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Derivatives | 3 Months Ended
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Mar. 31, 2018
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivatives |
12. | Derivatives
The Company enters into commitments to extend credit for mortgage loans at a specific rate (“Rate lock commitments”) and commitments to deliver these loans to third party investors at a fixed price (which are included in forwards in the below disclosure). In the normal course of operations, the Company also enters into other derivative contracts. These derivative contracts primarily consist of foreign exchange swaps, foreign exchange/commodities options, and interest rate swaps. The Company enters into derivative contracts to facilitate client transactions, hedge principal positions and facilitate hedging activities of affiliated companies. Derivative contracts can be exchange-traded or OTC. Exchange-traded derivatives typically fall within Level 1 or Level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The Company generally values exchange-traded derivatives using their closing prices. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy. However, some derivative contracts held by the Company, such as rate lock commitments and forwards related to mortgage loans, are valued by the Company using pricing models that entail unobservable inputs, which are significant to the fair value measurement of the derivative contracts. Accordingly, such derivative contracts are generally classified within Level 3 of the fair value hierarchy. The Company does not designate any derivative contracts as hedges for accounting purposes. U.S GAAP guidance requires that an entity recognize all derivative contracts as either assets or liabilities in the unaudited condensed consolidated statements of financial condition and measure those instruments at fair value. The fair value of all derivative contracts is recorded on a net-by-counterparty basis where a legal right to offset exists under an enforceable netting agreement. Derivative contracts are recorded as part of “Receivables from broker-dealers, clearing organizations, customers and related broker-dealers” and “Payables to broker-dealers, clearing organizations, customers and related broker-dealers” in the Company’s unaudited condensed consolidated statements of financial condition. The fair value of derivative contracts, computed in accordance with the Company’s netting policy, is set forth below (in thousands):
|  | March 31, 2018 |  |  | December 31, 2017 |
Derivative contract |  | Assets |  |  | Liabilities |  |  | Notional Amounts1 |  |  | Assets |  |  | Liabilities |  |  | Notional Amounts1 |
Forwards |  | $ | 9,888 |  |  | $ | 2,636 |  |  | $ | 1,435,352 |  |  | $ | 4,262 |  |  | $ | 1,483 |  |  | $ | 642,802 |
Rate lock commitments |  |  | 8,750 |  |  |  | 8,980 |  |  |  | 374,197 |  |  |  | 2,923 |  |  |  | 2,390 |  |  |  | 180,918 |
Foreign exchange/commodities options |  |  | 3,931 |  |  |  | — |  |  |  | 3,059,888 |  |  |  | 4,416 |  |  |  | 130 |  |  |  | 2,442,200 |
Futures |  |  | 1,233 |  |  |  | 810 |  |  |  | 10,453,750 |  |  |  | 25 |  |  |  | 1,066 |  |  |  | 13,023,030 |
Foreign exchange swaps |  |  | 943 |  |  |  | 727 |  |  |  | 472,287 |  |  |  | 801 |  |  |  | 2,846 |  |  |  | 407,600 |
Interest rate swaps |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 242 |  |  |  | — |  |  |  | 12,092 |
Equity options |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 18 |  |  |  | 961,000 |
Total |  | $ | 24,745 |  |  | $ | 13,153 |  |  | $ | 15,795,474 |  |  | $ | 12,669 |  |  | $ | 7,933 |  |  | $ | 17,669,642 |
1Notional amounts represent the sum of gross long and short derivative contracts, an indication of the volume of the Company’s derivative activity and does not represent anticipated losses. The interest rate swaps represent matched customer transactions settled through and guaranteed by a central clearing organization. Certain of the Company’s foreign exchange swaps are with Cantor. See Note 17—“Related Party Transactions,” for additional information related to these transactions. The replacement cost of contracts in a gain position were $24.7 million and $12.7 million, as of March 31, 2018 and December 31, 2017, respectively. The following tables present information about the offsetting of derivative instruments as of March 31, 2018 and December 31, 2017 (in thousands):
|  | March 31, 2018 |
|  |  |  |  |  |  |  |  |  | Net Amounts Presented in the |  |  | Gross Amounts Not Offset |  |  |  |  |
|  | Gross Amounts |  |  | Gross Amounts Offset |  |  | Statements of Financial Condition |  |  | Financial Instruments |  |  | Cash Collateral Received |  |  | Net Amounts |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forwards |  | $ | 9,900 |  |  | $ | (12 | ) |  | $ | 9,888 |  |  | $ | — |  |  | $ | — |  |  | $ | 9,888 |
Rate lock commitments |  |  | 8,750 |  |  |  | — |  |  |  | 8,750 |  |  |  | — |  |  |  | — |  |  |  | 8,750 |
Foreign exchange/commodities options |  |  | 102,667 |  |  |  | (98,736 | ) |  |  | 3,931 |  |  |  | — |  |  |  | — |  |  |  | 3,931 |
Futures |  |  | 43,541 |  |  |  | (42,308 | ) |  |  | 1,233 |  |  |  | — |  |  |  | — |  |  |  | 1,233 |
Foreign exchange swaps |  |  | 1,249 |  |  |  | (306 | ) |  |  | 943 |  |  |  | — |  |  |  | — |  |  |  | 943 |
Total |  | $ | 166,107 |  |  | $ | (141,362 | ) |  | $ | 24,745 |  |  | $ | — |  |  | $ | — |  |  | $ | 24,745 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rate lock commitments |  | $ | 8,980 |  |  | $ | — |  |  | $ | 8,980 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,980 |
Forwards |  |  | 2,648 |  |  |  | (12 | ) |  |  | 2,636 |  |  |  | — |  |  |  | — |  |  |  | 2,636 |
Futures |  |  | 43,118 |  |  |  | (42,308 | ) |  |  | 810 |  |  |  | — |  |  |  | — |  |  |  | 810 |
Foreign exchange swaps |  |  | 1,033 |  |  |  | (306 | ) |  |  | 727 |  |  |  | — |  |  |  | — |  |  |  | 727 |
Foreign exchange/commodities options |  |  | 98,736 |  |  |  | (98,736 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 154,515 |  |  | $ | (141,362 | ) |  | $ | 13,153 |  |  | $ | — |  |  | $ | — |  |  | $ | 13,153 |
|  | December 31, 2017 |
|  |  |  |  |  |  |  |  |  | Net Amounts Presented in the |  |  | Gross Amounts Not Offset |  |  |  |  |
|  | Gross Amounts |  |  | Gross Amounts Offset |  |  | Statements of Financial Condition |  |  | Financial Instruments |  |  | Cash Collateral Received |  |  | Net Amounts |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange/commodities options |  | $ | 31,834 |  |  | $ | (27,418 | ) |  | $ | 4,416 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,416 |
Forwards |  |  | 4,363 |  |  |  | (101 | ) |  |  | 4,262 |  |  |  | — |  |  |  | — |  |  |  | 4,262 |
Rate lock commitments |  |  | 2,923 |  |  |  | — |  |  |  | 2,923 |  |  |  | — |  |  |  | — |  |  |  | 2,923 |
Foreign exchange swaps |  |  | 1,135 |  |  |  | (334 | ) |  |  | 801 |  |  |  | — |  |  |  | — |  |  |  | 801 |
Interest rate swaps |  |  | 242 |  |  |  | — |  |  |  | 242 |  |  |  | — |  |  |  | — |  |  |  | 242 |
Futures |  |  | 78,969 |  |  |  | (78,944 | ) |  |  | 25 |  |  |  | — |  |  |  | — |  |  |  | 25 |
Total |  | $ | 119,466 |  |  | $ | (106,797 | ) |  | $ | 12,669 |  |  | $ | — |  |  | $ | — |  |  | $ | 12,669 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange swaps |  | $ | 3,180 |  |  | $ | (334 | ) |  | $ | 2,846 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,846 |
Rate lock commitments |  |  | 2,390 |  |  |  | — |  |  |  | 2,390 |  |  |  | — |  |  |  | — |  |  |  | 2,390 |
Forwards |  |  | 1,584 |  |  |  | (101 | ) |  |  | 1,483 |  |  |  | — |  |  |  | — |  |  |  | 1,483 |
Futures |  |  | 80,010 |  |  |  | (78,944 | ) |  |  | 1,066 |  |  |  | — |  |  |  | — |  |  |  | 1,066 |
Foreign exchange/commodities options |  |  | 27,548 |  |  |  | (27,418 | ) |  |  | 130 |  |  |  | — |  |  |  | — |  |  |  | 130 |
Equity options |  |  | 18 |  |  |  | — |  |  |  | 18 |  |  |  | — |  |  |  | — |  |  |  | 18 |
Total |  | $ | 114,730 |  |  | $ | (106,797 | ) |  | $ | 7,933 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,933 |
The change in fair value of interest rate swaps, futures, foreign exchange/commodities options, foreign exchange swaps, and generic forwards is reported as part of “Principal transactions” in the Company’s unaudited condensed consolidated statements of operations. The change in fair value of equity options related to marketable securities is included as part of “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations. The change in fair value of rate lock commitments and forwards related to mortgage loans are reported as part of “Gains from mortgage banking activities/originations, net” in the Company’s consolidated statements of operations. The change in fair value of rate lock commitments are disclosed net of $2.5 million and $0.8 million of expenses for the three months ended March 31, 2018 and 2017, respectively, which are reported as part of “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations. The table below summarizes gains and losses on derivative contracts for the three months ended March 31, 2018 and 2017 (in thousands):
|  | Three Months Ended March 31, |
Derivative contract |  | 2018 |  |  | 2017 |
Rate lock commitments and forwards |  | $ | 7,327 |  |  | $ | 2,462 |
Futures |  |  | 5,908 |  |  |  | 1,949 |
Foreign exchange/commodities options |  |  | 4,599 |  |  |  | 3,602 |
Foreign exchange swaps |  |  | 378 |  |  |  | 627 |
Equity options |  |  | 102 |  |  |  | — |
Interest rate swaps |  |  | (5 | ) |  |  | 28 |
Gain |  | $ | 18,309 |  |  | $ | 8,668 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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