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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2018
Derivative Financial Instruments [Abstract] |
Derivative Financial Instruments | 10. DERIVATIVE FINANCIAL INSTRUMENTS FASB ASC 815, Derivatives and Hedging (“FASB ASC 815”), provides for optional hedge accounting. When a derivative is deemed to be a hedge and certain documentation and effectiveness testing requirements are met, reporting entities are permitted to record all or a portion of the change in the fair value of a designated hedge as an adjustment to AOCI rather than as a gain or loss in the statements of operations. To date, the Company has not designated any derivatives as hedges under the provisions included in FASB ASC 815. All of the derivatives that the Company enters into contain master netting arrangements. If certain requirements are met, the offsetting provisions included in FASB ASC 210, Balance Sheet (“FASB ASC 210”), allow (but do not require) the reporting entity to net the asset and liability on the consolidated balance sheets. It is the Company’s policy to present the assets and liabilities on a net basis if the conditions of FASB ASC 210 are met. However, in general the Company does not enter into offsetting derivatives with the same counterparties. Therefore, in all of the periods presented, no derivatives are presented on a net basis. Derivative financial instruments are recorded at fair value. If the derivative was entered into as part of the Company’s broker-dealer operations, it will be included as a component of investments-trading or trading securities sold, not yet purchased. If it is entered into to hedge for another financial instrument included in other investments, at fair value then the derivative will be included as a component of other investments, at fair value. The Company may, from time to time, enter into derivatives to manage its risk exposures (i) arising from fluctuations in foreign currency rates with respect to the Company’s investments in foreign currency denominated investments; (ii) arising from the Company’s investments in interest sensitive investments; and (iii) arising from the Company’s facilitation of mortgage-backed trading. Derivatives entered into by the Company, from time to time, may include (i) foreign currency forward contracts; (ii) purchase and sale agreements of TBAs and other forward agency MBS contracts; and (iii) other extended settlement trades. TBAs are forward contracts to purchase or sell MBS whose collateral remain “to be announced” until just prior to the trade settlement. In addition to TBAs, the Company sometimes enters into forward purchases or sales of agency MBS where the underlying collateral has been identified. These transactions are referred to as other forward agency MBS contracts. TBAs and other forward agency MBS contracts are accounted for as derivatives by the Company under FASB ASC 815. The settlement of these transactions is not expected to have a material effect on the Company’s consolidated financial statements. In addition to TBAs and other forward agency MBS contracts as part of the Company’s broker-dealer operations, the Company may from time to time enter into other securities or loan trades that do not settle within the normal securities settlement period. In those cases, the purchase or sale of the security or loan is not recorded until the settlement date. However, from the trade date until the settlement date, the Company’s interest in the security is accounted for as a derivative as either a forward purchase commitment or forward sale commitment. Derivatives involve varying degrees of off-balance sheet risk, whereby changes in the level or volatility of interest rates or market values of the underlying financial instruments may result in changes in the value of a particular financial instrument in excess of its carrying amount. Depending on the Company’s investment strategy, realized and unrealized gains and losses are recognized in principal transactions and other income or in net trading in the Company’s consolidated statements of operations on a trade date basis. 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 September 30, 2018 and December 31, 2017, the Company had outstanding foreign currency forward contracts with a notional amount of 1.000 million Euros and 1.000 million Euros, respectively. EuroDollar Futures The Company invests in floating rate investments that expose it to fluctuations in interest rates and, therefore, the Company may, from time to time, hedge such exposure using EuroDollar futures. The Company carries such EuroDollar future contracts 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. As of September 30, 2018 and December 31, 2017, the Company had no outstanding EuroDollar future contracts. TBAs and Other Forward Agency MBS Contracts The Company enters into TBAs and other forward agency MBS transactions for three main reasons.
| (i) |  | 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 may enter into the purchase and sale of TBAs and other forward agency MBS contracts.
| (ii) |  | The Company also enters into TBAs and other forward agency MBS contracts 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 these clients.
| (iii) |  | Finally, the Company may enter into TBAs and other forward agency MBS contracts on a speculative basis.
The Company carries the TBAs and other forward agency MBS contracts 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 September 30, 2018, the Company had open TBA and other forward MBS purchase agreements in the notional amount of $1,304,554 and open TBA and other forward MBS sale agreements in the notional amount of $1,304,554. At December 31, 2017, the Company had open TBA and other forward agency MBS purchase agreements in the notional amount of $1,029,844 and open TBA and other forward agency MBS sale agreements in the notional amount of $1,029,844. Other Extended Settlement Trades When the Company buys or sells a financial instrument that will not settle in the regular time frame, the Company will account for that purchase and sale on the settlement date rather than the trade date. In those cases, the Company accounts for the transaction between trade date and settlement date as either a forward purchase commitment or a forward sale commitment, both considered derivatives. The Company will record an unrealized gain or unrealized loss on the derivative for the difference between the fair value of the underlying financial instrument as of the reporting date and the agreed upon transaction price. At September 30, 2018, the Company had open forward purchase commitments of $5,444 and open forward sale commitments of $12,500. At December 31, 2017, the Company had open forward purchase commitments of $28,146 and open forward sale commitments of $11,500. ﻿ The following table presents the Company’s derivative financial instruments and the amount and location of the fair value (unrealized gain / (loss)) recognized in the consolidated balance sheets as of September 30, 2018 and December 31, 2017. ﻿
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﻿DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION
﻿(Dollars in Thousands)
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﻿Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815 |  | Balance Sheet Classification |  |  | September 30, 2018 |  |  | December 31, 2017
﻿TBAs and other forward agency MBS |  | Investments-trading |  | $ | 5,277 |  | $ | 1,063
﻿Other extended settlement trades |  | Investments-trading |  |  | - |  |  | 55
﻿Foreign currency forward contracts |  | Other investments, at fair value |  |  | 3 |  |  | (26)
﻿TBAs and other forward agency MBS |  | Trading securities sold, not yet purchased |  |  | (4,706) |  |  | (607)
﻿Other extended settlement trades |  | Trading securities sold, not yet purchased |  |  | - |  |  | (251)
﻿ |  |  |  | $ | 574 |  | $ | 234
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The following table presents the Company’s derivative financial instruments and the amount and location of the net gain (loss) recognized in the consolidated statements of operations. ﻿ ﻿ ﻿
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﻿DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION
﻿(Dollars in Thousands)
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﻿Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815 |  | Income Statement Classification |  |  | Nine Months Ended September 30, 2018 |  |  | Nine Months Ended September 30, 2017
﻿Foreign currency forward contracts |  | Revenue-principal transactions and other income |  | $ | 65 |  | $ | (132)
﻿Other extended settlement trades |  | Revenue-net trading |  |  | (10) |  |  | (15)
﻿TBAs and other forward agency MBS |  | Revenue-net trading |  |  | 4,988 |  |  | 5,516
﻿ |  |  |  | $ | 5,043 |  | $ | 5,369
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﻿DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION
﻿(Dollars in Thousands)
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﻿Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815 |  | Income Statement Classification |  |  | Three Months Ended September 30, 2018 |  |  | Three Months Ended September 30, 2017
﻿Foreign currency forward contracts |  | Revenue-principal transactions and other income |  | $ | 14 |  | $ | (34)
﻿Other extended settlement trades |  | Revenue-net trading |  |  | (10) |  |  | 4
﻿TBAs and other forward agency MBS |  | Revenue-net trading |  |  | 1,535 |  |  | 1,584
﻿ |  |  |  | $ | 1,539 |  | $ | 1,554
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- References No definition available. + Details
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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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