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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2013
DERIVATIVE FINANCIAL INSTRUMENTS

6.    DERIVATIVE FINANCIAL INSTRUMENTS

Blackstone and the Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain risk management objectives and for general investment purposes. Additionally, Blackstone may enter into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. As a result of the use of derivative contracts, Blackstone and the consolidated Blackstone Funds are exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, Blackstone and the consolidated Blackstone Funds enter into contracts with certain major financial institutions, all of which have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

Fair Value Hedges

In June 2012, Blackstone removed the fair value designation of its interest rate swaps that were previously used to hedge a portion of the interest rate risk on the Partnership’s fixed rate borrowings. The impact to the Consolidated Statements of Operations for the period up through the date of de-designation is reflected within “Fair Value Hedges” in the table below. Changes in the fair value of the interest rate swaps subsequent to the date of de-designation are reflected within Freestanding Derivatives within Interest Rate Contracts in the table below.

Freestanding Derivatives

Freestanding derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include interest rate swaps, foreign exchange contracts, equity swaps, options, futures and other derivative contracts.

 

The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments. The notional amount represents the absolute value amount of all outstanding derivative contracts.

 

    December 31, 2013     December 31, 2012  
    Assets     Liabilities     Assets     Liabilities  
    Notional     Fair
Value		     Notional     Fair
Value		     Notional     Fair
Value		     Notional     Fair
Value		  

Freestanding Derivatives

                

Blackstone—Other

                

Interest Rate Contracts

   $ 1,994,276      $ 8,521      $ 1,083,140      $ 2,676      $ 689,300      $ 55,270      $ 636,555      $ 4,116   

Foreign Currency Contracts

     166,066        1,480        163,787        1,015        16,771        74        7,025        81   

Total Return Swaps

     326,929        342        —          —          —          —          —          —     

Credit Default Swaps

     —          —          10,000        591        —          —          —          —     

Investments of Consolidated Blackstone Funds

                

Foreign Currency Contracts

     396,569        30,830        239,037        10,018        435,229        37,898        301,551        17,101   

Interest Rate Contracts

     62,193        3,726        —          —          165,517        6,132        90,500        772   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 2,946,033      $ 44,899      $ 1,495,964      $ 14,300      $ 1,306,817      $ 99,374      $ 1,035,631      $ 22,070   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

The table below summarizes the impact to the Consolidated Statements of Operations from derivative financial instruments:

 

     Year Ended December 31,  
     2013     2012     2011  

Fair Value Hedges—Interest Rate Swaps

       

Hedge Ineffectiveness

    $ —        $ 548      $ 4,649   
  

 

 

    

 

 

    

 

 

  

Excluded from Assessment of Effectiveness

    $ —        $ (938 )    $ (3,465 ) 
  

 

 

    

 

 

    

 

 

  

Realized Gain

    $ —        $ 22,941      $ —     
  

 

 

    

 

 

    

 

 

  

Freestanding Derivatives

       

Realized Gains (Losses)

       

Interest Rate Contracts

    $ 34,206      $ (2,752 )    $ (8,634 ) 

Foreign Currency Contracts

      4,022        (3,816 )      1,739   

Credit Default Swaps

      752        (1 )      (111 ) 

Other

      —          —          (153 ) 
  

 

 

    

 

 

    

 

 

  

Total

    $ 38,980      $ (6,569 )    $ (7,159 ) 
  

 

 

    

 

 

    

 

 

  

Net Change in Unrealized Gains (Losses)

       

Interest Rate Contracts

    $ (1,947 )    $ 12,134      $ 8,718   

Foreign Currency Contracts

      2,636        (5,523 )      (33,408 ) 

Other

      392        —          (7 ) 
  

 

 

    

 

 

    

 

 

  

Total

    $ 1,081      $ 6,611      $ (24,697 ) 
  

 

 

    

 

 

    

 

 

  

 

Since the inception of the above mentioned hedge designation, Blackstone recognized a $64.2 million increase in the fair value of the hedged borrowing. This basis adjustment is being accreted using the effective interest method through August 15, 2019, the remaining term of the hedged borrowing.

As of December 31, 2013, 2012 and 2011, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.