Fair Value Disclosures

The following is a summary of our financial instruments, trading liabilities, short-term borrowings 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 $399.0 million and $590.1 million at September 30, 2018 and December 31, 2017, respectively, by level within the fair value hierarchy (in thousands):



	September 30, 2018
	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
Assets:
Trading assets, at fair value:
Corporate equity securities	$	3,635,288	$	72,569	$	49,683	$	—		$	3,757,540
Corporate debt securities	—		2,498,031		9,651		—			2,507,682
Collateralized debt obligations and collateralized loan obligations	—		82,339		33,981		—			116,320
U.S. government and federal agency securities	3,000,805		45,889		—		—			3,046,694
Municipal securities	—		749,616		—		—			749,616
Sovereign obligations	1,319,415		669,919		—		—			1,989,334
Residential mortgage-backed securities	—		1,894,533		4,954		—			1,899,487
Commercial mortgage-backed securities	—		791,449		23,916		—			815,365
Other asset-backed securities	—		263,967		69,305		—			333,272
Loans and other receivables	—		1,455,496		48,985		—			1,504,481
Derivatives	13,117		3,507,491		3,137		(3,334,100		)	189,645
Investments at fair value	—		—		326,977		—			326,977
FXCM term loan	—		—		73,800		—			73,800
Total trading assets, excluding investments at fair value based on NAV	$	7,968,625	$	12,031,299	$	644,389	$	(3,334,100	)	$	17,310,213

Available for sale securities:
U.S. government securities	$	1,607,725	$	—	$	—	$	—		$	1,607,725
Residential mortgage-backed securities	—		146,678		—		—			146,678
Commercial mortgage-backed securities	—		15,719		—		—			15,719
Other asset-backed securities	—		98,298		—		—			98,298
Total available for sale securities	$	1,607,725	$	260,695	$	—	$	—		$	1,868,420

Liabilities:
Trading liabilities:
Corporate equity securities	$	2,221,325	$	1,507	$	413	$	—		$	2,223,245
Corporate debt securities	—		1,511,979		1,557		—			1,513,536
U.S. government and federal agency securities	1,398,222		—		—		—			1,398,222
Sovereign obligations	1,513,237		969,845		55		—			2,483,137
Commercial mortgage-backed securities	—		—		70		—			70
Loans	—		1,136,579		8,661		—			1,145,240
Derivatives	8,487		4,149,630		12,134		(3,454,488		)	715,763
Total trading liabilities	$	5,141,271	$	7,769,540	$	22,890	$	(3,454,488	)	$	9,479,213
Long-term debt - structured notes	$	—	$	545,927	$	163,630	$	—		$	709,557



	December 31, 2017
	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
Assets:
Trading assets, at fair value:
Corporate equity securities	$	2,975,463	$	60,300	$	22,270	$	—		$	3,058,033
Corporate debt securities	—		3,261,300		26,036		—			3,287,336
Collateralized debt obligations and collateralized loan obligations	—		139,166		42,184		—			181,350
U.S. government and federal agency securities	1,269,230		39,443		—		—			1,308,673
Municipal securities	—		710,513		—		—			710,513
Sovereign obligations	1,381,552		1,035,907		—		—			2,417,459
Residential mortgage-backed securities	—		1,453,294		26,077		—			1,479,371
Commercial mortgage-backed securities	—		508,115		12,419		—			520,534
Other asset-backed securities	—		217,111		61,129		—			278,240
Loans and other receivables	—		1,620,581		47,304		—			1,667,885
Derivatives	165,396		3,323,278		9,295		(3,318,481		)	179,488
Investments at fair value	—		946		329,944		—			330,890
FXCM term loan	—		—		72,800		—			72,800
Total trading assets, excluding investments at fair value based on NAV	$	5,791,641	$	12,369,954	$	649,458	$	(3,318,481	)	$	15,492,572

Available for sale securities:
Corporate equity securities (2)	$	88,486	$	—	$	—	$	—		$	88,486
U.S. government securities	552,805		—		—		—			552,805
Residential mortgage-backed securities	—		34,561		—		—			34,561
Commercial mortgage-backed securities	—		5,870		—		—			5,870
Other asset-backed securities	—		34,839		—		—			34,839
Total available for sale securities	$	641,291	$	75,270	$	—	$	—		$	716,561

Liabilities:
Trading liabilities:
Corporate equity securities	$	1,721,267	$	32,122	$	48	$	—		$	1,753,437
Corporate debt securities	—		1,688,825		522		—			1,689,347
U.S. government and federal agency securities	1,430,737		—		—		—			1,430,737
Sovereign obligations	1,216,643		956,992		—		—			2,173,635
Commercial mortgage-backed securities	—		—		105		—			105
Loans	—		1,148,824		3,486		—			1,152,310
Derivatives	249,361		3,480,506		16,041		(3,490,514		)	255,394
Total trading liabilities	$	4,618,008	$	7,307,269	$	20,202	$	(3,490,514	)	$	8,454,965
Short-term borrowings	$	—	$	23,324	$	—	$	—		$	23,324
Long-term debt - structured notes	$	—	$	606,956	$	—	$	—		$	606,956


(1)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

(2)

As of January 1, 2018, the Company adopted the FASB's new guidance that affects the accounting for equity investments and the presentation and disclosure requirements for financial instruments. At September 30, 2018, equity investments are primarily classified as Trading assets, at fair value and the change in fair value of equity securities is now recognized through the Consolidated Statements of Operations. See Note 2 for additional information.

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. To the extent these securities are actively traded, valuation adjustments are not applied.

•

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 from 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 from subsequent financing or capital issuance by Jefferies Group. 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 from 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 from 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 from recently executed market transactions of institutional size. Where pricing data is less observable, valuations are categorized within Level 3 of the fair value hierarchy and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financing or recapitalization, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

Collateralized Debt Obligations and Collateralized Loan Obligations

Collateralized Debt Obligations ("CDOs") and Collateralized Loan Obligations ("CLOs") are measured based on prices observed from 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 Debt Securities: Callable and non-callable U.S. agency 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.

Sovereign Obligations

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. Sovereign government obligations are categorized within Level 1 or Level 2 of the fair value hierarchy, primarily based on the country of issuance. Sovereign government obligations

are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability of these input parameters.

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 principal-only and interest-only (including inverse interest-only) securities. Agency residential mortgage-backed securities are generally measured using recent transactions, pricing data from external pricing services or expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral and are categorized within Level 2 of the fair value hierarchy. We use prices observed from recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate factors such as weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer and weighted average loan age.

•

Non-Agency Residential Mortgage-Backed Securities: The fair value of non-agency residential mortgage-backed securities is 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. In addition, broker quotes, where available, are also referenced to compare prices primarily on interest-only securities.

Commercial Mortgage-Backed Securities

•

Agency Commercial Mortgage-Backed Securities: Government National Mortgage Association ("GNMA") project loan bonds are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation of 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 from 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, prices observed from recently executed market transactions or based on expected cash flow models that incorporate underlying loan collateral characteristics and performance. Non-agency commercial mortgage-backed securities are categorized within Level 2 and Level 3 of the fair value hierarchy depending on the observability of the underlying inputs.

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 or Level 3 of the fair value hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services, broker quotes and prices observed from recently executed market transactions. In addition, recent transaction data from comparable deals is deployed to develop market clearing yields and cumulative loss assumptions. The cumulative loss assumptions are based on the analysis of the underlying collateral and comparisons to earlier deals from the same issuer to gauge the relative performance of the deal.

Loans and Other Receivables

•

Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market consensus pricing service quotations. Where available, market price quotations from external pricing services are reviewed to ensure they 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 flows 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 and data provider pricing. 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 with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans to account for the arbitrage that is realized at the time of securitization. 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 and incorporating 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 observations in the same receivable.

Derivatives

•

Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted exchange prices, broker quotes or vanilla option valuation models, such as Black-Scholes, using observable valuation inputs from the principal market or consensus pricing services. Exchange quotes and/or valuation inputs are generally obtained from external vendors and pricing services. Broker quotes are validated directly through observable and tradeable quotes. Listed derivative contracts that use unadjusted exchange close prices are generally categorized within Level 1 of the fair value hierarchy. All other listed derivative contracts are generally categorized within Level 2 of the fair value hierarchy.

•

Over-the-Counter ("OTC") Derivative Contracts: 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 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 Black-Scholes, with key inputs including the underlying security price, foreign exchange spot rate, 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. Discounted cash flow models are also utilized to measure certain variable funding note swaps, which are backed by CLOs and incorporate constant prepayment rate, constant default rate and loss severity assumptions. 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 generally 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.

•

Oil Futures Derivatives: Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse Energy Finance accounts for the derivative instruments at fair value, which are classified as either Level 1 or Level 2 within the fair value hierarchy. Fair values classified as Level 1 are measured based on quoted closing exchange prices obtained from external pricing services and 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 based on NAV include investments in hedge funds, fund of funds and private equity funds, which are measured at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy. Investments at fair value also 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 analyses 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 Group's defined benefit plan in Germany. Fair value for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy.

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)
September 30, 2018
Equity Long/Short Hedge Funds (2)	$	90,347	$	—	(2)
Fixed Income and High Yield Hedge Funds (3)	219		—		—
Fund of Funds (4)	175		—		—
Equity Funds (5)	36,702		20,209		—
Commodity Funds (6)	10,228		—		—
Multi-asset Funds (7)	261,361		—		—
Total	$	399,032	$	20,209

December 31, 2017
Equity Long/Short Hedge Funds (2)	$	407,895	$	—	(2)
Fixed Income and High Yield Hedge Funds (3)	417		—		—
Fund of Funds (4)	189		—		—
Equity Funds (5)	26,798		19,084		—
Multi-asset Funds (7)	154,805		—		—
Total	$	590,104	$	19,084


(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, primarily in equity securities in domestic and international markets in both the public and private sectors. At December 31, 2017, 73% of these investments were redeemable with 10 business days or less prior written notice; these investments were primarily liquidated during 2018. At September 30, 2018 and December 31, 2017, 18% and 15%, respectively, of these investments are redeemable with 30 to 60 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)

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 be liquidated in one to ten years.


(6)	This category includes investments in hedge funds that invest, long and short, primarily in commodities. Investments in this category are redeemable with 60 days prior written notice.

(7)

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 September 30, 2018 and December 31, 2017, investments representing approximately 17% and 12%, respectively, of the fair value of investments in this category are redeemable with 30 days prior written notice.

Investment in FXCM

FXCM Group, LLC ("FXCM") is a provider of online 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 (the term of which was subsequently extended to January 2019), 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. During the nine months ended September 30, 2018, interest accrued at 20.5% per annum. During the nine months ended September 30, 2018, we received $15.4 million of principal and interest from FXCM and $70.6 million of principal remained outstanding under the term loan as of September 30, 2018. Through September 30, 2018, we have received cumulatively $347.0 million of principal, interest and fees from our initial $279.0 million investment in FXCM.

Our investment in the FXCM term loan is 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, is included within Principal transactions revenues in the Consolidated Statements of Operations. We recorded gains related to the term loan in Principal transactions revenues of $1.3 million and $16.4 million during the three and nine months ended September 30, 2018, respectively, and $2.3 million and $17.6 million during the three and nine months ended September 30, 2017, respectively.

On September 1, 2016, we, Global Brokerage Inc. ("Global Brokerage") and Global Brokerage Holdings, LLC ("Global Brokerage Holdings") entered into an agreement that amended the terms of our loan and associated rights. On November 10, 2017, the terms of our loan and associated rights were amended further. Among other changes, the amendments extended the maturity of the term loan to January 2019; and exchanged our rights for a 50% voting interest in FXCM, and up to 75% of all distributions. Through these amendments, we also gained the right to appoint three of six board members for FXCM. We have the right, as does Global Brokerage Holdings, the owner of the remaining 50% of FXCM voting interest that is not held by Jefferies, to require a sale of FXCM beginning in January 2018. Distributions to Jefferies under the amended agreements are now: 100% until amounts due under the loan are repaid; 50% of the next $350 million; then 90% of the next $600 million; and 60% of all amounts thereafter.

Through the amendments, we gained the ability to significantly influence FXCM through our seats on the board of directors. As a result, we classify our equity investment in FXCM in our September 30, 2018 and December 31, 2017 Consolidated Statements 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 ($73.8 million) and the investment in associated company ($139.0 million), which totaled $212.8 million at September 30, 2018.

We estimate the fair value of our term loan by using a valuation model 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 within Level 3 of the fair value hierarchy.

Nonrecurring Fair Value Measurements

As described further in Note 9, in the third quarter of 2018 we engaged an independent valuation firm to assist management in estimating the fair value of our equity investment in Golden Queen. Our estimate of fair value was based on a discounted cash flow 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 Golden Queen cash flows and a discount rate of 12%. The estimated fair value of our equity investment in Golden Queen was $62.3 million, which was $47.9 million lower than our prior carrying value at the end of the second quarter 2018. As a result, an impairment charge of $47.9 million was recorded in Income (loss) related to associated companies in the three and nine months ended September 30, 2018.

Additionally, in the first quarter of 2017 we engaged an independent valuation firm to assist management in estimating the fair value of our equity investment in FXCM. Our first quarter 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. The estimated fair value of our equity investment in FXCM was $186.7 million, which was $130.2 million lower than the carrying value at the end of the first quarter 2017. As a result, an impairment charge of $130.2 million was recorded in Income (loss) related to associated companies in the first quarter of 2017.

Other Secured Financings

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

Short-term Borrowings/Long-term Debt

Short-term borrowings that are accounted for at fair value include equity-linked notes, which are generally categorized within Level 2 of the fair value hierarchy, as the fair value is based on the price of the underlying equity security. Long-term debt includes variable rate, fixed-to-floating rate, CMS (constant maturity swap), digital and Bermudan structured notes. These are valued using various valuation models that incorporate Jefferies Group's own credit spread, market price quotations from external pricing sources referencing the appropriate interest rate curves, volatilities and other inputs as well as prices for transactions in a given note during the period. Long-term debt notes are generally categorized within Level 2 of the fair value hierarchy where market trades have been observed during the quarter, otherwise they are categorized within Level 3.

Level 3 Rollforwards

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 September 30, 2018 (in thousands):



Three months ended September 30, 2018
	Balance, June 30, 2018		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Issuances		Net transfers into (out of) Level 3			Balance at September 30, 2018		Changes in unrealized gains/losses included in earnings relating to instruments still held at September 30, 2018 (1)
Assets:
Trading assets:
Corporate equity securities	$	44,871	$	11,796		$	17,652		$	(23,010	)	$	(302	)	$	—	$	(1,324	)	$	49,683	$	9,136
Corporate debt securities	28,066		1,057			507			(21,403		)	(59		)	—		1,483			9,651		(165		)
CDOs and CLOs	42,517		(967		)	238,281			(240,002		)	(2,127		)	—		(3,721		)	33,981		(3,872		)
Residential mortgage-backed securities	3,655		(66		)	72			(1,597		)	(1		)	—		2,891			4,954		90
Commercial mortgage-backed securities	27,239		(222		)	8			—			(1,156		)	—		(1,953		)	23,916		(288		)
Other asset-backed securities	55,535		(2,269		)	307,358			(290,838		)	(4,356		)	—		3,875			69,305		(1,124		)
Loans and other receivables	64,036		(1,353		)	14,932			(23,700		)	(3,453		)	—		(1,477		)	48,985		1,007
Investments at fair value	318,543		2,383			6,051			—			—			—		—			326,977		2,383
FXCM term loan	76,100		1,347			—			—			(3,647		)	—		—			73,800		(2,300		)

Liabilities:
Trading liabilities:
Corporate equity securities	$	87	$	326		$	—		$	—		$	—		$	—	$	—		$	413	$	(326	)
Corporate debt securities	522		39			—			—			996			—		—			1,557		(39		)
Sovereign obligations	—		3			(598		)	629			—			—		21			55		(124		)
Commercial mortgage-backed securities	—		70			—			—			—			—		—			70		(70		)
Loans	12,881		(148		)	(4,871		)	1,787			—			—		(988		)	8,661		149
Net derivatives (2)	5,874		1,107			—			—			1,990			—		26			8,997		(2,090		)
Long-term debt (1)	160,626		3,004			—			—			—			—		—			163,630		(2,953		)

(1)

Realized and unrealized gains (losses) are primarily reported in Principal transactions revenues in the Consolidated Statements of Operations. Changes in instrument-specific credit risk related to structured notes are included in our Consolidated Statements of Comprehensive Income (Loss), net of tax. Changes in unrealized gains (losses) included in other comprehensive income (loss) for instruments still held at September 30, 2018 were losses of $0.1 million.


(2)	Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.

Analysis of Level 3 Assets and Liabilities for the three months ended September 30, 2018

During the three months ended September 30, 2018, transfers of assets of $13.6 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	Other asset-backed securities of $3.9 million, residential mortgage-backed securities of $2.9 million and commercial mortgage-backed securities of $2.6 million due to reduced pricing transparency.

During the three months ended September 30, 2018, transfers of assets of $13.8 million from Level 3 to Level 2 are primarily attributed to:


•	Commercial mortgage-backed securities of $4.6 million, CDOs and CLOs of $3.7 million and corporate equity securities of $2.6 million due to greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $11.7 million and net losses on Level 3 liabilities were $4.4 million for the three months ended September 30, 2018. Net gains on Level 3 assets were primarily due to an increased valuation of our FXCM term loan, certain investments at fair value and increased market values in corporate equity securities. Net losses on Level 3 liabilities were primarily due to increased valuations of certain structured notes.

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 nine months ended September 30, 2018 (in thousands):



Nine Months Ended September 30, 2018
	Balance, December 31, 2017		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Issuances		Net transfers into (out of) Level 3			Balance at September 30, 2018		Changes in unrealized gains/losses included in earnings relating to instruments still held at September 30, 2018 (1)
Assets:
Trading assets:
Corporate equity securities	$	22,270	$	31,475		$	35,993		$	(39,008	)	$	(2,082	)	$	—	$	1,035		$	49,683	$	26,852
Corporate debt securities	26,036		1,090			22,204			(38,553		)	(2,066		)	—		940			9,651		(1,738		)
CDOs and CLOs	42,184		(4,123		)	242,864			(249,691		)	(5,859		)	—		8,606			33,981		(7,333		)
Residential mortgage-backed securities	26,077		(7,334		)	2,018			(12,621		)	(6		)	—		(3,180		)	4,954		316
Commercial mortgage-backed securities	12,419		(1,236		)	1,720			(548		)	(5,415		)	—		16,976			23,916		(2,272		)
Other asset-backed securities	61,129		(7,528		)	523,045			(495,055		)	(12,281		)	—		(5		)	69,305		(3,307		)
Loans and other receivables	47,304		(2,812		)	104,009			(98,733		)	(14,610		)	—		13,827			48,985		(3,769		)
Investments at fair value	329,944		3,865			9,791			(17,569		)	—			—		946			326,977		3,271
FXCM term loan	72,800		16,432			—			—			(15,432		)	—		—			73,800		5,539

Liabilities:
Trading liabilities:
Corporate equity securities	$	48	$	365		$	—		$	—		$	—		$	—	$	—		$	413	$	(365	)
Corporate debt securities	522		39			—			—			996			—		—			1,557		(39		)
Sovereign obligations	—		3			(598		)	629			—			—		21			55		(124		)
Commercial mortgage-backed securities	105		(35		)	—			—			—			—		—			70		(70		)
Loans	3,486		(1,059		)	(15,702		)	19,409			—			—		2,527			8,661		1,059
Net derivatives (2)	6,746		(1,034		)	(6		)	—			2,984			296		11			8,997		(2,660		)
Long-term debt (1)	—		(25,078		)	—			—			—			81,284		107,424			163,630		13,235

(1)


(2)	Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.

Analysis of Level 3 Assets and Liabilities for the nine months ended September 30, 2018

During the nine months ended September 30, 2018, transfers of assets of $49.1 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	Commercial mortgage-backed securities of $17.0 million, loans and other receivables of $15.3 million and CDOs and CLOs of $8.7 million due to reduced pricing transparency.

During the nine months ended September 30, 2018, transfers of assets of $10.0 million from Level 3 to Level 2 are primarily attributed to:


•	Residential mortgage-backed securities of $4.6 million and corporate equity securities of $2.5 million due to greater pricing transparency supporting classification into Level 2.

During the nine months ended September 30, 2018, there were transfers of structured notes of $107.4 million from Level 2 to Level 3 due to a decrease in market observability.

Net gains on Level 3 assets were $29.8 million and net gains on Level 3 liabilities were $26.8 million for the nine months ended September 30, 2018. Net gains on Level 3 assets were primarily due to an increased valuation of our FXCM term loan and increased market values in corporate equity securities, partially offset by decreased market values across other asset-backed securities, residential mortgage-backed securities, CDOs and CLOs and certain loans and other receivables. Net gains on Level 3 liabilities were primarily due to decreased valuations of certain structured notes.



Three Months Ended September 30, 2017
	Balance, June 30, 2017		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Issuances		Net transfers into (out of) Level 3			Balance, September 30, 2017		Changes in unrealized gains/ losses relating to instruments still held at September 30, 2017 (1)
Assets:
Trading assets:
Corporate equity securities	$	20,548	$	4,344		$	4		$	(645	)	$	(55	)	$	—	$	(2,022	)	$	22,174	$	4,319
Corporate debt securities	24,727		(2,350		)	5,901			(5,551		)	(31		)	—		2,319			25,015		(2,224		)
CDOs and CLOs	48,208		(15,205		)	52,918			(36,564		)	245			—		468			50,070		(12,638		)
Residential mortgage-backed securities	33,032		(263		)	494			(732		)	(291		)	—		(11,591		)	20,649		188
Commercial mortgage-backed securities	16,263		(125		)	—			(676		)	(637		)	—		2,811			17,636		(161		)
Other asset-backed securities	43,349		(6,454		)	5,798			(3,789		)	(2,924		)	—		32,966			68,946		(3,570		)
Loans and other receivables	49,365		15,261			9,265			(5,854		)	(8,249		)	—		2,868			62,656		14,005
Investments at fair value	315,297		3,964			10,000			—			(292		)	—		—			328,969		3,964
FXCM term loan	129,050		2,330			—			—			(60,580		)	—		—			70,800		(2,401		)

Liabilities:
Trading liabilities:
Corporate equity securities	$	354	$	107		$	(369	)	$	27		$	—		$	—	$	—		$	119	$	(92	)
Corporate debt securities	522		—			—			—			—			—		—			522		—
Commercial mortgage-backed securities	70		(35		)	—			—			—			—		—			35		(35		)
Loans	4,967		(3,071		)	—			333			—			—		1,056			3,285		3,018
Net derivatives (2)	3,022		(2,980		)	—			—			5,040			—		—			5,082		(2,474		)


(1)	Realized and unrealized gains (losses) are reported in Principal transactions revenues 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 September 30, 2017

During the three months ended September 30, 2017, transfers of assets of $63.5 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	Other asset-backed securities of $46.4 million due to a lack of observable market transactions.

During the three months ended September 30, 2017, transfers of assets of $35.7 million from Level 3 to Level 2 are primarily attributed to:


•	Residential mortgage-backed securities of $14.6 million and other asset-backed securities of $13.5 million due to greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $1.5 million and net gains on Level 3 liabilities were $6.0 million for the three months ended September 30, 2017. Net gains on Level 3 assets were primarily due to increased valuations of our FXCM term loan, loans and other receivables, corporate equity securities and certain investments at fair value, partially offset by decreased valuations of other asset-backed securities, CDOs and CLOs and corporate debt securities. Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives and decreased valuations of certain loans.



Nine Months Ended September 30, 2017
	Balance, December 31, 2016		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Issuances		Net transfers into (out of) Level 3			Balance, September 30, 2017		Changes in unrealized gains/ losses relating to instruments still held at September 30, 2017 (1)
Assets:
Trading assets:
Corporate equity securities	$	21,739	$	3,416		$	945		$	(1,502	)	$	(356	)	$	—	$	(2,068	)	$	22,174	$	2,689
Corporate debt securities	25,005		(3,280		)	19,610			(18,364		)	(1,724		)	—		3,768			25,015		(3,424		)
CDOs and CLOs	54,354		(21,595		)	65,523			(62,441		)	239			—		13,990			50,070		(21,998		)
Municipal securities	27,257		(1,547		)	—			(25,710		)	—			—		—			—		—
Residential mortgage-backed securities	38,772		(1,446		)	113,391			(125,731		)	(572		)	—		(3,765		)	20,649		(2,005		)
Commercial mortgage-backed securities	20,580		(1,180		)	2,033			(5,199		)	(985		)	—		2,387			17,636		(952		)
Other asset-backed securities	40,911		(15,338		)	67,611			(4,121		)	(16,891		)	—		(3,226		)	68,946		(8,872		)
Loans and other receivables	81,872		27,709			84,342			(83,791		)	(23,241		)	—		(24,235		)	62,656		16,294
Investments at fair value	314,359		12,760			12,800			(10,119		)	(831		)	—		—			328,969		14,783
FXCM term loan	164,500		17,638			—			—			(111,338		)	—		—			70,800		(930		)
Liabilities:
Trading liabilities:
Corporate equity securities	$	313	$	134		$	(355	)	$	27		$	—		$	—	$	—		$	119	$	(92	)
Corporate debt securities	523		(1		)	—			—			—			—		—			522		1
Commercial mortgage-backed securities	—		35			—			—			—			—		—			35		(35		)
Loans	378		1,604			(364		)	333			—			—		1,334			3,285		(1,583		)
Net derivatives (2)	3,441		(2,854		)	—			—			5,162			404		(1,071		)	5,082		(2,333		)
Other secured financings	418		(418		)	—			—			—			—		—			—		—


(1)	Realized and unrealized gains (losses) are reported in Principal transactions revenues 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 nine months ended September 30, 2017

During the nine months ended September 30, 2017, transfers of assets of $30.9 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	CDOs and CLOs of $14.0 million and corporate debt securities of $8.1 million due to a lack of observable market transactions.

During the nine months ended September 30, 2017, transfers of assets of $44.0 million from Level 3 to Level 2 are primarily attributed to:


•	Loans and other receivables of $28.3 million due to a greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $17.1 million and net gains on Level 3 liabilities were $1.5 million for the nine months ended September 30, 2017. Net gains on Level 3 assets were primarily due to increased valuations of our FXCM term loan, certain loans and other receivables and certain investments at fair value, partially offset by decreased valuations of other asset-backed securities and CDOs and CLOs. Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives partially offset by increased valuations of certain loans.

Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair Value Measurements

The tables below present information on the valuation techniques, significant unobservable inputs and their ranges for our financial assets and liabilities, subject to threshold levels related to the market value of the positions held, measured at fair value on a recurring basis with a significant Level 3 balance. The range of unobservable inputs could differ significantly across different firms given the range of products across different firms in the financial services sector. The inputs are not representative of the inputs that could have been used in the valuation of any one financial instrument (i.e., the input used for valuing one financial instrument within a particular class of financial instruments may not be appropriate for valuing other financial instruments within that given class). Additionally, the ranges of inputs presented below should not be construed to represent uncertainty regarding the fair values of our financial instruments; rather the range of inputs is reflective of the differences in the underlying characteristics of the financial instruments in each category.

For certain categories, we have provided a weighted average of the inputs allocated based on the fair values of the financial instruments comprising the category. We do not believe that the range or weighted average of the inputs is indicative of the reasonableness of uncertainty of our Level 3 fair values. The range and weighted average are driven by the individual financial instruments within each category and their relative distribution in the population. The disclosed inputs when compared with the inputs as disclosed in other periods should not be expected to necessarily be indicative of changes in our estimates of unobservable inputs for a particular financial instrument as the population of financial instruments comprising the category will vary from period to period based on purchases and sales of financial instruments during the period as well as transfers into and out of Level 3 each period.



September 30, 2018
Financial Instruments Owned	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input/Range	Weighted Average
Corporate equity securities	$	41,038
Non-exchange traded securities			Market approach	Price	$3 to $75	$25.0
				Underlying stock price	$1 to $11	$9.0

Corporate debt securities	$	9,651	Market approach	Discount rate/yield	19%	—
				Estimated recovery percentage	46%	—
				Price	$10	—
				Comparable asset price	$101	—

CDOs and CLOs	$	33,981	Discounted cash flows	Constant prepayment rate	20%	—
				Constant default rate	1% to 2%	2	%
				Loss severity	30%	—
				Discount rate/yield	5% to 41%	16	%
			Scenario analysis	Estimated recovery percentage	2% to 41%	23	%

Residential mortgage-backed securities	$	4,954	Discounted cash flows	Cumulative loss rate	23%	—
				Duration (years)	15 years	—
				Discount rate/yield	9%	—
			Market approach	Price	$100	—

Commercial mortgage-backed securities	$	23,916	Discounted cash flows	Cumulative loss rate	8% to 84%	33	%
				Duration (years)	0 year to 3 years	1 year
				Discount rate/yield	3% to 38%	12	%
			Scenario analysis	Estimated recovery percentage	26%	—
				Price	$49	—

Other asset-backed securities	$	69,305	Discounted cash flows	Cumulative loss rate	0% to 29%	18	%
				Duration (years)	1 year to 5 years	2 years
				Discount rate/yield	5% to 12%	7	%
			Market approach	Price	$100	—

Loans and other receivables	$	48,985	Market approach	Estimated recovery percentage	0%	—
				Price	$50 to $100	$95.0
			Scenario analysis	Estimated recovery percentage	57% to 107%	88	%

Derivatives	$	3,137
Total return swaps			Market approach	Price	$100	—

Investments at fair value	$	111,899
Private equity securities			Market approach	Price	$3 to $250	$105.0
				Discount rate	20%	—

Investment in FXCM	$	73,800
Term loan			Discounted cash flows	Term based on the pay off (years)	0 months to 0.3 years	0.3 years

Trading Liabilities	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input/Range	Weighted Average
Corporate debt securities	$	1,557	Market approach	Estimated recovery percentage	53%	—

Loans	$	8,661	Market approach	Estimated recovery percentage	0%	—
				Price	$50	—

Derivatives	$	12,134
Equity options			Option model/default rate	Default probability	0%	—
Unfunded commitments			Market approach	Price	$99	—
Total return swaps			Market approach	Price	$95 to $100	$97.0
Variable funding note swaps			Discounted cash flows	Constant prepayment rate	20%	—
				Constant default rate	2%	—
				Loss severity	30%	—
				Discount rate/yield	41%	—

Long-term debt	$	163,630
Structured notes			Market approach	Price	$70 to $100	$80.0
				Price	€80 to €112	€96.0



December 31, 2017
Financial Instruments Owned	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input/Range	Weighted Average
Corporate equity securities	$	18,109
Non-exchange traded securities			Market approach	Price	$3 to $75	$33.0
				Underlying stock price	$6	—
			Comparable pricing	Comparable asset price	$7	—

Corporate debt securities	$	26,036	Convertible bond model	Discount rate/yield	8%	—
				Volatility	40%	—
			Market approach	Estimated recovery percentage	17%	—
				Price	$10	—

CDOs and CLOs	$	38,845	Discounted cash flows	Constant prepayment rate	20%	—
				Constant default rate	2%	—
				Loss severity	25% to 30%	26	%
				Discount rate/yield	3% to 26%	12	%
			Scenario analysis	Estimated recovery percentage	8% to 45%	26	%

Residential mortgage-backed securities	$	26,077	Discounted cash flows	Cumulative loss rate	3% to 19%	10	%
				Duration (years)	2 years to 4 years	3 years
				Discount rate/yield	6% to 10%	8	%

Commercial mortgage-backed securities	$	12,419	Discounted cash flows	Discount rate/yield	2% to 26%	12	%
				Cumulative loss rate	8% to 65%	44	%
				Duration (years)	1 year to 3 years	2 years
			Scenario analysis	Estimated recovery percentage	26% to 32%	28	%
				Price	$52 to $56	$54.0

Other asset-backed securities	$	61,129	Discounted cash flows	Cumulative loss rate	0% to 33%	23	%
				Duration (years)	1 year to 6 years	2 years
				Discount rate/yield	5% to 39%	9	%
			Market approach	Price	$100	—
			Scenario analysis	Estimated recovery percentage	14%	—

Loans and other receivables	$	46,121	Market approach	Estimated recovery percentage	76%	—
				Price	$54 to $100	$95.0
			Scenario analysis	Estimated recovery percentage	13% to 107%	78	%

Derivatives	$	9,295
Total return swaps			Market approach	Price	$101 to $106	$103.0
Interest rate swaps			Market approach	Credit spread	800 bps	—

Investments at fair value	$	110,010
Private equity securities			Market approach	Transaction level	$3 to $250	$172.0
				Price	$7	—
				Discount rate	20%	—

Investment in FXCM	$	72,800
Term loan			Discounted cash flows	Term based on the pay off (years)	0 months to 1 year	0.2 years

Trading Liabilities	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input/Range	Weighted Average
Derivatives	$	16,041
Equity options			Option model/default rate	Default probability	0%	—
Unfunded commitments			Market approach	Price	$99	—
Total return swaps			Market approach	Price	$101 to $106	$103.0
Variable funding note swaps			Discounted cash flows	Constant prepayment rate	20%	—
				Constant default rate	2%	—
				Loss severity	25%	—
				Discount rate/yield	26%	—

The fair values of certain Level 3 assets and liabilities that were determined based on third-party pricing information, unadjusted past transaction prices, reported NAV or a percentage of the reported enterprise fair value are excluded from the above tables. At September 30, 2018 and December 31, 2017, asset exclusions consisted of $223.7 million and $228.6 million, respectively, primarily comprised of investments at fair value, private equity securities, CDOs and CLOs, non-exchange traded securities and loans and other receivables. At September 30, 2018 and December 31, 2017, liability exclusions consisted of $0.5 million and $4.2 million, respectively, of loans, commercial mortgage-backed securities, sovereign obligations and corporate debt and equity securities.

Uncertainty of Fair Value Measurement From Use of Significant Unobservable Inputs

For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the uncertainty of the fair value measurement due to the use of significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below:


•	Non-exchange traded securities using comparable pricing valuation techniques. A significant increase (decrease) in the comparable asset price in isolation would result in a significantly higher (lower) fair value measurement.


•	Corporate debt securities using a convertible bond model. A significant increase (decrease) in the bond discount rate/yield would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in volatility would result in a significantly higher (lower) fair value measurement.

•

Non-exchange traded securities, corporate debt securities, loans and other receivables, unfunded commitments, interest rate swaps, total return swaps, residential mortgage-backed securities, other asset-backed securities, private equity securities and structured notes using a market approach valuation technique. A significant increase (decrease) in the transaction level of a private equity security would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the underlying stock price of the non-exchange traded securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the credit spread of certain derivatives would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the price of the private equity securities, non-exchange traded securities, corporate debt securities, unfunded commitments, total return swaps, residential mortgage-backed securities, other asset-backed securities, loans and other receivables or structured notes would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the estimated recovery rates of the cash flow outcomes underlying the corporate debt securities or loans and other receivables would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the bond discount rate/yield would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the comparable asset price of the corporate debt securities in isolation would result in a significantly higher (lower) fair value measurement.

•

Loans and other receivables, CDOs and CLOs, commercial mortgage-backed securities and other asset-backed securities using scenario analysis. A significant increase (decrease) in the possible recovery rates of the cash flow outcomes underlying the investment would result in a significantly higher (lower) fair value measurement for the financial instrument. A significant increase (decrease) in the price of the commercial mortgage-backed securities would result in a significantly higher (lower) fair value measurement.

•

CDOs and CLOs, residential and commercial mortgage-backed securities, other asset-backed securities and variable funding note swaps using a discounted cash flow valuation technique. A significant increase (decrease) in isolation in the constant default rate, loss severity or cumulative loss rate would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant prepayment rate and duration would have differing impacts depending on the capital structure and type of security. A significant increase (decrease) in the discount rate/security yield would result in a significantly lower (higher) fair value measurement.


•	Derivative equity options using an option/default rate model. A significant increase (decrease) in default probability would result in a significantly lower (higher) fair value measurement.


•	FXCM term loan using a discounted cash flow valuation technique. A significant increase (decrease) in term based on the time to pay off the loan would result in a higher (lower) fair value measurement.

Fair Value Option Election

We have elected the fair value option for all loans and loan commitments made by Jefferies Group's capital markets businesses. These loans and loan commitments include loans entered into by Jefferies Group's investment banking division in connection with client bridge financing and loan syndications, loans purchased by Jefferies Group's leveraged credit trading desk as part of its bank loan trading activities and mortgage and consumer loan commitments, purchases and fundings in connection with mortgage- and other asset-backed securitization activities. Loans and loan commitments originated or purchased by Jefferies Group's leveraged credit and mortgage-backed businesses are managed on a fair value basis. Loans are included in Trading assets and loan commitments are included in Trading liabilities. The fair value option election is not applied to loans made to affiliate entities as such loans are entered into as part of ongoing, strategic business ventures. Loans to affiliate entities are included in Loans to and investments in associated companies in the Consolidated Statements of Financial Condition and are accounted for on an amortized cost basis. Jefferies Group has also elected the fair value option for certain of its structured notes which are managed by Jefferies Group's capital markets business and are included in Long-term debt and Short-term borrowings in the Consolidated Statements of Financial Condition. Jefferies Group has elected the fair value option for certain financial instruments held by its subsidiaries as the investments are risk managed by Jefferies Group on a fair value basis. The fair value option has also been elected for certain secured financings that arise in connection with Jefferies Group's securitization activities and other structured financings. Other secured financings, receivables from brokers, dealers and clearing organizations, receivables from customers of securities operations, payables to brokers, dealers and clearing organizations and payables to customers of securities operations, are accounted for at cost plus accrued interest rather than at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.

The following is a summary of Jefferies Group's gains (losses) due to changes in instrument specific credit risk on loans, other receivables and debt instruments and gains (losses) due to other changes in fair value on long-term debt and short-term borrowings measured at fair value under the fair value option (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Financial Instruments Owned:
Loans and other receivables	$	14,002		$	24,846		$	7,495		$	27,715

Financial Instruments Sold:
Loans	$	(2,708	)	$	3,436		$	(2,467	)	$	(7,286	)
Loan commitments	$	(1,695	)	$	82		$	(1,964	)	$	229

Long-term Debt:
Changes in instrument specific credit risk (1)	$	1,401		$	5,638		$	19,986		$	(14,141	)
Other changes in fair value (2)	$	(6,842	)	$	(1,854	)	$	33,626		$	2,786

Short-term Borrowings:
Changes in instrument specific credit risk (1)	$	—		$	19		$	—		$	1
Other changes in fair value (2)	$	—		$	(2,570	)	$	—		$	(37	)


(1)	Changes in instrument specific credit risk related to structured notes are included in the Consolidated Statements of Comprehensive Income (Loss), net of tax.


(2)	Other changes in fair value are included in Principal transactions revenues in the Consolidated Statements of Operations.

The following is a summary of the amount by which contractual principal exceeds fair value for loans and other receivables, long-term debt and short-term borrowings measured at fair value under the fair value option (in thousands):



	September 30, 2018		December 31, 2017
Financial Instruments Owned:
Loans and other receivables (1)	$	896,470	$	752,076
Loans and other receivables on nonaccrual status and/or 90 days or greater past due (1) (2)	$	167,355	$	159,462
Long-term debt and short-term borrowings	$	89,345	$	32,839


(1)	Interest income is recognized separately from other changes in fair value and is included in Interest income in the Consolidated Statements of Operations.


(2)	Amounts include all loans and other receivables 90 days or greater past due by which contractual principal exceeds fair value of $33.7 million and $38.7 million at September 30, 2018 and December 31, 2017, respectively.

The aggregate fair value of Jefferies Group's loans and other receivables on nonaccrual status and/or 90 days or greater past due was $77.0 million and $55.1 million at September 30, 2018 and December 31, 2017, respectively, which includes loans and other receivables 90 days or greater past due of $25.6 million and $37.4 million at September 30, 2018 and December 31, 2017, respectively.

Jefferies Group had elected the fair value option for its investment in KCG Holdings, Inc. ("KCG"). The change in the fair value of this investment aggregated $2.2 million and $93.4 million for the three and nine months ended September 30, 2017, respectively. Jefferies Group's investment in KCG was sold in July 2017.

As of December 31, 2017, we owned approximately 46.6 million common shares of HRG, representing approximately 23% of HRG’s outstanding common shares, which were accounted for under the fair value option. On July 13, 2018, HRG merged into its 62% owned subsidiary, Spectrum Brands. Our approximately 23% owned interest in HRG thereby converted into approximately 14% of the outstanding shares of the re-named company, Spectrum Brands, which we account for under the fair value option. As of September 30, 2018, we owned approximately 7.5 million common shares of Spectrum Brands, representing approximately 14% of Spectrum Brands outstanding common shares. The shares are included in our Consolidated Statements of Financial Condition at fair value of $561.5 million and $789.9 million at September 30, 2018 and December 31, 2017, respectively. The shares were acquired at an aggregate cost of $475.6 million. The change in the fair value of our investment in Spectrum Brands/HRG aggregated $(48.5) million and $(97.9) million for the three months ended September 30, 2018 and 2017, respectively, and $(228.4) million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively. As reported in its Form 10-Q, for the nine months ended June 30, 2018 and 2017, Spectrum Brands' revenues were $2,358.1 million and $2,222.7 million, respectively; net income (loss) from continuing operations was $443.7 million and $(46.0) million, respectively; net income was $941.6 million and $249.2 million, respectively; and net income attributable to Spectrum Brands controlling interest was $847.7 million and $132.2 million, respectively. One of our officers currently serves as a director on Spectrum Brands board.

We believe accounting for these investments at fair value better reflects the economics of these investments, and quoted market prices for these investments provides an objectively determined fair value at each balance sheet date. Our investment in HomeFed, which is a publicly traded company, is accounted for under the equity method of accounting rather than the fair value option method. HomeFed’s common stock is not listed on any stock exchange, and price information for the common stock is not regularly quoted on any automated quotation system. It is traded in the over-the-counter market with high and low bid prices published by the NASD OTC Bulletin Board Service; however, trading volume is minimal. For these reasons, we did not elect the fair value option for HomeFed.

Financial Instruments Not Measured at Fair Value

Certain of our financial instruments are not carried at fair value but are recorded at amounts that approximate fair value due to their liquid or short-term nature and generally negligible credit risk. These financial assets include Cash and cash equivalents and Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations and would generally be presented in Level 1 of the fair value hierarchy. Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations includes U.S. Treasury securities with a fair value of $34.8 million and $99.7 million at September 30, 2018 and December 31, 2017, respectively. See Note 22 for additional information related to financial instruments not measured at fair value.