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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2012
Derivative Financial Instruments

10. DERIVATIVE FINANCIAL INSTRUMENTS

The Company may, from time to time, enter into the following derivative instruments:

Foreign Currency Forward Contracts

The Company invests in foreign currency denominated investments that expose it to fluctuations in foreign currency rates and, therefore, the Company may, from time to time, hedge such exposure by using foreign currency forward contracts. The Company carries the foreign currency forward contracts at fair value and includes them as a component of other investments, at fair value in the Company’s consolidated balance sheets. As of December 31, 2012 and 2011, the Company had no outstanding foreign currency forward contracts. However, the Company did enter into foreign currency forward contracts at various times during the years ended December 31, 2012, 2011, and 2010. During the fourth quarters of 2012 and 2011, the Company terminated all of the foreign currency forward contracts.

EuroDollar Futures

The Company invests in floating rate investments that expose it to fluctuations in interest and, therefore, the Company may, from time to time, hedge such exposure using EuroDollar futures. The Company carries the EuroDollar futures contracts at fair value and includes them as a component of investments-trading in the Company’s consolidated balance sheets. As of December 31, 2012 and 2011, the Company had no outstanding EuroDollar future contracts. However, the Company did enter into EuroDollar futures contracts at various times during the years ended December 31, 2012, 2011, and 2010.

TBAs

The Company trades U.S. Government agency obligations. In connection with these activities, the Company may be required to maintain inventory in order to facilitate customer transactions. In order to mitigate exposure to market risk, the Company enters into the purchase and sale of TBAs. The Company carries the TBAs at fair value and includes them as a component of investments — trading or trading securities sold, not yet purchased in the Company’s consolidated balance sheets. At December 31, 2012, the Company had open TBA sale agreements in the notional amount of $40,125 and open TBA purchase agreements in the notional amount of $32,794. At December 31, 2011, the Company had open TBA sale agreements in the notional amount of $4,325.

 

The following table presents the Company’s derivative financial instruments and the amount and location of the fair value recognized in the consolidated balance sheets as of December 31, 2012 and 2011, respectively.

DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION

(Dollars in Thousands)

 

Derivative Financial

Instruments Not Designated as

Hedging Instruments under

FASB ASC 815:

   

Balance Sheet Classification

    Unrealized Gain /
(Loss) as of
December 31, 2012		     Unrealized Gain /
(Loss) as of
December 31, 2011		  

TBAs

    Investments-trading    $ 35     $ —    

TBAs

    Trading securities sold not yet purchased      (13 )      (16 ) 
     

 

 

    

 

 

  
      $ 22      $ (16 ) 
     

 

 

    

 

 

  

The following table presents the Company’s derivative financial instruments and the amount and location of the net gain (loss) recognized in the consolidated statement of operations for the years ended December 31, 2012, 2011 and 2010:

DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION

(Dollars in Thousands)

 

Derivative Financial

Instruments Not Designated as

Hedging Instruments under

FASB ASC 815:

  

Income Statement Classification

   Year Ended
December 31,
2012		     Year Ended
December 31,
2011		     Year Ended
December 31,
2010		  

Foreign currency forward contracts

   Revenues — principal transactions and other income / (loss)   $ 40      $ (662 )    $ (2,320 ) 

EuroDollar futures contracts

   Revenues — net trading     (30 )      (2 )      (212 ) 

TBAs

   Revenues — net trading     1,185        (9,260 )      2,577   
   

 

 

    

 

 

    

 

 

  
    $ 1,195      $ (9,924 )    $ 45   
   

 

 

    

 

 

    

 

 

  

In addition to the above activities related to TBAs, the Company also enters into TBAs in order to assist clients (generally small to mid-size mortgage loan originators) in hedging the interest rate risk associated with the mortgages owned by the clients. In general, the Company will enter into a TBA purchase agreement with the client. Then, the Company will immediately enter into a TBA sale agreement with the identical terms and settlement date with a separate counter-party. The Company seeks to profit through a small mark-up in the price of the transaction. The TBAs will match underlying terms and settlement dates. Because the Company has purchased and sold the same security, it is no longer exposed to market movements of the underlying TBA. The gain or loss on the transaction is recorded as a component of net trading in the consolidated statement of operations and is included in due to or due from broker in the consolidated balance sheet until it settles. As of December 31, 2012, the Company had unsettled TBA purchase contracts and offsetting TBA sale agreements in the notional amount of $513,188. The net profit on these transactions is recorded as a component of net trading revenue. Any revenue on trades that have not yet settled is included as a component of due to or due from brokers, dealers, and clearing organizations.