☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 95-4719745 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
520 Madison Avenue, New York, New York | 10022 |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☐ |
Emerging growth company ☐ |
Page | |
February 28, 2018 | November 30, 2017 | ||||||
ASSETS | |||||||
Cash and cash equivalents ($5,106 and $7,514 at February 28, 2018 and November 30, 2017, respectively, related to consolidated VIEs) | $ | 5,016,863 | $ | 5,164,492 | |||
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations | 802,693 | 578,014 | |||||
Financial instruments owned, at fair value, (including securities pledged of $10,861,294 and $10,842,051 at February 28, 2018 and November 30, 2017, respectively; and $1,508 and $38,044 at February 28, 2018 and November 30, 2017, respectively, related to consolidated VIEs) | 15,318,223 | 14,193,352 | |||||
Loans to and investments in related parties | 829,157 | 682,790 | |||||
Securities borrowed | 7,300,171 | 7,721,803 | |||||
Securities purchased under agreements to resell | 2,983,945 | 3,689,559 | |||||
Securities received as collateral | — | 103 | |||||
Receivables: | |||||||
Brokers, dealers and clearing organizations | 3,833,107 | 2,514,838 | |||||
Customers | 1,596,975 | 1,563,758 | |||||
Fees, interest and other ($4 and $197 at February 28, 2018 and November 30, 2017, respectively, related to consolidated VIEs) | 305,372 | 381,231 | |||||
Premises and equipment | 301,771 | 297,750 | |||||
Goodwill | 1,648,886 | 1,647,089 | |||||
Other assets ($2 at both February 28, 2018 and November 30, 2017, related to consolidated VIEs) | 1,225,827 | 1,270,912 | |||||
Total assets | $ | 41,162,990 | $ | 39,705,691 | |||
LIABILITIES AND EQUITY | |||||||
Short-term borrowings (includes $0 and $23,324 at fair value at February 28, 2018 and November 30, 2017, respectively) | $ | 468,046 | $ | 436,215 | |||
Financial instruments sold, not yet purchased, at fair value | 9,630,413 | 8,171,929 | |||||
Collateralized financings: | |||||||
Securities loaned | 2,372,473 | 2,843,911 | |||||
Securities sold under agreements to repurchase | 8,250,339 | 8,660,511 | |||||
Other secured financings (includes $698,422 and $722,108 at February 28, 2018 and November 30, 2017, respectively, related to consolidated VIEs) | 702,356 | 722,108 | |||||
Obligation to return securities received as collateral | — | 103 | |||||
Payables: | |||||||
Brokers, dealers and clearing organizations | 3,045,716 | 2,226,768 | |||||
Customers | 2,886,631 | 2,664,023 | |||||
Accrued expenses and other liabilities ($534 and $1,391 at February 28, 2018 and November 30, 2017, respectively, related to consolidated VIEs) | 1,132,745 | 1,803,720 | |||||
Long-term debt (includes $735,456 and $606,956 at fair value at February 28, 2018 and November 30, 2017, respectively) | 7,175,550 | 6,416,844 | |||||
Total liabilities | 35,664,269 | 33,946,132 | |||||
EQUITY | |||||||
Member’s paid-in capital | 5,635,812 | 5,895,601 | |||||
Accumulated other comprehensive loss: | |||||||
Currency translation adjustments | (87,388 | ) | (98,909 | ) | |||
Changes in instrument specific credit risk | (46,001 | ) | (27,888 | ) | |||
Cash flow hedges | 110 | (936 | ) | ||||
Additional minimum pension liability | (4,548 | ) | (9,046 | ) | |||
Total accumulated other comprehensive loss | (137,827 | ) | (136,779 | ) | |||
Total Jefferies Group LLC member’s equity | 5,497,985 | 5,758,822 | |||||
Noncontrolling interests | 736 | 737 | |||||
Total equity | 5,498,721 | 5,759,559 | |||||
Total liabilities and equity | $ | 41,162,990 | $ | 39,705,691 |
Three Months Ended February 28, | |||||||
2018 | 2017 | ||||||
Revenues: | |||||||
Commissions and other fees | $ | 147,902 | $ | 145,822 | |||
Principal transactions | 217,473 | 221,902 | |||||
Investment banking | 439,991 | 408,021 | |||||
Asset management fees | 4,930 | 7,981 | |||||
Interest | 257,816 | 202,023 | |||||
Other | 18,483 | 24,048 | |||||
Total revenues | 1,086,595 | 1,009,797 | |||||
Interest expense | 265,349 | 214,284 | |||||
Net revenues | 821,246 | 795,513 | |||||
Non-interest expenses: | |||||||
Compensation and benefits | 455,633 | 460,172 | |||||
Non-compensation expenses: | |||||||
Floor brokerage and clearing fees | 43,819 | 45,858 | |||||
Underwriting costs | 14,275 | — | |||||
Technology and communications | 69,077 | 65,507 | |||||
Occupancy and equipment rental | 24,591 | 25,815 | |||||
Business development | 42,107 | 22,632 | |||||
Professional services | 30,408 | 32,124 | |||||
Other | 18,598 | 19,206 | |||||
Total non-compensation expenses | 242,875 | 211,142 | |||||
Total non-interest expenses | 698,508 | 671,314 | |||||
Earnings before income taxes | 122,738 | 124,199 | |||||
Income tax expense | 183,557 | 10,179 | |||||
Net earnings (loss) | (60,819 | ) | 114,020 | ||||
Net earnings (loss) attributable to noncontrolling interests | (1 | ) | 1 | ||||
Net earnings (loss) attributable to Jefferies Group LLC | $ | (60,818 | ) | $ | 114,019 |
Three Months Ended February 28, | |||||||
2018 | 2017 | ||||||
Net earnings (loss) | $ | (60,819 | ) | $ | 114,020 | ||
Other comprehensive income (loss), net of tax: | |||||||
Currency translation and other adjustments (1) | 16,019 | (2,530 | ) | ||||
Changes in instrument specific credit risk (2) | (18,113 | ) | (9,695 | ) | |||
Cash flow hedges (3) | 1,046 | — | |||||
Total other comprehensive income (loss), net of tax (4) | (1,048 | ) | (12,225 | ) | |||
Comprehensive income (loss) | (61,867 | ) | 101,795 | ||||
Net earnings (loss) attributable to noncontrolling interests | (1 | ) | 1 | ||||
Comprehensive income (loss) attributable to Jefferies Group LLC | $ | (61,866 | ) | $ | 101,794 |
(1) | The amount during the three months ended February 28, 2018 includes $5.3 million related to the transfer of the German Pension Plan, which was reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings, and ($0.8) million related to the Tax Cuts and Jobs Act (the “Tax Act”), which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information. |
(2) | The amount reflects income tax expense of approximately $1.9 million for the three months ended February 28, 2018 and income tax benefit of approximately $6.3 million for the three months ended February 28, 2017. The amount during the three months ended February 28, 2018 also includes ($6.5) million related to the Tax Act, which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information. |
(3) | The amount during the three months ended February 28, 2018 includes $0.2 million related to the Tax Act, which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information. |
(4) | None of the components of other comprehensive income (loss) are attributable to noncontrolling interests. |
Three Months Ended February 28, 2018 | Year Ended November 30, 2017 | ||||||
Member’s paid-in capital: | |||||||
Balance, beginning of period | $ | 5,895,601 | $ | 5,538,103 | |||
Cumulative effect of the adoption of the new revenue standard, net of tax | (6,121 | ) | — | ||||
Net earnings (loss) attributable to Jefferies Group LLC | (60,818 | ) | 357,498 | ||||
Distribution to Leucadia National Corporation | (200,000 | ) | — | ||||
Tax Cuts and Jobs Act adjustment | 7,150 | — | |||||
Balance, end of period | $ | 5,635,812 | $ | 5,895,601 | |||
Accumulated other comprehensive income (loss), net of tax (1) (2): | |||||||
Balance, beginning of period | $ | (136,779 | ) | $ | (168,157 | ) | |
Currency adjustments | 11,521 | 53,396 | |||||
Changes in instrument specific credit risk (3) | (18,113 | ) | (21,394 | ) | |||
Cash flow hedges (4) | 1,046 | (936 | ) | ||||
Pension adjustments (5) | 4,498 | 312 | |||||
Balance, end of period | $ | (137,827 | ) | $ | (136,779 | ) | |
Total Jefferies Group LLC member’s equity | $ | 5,497,985 | $ | 5,758,822 | |||
Noncontrolling interests: | |||||||
Balance, beginning of period | $ | 737 | $ | 651 | |||
Net earnings (loss) attributable to noncontrolling interests | (1 | ) | 86 | ||||
Balance, end of period | $ | 736 | $ | 737 | |||
Total equity | $ | 5,498,721 | $ | 5,759,559 |
(1) | The components of other comprehensive income (loss) are attributable to Jefferies Group LLC. None of the components of other comprehensive income (loss) are attributable to noncontrolling interests. |
(2) | There were no material reclassifications out of Accumulated other comprehensive income (loss) during the year ended November 30, 2017. |
(3) | The amount during the three months ended February 28, 2018 includes ($6.5) million related to the Tax Act, which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information. |
(4) | The amount during the three months ended February 28, 2018 includes $0.2 million related to the Tax Act, which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information. |
(5) | The amount during the three months ended February 28, 2018 includes $5.3 million related to the transfer of the German Pension Plan, which was reclassified to earnings, and ($0.8) million related to the Tax Act, which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information. |
Three Months Ended February 28, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities: | |||||||
Net earnings (loss) | $ | (60,819 | ) | $ | 114,020 | ||
Adjustments to reconcile net earnings (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 1,843 | 252 | |||||
Income on loans to and investments in related parties | (5,605 | ) | (26,264 | ) | |||
Distributions received on investments in related parties | — | 2,240 | |||||
Other adjustments | (38,250 | ) | (9,435 | ) | |||
Net change in assets and liabilities: | |||||||
Securities deposited with clearing and depository organizations | 64,861 | 13 | |||||
Receivables: | |||||||
Brokers, dealers and clearing organizations | (1,314,557 | ) | (670,299 | ) | |||
Customers | (33,216 | ) | (338,876 | ) | |||
Fees, interest and other | 71,275 | (1,211 | ) | ||||
Securities borrowed | 427,310 | 856,236 | |||||
Financial instruments owned | (1,102,846 | ) | 566,847 | ||||
Securities purchased under agreements to resell | 716,157 | (609,225 | ) | ||||
Other assets | 50,756 | (145,374 | ) | ||||
Payables: | |||||||
Brokers, dealers and clearing organizations | 814,852 | (329,027 | ) | ||||
Customers | 222,603 | 114,834 | |||||
Securities loaned | (476,725 | ) | (295,666 | ) | |||
Financial instruments sold, not yet purchased | 1,442,571 | 375,034 | |||||
Securities sold under agreements to repurchase | (418,052 | ) | 525,137 | ||||
Accrued expenses and other liabilities | (679,748 | ) | (241,753 | ) | |||
Net cash used in operating activities | (317,590 | ) | (112,517 | ) | |||
Cash flows from investing activities: | |||||||
Contributions to loans to and investments in related parties | (1,778,386 | ) | (1,134,714 | ) | |||
Distributions from loans to and investments in related parties | 1,639,300 | 1,140,234 | |||||
Net payments on premises and equipment | (16,953 | ) | (22,396 | ) | |||
Cash received from contingent consideration | — | 1,250 | |||||
Net cash used in investing activities | (156,039 | ) | (15,626 | ) |
Three Months Ended February 28, | |||||||
2018 | 2017 | ||||||
Cash flows from financing activities: | |||||||
Proceeds from short-term borrowings | 275,000 | — | |||||
Payments on short-term borrowings | (248,323 | ) | (107,113 | ) | |||
Proceeds from issuance of long-term debt, net of issuance costs | 1,138,705 | 792,376 | |||||
Repayment of long-term debt | (334,978 | ) | — | ||||
Dividend distribution | (200,000 | ) | — | ||||
Net payments on other secured financings | (19,752 | ) | (161,456 | ) | |||
Net change in bank overdrafts | 2,360 | 4,195 | |||||
Net cash provided by financing activities | 613,012 | 528,002 | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2,528 | (558 | ) | ||||
Net increase in cash, cash equivalents and restricted cash | 141,911 | 399,301 | |||||
Cash, cash equivalents and restricted cash at beginning of period | 5,642,776 | 4,286,513 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 5,784,687 | $ | 4,685,814 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid (received) during the period for | |||||||
Interest | $ | 314,921 | $ | 238,938 | |||
Income taxes, net | (2,184 | ) | 477 |
February 28, 2018 | November 30, 2017 | ||||||
Cash and cash equivalents | $ | 5,016,863 | $ | 5,164,492 | |||
Cash and securities segregated and on deposit for regulatory purposes with clearing and depository organizations | 767,824 | 478,284 | |||||
Total cash, cash equivalents and restricted cash | $ | 5,784,687 | $ | 5,642,776 |
Note | Page |
• | Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed. |
• | Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring advisory engagements, are expensed as incurred. |
• | All investment banking expenses are recognized within their respective expense category on the Consolidated Statements of Earnings and any expenses reimbursed by clients are recognized as Investment banking revenues. |
• | Performance fee revenue is generally recognized only at the end of the performance period to the extent that the benchmark return has been met. |
• | Investment Banking Revenues. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction. |
• | Certain Capital Markets Revenues. Revenues associated with price stabilization activities as part of a securities underwriting were historically recognized as part of Investment banking revenues. Under the new revenue standard, revenue from these activities is recognized within Principal transaction revenues, as these revenues are not considered to be within the scope of the new standard. |
• | Investment Banking Advisory Expenses. Historically, expenses associated with investment banking advisory assignments were deferred until reimbursed by the client, the related fee revenue is recognized or the engagement is otherwise concluded. Under the new revenue standard, expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred. |
• | Investment Banking Underwriting and Advisory Expenses. Expenses have historically been recorded net of client reimbursements and/or netted against revenues. Under the new revenue standard, all investment banking expenses will be recognized within their respective expense category on the Consolidated Statements of Earnings and any expense reimbursements will be recognized as Investment banking revenues (i.e., expenses are no longer recorded net of client reimbursements and are not netted against revenues). |
• | Asset Management Fees. In certain asset management fee arrangements, we receive performance-based fees, which vary with performance or, in certain cases, are earned when the return on assets under management exceed certain benchmark returns or other performance targets. Historically, performance fees have been accrued (or reversed) quarterly based on measuring performance to date versus any relevant benchmark return hurdles stated in the investment management agreement. Under the new revenue standard, performance fees are considered variable as they are subject to fluctuation (e.g., based on market performance) and/or are contingent on a future event during the measurement period (e.g., exceeding a specified benchmark index) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met. |
Three Months Ended February 28, 2018 | |||||||||||
As Reported | ASC 606 Impact | Adjusted (1) | |||||||||
Revenues: | |||||||||||
Investment banking | $ | 439,991 | $ | 32,485 | $ | 407,506 | |||||
Total revenues | 1,086,595 | 32,485 | 1,054,110 | ||||||||
Net revenues | 821,246 | 32,485 | 788,761 | ||||||||
Non-interest expenses: | |||||||||||
Underwriting costs | 14,275 | 14,275 | — | ||||||||
Technology and communications | 69,077 | 103 | 68,974 | ||||||||
Business development | 42,107 | 17,243 | 24,864 | ||||||||
Professional services | 30,408 | 711 | 29,697 | ||||||||
Other expenses | 18,598 | 153 | 18,445 | ||||||||
Total non-compensation expenses | 242,875 | 32,485 | 210,390 | ||||||||
Total non-interest expenses | 698,508 | 32,485 | 666,023 |
(1) | The amounts reflect each affected financial statement line item as they would have been reported under U.S. GAAP, prior to the adoption of the new revenue standard. |
February 28, 2018 | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting (1) | Total | |||||||||||||||
Assets: | |||||||||||||||||||
Financial instruments owned: | |||||||||||||||||||
Corporate equity securities | $ | 2,127,451 | $ | 65,101 | $ | 35,412 | $ | — | $ | 2,227,964 | |||||||||
Corporate debt securities | — | 2,865,547 | 26,103 | — | 2,891,650 | ||||||||||||||
Collateralized debt obligations and collateralized loan obligations | — | 144,505 | 26,433 | — | 170,938 | ||||||||||||||
U.S. government and federal agency securities | 844,212 | 42,943 | — | — | 887,155 | ||||||||||||||
Municipal securities | — | 713,643 | — | — | 713,643 | ||||||||||||||
Sovereign obligations | 1,312,317 | 1,139,803 | — | — | 2,452,120 | ||||||||||||||
Residential mortgage-backed securities | — | 2,357,081 | 21,762 | — | 2,378,843 | ||||||||||||||
Commercial mortgage-backed securities | — | 505,552 | 15,103 | — | 520,655 | ||||||||||||||
Other asset-backed securities | — | 286,459 | 51,288 | — | 337,747 | ||||||||||||||
Loans and other receivables | — | 2,118,571 | 62,043 | — | 2,180,614 | ||||||||||||||
Derivatives (2) | 8,651 | 2,545,221 | 4,712 | (2,409,046 | ) | 149,538 | |||||||||||||
Investments at fair value | — | — | 79,879 | — | 79,879 | ||||||||||||||
Total financial instruments owned, excluding Investments at fair value based on NAV | $ | 4,292,631 | $ | 12,784,426 | $ | 322,735 | $ | (2,409,046 | ) | $ | 14,990,746 | ||||||||
Liabilities: | |||||||||||||||||||
Financial instruments sold, not yet purchased: | |||||||||||||||||||
Corporate equity securities | $ | 1,768,112 | $ | 6,592 | $ | 61 | $ | — | $ | 1,774,765 | |||||||||
Corporate debt securities | — | 1,595,775 | 522 | — | 1,596,297 | ||||||||||||||
U.S. government and federal agency securities | 1,398,020 | — | — | — | 1,398,020 | ||||||||||||||
Municipal securities | — | 7,659 | — | — | 7,659 | ||||||||||||||
Sovereign obligations | 1,208,396 | 923,899 | — | — | 2,132,295 | ||||||||||||||
Commercial mortgage-backed securities | — | — | 35 | — | 35 | ||||||||||||||
Loans | — | 1,861,278 | 10,323 | — | 1,871,601 | ||||||||||||||
Derivatives | 11,451 | 3,476,824 | 11,594 | (2,650,128 | ) | 849,741 | |||||||||||||
Total financial instruments sold, not yet purchased | $ | 4,385,979 | $ | 7,872,027 | $ | 22,535 | $ | (2,650,128 | ) | $ | 9,630,413 | ||||||||
Long-term debt | $ | — | $ | 735,456 | $ | — | $ | — | $ | 735,456 |
(1) | Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty. |
(2) | During the three months ended February 28, 2018, we transferred from Level 1 to Level 2 $20.8 million of listed options included in Financial instruments owned—Derivatives, which are measured based on broker quotes or mid-market valuations. There were no other material transfers between Level 1 and Level 2 for three months ended February 28, 2018 and 2017. |
November 30, 2017 | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting (1) | Total | |||||||||||||||
Assets: | |||||||||||||||||||
Financial instruments owned: | |||||||||||||||||||
Corporate equity securities | $ | 1,801,453 | $ | 57,091 | $ | 22,009 | $ | — | $ | 1,880,553 | |||||||||
Corporate debt securities | — | 3,261,300 | 26,036 | — | 3,287,336 | ||||||||||||||
Collateralized debt obligations and collateralized loan obligations | — | 139,166 | 30,004 | — | 169,170 | ||||||||||||||
U.S. government and federal agency securities | 1,269,230 | 39,443 | — | — | 1,308,673 | ||||||||||||||
Municipal securities | — | 710,513 | — | — | 710,513 | ||||||||||||||
Sovereign obligations | 1,381,552 | 1,035,907 | — | — | 2,417,459 | ||||||||||||||
Residential mortgage-backed securities | — | 1,453,294 | 26,077 | — | 1,479,371 | ||||||||||||||
Commercial mortgage-backed securities | — | 508,115 | 12,419 | — | 520,534 | ||||||||||||||
Other asset-backed securities | — | 217,111 | 61,129 | — | 278,240 | ||||||||||||||
Loans and other receivables | — | 1,620,581 | 47,304 | — | 1,667,885 | ||||||||||||||
Derivatives | 160,168 | 3,248,586 | 9,295 | (3,254,216 | ) | 163,833 | |||||||||||||
Investments at fair value | — | 946 | 93,454 | — | 94,400 | ||||||||||||||
Total financial instruments owned, excluding Investments at fair value based on NAV | $ | 4,612,403 | $ | 12,292,053 | $ | 327,727 | $ | (3,254,216 | ) | $ | 13,977,967 | ||||||||
Securities received as collateral | $ | 103 | $ | — | $ | — | $ | — | $ | 103 | |||||||||
Liabilities: | |||||||||||||||||||
Financial instruments sold, not yet purchased: | |||||||||||||||||||
Corporate equity securities | $ | 1,456,675 | $ | 32,122 | $ | 48 | $ | — | $ | 1,488,845 | |||||||||
Corporate debt securities | — | 1,688,825 | 522 | — | 1,689,347 | ||||||||||||||
U.S. government and federal agency securities | 1,430,737 | — | — | — | 1,430,737 | ||||||||||||||
Sovereign obligations | 1,216,643 | 956,992 | — | — | 2,173,635 | ||||||||||||||
Commercial mortgage-backed securities | — | — | 105 | — | 105 | ||||||||||||||
Loans | — | 1,148,824 | 3,486 | — | 1,152,310 | ||||||||||||||
Derivatives | 247,919 | 3,399,239 | 16,041 | (3,426,249 | ) | 236,950 | |||||||||||||
Total financial instruments sold, not yet purchased | $ | 4,351,974 | $ | 7,226,002 | $ | 20,202 | $ | (3,426,249 | ) | $ | 8,171,929 | ||||||||
Short-term borrowings | $ | — | $ | 23,324 | $ | — | $ | — | $ | 23,324 | |||||||||
Long-term debt | $ | — | $ | 606,956 | $ | — | $ | — | $ | 606,956 | |||||||||
Obligation to return securities received as collateral | $ | 103 | $ | — | $ | — | $ | — | $ | 103 |
(1) | Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty. |
• | Exchange-Traded Equity Securities: Exchange-traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy. To the extent these securities are actively traded, valuation adjustments are not applied. |
• | Non-Exchange-Traded Equity Securities: Non-exchange-traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed from recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange-traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization (“EBITDA”), price/book value), discounted cash flow analyses and transaction prices observed from subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration). |
• | Equity Warrants: Non-exchange-traded equity warrants are measured primarily using pricing data from external pricing services, prices observed from recently executed market transactions and broker quotations are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange-traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. |
• | Corporate Bonds: Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed from recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited portion of our corporate bonds. |
• | High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed from recently executed market transactions of institutional size. Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financing or recapitalization, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers. |
• | U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized within Level 1 of the fair value hierarchy. |
• | U.S. Agency Debt Securities: Callable and non-callable U.S. agency debt securities are measured primarily based on quoted market prices obtained from external pricing services and are generally categorized within Level 1 or Level 2 of the fair value hierarchy. |
• | Agency Residential Mortgage-Backed Securities (“RMBS”): Agency RMBS include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy. |
• | Agency Residential Interest-Only and Inverse Interest-Only Securities: The fair value is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed from recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer and weighted average loan age. Agency Residential Interest-Only and Inverse Interest-Only Securities are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate. |
• | Non-Agency RMBS: The fair value of non-agency RMBS is determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields. In addition, broker quotes, where available, are also referenced to compare prices primarily on interest-only securities. |
• | Agency Commercial Mortgage-Backed Securities (“CMBS”): Government National Mortgage Association (“GNMA”) project loan bonds are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation of various factors, including prepayment speeds, default rates and cash flow structures, as well as the likelihood of pricing levels in the current market environment. Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed from recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy. |
• | Non-Agency CMBS: Non-agency CMBS are measured using pricing data obtained from external pricing services and prices observed from recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy. |
• | Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, market prices for debt securities of the same creditor and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure. |
• | Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans and data provider pricing. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing. |
• | Project Loans and Participation Certificates in GNMA Project and Construction Loans: Valuations of participation certificates in GNMA project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans to account for the arbitrage that is realized at the time of securitization. The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions. |
• | Consumer Loans and Funding Facilities: Consumer and small business whole loans and related funding facilities are valued based on observed market transactions and incorporating valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy. |
• | Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent trade activity in the same receivable. |
• | Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted exchange prices, broker quotes or vanilla option valuation models, such as Black-Scholes, using observable valuation inputs from the principal market. Exchange quotes and/or valuation inputs are generally obtained from external vendors and pricing services. Broker quotes are validated directly through observable and tradeable quotes. Listed derivative contracts that use unadjusted exchange close prices are generally categorized within Level 1 of the fair value hierarchy. All other listed derivative contracts are generally categorized within Level 2 of the fair value hierarchy. |
• | Over-the-Counter (“OTC”) Derivative Contracts: OTC derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy. |
February 28, 2018 | |||||||||
Fair Value (1) | Unfunded Commitments | Redemption Frequency (if currently eligible) | |||||||
Equity Long/Short Hedge Funds (2) | $ | 34,623 | $ | — | Monthly, Quarterly | ||||
Fixed Income and High Yield Hedge Funds (3) | 405 | — | — | ||||||
Fund of Funds (4) | 186 | — | — | ||||||
Equity Funds (5) | 32,839 | 18,176 | — | ||||||
Multi-asset Funds (6) | 259,424 | — | — | ||||||
Total | $ | 327,477 | $ | 18,176 |
November 30, 2017 | |||||||||
Fair Value (1) | Unfunded Commitments | Redemption Frequency (if currently eligible) | |||||||
Equity Long/Short Hedge Funds (2) | $ | 33,176 | $ | — | Monthly, Quarterly | ||||
Fixed Income and High Yield Hedge Funds (3) | 417 | — | — | ||||||
Fund of Funds (4) | 189 | — | — | ||||||
Equity Funds (5) | 26,798 | 19,084 | — | ||||||
Multi-asset Funds (6) | 154,805 | — | — | ||||||
Total | $ | 215,385 | $ | 19,084 |
(1) | Where fair value is calculated based on NAV, fair value has been derived from each of the funds’ capital statements. |
(2) | This category includes investments in hedge funds that invest, long and short, primarily in equity securities in domestic and international markets in both the public and private sectors. At both February 28, 2018 and November 30, 2017, approximately 1% of the fair value of investments in this category are classified as being in liquidation. |
(3) | This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt and private equity investments. There are no redemption provisions. |
(4) | This category includes investments in fund of funds that invest in various private equity funds. The investments in this category are managed by us and have no redemption provisions. These investments are gradually being liquidated or we have requested redemption, however, we are unable to estimate when these funds will be received. |
(5) | At February 28, 2018 and November 30, 2017, the investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries. These investments cannot be redeemed; instead, distributions are received through the liquidation of the underlying assets of the funds which are expected to be liquidated in one to six years. |
(6) | This category includes investments in hedge funds that invest, long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At February 28, 2018 and November 30, 2017, investments representing approximately 17% and 12%, respectively, of the fair value of investments in this category are redeemable with 30 days prior written notice. |
Three Months Ended February 28, 2018 | |||||||||||||||||||||||||||||||||||
Balance at November 30, 2017 | Total gains/losses (realized and unrealized) (1) | Purchases | Sales | Settlements | Issuances | Net transfers into/ (out of) Level 3 | Balance at February 28, 2018 | Change in unrealized gains/ (losses) relating to instruments still held at February 28, 2018 (1) | |||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||
Financial instruments owned: | |||||||||||||||||||||||||||||||||||
Corporate equity securities | $ | 22,009 | $ | 11,684 | $ | 2,733 | $ | (1,381 | ) | $ | (1,687 | ) | $ | — | $ | 2,054 | $ | 35,412 | $ | 10,674 | |||||||||||||||
Corporate debt securities | 26,036 | (9 | ) | 928 | (346 | ) | (2,049 | ) | — | 1,543 | 26,103 | (1,086 | ) | ||||||||||||||||||||||
CDOs and CLOs | 30,004 | (3,782 | ) | 43,796 | (34,168 | ) | (3,838 | ) | — | (5,579 | ) | 26,433 | (3,006 | ) | |||||||||||||||||||||
RMBS | 26,077 | (3,212 | ) | — | — | (3 | ) | — | (1,100 | ) | 21,762 | (2,366 | ) | ||||||||||||||||||||||
CMBS | 12,419 | (231 | ) | 1,260 | (508 | ) | (1,285 | ) | — | 3,448 | 15,103 | (622 | ) | ||||||||||||||||||||||
Other ABS | 61,129 | (1,385 | ) | 57,095 | (53,459 | ) | (3,776 | ) | — | (8,316 | ) | 51,288 | 127 | ||||||||||||||||||||||
Loans and other receivables | 47,304 | 1,598 | 15,635 | (803 | ) | (9,730 | ) | — | 8,039 | 62,043 | (190 | ) | |||||||||||||||||||||||
Investments at fair value | 93,454 | 499 | 240 | (16,624 | ) | — | — | 2,310 | 79,879 | (95 | ) | ||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||
Financial instruments sold, not yet purchased: | |||||||||||||||||||||||||||||||||||
Corporate equity securities | $ | 48 | $ | 13 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 61 | $ | (13 | ) | ||||||||||||||||
Corporate debt securities | 522 | — | — | — | — | — | — | 522 | — | ||||||||||||||||||||||||||
CMBS | 105 | (70 | ) | — | — | — | — | — | 35 | (35 | ) | ||||||||||||||||||||||||
Loans | 3,486 | 6 | (25 | ) | 3,442 | — | — | 3,414 | 10,323 | (6 | ) | ||||||||||||||||||||||||
Net derivatives (2) | 6,746 | (1,166 | ) | (6 | ) | — | 1,012 | 296 | — | 6,882 | (5,609 | ) |
(1) | Realized and unrealized gains/losses are reported in Principal transaction revenues in our Consolidated Statements of Earnings. |
(2) | Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased—Derivatives. |
• | CDOs and CLOs of $9.1 million and loans and other receivables of $8.6 million due to reduced pricing transparency. |
• | CDOs and CLOs of $14.7 million and other ABS of $8.3 million due to greater pricing transparency supporting classification into Level 2. |
Three Months Ended February 28, 2017 | |||||||||||||||||||||||||||||||||||
Balance at November 30, 2016 | Total gains/losses (realized and unrealized) (1) | Purchases | Sales | Settlements | Issuances | Net transfers into/ (out of) Level 3 | Balance at February 28, 2017 | Change in unrealized gains/ (losses) relating to instruments still held at February 28, 2017 (1) | |||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||
Financial instruments owned: | |||||||||||||||||||||||||||||||||||
Corporate equity securities | $ | 21,739 | $ | 532 | $ | 847 | $ | (145 | ) | $ | (186 | ) | $ | — | $ | (2,207 | ) | $ | 20,580 | $ | 362 | ||||||||||||||
Corporate debt securities | 25,005 | (1,793 | ) | 3,002 | (3,157 | ) | (1,207 | ) | — | 11,617 | 33,467 | (1,662 | ) | ||||||||||||||||||||||
CDOs and CLOs | 54,354 | (7,594 | ) | 8,663 | (22,633 | ) | (45 | ) | — | 12,609 | 45,354 | (8,525 | ) | ||||||||||||||||||||||
Municipal securities | 27,257 | (636 | ) | — | (67 | ) | — | — | — | 26,554 | (641 | ) | |||||||||||||||||||||||
RMBS | 38,772 | (253 | ) | 263 | (12,411 | ) | (210 | ) | — | 13,098 | 39,259 | (440 | ) | ||||||||||||||||||||||
CMBS | 20,580 | (1,420 | ) | — | (412 | ) | — | — | 1,905 | 20,653 | (1,421 | ) | |||||||||||||||||||||||
Other ABS | 40,911 | (1,788 | ) | 3,553 | (299 | ) | (3,335 | ) | — | (1,340 | ) | 37,702 | (1,717 | ) | |||||||||||||||||||||
Loans and other receivables | 81,872 | 4,950 | 9,489 | (9,778 | ) | (7,764 | ) | — | (25,597 | ) | 53,172 | 836 | |||||||||||||||||||||||
Investments at fair value | 96,369 | (2,199 | ) | — | (10,119 | ) | (266 | ) | — | — | 83,785 | (176 | ) | ||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||
Financial instruments sold, not yet purchased: | |||||||||||||||||||||||||||||||||||
Corporate equity securities | $ | 313 | $ | 11 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 324 | $ | (11 | ) | ||||||||||||||||
Corporate debt securities | 523 | — | — | — | — | — | — | 523 | — | ||||||||||||||||||||||||||
Loans | 378 | 189 | (323 | ) | — | — | — | 792 | 1,036 | (189 | ) | ||||||||||||||||||||||||
Net derivatives (2) | 3,441 | (4,384 | ) | — | — | 3,373 | 186 | 3,797 | 6,413 | 1,347 | |||||||||||||||||||||||||
Other secured financings | 418 | (8 | ) | — | — | — | — | (323 | ) | 87 | 11 |
(1) | Realized and unrealized gains/losses are reported in Principal transaction revenues in our Consolidated Statements of Earnings. |
(2) | Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased—Derivatives. |
• | CDOS and CLOs of $18.1 million, RMBS of $13.7 million and corporate debt securities of $11.6 million due to a lack of observable market transactions. |
• | Loans and other receivables of $28.2 million due to greater pricing transparency supporting classification into Level 2. |
February 28, 2018 | ||||||||||||||
Financial Instruments Owned: | Fair Value (in thousands) | Valuation Technique | Significant Unobservable Input(s) | Input / Range | Weighted Average | |||||||||
Corporate equity securities | $ | 30,335 | ||||||||||||
Non-exchange-traded securities | Market approach | Price | $3-$750 | $ | 183 | |||||||||
Underlying stock price | $11 | — | ||||||||||||
Comparable pricing | Comparable asset price | $10 | — | |||||||||||
Corporate debt securities | $ | 26,103 | Convertible bond model | Discount rate/yield | 9% | — | ||||||||
Volatility | 40% | — | ||||||||||||
Market approach | Estimated recovery percentage | 2%-32% | 25 | % | ||||||||||
Price | $10 | — | ||||||||||||
Comparable pricing | Comparable asset price | $47 | — | |||||||||||
CDOs and CLOs | $ | 26,433 | Discounted cash flows | Constant prepayment rate | 20% | — | ||||||||
Constant default rate | 2% | — | ||||||||||||
Loss severity | 25%-30% | 26 | % | |||||||||||
Discount rate/yield | 6%-31% | 17 | % | |||||||||||
Scenario analysis | Estimated recovery percentage | 7%-40% | 23 | % | ||||||||||
RMBS | $ | 21,762 | Discounted cash flows | Cumulative loss rate | 3%-19% | 9 | % | |||||||
Duration (years) | 2-4 | 3 | ||||||||||||
Discount rate/yield | 3%-9% | 7 | % | |||||||||||
CMBS | $ | 15,103 | Discounted cash flows | Cumulative loss rate | 7%-65% | 33 | % | |||||||
Duration (years) | 0-2 | 1 | ||||||||||||
Discount rate/yield | 3%-24% | 17 | % | |||||||||||
Scenario analysis | Estimated recovery percentage | 26%-32% | 28 | % | ||||||||||
Price | $49-$52 | $ | 50 | |||||||||||
Other ABS | $ | 51,288 | Discounted cash flows | Cumulative loss rate | 0%-27% | 22 | % | |||||||
Duration (years) | 1-6 | 2 | ||||||||||||
Discount rate/yield | 5%-11% | 8 | % | |||||||||||
Scenario analysis | Estimated recovery percentage | 11% | — | |||||||||||
Loans and other receivables | $ | 54,004 | Market approach | Estimated recovery percentage | 23%-79% | 36 | % | |||||||
Price | $97 | — | ||||||||||||
Transaction level | $100 | — | ||||||||||||
Scenario analysis | Estimated recovery percentage | 62%-107% | 90 | % | ||||||||||
Derivatives | $ | 4,712 | ||||||||||||
Total return swaps | Market approach | Price | $102 | — | ||||||||||
Investments at fair value | $ | 79,879 | ||||||||||||
Private equity securities | Market approach | Price | $0-$250 | $ | 104 | |||||||||
Financial Instruments Sold, Not Yet Purchased: | ||||||||||||||
Derivatives | $ | 11,594 | ||||||||||||
Equity options | Option model/default rate | Default probability | 0% | — | ||||||||||
Unfunded commitments | Market approach | Price | $97 | — | ||||||||||
Total return swaps | Market approach | Price | $102 | — | ||||||||||
Variable funding note swaps | Discounted cash flows | Constant prepayment rate | 20% | — | ||||||||||
Constant default rate | 2% | — | ||||||||||||
Loss severity | 25% | — | ||||||||||||
Discount rate/yield | 31% | — |
November 30, 2017 | ||||||||||||||
Financial Instruments Owned: | Fair Value (in thousands) | Valuation Technique | Significant Unobservable Input(s) | Input / Range | Weighted Average | |||||||||
Corporate equity securities | $ | 18,109 | ||||||||||||
Non-exchange-traded securities | Market approach | Price | $3-$75 | $ | 33 | |||||||||
Underlying stock price | $6 | — | ||||||||||||
Comparable pricing | Comparable asset price | $7 | — | |||||||||||
Corporate debt securities | $ | 26,036 | Convertible bond model | Discount rate/yield | 8% | — | ||||||||
Volatility | 40% | — | ||||||||||||
Market approach | Estimated recovery percentage | 17% | — | |||||||||||
Price | $10 | — | ||||||||||||
CDOs and CLOs | $ | 30,004 | Discounted cash flows | Constant prepayment rate | 20% | — | ||||||||
Constant default rate | 2% | — | ||||||||||||
Loss severity | 25%-30% | 26 | % | |||||||||||