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Financial Instruments
 12 Months Ended
Dec. 31, 2013
Financial Instruments  
Financial Instruments

NOTE 8. Financial Instruments

        The Company sold substantially all of its financial instruments in connection with the discontinuation of its Fixed Income businesses in the second quarter of 2013 and the Homeward Transaction in the first quarter of 2013. The Company maintains cash equivalents and continues to hold investments, principally in FA Technology Ventures, L.P. ("FATV" or "the Partnership").

        The Company's financial instruments are recorded within the Statement of Financial Condition at fair value. ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

  • Level 1:    Quoted prices in active markets that the Company has the ability to access at the reporting date, for identical assets or liabilities.

    Level 2:    Directly or indirectly observable prices in active markets for similar assets or liabilities; quoted prices for identical or similar items in markets that are not active; inputs other than quoted prices (e.g., interest rates, yield curves, credit risks, volatilities); or "market corroborated inputs."

    Level 3:    Unobservable inputs that reflect management's own assumptions about the assumptions market participants would make.

        Prices are not adjusted for the effects, if any, of the Company holding a large block relative to the overall trading volume (referred to as a "blockage factor").

Fair Valuation Methodology

        Cash Equivalents—These financial assets represent cash in banks or cash invested in highly liquid investments with original maturities of less than 90 days that are not segregated for regulatory purposes or held for sale in the ordinary course of business. These investments are valued at par, which represent fair value, and are considered Level 1 as these instruments are generally traded in active, quoted and highly liquid markets. The Company's cash equivalents were $3.8 million and $3.1 million at December 31, 2013 and December 31, 2012, respectively.

        Financial Instruments Owned—The remaining financial instruments owned of approximately $0.7 million at December 31, 2013 were primarily associated with legacy deferred compensation plans provided by the Company, which are scheduled to be paid out to plan participants between 2014 and 2016. The Company has not permitted new amounts to be deferred under these plans since February 28, 2007. The assets are all Level 1 equity securities, which are traded in active, quoted and highly liquid markets.

        Investments—The Company's investments consist of interests in privately held securities, the valuations of which are based predominantly on unobservable inputs and are therefore classified as Level 3. The Company's investments were $18.9 million and $20.5 million at December 31, 2013 and December 31, 2012, respectively. Refer to Note 10 herein for additional information.

Investments—Quantitative Disclosure About Significant Unobservable Inputs

        The Company's investments are primarily associated with the Company's limited partnership investment in FATV of approximately $17.6 million (6 privately held companies) and $17.1 million (7 privately held companies) at December 31, 2013 and December 31, 2012, respectively. Refer to Note 10 herein for additional information.

Unobservable Inputs—December 31, 2013

Valuation Technique
  Unobservable Input   Range (Weighted Average)

Market comparable companies

   Enterprise value/Revenue multiple   2.7x - 7.0x (5.5x)

 

   Discount applied to multiples   30% - 35% (30%)

Venture capital method

  

Enterprise value/EBITDA multiple

  

5.0x

 

   Discount applied to enterprise value   55%

Unobservable Inputs—December 31, 2012

Valuation Technique
  Unobservable Input   Range (Weighted Average)

Market comparable companies

   Enterprise value/Revenue multiple   4.3x - 6.7x (5.7x)

 

   Discount applied to multiples   25.0% - 40.0% (22.0%)

        An increase in the enterprise value/revenue and EBITDA multiples would result in a higher fair value for these investments, whereas, an increase in the discounts applied would reduce fair value.

        The following table summarizes the categorization of the financial instruments within the fair value hierarchy including those for which the Company accounts for under the FVO at December 31, 2012 (prior to the discontinuation of the Fixed Income businesses):

 
   Assets at Fair Value  
(In thousands)
  Level 1   Level 2   Level 3   Total  

Financial instruments owned

                          

Agency mortgage-backed securities

   $ —   $ 903,928   $ 1,110   $ 905,038  

Loans

     —     77,573     —     77,573  

Federal agency obligations

     —     46,021     —     46,021  

Corporate debt securities

     —     30,246     —     30,246  

Residential mortgage-backed securities

     —     23,077     149     23,226  

Commercial mortgage-backed securities

     —     4,880     18     4,898  

Preferred stock

     2,439     —     —     2,439  

U.S. Government obligations

     1,996     100     —     2,096  

Other debt obligations

     —     2,074     —     2,074  

Equity securities

     675     —     28     703  

Collateralized debt obligations

     —     —     671     671  

Derivatives

     232     —     964     1,196  

Investments

     —     —     20,478     20,478  
                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total financial assets at fair value

   $ 5,342   $ 1,087,899   $ 23,418   $ 1,116,659  
                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                   

 
   Liabilities at Fair Value  
(In thousands)
  Level 1   Level 2   Level 3   Total  

Securities sold but not yet purchased

                          

U.S. Government obligations

   $ 128,504   $ —   $ —   $ 128,504  

Corporate debt securities

     —     2,520     —     2,520  

Equity securities

     2     —     —     2  

Derivatives

     1,704     —     —     1,704  
                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total financial liabilities at fair value

   $ 130,210   $ 2,520   $ —   $ 132,730  
                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                   

        The Company reviews its financial instrument classification on a quarterly basis. As the observability and strength of valuation attributes change, the Company may reclassify certain financial assets or liabilities between levels. The Company's policy is to utilize an end-of-period convention for determining transfers in or out of Levels 1, 2 and 3. During the years ended December 31, 2013 and December 31, 2012, there were no transfers between Levels 1 and 2.

        Prior to the discontinuation of the Company's Fixed Income businesses, the Company held financial instruments classified as Level 3 within the fair value hierarchy. All of these financial instruments have been sold. The following table summarizes the changes in the Company's Level 3 financial instruments for the year ended December 31, 2013:

(In thousands of dollars)
  Balance at
December 31,
2012		   Total gains or
(losses)
(realized and
unrealized)		   Purchases   Sales   Settlements   Transfers in
and/or out
of Level 3		   Balance at
December 31,
2013		   Changes in
unrealized
gains/(losses)
on Level 3
assets still
held at the
reporting
date		  

Agency mortgage-backed securities

   $ 1,110   $ (50 ) $ —   $ (1,060 ) $ —   $ —   $ —   $ —  

Collateralized debt obligations

     671     (567 )   —     (104 )   —     —     —     —  

Residential mortgage-backed securities

     149     (86 )   —     (51 )   (12 )   —     —     —  

Equities

     28     (28 )   —     —     —     —     —     —  

Commercial mortgage-backed securities

     18     (15 )   —     (3 )   —     —     —     —  

Investments

     20,478     1,267     946     —     (3,802 )   —     18,889     281  

Derivatives

     964     —     —     —     (964 )   —     —     —  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 23,418   $ 521   $ 946   $ (1,218 ) $ (4,778 ) $ —   $ 18,889   $ 281  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                   

        The following table summarizes the changes in the Company's Level 3 financial instruments for the year ended December 31, 2012:

(In thousands)
  Balance at
December 31,
2011		   Total gains or
(losses)
(realized and
unrealized)		   Purchases   Sales   Settlements   Transfers in
and/or out
of Level 3(1)		   Balance at
December 31,
2012		   Changes in
unrealized
gains/(losses)
on Level 3
assets still
held at the
reporting
date		  

Agency mortgage-backed securities

   $ 1,367   $ (350 ) $ 222   $ (1,232 ) $ (2 ) $ 1,105   $ 1,110   $ (181 )

Collateralized debt obligations

     647     24     61     (61 )   —     —     671     28  

Residential mortgage-backed securities

     18,419     (623 )   303     (17,329 )   (621 )   —     149     14  

Equities

     112     (84 )   —     —     —     —     28     (85 )

Commercial mortgage-backed securities

     38,154     (6,938 )   8,393     (37,432 )   (58 )   (2,101 )   18   $ (58 )

Other debt obligations

     192     —     3,784     (3,976 )   —     —     —     —  

Preferred stock

     571     870     4,942     (6,383 )   —     —     —     —  

Investments

     18,310     1,235     950     —     (17 )   —     20,478     1,767  

Derivatives

     1,696     6,539     —     —     (7,271 )   —     964     964  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 79,468   $ 673   $ 18,655   $ (66,413 ) $ (7,969 ) $ (996 ) $ 23,418   $ 2,449  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                   
(1)
During the year ended December 31, 2012, the Company transferred approximately $2.1 million of commercial mortgage-backed securities from Level 3 to Level 2 due to price discovery resulting from Company trading activity occurring in close proximity to the respective quarter-end. In addition, $1.1 million of agency mortgage-backed securities were transferred into Level 3 (from Level 2) due to limited price discovery at year-end.