Fair value measurements (Tables)

9 Months Ended

Sep. 30, 2018

Quantitative Information about Level 3 Fair Value Measurements

Additional information regarding the valuation technique and inputs for ARS used is as follows:



(Expressed in thousands)
Quantitative Information about ARS Level 3 Fair Value Measurements as of September 30, 2018
Product	Principal		Valuation Adjustment		Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
Auction Rate Securities Owned ⁽¹⁾
Auction Rate Preferred Securities	$	21,500	$	406	$	21,094	Discounted Cash Flow	Discount Rate ⁽²⁾	3.14% to 4.28%	4.26%
								Duration	2.5 Years	2.5 Years
								Current Yield ⁽³⁾	2.38% to 3.46%	3.45%

Auction Rate Preferred Securities	18,950		2,697		16,253		Tender Offer ⁽⁴⁾	N/A	N/A	N/A

Municipal Auction Rate Securities	75		—		75		Par	N/A	N/A	N/A

Student Loan Auction Rate Securities	275		14		261		Discounted Cash Flow	Discount Rate ⁽⁵⁾	4.17%	4.17%
								Duration	5.5 Years	5.5 Years
								Current Yield ⁽³⁾	3.09%	3.09%
	$	40,800	$	3,117	$	37,683
Auction Rate Securities Commitments to Purchase ⁽⁶⁾
Auction Rate Preferred Securities	$	49	$	1	$	48	Discounted Cash Flow	Discount Rate ⁽²⁾	3.14% to 4.28%	4.26%
								Duration	2.5 Years	2.5 Years
								Current Yield ⁽³⁾	2.38% to 3.46%	3.45%

Auction Rate Preferred Securities	7,184		1,078		6,106		Tender Offer ⁽⁴⁾	N/A	N/A	N/A
	$	7,233	$	1,079	$	6,154
Total	$	48,033	$	4,196	$	43,837


(1)	Principal amount represents the par value of the ARS and is included in securities owned on the condensed consolidated balance sheet as of September 30, 2018. The valuation adjustment amount is included as a reduction to securities owned on the condensed consolidated balance sheet as of September 30, 2018.


(2)	Derived by applying a multiple to a spread between 110% to 150% to the U.S. Treasury rate of 2.85%.


(3)	Based on current yields for ARS positions owned.


(4)	Residual ARS amounts owned and ARS commitments to purchase that were subject to tender offers were priced at the tender offer price. Included in Level 2 of the fair value hierarchy.


(5)	Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 2.97%.


(6)	Principal amount represents the present value of the ARS par value that the Company is committed to purchase at a future date. This principal amount is presented as an off-balance sheet item. The valuation adjustment amount is included in accounts payable and other liabilities on the condensed consolidated balance sheet as of September 30, 2018.

Investments in Company-Sponsored Funds

The following table provides information about the Company's investments in Company-sponsored funds as of September 30, 2018:



(Expressed in thousands)
	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Hedge funds ⁽¹⁾	$	1,631	$	—	Annually	30 - 120 Days
Private equity funds ⁽²⁾	4,974		1,400		N/A	N/A
	$	6,605	$	1,400


(1)	Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies. Each hedge fund has various restrictions regarding redemption; no investment is locked-up for a period greater than one year.


(2)	Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources. Due to the illiquid nature of these funds, investors are not permitted to make withdrawals without the consent of the general partner. The lock-up period of the private equity funds can extend to 10 years.

Assets and Liabilities Measured at Fair Value on Recurring Basis

The Company's assets and liabilities, recorded at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, have been categorized based upon the above fair value hierarchy as follows:

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2018



(Expressed in thousands)
	Fair Value Measurements as of September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	10,500	$	—	$	—	$	10,500
Deposits with clearing organizations	31,291		—		—		31,291
Securities owned:
U.S. Treasury securities	701,261		—		—		701,261
U.S. Agency securities	14,688		7,425		—		22,113
Sovereign obligations	—		2,964		—		2,964
Corporate debt and other obligations	—		14,400		—		14,400
Mortgage and other asset-backed securities	—		2,777		—		2,777
Municipal obligations	—		45,427		—		45,427
Convertible bonds	—		34,013		—		34,013
Corporate equities	34,613		—		—		34,613
Auction rate securities	—		16,253		21,430		37,683
Securities owned, at fair value	750,562		123,259		21,430		895,251
Investments ⁽¹⁾	—		—		104		104
Derivative contracts:
TBAs	—		12,309		—		12,309
Total	$	792,353	$	135,568	$	21,534	$	949,455
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	107,031	$	—	$	—	$	107,031
U.S. Agency securities	—		2		—		2
Corporate debt and other obligations	—		4,061		—		4,061
Mortgage and other asset-backed securities	—		2,349		—		2,349
Convertible bonds	—		7,356		—		7,356
Corporate equities	22,947		—		—		22,947
Securities sold but not yet purchased, at fair value	129,978		13,768		—		143,746
Derivative contracts:
Futures	709		—		—		709
Foreign exchange forward contracts	2		—		—		2
TBAs	—		12,258		—		12,258
ARS purchase commitments	—		1,078		1		1,079
Derivative contracts, total	711		13,336		1		14,048
Total	$	130,689	$	27,104	$	1	$	157,794


(1)	Included in other assets on the condensed consolidated balance sheet.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017



(Expressed in thousands)
	Fair Value Measurements as of December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	10,490	$	—	$	—	$	10,490
Deposits with clearing organizations	34,293		—		—		34,293
Securities owned:
U.S. Treasury securities	640,337		—		—		640,337
U.S. Agency securities	3,011		6,894		—		9,905
Sovereign obligations	—		608		—		608
Corporate debt and other obligations	—		12,538		—		12,538
Mortgage and other asset-backed securities	—		4,037		—		4,037
Municipal obligations	—		89,618		35		89,653
Convertible bonds	—		23,216		—		23,216
Corporate equities	34,067		—		—		34,067
Money markets	383		—		—		383
Auction rate securities	—		24,455		87,398		111,853
Securities owned, at fair value	677,798		161,366		87,433		926,597
Investments ⁽¹⁾	—		—		169		169
Derivative contracts:
TBAs	—		716		—		716
Total	$	722,581	$	162,082	$	87,602	$	972,265
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	53,425	$	—	$	—	$	53,425
U.S. Agency securities	—		13		—		13
Sovereign obligations	—		1,179		—		1,179
Corporate debt and other obligations	—		4,357		—		4,357
Mortgage and other asset-backed securities	—		10		—		10
Convertible bonds	—		10,109		—		10,109
Corporate equities	25,393		—		—		25,393
Securities sold but not yet purchased, at fair value	78,818		15,668		—		94,486
Derivative contracts:
Futures	766		—		—		766
TBAs	—		614		—		614
ARS purchase commitments	—		—		8		8
Derivative contracts, total	766		614		8		1,388
Total	$	79,584	$	16,282	$	8	$	95,874


(1)	Included in other assets on the condensed consolidated balance sheet.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on Recurring Basis

The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2018 and 2017:



(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Three Months Ended September 30, 2018
	Beginning Balance		Total Realized and Unrealized Gains (Losses) ⁽³⁾⁽⁴⁾			Purchases and Issuances		Sales and Settlements			Transfers In (Out)			Ending Balance


Assets
Auction rate securities ⁽¹⁾⁽⁵⁾	$	72,621	$	(2,163	)	$	2,150	$	(34,925	)	$	(16,253	)	$	21,430
Investments	164		—			—		—			(60		)	104
Liabilities
ARS purchase commitments ⁽²⁾⁽⁵⁾	131		(948		)	—		—			1,078			1


(1)	Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.


(2)	Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.


(3)	Included in principal transactions in the condensed consolidated statement of income, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of income.


(4)	Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.


(5)	Represents transfers from Level 3 to Level 2 of the fair value hierarchy. Transfers were due to tender offers by issuers of ARS.



(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Three Months Ended September 30, 2017
	Beginning Balance		Total Realized and Unrealized Gains (Losses) ⁽³⁾⁽⁴⁾			Purchases and Issuances		Sales and Settlements			Transfers In (Out)		Ending Balance


Assets
Municipal obligations	$	36	$	(1	)	$	—	$	—		$	—	$	35
Auction rate securities ⁽¹⁾	107,170		(161		)	25		(250		)	—		106,784
Investments	168		(1		)	—		—			—		167
ARS purchase commitments ⁽²⁾	—		—			—		—			—		—
Liabilities
ARS purchase commitments ⁽²⁾	254		(22		)	—		—			—		276


(1)	Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.


(2)	Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.


(3)	Included in principal transactions in the condensed consolidated statement of income, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of income.


(4)	Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.

The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2018 and 2017:



(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Nine Months Ended September 30, 2018
	Beginning Balance		Total Realized and Unrealized Gains (Losses) ⁽³⁾⁽⁴⁾			Purchases and Issuances		Sales and Settlements			Transfers In (Out)			Ending Balance


Assets
Municipal obligations	$	35	$	14		$	76	$	(125	)	$	—		$	—
Auction rate securities ⁽¹⁾⁽⁵⁾	87,398		(2,218		)	6,250		(36,145		)	(33,855		)	21,430
Investments	169		(5		)	—		—			(60		)	104
Liabilities
ARS purchase commitments ⁽²⁾⁽⁵⁾	8		(1,162		)	—		—			1,169			1


(1)	Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.


(2)	Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.


(3)	Included in principal transactions in the condensed consolidated statement of income, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of income.


(4)	Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.


(5)	Represents transfers from Level 3 to Level 2 of the fair value hierarchy. Transfers were due to tender offers by issuers of ARS.



(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Nine Months Ended September 30, 2017
	Beginning Balance		Total Realized and Unrealized Gains (Losses) ⁽³⁾⁽⁴⁾			Purchases and Issuances		Sales and Settlements			Transfers In (Out)		Ending Balance


Assets
Municipal obligations	$	44	$	(9	)	$	—	$	—		$	—	$	35
Auction rate securities ⁽¹⁾	84,926		983			22,075		(1,200		)	—		106,784
Investments	158		9			—		—			—		167
ARS purchase commitments ⁽²⁾	849		(849		)	—		—			—		—
Liabilities
ARS purchase commitments ⁽²⁾	645		369			—		—			—		276


(1)	Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.


(2)	Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.


(3)	Included in principal transactions in the condensed consolidated statement of income, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of income.


(4)	Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.

Financial Instruments, Estimate Not Practicable, Fair Value

Assets and liabilities not measured at fair value as of September 30, 2018



(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash	$	27,031	$	27,031	$	—	$	—	$	27,031
Deposits with clearing organization	22,665		22,665		—		—		22,665
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	114,795		—		114,795		—		114,795
Receivables from brokers	31,396		—		31,396		—		31,396
Securities failed to deliver	23,390		—		23,390		—		23,390
Clearing organizations	29,026		—		29,026		—		29,026
Other	5,183		—		5,183		—		5,183
	203,790		—		203,790		—		203,790
Receivable from customers	797,751		—		797,751		—		797,751
Securities purchased under agreements to resell	1,502		—		1,502		—		1,502
Notes receivable, net	43,278		—		43,278		—		43,278
Investments ⁽¹⁾	68,585		—		68,585		—		68,585


(1)	Included in other assets on the condensed consolidated balance sheet.



(Expressed in thousands)			Fair Value Measurement: Liabilities
	Carrying Value		Level 1		Level 2		Level 3		Total
Drafts payable	$	29,242	$	29,242	$	—	$	—	$	29,242
Bank call loans	3,000		—		3,000		—		3,000
Payables to brokers, dealers and clearing organizations:
Securities loaned	197,332		—		197,332		—		197,332
Payable to brokers	2,004		—		2,004		—		2,004
Securities failed to receive	18,102		—		18,102		—		18,102
Other	106		—		106		—		106
	217,544		—		217,544		—		217,544
Payables to customers	351,750		—		351,750		—		351,750
Securities sold under agreements to repurchase	606,010		—		606,010		—		606,010
Senior secured notes	200,000		—		202,938		—		202,938

Assets and liabilities not measured at fair value as of December 31, 2017



(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash	$	37,664	$	37,664	$	—	$	—	$	37,664
Deposits with clearing organization	7,929		7,929		—		—		7,929
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	132,368		—		132,368		—		132,368
Receivables from brokers	19,298		—		19,298		—		19,298
Securities failed to deliver	9,442		—		9,442		—		9,442
Clearing organizations	24,361		—		24,361		—		24,361
Other	930		—		930		—		930
	186,399		—		186,399		—		186,399
Receivable from customers	848,226		—		848,226		—		848,226
Securities purchased under agreements to resell	658		—		658		—		658
Notes receivable, net	40,520		—		40,520		—		40,520
Investments ⁽¹⁾	65,404		—		65,404		—		65,404


(1)	Included in other assets on the condensed consolidated balance sheet.



(Expressed in thousands)			Fair Value Measurement: Liabilities
	Carrying Value		Level 1		Level 2		Level 3		Total
Drafts payable	$	42,212	$	42,212	$	—	$	—	$	42,212
Bank call loans	118,300		—		118,300		—		118,300
Payables to brokers, dealers and clearing organizations:
Securities loaned	180,270		—		180,270		—		180,270
Payable to brokers	1,567		—		1,567		—		1,567
Securities failed to receive	17,559		—		17,559		—		17,559
Other	10,707		—		10,707		—		10,707
	210,103		—		210,103		—		210,103
Payables to customers	385,907		—		385,907		—		385,907
Securities sold under agreements to repurchase	586,478		—		586,478		—		586,478
Senior secured notes	200,000		—		206,380		—		206,380

Notional Amounts and Fair Values of Derivatives by Product

The notional amounts and fair values of the Company's derivatives as of September 30, 2018 and December 31, 2017 by product were as follows:



(Expressed in thousands)
	Fair Value of Derivative Instruments as of September 30, 2018
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments⁽¹⁾
Other contracts	TBAs	$	568,430	$	11,057
	Other TBAs ⁽²⁾	28,501		1,252
		$	596,931	$	12,309
Liabilities:
Derivatives not designated as hedging instruments ⁽¹⁾
Commodity contracts	Futures	$	3,720,000	$	709
Other contracts	Foreign exchange forward contracts	200		2
	TBAs	568,430		11,068
	Other TBAs ⁽²⁾	28,501		1,190
	ARS purchase commitments	7,233		1,079
		$	4,324,364	$	14,048


(1)	See "Derivative Instruments and Hedging Activities" above for description of derivative financial instruments. Such derivative instruments are not subject to master netting agreements, thus the related amounts are not offset.


(2)	Represents TBA purchase and sale contracts related to the legacy OMHHF business.



(Expressed in thousands)
	Fair Value of Derivative Instruments as of December 31, 2017
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments ⁽¹⁾
Other contracts	TBAs	$	26,000	$	22
	Other TBAs ⁽²⁾	39,576		694
		$	65,576	$	716
Liabilities:
Derivatives not designated as hedging instruments⁽¹⁾
Commodity contracts	Futures	$	5,844,000	$	766
Other contracts	TBAs	26,000		22
	Other TBAs ⁽²⁾	39,576		592
	ARS purchase commitments	10,992		8
		$	5,920,568	$	1,388


(1)	See "Derivative Instruments and Hedging Activities" above for a description of derivative financial instruments.


(2)	Represents TBA purchase and sale contracts related to the legacy OMHHF business.

Fair Value Amounts of Derivative Instruments and their Effect on Statement of Operations

The following table presents the location and fair value amounts of the Company's derivative instruments and their effect in the condensed consolidated statements of income for the three months ended September 30, 2018 and 2017:



(Expressed in thousands)
	The Effect of Derivative Instruments in the Statement of Income
	For the Three Months Ended September 30, 2018
		Recognized in Income on Derivatives (pre-tax)
Types	Description	Location	Net Gain (Loss)
Commodity contracts	Futures	Principal transactions revenue	$	413
Other contracts	Foreign exchange forward contracts	Other revenue	2
Other contracts	TBAs	Principal transactions revenue	73
	Other TBAs	Other revenue	62
	ARS purchase commitments	Principal transactions revenue	(857		)
			$	(307	)

(Expressed in thousands)
	The Effect of Derivative Instruments in the Statement of Income
	For the Three Months Ended September 30, 2017
		Recognized in Income on Derivatives (pre-tax)
Types	Description	Location	Net Gain (Loss)
Commodity contracts	Futures	Principal transactions revenue	$	(20	)
Other contracts	Foreign exchange forward contracts	Other revenue	—
	TBAs	Principal transactions revenue	(26		)
	Other TBAs	Other revenue	(70		)
	ARS purchase commitments	Principal transactions revenue	(22		)
			$	(138	)



(Expressed in thousands)
	The Effect of Derivative Instruments in the Statement of Income
	For the Nine Months Ended September 30, 2018
		Recognized in Income on Derivatives (pre-tax)
Types	Description	Location	Net Gain (Loss)
Commodity contracts	Futures	Principal transactions revenue	$	1,764
Other contracts	Foreign exchange forward contracts	Other revenue	(3		)
Other contracts	TBAs	Principal transactions revenue	269
	Other TBAs	Other revenue	209
	ARS purchase commitments	Principal transactions revenue	(1,071		)
			$	1,168

(Expressed in thousands)
	The Effect of Derivative Instruments in the Statement of Income
	For the Nine Months Ended September 30, 2017
		Recognized in Income on Derivatives (pre-tax)
Types	Description	Location	Net Gain (Loss)
Commodity contracts	Futures	Principal transactions revenue	$	214
Other contracts	Foreign exchange forward contracts	Other revenue	12
	TBAs	Principal transactions revenue	(184		)
	Other TBAs	Other revenue	(320		)
	ARS purchase commitments	Principal transactions revenue	(480		)
			$	(758	)