Fair Value Measurements

Fair Value Hierarchy—For disclosure purposes, financial instruments, whether measured at fair value on a recurring or nonrecurring basis or not measured at fair value, are classified in a hierarchy consisting of three levels based on the observability of valuation inputs in the market place as discussed below:


•	Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.

•

Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.


•	Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

Fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Fair values of interest rate caps, floors, flooridors, and corridors are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rates of the floors or rise above the strike rates of the caps. Variable interest rates used in the calculation of projected receipts and payments on the swaps, caps, and floors are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (Level 2 inputs). We also incorporate credit valuation adjustments (Level 3 inputs) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.

Fair values of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs). The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.

Fair values of marketable securities and liabilities associated with marketable securities, including public equity securities, equity put and call options, and other investments, are based on their quoted market closing prices (Level 1 inputs).

When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at September 30, 2014, the LIBOR interest rate forward curve (Level 2 inputs) assumed an uptrend from 0.16% to 1.05% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of hedge and non-hedge designated derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):



	Quoted Market Prices (Level 1)			Significant Other Observable Inputs (Level 2)		Counterparty and Cash Collateral Netting⁽⁴⁾			Total


September 30, 2014:
Assets
Derivative assets:
Interest rate derivatives - non-hedge	$	—		$	312	$	—		$	312		⁽¹⁾
Credit default swaps	—			664		(563		)	101			⁽¹⁾
Equity put and call options	769			—		—			769			⁽²⁾
Non-derivative assets:
Equity and US treasury securities	43,504			—		—			43,504			⁽²⁾
Total	44,273			976		(563		)	44,686

Liabilities
Derivative liabilities:
Short-equity put options	(279		)	—		—			(279		)	⁽³⁾
Short-equity call options	(156		)	—		—			(156		)	⁽³⁾
Non-derivative liabilities:
Margin account balance	(3,867		)	—		—			(3,867		)	⁽³⁾
Total	(4,302		)	—		—			(4,302		)
Net	$	39,971		$	976	$	(563	)	$	40,384

December 31, 2013:
Assets
Derivative assets:
Interest rate derivatives - non-hedge	$	—		$	19	$	—		$	19		⁽¹⁾
Equity put and call options	560			—		—			560			⁽²⁾
Non-derivative assets:
Equity and US treasury securities	29,041			—		—			29,041			⁽²⁾
Total	29,601			19		—			29,620
Liabilities
Derivative liabilities:
Credit default swaps	—			995		(1,068		)	(73		)	⁽³⁾
Short-equity put options	(82		)	—		—			(82		)	⁽³⁾
Short-equity call options	(479		)	—		—			(479		)	⁽³⁾
Non-derivative liabilities:
Margin account balance	(3,130		)	—		—			(3,130		)	⁽³⁾
Total	(3,691		)	995		(1,068		)	(3,764		)
Net	$	25,910		$	1,014	$	(1,068	)	$	25,856

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⁽¹⁾ Reported net as “Derivative assets, net” in the consolidated balance sheets.

⁽²⁾ Reported as “Marketable securities” in the consolidated balance sheets.

⁽³⁾ Reported as “Liabilities associated with marketable securities and other” in the consolidated balance sheets.

⁽⁴⁾ Represents cash collateral posted by our counterparty.

Effect of Fair-Value-Measured Assets and Liabilities on Consolidated Statements of Operations

The following tables summarize the effect of fair-value-measured assets and liabilities on the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 (in thousands):



	Gain (Loss) Recognized in Income								Reclassified from Accumulated OCI into Interest Expense
	Three Months Ended September 30,								Three Months Ended September 30,
	2014				2013				2014		2013
Assets
Derivative assets:
Interest rate derivatives	$	(156	)		$	(128	)		$	—	$	29
Credit default swaps	65				(711		)		—		—
Equity put and call options	(115		)		(621		)		—		—
Non-derivative assets:
Equity and US treasury securities	(612		)		965				—		—
Total	(818		)		(495		)		—		29
Liabilities
Derivative liabilities:
Short-equity put options	102				(148		)		—		—
Short-equity call options	212				316				—		—
Total	314				168				—		—
Net	$	(504	)		$	(327	)		$	—	$	29
Total combined
Interest rate derivatives	$	(156	)		$	(128	)		$	—	$	29
Credit default swaps	86				(689		)		—		—
Total derivatives	(70		)	⁽¹⁾	(817		)	⁽¹⁾	—		29
Unrealized loss on marketable securities	(2,875		)	⁽³⁾	257			⁽³⁾	—		—
Realized gain (loss) on marketable securities	2,441			^{(2) (4)}	233			^{(2) (4)}	—		—
Net	$	(504	)		$	(327	)		$	—	$	29



	Gain (Loss) Recognized in Income								Interest Savings (Cost) Recognized in Income						Reclassified from Accumulated OCI into Interest Expense
	Nine Months Ended September 30,								Nine Months Ended September 30,						Nine Months Ended September 30,
	2014				2013				2014		2013				2014		2013
Assets
Derivative assets:
Interest rate derivatives	$	(349	)		$	(10,757	)		$	—	$	10,639			$	100	$	53
Equity put and call options	(1,219		)		(435		)		—		—				—		—
Credit default swaps	(394		)		(886		)		—		—				—		—
Non-derivative assets:
Equity and US treasury securities	2,536				2,074				—		—				—		—
Total	574				(10,004		)		—		10,639				100		53
Liabilities
Derivative liabilities:
Interest rate derivatives	—				4,400				—		(4,424		)		—		—
Credit default swaps	—				(142		)		—		—				—		—
Short-equity put options	46				—				—		—				—		—
Short-equity call options	235				402				—		—				—		—
Total	281				4,660				—		(4,424		)		—		—
Net	$	855			$	(5,344	)		$	—	$	6,215			$	100	$	53
Total combined
Interest rate derivatives	$	(349	)		$	(6,357	)		$	—	$	6,215			$	100	$	53
Credit default swaps	(331		)		(820		)		—		—				—		—
Total derivatives	(680		)	⁽¹⁾	(7,177		)	⁽¹⁾	—		6,215			⁽²⁾	100		53
Unrealized gain (loss) on marketable securities	(3,818		)	⁽³⁾	2,039			⁽³⁾	—		—				—		—
Realized gain (loss) on marketable securities	5,353			^{(2) (4)}	(206		)	^{(2) (4)}	—		—				—		—
Net	$	855			$	(5,344	)		$	—	$	6,215			$	100	$	53

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⁽¹⁾Reported as “Unrealized loss on derivatives” in the consolidated statements of operations.

⁽²⁾Included in “Other income” in the consolidated statements of operations.

⁽³⁾Reported as “Unrealized gain (loss) on marketable securities” in the consolidated statements of operations.

⁽⁴⁾Includes costs of $21 and $63 for the three and nine months ended September 30, 2014, respectively, and $22 and $66 for the three and nine months ended September 30, 2013, respectively, associated with credit default swaps.

There was no change in fair value of our interest rate derivatives that were recognized in other comprehensive loss for the three and nine months ended September 30, 2014. For the three and nine months ended September 30, 2013, the change in fair value of our interest rate derivatives that was recognized in other comprehensive loss was a loss of $2,000 and $4,000, respectively.