10-Q 1 luk10q3312017.htm LEUCADIA NATIONAL CORPORATION 1ST QTR. 2017 FORM 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
__________
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to

Commission File Number 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
New York
(State or other jurisdiction of
13-2615557
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
520 Madison Avenue, New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 460-1900
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)
______________________

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer o
Non-accelerated filer    o
 
 
(Do not check if a smaller reporting company)
Smaller reporting company  o
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares outstanding of each of the issuer’s classes of common stock at April 26, 2017 was 359,818,382.




PART I. FINANCIAL INFORMATION

Item I. Financial Statements.
 
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2017 and December 31, 2016
(Dollars in thousands, except par value)
(Unaudited)
 
March 31,
 
December 31,
 
2017
 
2016
ASSETS
 
 
 
Cash and cash equivalents
$
4,261,427

 
$
3,807,558

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
705,313

 
857,337

Financial instruments owned, including securities pledged of $10,184,574 and $9,706,881:
 

 
 

Trading assets, at fair value
14,606,439

 
14,985,237

Available for sale securities
462,503

 
301,049

Total financial instruments owned
15,068,942


15,286,286

Investments in managed funds
498,529

 
515,318

Loans to and investments in associated companies
2,122,479

 
2,125,098

Securities borrowed
6,886,436

 
7,743,562

Securities purchased under agreements to resell
4,468,494

 
3,862,488

Receivables
5,553,667

 
4,425,178

Property, equipment and leasehold improvements, net
718,439

 
709,242

Intangible assets, net and goodwill
2,499,103

 
2,513,678

Deferred tax asset, net
1,360,779

 
1,461,815

Assets held for sale

 
128,083

Other assets
1,836,389

 
1,635,664

Total assets
$
45,979,997


$
45,071,307

 
 
 
 
LIABILITIES
 

 
 

Short-term borrowings
$
422,924

 
$
525,842

Trading liabilities, at fair value
8,763,993

 
8,388,619

Securities loaned
2,522,846

 
2,819,132

Securities sold under agreements to repurchase
7,315,459

 
6,791,676

Other secured financings
837,204

 
1,026,429

Payables, expense accruals and other liabilities
6,859,832

 
7,373,708

Long-term debt
8,198,419

 
7,380,443

Total liabilities
34,920,677


34,305,849

 
 
 
 
Commitments and contingencies


 


 
 
 
 
MEZZANINE EQUITY
 

 
 

Redeemable noncontrolling interests
342,574

 
336,809

Mandatorily redeemable convertible preferred shares
125,000

 
125,000

 
 
 
 
EQUITY
 

 
 

Common shares, par value $1 per share, authorized 600,000,000 shares; 359,815,689 and 359,425,061 shares issued and outstanding, after deducting 56,575,299 and 56,947,654 shares held in treasury
359,816

 
359,425

Additional paid-in capital
4,819,281

 
4,812,587

Accumulated other comprehensive income
315,637

 
310,697

Retained earnings
4,903,424

 
4,645,391

Total Leucadia National Corporation shareholders’ equity
10,398,158


10,128,100

Noncontrolling interests
193,588

 
175,549

Total equity
10,591,746


10,303,649

 
 
 
 
Total
$
45,979,997

 
$
45,071,307


See notes to interim consolidated financial statements.

2



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended March 31, 2017 and 2016
(In thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
 
 
 
2017
 
2016
Revenues:
 
 
 
 
Beef processing services
 
$
1,559,023

 
$
1,631,371

Commissions
 
145,822

 
155,824

Principal transactions
 
416,501

 
(102,483
)
Investment banking
 
408,021

 
230,930

Interest income
 
223,630

 
232,016

Net realized securities gains
 
460

 
728

Other
 
326,912

 
58,923

Total revenues
 
3,080,369

 
2,207,309

Interest expense of Jefferies
 
212,387

 
192,203

Net revenues
 
2,867,982

 
2,015,106

 
 
 
 
 
Expenses:
 
 

 
 

Cost of sales
 
1,533,094

 
1,648,052

Compensation and benefits
 
504,183

 
389,407

Floor brokerage and clearing fees
 
45,858

 
40,479

Interest
 
27,384

 
22,318

Depreciation and amortization
 
49,510

 
49,610

Selling, general and other expenses
 
181,282

 
187,255

 
 
2,341,311

 
2,337,121

 
 
 
 
 
Income (loss) before income taxes and income (loss) related to associated companies
 
526,671

 
(322,015
)
Income (loss) related to associated companies
 
(128,574
)
 
20,052

Income (loss) before income taxes
 
398,097

 
(301,963
)
Income tax provision (benefit)
 
104,174

 
(83,361
)
Net income (loss)
 
293,923

 
(218,602
)
Net loss attributable to the noncontrolling interests
 
523

 
1,052

Net income attributable to the redeemable noncontrolling interests
 
(12,022
)
 
(4,314
)
Preferred stock dividends
 
(1,016
)
 
(1,016
)
 
 
 

 
 

Net income (loss) attributable to Leucadia National Corporation common shareholders
 
$
281,408

 
$
(222,880
)
 
 
 
 
 
Basic earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:
 
 
 
 
Net income (loss)
 
$
0.76

 
$
(0.60
)
 
 
 
 
 
Diluted earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:
 
 
 
 
Net income (loss)
 
$
0.75

 
$
(0.60
)


See notes to interim consolidated financial statements.

3



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the periods ended March 31, 2017 and 2016
(In thousands)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
 
 
 
2017
 
2016
 
 
 
 
 
Net income (loss)
 
$
293,923

 
$
(218,602
)
Other comprehensive income (loss):
 
 

 
 

Net unrealized holding gains (losses) on investments arising during the period, net of income tax provision (benefit) of $5,907 and $(522)
 
10,143

 
(940
)
Less: reclassification adjustment for net (gains) losses included in net income (loss), net of income tax provision (benefit) of $(11) and $14
 
18

 
(26
)
Net change in unrealized holding gains (losses) on investments, net of income tax provision (benefit) of $5,918 and $(536)
 
10,161

 
(966
)
 
 
 
 
 
Net unrealized foreign exchange gains (losses) arising during the period, net of income tax provision (benefit) of $1,511 and $3,236
 
(18
)
 
(43,921
)
Less: reclassification adjustment for foreign exchange (gains) losses included in net income (loss), net of income tax provision (benefit) of $1,097 and $0
 
5,290

 

Net change in unrealized foreign exchange gains (losses), net of income tax provision (benefit) of $414 and $3,236
 
5,272

 
(43,921
)
 
 
 
 
 
Net unrealized gains (losses) on instrument specific credit risk arising during the period, net of income tax provision (benefit) of $(6,345) and $0
 
(9,695
)
 
(302
)
Less: reclassification adjustment for instrument specific credit risk (gains) losses included in net income (loss), net of income tax provision (benefit) of $0 and $0
 

 

Net change in unrealized instrument specific credit risk gains (losses), net of income tax provision (benefit) of $(6,345) and $0
 
(9,695
)
 
(302
)
 
 
 
 
 
Net pension gains (losses) arising during the period, net of income tax provision (benefit) of $0 and $0
 

 

Less: reclassification adjustment for pension (gains) losses included in net income (loss), net of income tax provision (benefit) of $(1,435) and $(178)
 
(798
)
 
400

Net change in pension liability, net of income tax provision (benefit) of $1,435 and $178
 
(798
)
 
400

 
 
 
 
 
Other comprehensive income (loss), net of income taxes
 
4,940

 
(44,789
)
 
 
 
 
 
Comprehensive income (loss)
 
298,863

 
(263,391
)
Comprehensive loss attributable to the noncontrolling interests
 
523

 
1,052

Comprehensive (income) attributable to the redeemable noncontrolling interests
 
(12,022
)
 
(4,314
)
Preferred stock dividends
 
(1,016
)
 
(1,016
)
 
 
 
 
 
Comprehensive income (loss) attributable to Leucadia National Corporation common shareholders
 
$
286,348

 
$
(267,669
)











See notes to interim consolidated financial statements.

4



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the periods ended March 31, 2017 and 2016
(In thousands)
(Unaudited)
 
2017
 
2016
Net cash flows from operating activities:
 
 
 
Net income (loss)
$
293,923

 
$
(218,602
)
Adjustments to reconcile net income (loss) to net cash used for operations:
 

 
 

Deferred income tax provision (benefit)
99,357

 
(81,521
)
Depreciation and amortization of property, equipment and leasehold improvements
34,482

 
34,955

Other amortization
3,541

 
212

Share-based compensation
9,983

 
6,933

Provision for doubtful accounts
9,517

 
11,003

Net securities gains
(460
)
 
(728
)
Loss related to associated companies
102,311

 
3,364

Distributions from associated companies
14,040

 
13,908

Net (gains) losses related to property and equipment, and other assets
(29
)
 
5,874

Gain on sale of subsidiary
(179,894
)
 

Net change in:
 
 
 
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
152,001

 
70,939

Trading assets
304,957

 
3,041,330

Investments in managed funds
18,520

 
49,350

Securities borrowed
856,236

 
(385,463
)
Securities purchased under agreements to resell
(609,225
)
 
298,260

Receivables from brokers, dealers and clearing organizations
(807,458
)
 
(204,142
)
Receivables from customers of securities operations
(341,347
)
 
6,966

Other receivables
(35,160
)
 
(22,889
)
Other assets
(177,164
)
 
(370,398
)
Trading liabilities
381,118

 
761,729

Securities loaned
(295,666
)
 
(295,559
)
Securities sold under agreements to repurchase
525,137

 
(1,721,276
)
Payables to brokers, dealers and clearing organizations
(329,027
)
 
(1,492,311
)
Payables to customers of securities operations
114,834

 
(180,980
)
Trade payables, expense accruals and other liabilities
(317,806
)
 
(262,392
)
Other
(19,704
)
 
8,645

Net cash used for operating activities
(192,983
)

(922,793
)
 
 
 
 
Net cash flows from investing activities:
 

 
 

Acquisitions of property, equipment and leasehold improvements, and other assets
(46,985
)
 
(90,722
)
Proceeds from disposals of property and equipment, and other assets
17,288

 
5,298

Proceeds from sale of subsidiary, net of expenses and cash of operations sold
291,425

 

Advances on notes, loans and other receivables
(23,634
)
 
(148,622
)
Collections on notes, loans and other receivables
86,608

 
11,686

Loans to and investments in associated companies
(1,227,838
)
 
(284,820
)
Capital distributions and loan repayments from associated companies
1,143,541

 
193,952

Purchases of investments (other than short-term)
(383,934
)
 
(295,088
)
Proceeds from maturities of investments
52,335

 
18,358

Proceeds from sales of investments
214,754

 
83,460

Other
1,250

 
(5,959
)
Net cash provided by (used for) investing activities
124,810


(512,457
)
(continued)




See notes to interim consolidated financial statements.

5



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the periods ended March 31, 2017 and 2016
(In thousands)
(Unaudited)

 
2017
 
2016
Net cash flows from financing activities:
 
 
 
Issuance of debt, net of issuance costs
$
880,493

 
$
262,249

Net change in short-term borrowings
(107,113
)
 
1,226

Repayment of debt
(55,405
)
 
(34,937
)
Net change in other secured financings
(189,518
)
 
119,794

Net change in bank overdrafts
4,195

 

Issuance of common shares
805

 
531

Net distributions to redeemable noncontrolling interests
(185
)
 

Distributions to noncontrolling interests
(179
)
 
(271
)
Contributions from noncontrolling interests
18,777

 
94,904

Purchase of common shares for treasury
(3,455
)
 
(9,624
)
Dividends paid
(22,710
)
 
(23,001
)
Other

 
153

Net cash provided by financing activities
525,705

 
411,024

 
 
 
 
Effect of foreign exchange rate changes on cash
(527
)
 
(10,356
)
 
 
 
 
Change in cash classified as assets held for sale
(3,136
)
 

 
 
 
 
Net increase (decrease) in cash and cash equivalents
453,869

 
(1,034,582
)
 
 

 
 

Cash and cash equivalents at January 1,
3,807,558

 
3,638,648

 
 

 
 

Cash and cash equivalents at March 31,
$
4,261,427

 
$
2,604,066

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the year for:
 

 
 

Interest
$
248,211

 
$
195,300

Income tax payments (refunds), net
$
2,728

 
$
(8,596
)
 
 
 
 
















See notes to interim consolidated financial statements.

6



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the periods ended March 31, 2017 and 2016
(In thousands, except par value and per share amounts)
(Unaudited)

 
Leucadia National Corporation Common Shareholders
 
 
 
 
 
Common
Shares
$1 Par
Value
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Subtotal
 
Noncontrolling
Interests
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
362,617

 
$
4,986,819

 
$
438,793

 
$
4,612,982

 
$
10,401,211

 
$
64,679

 
$
10,465,890

Net loss
 

 
 

 
 

 
(222,880
)
 
(222,880
)
 
(1,052
)
 
(223,932
)
Other comprehensive loss, net of taxes
 

 
 

 
(44,789
)
 
 

 
(44,789
)
 
 

 
(44,789
)
Contributions from noncontrolling interests
 

 
 

 
 

 
 

 

 
94,904

 
94,904

Distributions to noncontrolling interests
 

 
 

 
 

 
 

 

 
(271
)
 
(271
)
Deconsolidation of asset management entities
 

 
 

 
 

 
 

 

 
(385
)
 
(385
)
Share-based compensation expense
 

 
6,933

 
 

 
 

 
6,933

 
 

 
6,933

Change in fair value of redeemable noncontrolling interests
 

 
(12,835
)
 
 

 
 

 
(12,835
)
 
 

 
(12,835
)
Purchase of common shares for treasury
(583
)
 
(9,041
)
 
 

 
 

 
(9,624
)
 
 

 
(9,624
)
Dividends ($.0625 per common share)
 

 
 

 
 

 
(23,577
)
 
(23,577
)
 
 

 
(23,577
)
Other
295

 
(3,429
)
 
 

 
 

 
(3,134
)
 


 
(3,134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2016
$
362,329


$
4,968,447


$
394,004


$
4,366,525


$
10,091,305


$
157,875


$
10,249,180

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
359,425

 
$
4,812,587

 
$
310,697

 
$
4,645,391

 
$
10,128,100

 
$
175,549

 
$
10,303,649

Net income
 

 
 

 
 

 
281,408

 
281,408

 
(523
)
 
280,885

Other comprehensive income, net of taxes
 

 
 

 
4,940

 
 

 
4,940

 
 

 
4,940

Contributions from noncontrolling interests
 

 
 

 
 

 
 

 

 
18,777

 
18,777

Distributions to noncontrolling interests
 

 
 

 
 

 
 

 

 
(179
)
 
(179
)
Change in interest in consolidated subsidiary
 

 
36

 
 

 
 

 
36

 
(36
)
 

Share-based compensation expense
 

 
9,983

 
 

 
 

 
9,983

 
 

 
9,983

Change in fair value of redeemable noncontrolling interests
 

 
(1,038
)
 
 

 
 

 
(1,038
)
 
 

 
(1,038
)
Exercise of options to purchase common shares
18

 
400

 
 
 
 
 
418

 
 
 
418

Purchase of common shares for treasury
(147
)
 
(3,308
)
 
 

 
 

 
(3,455
)
 
 

 
(3,455
)
Dividends ($.0625 per common share)
 

 
 

 
 

 
(23,375
)
 
(23,375
)
 
 

 
(23,375
)
Other
520

 
621

 
 

 
 

 
1,141

 


 
1,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
$
359,816


$
4,819,281


$
315,637


$
4,903,424


$
10,398,158


$
193,588


$
10,591,746








See notes to interim consolidated financial statements.

7



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Note 1.  Nature of Operations

Leucadia National Corporation (“Leucadia” or the “Company”) is a diversified holding company focused on long-term value creation to maximize shareholder value.  We continuously review acquisitions of businesses, securities and assets that have the potential for significant long-term value creation, invest in a broad array of businesses, and evaluate the retention and disposition of our existing operations and holdings.  Changes in the mix of our businesses and investments should be expected.

Our financial services businesses and investments include Jefferies (investment banking and capital markets), Leucadia Asset Management (asset management), Berkadia (commercial mortgage banking, investment sales and servicing), FXCM (provider of online foreign exchange trading services), HomeFed (publicly traded real estate company) and Foursight Capital (vehicle finance).  We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group (insurance and consumer products), Vitesse Energy and JETX Energy (oil and gas exploration and development), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Idaho Timber (manufacturing company), and Golden Queen (gold and silver mining project). The structure of each of our investments was tailored to the unique opportunity each transaction presented. Our investments may be reflected in our consolidated results as consolidated subsidiaries, equity investments, securities, or in other ways, depending on the structure of our specific holdings.

Jefferies is a global full-service, integrated securities and investment banking firm.  In March 2013, Jefferies became an indirect wholly-owned subsidiary of Leucadia, yet retains a separate credit rating and continues to be a separate SEC reporting company.  Through Jefferies, we own 50% of Jefferies Finance LLC ("Jefferies Finance"), our joint venture with Babson Capital Management LLC (now Barings, LLC) and Massachusetts Mutual Life Insurance Company.  Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt of middle market and growth companies in the form of term and revolving loans.  Through Jefferies, we also own a 48.5% voting interest in Jefferies LoanCore, LLC ("Jefferies LoanCore"), a joint venture with the Government of Singapore Investment Corporation, the Canadian Pension Plan Investment Board and LoanCore, LLC.  Jefferies LoanCore originates, purchases and securitizes commercial real estate loans throughout the U.S.

Jefferies has a November 30 year-end, which it retains for standalone reporting purposes.  We reflect Jefferies in our consolidated financial statements utilizing a one month lag.  We have reviewed Jefferies business and internal operating results for the month of March 2017 for the purpose of evaluating whether financial statement disclosure or adjustments are required in this Quarterly Report on Form 10-Q, and we have concluded that no additional disclosures or adjustments are warranted.

Leucadia Asset Management ("LAM") supports and develops focused alternative asset management businesses led by distinct management teams. These primarily include Folger Hill Asset Management LLC ("Folger Hill"), a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital, a first-loss product; 54 Madison Capital, LLC ("54 Madison"), which invests in real estate projects; CoreCommodity Management LLC, an asset manager that focuses on commodities strategies; Tenacis Capital, a systematic macro investment platform; Lake Hill, an electronic trader in listed options and futures across asset classes; as well as several other smaller businesses. In addition, several investment management businesses, including Jefferies Strategic Investments Division, operate under Jefferies and are included under our marketing of the LAM platform.

Our investment in FXCM Group, LLC ("FXCM") and associated companies consists of a senior secured term loan due January 2018 ($123.0 million outstanding at March 31, 2017), a 49.9% common membership interest in FXCM and up to 65% of all distributions. FXCM's six-member board is comprised of three directors appointed by Leucadia and three directors appointed by Global Brokerage Holdings, LLC ("Global Brokerage Holdings" and formerly FXCM Holdings, LLC). See Notes 3 and 9 to our consolidated financial statements for additional information.

Berkadia Commercial Mortgage LLC ("Berkadia"), our 50-50 equity method joint venture with Berkshire Hathaway Inc., is a U.S. commercial real estate company providing capital solutions, investment sales advisory and mortgage servicing for multifamily and commercial properties.

We own an approximate 70% equity method interest in HomeFed, which owns and develops residential and mixed use real estate properties.  HomeFed is a public company traded on the NASD OTC Bulletin Board.

We own 100% of Foursight Capital, an auto loan originator and servicer, and 85% of Chrome Capital, which owns and manages a portfolio of leases on used Harley-Davidson motorcycles and is in the process of winding down.

8



We own approximately 23% of HRG Group, Inc. ("HRG"), a publicly traded company (NYSE: HRG), and we reflect this investment at fair value based on quoted market prices. HRG primarily owns approximately 58% of Spectrum Brands, a publicly traded (NYSE: SPB) global consumer products company; an approximately 80% ownership stake in Fidelity & Guaranty Life ("FGL"), a publicly traded (NYSE: FGL) life insurance and annuity products company; and Front Street, a long-term reinsurance company. On November 8, 2015, FGL and Anbang Insurance Group Co., Ltd. ("Anbang") entered into a definitive merger agreement pursuant to which Anbang would have acquired FGL for $26.80 per share in cash. On April 17, 2017, FGL terminated the merger agreement with Anbang and announced that it is continuing to evaluate strategic alternatives to maximize shareholder value and has received interest from a number of parties.

We own 78.9% of National Beef Packing Company.  National Beef processes and markets fresh and chilled boxed beef, ground beef, beef by-products, consumer-ready beef and pork, and wet blue leather for domestic and international markets.  National Beef operates two beef processing facilities, three consumer-ready facilities and a wet blue tanning facility, all located in the U.S. National Beef operates one of the largest wet blue tanning facilities in the world that sells processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries.  National Beef owns Kansas City Steak Company, LLC, which sells portioned beef and other products directly to customers through the internet, direct mail and direct response television.  National Beef also owns a refrigerated and livestock transportation and logistics company that provides transportation services for National Beef and third parties.

Vitesse Energy, LLC ("Vitesse") is our 96% owned consolidated subsidiary that acquires and develops non-operated working and royalty oil and gas interests in the Bakken Shale oil field in North Dakota and Montana as well as the Denver-Julesburg Basin in Wyoming.

JETX Energy, LLC ("JETX"), formerly Juneau Energy, LLC, is our 98% owned consolidated subsidiary that engages in the exploration, development and production of oil and gas from onshore, unconventional resource areas.  JETX currently has non-operated working interests and acreage in the Texas Gulf Coast regions.

Garcadia is an equity method joint venture that owns and operates 28 automobile dealerships in California, Texas, Iowa and Michigan. We own approximately 75% of Garcadia.

We own approximately 42% of the common shares of Linkem, as well as convertible preferred shares which, if converted, would increase our ownership to approximately 53% of Linkem's common equity at March 31, 2017.  Linkem provides residential broadband services using LTE technologies deployed over the 3.5 GHz spectrum band.  Linkem operates in Italy, which has few cable television systems and poor broadband alternatives. Linkem is accounted for under the equity method.

Conwed Plastics ("Conwed") was our consolidated subsidiary that manufactured and marketed lightweight plastic netting used for building and construction, erosion and sediment control, packaging, agricultural purposes, carpet padding, filtration, consumer products and other purposes. In January 2017, we sold 100% of Conwed to Schweitzer-Mauduit International, Inc., (NYSE: SWM) for $295 million in cash plus potential earn-out payments over five years of up to $40 million in cash to the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. We recognized a $179.9 million pre-tax gain on the sale of Conwed in Other revenues in the three months ended March 31, 2017.

Idaho Timber is our consolidated subsidiary engaged in the manufacture and distribution of various wood products, including the following principal activities: remanufacturing dimension lumber; remanufacturing, bundling and bar coding of home center boards for large retailers; and production of pine dimension lumber and 5/4” radius-edge pine decking. 

Golden Queen Mining Company, LLC ("Golden Queen") owns the Soledad Mountain project, an open pit, heap leach gold and silver mining project in Kern County, California, which commenced gold and silver production in March 2016.  We and the Clay family have formed and made contributions to a limited liability company, controlled by us, through which we invested in Golden Queen for the development and operation of the project. Our effective ownership of Golden Queen is approximately 35% and is accounted for under the equity method.


9



Note 2.  Basis of Presentation and Significant Accounting Policies

Our unaudited interim consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in our Annual Report on Form 10-K.  These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented.  Results of operations for interim periods are not necessarily indicative of annual results of operations.

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate all of these estimates and assumptions.  The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, asset impairment, the ability to realize deferred tax assets, the recognition and measurement of uncertain tax positions and contingencies.  Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.
Fair Value Hierarchy
In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources.  Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:
Level 1:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments fair values for which have been derived using model inputs that are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3:
Instruments that have little to no pricing observability as of the reported date.  These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Financial instruments are valued at quoted market prices, if available.  Certain financial instruments have bid and ask prices that can be observed in the marketplace.  For financial instruments whose inputs are based on bid-ask prices, the financial instrument is valued at the point within the bid-ask range that meets our best estimate of fair value.  We use prices and inputs that are current at the measurement date.  For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments.

The valuation of financial instruments may include the use of valuation models and other techniques.  Adjustments to valuations derived from valuation models may be made when, in management’s judgment, features of the financial instrument such as its complexity, the market in which the financial instrument is traded and risk uncertainties about market conditions require that an adjustment be made to the value derived from the models.  Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions.  As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels.  Transfers among the levels are recognized at the beginning of each period.  The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

10



Valuation Process for Financial Instruments
The Jefferies Independent Price Verification ("IPV") Group, which is part of the Jefferies finance department, in partnership with Jefferies Risk Management, is responsible for establishing Jefferies valuation policies and procedures.  The IPV Group and Risk Management, which are independent of business functions, play an important role and serve as a control function in determining that Jefferies financial instruments are appropriately reflected at fair value.  This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.  The IPV Group reports to the Jefferies Global Controller and is subject to the oversight of the IPV Committee, which includes senior members of Jefferies finance department and other personnel.  Jefferies independent price verification policies and procedures are reviewed, at a minimum, annually and changes to the policies require the approval of the IPV Committee.
Price Testing Process.  Jefferies business units are responsible for determining the fair value of Jefferies financial instruments using approved valuation models and methodologies.  In order to ensure that the business unit valuations represent a fair value exit price, the IPV Group tests and validates the fair value of the financial instruments inventory.  In the testing process, the IPV Group obtains prices and valuation inputs from sources independent of Jefferies, consistently adheres to established procedures set forth in the valuation policies for sourcing prices and valuation inputs and utilizing valuation methodologies.  Sources used to validate fair value prices and inputs include, but are not limited to, exchange data, recently executed transactions, pricing data obtained from third party vendors, pricing and valuation services, broker quotes and observed comparable transactions.

To the extent discrepancies between the business unit valuations and the pricing or valuations resulting from the price testing process are identified, such discrepancies are investigated by the IPV Group and fair values are adjusted, as appropriate.  The IPV Group maintains documentation of its testing, results, rationale and recommendations and prepares a monthly summary of its valuation results.  This process also forms the basis for the classification of fair values within the fair value hierarchy (i.e., Level 1, Level 2 or Level 3).  The IPV Group utilizes the additional expertise of Risk Management personnel in valuing more complex financial instruments and financial instruments with less or limited pricing observability.  The results of the valuation testing are reported to the IPV Committee on a monthly basis, which discusses the results and determines the financial instrument fair values in the consolidated financial statements.  This process specifically assists management in asserting as to the fair presentation of our financial condition and results of operations as included within our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.  At each quarter end, the overall valuation results, as determined by the IPV Committee, are presented to the Jefferies Audit Committee.

Judgment exercised in determining Level 3 fair value measurements is supplemented by daily analysis of profit and loss performed by the Product Control functions.  Gains and losses, which result from changes in fair value, are evaluated and corroborated daily based on an understanding of each trading desk's overall risk positions and developments in a particular market on the given day.  Valuation techniques generally rely on recent transactions of suitably comparable financial instruments and use the observable inputs from those comparable transactions as a validation basis for Level 3 inputs.  Level 3 fair value measurements are further validated through subsequent sales testing and market comparable sales, if such information is available.  Level 3 fair value measurements require documentation of the valuation rationale applied, which is reviewed for consistency in application from period to period.

Third Party Pricing Information.  Pricing information obtained from external data providers (including independent pricing services and brokers) may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities.  External pricing data is subject to evaluation for reasonableness by the IPV Group using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period.  Jefferies processes challenge the appropriateness of pricing information obtained from external data providers (including independent pricing services and brokers) to validate the data for consistency with the definition of a fair value exit price.  Jefferies process includes understanding and evaluating the external data providers’ valuation methodologies.  For corporate, U.S. government and agency, and municipal debt securities, and loans, to the extent independent pricing services or broker quotes are utilized in Jefferies valuation process, the vendor service providers are collecting and aggregating observable market information as to recent trade activity and active bid-ask submissions.  The composite pricing information received from the independent pricing service is thus not based on unobservable inputs or proprietary models.  For mortgage- and other asset-backed securities, collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs"), the independent pricing services use a matrix evaluation approach incorporating both observable yield curves and market yields on comparable securities as well as implied inputs from observed trades for comparable securities in order to determine prepayment speeds, cumulative default rates and loss severity.  Further, Jefferies considers pricing data from multiple service providers as available as well as compares pricing data to prices observed for recent transactions, if any, in order to corroborate valuation inputs.


11



Model Review Process.  If a pricing model is used to determine fair value, the pricing model is reviewed for theoretical soundness and appropriateness by Risk Management, independent from the trading desks, and then approved by Risk Management to be used in the valuation process.  Review and approval of a model for use may include benchmarking the model against relevant third party valuations, testing sample trades in the model, backtesting the results of the model against actual trades and stress-testing the sensitivity of the pricing model using varying inputs and assumptions.  In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.  Models are independently reviewed and validated by Risk Management annually or more frequently if market conditions or use of the valuation model changes.

Hedge Accounting

Jefferies applies hedge accounting using interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior long-term debt. Jefferies interest rate swaps are included within Trading assets - Derivatives and Trading liabilities - Derivatives in the Consolidated Statements of Financial Condition. Jefferies uses regression analysis to perform ongoing prospective and retrospective assessments of the effectiveness of these hedging relationships. A hedging relationship is deemed effective if the change in fair value of the interest rate swap and the change in the fair value of the long-term debt due to changes in the benchmark interest rate offset within a range of 80% to 125%. The impact of valuation adjustments related to Jefferies own credit spreads and counterparty credit spreads are included in the assessment of effectiveness. For qualifying fair value hedges of benchmark interest rates, the change in the fair value of the derivative and the change in fair value of the long-term debt provide offset of one another, and together with any resulting ineffectiveness, are recorded in Interest expense. See Note 4 for further information.

Receivables

At March 31, 2017 and December 31, 2016, Receivables include receivables from brokers, dealers and clearing organizations of $2,868.2 million and $2,062.9 million, respectively, and receivables from customers of securities operations of $1,181.9 million and $843.1 million, respectively.
Payables, expense accruals and other liabilities
At March 31, 2017 and December 31, 2016, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $2,967.6 million and $3,290.4 million, respectively, and payables to customers of securities operations of $2,412.1 million and $2,297.3 million, respectively.
Accounting Developments - Accounting Standards to be Adopted in Future Periods

Revenue Recognition.  In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures.  The core principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  This guidance is effective for interim and annual periods beginning after December 15, 2017.  We intend to adopt the new guidance with a cumulative-effect adjustment to opening retained earnings and our evaluation of the impact this new guidance will have on our consolidated financial statements is ongoing.

Financial Instruments. In January 2016, the FASB issued new guidance that affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact of the new guidance related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption was permitted for the accounting guidance on financial liabilities under the fair value option and we adopted this guidance in the first quarter of 2016. The adoption of the guidance on financial liabilities under the fair value option did not have a significant impact on our consolidated financial statements.

Leases. In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of lease assets and lease liabilities on the statement of financial condition. The guidance is effective for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

Financial Instruments - Credit Losses. In June 2016, the FASB issued new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

12




Cash Flow Classifications. In August 2016, the FASB issued new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

Goodwill. In January 2017, the FASB issued new guidance for simplifying goodwill impairment testing. The guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.

Retirement Benefits. In March 2017, the FASB issued new guidance for improving the presentation of net periodic pension costs in the statement of operations. The update also allows the service cost to be eligible for capitalization, when applicable. The guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Accounting Developments - Adopted Accounting Standards

Share-Based Payments to Employees. In January 2017, we adopted the FASB's new guidance that simplifies and improves accounting for share-based payments. The amendments include the recognition of all excess tax benefits and tax deficiencies as income tax expense or benefit in the statement of operations and changes to the timing of recognition of excess tax benefits, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The adoption of this guidance did not have a significant impact on our consolidated financial statements. We elected to account for forfeitures as they occur, which results in dividends and dividend equivalents originally charged against retained earnings for forfeited shares to be reclassified to compensation cost in the period in which the forfeiture occurs.

13



Note 3.  Fair Value Disclosures

The following is a summary of our financial instruments, trading liabilities and long-term debt that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") (within trading assets) of $24.2 million and $24.3 million, respectively, by level within the fair value hierarchy at March 31, 2017 and December 31, 2016 (in thousands):
 
March 31, 2017
 
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
2,620,350

 
$
86,959

 
$
20,580

 
$

 
$
2,727,889

Corporate debt securities

 
2,422,480

 
33,467

 

 
2,455,947

CDOs and CLOs

 
39,899

 
45,354

 

 
85,253

U.S. government and federal agency securities
1,124,343

 
28,702

 

 

 
1,153,045

Municipal securities

 
714,104

 
26,554

 

 
740,658

Sovereign obligations
1,506,428

 
1,312,799

 

 

 
2,819,227

Residential mortgage-backed securities

 
1,400,215

 
39,259

 

 
1,439,474

Commercial mortgage-backed securities

 
565,494

 
20,653

 

 
586,147

Other asset-backed securities

 
113,881

 
37,702

 

 
151,583

Loans and other receivables

 
1,729,227

 
53,172

 

 
1,782,399

Derivatives
5,045

 
3,016,829

 
4,905

 
(2,826,763
)
 
200,016

Investments at fair value

 

 
307,830

 

 
307,830

FXCM term loan

 

 
132,800

 

 
132,800

Total trading assets, excluding investments at fair value based on NAV
$
5,256,166


$
11,430,589


$
722,276


$
(2,826,763
)

$
14,582,268

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
95,545

 
$

 
$

 
$

 
$
95,545

Corporate debt securities

 
179

 

 

 
179

U.S. government securities
293,142

 

 

 

 
293,142

Residential mortgage-backed securities

 
34,828

 

 

 
34,828

Commercial mortgage-backed securities

 
10,446

 

 

 
10,446

Other asset-backed securities

 
28,363

 

 

 
28,363

Total available for sale securities
$
388,687


$
73,816


$


$


$
462,503

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
1,468,429

 
$
32,576

 
$
324

 
$

 
$
1,501,329

Corporate debt securities

 
1,544,945

 
523

 

 
1,545,468

U.S. government and federal agency securities
841,725

 

 

 

 
841,725

Sovereign obligations
1,500,854

 
1,485,616

 

 

 
2,986,470

Loans

 
1,491,488

 
1,036

 

 
1,492,524

Derivatives
7,710

 
3,171,881

 
11,318

 
(2,794,432
)
 
396,477

Total trading liabilities
$
3,818,718


$
7,726,506


$
13,201


$
(2,794,432
)

$
8,763,993

Other secured financings
$

 
$
34,100

 
$
87

 
$

 
$
34,187

Long-term debt - structured notes
$

 
$
310,057

 
$

 
$

 
$
310,057


14



 
December 31, 2016
 
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Counterparty
and
Cash
Collateral
Netting (2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Trading assets, at fair value:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
2,522,977

 
$
92,839

 
$
21,739

 
$

 
$
2,637,555

Corporate debt securities

 
2,675,020

 
25,005

 

 
2,700,025

CDOs and CLOs

 
54,306

 
54,354

 

 
108,660

U.S. government and federal agency securities
2,389,397

 
56,726

 

 

 
2,446,123

Municipal securities

 
708,469

 
27,257

 

 
735,726

Sovereign obligations
1,432,556

 
990,492

 

 

 
2,423,048

Residential mortgage-backed securities

 
960,494

 
38,772

 

 
999,266

Commercial mortgage-backed securities

 
296,405

 
20,580

 

 
316,985

Other asset-backed securities

 
63,587

 
40,911

 

 
104,498

Loans and other receivables

 
1,557,233

 
81,872

 

 
1,639,105

Derivatives
3,825

 
4,616,822

 
6,429

 
(4,255,998
)
 
371,078

Investments at fair value

 

 
314,359

 

 
314,359

FXCM term loan

 

 
164,500

 

 
164,500

Total trading assets, excluding investments at fair value based on NAV
$
6,348,755


$
12,072,393


$
795,778


$
(4,255,998
)

$
14,960,928

 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
79,425

 
$

 
$

 
$

 
$
79,425

Corporate debt securities

 
179

 

 

 
179

U.S. government securities
174,933

 

 

 

 
174,933

Residential mortgage-backed securities

 
19,133

 

 

 
19,133

Commercial mortgage-backed securities

 
8,337

 

 

 
8,337

Other asset-backed securities

 
19,042

 

 

 
19,042

Total available for sale securities
$
254,358


$
46,691


$


$


$
301,049

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
1,593,548

 
$
16,806

 
$
313

 
$

 
$
1,610,667

Corporate debt securities

 
1,718,424

 
523

 

 
1,718,947

U.S. government and federal agency securities
976,497

 

 

 

 
976,497

Sovereign obligations
1,375,590

 
1,253,754

 

 

 
2,629,344

Loans

 
801,977

 
378

 

 
802,355

Derivatives
2,566

 
4,867,586

 
9,870

 
(4,229,213
)
 
650,809

Total trading liabilities
$
3,948,201


$
8,658,547


$
11,084


$
(4,229,213
)

$
8,388,619

Other secured financings
$

 
$
41,350

 
$
418

 
$

 
$
41,768

Long-term debt - structured notes
$

 
$
248,856

 
$

 
$

 
$
248,856


(1)
There were no material transfers between Level 1 and Level 2 during the three months ended March 31, 2017 and during the year ended December 31, 2016.
(2)
Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:

Corporate Equity Securities

Exchange Traded Equity Securities:  Exchange traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy.

15



Non-exchange Traded Equity Securities:  Non-exchange traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy.  Where such information is not available, non-exchange traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization ("EBITDA"), price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by Jefferies.  When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).
Equity Warrants:  Non-exchange traded equity warrants are measured primarily using pricing data from external pricing services, prices observed for recently executed market transactions and broker quotations and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

Corporate Debt Securities

Corporate Bonds:  Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed for recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve.  Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy.  If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions.  Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited portion of our corporate bonds.
High Yield Corporate and Convertible Bonds:  A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed for recently executed market transactions of comparable size.  Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

CDOs and CLOs

CDOs and CLOs are measured based on prices observed for recently executed market transactions of the same or similar security or based on valuations received from third party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs.  Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria including but not limited to collateral type, tranche type, rating, origination year, prepayment rates, default rates, and loss severity.

U.S. Government and Federal Agency Securities

U.S. Treasury Securities:  U.S. Treasury securities are measured based on quoted market prices and categorized within Level 1 of the fair value hierarchy.
U.S. Agency Issued Debt Securities:  Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services and are generally categorized within Level 1 or Level 2 of the fair value hierarchy.

Municipal Securities

Municipal securities are measured based on quoted prices obtained from external pricing services and are generally categorized within Level 2 of the fair value hierarchy.


16



Sovereign Obligations

Foreign sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size.  To the extent external price quotations are not available or recent transactions have not been observed, valuation techniques incorporating interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value of sovereign bonds or obligations. Foreign sovereign government obligations are classified in Level 1, Level 2 or Level 3 of the fair value hierarchy, primarily based on the country of issuance.

Residential Mortgage-Backed Securities

Agency Residential Mortgage-Backed Securities:  Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and interest-only and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy.
Agency Residential Interest-Only and Inverse Interest-Only Securities ("Agency Inverse IOs"):  The fair value of Agency Inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral.  We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions.  Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age.  Agency Inverse IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.
Non-Agency Residential Mortgage-Backed Securities:  Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used.  Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses.  Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate.  Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.

Commercial Mortgage-Backed Securities

Agency Commercial Mortgage-Backed Securities:  Government National Mortgage Association (“GNMA”) project loans are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value.  GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.
Non-Agency Commercial Mortgage-Backed Securities:  Non-agency commercial mortgage-backed securities are measured using pricing data obtained from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.

Other Asset-Backed Securities

Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables, student loans and other consumer loans and are categorized within Level 2 and Level 3 of the fair value hierarchy.  Valuations are primarily determined using pricing data obtained from external pricing services and broker quotes and prices observed for recently executed market transactions.


17



Loans and Other Receivables

Corporate Loans:  Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data.  Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.
Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.
Project Loans and Participation Certificates in GNMA Project and Construction Loans:  Valuations of participation certificates in GNMA project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations of assets with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.
Consumer Loans and Funding Facilities: Consumer and small business whole loans and related funding facilities are valued based on observed market transactions incorporating additional valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy.
Escrow and Trade Claim Receivables:  Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers.  Escrow and trade claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent trade activity in the same security.

Derivatives

Listed Derivative Contracts:  Listed derivative contracts that are actively traded are measured based on quoted exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy.  Listed derivatives for which there is limited trading activity are measured based on incorporating the closing auction price of the underlying equity security, use similar valuation approaches as those applied to over-the-counter derivative contracts and are categorized within Level 2 of the fair value hierarchy.
OTC Derivative Contracts:  Over-the-counter ("OTC") derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction.  Inputs to valuation models are appropriately calibrated to market data.  For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets.  OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models.  Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.

OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as the Black-Scholes, with key inputs impacting the valuation including the underlying security, foreign exchange spot rate or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.  Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves.  Credit default swaps include both index and single-name credit default swaps.  External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps.  For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts.  Total return swaps executed on other underlyings are measured based on valuations received from external pricing services.

National Beef Derivatives: National Beef uses futures contracts in order to reduce its exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. The futures contracts and their related firm purchase commitments are accounted for at fair value, which are classified as Level 1 or Level 2 within the fair value hierarchy. Certain firm commitments for live cattle purchases and all firm commitments for sales are treated as normal purchases and sales and

18



therefore not marked to market. Fair values classified as Level 1 are calculated based on the quoted market prices of identical assets or liabilities compared to National Beef's cost of those same assets or liabilities. Fair values classified as Level 2 are calculated based on the difference between the contracted price for live cattle and the relevant quoted market price for live cattle futures.
Oil Futures Derivatives: Vitesse uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse accounts for the derivative instruments at fair value, which are classified as Level 2 within the fair value hierarchy. Fair values classified as Level 2 are determined under the income valuation technique using an option-pricing model that is based on directly or indirectly observable inputs.

Investments at Fair Value

Investments at fair value included in Trading assets on the Consolidated Statements of Financial Condition include direct equity investments in private companies, which are measured at fair value using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analysis and transaction prices observed for subsequent financing or capital issuance by the company.  Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy.  Additionally, investments at fair value include investments in insurance contracts relating to Jefferies defined benefit plan in Germany.  Fair value for the insurance contracts are determined using a third party and is categorized within Level 3 of the fair value hierarchy. 

Investment in FXCM

FXCM is an online provider of foreign exchange trading services.  In January 2015, we entered into a credit agreement with FXCM, and provided FXCM a $300 million senior secured term loan due January 2017, with rights to a variable proportion of certain future distributions in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January 2018.  The loan had an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter, not to exceed 20.5% per annum.  Through the first quarter of 2017 interest accrued at 20.5% per annum. During the three months ended March 31, 2017, we received $42.7 million of principal, interest and fees from FXCM and $123.0 million remained outstanding under the term loan as of March 31, 2017.  

Through September 1, 2016, the total amount of our investment in FXCM was reported within Trading assets, at fair value in our Consolidated Statements of Financial Condition, and unrealized and realized changes in value, including the component related to interest income on the loan, were included within Principal transactions in the Consolidated Statements of Operations.  We recorded in Principal transactions an aggregate $10.9 million during the three months ended March 31, 2017 from our term loan and losses of $(53.2) million during the three months ended March 31, 2016 from our term loan and related rights.

On September 1, 2016 we, Global Brokerage Inc. ("Global Brokerage" and formerly FXCM Inc.) and Global Brokerage Holdings entered into an agreement that amended the terms of our loan and associated rights. Among other changes, the amendments extended the maturity of the term loan by one year to January 2018 to allow FXCM more time to optimize remaining asset sales; gave Leucadia a 49.9% common membership interest in FXCM, and up to 65% of all distributions; created a six-member board for FXCM, comprised of three directors appointed by Leucadia and three directors appointed by Global Brokerage Holdings; put in place a long-term incentive program for FXCM's senior management; and gave Global Brokerage Holdings the same right Leucadia has to require a sale of FXCM beginning in January 2018. Distributions to Leucadia under the amended agreements are now: 100% until amounts due under the loan are repaid; 45% of the next $350 million; then 79.2% of the next $500 million; and 51.6% of all amounts thereafter.

During February 2017, Global Brokerage Holdings and FXCM's U.S. subsidiary, Forex Capital Markets LLC ("FXCM U.S.") settled complaints filed by the National Futures Association ("NFA") and the Commodity Futures Trading Commission ("CFTC") against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. The NFA settlement has no monetary fine and the CFTC settlement has a $7 million fine. As part of the settlements, FXCM U.S. withdrew from business and agreed to sell FXCM U.S.'s customer accounts to Gain Capital Holdings, Inc. FXCM U.S. generated approximately 20% of FXCM's revenue, but was not profitable. FXCM also announced the implementation of a restructuring plan that includes the termination of approximately 150 employees, which represents approximately 18% of its global workforce. The proceeds from the sale of the U.S. accounts, net of closure and severance costs, as well as regulatory capital released after a sale, has been used to pay down the Leucadia term loan. As part of the settlement, Leucadia, Global Brokerage Holdings and FXCM have amended the management and incentive compensation agreements, giving any three directors of the FXCM board the right to terminate management and any unvested incentive compensation at any time.


19



On February 21, 2017, Drew Niv resigned as the Chief Executive Officer of FXCM, although he remains in an advisory position. Brendan Callan became the interim Chief Executive Officer of FXCM and Jimmy Hallac (a Managing Director at Leucadia) became Chairman of the Board of FXCM.

In addition, on February 21, 2017, Mr. Niv resigned from his positions as Chief Executive Officer and Chairman of the Board of Global Brokerage, but remains as acting Chief Executive Officer of Global Brokerage until his successor is identified.

We do not hold any interest in Global Brokerage, the publicly traded company and issuer of senior convertible notes. Global Brokerage holds an economic interest of 74.5% in Global Brokerage Holdings, which in turn holds 50.1% of FXCM. As more fully described above, we own the remaining 49.9% of FXCM, and our senior secured term loan is also with FXCM, which is a holding company for all of FXCM's affiliated operating subsidiaries. Net profits and proceeds generated by these subsidiaries, and from the sales of these subsidiaries, flow first to FXCM, where they are applied to the outstanding balance of our term loan and then, in accordance with the agreement described above, to us and Global Brokerage Holdings. A portion of the profits and proceeds that flow to Global Brokerage Holdings then flow to Global Brokerage, in accordance with its economic interest.

Through the amendments on September 1, 2016, our derivative rights were exchanged for a 49.9% common membership interest in FXCM and up to 65% of all distributions. We gained the ability to significantly influence FXCM through our common membership interest and our seats on the board of directors. As a result, we classify our equity investment in FXCM in our March 31, 2017 Consolidated Statement of Financial Condition as Loans to and investments in associated companies. We account for our equity interest on a one month lag. As the amendments only extended the maturity of the term loan, we continue to use the fair value option and classify our term loan within Trading assets, at fair value.

FXCM is considered a variable interest entity ("VIE") and our term loan and equity ownership are variable interests.  We have determined that we are not the primary beneficiary of FXCM because we do not have the power to direct the activities that most significantly impact FXCM's performance.  Therefore, we do not consolidate FXCM and we account for our equity interest as an investment in an associated company.

Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of the term loan ($132.8 million) and the investment in associated company ($186.7 million), which totaled $319.5 million at March 31, 2017.

We engaged an independent valuation firm to assist management in estimating the fair value of our loan to FXCM.  Our estimate of fair value was determined using valuation models with inputs including management’s assumptions concerning the amount and timing of expected cash flows; the loan’s implied credit rating and effective yield.  Because of these inputs and the degree of judgment involved, we have categorized our term loan in Level 3.

As described further in Note 9, we engaged an independent valuation firm to assist management in estimating the fair value of our equity investment in FXCM. Our estimate of fair value was based on a discounted cash flow and comparable public company analysis and is categorized within Level 3 of the fair value hierarchy. The discounted cash flow valuation model used inputs including management's projections of future FXCM cash flows and a discount rate of approximately 15%. The comparable public company model used market data for comparable companies including a price to EBITDA multiple of 5.4 and a price to revenue multiple of 1.5.

Investments at Fair Value Based on NAV and Investments in Managed Funds

Investments at fair value based on NAV and Investments in managed funds include investments in hedge funds, fund of funds, private equity funds and other funds, which are measured at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy.


20



The following tables present information about our investments in entities that have the characteristics of an investment company (in thousands).
 
Fair Value (1)
 
Unfunded
Commitments
 
Redemption
Frequency
(if currently eligible)
March 31, 2017
 
 
 
 
 
Equity Long/Short Hedge Funds (2)
$
362,870

 
$

 
(2)
Fixed Income and High Yield Hedge Funds (3)
761

 

 
Fund of Funds (4)
169

 

 
Equity Funds (5)
40,688

 
20,040

 
Multi-asset Funds (6)
118,211

 

 
Total
$
522,699


$
20,040

 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 
Equity Long/Short Hedge Funds (2)
$
363,256

 
$

 
(2)
Fixed Income and High Yield Hedge Funds (3)
772

 

 
Fund of Funds (4)
230

 

 
Equity Funds (5)
42,179

 
20,295

 
Multi-asset Funds (6)
133,190

 

 
Total
$
539,627


$
20,295

 
 
 
(1)
Where fair value is calculated based on NAV, fair value has been derived from each of the funds' capital statements.
(2)
This category includes investments in hedge funds that invest, long and short, in primarily equity securities in domestic and international markets in both the public and private sectors.  At March 31, 2017 and December 31, 2016, the majority of these investments are redeemable with 10 business days prior written notice.
(3)
This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt, and private equity investments.  There are no redemption provisions. 
(4)
This category includes investments in fund of funds that invest in various private equity funds.  The investments in this category are managed by us and have no redemption provisions.  These investments are gradually being liquidated or we have requested redemption, however, we are unable to estimate when these funds will be received.
(5)
At March 31, 2017 and December 31, 2016, the investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries.  These investments cannot be redeemed; instead distributions are received through the liquidation of the underlying assets of the funds, which are expected to liquidate in one to six years. 
(6)
This category includes investments in hedge funds that invest, long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At March 31, 2017 and December 31, 2016, investments representing approximately 13% and 12%, respectively, of the fair value of investments in this category are redeemable with 30 to 90 days prior written notice.

Other Secured Financings

Other secured financings that are accounted for at fair value include notes issued by consolidated VIEs, which are classified as Level 2 or Level 3 within the fair value hierarchy.  Fair value is based on recent transaction prices for similar assets. 

Long-term Debt - Structured Notes

Long-term debt includes variable rate and fixed to floating rate structured notes that contain various interest rate payment terms and are generally measured using valuation models for the derivative and debt portions of the notes. These models incorporate market price quotations from external pricing sources referencing the appropriate interest rate curves and are generally categorized within Level 2 of the fair value hierarchy. The impact of Jefferies credit spreads is also included based on observed secondary bond market spreads and asset-swap spreads.

21



The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the three months ended March 31, 2017 (in thousands):
Three Months Ended March 31, 2017
 
Balance, December 31, 2016
 
Total gains (losses)
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance at March 31, 2017
 
Changes in
unrealized gains (losses) relating to instruments still held at
March 31, 2017 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
21,739

 
$
532

 
$
847

 
$
(145
)
 
$
(186
)
 
$

 
$
(2,207
)
 
$
20,580

 
$
362

Corporate debt securities
25,005

 
(1,793
)
 
3,002

 
(3,157
)
 
(1,207
)
 

 
11,617

 
33,467

 
(1,662
)
CDOs and CLOs
54,354

 
(7,594
)
 
8,663

 
(22,633
)
 
(45
)
 

 
12,609

 
45,354

 
(8,525
)
Municipal securities
27,257

 
(636
)
 

 
(67
)
 

 

 

 
26,554

 
(641
)
Residential mortgage-backed securities
38,772

 
(253
)
 
263

 
(12,411
)
 
(210
)
 

 
13,098

 
39,259

 
(440
)
Commercial mortgage-backed securities
20,580

 
(1,420
)
 

 
(412
)
 

 

 
1,905

 
20,653

 
(1,421
)
Other asset-backed securities
40,911

 
(1,788
)
 
3,553

 
(299
)
 
(3,335
)
 

 
(1,340
)
 
37,702

 
(1,717
)
Loans and other receivables
81,872

 
4,950

 
9,489

 
(9,778
)
 
(7,764
)
 

 
(25,597
)
 
53,172

 
836

Investments at fair value
314,359

 
3,856

 

 
(10,119
)
 
(266
)
 

 

 
307,830

 
5,879

FXCM term loan
164,500

 
10,878

 

 

 
(42,578
)
 

 

 
132,800

 
3,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trading liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate equity securities
$
313

 
$
11

 
$

 
$

 
$

 
$

 
$

 
$
324

 
$
(11
)
Corporate debt securities
523

 

 

 

 

 

 

 
523

 

Net derivatives (2)
3,441

 
(4,384
)
 

 

 
3,373

 
186

 
3,797

 
6,413

 
1,347

Loans
378

 
189

 
(323
)
 

 

 

 
792

 
1,036

 
(189
)
Other secured financings
418

 
(8
)
 

 

 

 

 
(323
)
 
87

 
11


(1)
Realized and unrealized gains (losses) are reported in Principal transactions in the Consolidated Statements of Operations.
(2)
Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.

Analysis of Level 3 Assets and Liabilities for the three months ended March 31, 2017

During the three months ended March 31, 2017, transfers of assets of $49.9 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
CDOs and CLOs of $18.1 million and residential mortgage-backed securities of $13.7 million, due to a lack of observable market transactions;
Corporate debt securities of $11.6 million due to a lack of observable market transactions.

During the three months ended March 31, 2017, transfers of assets of $39.8 million from Level 3 to Level 2 are primarily attributed to:
Loans and other receivables of $28.2 million due to greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $6.7 million and net gains on Level 3 liabilities were $4.2 million for the three months ended March 31, 2017.  Net gains on Level 3 assets were primarily due to increased valuations of our FXCM term loan and increased valuations of certain investments at fair value and loans and other receivables, partially offset by decreased valuations of CDOs and CLOs, corporate debt securities, other asset-backed securities and commercial mortgage-backed securities. Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives.

22



The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the three months ended March 31, 2016 (in thousands):
Three Months Ended March 31, 2016
 
Balance, December 31, 2015
 
Total gains (losses)
(realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers
into (out of)
Level 3
 
Balance, March 31, 2016
 
Changes in
unrealized gains (losses) relating to instruments still held at
March 31, 2016 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
40,906

 
$
3,071

 
$
2,087

 
$

 
$

 
$

 
$
(15,524
)
 
$
30,540

 
$
3,560

Corporate debt securities
25,876

 
(2,602
)
 
15,337

 
(15,129
)
 
(111
)
 

 
2,263

 
25,634

 
(2,540
)
CDOs and CLOs
85,092

 
(16,573
)
 
1,021

 
(20,178
)
 
(463
)
 

 
18,449

 
67,348

 
(17,003
)
Sovereign obligations
120

 
(1
)
 

 

 

 

 

 
119

 
(1
)
Residential mortgage-backed securities
70,263

 
(4,548
)
 
62,844

 
(64,926
)
 
(114
)
 

 
4,500

 
68,019

 
(3,358
)
Commercial mortgage-backed securities
14,326

 
(971