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”). For a detailed discussion of accounting policies related to the Company’s financial instruments & investments, loans and derivative financial instruments prior to the Company’s exit from the previously mentioned businesses, refer to Note 1 and Note 8 within the footnotes to the consolidated financial statements contained within Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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 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 $3.3 million and $3.1 million at June 30, 2013 and December 31, 2012, respectively.

Financial Instruments Owned — The remaining financial instruments owned of approximately $0.9 million at June 30, 2013 are primarily associated with legacy deferred compensation plans provided by the Company, which will be paid out between 2014 and 2016. The Company has not permitted new amounts to be deferred under these plans since February 28, 2007. The assets are substantially 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 $21.0 million and $20.5 million at June 30, 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 of approximately $21.0 million at June 30, 2013, are primarily associated with the Company’s limited partnership investment in FATV of approximately $17.2 million. FATV holds interests in seven privately held companies. Refer to Note 10 herein for additional information.

Valuation Technique	Unobservable Input	Range (Weighted Average)
Market comparable companies	Enterprise value/Revenue multiple	2.9x - 7.2x (6.0x)
	Discount applied to multiples	25% - 35% (27%)

An increase in the enterprise value/revenue multiple would result in a higher fair value for these investments, whereas, an increase in the discounts applied to these multiples 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 fair value option at December 31, 2012:

	Assets at Fair Value
(In thousands of dollars)	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
Total financial instruments owned, at fair value	5,342		1,087,899		2,940		1,096,181
Investments	—		—		20,478		20,478
Total	$	5,342	$	1,087,899	$	23,418	$	1,116,659

	Liabilities at Fair Value
(In thousands of dollars)	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

Financial Instrument Classification — Transfers between Levels 1, 2 and 3

The Company reviews its financial instrument classification on a quarterly basis. As the observability and strength of valuation attributes change, reclassifications of certain financial assets or liabilities may occur 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 three and six months ended June 30, 2013 and June 30, 2012, there were no transfers between Levels 1 and 2. Transfers between Levels 2 and 3 are disclosed in the Level 3 roll-forward tables below.

The following table summarizes the changes in the Company’s Level 3 financial instruments for the three months ended June 30, 2013:

(In thousands of dollars)	Balance at March 31, 2013		Total gains or (losses) (realized and unrealized)			Purchases		Sales			Settlements		Transfers in and/or out of Level 3		Balance at June 30, 2013		Changes in unrealized gains/(losses) on Level 3 assets still held at the reporting date
Agency mortgage-backed securities	$	5	$	(5	)	$	—	$	—		$	—	$	—	$	—	$	—
Collateralized debt obligations	659		(555		)	—		(104		)	—		—		—		—
Residential mortgage-backed securities	91		(90		)	—		(1		)	—		—		—		—
Equities	28		(28		)	—		—			—		—		—		—
Commercial mortgage-backed securities	18		(15		)	—		(3		)	—		—		—		—
Investments	21,597		(601		)	—		(1		)	—		—		20,995		(542		)
Total	$	22,398	$	(1,294	)	$	—	$	(109	)	$	—	$	—	$	20,995	$	(542	)

The following table summarizes the changes in the Company’s Level 3 financial instruments for the three months ended June 30, 2012:

(In thousands of dollars)	Balance at March 31, 2012		Total gains or (losses) (realized and unrealized)			Purchases		Sales			Settlements			Transfers in and/or out of Level 3(1)			Balance at June 30, 2012		Changes in unrealized gains/(losses) on Level 3 assets still held at the reporting date
Commercial mortgage-backed securities	$	27,850	$	(2,638	)	$	16,746	$	(34,171	)	$	(4	)	$	(2,101	)	$	5,682	$	(1,036	)
Residential mortgage-backed securities	26,603		(2,871		)	12,203		(24,878		)	(702		)	—			10,355		(882		)
Other debt obligations	318		(26		)	2,770		(504		)	(5		)	—			2,553		(15		)
Agency mortgage-backed securities	362		(361		)	1,750		(264		)	(1		)	—			1,486		(177		)
Collateralized debt obligations	585		(31		)	61		(61		)	—			—			554		(31		)
Equities	103		9			—		—			—			—			112		9
Investments	18,440		(150		)	800		—			—			—			19,090		(478		)
Derivatives	885		1,737			—		—			(885		)	—			1,737		1,737
Total	$	75,146	$	(4,331	)	$	34,330	$	(59,878	)	$	(1,597	)	$	(2,101	)	$	41,569	$	(873	)

(1) During the three months ended June 30, 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 June 30, 2012.

The following table summarizes the changes in the Company’s Level 3 financial instruments for the six months ended June 30, 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 June 30, 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		(429		)	947		(1		)	—			—		20,995		(354		)
Derivatives	964		—			—		—			(964		)	—		—		—
Total	$	23,418	$	(1,175	)	$	947	$	(1,219	)	$	(976	)	$	—	$	20,995	$	(354	)

The following table summarizes the changes in the Company’s Level 3 financial instruments for the six months ended June 30, 2012:

(In thousands of dollars)	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 June 30, 2012		Changes in unrealized gains/(losses) on Level 3 assets still held at the reporting date
Commercial mortgage-backed securities	$	38,154	$	(6,081	)	$	10,108	$	(34,339	)	$	(59	)	$	(2,101	)	$	5,682	$	(1,253	)
Residential mortgage-backed securities	18,419		(1,403		)	11,067		(17,224		)	(504		)	—			10,355		(859		)
Other debt obligations	192		(16		)	6,357		(3,976		)	(4		)	—			2,553		(15		)
Agency mortgage-backed securities	1,367		(408		)	1,760		(1,232		)	(1		)	—			1,486		(208		)
Collateralized debt obligations	647		(93		)	61		(61		)	—			—			554		(93		)
Equities	112		—			—		—			—			—			112		—
Preferred stock	571		188			5,624		(6,383		)	—			—			—		—
Investments	18,310		(20		)	800		—			—			—			19,090		(153		)
Derivatives	1,696		2,622			—		—			(2,581		)	—			1,737		1,737
Total	$	79,468	$	(5,211	)	$	35,777	$	(63,215	)	$	(3,149	)	$	(2,101	)	$	41,569	$	(844	)

(1) During the six months ended June 30, 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 June 30, 2012.