| 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 September 30, 2019 , 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 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 September 30, 2019 and December 31, 2018 . 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 September 30, 2019
Net Unrealized
Fair Value - Long Positions
Fair Value - Short Positions
Gain (Loss) on
Sector
Gains
Losses
Gains
Losses
Open Positions
Futures contracts:
Energies
$
-
$ (802,338)
$ 19,228
$
-
$ (783,110)
Grains
1,770
(1,060)
504,461
(264,980)
240,191
Interest rates
91,204
(9,188)
403,343
(348,513)
136,846
Livestock
5,950
(10)
60
(12,710)
(6,710)
Metals
313,429
(443,924)
241,125
(319,347)
(208,717)
Softs
-
-
26,011
(103,610)
(77,599)
Stock indices
194,426
(271,134)
90,429
(115,451)
(101,730)
Total futures contracts
606,779
(1,527,654)
1,284,657
(1,164,611)
(800,829)
Forward currency contracts
690,544
(2,893,671)
3,090,065
(1,079,629)
(192,691)
Total futures and
forward currency contracts
$ 1,297,323
$ (4,421,325)
$ 4,374,722
$ (2,244,240)
$ (993,520)
Fair Value of Futures and Forward Currency Contracts at December 31, 2018
Net Unrealized
Fair Value - Long Positions
Fair Value - Short Positions
Gain (Loss) on
Sector
Gains
Losses
Gains
Losses
Open Positions
Futures contracts:
Energies
$
-
$ (59,830)
$ 3,439,881
$ (89,078)
$ 3,290,973
Grains
480
(18,990)
254,628
(3,050)
233,068
Interest rates
1,324,780
(178,816)
73
(1,090,509)
55,528
Livestock
-
-
1,960
(1,150)
810
Metals
33,972
(544,058)
657,517
(260,620)
(113,189)
Softs
-
-
83,680
(7,099)
76,581
Stock indices
72,509
(163,175)
83,422
(308,793)
(316,037)
Total futures contracts
1,431,741
(964,869)
4,521,161
(1,760,299)
3,227,734
Forward currency contracts
1,791,331
(971,138)
2,070,787
(2,609,920)
281,060
Total futures and
forward currency contracts
$ 3,223,072
$ (1,936,007)
$ 6,591,948
$ (4,370,219)
$ 3,508,794
The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the three and nine months ended September 30, 2019 and 2018 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 nine months ended September 30, 2019 and 2018
Sector
Three months ended: September 30, 2019
Three months ended: September 30, 2018
Nine months ended: September 30, 2019
Nine months ended: September 30, 2018
Futures contracts:
Energies
$ (2,659,402)
$ 1,440,878
$ (6,999,886)
$ 7,172,781
Grains
642,858
337,657
1,967,023
1,019,088
Interest rates
460,188
(3,396,621)
8,240,958
(2,096,082)
Livestock
(165,430)
23,450
44,980
28,850
Metals
(237,875)
115,135
(711,590)
(1,210,811)
Softs
285,979
117,665
206,226
534,835
Stock indices
3,024,190
5,149,489
3,560,741
(6,426,547)
Total futures contracts
1,350,508
3,787,653
6,308,452
(977,886)
Forward currency contracts
387,831
806,493
(1,613,013)
(223,615)
Total futures and
forward currency contracts
$ 1,738,339
$ 4,594,146
$ 4,695,439
$ (1,201,501)
The following table presents average notional value by sector of open futures and forward currency contracts for the nine months ended September 30, 2019 and 2018 in U.S. dollars. The Partnership’s average net asset value for the nine months ended September 30, 2019 and 2018 was approximately $159,000,000 and $160,000,000 , respectively.
Average notional value by sector of futures and forward currency contracts for the nine months ended September 30, 2019 and 2018
2019
2018
Sector
Long positions
Short positions
Long positions
Short positions
Futures contracts:
Energies
$ 10,710,588
$ 16,083,367
$ 45,114,043
$ 2,623,200
Grains
2,227,178
9,724,495
971,351
14,630,484
Interest rates
167,096,856
138,507,852
311,551,283
76,708,597
Livestock
320,490
717,053
145,130
460,825
Metals
2,054,703
9,688,499
5,509,603
16,186,544
Softs
186,119
3,815,158
1,125,701
1,818,722
Stock indices
62,999,353
39,500,771
125,125,831
19,326,133
Total futures contracts
245,595,287
218,037,195
489,542,942
131,754,505
Forward currency contracts
32,945,989
81,457,701
29,926,091
126,742,856
Total futures and
forward currency contracts
$ 278,541,276
$ 299,494,896
$ 519,469,033
$ 258,497,361
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 September 30, 2019 and 2018 . 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), SG Americas Securities, LLC., and BofA Securities, Inc. (formerly Merrill Lynch Pierce, Fenner & Smith Inc.) as well as the FX prime brokers, Deutsche Bank AG (“DB”) and Bank of America, N.A. (“BA”), and the swap dealer, Morgan Stanley & Co., LLC (“MS”), 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 FASB Accounting Standards Codification Topic 210, “ Balance Sheet ,” were met.
The following tables present gross amounts of assets or liabilities which qualify for offset as presented in the Statements of Financial Condition as of September 30, 2019 and December 31, 2018 .
Offsetting derivative assets and liabilities at September 30, 2019
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
Futures contracts
Counterparty C
$ 539,004
$ (404,934)
$ 134,070
Counterparty I
1,778,728
(1,247,470)
531,258
Counterparty J
374,533
(239,032)
135,501
Total futures contracts
2,692,265
(1,891,436)
800,829
Forward currency contracts
Counterparty G
$ 1,635,231
$ (1,470,953)
$ 164,278
Counterparty K
2,338,069
(2,309,656)
28,413
Total forward currency contracts
3,973,300
(3,780,609)
192,691
Total liabilities
$ 6,665,565
$ (5,672,045)
$ 993,520
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 (3)
Counterparty C
$ 134,070
$
-
$ (134,070)
$
-
Counterparty G
164,278
-
(164,278)
-
Counterparty I
531,258
-
(531,258)
-
Counterparty J
135,501
-
(135,501)
-
Counterparty K
28,413
-
(28,413)
-
Total
$ 993,520
$
-
$ (993,520)
$
-
(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 and liabilities presented in the Statement of
Financial Condition for each respective counterparty.
(3) Net amount represents the amounts owed by the Partnership to each counterparty as of September 30, 2019.
Offsetting derivative assets and liabilities at December 31, 2018
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
$ 1,839,982
$ (486,687)
$ 1,353,295
Counterparty I
2,527,506
(1,885,461)
642,045
Counterparty J
1,585,414
(353,020)
1,232,394
Total futures contracts
5,952,902
(2,725,168)
3,227,734
Forward currency contracts
Counterparty G
1,702,480
(1,120,787)
581,693
Total assets
$ 7,655,382
$ (3,845,955)
$ 3,809,427
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 K
$ 2,460,271
$ (2,159,638)
$ 300,633
Total liabilities
$ 2,460,271
$ (2,159,638)
$ 300,633
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
$ 1,353,295
$
-
$ (1,353,295)
$
-
Counterparty G
581,693
-
-
581,693
Counterparty I
642,045
-
(642,045)
-
Counterparty J
1,232,394
-
(1,232,394)
-
Total
$ 3,809,427
$
-
$ (3,227,734)
$ 581,693
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 K
$ 300,633
$
-
$ (300,633)
$
-
Total
$ 300,633
$
-
$ (300,633)
$
-
(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, 2018.
(4) Net amount represents the amounts owed by the Partnership to each counterparty as of December 31, 2018.
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 DB, BA and prior to October 2018, MS. The Partnership’s concentration of credit risk associated with DB, BA 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, BA and MS. The amount of such credit risk was $12,363,409 and $10,370,454 at September 30, 2019 and December 31, 2018 , respectively. |
