| Derivative Instruments | 3. DERIVATIVE INSTRUMENTS
The Derivatives and Hedging topic of the Codification requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.
The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions, and the liquidity of the markets in which it trades.
The Partnership engages in the speculative trading of futures and forward contracts on currencies, energies, grains, interest rates, livestock, metals, softs and stock indices. The following were the primary trading risk exposures of the Partnership at June 30, 2016 , by market sector:
Agricultural (grains, livestock and softs) – The Partnership’s primary exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions as well as supply and demand factors.
Currencies – Exchange rate risk is a principal market exposure of the Partnership. The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. The fluctuations are influenced by interest rate changes, as well as political and general economic conditions. The Partnership trades in a large number of currencies, including cross-rates—e.g., positions between two currencies other than the U.S. dollar.
Energies – The Partnership’s primary energy market exposure is to gas and oil price movements often resulting from political developments in the oil producing countries and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Interest rates – Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country, as well as relative interest rate movements between countries, may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in countries or regions, including Australia, Canada, Japan, Switzerland, the United Kingdom, the U.S. and the Eurozone. However, the Partnership also may take positions in futures contracts on the government debt of other nations. The General Partner anticipates that interest rates in these industrialized countries or areas, both long-term and short-term, will remain the primary interest rate market exposure of the Partnership for the foreseeable future.
Metals – The Partnership’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, platinum, silver, tin and zinc.
Stock indices – The Partnership’s equity exposure, through stock index futures, is to equity price risk in the major industrialized countries, as well as other countries.
The Derivatives and Hedging topic of the Codification requires entities to recognize in the Statements of Financial Condition all derivative contracts as assets or liabilities. Fair values of futures and forward currency contracts in an asset position by counterparty are recorded in the Statements of Financial Condition as “Net unrealized appreciation on open futures and forward currency contracts.” Fair values of futures and forward currency contracts in a liability position by counterparty are recorded in the Statements of Financial Condition as “Net unrealized depreciation on open futures and forward currency contracts.” The Partnership’s policy regarding fair value measurement is discussed in the Fair Value and Disclosures note, contained herein.
Since the derivatives held or sold by the Partnership are for speculative trading purposes, the derivative instruments are not designated as hedging instruments under the provisions of the Derivatives and Hedging guidance. Accordingly, all realized gains and losses, as well as any change in net unrealized gains or losses on open positions from the preceding period, are recognized as part of the Partnership’s trading gains and losses in the Statements of Operations.
The following tables present the fair value of open futures and forward currency contracts, held long or sold short, at June 30, 2016 and December 31, 2015 . Fair value is presented on a gross basis even though the contracts are subject to master netting agreements and qualify for net presentation in the Statements of Financial Condition.
Fair Value of Futures and Forward Currency Contracts at June 30, 2016
Net Unrealized
Fair Value - Long Positions
Fair Value - Short Positions
Gain (Loss) on
Sector
Gains
Losses
Gains
Losses
Open Positions
Futures contracts:
Energies
$ 272,171
$ (81,110)
$
-
$ (77,480)
$ 113,581
Grains
254,230
(188)
458,130
(9,960)
702,212
Interest rates
2,792,405
(75,129)
-
(114)
2,717,162
Livestock
-
-
19,860
(2,140)
17,720
Metals
602,290
(491)
3,690
(672,305)
(66,816)
Softs
78,624
(7,358)
475
(18,853)
52,888
Stock indices
2,299,690
(90,884)
11,670
(4,309)
2,216,167
Total futures contracts
6,299,410
(255,160)
493,825
(785,161)
5,752,914
Forward currency contracts
1,605,410
(3,003,964)
3,220,438
(1,146,486)
675,398
Total futures and
forward currency contracts
$ 7,904,820
$ (3,259,124)
$ 3,714,263
$ (1,931,647)
$ 6,428,312
Fair Value of Futures and Forward Currency Contracts at December 31, 2015
Net Unrealized
Fair Value - Long Positions
Fair Value - Short Positions
Gain (Loss) on
Sector
Gains
Losses
Gains
Losses
Open Positions
Futures contracts:
Energies
$
-
$
-
$ 1,252,818
$ (281,259)
$ 971,559
Grains
282
-
225,035
(6,913)
218,404
Interest rates
665,891
(852,032)
-
(764)
(186,905)
Livestock
-
-
-
(52,200)
(52,200)
Metals
279,706
(33,950)
419,632
(302,687)
362,701
Softs
75,246
(47,977)
100
(47,711)
(20,342)
Stock indices
542,082
(177,337)
77,458
(21,095)
421,108
Total futures contracts
1,563,207
(1,111,296)
1,975,043
(712,629)
1,714,325
Forward currency contracts
470,266
(1,173,574)
2,459,391
(734,085)
1,021,998
Total futures and
forward currency contracts
$ 2,033,473
$ (2,284,870)
$ 4,434,434
$ (1,446,714)
$ 2,736,323
The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the three and six months ended June 30, 2016 and 2015 as “Net realized gains (losses) on closed positions: Futures and forward currency contracts” and “Net change in unrealized: Futures and forward currency contracts.” These trading gains and losses are detailed below.
Trading gains (losses) of futures and forward currency contracts for the three and six months ended June 30, 2016 and 2015
Sector
Three months ended: June 30, 2016
Three months ended: June 30, 2015
Six months ended: June 30, 2016
Six months ended: June 30, 2015
Futures contracts:
Energies
$ (898,657)
$ (2,989,877)
$ (317,096)
$ (2,949,993)
Grains
2,088,987
(155,993)
2,188,830
(594,580)
Interest rates
8,844,057
(3,831,407)
18,762,198
614,664
Livestock
19,280
23,410
27,080
69,980
Metals
(744,585)
452,840
(1,183,159)
492,097
Softs
94,222
(115,776)
(344,920)
176,093
Stock indices
651,579
(757,616)
3,222,968
3,028,596
Total futures contracts
10,054,883
(7,374,419)
22,355,901
836,857
Forward currency contracts
713,528
(2,531,710)
2,131,591
(961,823)
Total futures and
forward currency contracts
$ 10,768,411
$ (9,906,129)
$ 24,487,492
$ (124,966)
The following table presents average notional value by sector of open futures and forward currency contracts for the six months ended June 30, 2016 and 2015 in U.S. dollars. The Partnership’s average net asset value for the six months ended June 30, 2016 and 2015 was approximately $149,000,000 and $135,000,000 , respectively.
Average notional value by sector of futures and forward currency contracts for the six months ended June 30, 2016 and 2015
2016
2015
Sector
Long positions
Short positions
Long positions
Short positions
Futures contracts:
Energies
$ 6,910,721
$ 8,558,518
$ 1,448,663
$ 9,825,926
Grains
3,967,670
10,112,898
4,207,213
3,424,191
Interest rates
291,264,020
5,865,668
211,081,309
18,252,128
Livestock
53,900
871,217
283,487
815,403
Metals
2,350,526
10,800,230
1,132,739
16,090,270
Softs
1,916,148
1,115,095
725,130
3,439,708
Stock indices
65,308,863
8,156,682
104,505,168
4,724,210
Total futures contracts
371,771,848
45,480,308
323,383,709
56,571,836
Forward currency contracts
65,517,472
53,759,854
46,143,784
48,596,808
Total futures and
forward currency contracts
$ 437,289,320
$ 99,240,162
$ 369,527,493
$ 105,168,644
Notional values in the interest rate sector were calculated by converting the notional value in local currency of open interest rate futures positions with maturities less than 10 years to 10 -year equivalent fixed income instruments and translated to U.S. dollars at June 30, 2016 and 2015 . The 10-year note is often used as a benchmark for many types of fixed-income instruments and the General Partner believes it is a more meaningful representation of notional values of the Partnership’s open interest rate positions.
The customer agreements between the Partnership, the futures clearing brokers, including Deutsche Bank Securities Inc. (a wholly-owned subsidiary of Deutsche Bank AG), and SG Americas Securities, LLC., as well as the FX prime broker, Deutsche Bank AG, and the swap dealer, Morgan Stanley & Co., LLC, give the Partnership the legal right to net unrealized gains and losses on open futures and foreign currency contracts. The Partnership netted, for financial reporting purposes, the unrealized gains and losses on open futures and forward currency contracts on the Statements of Financial Condition as the criteria under ASC 210-20, “Balance Sheet,” were met. The Partnership ceased clearing trades through J.P. Morgan Securities LLC during September 2015.
Offsetting derivative assets at June 30, 2016
Assets
Gross amounts of recognized assets
Gross amounts offset in the Statement of Financial Condition
Net amounts of assets presented in the Statement of Financial Condition
Futures contracts
Counterparty C
$ 2,865,221
$ (296,536)
$ 2,568,685
Counterparty I
3,928,014
(743,785)
3,184,229
Total futures contracts
6,793,235
(1,040,321)
5,752,914
Forward currency contracts
Counterparty G
3,819,311
(3,517,380)
301,931
Counterparty H
1,006,537
(633,070)
373,467
Total forward currency contracts
4,825,848
(4,150,450)
675,398
Total assets
$ 11,619,083
$ (5,190,771)
$ 6,428,312
Amounts Not Offset in the Statement of Financial Condition
Counterparty
Net amounts of Assets presented in the Statement of Financial Condition
Financial Instruments
Collateral Received (1)(2)
Net Amount (3)
Counterparty C
$ 2,568,685
$
-
$ (2,568,685)
$
-
Counterparty G
301,931
-
-
301,931
Counterparty H
373,467
-
-
373,467
Counterparty I
3,184,229
-
(3,184,229)
-
Total
$ 6,428,312
$
-
$ (5,752,914)
$ 675,398
(1) Collateral received includes trades made on exchanges. These trades are subject to central counterparty clearing where settlement is guaranteed by the exchange.
(2) Collateral disclosed is limited to an amount not to exceed 100% of the net amount of assets presented in the Statement of Financial Condition,
for each respective counterparty.
(3) Net amount represents the amount that is subject to loss in the event of a counterparty failure as of June 30, 2016.
Offsetting derivative assets and liabilities at December 31, 2015
Assets
Gross amounts of recognized assets
Gross amounts offset in the Statement of Financial Condition
Net amounts of assets presented in the Statement of Financial Condition
Futures contracts
Counterparty C
$ 1,495,003
$ (1,082,320)
$ 412,683
Counterparty I
2,043,247
(741,605)
1,301,642
Total futures contracts
3,538,250
(1,823,925)
1,714,325
Forward currency contracts
Counterparty G
2,231,633
(1,128,378)
1,103,255
Total forward currency contracts
2,231,633
(1,128,378)
1,103,255
Total assets
$ 5,769,883
$ (2,952,303)
$ 2,817,580
Liabilities
Gross amounts of recognized liabilities
Gross amounts offset in the Statement of Financial Condition
Net amounts of liabilities presented in the Statement of Financial Condition
Forward currency contracts
Counterparty H
$ 779,281
$ (698,024)
$ 81,257
Total liabilities
$ 779,281
$ (698,024)
$ 81,257
Amounts Not Offset in the Statement of Financial Condition
Counterparty
Net amounts of Assets presented in the Statement of Financial Condition
Financial Instruments
Collateral Received (1)(2)
Net Amount (3)
Counterparty C
$ 412,683
$
-
$ (412,683)
$
-
Counterparty G
1,103,255
-
-
1,103,255
Counterparty I
1,301,642
-
(1,301,642)
-
Total
$ 2,817,580
$
-
$ (1,714,325)
$ 1,103,255
Amounts Not Offset in the Statement of Financial Condition
Counterparty
Net amounts of Liabilities presented in the Statement of Financial Condition
Financial Instruments
Collateral Pledged (1)(2)
Net Amount (4)
Counterparty H
$ 81,257
$
-
$ (81,257)
$
-
Total
$ 81,257
$
-
$ (81,257)
$
-
(1) Collateral received includes trades made on exchanges. These trades are subject to central counterparty clearing where settlement is guaranteed by the exchange. Collateral pledged includes both cash and U.S. Treasury notes held at each respective counterparty.
(2) Collateral disclosed is limited to an amount not to exceed 100% of the net amount of assets presented in the Statement of Financial Condition,
for each respective counterparty.
(3) Net amount represents the amount that is subject to loss in the event of a counterparty failure as of December 31, 2015.
(4) Net amount represents the amounts owed by the Partnership to each counterparty as of December 31, 2015.
CONCENTRATION OF CREDIT RISK
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk is normally reduced to the extent that an exchange or clearing organization acts as a counterparty to futures transactions since typically the collective credit of the members of the exchange is pledged to support the financial integrity of the exchange.
The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Partnership’s assets at financial institutions and trading counterparties which the General Partner believes to be creditworthy. In addition, for OTC forward currency contracts, the Partnership enters into master netting agreements with its counterparties. Collateral posted at the various counterparties for trading of futures and forward currency contracts includes cash and U.S. Treasury notes.
The Partnership’s forward currency trading activities are cleared through Deutsche Bank AG (“DB”) and Morgan Stanley & Co. LLC (“MS”). The Partnership’s concentration of credit risk associated with DB or MS nonperformance includes unrealized gains inherent in such contracts, which are recognized in the Statements of Financial Condition plus the value of margin or collateral held by DB and MS. The amount of such credit risk was $11,828,530 and $14,631,693 at June 30, 2016 and December 31, 2015 , respectively. |
