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Fair value measurements

9 Months Ended

Sep. 30, 2023

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, quoted market prices for comparable securities or discounted cash flow models. 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 is 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")

As of September 30, 2023, the Company owned $2.7 million of ARS. This amount represents the unredeemed or unsold amount that the Company holds as a result of ARS buybacks in previous years. The Company has valued the ARS securities owned at the tender offer price and categorized them in Level 3 of the fair value hierarchy due to the illiquid nature of the securities and the period of time since the last tender offer. The fair value of ARS 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, 2023, the Company had a valuation allowance totaling $0.2 million relating to ARS owned (which is included as a reduction to securities owned 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 unless another method provides a better indicator of fair value.

The following table provides information about the Company's investments in Company-sponsored funds as of September 30, 2023:


(Expressed in thousands)
	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Hedge funds (1)	$	459	$	—	Quarterly - Annually	30 - 120 Days
Private equity funds (2)	10,971		2,367		N/A	N/A
	$	11,430	$	2,367

(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 diversified portfolios focusing on but not limited to technology companies, venture capital and global natural resources.

The following table provides information about the Company's investments in Company-sponsored funds as of December 31, 2022:


(Expressed in thousands)
	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Hedge funds (1)	$	574	$	—	Quarterly - Annually	30 - 120 Days
Private equity funds (2)	8,221		3,018		N/A	N/A
	$	8,795	$	3,018

(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 diversified portfolios focusing on but not limited to technology companies, venture capital and global natural resources.

The Company owns 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. As of September 30, 2023, the fair value of the investment was $7.0 million and was 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, 2023 and December 31, 2022, 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, 2023:


(Expressed in thousands)
	Fair Value Measurements as of September 30, 2023
	Level 1		Level 2		Level 3		Total
Assets

Deposits with clearing organizations	$	34,970	$	—	$	—	$	34,970
Securities owned:
U.S. Treasury securities	710,730		—		—		710,730
U.S. Agency securities	—		2		—		2
Sovereign obligations	—		261		—		261
Corporate debt and other obligations	—		23,079		—		23,079
Mortgage and other asset-backed securities	—		6,664		—		6,664
Municipal obligations	—		61,735		—		61,735
Convertible bonds	—		19,028		—		19,028
Corporate equities	29,360		—		—		29,360
Money markets	—		373		—		373
Auction rate securities	—		—		2,713		2,713
Securities owned, at fair value	740,090		111,142		2,713		853,945
Investments (1)	3,976		12,084		—		16,060

Derivative contracts:
Futures	1		—		—		1
TBAs	—		153		—		153

Derivative contracts, total	1		153		—		154
Total	$	779,037	$	123,379	$	2,713	$	905,129
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	12,505	$	—	$	—	$	12,505


Corporate debt and other obligations	—		13,799		—		13,799
Mortgage and other asset-backed securities	—		143		—		143

Convertible bonds	—		8,117		—		8,117
Corporate equities	11,013		—		—		11,013

Securities sold but not yet purchased, at fair value	23,518		22,059		—		45,577

Derivative contracts:
Futures	1,874		—		—		1,874

TBAs	—		146		—		146


Derivative contracts, total	1,874		146		—		2,020
Total	$	25,392	$	22,205	$	—	$	47,597

(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, 2022:


(Expressed in thousands)
	Fair Value Measurements as of December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets


Deposits with clearing organizations	$	24,937	$	—	$	—	$	24,937
Securities owned:
U.S. Treasury securities	362,815		—		—		362,815
U.S. Agency securities	—		6,012		—		6,012
Sovereign obligations	—		9,502		—		9,502
Corporate debt and other obligations	—		9,844		—		9,844
Mortgage and other asset-backed securities	—		1,882		—		1,882
Municipal obligations	—		30,126		—		30,126
Convertible bonds	—		21,800		—		21,800
Corporate equities	24,837		—		—		24,837

Auction rate securities	—		—		31,776		31,776
Securities owned, at fair value	387,652		79,166		31,776		498,594
Investments (1)	—		7,068		—		7,068

Derivative contracts:
TBAs	—		1,762		—		1,762


Total	$	412,589	$	87,996	$	31,776	$	532,361
Liabilities
Securities sold but not yet purchased:
U.S. Treasury securities	$	25,006	$	—	$	—	$	25,006
U.S. Agency securities	—		3		—		3
Sovereign obligations	—		9,048		—		9,048
Corporate debt and other obligations	—		2,905		—		2,905


Convertible bonds	—		4,428		—		4,428
Corporate equities	11,378		—		—		11,378

Securities sold but not yet purchased, at fair value	36,384		16,384		—		52,768

Derivative contracts:
Futures	44		—		—		44

TBAs	—		1,761		—		1,761

Derivative contracts, total	44		1,761		—		1,805
Total	$	36,428	$	18,145	$	—	$	54,573

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

The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2023 and 2022:


(Expressed in thousands)
	Level 3 Assets and Liabilities
	For the Three Months Ended September 30, 2023
			Total Realized
	Beginning		and Unrealized		Purchases		Sales and		Transfers		Ending
	Balance		Gain		and Issuances		Settlements		In (Out)		Balance
Assets
Auction rate securities (1)	$	31,682	$	3,153	$	—	$	(32,122)	$	—	$	2,713

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

(Expressed in thousands)

Level 3 Assets and Liabilities

For the Three Months Ended September 30, 2022

Total Realized

Beginning

and Unrealized

Purchases

Sales and

Transfers

Ending

Balance

Losses

and Issuances

Settlements

In (Out)

Balance

Assets

Auction rate securities (1)

31,977

(29)

1,175

—

33,123

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

(Expressed in thousands)

Level 3 Assets and Liabilities

For the Nine Months Ended September 30, 2023

Total Realized

Beginning

and Unrealized

Purchases

Sales and

Transfers

Ending

Balance

Gain

and Issuances

Settlements

In (Out)

Balance

Assets

Auction rate securities (1)

31,776

3,159

—

(32,222)

—

2,713

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

(Expressed in thousands)

Level 3 Assets and Liabilities

For the Nine Months Ended September 30, 2022

Total Realized

Beginning

and Unrealized

Purchases

Sales and

Transfers

Ending

Balance

Losses

and Issuances

Settlements

In (Out)

Balance

Assets

Auction rate securities (1)

31,804

(56)

1,375

—

33,123

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

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., 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 (e.g., cash and receivables from customers) 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, 2023:


(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	30,773	$	30,773	$	—	$	—	$	30,773
Restricted cash	25,949		25,949		—		—		25,949
Deposits with clearing organizations	53,957		53,957		—		—		53,957
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	142,544		—		142,544		—		142,544
Receivables from brokers	45,021		—		45,021		—		45,021
Securities failed to deliver	20,203		—		20,203		—		20,203
Clearing organizations and other	51,599		—		51,599		—		51,599

	259,367		—		259,367		—		259,367
Receivable from customers	1,087,314		—		1,087,314		—		1,087,314

Notes receivable, net	61,270		—		61,270		—		61,270
Investments (1)	85,606		—		85,606		—		85,606

(1) The cash surrender value of Company-owned life insurance policies, which fluctuates based on changes in fair value of the policies’ underlying investments, comprises approximately $84 million of this balance. This balance is included within 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	$	14,521	$	14,521	$	—	$	—	$	14,521
Bank call loans	56,200		—		56,200		—		56,200
Payables to brokers, dealers and clearing organizations:
Securities loaned	292,860		—		292,860		—		292,860
Payable to brokers	1,337		—		1,337		—		1,337
Securities failed to receive	29,031		—		29,031		—		29,031
Clearing organization and other	25,243		—		25,243		—		25,243
	348,471		—		348,471		—		348,471
Payables to customers	363,839		—		363,839		—		363,839
Securities sold under agreements to repurchase	680,064		—		680,064		—		680,064
Senior secured notes	113,050		—		108,084		—		108,084

Assets and liabilities not measured at fair value as of December 31, 2022:


(Expressed in thousands)			Fair Value Measurement: Assets
	Carrying Value		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	112,433	$	112,433	$	—	$	—	$	112,433
Restricted cash	25,534		25,534		—		—		25,534
Deposits with clearing organization	52,754		52,754		—		—		52,754
Receivable from brokers, dealers and clearing organizations:
Securities borrowed	127,817		—		127,817		—		127,817
Receivables from brokers	49,125		—		49,125		—		49,125
Securities failed to deliver	9,099		—		9,099		—		9,099
Clearing organizations	20,035		—		20,035		—		20,035

	206,076		—		206,076		—		206,076
Receivable from customers	1,202,764		—		1,202,764		—		1,202,764

Notes receivable, net	57,495		—		57,495		—		57,495
Investments (1)	79,322		—		79,322		—		79,322

(1) The cash surrender value of Company-owned life insurance policies, which fluctuates based on changes in fair value of the policies’ underlying investments, comprises approximately $77 million of this balance. This balance is included within 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	320,843	—	320,843	—	320,843
Payable to brokers	123	—	123	—	123
Securities failed to receive	62,646	—	62,646	—	62,646
Other	166,350	—	166,350	—	166,350
	549,962	—	549,962	—	549,962
Payables to customers	456,475	—	456,475	—	456,475
Securities sold under agreements to repurchase	161,009	—	161,009	—	161,009
Senior secured notes	114,050	—	113,233	—	113,233

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, 2023, the Company had no 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 or other liabilities on the condensed consolidated balance sheet and other income in the condensed consolidated income statement.

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 income statement 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 income statement as principal transactions revenue, net.

The notional amounts and fair values of the Company's derivatives as of September 30, 2023 and December 31, 2022 by product were as follows:


(Expressed in thousands)
	Fair Value of Derivative Instruments as of September 30, 2023
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments (1)
Other contracts	TBAs	$	8,746	$	153

	Futures	5,000		1
		$	13,746	$	154
Liabilities:
Derivatives not designated as hedging instruments (1)
Commodity contracts	Futures	$	7,625,000	$	1,874

Other contracts	TBAs	8,746		146



		$	7,633,746	$	2,020

(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.


(Expressed in thousands)
	Fair Value of Derivative Instruments as of December 31, 2022
	Description	Notional		Fair Value
Assets:
Derivatives not designated as hedging instruments (1)
Other contracts	TBAs	$	1,775	$	1,762
	Forward reverse repurchase agreements	15,000		—
	Other	275		$	—
		$	17,050	$	1,762
Liabilities:
Derivatives not designated as hedging instruments (1)
Commodity contracts	Futures	$	1,912,500	$	44


Other contracts	TBAs	1,775		1,761


		$	1,914,275	$	1,805

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, 2023 and 2022:

(Expressed in thousands)

The Effect of Derivative Instruments in the Income Statement

For the Three Months Ended September 30, 2023

Recognized in Income on Derivatives
(pre-tax)

Types

Description

Location

Net Gain

Commodity contracts

Futures

Principal transactions revenue, net

1,078

Other contracts

TBAs

Principal transactions revenue, net

1,103

(Expressed in thousands)

The Effect of Derivative Instruments in the Income Statement

For the Three Months Ended September 30, 2022

Recognized in Income on Derivatives
(pre-tax)

Types

Description

Location

Net Gain

Commodity contracts

Futures

Principal transactions revenue, net

349

Other contracts

TBAs

Principal transactions revenue, net

350

(Expressed in thousands)

The Effect of Derivative Instruments in the Income Statement

For the Nine Months Ended September 30, 2023

Recognized in Income on Derivatives
(pre-tax)

Types

Description

Location

Net Gain/(Loss)

Commodity contracts

Futures

Principal transactions revenue, net

4,817

Other contracts

Foreign exchange forward contracts

Other revenue

(8)

TBAs

Principal transactions revenue, net

4,872

(Expressed in thousands)

The Effect of Derivative Instruments in the Income Statement

For the Nine Months Ended September 30, 2022

Recognized in Income on Derivatives
(pre-tax)

Types

Description

Location

Net Gain/(Loss)

Commodity contracts

Futures

Principal transactions revenue, net

3,868

Other contracts

Foreign exchange forward contracts

Other revenue

(20)

TBAs

Principal transactions revenue, net

3,905

- 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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