Fair value measurements

Securities owned, securities sold but not yet purchased, investments and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period.

Valuation Techniques

A description of the valuation techniques applied and inputs used in measuring the fair value of the Company's financial instruments is as follows:

U.S. Government Obligations

U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers.

U.S. Agency Obligations

U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable to-be-announced ("TBA") security.

Sovereign Obligations

The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs.

Corporate Debt and Other Obligations

The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information.

Mortgage and Other Asset-Backed Securities

The Company values non-agency securities collateralized by home equity and various other types of collateral based on external pricing and spread data provided by independent pricing services. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds.

Municipal Obligations

The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information.

Convertible Bonds

The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined based on cash flow models using yield curves and bond spreads as key inputs.

Corporate Equities

Equity securities and options are generally valued based on quoted prices from the exchange or market where traded. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads.

Auction Rate Securities ("ARS")

Background

In February 2010, Oppenheimer finalized settlements with each of the New York Attorney General's office ("NYAG") and the Massachusetts Securities Division ("MSD") and, together (the "Regulators") concluding proceedings by the Regulators concerning Oppenheimer's marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients. Over the last nine years, the Company has bought back $140.2 million of ARS pursuant to these settlements. These buybacks coupled with ARS issuer redemptions and tender offers have significantly reduced the level of ARS held by Eligible Investors. As of September 30, 2019, the Company had $3.4 million of ARS to purchase from Eligible Investors related to the settlements with the Regulators. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Over the last nine years, the Company has purchased $102.3 million of ARS pursuant to these legal settlements and awards. As of September 30, 2019, the Company had one remaining commitment to purchase $3.6 million in ARS by June 30, 2020.

As of September 30, 2019, the Company owned $29.4 million of ARS. This amount represents the unredeemed or unsold amount that the Company holds as a result of ARS buybacks pursuant to the settlements with the Regulators and legal settlements and awards referred to above.

Valuation

The Company’s ARS owned and ARS purchase commitments referred to above have, for the most part, been subject to recent issuer tender offers. As a result, the Company has valued the ARS securities owned and the ARS purchase commitments at the observable tender offer price which provides the basis to categorize them in Level 2 of the fair value hierarchy. The ARS purchase commitments related to the settlements with the Regulators and legal settlements and awards are considered derivative assets or liabilities. The ARS purchase commitments represent the difference between the principal value and the fair value of the ARS the Company is committed to purchase.

As of September 30, 2019, the Company had a valuation adjustment (unrealized loss) totaling $5.1 million which consists of $4.1 million for ARS owned (which is included as a reduction to securities owned on the condensed consolidated balance sheet) and $1.0 million for ARS purchase commitments from legal settlements and awards and settlements with regulators (which is included in accounts payable and other liabilities on the condensed consolidated balance sheet).

Investments

In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment.

The following table provides information about the Company's investments in Company-sponsored funds as of September 30, 2019:



(Expressed in thousands)
	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Hedge funds ⁽¹⁾	$	1,577	$	—	Quarterly - Annually	30 - 120 Days
Private equity funds ⁽²⁾	4,335		1,399		N/A	N/A
	$	5,912	$	1,399


(1)	Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven,

and activist strategies.


(2)	Includes private equity funds and private equity fund of funds with a focus on diversified portfolios,

real estate and global natural resources.

Valuation Process

The Company's Finance & Accounting ("F&A") group is responsible for the Company's fair value policies, processes and procedures. F&A is independent from the business units and trading desks and is headed by the Company's Chief Financial Officer ("CFO"), who has final authority over the valuation of the Company's financial instruments. The Finance Control Group ("FCG") within F&A is responsible for daily profit and loss reporting, front-end trading system position reconciliations, monthly profit and loss reporting, and independent price verification procedures.

For financial instruments categorized in Levels 1 and 2 of the fair value hierarchy, the FCG performs a monthly independent price verification to determine the reasonableness of the prices provided by the Company's independent pricing vendor. The FCG uses its third-party pricing vendor, executed transactions, and broker-dealer quotes for validating the fair values of financial instruments.

Assets and Liabilities Measured at Fair Value

The Company's assets and liabilities, recorded at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, 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, 2019



(Expressed in thousands)
	Fair Value Measurements as of September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets
Deposits with clearing organizations	$	36,461	$	—	$	—	$	36,461
Securities owned:
U.S. Treasury securities	462,298		—		—		462,298
U.S. Agency securities	1,605		7,135		—		8,740
Sovereign obligations	—		2,571		—		2,571
Corporate debt and other obligations	—		24,448		—		24,448
Mortgage and other asset-backed securities	—		2,292		—		2,292
Municipal obligations	—		66,550		—		66,550
Convertible bonds	—		28,796		—		28,796
Corporate equities	31,822		—		—		31,822
Money markets	363		—		—		363
Auction rate securities	—		25,314		—		25,314
Securities owned, at fair value	496,088		157,106		—		653,194
Derivative contracts:
TBAs	—		12		—		12
Total	$	532,549	$	157,118	$	—	$	689,667
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	74,020	$	—	$	—	$	74,020
U.S. Agency securities	—		7		—		7
Sovereign obligations	—		2,503		—		2,503
Corporate debt and other obligations	—		11,683		—		11,683
Mortgage and other asset-backed securities	—		1		—		1
Convertible bonds	—		16,216		—		16,216
Corporate equities	17,450		—		—		17,450
Securities sold but not yet purchased, at fair value	91,470		30,410		—		121,880
Derivative contracts:
Futures	322		—		—		322
TBAs	—		9		—		9
ARS purchase commitments	—		1,006		—		1,006
Derivative contracts, total	322		1,015		—		1,337
Total	$	91,792	$	31,425	$	—	$	123,217

(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, 2018



(Expressed in thousands)
	Fair Value Measurements as of December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	10,500	$	—	$	—	$	10,500
Deposits with clearing organizations	34,599		—		—		34,599
Securities owned:
U.S. Treasury securities	657,208		—		—		657,208
U.S. Agency securities	812		6,494		—		7,306
Sovereign obligations	—		214		—		214
Corporate debt and other obligations	—		20,665		—		20,665
Mortgage and other asset-backed securities	—		2,486		—		2,486
Municipal obligations	—		52,261		—		52,261
Convertible bonds	—		31,270		—		31,270
Corporate equities	28,215		—		—		28,215
Money markets	7		—		—		7
Auction rate securities	—		16,253		21,699		37,952
Securities owned, at fair value	686,242		129,643		21,699		837,584
Investments ⁽¹⁾	—		—		101		101
Derivative contracts:
TBAs	—		4,873		—		4,873
Total	$	731,341	$	134,516	$	21,800	$	887,657
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	53,646	$	—	$	—	$	53,646
U.S. Agency securities	—		3		—		3
Sovereign obligations	—		78		—		78
Corporate debt and other obligations	—		7,236		—		7,236
Convertible bonds	—		9,709		—		9,709
Corporate equities	14,774		—		—		14,774
Securities sold but not yet purchased, at fair value	68,420		17,026		—		85,446
Derivative contracts:
Futures	807		—		—		807
Foreign exchange forward contracts	4		—		—		4
TBAs	—		4,873		—		4,873
ARS purchase commitments	—		1,096		—		1,096
Derivative contracts, total	811		5,969		—		6,780
Total	$	69,231	$	22,995	$	—	$	92,226

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

For the three months ended September 30, 2019, there were no balances or changes in Level 3 assets and liabilities.

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



(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Three Months Ended September 30, 2018
	Beginning Balance		Total Realized and Unrealized 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 losses

from investments which are included in other income in the condensed consolidated statement of income.


(4)	Unrealized 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.

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, 2019 and 2018:



(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Nine Months Ended September 30, 2019
	Beginning Balance		Total Realized and Unrealized Gains ⁽²⁾⁽³⁾		Purchases and Issuances		Sales and Settlements			Transfers Out			Ending Balance


Assets
Auction rate securities ⁽¹⁾	$	21,699	$	1	$	—	$	(350	)	$	(21,350	)	$	—
Investments	101		5		—		—			(106		)	—


(1)	Represents auction rate preferred securities that failed in the auction rate market.


(2)	Included in principal transactions in the condensed consolidated statement of income, except for

gains from investments which are included in other income in the condensed consolidated

statement of income.


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



(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.

Financial Instruments Not Measured at Fair Value

The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value on the condensed consolidated balance sheets. The table below excludes non-financial assets and liabilities (e.g., right-of-use lease assets, lease liabilities, furniture, equipment and leasehold improvements and accrued compensation).

The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 or Level 2 approximates fair value because of the relatively short-term nature of the underlying assets. The fair value of the Company's senior secured notes, categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the notes trade.

Assets and liabilities not measured at fair value as of September 30, 2019



(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash	$	26,193	$	26,193	$	—	$	—	$	26,193
Deposits with clearing organization	37,269		37,269		—		—		37,269
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	103,738		—		103,738		—		103,738
Receivables from brokers	13,839		—		13,839		—		13,839
Securities failed to deliver	13,362		—		13,362		—		13,362
Clearing organizations	24,775		—		24,775		—		24,775
Other	2,017		—		2,017		—		2,017
	157,731		—		157,731		—		157,731
Receivable from customers	754,927		—		754,927		—		754,927
Notes receivable, net	43,920		—		43,920		—		43,920
Investments ⁽¹⁾	68,919		—		68,919		—		68,919

(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	$	17,794	$	17,794	$	—	$	—	$	17,794
Payables to brokers, dealers and clearing organizations:
Securities loaned	209,298		—		209,298		—		209,298
Payable to brokers	7,040		—		7,040		—		7,040
Securities failed to receive	13,228		—		13,228		—		13,228
Other	134,707		—		134,707		—		134,707
	364,273		—		364,273		—		364,273
Payables to customers	313,056		—		313,056		—		313,056
Securities sold under agreements to repurchase	253,720		—		253,720		—		253,720
Senior secured notes	150,000		—		154,907		—		154,907

Assets and liabilities not measured at fair value as of December 31, 2018



(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash	$	80,175	$	80,175	$	—	$	—	$	80,175
Deposits with clearing organization	33,079		33,079		—		—		33,079
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	108,144		—		108,144		—		108,144
Receivables from brokers	20,140		—		20,140		—		20,140
Securities failed to deliver	7,021		—		7,021		—		7,021
Clearing organizations	28,777		—		28,777		—		28,777
Other	2,411		—		2,411		—		2,411
	166,493		—		166,493		—		166,493
Receivable from customers	720,777		—		720,777		—		720,777
Securities purchased under agreements to resell	290		—		290		—		290
Notes receivable, net	44,058		—		44,058		—		44,058
Investments ⁽¹⁾	59,765		—		59,765		—		59,765

(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	$	16,348	$	16,348	$	—	$	—	$	16,348
Bank call loans	15,000		—		15,000		—		15,000
Payables to brokers, dealers and clearing organizations:
Securities loaned	146,815		—		146,815		—		146,815
Payable to brokers	158		—		158		—		158
Securities failed to receive	27,799		—		27,799		—		27,799
Other	113,628		—		113,628		—		113,628
	288,400		—		288,400		—		288,400
Payables to customers	336,616		—		336,616		—		336,616
Securities sold under agreements to repurchase	484,218		—		484,218		—		484,218
Senior secured notes	200,000		—		199,722		—		199,722

Fair Value Option

The Company elected the fair value option for securities sold under agreements to repurchase ("repurchase agreements") and securities purchased under agreements to resell ("reverse repurchase agreements") that do not settle overnight or have an open settlement date. The Company has elected the fair value option for these instruments to reflect more accurately market and economic events in its earnings and to mitigate a potential mismatch in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. As of September 30, 2019, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.

Derivative Instruments and Hedging Activities

The Company transacts, on a limited basis, in exchange traded and over-the-counter derivatives for both asset and liability management as well as for trading and investment purposes. Risks managed using derivative instruments include interest rate risk and, to a lesser extent, foreign exchange risk. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the condensed consolidated balance sheet.

Foreign exchange hedges

From time to time, the Company also utilizes forward and options contracts to hedge the foreign currency risk associated with compensation obligations to Oppenheimer Israel (OPCO) Ltd. employees denominated in New Israeli Shekel ("NIS"). Such hedges have not been designated as accounting hedges. Unrealized gains and losses on foreign exchange forward contracts are recorded in other assets on the condensed consolidated balance sheet and other income in the condensed consolidated statement of income.

Derivatives used for trading and investment purposes

Futures contracts represent commitments to purchase or sell securities or other commodities at a future date and at a specified price. Market risk exists with respect to these instruments. Notional or contractual amounts are used to express the volume of these transactions and do not represent the amounts potentially subject to market risk. The Company uses futures contracts, including U.S. Treasury notes, Federal Funds, General Collateral futures and Eurodollar contracts primarily as an economic hedge of interest rate risk associated with government trading activities. Unrealized gains and losses on futures contracts are recorded on the condensed consolidated balance sheet in payable to brokers, dealers and clearing organizations and in the condensed consolidated statement of income as principal transactions revenue, net.

To-be-announced securities

The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the TBA market as economic hedges against mortgage-backed securities that it owns or has sold but not yet purchased. TBAs provide for the forward or delayed delivery of the underlying instrument with settlement up to 180 days. The contractual or notional amounts related to these financial instruments reflect the volume of activity and do not reflect the amounts at risk. Net unrealized gains and losses on TBAs are recorded on the condensed consolidated balance sheet in receivable from brokers, dealers and clearing organizations or payable to brokers, dealers and clearing organizations and in the condensed consolidated statement of income as principal transactions revenue, net.

The notional amounts and fair values of the Company's derivatives as of September 30, 2019 and December 31, 2018 by product were as follows:



(Expressed in thousands)
	Fair Value of Derivative Instruments as of September 30, 2019
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments⁽¹⁾
Other contracts	TBAs	$	15,742	$	12
		$	15,742	$	12
Liabilities:
Derivatives not designated as hedging instruments ⁽¹⁾
Commodity contracts	Futures	$	2,846,000	$	322
Other contracts	TBAs	12,240		9
	ARS purchase commitments	7,010		1,006
		$	2,865,250	$	1,337


(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.



(Expressed in thousands)
	Fair Value of Derivative Instruments as of December 31, 2018
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments ⁽¹⁾
Other contracts	TBAs	$	729,500	$	4,873
		$	729,500	$	4,873
Liabilities:
Derivatives not designated as hedging instruments⁽¹⁾
Commodity contracts	Futures	$	4,580,800	$	807
Other contracts	Foreign exchange forward contracts	200		4
	TBAs	729,500		4,873
	ARS purchase commitments	7,305		1,096
		$	5,317,805	$	6,780


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

thus the related amounts are not offset.

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 and nine months ended September 30, 2019 and 2018:



(Expressed in thousands)
	The Effect of Derivative Instruments in the Income Statement
	For the Three Months Ended September 30, 2019
		Recognized in Income on Derivatives (pre-tax)
Types	Description	Location	Net Gain (Loss)
Commodity contracts	Futures	Principal transactions revenue	$	(443	)
Other contracts	Foreign exchange forward contracts	Other revenue	5
	TBAs	Principal transactions revenue	(9		)
	ARS purchase commitments	Principal transactions revenue	(242		)
			$	(689	)

(Expressed in thousands)
	The Effect of Derivative Instruments in the Income Statement
	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
	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 Income Statement
	For the Nine Months Ended September 30, 2019
		Recognized in Income on Derivatives (pre-tax)
Types	Description	Location	Net Gain (Loss)
Commodity contracts	Futures	Principal transactions revenue	$	(3,109	)
Other contracts	Foreign exchange forward contracts	Other revenue	15
	TBAs	Principal transactions revenue	(85		)
	ARS purchase commitments	Principal transactions revenue	90
			$	(3,089	)

(Expressed in thousands)
	The Effect of Derivative Instruments in the Income Statement
	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		)
	TBAs	Principal transactions revenue	269
	Other TBAs	Other revenue	209
	ARS purchase commitments	Principal transactions revenue	(1,071		)
			$	1,168