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Fair value measurements

9 Months Ended

Sep. 30, 2020

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 with the NYAG, 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 ten years, the Company has bought back $142.5 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 defined). As of September 30, 2020, the Company had $1.3 million of ARS remaining 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 ten years, the Company has purchased $106.1 million of ARS pursuant to these legal settlements and awards. The Company has completed its ARS purchase obligations under such legal settlements and awards.

As of September 30, 2020, the Company owned $30.7 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 the 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 issuer tender offers. As a result, the Company has valued the ARS securities owned and the ARS purchase commitments at the tender offer price and categorized them in Level 3 of the fair value hierarchy due to the illiquid nature of the securities. The ARS purchase commitments related to the settlements with the Regulators 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. The fair value of ARS and ARS purchase commitments is particularly sensitive to movements in interest rates. However, an increase or decrease in short-term interest rates may or may not result in a higher or lower tender offer in the future or the tender offer price may not provide a reasonable estimate of the fair value of the securities. In such cases, other valuation techniques might be necessary.

As of September 30, 2020, the Company had a valuation adjustment (unrealized loss) totaling $5.2 million which consists of $5.0 million for ARS owned (which is included as a reduction to securities owned on the condensed consolidated balance sheet) and $191,510 for ARS purchase commitments from settlements with the 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, 2020:


(Expressed in thousands)
	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Hedge funds (1)	$	1,138	$	—	Quarterly - Annually	30 - 120 Days
Private equity funds (2)	4,351		1,238		N/A	N/A
	$	5,489	$	1,238

(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

The following table provides information about the Company's investments in Company-sponsored funds as of December 31, 2019:


(Expressed in thousands)
	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Hedge funds (1)	$	1,589	$	—	Quarterly - Annually	30 - 120 Days
Private equity funds (2)	4,227		1,339		N/A	N/A
	$	5,816	$	1,339

(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.

During the third quarter of 2020, the Company made an investment in a financial technologies firm. The Company elected the fair value option for this investment and it is included in other assets on the condensed consolidated balance sheet. The Company determined the fair value of the investment based on an implied market-multiple approach and observable market data, including comparable company transactions. The investment is categorized in Level 2 of the fair value hierarchy.

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, 2020 and December 31, 2019, 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, 2020:


(Expressed in thousands)
	Fair Value Measurements as of September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets

Deposits with clearing organizations	$	35,344	$	—	$	—	$	35,344
Securities owned:
U.S. Treasury securities	470,683		—		—		470,683
U.S. Agency securities	—		14,787		—		14,787
Sovereign obligations	—		207		—		207
Corporate debt and other obligations	—		27,111		—		27,111
Mortgage and other asset-backed securities	—		2,963		—		2,963
Municipal obligations	—		46,645		—		46,645
Convertible bonds	—		19,992		—		19,992
Corporate equities	32,121		—		—		32,121
Money markets	1,470		—		—		1,470
Auction rate securities	—		—		30,701		30,701
Securities owned, at fair value	504,274		111,705		30,701		646,680
Investments (1)	—		3,961		—		3,961

Derivative contracts:
TBAs	—		275		—		275


Total	$	539,618	$	115,941	$	30,701	$	686,260
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	181,419	$	—	$	—	$	181,419
U.S. Agency securities	—		4,972		—		4,972
Sovereign obligations	—		936		—		936
Corporate debt and other obligations	—		6,049		—		6,049


Convertible bonds	—		6,434		—		6,434
Corporate equities	22,639		—		—		22,639

Securities sold but not yet purchased, at fair value	204,058		18,391		—		222,449

Derivative contracts:
Futures	116		—		—		116

TBAs	—		220		—		220
ARS purchase commitments	—		—		192		192
Derivative contracts, total	116		220		192		528
Total	$	204,174	$	18,611	$	192	$	222,977

(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, 2019:


(Expressed in thousands)
	Fair Value Measurements as of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets


Deposits with clearing organizations	$	25,118	$	—	$	—	$	25,118
Securities owned:
U.S. Treasury securities	613,030		—		—		613,030
U.S. Agency securities	19,917		15,974		—		35,891
Sovereign obligations	—		11,405		—		11,405
Corporate debt and other obligations	—		8,310		—		8,310
Mortgage and other asset-backed securities	—		2,697		—		2,697
Municipal obligations	—		40,260		—		40,260
Convertible bonds	—		29,816		—		29,816
Corporate equities	32,215		—		—		32,215
Money markets	781		—		—		781
Auction rate securities	—		25,314		—		25,314
Securities owned, at fair value	665,943		133,776		—		799,719






Total	$	691,061	$	133,776	$	—	$	824,837
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	52,882	$	—	$	—	$	52,882
U.S. Agency securities	—		18		—		18
Sovereign obligations	—		6,405		—		6,405
Corporate debt and other obligations	—		664		—		664
Mortgage and other asset-backed securities	—		18,624		—		18,624


Corporate equities	21,978		—		—		21,978

Securities sold but not yet purchased, at fair value	74,860		25,711		—		100,571

Derivative contracts:
Futures	267		—		—		267

TBAs	—		124		—		124
ARS purchase commitments	—		1,023		—		1,023
Derivative contracts, total	267		1,147		—		1,414
Total	$	75,127	$	26,858	$	—	$	101,985

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, 2020:

(Expressed in thousands)

Level 3 Assets and Liabilities

For the Three Months Ended September 30, 2020

Total Realized

Beginning

and Unrealized

Purchases

Sales and

Transfers

Ending

Balance

Gains (Losses)(3)(4)

and Issuances

Settlements

In (Out)

Balance

Assets

Auction rate securities (1)

29,566

(165)

1,300

—

30,701

Liabilities

ARS Purchase Commitments (2)

332

140

—

192

(1) Represents 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.

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

For the three months ended September 30, 2020, Level 3 assets increased by $1.1 million. There were no balances or changes in Level 3 assets and liabilities during the three months ended September 30, 2019.

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, 2020 and 2019:

(Expressed in thousands)

Level 3 Assets and Liabilities

For the Nine Months Ended September 30, 2020

Total Realized

Beginning

and Unrealized

Purchases

Sales and

Transfers

Ending

Balance

Gains (Losses)(4)(5)

and Issuances

Settlements

In (Out)

Balance

Assets

Auction rate securities (1) (2)

—

(165)

1,300

—

29,566

30,701

Liabilities

ARS Purchase Commitments (1) (3)

—

140

—

332

192

(1) Transferred to Level 3 of the fair value hierarchy due to the illiquid nature of the securities as result of the length of time since the last tender offer.

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

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

(4) Included in principal transactions in the condensed consolidated statement of income.

(5) 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, 2019

Total Realized

Beginning

and Unrealized

Purchases

Sales and

Transfers

Ending

Balance

Gains(3)(4)

and Issuances

Settlements

In (Out)

Balance

Assets

Auction rate securities (1) (2)

21,699

—

(350)

(21,350)

—

Investments

101

—

(106)

—

(1) Transferred to Level 2 of the fair value hierarchy as a result of recent tender offer activities.

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

(3) 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.

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

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, 2020:


(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash	$	32,080	$	32,080	$	—	$	—	$	32,080
Deposits with clearing organization	41,858		41,858		—		—		41,858
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	128,199		—		128,199		—		128,199
Receivables from brokers	29,088		—		29,088		—		29,088
Securities failed to deliver	14,565		—		14,565		—		14,565
Clearing organizations	34,165		—		34,165		—		34,165
Other	1,184		—		1,184		—		1,184
	207,201		—		207,201		—		207,201
Receivable from customers	1,095,035		—		1,095,035		—		1,095,035

Notes receivable, net	44,723		—		44,723		—		44,723
Investments (1)	75,785		—		75,785		—		75,785

(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	$	18,251	$	18,251	$	—	$	—	$	18,251
Bank call loans	156,900		—		156,900		—		156,900
Payables to brokers, dealers and clearing organizations:
Securities loaned	291,969		—		291,969		—		291,969
Payable to brokers	2,280		—		2,280		—		2,280
Securities failed to receive	19,421		—		19,421		—		19,421
Other	53,163		—		53,163		—		53,163
	366,833		—		366,833		—		366,833
Payables to customers	380,746		—		380,746		—		380,746
Securities sold under agreements to repurchase	252,827		—		252,827		—		252,827
Senior secured notes	125,000		—		126,111		—		126,111

Assets and liabilities not measured at fair value as of December 31, 2019:


(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash	$	79,550	$	79,550	$	—	$	—	$	79,550
Deposits with clearing organization	23,297		23,297		—		—		23,297
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	99,635		—		99,635		—		99,635
Receivables from brokers	19,024		—		19,024		—		19,024
Securities failed to deliver	7,173		—		7,173		—		7,173
Clearing organizations	36,269		—		36,269		—		36,269
Other	1,316		—		1,316		—		1,316
	163,417		—		163,417		—		163,417
Receivable from customers	796,934		—		796,934		—		796,934

Notes receivable, net	43,670		—		43,670		—		43,670
Investments (1)	73,971		—		73,971		—		73,971

(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


Payables to brokers, dealers and clearing organizations:
Securities loaned	$	234,343	$	—	$	234,343	$	—	$	234,343
Payable to brokers	4,548		—		4,548		—		4,548
Securities failed to receive	14,603		—		14,603		—		14,603
Other	267,214		—		267,214		—		267,214
	520,708		—		520,708		—		520,708
Payables to customers	334,735		—		334,735		—		334,735
Securities sold under agreements to repurchase	287,265		—		287,265		—		287,265
Senior secured notes	150,000		—		154,988		—		154,988

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, 2020, 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, 2020 and December 31, 2019 by product were as follows:


(Expressed in thousands)
	Fair Value of Derivative Instruments as of September 30, 2020
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments (1)
Other contracts	TBAs	$	22,885	$	275


		$	22,885	$	275
Liabilities:
Derivatives not designated as hedging instruments (1)
Commodity contracts	Futures	$	3,630,000	$	116

Other contracts	TBAs	19,585		220


	ARS purchase commitments	1,291		192
		$	3,650,876	$	528

(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, 2019
	Description	Notional		Fair Value





Liabilities:
Derivatives not designated as hedging instruments (1)
Commodity contracts	Futures	$	5,209,000	$	267


Other contracts	TBAs	13,245		124

	ARS purchase commitments	7,128		1,023
		$	5,229,373	$	1,414

(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 income statements for the three and nine months ended September 30, 2020 and 2019:

(Expressed in thousands)

The Effect of Derivative Instruments in the Income Statement

For the Three Months Ended September 30, 2020

Recognized in Income on Derivatives
(pre-tax)

Types

Description

Location

Net Gain (Loss)

Commodity contracts

Futures

Principal transactions revenue

(15)

Other contracts

Foreign exchange forward contracts

Other revenue

TBAs

Principal transactions revenue

(17)

ARS purchase commitments

Principal transactions revenue

140

175

(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

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 Nine Months Ended September 30, 2020

Recognized in Income on Derivatives
(pre-tax)

Types

Description

Location

Net Gain (Loss)

Commodity contracts

Futures

Principal transactions revenue

(8,362)

Other contracts

Foreign exchange forward contracts

Other revenue

TBAs

Principal transactions revenue

(31)

ARS purchase commitments

Principal transactions revenue

831

(7,473)

(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

TBAs

Principal transactions revenue

(85)

ARS purchase commitments

Principal transactions revenue

(3,089)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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