NOTE 2 – FAIR VALUE

Substantially all of the Partnership’s financial assets and financial liabilities covered under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820, Fair Value Measurement and Disclosure (“ASC 820”), are carried at fair value or contracted amounts which approximate fair value. Upon the adoption of fair value guidance set forth in FASB ASC No. 825, Financial Instruments, the Partnership elected not to take the fair value option on all debt and liabilities subordinated to the claims of general creditors.

Fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, also known as the “exit price.” Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The Partnership’s financial assets and financial liabilities recorded at fair value in the Consolidated Statements of Financial Condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 with the related amount of subjectivity associated with the inputs to value these assets and liabilities at fair value for each level, are as follows:

Level I – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets and liabilities categorized as Level I generally are U.S. treasuries, investments in publicly traded mutual funds with quoted market prices, government and agency obligations, and equities listed in active markets.

Level II – Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with related market data at the measurement date and for the duration of the instrument’s anticipated life. The Partnership uses the market approach valuation technique which incorporates third-party pricing services and other relevant observable information (such as market interest rates, yield curves, prepayment risk and credit risk generated by market transactions involving identical or comparable assets or liabilities) in valuing these types of investments. When third-party pricing services are used, the methods and assumptions used are reviewed by the Partnership.

The types of assets and liabilities categorized as Level II generally are certificates of deposit, state and municipal obligations, and corporate bonds and notes.

Level III – Inputs are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the inputs to the model.

The Partnership did not have any assets or liabilities categorized as Level III during the periods ended March 28, 2014 and December 31, 2013. In addition, there were no transfers into or out of Levels I, II or III during these periods. Securities sold, not yet purchased are included within accounts payable, accrued expenses and other on the Consolidated Statements of Financial Condition.

The following tables show the Partnership’s financial assets and liabilities measured at fair value:


	Financial Assets at Fair Value as of March 28, 2014
	Level I		Level II		Level III		Total
Investments segregated under federal regulations:
U.S. treasuries	$	1,152	$	—	$	—	$	1,152
Certificates of deposit		—		225		—		225

Total investments segregated under federal regulations	$	1,152	$	225	$	—	$	1,377

Securities owned:
Inventory securities:
State and municipal obligations	$	—	$	54	$	—	$	54
Equities		37		—		—		37
Corporate bonds and notes		—		3		—		3
Other		1		1		—		2

Total inventory securities	$	38	$	58	$	—	$	96

Investment securities:
Mutual funds	$	113	$	—	$	—	$	113
Government and agency obligations		19		—		—		19
Equities		5		—		—		5
Other		—		1		—		1

Total investment securities	$	137	$	1	$	—	$	138


	Financial Liabilities at Fair Value as of March 28, 2014
	Level I		Level II		Level III		Total
Securities sold, not yet purchased:
Corporate bonds and notes	$	—	$	2	$	—	$	2
Equities		1		—		—		1
Other		—		1		—		1

Total securities sold, not yet purchased	$	1	$	3	$	—	$	4


	Financial Assets at Fair Value as of December 31, 2013
	Level I		Level II		Level III		Total
Investments segregated under federal regulations:
U.S. treasuries	$	1,154	$	—	$	—	$	1,154
Certificates of deposit		—		225		—		225

Total investments segregated under federal regulations	$	1,154	$	225	$	—	$	1,379

Securities owned:
Inventory securities:
State and municipal obligations	$	—	$	67	$	—	$	67
Equities		27		—		—		27
Corporate bonds and notes		—		3		—		3
Certificates of deposit		—		2		—		2
Unit investment trusts		2		—		—		2
Other		—		1		—		1

Total inventory securities	$	29	$	73	$	—	$	102

Investment securities:
Mutual funds	$	116	$	—	$	—	$	116
Government and agency obligations		19		—		—		19
Equities		5		—		—		5
Other		—		1		—		1

Total investment securities	$	140	$	1	$	—	$	141


	Financial Liabilities at Fair Value as of December 31, 2013
	Level I		Level II		Level III		Total
Securities sold, not yet purchased:
Corporate bonds and notes	$	—	$	2	$	—	$	2
Equities		1		—		—		1
Other		—		1		—		1

Total securities sold, not yet purchased	$	1	$	3	$	—	$	4

The Partnership attempts to reduce its exposure to market price fluctuations of its inventory securities through the sale of U.S. government securities and, to a limited extent, the sale of fixed income futures contracts. The amount of the securities purchased or sold fluctuates on a daily basis due to changes in inventory securities owned, interest rates and market conditions. Futures contracts are settled daily, and any gain or loss is recognized as a component of net inventory gains, which are included in principal transactions revenue. The notional amounts of futures contracts outstanding were $6 and $9 at March 28, 2014 and December 31, 2013, respectively. The average notional amounts of futures contracts outstanding throughout the three month period ended March 28, 2014 and the year ended December 31, 2013 were approximately $6 and $7, respectively. The underlying assets of these contracts are not reflected in the Partnership’s Consolidated Financial Statements; however, the related mark-to-market adjustments are included in investment securities in the Consolidated Statements of Financial Condition and were gains of $0.029 and $0.031 as of March 28, 2014 and December 31, 2013, respectively. The total losses related to these assets, recorded within the Consolidated Statements of Income, were $0.323 and $0.220 for the three month periods ended March 28, 2014 and March 29, 2013, respectively.

The Partnership estimates the fair value of long-term debt and the liabilities subordinated to claims of general creditors based on the present value of future principal and interest payments associated with the debt, using current interest rates for debt of a similar nature as that of the Partnership (Level II input). The following table shows the estimated fair values and book values of long-term debt and liabilities subordinated to claims of general creditors as of:


	March 28, 2014				December 31, 2013
	Book Value		Fair Value		Book Value		Fair Value
Long-term debt	$	4	$	4	$	4	$	5
Liabilities subordinated to claims of general creditors		50		50		50		50

Total	$	54	$	54	$	54	$	55