Jefferies Financial Group Inc. (Form: 10-Q, Received: 08/01/2018 16:46:44)

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 June 30, 2018



	[ ]	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

JEFFERIES FINANCIAL GROUP INC.

(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)

Leucadia National Corporation

(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 July 25, 2018 was 333,332,094 .

PART I. FINANCIAL INFORMATION

Item I. Financial Statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2018 and December 31, 2017

(Dollars in thousands, except par value)

(Unaudited)



	June 30,		December 31,
	2018		2017
ASSETS
Cash and cash equivalents	$	4,741,057	$	5,275,480
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	709,646		578,014
Financial instruments owned, including securities pledged of $11,079,600 and $10,842,051:
Trading assets, at fair value	18,318,992		16,082,676
Available for sale securities	1,242,475		716,561
Total financial instruments owned	19,561,467		16,799,237
Loans to and investments in associated companies	2,522,944		2,066,829
Securities borrowed	7,599,043		7,721,803
Securities purchased under agreements to resell	3,822,232		3,689,559
Receivables	5,876,389		5,419,015
Property, equipment and leasehold improvements, net	353,553		750,403
Intangible assets, net and goodwill	1,901,352		2,463,180
Deferred tax asset, net	537,063		743,811
Assets held for sale	249,825		—
Other assets	1,527,227		1,661,777
Total assets (1)	$	49,401,798	$	47,169,108

LIABILITIES
Short-term borrowings	$	506,218	$	436,215
Trading liabilities, at fair value	10,183,242		8,454,965
Securities loaned	2,555,701		2,843,911
Securities sold under agreements to repurchase	8,773,506		8,660,511
Other secured financings	1,464,571		1,029,485
Payables, expense accruals and other liabilities	7,496,897		7,167,666
Long-term debt	7,714,970		7,885,783
Total liabilities (1)	38,695,105		36,478,536

Commitments and contingencies

MEZZANINE EQUITY
Redeemable noncontrolling interests	14,252		426,593
Mandatorily redeemable convertible preferred shares	125,000		125,000

EQUITY
Common shares, par value $1 per share, authorized 600,000,000 shares; 333,310,944 and 356,227,038 shares issued and outstanding, after deducting 83,558,159 and 60,165,980 shares held in treasury	333,311		356,227
Additional paid-in capital	4,366,631		4,676,038
Accumulated other comprehensive income	314,973		372,724
Retained earnings	5,523,277		4,700,968
Total Jefferies Financial Group Inc. shareholders’ equity	10,538,192		10,105,957
Noncontrolling interests	29,249		33,022
Total equity	10,567,441		10,138,979

Total	$	49,401,798	$	47,169,108

(1)

Total assets include assets related to variable interest entities of $543.2 million and $382.9 million at June 30, 2018 and December 31, 2017 , respectively, and Total liabilities include liabilities related to variable interest entities of $1,465.8 million and $1,031.0 million at June 30, 2018 and December 31, 2017 , respectively. See Note 8 for additional information related to variable interest entities.

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the periods ended June 30, 2018 and 2017

(In thousands, except per share amounts)

(Unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2018			2017			2018			2017
Revenues:
Commissions and other fees	$	157,704		$	152,643		$	305,606		$	298,465
Principal transactions	53,755			225,234			199,418			641,637
Investment banking	500,297			351,863			940,288			759,884
Interest income	327,314			249,543			602,536			473,056
Manufacturing revenues	114,735			81,329			213,100			161,543
Other	90,021			53,584			143,989			298,524
Total revenues	1,243,826			1,114,196			2,404,937			2,633,109
Interest expense of Jefferies Group	332,667			257,335			598,343			469,722
Net revenues	911,159			856,861			1,806,594			2,163,387

Expenses:
Compensation and benefits	478,515			480,887			968,174			974,902
Cost of sales	90,690			69,982			172,625			139,238
Floor brokerage and clearing fees	45,046			44,435			87,222			90,293
Interest expense	24,279			25,580			45,777			51,150
Depreciation and amortization	31,905			26,258			60,065			53,369
Selling, general and other expenses	236,562			177,566			462,906			352,714
Total expenses	906,997			824,708			1,796,769			1,661,666

Income from continuing operations before income taxes and income (loss) related to associated companies	4,162			32,153			9,825			501,721
Income (loss) related to associated companies	33,353			14,104			65,453			(114,470		)
Income from continuing operations before income taxes	37,515			46,257			75,278			387,251
Income tax provision (benefit)	9,598			26,185			(38,831		)	117,428
Income from continuing operations	27,917			20,072			114,109			269,823
Income from discontinued operations, net of income tax provision of $31,111, $24,435, $47,045 and $37,366	77,106			53,990			130,063			98,162
Gain on disposal of discontinued operations, net of income tax provision of $229,553, $0, $229,553 and $0	643,921			—			643,921			—
Net income	748,944			74,062			888,093			367,985
Net (income) loss attributable to the noncontrolling interests	(136		)	1,446			1,208			1,969
Net income attributable to the redeemable noncontrolling interests	(22,108		)	(16,300		)	(36,904		)	(28,322		)
Preferred stock dividends	(1,171		)	(1,015		)	(2,343		)	(2,031		)

Net income attributable to Jefferies Financial Group Inc. common shareholders	$	725,529		$	58,193		$	850,054		$	339,601

(continued)

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Operations, continued

For the periods ended June 30, 2018 and 2017

(In thousands, except per share amounts)

(Unaudited)



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017

Basic earnings per common share attributable to Jefferies Financial Group Inc. common shareholders:
Income from continuing operations	$	0.08	$	0.06	$	0.31	$	0.73
Income from discontinued operations	0.15		0.10		0.26		0.19
Gain on disposal of discontinued operations	1.82		—		1.79		—
Net income	$	2.05	$	0.16	$	2.36	$	0.92

Diluted earnings per common share attributable to Jefferies Financial Group Inc. common shareholders:
Income from continuing operations	$	0.08	$	0.06	$	0.31	$	0.72
Income from discontinued operations	0.15		0.10		0.25		0.19
Gain on disposal of discontinued operations	1.80		—		1.77		—
Net income	$	2.03	$	0.16	$	2.33	$	0.91

Dividends per common share	$	0.1000	$	0.0625	$	0.2000	$	0.1250

Amounts attributable to Jefferies Financial Group Inc. common shareholders:
Income from continuing operations, net of taxes	$	27,193	$	20,612	$	113,211	$	269,897
Income from discontinued operations, net of taxes	54,415		37,581		92,922		69,704
Gain on disposal of discontinued operations, net of taxes	643,921		—		643,921		—
Net income	$	725,529	$	58,193	$	850,054	$	339,601

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the periods ended June 30, 2018 and 2017

(In thousands)

(Unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2018			2017			2018			2017

Net income	$	748,944		$	74,062		$	888,093		$	367,985
Other comprehensive income (loss):
Net unrealized holding gains (losses) on investments arising during the period, net of income tax provision (benefit) of $227, $(203), $(143) and $5,704	818			(346		)	(408		)	9,797
Less: reclassification adjustment for net (gains) losses included in net income, net of income tax provision of $42, $282, $37 and $271	(118		)	(485		)	(103		)	(467		)
Net change in unrealized holding gains (losses) on investments, net of income tax provision (benefit) of $185, $(485), $(180) and $5,433	700			(831		)	(511		)	9,330

Net unrealized foreign exchange gains (losses) arising during the period, net of income tax provision (benefit) of $(2,719), $(10,066), $(793) and $(8,555)	(49,310		)	37,893			(31,407		)	37,875
Less: reclassification adjustment for foreign exchange (gains) losses included in net income, net of income tax provision (benefit) of $(16), $0, $(16) and $1,097	(20,459		)	—			(20,459		)	5,290
Net change in unrealized foreign exchange gains (losses), net of income tax provision (benefit) of $(2,703), $(10,066), $(777) and $(9,652)	(69,769		)	37,893			(51,866		)	43,165

Net unrealized gains (losses) on instrument specific credit risk arising during the period, net of income tax provision (benefit) of $8,875, $(1,074), $4,241 and $(7,419)	26,287			(2,683		)	14,718			(12,378		)
Less: reclassification adjustment for instrument specific credit risk (gains) losses included in net income, net of income tax provision of $78, $0, $78 and $0	(270		)	—			(270		)	—
Net change in unrealized instrument specific credit risk gains (losses), net of income tax provision (benefit) of $8,797, $(1,074), $4,163 and $(7,419)	26,017			(2,683		)	14,448			(12,378		)

Net change in unrealized cash flow hedges gains (losses), net of income tax provision (benefit) of $(721), $0, $513 and $0	251			—			1,499			—

Reclassification adjustment for pension (gains) losses included in net income, net of income tax provision (benefit) of $(188), $(199), $(339) and $(1,634)	457			426			6,263			(372		)

Other comprehensive income (loss), net of income taxes	(42,344		)	34,805			(30,167		)	39,745

Comprehensive income	706,600			108,867			857,926			407,730
Comprehensive (income) loss attributable to the noncontrolling interests	(136		)	1,446			1,208			1,969
Comprehensive income attributable to the redeemable noncontrolling interests	(22,108		)	(16,300		)	(36,904		)	(28,322		)
Preferred stock dividends	(1,171		)	(1,015		)	(2,343		)	(2,031		)

Comprehensive income attributable to Jefferies Financial Group Inc. common shareholders	$	683,185		$	92,998		$	819,887		$	379,346

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the six months ended June 30, 2018 and 2017

(In thousands)

(Unaudited)



	2018			2017
Net cash flows from operating activities:
Net income	$	888,093		$	367,985
Adjustments to reconcile net income to net cash provided by (used for) operations:
Pre-tax income from discontinued operations, including gain on disposal	(1,050,582		)	(135,176		)
Deferred income tax provision	203,493			131,957
Depreciation and amortization of property, equipment and leasehold improvements	52,516			44,724
Other amortization	(15,748		)	(14,162		)
Share-based compensation	25,198			20,375
Provision for doubtful accounts	16,647			17,579
(Income) loss related to associated companies	(90,287		)	59,975
Distributions from associated companies	42,952			34,463
Net (income) losses related to property and equipment, and other assets	9,006			(125		)
Gain on sale of subsidiary	—			(178,236		)
Net change in:
Securities deposited with clearing and depository organizations	64,880			108
Trading assets	(2,245,744		)	(278,135		)
Securities borrowed	97,924			(143,554		)
Securities purchased under agreements to resell	(176,922		)	(452,154		)
Receivables from brokers, dealers and clearing organizations	(187,663		)	(969,962		)
Receivables from customers of securities operations	(419,506		)	(379,669		)
Other receivables	(86,984		)	(146,693		)
Other assets	(57,380		)	(161,807		)
Trading liabilities	1,799,908			683,987
Securities loaned	(266,028		)	616,701
Securities sold under agreements to repurchase	139,287			1,818,042
Payables to brokers, dealers and clearing organizations	518,671			(969,230		)
Payables to customers of securities operations	489,060			300,774
Trade payables, expense accruals and other liabilities	(351,950		)	107,562
Other	(87,605		)	20,585
Net cash provided by (used for) operating activities - continuing operations	(688,764		)	395,914
Net cash provided by operating activities - discontinued operations	164,650			77,578
Net cash provided by (used for) operating activities	(524,114		)	473,492

Net cash flows from investing activities:
Acquisitions of property, equipment and leasehold improvements, and other assets	(240,864		)	(63,574		)
Proceeds from disposals of property and equipment, and other assets	8,138			21,229
Proceeds from sale of subsidiary, net of expenses and cash of operations sold	—			289,767
Advances on notes, loans and other receivables	—			(41,456		)
Collections on notes, loans and other receivables	11,785			171,320
Loans to and investments in associated companies	(1,921,671		)	(2,756,274		)
Capital distributions and loan repayments from associated companies	1,925,104			2,595,676
Purchases of investments (other than short-term)	(1,961,344		)	(522,310		)
Proceeds from maturities of investments	370,360			112,455
Proceeds from sales of investments	955,785			409,881
Other	1			1,250
Net cash provided by (used for) investing activities - continuing operations	(852,706		)	217,964
Net cash provided by (used for) investing activities - discontinued operations	860,827			(22,165		)
Net cash provided by investing activities	8,121			195,799

(continued)

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

For the six months ended June 30, 2018 and 2017

(In thousands)

(Unaudited)



	2018			2017
Net cash flows from financing activities:
Issuance of debt, net of issuance costs	$	1,863,299		$	1,013,886
Other changes in short-term borrowings, net	—			(85,158		)
Repayment of debt	(1,585,149		)	(346,838		)
Net change in other secured financings	434,188			(264,016		)
Net change in bank overdrafts	(2,722		)	(1,544		)
Distributions to noncontrolling interests	—			(9,347		)
Contributions from noncontrolling interests	113			24,669
Purchase of common shares for treasury	(562,429		)	(32,126		)
Dividends paid	(70,050		)	(45,409		)
Other	1,281			899
Net cash provided by financing activities - continuing operations	78,531			255,016
Net cash provided by (used for) financing activities - discontinued operations	120,322			(11,748		)
Net cash provided by financing activities	198,853			243,268

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(9,582		)	4,895

Change in cash classified as assets held for sale	—			(3,136		)

Net increase in cash, cash equivalents and restricted cash	(326,722		)	914,318

Cash, cash equivalents and restricted cash at January 1,	5,774,505			4,597,113

Cash, cash equivalents and restricted cash at June 30,	$	5,447,783		$	5,511,431

The following presents our cash, cash equivalents and restricted cash by category within the Consolidated Statements of Financial Condition to the total of the same amounts in the Consolidated Statements of Cash Flows above (in thousands):



	June 30, 2018		June 30, 2017
Cash and cash equivalents	$	4,741,057	$	4,661,937
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	674,796		819,226
Other assets	31,930		30,268
Total cash, cash equivalents and restricted cash	$	5,447,783	$	5,511,431

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the six months ended June 30, 2018 and 2017

(In thousands, except par value and per share amounts)

(Unaudited)



	Jefferies Financial Group Inc. 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, 2017	$	359,425		$	4,812,587		$	310,697		$	4,645,391		$	10,128,100		$	175,549		$	10,303,649
Net income										339,601			339,601			(1,969		)	337,632
Other comprehensive income, net of taxes							39,745						39,745						39,745
Contributions from noncontrolling interests													—			24,669			24,669
Distributions to noncontrolling interests													—			(9,347		)	(9,347		)
Change in interest in consolidated subsidiary				44									44			(44		)	—
Share-based compensation expense				20,375									20,375						20,375
Change in fair value of redeemable noncontrolling interests				39,965									39,965						39,965
Purchase of common shares for treasury	(1,359		)	(32,713		)							(34,072		)				(34,072		)
Dividends ($.125 per common share)										(46,738		)	(46,738		)				(46,738		)
Other	579			3,708									4,287						4,287
Balance, June 30, 2017	$	358,645		$	4,843,966		$	350,442		$	4,938,254		$	10,491,307		$	188,858		$	10,680,165


Balance, January 1, 2018	$	356,227		$	4,676,038		$	372,724		$	4,700,968		$	10,105,957		$	33,022		$	10,138,979
Cumulative effect of the adoption of accounting standards							(27,584		)	45,396			17,812						17,812
Balance, January 1, 2018, as adjusted	356,227			4,676,038			345,140			4,746,364			10,123,769			33,022			10,156,791
Net income										850,054			850,054			(1,208		)	848,846
Other comprehensive loss, net of taxes							(30,167		)				(30,167		)				(30,167		)
Contributions from noncontrolling interests													—			113			113
Reversal of cumulative National Beef redeemable noncontrolling interests fair value adjustments prior to deconsolidation				237,669									237,669			—			237,669
Change in interest in consolidated subsidiary				2,677									2,677			(2,677		)	—
Share-based compensation expense				25,198									25,198						25,198
Change in fair value of redeemable noncontrolling interests				(21,404		)							(21,404		)				(21,404		)
Purchase of common shares for treasury	(24,249		)	(562,102		)							(586,351		)				(586,351		)
Dividends ($.20 per common share)										(73,141		)	(73,141		)				(73,141		)
Other	1,333			8,555									9,888			(1		)	9,887
Balance, June 30, 2018	$	333,311		$	4,366,631		$	314,973		$	5,523,277		$	10,538,192		$	29,249		$	10,567,441

See notes to interim consolidated financial statements.

JEFFERIES FINANCIAL GROUP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1. Nature of Operations

Jefferies Financial Group Inc. ("Jefferies" or the "Company"), formerly known as Leucadia National Corporation, is a diversified financial services company engaged in investment banking and capital markets, merchant banking and the early stages of building an alternative asset management platform. Our financial services businesses and subsidiaries include Jefferies Group (investment banking and capital markets), Leucadia Asset Management (alternative asset management), Berkadia (commercial mortgage banking, investment sales and servicing), HomeFed (real estate), FXCM (provider of online foreign exchange trading services) and Foursight Capital (vehicle finance).

Our merchant banking portfolio includes equity interests in NYSE-listed Spectrum Brands (consumer products), National Beef (beef processing), Vitesse Energy Finance and JETX Energy (oil and gas), Linkem (fixed wireless broadband services in Italy), Idaho Timber (manufacturing) and Golden Queen (gold and silver mining).

From time to time, we evaluate the retention and disposition of businesses and investments, and changes in the mix of these holdings should be expected.

We own 31% 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. On June 5, 2018, we completed the sale of 48% of National Beef to Marfrig Global Foods S.A. ("Marfrig") for $907.7 million in cash, reducing our ownership in National Beef from 79% to 31% . The pre-tax gain recognized as a result of this transaction is $873.5 million for the three and six months ended June 30, 2018 . During 2018, prior to the closing, we received an additional $229.4 million in distributions of recent profits plus a true-up to the debt amount set in the enterprise valuation associated with the sale. Marfrig has also acquired a further 3% of National Beef from other equity owners and owns 51% of National Beef. We will continue to designate two board members and have a series of other rights in respect of our continuing equity interest, with a lockup period of five years and thereafter fair market value liquidity protections. As of the closing of the sale on June 5, 2018, we have deconsolidated our investment in National Beef and account for our remaining 31% interest in National Beef under the equity method of accounting. We have classified the results of National Beef prior to June 5, 2018 as discontinued operations in the Consolidated Statements of Operations. See Note 24 for more information.

We currently own approximately 75% of Garcadia, an equity method joint venture that owns and operates 28 automobile dealerships in California, Texas, Iowa and Michigan. In April 2018, we entered into an agreement to sell 100% of our equity interests in Garcadia and our associated real estate to our current partners, the Garff family. At closing, we will receive $435 million in cash and $50 million in senior preferred equity of an entity that will own all of the automobile dealerships associated broadly with the Ken Garff Automotive Group, including all of the Garcadia dealerships. At or prior to closing, we will pay approximately $52 million to retire the mortgage debt on the real estate to be sold. This transaction is expected to close in the third quarter of 2018.

Vitesse Energy, LLC ("Vitesse Energy Finance") is our consolidated subsidiary that acquires and invests in 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. These non-operated interests represent Vitesse Energy Finance’s share of mineral rights associated with specified acreage. As operators convert undeveloped portions of this acreage into flowing horizontal wells, our interests in the mineral rights are essentially converted into interests in the cash flows associated with the wells. In April 2018, Vitesse Energy Finance acquired a package of non-operated Bakken assets from a private equity fund for $190 million in cash, of which approximately $144 million was funded as equity by Jefferies and the balance was drawn under Vitesse Energy Finance’s credit line. The assets purchased include interests in mineral rights associated with future oil and gas development, as well as interests in existing cash flows from producing wells through revenue sharing arrangements.

Leucadia Asset Management ("LAM") supports and develops focused alternative asset management businesses led by distinct management teams. We are patiently developing this business over time, and changes in the platforms and structure should be expected. During the second quarter of 2018, we took steps to expand our asset management efforts including the formation of a strategic relationship with Weiss Multi-Strategy Advisers LLC. We invested $250.0 million in Weiss' strategy and will receive a profit share in the first year, and a revenue share thereafter. In addition, we finalized an agreement with Schonfeld Strategic Advisors LLC to merge the business of Folger Hill Asset Management with Schonfeld's fundamental equities business, under the Schonfeld brand. In connection with the pending merger, we have agreed to make a $250.0 million investment in the combined strategy and we will own a revenue share in the management company.

On July 13, 2018, HRG Group, Inc. ("HRG") merged into its 62% owned subsidiary, Spectrum Brands Holdings, Inc. ("Spectrum Brands"). Our approximately 23% interest in HRG thereby converted into approximately 14% of the outstanding shares of the re-named company, Spectrum Brands.

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. For a detailed discussion about the Company’s significant accounting policies, see Note 2, Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 10-K").

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.

Jefferies Group has a November 30 year-end, which it retains for standalone reporting purposes. We reflect Jefferies Group in our consolidated financial statements utilizing a one month lag. We have reviewed Jefferies Group's business and internal operating results for the month of June 2018 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.

During the six months ended June 30, 2018 , other than the following, there were no significant updates made to the Company’s significant accounting policies. The accounting policy changes are attributable to the adoption of the Financial Accounting Standards Board ("FASB") guidance on Revenue from Contracts with Customers (the "new revenue standard"). These revenue recognition policy updates are applied prospectively in our financial statements from January 1, 2018 forward using the modified retrospective approach. Reported financial information for the historical comparable periods were not revised and continue to be reported under the accounting standards in effect during the historical periods.

Revenue Recognition Policies

Investment Banking Revenues:


•	Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed.


•	Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring advisory engagements, are expensed as incurred.


•	All investment banking expenses are recognized within their respective expense category in the Consolidated Statements of Operations and any expenses reimbursed by clients are recognized as Investment banking revenues.

Asset Management Fees:


•	Performance fee revenue is generally recognized only at the end of the performance period to the extent that the benchmark return has been met.

See Accounting Developments - Adopted Accounting Standards below and Note 17 for further information.

Changes to the Consolidated Statements of Operations

Manufacturing revenues, which were previously reported within Other revenues, are now broken out separately in the Consolidated Statements of Operations. Manufacturing revenues are primarily from Idaho Timber, which manufactures and distributes an extensive range of quality wood products to markets across North America. Idaho Timber's primary business consists of the sale of lumber that is manufactured or remanufactured at one of its locations. Agreements with customers for these sales specify the

type, quantity and price of products to be delivered as well as the delivery date and payment terms. The transaction price is fixed at the time of sale and revenue is generally recognized when the customer takes control of the product.

We have reorganized the presentation of our gains and losses generated from our capital invested in asset management funds. This was previously presented as Other revenues and is now presented within Principal transactions revenues. For the three months ended June 30, 2017 , this resulted in a decrease to Principal transactions revenues of $0.8 million and an increase to Other revenues of $0.8 million . For the six months ended June 30, 2017 , this resulted in a decrease to Principal transactions revenues of $0.9 million and an increase to Other revenues of $0.9 million .

Receivables

At June 30, 2018 and December 31, 2017 , Receivables include receivables from brokers, dealers and clearing organizations of $2,831.0 million and $2,635.2 million , respectively, and receivables from customers of securities operations of $1,977.3 million and $1,563.8 million , respectively.

Payables, expense accruals and other liabilities

At June 30, 2018 and December 31, 2017 , Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $2,753.1 million and $2,228.9 million , respectively, and payables to customers of securities operations of $3,153.0 million and $2,664.0 million , respectively.

Supplemental Cash Flow Information



	For the Six Months Ended June 30,
	For the Six Months Ended June 30,
	2018		2017
Cash paid during the year for:	(In thousands)
Interest	$	654,370	$	535,959
Income tax payments (refunds), net	$	15,804	$	9,977

During the six months ended June 30, 2018 and 2017 , we had $23.9 million and $1.9 million , respectively, in non-cash financing activities related to purchases of common shares for treasury which settled subsequent to quarter end.

Accounting Developments - Adopted Accounting Standards

Revenue Recognition. In May 2014, the FASB issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The core principle of 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 or services. We adopted the guidance as of January 1, 2018 and recognized an increase of $17.8 million after-tax to beginning Retained earnings as the cumulative effect of adoption of accounting standards. The increase primarily relates to the recognition of $24.3 million of revenue previously deferred from the sale of real estate to HomeFed in 2014, offset by a decrease of $6.1 million related to Jefferies Group. For Jefferies Group, the impact of adoption primarily related to investment banking expenses that were deferred as of December 31, 2017 under the previously existing accounting guidance, which would have been expensed in prior periods under the new revenue standard and investment banking revenues that were previously recognized in prior periods, which would have been deferred as of December 31, 2017 under the new revenue standard. We elected to adopt the new guidance using a modified retrospective approach applied to contracts that were not completed as of January 1, 2018. Accordingly, the new revenue standard is applied prospectively in our financial statements from January 1, 2018 forward and reported financial information for historical comparable periods is not revised and continues to be reported under the accounting standards in effect during those historical periods.

The new revenue standard does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, and as a result, did not have an impact on the elements of our Consolidated Statements of Operations most closely associated with financial instruments, including Principal transactions revenues, Interest income and Interest expense. The new revenue standard primarily impacts Jefferies Group's revenue recognition and presentation accounting policies as follows:

• Investment Banking Revenues. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction.

• Certain Capital Markets Revenues. Revenues associated with price stabilization activities as part of a securities underwriting were historically recognized as part of Investment banking revenues. Under the new revenue standard, revenues from these activities are recognized within Principal transactions revenues, as these revenues are not considered to be within the scope of the new standard.

• Investment Banking Advisory Expenses. Historically, expenses associated with investment banking advisory assignments were deferred until reimbursed by the client, the related fee revenue is recognized or the engagement is otherwise concluded. Under the new revenue standard, expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred.

• Investment Banking Underwriting and Advisory Expenses. Expenses have historically been recorded net of client reimbursements and/or netted against revenues. Under the new revenue standard, all investment banking expenses will be recognized within their respective expense category in the Consolidated Statements of Operations and any expense reimbursements will be recognized as Investment banking revenues (i.e., expenses are no longer recorded net of client reimbursements and are not netted against revenues).

• Asset Management Fees. In certain asset management fee arrangements, Jefferies Group and LAM receive performance-based fees, which vary with performance or, in certain cases, are earned when the return on assets under management exceed certain benchmark returns or other performance targets. Historically, performance fees have been accrued (or reversed) quarterly based on measuring performance to date versus any relevant benchmark return hurdles stated in the investment management agreement. Under the new revenue standard, performance fees are considered variable as they are subject to fluctuation (e.g., based on market performance) and/or are contingent on a future event during the measurement period (e.g., exceeding a specified benchmark index) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met.

There was no significant impact as a result of applying the new revenue standard to our consolidated financial statements for the three and six months ended June 30, 2018 , except as it relates to the presentation of Jefferies Group's investment banking expenses. The table below presents the impact of applying the new revenue recognition standard to the Consolidated Statements of Operations for the three and six months ended June 30, 2018 as a result of the change in presentation of investment banking expenses (in thousands):



	For the Three Months Ended June 30, 2018						For the Six Months Ended June 30, 2018
	As Reported		Impact of Adoption of Revenue Recognition Standard		Financial Results Prior to Adoption of Revenue Recognition Standard		As Reported		Impact of Adoption of Revenue Recognition Standard		Financial Results Prior to Adoption of Revenue Recognition Standard
Revenues:
Commissions and other fees	$	157,704	$	—	$	157,704	$	305,606	$	—	$	305,606
Principal transactions	53,755		—		53,755		199,418		—		199,418
Investment banking	500,297		32,342		467,955		940,288		64,827		875,461
Interest income	327,314		—		327,314		602,536		—		602,536
Manufacturing revenues	114,735		—		114,735		213,100		—		213,100
Other	90,021		—		90,021		143,989		—		143,989
Total revenues	1,243,826		32,342		1,211,484		2,404,937		64,827		2,340,110
Interest expense of Jefferies Group	332,667		—		332,667		598,343		—		598,343
Net revenues	911,159		32,342		878,817		1,806,594		64,827		1,741,767

Expenses:
Compensation and benefits	478,515		—		478,515		968,174		—		968,174
Cost of sales	90,690		—		90,690		172,625		—		172,625
Floor brokerage and clearing fees	45,046		—		45,046		87,222		—		87,222
Interest expense	24,279		—		24,279		45,777		—		45,777
Depreciation and amortization	31,905		—		31,905		60,065		—		60,065
Selling, general and other expenses	236,562		32,342		204,220		462,906		64,827		398,079
Total expenses	906,997		32,342		874,655		1,796,769		64,827		1,731,942

Income from continuing operations before income taxes and income (loss) related to associated companies	$	4,162	$	—	$	4,162	$	9,825	$	—	$	9,825

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 have adopted the new guidance as of January 1, 2018 with a cumulative effect increase to opening retained earnings of $27.6 million and a corresponding decrease to Accumulated other comprehensive income. The opening retained earnings adjustment is to recognize the unrealized gains we had for available for sale equity securities. Beginning in 2018, these available for sale equity securities are now reported as part of Trading assets, at fair value within the Consolidated Statements of Financial Condition. 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 material impact 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. We adopted

this guidance in the first quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements. The adoption of this guidance resulted in the following adjustments to the Consolidated Statements of Operations for the three and six months ended June 30, 2017 : a decrease of $0.9 million and $1.7 million , respectively, to Compensation and benefits expenses and an increase to Selling, general and other expenses of $0.9 million and $1.7 million , respectively.

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. We adopted this guidance in the first quarter of 2018. Prior periods were retrospectively adjusted to conform to the current period presentation. The adoption of the guidance did not have a material impact on our Consolidated Statements of Cash Flows. Upon adoption, we recorded an increase of $64.4 million in Net cash provided by operating activities and a decrease of $(5.1) million in Net cash provided by investing activities for the six months ended June 30, 2017 related to reclassifying the changes in our restricted cash balance from operating and investing activities to the cash and cash equivalent balances within the Consolidated Statements of Cash Flows.

Compensation. In May 2017, the FASB issued new guidance providing clarity and reducing diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. We adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements.

Accounting Developments - Accounting Standards to be Adopted in Future Periods

Leases. In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of all leases that are longer than one year onto the balance sheet, which will result in the recognition of a right of use asset and a corresponding lease liability. The right of use asset and lease liability will be measured initially using the present value of the remaining rental payments. This guidance change for leases where we are the lessee will require modifications to our current lease accounting systems and the determination of the present value of the remaining rental payments. 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.

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. We do not believe the new guidance will have a material impact on our consolidated financial statements.

Derivatives and hedging. In August 2017, the FASB issued new guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. We do not believe the new guidance will have a material impact on our consolidated financial statements.

Note 3. 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 $405.0 million and $590.1 million at June 30, 2018 and December 31, 2017 , respectively, by level within the fair value hierarchy (in thousands):



	June 30, 2018
	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
Assets:
Trading assets, at fair value:
Corporate equity securities	$	3,472,077	$	70,011	$	44,871	$	—		$	3,586,959
Corporate debt securities	821		2,858,014		28,066		—			2,886,901
Collateralized debt obligations and collateralized loan obligations	—		82,399		42,517		—			124,916
U.S. government and federal agency securities	2,095,792		40,450		—		—			2,136,242
Municipal securities	—		827,478		—		—			827,478
Sovereign obligations	1,332,770		1,141,113		—		—			2,473,883
Residential mortgage-backed securities	—		2,037,431		3,655		—			2,041,086
Commercial mortgage-backed securities	—		941,432		27,239		—			968,671
Other asset-backed securities	—		281,821		55,535		—			337,356
Loans and other receivables	—		1,771,853		64,036		—			1,835,889
Derivatives (2)	27,435		3,369,641		5,743		(3,102,888		)	299,931
Investments at fair value	—		—		318,543		—			318,543
FXCM term loan	—		—		76,100		—			76,100
Total trading assets, excluding investments at fair value based on NAV	$	6,928,895	$	13,421,643	$	666,305	$	(3,102,888	)	$	17,913,955

Available for sale securities:
U.S. government securities	$	1,217,550	$	—	$	—	$	—		$	1,217,550
Residential mortgage-backed securities	—		661		—		—			661
Commercial mortgage-backed securities	—		10,756		—		—			10,756
Other asset-backed securities	—		13,508		—		—			13,508
Total available for sale securities	$	1,217,550	$	24,925	$	—	$	—		$	1,242,475

Liabilities:
Trading liabilities:
Corporate equity securities	$	2,344,870	$	4,313	$	87	$	—		$	2,349,270
Corporate debt securities	—		1,721,602		522		—			1,722,124
U.S. government and federal agency securities	1,914,531		—		—		—			1,914,531
Sovereign obligations	1,518,030		1,083,853		—		—			2,601,883
Loans	—		1,106,907		12,881		—			1,119,788
Derivatives	19,357		3,684,018		11,617		(3,239,346		)	475,646
Total trading liabilities	$	5,796,788	$	7,600,693	$	25,107	$	(3,239,346	)	$	10,183,242
Short-term borrowings	$	—	$	68,818	$	—	$	—		$	68,818
Long-term debt - structured notes	$	—	$	547,630	$	160,626	$	—		$	708,256



	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 (3)	$	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)

During the six months ended June 30, 2018 , Jefferies Group transferred from Level 1 to Level 2 $20.8 million of listed options included in Trading assets - Derivatives, which are measured based on broker quotes or mid-market valuations. There were no other material transfers of Trading assets and Trading liabilities between Level 1 and Level 2 for the three and six months ended June 30, 2018 and 2017 .

(3)

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 June 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 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. 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. Sovereign government obligations are classified in Level 1 or Level 2 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 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: The fair value 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 from 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 residential interest-only and inverse interest-only securities 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: 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 and prices observed from 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 from recently executed market transactions.

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 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 trade activity 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. 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 the 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)
June 30, 2018
Equity Long/Short Hedge Funds (2)	$	107,384	$	—	(2)
Fixed Income and High Yield Hedge Funds (3)	342		—		—
Fund of Funds (4)	176		—		—
Equity Funds (5)	35,991		20,696		—
Multi-asset Funds (6)	261,144		—		—
Total	$	405,037	$	20,696

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 (6)	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 June 30, 2018 and December 31, 2017 , 33% 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 multi-asset securities in domestic and international markets in both the public and private sectors. At June 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 six months ended June 30, 2018 , interest accrued at 20.5% per annum. During the six months ended June 30, 2018 , we received $11.8 million of principal and interest from FXCM and $70.4 million of principal remained outstanding under the term loan as of June 30, 2018 . Through June 30, 2018 , we have received cumulatively $343.4 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 $6.5 million and $15.1 million during the three and six months ended June 30, 2018 , respectively, and $4.4 million and $15.3 million during the three and six months ended June 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 June 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 ( $76.1 million ) and the investment in associated company ( $143.8 million ), which totaled $219.9 million at June 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 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 classified as Level 2 or Level 3 within 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 as Level 2 within 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 as 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 June 30, 2018 (in thousands):



Three months ended June 30, 2018
	Balance, March 31, 2018		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Issuances		Net transfers into (out of) Level 3			Balance at June 30, 2018		Changes in unrealized gains/losses relating to instruments still held at June 30, 2018 (1)
Assets:
Trading assets:
Corporate equity securities	$	35,753	$	2,951		$	1,485		$	(75	)	$	(110	)	$	—	$	4,867		$	44,871	$	3,241
Corporate debt securities	26,103		923			17,058			(13,481		)	—			—		(2,537		)	28,066		543
CDOs and CLOs	38,613		(2,616		)	251			(1,905		)	(431		)	—		8,605			42,517		(2,688		)
Residential mortgage-backed securities	21,762		(5,416		)	112			(13,113		)	(35		)	—		345			3,655		423
Commercial mortgage-backed securities	15,103		(2,213		)	—			—			(1,924		)	—		16,273			27,239		(2,706		)
Other asset-backed securities	51,288		(4,001		)	59,057			(62,905		)	(3,846		)	—		15,942			55,535		(2,670		)
Loans and other receivables	62,043		(6,051		)	19,029			(16,237		)	(1,940		)	—		7,192			64,036		(5,185		)
Investments at fair value	318,159		(807		)	3,501			(2,310		)	—			—		—			318,543		(807		)
FXCM term loan	73,200		6,488			—			—			(3,588		)	—		—			76,100		2,900

Liabilities:
Trading liabilities:
Corporate equity securities	$	61	$	26		$	—		$	—		$	—		$	—	$	—		$	87	$	(26	)
Corporate debt securities	522		—			—			—			—			—		—			522		—
Commercial mortgage-backed securities	35		(35		)	—			—			—			—		—			—		—
Loans	10,323		(3,416		)	(10,543		)	8,685			(29		)	—		7,861			12,881		3,231
Net derivatives (2)	6,882		(1,580		)	—			—			569			—		3			5,874		(115		)
Long-term debt	—		(20,838		)	—			—			—			23,362		158,102			160,626		20,838


(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 June 30, 2018

During the three months ended June 30, 2018 , transfers of assets of $78.7 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	CDOs and CLOs of $20.3 million , commercial mortgage-backed securities of $17.1 million , loans and other receivables of $16.4 million and other asset-backed securities of $15.9 million due to reduced pricing transparency.

During the three months ended June 30, 2018 , transfers of assets of $28.0 million from Level 3 to Level 2 are primarily attributed to:


•	CDOs and CLOs of $11.7 million and loans and other receivables of $9.2 million due to greater pricing transparency supporting classification into Level 2.

During the three months ended June 30, 2018 , there were transfers of long-term debt of $158.1 million from Level 2 to Level 3 due to a decrease in market observability.

Net losses on Level 3 assets were $10.7 million and net gains on Level 3 liabilities were $25.8 million for the three months ended June 30, 2018 . Net losses on Level 3 assets were primarily due to decreased market values across certain loans and other receivables, residential mortgage-backed securities and other asset-backed securities, partially offset by an increased valuation of our FXCM term loan. Net gains on Level 3 liabilities were primarily due to decreased valuations of certain long-term debt.

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 six months ended June 30, 2018 (in thousands):



Six Months Ended June 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 June 30, 2018		Changes in unrealized gains/losses relating to instruments still held at June 30, 2018 (1)
Assets:
Trading assets:
Corporate equity securities	$	22,270	$	15,052		$	5,383		$	(520	)	$	(1,779	)	$	—	$	4,465		$	44,871	$	14,419
Corporate debt securities	26,036		434			19,304			(15,704		)	(2,049		)	—		45			28,066		(1,048		)
CDOs and CLOs	42,184		(3,227		)	568			(2,374		)	(3,765		)	—		9,131			42,517		(5,641		)
Residential mortgage-backed securities	26,077		(4,193		)	112			(10,959		)	(88		)	—		(7,294		)	3,655		419
Commercial mortgage-backed securities	12,419		(2,292		)	1,208			(487		)	(3,209		)	—		19,600			27,239		(3,176		)
Other asset-backed securities	61,129		(5,476		)	132,291			(124,787		)	(7,622		)	—		—			55,535		(2,498		)
Loans and other receivables	47,304		(201		)	46,682			(25,456		)	(11,648		)	—		7,355			64,036		(1,756		)
Investments at fair value	329,944		1,483			3,740			(17,570		)	—			—		946			318,543		889
FXCM term loan	72,800		15,085			—			—			(11,785		)	—		—			76,100		7,839

Liabilities:
Trading liabilities:
Corporate equity securities	$	48	$	39		$	—		$	—		$	—		$	—	$	—		$	87	$	(39	)
Corporate debt securities	522		—			—			—			—			—		—			522		—
Commercial mortgage-backed securities	105		(105		)	—			—			—			—		—			—		—
Loans	3,486		1,226			(5,100		)	12,092			—			—		1,177			12,881		106
Net derivatives (2)	6,746		(668		)	(6		)	—			(494		)	296		—			5,874		535
Long-term debt	—		(28,082		)	—			—			—			81,284		107,424			160,626		20,082


(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 six months ended June 30, 2018

During the six months ended June 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 $19.7 million and CDOs and CLOs of $12.7 million due to reduced pricing transparency.

During the six months ended June 30, 2018 , transfers of assets of $14.9 million from Level 3 to Level 2 are primarily attributed to:


•	Residential mortgage-backed securities of $9.0 million due to greater pricing transparency supporting classification into Level 2.

During the six months ended June 30, 2018 , there were transfers of long-term debt of $107.4 million from Level 2 to Level 3 due to a decrease in market observability.

Net gains on Level 3 assets were $16.7 million and net gains on Level 3 liabilities were $27.6 million for the six months ended June 30, 2018 . Net gains on Level 3 assets were primarily due to an increased valuation of our FXCM term loan and increased market values across corporate equity securities, partially offset by decreased market values across other asset-backed securities, residential mortgage-backed securities, CDOs and CLOs and commercial mortgage-backed securities. Net gains on Level 3 liabilities were primarily due to decreased valuations of certain long-term debt.



Three Months Ended June 30, 2017
	Balance, March 31, 2017		Total gains/ losses (realized and unrealized) (1)			Purchases		Sales			Settlements			Issuances		Net transfers into (out of) Level 3			Balance, June 30, 2017		Changes in unrealized gains/ losses relating to instruments still held at June 30, 2017 (1)
Assets:
Trading assets:
Corporate equity securities	$	20,580	$	(1,198	)	$	490	$	(1,263	)	$	(281	)	$	—	$	2,220		$	20,548	$	(1,428	)
Corporate debt securities	33,467		(1,420		)	8,789		(9,181		)	(6,986		)	—		58			24,727		(1,983		)
CDOs and CLOs	45,354		(1,668		)	16,334		(19,103		)	—			—		7,291			48,208		(745		)
Municipal securities	26,554		(70		)	—		(26,484		)	—			—		—			—		—
Residential mortgage-backed securities	39,259		(2,188		)	3,176		(6,636		)	(4		)	—		(575		)	33,032		(1,024		)
Commercial mortgage-backed securities	20,653		98			534		(4,111		)	(1		)	—		(910		)	16,263		(546		)
Other asset-backed securities	37,702		(3,663		)	13,476		—			(2,241		)	—		(1,925		)	43,349		(3,642		)
Loans and other receivables	53,172		3,226			20,054		(19,378		)	(7,181		)	—		(528		)	49,365		1,687
Investments at fair value	307,830		4,940			2,800		—			(273		)	—		—			315,297		4,940
FXCM term loan	132,800		4,430			—		—			(8,180		)	—		—			129,050		(1,801		)

Liabilities:
Trading liabilities:
Corporate equity securities	$	324	$	30		$	—	$	—		$	—		$	—	$	—		$	354	$	(30	)
Corporate debt securities	523		(1		)	—		—			—			—		—			522		1
Commercial mortgage-backed securities	—		70			—		—			—			—		—			70		(70		)
Net derivatives (2)	6,413		(3,617		)	—		—			(3		)	218		11			3,022		(147		)
Loans	1,036		3,867			—		—			—			—		64			4,967		(3,867		)
Other secured financings	87		(87		)	—		—			—			—		—			—		—


(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 June 30, 2017

During the three months ended June 30, 2017 , transfers of assets of $29.4 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	Residential mortgage-backed securities of $12.0 million due to a lack of observable market transactions.

During the three months ended June 30, 2017 , transfers of assets of $23.8 million from Level 3 to Level 2 are primarily attributed to:


•	Residential mortgage-backed securities of $12.6 million due to greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $2.5 million and net losses on Level 3 liabilities were $0.3 million for the three months ended June 30, 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 other asset-backed securities, residential mortgage-backed securities, CDOs and CLOs and corporate debt and equity securities.



Six Months Ended June 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, June 30, 2017		Changes in unrealized gains/ losses relating to instruments still held at June 30, 2017 (1)
Assets:
Trading assets:
Corporate equity securities	$	21,739	$	(489	)	$	1,056		$	(1,117	)	$	(1,907	)	$	—	$	1,266		$	20,548	$	(1,215	)
Corporate debt securities	25,005		(3,300		)	15,133			(15,295		)	(1,693		)	—		4,877			24,727		(3,571		)
CDOs and CLOs	54,354		(8,709		)	24,741			(35,044		)	—			—		12,866			48,208		(9,431		)
Municipal securities	27,257		(1,547		)	—			(25,710		)	—			—		—			—		—
Residential mortgage-backed securities	38,772		(3,000		)	5,886			(11,750		)	(16		)	—		3,140			33,032		(1,667		)
Commercial mortgage-backed securities	20,580		(1,119		)	534			(4,523		)	(2		)	—		793			16,263		(907		)
Other asset-backed securities	40,911		(5,489		)	17,029			(300		)	(5,576		)	—		(3,226		)	43,349		(5,461		)
Loans and other receivables	81,872		10,062			63,616			(61,423		)	(17,017		)	—		(27,745		)	49,365		(3,679		)
Investments at fair value	314,359		8,796			2,800			(10,119		)	(539		)	—		—			315,297		10,820
FXCM term loan	164,500		15,308			—			—			(50,758		)	—		—			129,050		1,471
Liabilities:
Trading liabilities:
Corporate equity securities	$	313	$	41		$	—		$	—		$	—		$	—	$	—		$	354	$	(41	)
Corporate debt securities	523		(1		)	—			—			—			—		—			522		1
Commercial mortgage-backed securities	—		70			—			—			—			—		—			70		(70		)
Net derivatives (2)	3,441		(6,154		)	—			—			1,534			404		3,797			3,022		(614		)
Loans	378		4,091			(364		)	—			—			—		862			4,967		(4,091		)
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 six months ended June 30, 2017

During the six months ended June 30, 2017 , transfers of assets of $41.0 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:


•	CDOs and CLOs of $12.4 million and residential mortgage-backed securities of $11.5 million due to a lack of observable market transactions.

During the six months ended June 30, 2017 , transfers of assets of $49.0 million from Level 3 to Level 2 are primarily attributed to:


•	Loans and other receivables of $30.8 million due to a greater pricing transparency supporting classification into Level 2.

Net gains on Level 3 assets were $10.5 million and net gains on Level 3 liabilities were $2.4 million for the six months ended June 30, 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 other asset-backed securities, residential mortgage-backed securities, CDOs and CLOs, municipal securities and corporate debt securities. Net gains

on Level 3 liabilities were primarily due to increased valuations of certain net derivatives partially offset by decreased 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.



June 30, 2018
Financial Instruments Owned	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input/Range	Weighted Average
Corporate equity securities	$	38,212
Non-exchange traded securities			Market approach	Price	$0 to $75	$18.0
				Underlying stock price	$3 to $11	$9.0
			Comparable pricing	Comparable asset price	$9	—

Corporate debt securities	$	24,869	Market approach	Discount rate/yield	4%	—
				Estimated recovery percentage	40%	—
				Price	$10 to $89	$78.0

CDOs and CLOs	$	39,178	Discounted cash flows	Constant prepayment rate	20%	—
				Constant default rate	1% to 2%	2	%
				Loss severity	25% to 30%	26	%
				Discount rate/yield	11% to 37%	18	%
			Scenario analysis	Estimated recovery percentage	7% to 43%	27	%

Residential mortgage-backed securities	$	3,655	Discounted cash flows	Cumulative loss rate	46%	—
				Duration (years)	8 years	—
				Discount rate/yield	4%	—

Commercial mortgage-backed securities	$	27,239	Discounted cash flows	Cumulative loss rate	7% to 81%	39	%
				Duration (years)	1 year to 3 years	1 year
				Discount rate/yield	4% to 15%	9	%
			Scenario analysis	Estimated recovery percentage	26%	—
				Price	$49	—

Other asset-backed securities	$	55,535	Discounted cash flows	Cumulative loss rate	0% to 28%	21	%
				Duration (years)	1 year to 6 years	2 years
				Discount rate/yield	5% to 12%	8	%
			Market approach	Price	$100	—

Loans and other receivables	$	64,036	Market approach	Estimated recovery percentage	0%	—
				Price	$13 to $101	$84.0
			Scenario analysis	Estimated recovery percentage	57% to 107%	88	%

Derivatives	$	5,743
Credit default swaps			Market approach	Credit spread	225 bps	—
Total return swaps			Market approach	Price	$101 to $103	$102.0

Investments at fair value	$	112,211
Private equity securities			Market approach	Price	$3 to $250	$172.0
				Transaction level	$7	—

Investment in FXCM	$	76,100
Term loan			Discounted cash flows	Term based on the pay off (years)	0 months to 0.5 years	0.5 years

Trading Liabilities	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input/Range	Weighted Average
Loans	$	12,881	Market approach	Estimated recovery percentage	0%	—
				Price	$13 to $101	$62.0

Derivatives	$	11,617
Equity options			Option model/default rate	Default probability	0%	—
Unfunded commitments			Market approach	Price	$98	—
Total return swaps			Market approach	Price	$101 to $103	$102.0
Variable funding note swaps			Discounted cash flows	Constant prepayment rate	20%	—
				Constant default rate	2%	—
				Loss severity	25%	—
				Discount rate/yield	37%	—

Long-term debt	$	160,626
Structured notes			Market approach	Price	$71 to $99	$80.0
				Price	€79 to €110	€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 June 30, 2018 and December 31, 2017 , asset exclusions consisted of $219.5 million and $228.6 million , respectively, primarily comprised of investments at fair value, private equity securities, CDOs and CLOs, non-exchange traded securities, corporate debt securities and loans and other receivables. At June 30, 2018 and December 31, 2017 , liability exclusions consisted of $0.6 million and $4.2 million , respectively, of loans, commercial mortgage-backed securities and corporate debt and equity securities.

Sensitivity of Fair Values to Changes in Significant Unobservable Inputs

For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in 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, credit default swaps, 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, 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.

•

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 June 30,						For the Six Months Ended June 30,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Financial Instruments Owned:
Loans and other receivables	$	(8,754	)	$	(4,282	)	$	(6,428	)	$	(11,094	)

Financial Instruments Sold:
Loans	$	1		$	(1,734	)	$	260		$	(1,761	)
Loan commitments	$	26		$	3,332		$	(103	)	$	4,203

Long-term Debt:
Changes in instrument specific credit risk (1)	$	34,787		$	(3,757	)	$	18,585		$	(19,797	)
Other changes in fair value (2)	$	(175	)	$	1,516		$	40,979		$	4,933

Short-term Borrowings:
Changes in instrument specific credit risk (1)	$	27		$	—		$	27		$	—
Other changes in fair value (2)	$	1,636		$	—		$	1,636		$	—


(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):



	June 30, 2018		December 31, 2017
Financial Instruments Owned:
Loans and other receivables (1)	$	992,124	$	752,076
Loans and other receivables on nonaccrual status and/or 90 days or greater past due (1) (2)	$	193,097	$	159,462
Long-term debt and short-term borrowings	$	96,576	$	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 $33.6 million and $38.7 million at June 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 $90.1 million and $55.1 million at June 30, 2018 and December 31, 2017 , respectively, which includes loans and other receivables 90 days or greater past due of $25.2 million and $37.4 million at June 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 $95.8 million and $91.2 million for the three and six months ended June 30, 2017 , respectively. Jefferies Group's investment in KCG was sold in July 2017.

As of June 30, 2018 and December 31, 2017 , we owned approximately 46.6 million common shares of HRG, representing approximately 23% of HRG’s outstanding common shares, which are accounted for under the fair value option. The shares are included in our Consolidated Statements of Financial Condition at fair value of $610.0 million and $789.9 million at June 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 HRG aggregated $(158.4) million and $(75.0) million for the three months ended June 30, 2018 and 2017 , respectively, and $(179.9) million and $100.2 million for the six months ended June 30, 2018 and 2017 , respectively. As reported in its Form 10-Q, for the six months ended March 31, 2018 and 2017, HRG's revenues were $1,412.6 million and $1,359.7 million , respectively; net income (loss) from continuing operations was $40.8 million and $(49.8) million , respectively; net income was $542.3 million and $209.4 million , respectively; and net income attributable to HRG was $470.3 million and $130.1 million , respectively.

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 will account for under the fair value option. We currently have one 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 $34.9 million and $99.7 million at June 30, 2018 and December 31, 2017 , respectively. See Note 22 for additional information related to financial instruments not measured at fair value.

Note 4. Derivative Financial Instruments

Derivative Financial Instruments

Derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Trading assets and Trading liabilities, net of cash paid or received under credit support agreements and on a net counterparty basis when a legally enforceable right to offset exists under a master netting agreement. Predominantly, Jefferies Group and our Leucadia Asset Management businesses may enter into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from trading activities. In addition, Jefferies Group applies hedge accounting to an interest rate swap that has been designated as a fair value hedge of the changes in fair value due to the benchmark interest rate for certain fixed rate senior long-term debt. See Notes 3 and 20 for additional disclosures about derivative financial instruments.

Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. Jefferies Group manages the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of its firm wide risk management policies.

In connection with Jefferies Group's derivative activities, Jefferies Group may enter into International Swaps and Derivatives Association, Inc. ("ISDA") master netting agreements or similar agreements with counterparties. See Note 10 for additional information regarding the offsetting of derivative contracts.

The following table presents the fair value and related number of derivative contracts categorized by type of derivative contract as reflected in the Consolidated Statements of Financial Condition at June 30, 2018 and December 31, 2017 . The fair value of assets/liabilities represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged. The following tables also provide information regarding (1) the extent to which, under enforceable master netting arrangements, such balances are presented net in our Consolidated Statements of Financial Condition as appropriate under GAAP and (2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our financial position (in thousands, except contract amounts):



	Assets				Liabilities
	Fair Value			Number of Contracts	Fair Value			Number of Contracts
June 30, 2018
Derivatives designated as accounting hedges - interest rate contracts	$	—		—	$	25,668		1

Derivatives not designated as accounting hedges:
Interest rate contracts	$	807,662		56,517	$	953,263		21,199
Foreign exchange contracts	290,275			6,519	282,540			5,609
Equity contracts	2,238,701			2,262,333	2,399,564			1,912,121
Commodity contracts	9,653			8,682	16,657			7,810
Credit contracts	56,528			166	37,300			111
Total	3,402,819				3,689,324
Counterparty/cash-collateral netting (1)	(3,102,888		)		(3,239,346		)
Total derivatives not designated as accounting hedges	$	299,931			$	449,978

Total per Consolidated Statement of Financial Condition (2)	$	299,931			$	475,646

December 31, 2017
Derivatives designated as accounting hedges - interest rate contracts	$	—		—	$	2,420		1

Derivatives not designated as accounting hedges:
Interest rate contracts	$	1,717,058		38,941	$	1,708,776		12,828
Foreign exchange contracts	366,541			6,463	349,512			4,612
Equity contracts	1,373,016			2,728,750	1,638,258			2,118,526
Commodity contracts	3,093			7,249	5,141			6,047
Credit contracts	38,261			130	41,801			191
Total	3,497,969				3,743,488
Counterparty/cash-collateral netting (1)(3)	(3,318,481		)		(3,490,514		)
Total derivatives not designated as accounting hedges	$	179,488			$	252,974

Total per Consolidated Statement of Financial Condition (2)(3)	$	179,488			$	255,394


(1)	Amounts netted include both netting by counterparty and for cash collateral paid or received.


(2)	We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.

(3)

Pursuant to a rule change by the London Clearing House in the first fiscal quarter of 2018, variation margin exchanged each day with this clearing organization on certain interest rate derivatives is characterized as settlement payments as opposed to cash posted as collateral. The impact of this rule change would have been a reduction in gross interest rate derivative assets and liabilities as of December 31, 2017 of approximately $800 million , and a corresponding decrease in counterparty and cash collateral netting, with no impact to our Consolidated Statement of Financial Condition .

The following table provides information related to gains (losses) recognized in Interest expense of Jefferies Group in the Consolidated Statements of Operations on a fair value hedge (in thousands):



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2018		2017			2018			2017
Interest rate swaps	$	19	$	12,352		$	(21,202	)	$	7,743
Long-term debt	120		(10,295		)	22,835			(4,890		)
Total	$	139	$	2,057		$	1,633		$	2,853

The following table presents unrealized and realized gains (losses) on derivative contracts which are primarily recognized in Principal transactions revenues in Income (loss) from continuing operations in the Consolidated Statements of Operations, which are utilized in connection with our client activities and our economic risk management activities (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Interest rate contracts	$	(4,860	)	$	362		$	22,102		$	10,040
Foreign exchange contracts	8,390			357			11,518			2,860
Equity contracts	(45,419		)	26,918			(250,565		)	(151,704		)
Commodity contracts	(10,991		)	(3,792		)	(16,305		)	(1,838		)
Credit contracts	1,731			3,888			740			14,080
Total	$	(51,149	)	$	27,733		$	(232,510	)	$	(126,562	)

The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising Jefferies Group's business activities and are before consideration of economic hedging transactions, which generally offset the net gains (losses) included above. Jefferies Group substantially mitigates its exposure to market risk on its cash instruments through derivative contracts, which generally provide offsetting revenues, and Jefferies Group manages the risk associated with these contracts in the context of its overall risk management framework.

OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities as reflected in the Consolidated Statement of Financial Condition at June 30, 2018 (in thousands):



	OTC Derivative Assets (1) (2) (3)
	0-12 Months		1-5 Years		Greater Than 5 Years		Cross- Maturity Netting (4)			Total
Commodity swaps, options and forwards	$	392	$	675	$	—	$	(1,067	)	$	—
Equity swaps and options	940		4,178		—		(214		)	4,904
Credit default swaps	26		24,870		2,790		(1,203		)	26,483
Total return swaps	49,176		3,233		—		(756		)	51,653
Foreign currency forwards, swaps and options	58,329		17,637		—		(3,355		)	72,611
Fixed income forwards	477		—		—		—			477
Interest rate swaps, options and forwards	21,599		104,120		88,827		(86,399		)	128,147
Total	$	130,939	$	154,713	$	91,617	$	(92,994	)	284,275
Cross product counterparty netting										(34,466		)
Total OTC derivative assets included in Trading assets										$	249,809


(1)	At June 30, 2018 , we held exchange traded derivative assets, other derivative assets and other credit agreements with a fair value of $185.6 million , which are not included in this table.


(2)	OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received in the Consolidated Statements of Financial Condition. At June 30, 2018 , cash collateral received was $135.6 million .


(3)	Derivative fair values include counterparty netting within product category.


(4)	Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.



	OTC Derivative Liabilities (1) (2) (3)
	0-12 Months		1-5 Years		Greater Than 5 Years		Cross-Maturity Netting (4)			Total
Commodity swaps, options and forwards	$	11,328	$	3,060	$	—	$	(1,067	)	$	13,321
Equity swaps and options	13,752		69,159		3,141		(214		)	85,838
Credit default swaps	64		7,829		6		(1,203		)	6,696
Total return swaps	64,750		101,271		—		(756		)	165,265
Foreign currency forwards, swaps and options	55,195		13,123		—		(3,355		)	64,963
Fixed income forwards	3,879		—		—		—			3,879
Interest rate swaps, options and forwards	35,661		135,417		215,891		(86,399		)	300,570
Total	$	184,629	$	329,859	$	219,038	$	(92,994	)	640,532
Cross product counterparty netting										(34,466		)
Total OTC derivative liabilities included in Trading liabilities										$	606,066


(1)	At June 30, 2018 , we held exchange traded derivative liabilities, other derivative liabilities and other credit agreements with a fair value of $141.6 million , which are not included in this table.


(2)	OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged in the Consolidated Statements of Financial Condition. At June 30, 2018 , cash collateral pledged was $272.0 million .


(3)	Derivative fair values include counterparty netting within product category.


(4)	Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

At June 30, 2018 , the counterparty credit quality with respect to the fair value of our OTC derivative assets was as follows (in thousands):



Counterparty credit quality (1):
A- or higher	$	178,563
BBB- to BBB+	3,835
BB+ or lower	52,437
Unrated	14,974
Total	$	249,809


(1)	Jefferies Group utilizes internal credit ratings determined by Jefferies Group's Risk Management department. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.

Credit Related Derivative Contracts

The external credit ratings of the underlyings or referenced assets for our written credit related derivative contracts (in millions):



	External Credit Rating
	Investment Grade		Non-investment grade		Total Notional
June 30, 2018
Credit protection sold:
Index credit default swaps	$	203.0	$	280.0	$	483.0
Single name credit default swaps	$	44.3	$	41.4	$	85.7

December 31, 2017
Credit protection sold:
Index credit default swaps	$	3.0	$	126.0	$	129.0
Single name credit default swaps	$	129.1	$	89.1	$	218.2

Contingent Features

Certain of Jefferies Group's derivative instruments contain provisions that require their debt to maintain an investment grade credit rating from each of the major credit rating agencies. If Jefferies Group's debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on Jefferies Group's derivative instruments in liability positions. The following table presents the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position, the collateral amounts posted or received in the normal course of business and the potential collateral Jefferies Group would have been required to return and/or post additionally to its counterparties if the credit-risk-related contingent features underlying these agreements were triggered (in millions):



	June 30, 2018			December 31, 2017

Derivative instrument liabilities with credit-risk-related contingent features	$	186.1		$	95.1
Collateral posted	$	(56.1	)	$	(86.4	)
Collateral received	$	119.5		$	5.6
Return of and additional collateral required in the event of a credit rating downgrade below investment grade (1)	$	249.5		$	14.3

(1) These outflows include initial margin received from counterparties at the execution of the derivative contract. The initial margin will be returned if counterparties elect to terminate the contract after a downgrade.

Other 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. The gains and losses associated with the change in fair value of the derivatives are recorded in Other revenues.

Note 5. Collateralized Transactions

Jefferies Group enters into secured borrowing and lending arrangements to obtain collateral necessary to effect settlement, finance inventory positions, meet customer needs or re-lend as part of dealer operations. Jefferies Group monitors the fair value of the securities loaned and borrowed on a daily basis as compared with the related payable or receivable, and requests additional collateral or return of excess collateral, as appropriate. Jefferies Group pledges financial instruments as collateral under repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. Jefferies Group's agreements with counterparties generally contain contractual provisions allowing the counterparty the right to sell or repledge the collateral. Pledged securities owned that can be sold or repledged by the counterparty are included in Financial instruments owned and noted parenthetically as Securities pledged in our Consolidated Statements of Financial Condition.

The following tables set forth the carrying value of securities lending arrangements and repurchase agreements by class of collateral pledged and remaining contractual maturity (in thousands):



Collateral Pledged	Securities Lending Arrangements		Repurchase Agreements		Total
June 30, 2018
Corporate equity securities	$	2,210,311	$	430,084	$	2,640,395
Corporate debt securities	343,068		1,999,524		2,342,592
Mortgage- and asset-backed securities	—		3,179,689		3,179,689
U.S. government and federal agency securities	2,322		7,938,208		7,940,530
Municipal securities	—		550,030		550,030
Sovereign obligations	—		2,419,766		2,419,766
Loans and other receivables	—		539,940		539,940
Total	$	2,555,701	$	17,057,241	$	19,612,942

December 31, 2017
Corporate equity securities	$	2,353,798	$	214,413	$	2,568,211
Corporate debt securities	470,908		2,336,702		2,807,610
Mortgage- and asset-backed securities	—		2,562,268		2,562,268
U.S. government and federal agency securities	19,205		11,792,534		11,811,739
Municipal securities	—		444,861		444,861
Sovereign obligations	—		2,023,530		2,023,530
Loans and other receivables	—		454,941		454,941
Total	$	2,843,911	$	19,829,249	$	22,673,160



	Contractual Maturity
	Overnight and Continuous		Up to 30 Days		30 to 90 Days		Greater than 90 Days		Total
June 30, 2018
Securities lending arrangements	$	1,369,012	$	—	$	856,607	$	330,082	$	2,555,701
Repurchase agreements	8,515,963		2,261,426		3,998,685		2,281,167		17,057,241
Total	$	9,884,975	$	2,261,426	$	4,855,292	$	2,611,249	$	19,612,942

December 31, 2017
Securities lending arrangements	$	1,676,940	$	—	$	741,971	$	425,000	$	2,843,911
Repurchase agreements	10,780,474		4,058,228		3,211,464		1,779,083		19,829,249
Total	$	12,457,414	$	4,058,228	$	3,953,435	$	2,204,083	$	22,673,160

Jefferies Group receives securities as collateral under resale agreements, securities borrowing transactions and customer margin loans. Jefferies Group also receives securities as collateral in connection with securities-for-securities transactions in which it is the lender of securities. In many instances, Jefferies Group is permitted by contract to rehypothecate the securities received as collateral. These securities may be used to secure repurchase agreements, enter into securities lending transactions, satisfy margin requirements on derivative transactions or cover short positions. At June 30, 2018 and December 31, 2017 , the approximate fair value of securities received as collateral by Jefferies Group that may be sold or repledged was $25.3 billion and $27.1 billion , respectively. A substantial portion of these securities have been sold or repledged.

Note 6. Securitization Activities

Jefferies Group engages in securitization activities related to corporate loans, commercial mortgage loans, consumer loans and mortgage-backed and other asset-backed securities. In securitization transactions, Jefferies Group transfers assets to special purpose entities ("SPEs") and acts as the placement or structuring agent for the beneficial interests sold to investors by the SPE. A significant portion of the securitization transactions are the securitization of assets issued or guaranteed by U.S. government agencies. These SPEs generally meet the criteria of VIEs; however, the SPEs are generally not consolidated as Jefferies Group is not considered the primary beneficiary for these SPEs.

Jefferies Group accounts for securitization transactions as sales, provided it has relinquished control over the transferred assets. Transferred assets are carried at fair value with unrealized gains and losses reflected in Principal transactions revenues in

the Consolidated Statements of Operations prior to the identification and isolation for securitization. Subsequently, revenues recognized upon securitization are reflected as net underwriting revenues. Jefferies Group generally receives cash proceeds in connection with the transfer of assets to an SPE. Jefferies Group may, however, have continuing involvement with the transferred assets, which is limited to retaining one or more tranches of the securitization (primarily senior and subordinated debt securities in the form of mortgage- and other asset-backed securities or CLOs), which are included in Trading assets and are generally initially categorized as Level 2 within the fair value hierarchy. Jefferies Group applies fair value accounting to the securities.

The following table presents activity related to Jefferies Group's securitizations that were accounted for as sales in which it had continuing involvement (in millions):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Transferred assets	$	1,042.6	$	715.1	$	3,800.3	$	1,668.6
Proceeds on new securitizations	$	1,043.4	$	723.6	$	3,802.3	$	1,686.1
Cash flows received on retained interests	$	7.8	$	8.2	$	23.8	$	14.6

Jefferies Group has no explicit or implicit arrangements to provide additional financial support to these SPEs, has no liabilities related to these SPEs and has no outstanding derivative contracts executed in connection with these securitization activities at June 30, 2018 and December 31, 2017 .

The following table summarizes Jefferies Group's retained interests in SPEs where it transferred assets and has continuing involvement and received sale accounting treatment (in millions):



	June 30, 2018				December 31, 2017
Securitization Type	Total Assets		Retained Interests		Total Assets		Retained Interests
U.S. government agency residential mortgage-backed securities	$	10,472.8	$	376.2	$	6,383.5	$	28.2
U.S. government agency commercial mortgage-backed securities	$	1,350.1	$	123.3	$	2,075.7	$	81.4
CLOs	$	2,804.0	$	10.4	$	3,957.8	$	20.3
Consumer and other loans	$	331.0	$	44.4	$	247.6	$	47.8

Total assets represent the unpaid principal amount of assets in the SPEs in which Jefferies Group has continuing involvement and are presented solely to provide information regarding the size of the transactions and the size of the underlying assets supporting its retained interests, and are not considered representative of the risk of potential loss. Assets retained in connection with a securitization transaction represent the fair value of the securities of one or more tranches issued by an SPE, including senior and subordinated tranches. Jefferies Group's risk of loss is limited to this fair value amount which is included in total Trading assets in our Consolidated Statements of Financial Condition.

Although not obligated, in connection with secondary market-making activities Jefferies Group may make a market in the securities issued by these SPEs. In these market-making transactions, Jefferies Group buys these securities from and sells these securities to investors. Securities purchased through these market-making activities are not considered to be continuing involvement in these SPEs. To the extent Jefferies Group purchased securities through these market-making activities and Jefferies Group is not deemed to be the primary beneficiary of the VIE, these securities are included in agency and non-agency mortgage- and asset-backed securitizations in the nonconsolidated VIEs section presented in Note 8.

Foursight Capital also utilizes SPEs to securitize automobile loans receivable. These SPEs are VIEs and our subsidiary is the primary beneficiary; the related assets and the secured borrowings are recognized in the Consolidated Statements of Financial Condition. These secured borrowings do not have recourse to our subsidiary’s general credit. See Note 8 for further information on securitization activities and VIEs.

Note 7. Available for Sale Securities and Other Investments

The amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as available for sale are as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2018
Bonds and notes:
U.S. government securities	$	1,217,384	$	169	$	3	$	1,217,550
Residential mortgage-backed securities	659		3		1		661
Commercial mortgage-backed securities	10,963		—		207		10,756
Other asset-backed securities	13,528		20		40		13,508
Total fixed maturities	1,242,534		192		251		1,242,475

Total Available for sale securities	$	1,242,534	$	192	$	251	$	1,242,475

December 31, 2017
Bonds and notes:
U.S. government securities	$	552,847	$	—	$	42	$	552,805
Residential mortgage-backed securities	34,381		272		92		34,561
Commercial mortgage-backed securities	5,857		17		4		5,870
Other asset-backed securities	34,837		46		44		34,839
Total fixed maturities	627,922		335		182		628,075

Equity securities:
Common stocks:
Banks, trusts and insurance companies	35,071		17,500		—		52,571
Industrial, miscellaneous and all other	17,504		18,411		—		35,915
Total equity securities	52,575		35,911		—		88,486

Total Available for sale securities	$	680,497	$	36,246	$	182	$	716,561

At June 30, 2018 , the Company had other investments (classified as Other assets and Loans to and investments in associated companies) in which fair values are not readily determinable, aggregating $224.4 million . There were no unrealized gains, losses or impairments recognized on these investments during the three and six months ended June 30, 2018 .

The amortized cost and estimated fair value of investments classified as available for sale at June 30, 2018 , by contractual maturity, are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Amortized Cost		Estimated Fair Value
	(In thousands)
Due within one year	$	1,217,384	$	1,217,550
	1,217,384		1,217,550
Mortgage-backed and asset-backed securities	25,150		24,925
	$	1,242,534	$	1,242,475

At June 30, 2018 , the unrealized losses on investments which have been in a continuous unrealized loss position 12 months or longer were not significant.

Note 8. Variable Interest Entities

VIEs are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.

Our variable interests in VIEs include debt and equity interests, equity interests in associated companies, commitments, guarantees and certain fees. Our involvement with VIEs arises primarily from the following activities, but also includes other activities discussed below:


•	Purchases of securities in connection with our trading and secondary market-making activities;


•	Retained interests held as a result of securitization activities, including the resecuritization of mortgage- and other asset-backed securities and the securitization of commercial mortgage, corporate and consumer loans;


•	Acting as placement agent and/or underwriter in connection with client-sponsored securitizations;


•	Financing of agency and non-agency mortgage- and other asset-backed securities;


•	Warehouse funding arrangements for client-sponsored consumer loan vehicles and CLOs through participation certificates, forward sales agreements and revolving loan and note commitments; and


•	Loans to, investments in and fees from various investment vehicles.

We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires significant judgment. Our considerations in determining the VIE’s most significant activities and whether we have power to direct those activities include, but are not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees. In situations where we have determined that the power over the VIE’s significant activities is shared, we assess whether we are the party with the power over the most significant activities. If we are the party with the power over the most significant activities, we meet the "power" criteria of the primary beneficiary. If we do not have the power over the most significant activities or we determine that decisions require consent of each sharing party, we do not meet the "power" criteria of the primary beneficiary.

We assess our variable interests in a VIE both individually and in aggregate to determine whether we have an obligation to absorb losses of or a right to receive benefits from the VIE that could potentially be significant to the VIE. The determination of whether our variable interest is significant to the VIE requires significant judgment. In determining the significance of our variable interest, we consider the terms, characteristics and size of the variable interests, the design and characteristics of the VIE, our involvement in the VIE and our market-making activities related to the variable interests.

Consolidated VIEs

The following table presents information about the assets and liabilities of our consolidated securitization vehicles VIEs, which are presented in our Consolidated Statements of Financial Condition in the respective asset and liability categories (in millions). The assets and liabilities in the table below are presented prior to consolidation and thus a portion of these assets and liabilities are eliminated in consolidation.



	June 30, 2018		December 31, 2017
Cash	$	4.1	$	11.7
Financial instruments owned	0.9		37.6
Securities purchased under agreement to resell (1)	1,022.0		729.3
Receivables	509.2		318.1
Other	29.0		15.5
Total assets	$	1,565.2	$	1,112.2

Other secured financings (2)	$	1,518.6	$	1,073.5
Other (3)	45.9		38.3
Total liabilities	$	1,564.5	$	1,111.8


(1)	Securities purchased under agreements to resell represent an amount due under a collateralized transaction on a related consolidated entity, which is eliminated in consolidation.


(2)	Approximately $54.0 million and $44.1 million of the secured financings represent an amount held by Jefferies Group in inventory and eliminated in consolidation at June 30, 2018 and December 31, 2017 , respectively.


(3)	Includes $41.0 million and $32.0 million at June 30, 2018 and December 31, 2017 , respectively, of intercompany payables that are eliminated in consolidation.

Securitization Vehicles. Jefferies Group is the primary beneficiary of asset-backed financing vehicles to which Jefferies Group sells agency and non-agency residential and commercial mortgage loans, mortgage-backed securities and consumer loans pursuant to the terms of a master repurchase agreement. Jefferies Group manages the assets within these vehicles. Jefferies Group's variable interests in these vehicles consist of its collateral margin maintenance obligations under the master repurchase agreement and retained interests in securities issued. The assets of these VIEs consist of reverse repurchase agreements, which are available for the benefit of the vehicle’s debt holders. The creditors of these VIEs do not have recourse to Jefferies Group's general credit and each such VIE’s assets are not available to satisfy any other debt.

Jefferies Group is also the primary beneficiary of a securitization vehicle associated with their financing of small business loans. In the creation of the securitization vehicle, Jefferies Group was involved in the decisions made during the establishment and design of the entity and holds variable interests consisting of the securities retained that could potentially be significant. The assets of the VIE consist of small business loans, which are available for the benefit of the vehicles' beneficial interest holders. The creditors of the VIE do not have recourse to Jefferies Group's general credit and the assets of the VIE are not available to satisfy any other debt.

At June 30, 2018 and December 31, 2017 , Foursight Capital is the primary beneficiary of SPEs it utilized to securitize automobile loans receivable. Foursight Capital acts as the servicer for which it receives a fee, and owns an equity interest in the SPEs. The notes issued by the SPEs are secured solely by the assets of the SPEs and do not have recourse to Foursight Capital’s general credit and the assets of the VIEs are not available to satisfy any other debt. During the six months ended June 30, 2018 , automobile loan receivables aggregating $290.9 million were securitized by Foursight Capital in connection with a secured borrowing offering. The majority of the proceeds from issuance of the secured borrowing were used to pay down Foursight Capital’s two credit facilities.

Nonconsolidated VIEs

The following tables present information about our variable interests in nonconsolidated VIEs (in millions):



	Financial Statement Carrying Amount				Maximum Exposure to Loss		VIE Assets
	Assets		Liabilities		Maximum Exposure to Loss		VIE Assets

June 30, 2018
CLOs	$	304.2	$	3.9	$	1,710.4	$	4,343.6
Consumer loan vehicles	315.6		—		627.2		2,856.2
Related party private equity vehicles	33.8		—		52.0		106.7
Other private investment vehicles	149.7		—		160.5		5,249.4
Total	$	803.3	$	3.9	$	2,550.1	$	12,555.9

December 31, 2017
CLOs	$	168.1	$	8.9	$	1,030.4	$	5,364.3
Consumer loan vehicles	254.8		—		759.8		2,322.7
Related party private equity vehicles	23.7		—		45.4		75.0
Other private investment vehicles	133.0		—		142.0		4,624.9
Total	$	579.6	$	8.9	$	1,977.6	$	12,386.9

Our maximum exposure to loss often differs from the carrying value of the variable interests. The maximum exposure to loss is dependent on the nature of the variable interests in the VIEs and is limited to the notional amounts of certain loan and equity commitments and guarantees. Our maximum exposure to loss does not include the offsetting benefit of any financial instruments that may be utilized to hedge the risks associated with its variable interests and is not reduced by the amount of collateral held as part of a transaction with a VIE.

Collateralized Loan Obligations. Assets collateralizing the CLOs include bank loans, participation interests and sub-investment grade and senior secured U.S. loans. Jefferies Group underwrites securities issued in CLO transactions on behalf of sponsors and provides advisory services to the sponsors. Jefferies Group may also sell corporate loans to the CLOs. Jefferies Group's variable interests in connection with CLOs where it has been involved in providing underwriting and/or advisory services consist of the following:


•	Forward sale agreements whereby Jefferies Group commits to sell, at a fixed price, corporate loans and ownership interests in an entity holding such corporate loans to CLOs;


•	Warehouse funding arrangements in the form of participation interests in corporate loans held by CLOs and commitments to fund such participation interests;


•	Trading positions in securities issued in a CLO transaction; and


•	Investments in variable funding notes issued by CLOs.

Consumer Loan Vehicles. Jefferies Group provides financing and lending related services to certain client-sponsored VIEs in the form of revolving funding note agreements, revolving credit facilities and forward purchase agreements. The underlying assets, which are collateralizing the vehicles, are primarily composed of unsecured consumer and small business loans. In addition, Jefferies Group may provide structuring and advisory services and act as an underwriter or placement agent for securities issued by the vehicles. Jefferies Group does not control the activities of these entities.

Related Party Private Equity Vehicles. Jefferies Group committed to invest equity in private equity funds (the "JCP Funds") managed by Jefferies Capital Partners, LLC (the "JCP Manager"). Additionally, Jefferies Group committed to invest equity in the general partners of the JCP Funds (the "JCP General Partners") and the JCP Manager. Jefferies Group's variable interests in the JCP Funds, JCP General Partners and JCP Manager (collectively, the "JCP Entities") consist of equity interests that, in total, provide Jefferies Group with limited and general partner investment returns of the JCP Funds, a portion of the carried interest earned by the JCP General Partners and a portion of the management fees earned by the JCP Manager. At June 30, 2018 and December 31, 2017 , Jefferies Group's total equity commitment in the JCP Entities was $144.7 million and $148.1 million , respectively, of which $126.5 million and $126.3 million had been funded, respectively. The carrying value of Jefferies Group's equity investments in the JCP Entities was $33.8 million and $23.7 million at June 30, 2018 and December 31, 2017 , respectively. Jefferies Group's exposure to loss is limited to the total of its carrying value and unfunded equity commitment. The assets of the JCP Entities primarily consist of private equity and equity related investments.

Other Private Investment Vehicles. The carrying amount of our equity investment was $149.7 million and $133.0 million at June 30, 2018 and December 31, 2017 , respectively. Our unfunded equity commitment related to these investments totaled $10.8 million and $9.1 million at June 30, 2018 and December 31, 2017 , respectively. Our exposure to loss is limited to the total of our carrying value and unfunded equity commitment. These private investment vehicles have assets primarily consisting of private and public equity investments, debt instruments and various oil and gas assets.

Mortgage- and Other Asset-Backed Securitization Vehicles. In connection with Jefferies Group's secondary trading and market-making activities, Jefferies Group buys and sells agency and non-agency mortgage-backed securities and other asset-backed securities, which are issued by third party securitization SPEs and are generally considered variable interests in VIEs. Securities issued by securitization SPEs are backed by residential mortgage loans, U.S. agency collateralized mortgage obligations, commercial mortgage loans, CDOs and CLOs and other consumer loans, such as installment receivables, auto loans and student loans. These securities are accounted for at fair value and included in Trading assets in our Consolidated Statements of Financial Condition. Jefferies Group has no other involvement with the related SPEs and therefore does not consolidate these entities.

Jefferies Group also engages in underwriting, placement and structuring activities for third-party-sponsored securitization trusts generally through agency (FNMA ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") or GNMA ("Ginnie Mae")) or non-agency-sponsored SPEs and may purchase loans or mortgage-backed securities from third parties that are subsequently transferred into the securitization trusts. The securitizations are backed by residential and commercial mortgage, home equity and auto loans. Jefferies Group does not consolidate agency-sponsored securitizations as it does not have the power to direct the activities of the SPEs that most significantly impact their economic performance. Further, Jefferies Group is not the servicer of non-agency-sponsored securitizations and therefore does not have power to direct the most significant activities of the SPEs and accordingly, does not consolidate these entities. Jefferies Group may retain unsold senior and/or subordinated interests at the time of securitization in the form of securities issued by the SPEs.

Jefferies Group transfers existing securities, typically mortgage-backed securities, into resecuritization vehicles. These transactions in which debt securities are transferred to a VIE in exchange for new beneficial interests occur in connection with both agency and non-agency-sponsored VIEs. The consolidation analysis is largely dependent on Jefferies Group's role and interest in the resecuritization trusts. Most resecuritizations in which Jefferies Group is involved are in connection with investors seeking securities with specific risk and return characteristics. As such, Jefferies Group has concluded that the decision-making power is shared between Jefferies Group and the investor(s), considering the joint efforts involved in structuring the trust and selecting the underlying assets as well as the level of security interests the investor(s) hold in the SPE; therefore, Jefferies Group does not consolidate the resecuritization VIEs.

At June 30, 2018 and December 31, 2017 , Jefferies Group held $2,898.7 million and $1,829.6 million of agency mortgage-backed securities, respectively, and $189.6 million and $253.2 million of non-agency mortgage- and other asset-backed securities, respectively, as a result of its secondary trading and market-making activities, underwriting, placement and structuring activities and resecuritization activities. Jefferies Group's maximum exposure to loss on these securities is limited to the carrying value of its investments in these securities. These mortgage- and other asset-backed securitization vehicles discussed are not included in the above table containing information about Jefferies Group's variable interests in nonconsolidated VIEs.

We also have a variable interest in a nonconsolidated VIE consisting of our equity interest in an associated company, Golden Queen Mining Company, LLC ("Golden Queen"). In addition, we have a variable interest in a nonconsolidated VIE consisting of our senior secured term loan receivable and equity interest in FXCM. See Notes 3 and 9 for further discussion.

Note 9. Loans to and Investments in Associated Companies

A summary of Loans to and investments in associated companies accounted for under the equity method of accounting during the six months ended June 30, 2018 and 2017 is as follows (in thousands):



	Loans to and investments in associated companies as of January 1,		Income (losses) related to associated companies			Income (losses) related to Jefferies Group's associated companies (1)			Contributions to (distributions from) associated companies, net			Other, including foreign exchange and unrealized gains (losses)			Loans to and investments in associated companies as of June 30,

2018
Jefferies Finance	$	655,467	$	—		$	30,566		$	31,461		$	—		$	717,494
National Beef (2)	—		24,401			—			(13,099		)	592,239			603,541
Berkadia	210,594		51,742			—			(17,853		)	(720		)	243,763
FXCM (3)	158,856		(15,040		)	—			—			(34		)	143,782
Garcadia companies (4)	179,143		20,955			—			(22,915		)	(177,183		)	—
Linkem	192,136		(12,764		)	—			542			(2,321		)	177,593
HomeFed	341,874		4,445			—			—			—			346,319
Golden Queen (5)	105,005		(3,296		)	—			8,441			—			110,150
Other	223,754		(4,990		)	(5,732		)	(33,853		)	1,123			180,302
Total	$	2,066,829	$	65,453		$	24,834		$	(47,276	)	$	413,104		$	2,522,944

2017
Jefferies Finance	$	490,464	$	—		$	50,176		$	—		$	—		$	540,640
Jefferies LoanCore	154,731		—			6,374			56,950			—			218,055
Berkadia	184,443		33,140			—			(4,567		)	32			213,048
FXCM (3)	336,258		(162,015		)	—			—			87			174,330
Garcadia companies	185,815		25,971			—			(29,407		)	—			182,379
Linkem	154,000		(17,024		)	—			31,996			22,765			191,737
HomeFed	302,231		9,684			—			31,316			—			343,231
Golden Queen	111,302		(1,709		)	—			(53		)	—			109,540
Other	205,854		(2,517		)	(2,055		)	65,181			—			266,463
Total	$	2,125,098	$	(114,470	)	$	54,495		$	151,416		$	22,884		$	2,239,423


(1)	Primarily classified in Investment banking revenues and Other revenues.


(2)	As discussed more fully in Notes 1 and 24, in June 2018, we completed the sale of 48% of National Beef to Marfrig, reducing our ownership in National Beef to 31% . As of the closing of the sale on June 5, 2018, we have deconsolidated our investment in National Beef and account for our remaining interest under the equity method of accounting.


(3)	As further described in Note 3, our investment in FXCM includes both our equity method investment in FXCM and our term loan with FXCM. Our equity method investment is included as Loans to and investments in associated companies and our term loan is included as Trading assets, at fair value in our Consolidated Statements of Financial Condition.


(4)	As more fully discussed in Note 1, in April 2018, we entered into an agreement to sell 100% of our equity interests in Garcadia and our associated real estate to our current partners, the Garff family. At June 30, 2018 , our investment in Garcadia is classified as Assets held for sale in our Consolidated Statement of Financial Condition.


(5)	At June 30, 2018 and December 31, 2017 , the balance reflects $27.0 million and $30.5 million , respectively, related to a noncontrolling interest.

Income (losses) related to associated companies includes the following (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
National Beef	$	24,401		$	—		$	24,401		$	—
Berkadia	25,461			16,186			51,742			33,140
FXCM	(6,816		)	(12,115		)	(15,040		)	(162,015		)
Garcadia companies	9,572			12,677			20,955			25,971
Linkem	(5,309		)	(8,876		)	(12,764		)	(17,024		)
HomeFed	(7,165		)	9,348			4,445			9,684
Golden Queen	673			(412		)	(3,296		)	(1,709		)
Other	(7,464		)	(2,704		)	(4,990		)	(2,517		)
Total	$	33,353		$	14,104		$	65,453		$	(114,470	)

Income (losses) related to Jefferies Group's associated companies (primarily classified in Investment banking revenues and Other revenues) includes the following (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Jefferies Finance	$	20,733		$	25,211		$	30,566		$	50,176
Jefferies LoanCore	—			4,042			—			6,374
Other	(1,504		)	(1,021		)	(5,732		)	(2,055		)
Total	$	19,229		$	28,232		$	24,834		$	54,495

Jefferies Finance

Through Jefferies Group, we own 50% of Jefferies Finance LLC ("Jefferies Finance"), our joint venture with Massachusetts Mutual Life Insurance Company ("MassMutual"). Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt to middle market and growth companies in the form of term and revolving loans. Loans are originated primarily through the investment banking efforts of Jefferies Group. Jefferies Finance may also originate other debt products such as second lien term, bridge and mezzanine loans, as well as related equity co-investments. Jefferies Finance also purchases syndicated loans in the secondary market and acts as an investment advisor for various loan funds.

At June 30, 2018 , Jefferies Group and MassMutual each had equity commitments to Jefferies Finance of $750.0 million . At June 30, 2018 , $687.5 million of Jefferies Group's commitment was funded. The investment commitment is scheduled to expire on March 1, 2019 with automatic one year extensions absent a 60 -day termination notice by either party.

Jefferies Finance has executed a Secured Revolving Credit Facility with Jefferies Group and MassMutual, to be funded equally, to support loan underwritings by Jefferies Finance, which bears interest based on the interest rates of the related Jefferies Finance underwritten loans and is secured by the underlying loans funded by the proceeds of the facility. The total Secured Revolving Credit Facility is a committed amount of $500.0 million at June 30, 2018 and December 31, 2017 . Advances are shared equally between Jefferies Group and MassMutual. The facility is scheduled to mature on March 1, 2019 with automatic one year extensions absent a 60 -day termination notice by either party. At June 30, 2018 and December 31, 2017 , none of Jefferies Group's $250.0 million commitment was funded. Jefferies Group recognized interest income and unfunded commitment fees related to the facility of $0.7 million and $1.4 million during the three months ended June 30, 2018 and 2017 , respectively, and $1.7 million and $2.8 million during the six months ended June 30, 2018 and 2017 , respectively.

Jefferies Group engages in debt capital markets transactions with Jefferies Finance related to the originations and syndications of loans by Jefferies Finance. In connection with such services, Jefferies Group earned fees of $109.6 million and $73.1 million during the three months ended June 30, 2018 and 2017 , respectively, and $211.0 million and $139.3 million during the six months ended June 30, 2018 and 2017 , respectively, which are recognized in Investment banking revenues in the Consolidated Statements of Operations. In addition, Jefferies Group paid fees to Jefferies Finance in respect of certain loans originated by Jefferies Finance of $14.9 million and $0.4 million during the three months ended June 30, 2018 and 2017 , respectively, and $33.4 million and $2.5 million during the six months ended June 30, 2018 and 2017 , respectively, which are recognized within Selling, general and other expenses in the Consolidated Statements of Operations.

Jefferies Group acts as a placement agent for CLOs managed by Jefferies Finance, for which Jefferies Group recognized fees of $2.4 million and $1.2 million during the three months ended June 30, 2018 and 2017 , respectively, and $2.7 million and $3.9 million during the six months ended June 30, 2018 and 2017 , respectively, which are included in Investment banking revenues in the Consolidated Statements of Operations. At June 30, 2018 and December 31, 2017 , Jefferies Group held securities issued by CLOs managed by Jefferies Finance, which are included in Trading assets. Additionally, Jefferies Group has entered into participation agreements and derivative contracts with Jefferies Finance based upon certain securities issued by the CLO. Gains (losses) related to the derivative contracts were not material.

Under a service agreement, Jefferies Group charged Jefferies Finance $8.9 million and $9.3 million during the three months ended June 30, 2018 and 2017 , respectively, and $35.0 million and $29.5 million for services provided during the six months ended June 30, 2018 and 2017 , respectively. At June 30, 2018 , Jefferies Group had a receivable from Jefferies Finance, included in Other assets in the Consolidated Statement of Financial Condition, of $49.9 million and a payable to Jefferies Finance, included in Payables, expense accruals and other liabilities in the Consolidated Statement of Financial Condition of $14.1 million . At December 31, 2017 , Jefferies Group had a receivable from Jefferies Finance, included in Other assets in the Consolidated Statement of Financial Condition, of $34.6 million and a payable to Jefferies Finance, included in Payables, expense accruals and other liabilities in the Consolidated Statement of Financial Condition, of $14.1 million .

Jefferies Group enters into OTC foreign exchange contracts with Jefferies Finance. In connection with these contracts Jefferies Group had $0.2 million recorded in Receivables and $1.5 million included in Trading assets in our Consolidated Statements of Financial Condition at June 30, 2018 and December 31, 2017 , respectively.

Jefferies LoanCore

Jefferies LoanCore, a commercial real estate finance company and a joint venture with the Government of Singapore Investment Corporation, the Canada Pension Plan Investment Board and LoanCore, LLC, originates and purchases commercial real estate loans throughout the U.S. and Europe. On October 31, 2017, Jefferies Group sold all of its membership interests (which constituted a 48.5% voting interest) in Jefferies LoanCore for approximately $173.1 million , the estimated book value as of October 31, 2017. In addition, Jefferies Group may be entitled to additional cash consideration over the next five years in the event Jefferies LoanCore's yearly return on equity exceeds certain thresholds.

National Beef

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. As discussed in Notes 1 and 24, on June 5, 2018, we completed the sale of 48% of National Beef to Marfrig, reducing our ownership in National Beef to 31% . As of the closing of the sale on June 5, 2018, we have deconsolidated our investment in National Beef and account for our remaining interest under the equity method of accounting.

As part of the deconsolidation of National Beef, we adjusted our retained 31% interest in National Beef to fair value. The fair value of our retained 31% interest in National Beef of $592.3 million was based on the implied equity value of 100% of National Beef from the transaction with Marfrig. The transaction with Marfrig was based on a $1.9 billion equity valuation and a $2.3 billion enterprise valuation for 100% of National Beef. The fair value was allocated to the tangible and intangible assets of National Beef and a number of assets including customer relationships, tradenames, cattle supply contracts and property, plant and equipment had fair values higher than book values. As we recognize our share of National Beef's income going forward, the difference between the estimated fair value and the underlying book value of National Beef's customer relationships, tradenames, cattle supply contracts and property, plant and equipment will be amortized over their respective useful lives (weighted average life of 15 years).

Berkadia

Berkadia Commercial Mortgage LLC ("Berkadia") is a commercial mortgage banking and servicing joint venture formed in 2009 with Berkshire Hathaway Inc. We and Berkshire Hathaway each contributed $217.2 million of equity capital to the joint venture and each have a 50% equity interest in Berkadia. Through June 30, 2018 , cumulative cash distributions received by Jefferies from this investment aggregated $579.9 million . Berkadia originates commercial/multifamily real estate loans that are sold to U.S. government agencies, and originates and brokers commercial/multifamily mortgage loans which are not part of government agency programs. Berkadia is an investment sales advisor focused on the multifamily industry. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions.

Berkadia uses all of the proceeds from the commercial paper sales of an affiliate of Berkadia to fund new mortgage loans, servicer advances, investments and other working capital requirements. Repayment of the commercial paper is supported by a $1.5 billion surety policy issued by a Berkshire Hathaway insurance subsidiary and corporate guaranty, and we have agreed to reimburse Berkshire Hathaway for one-half of any losses incurred thereunder. As of June 30, 2018 , the aggregate amount of commercial paper outstanding was $1.47 billion .

FXCM

As discussed more fully in Note 3, at June 30, 2018 , Jefferies has a 50% voting interest in FXCM and a senior secured term loan to FXCM due January 2019. On September 1, 2016, 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 Consolidated Statements of Financial Condition as Loans to and investments in associated companies. Our term loan remains classified within Trading assets, at fair value. We account for our equity interest in FXCM on a one month lag. We are amortizing our basis difference between the estimated fair value and the underlying book value of FXCM customer relationships, technology, trade name, leases and long-term debt over their respective useful lives.

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 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. As part of the settlements, FXCM U.S. withdrew from business and sold FXCM U.S.'s customer accounts. Based on the above actions, we evaluated in the first quarter of 2017 whether our equity method investment was fully recoverable. We engaged an independent valuation firm to assist management in estimating the fair value of FXCM. Our estimate of fair value was based on a discounted cash flow and comparable public company analysis. The result of our analysis indicated that the estimated fair value of our equity interest in FXCM was lower than our carrying value by $130.2 million . We concluded based on the regulatory actions, FXCM's restructuring plan, investor perception and declines in the trading price of Global Brokerage's common shares and convertible debt, that the decline in fair value of our equity interest was other than temporary. As such, we impaired our equity investment in FXCM in the first quarter of 2017 by $130.2 million .

FXCM is considered a VIE and our term loan and equity interest 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.

Garcadia

Garcadia is a joint venture between us and Garff Enterprises, Inc. ("Garff") that owns and operates 28 automobile dealerships comprised of domestic and foreign automobile makers. The Garcadia joint venture agreement specifies that we and Garff shall have equal board representation and equal votes on all matters affecting Garcadia, and that all operating cash flows from Garcadia will be allocated 65% to us and 35% to Garff, with the exception of one dealership from which we receive 83% of all operating cash flows and four other dealerships from which we receive 71% of all operating cash flows. Garcadia’s strategy is to acquire automobile dealerships in primary or secondary market locations meeting its specified return criteria.

In April 2018, we entered into an agreement to sell 100% of our equity interests in Garcadia and our associated real estate to our current partners, the Garff family. At closing, we will receive $435 million in cash and $50 million in senior preferred equity of an entity that will own all of the automobile dealerships associated broadly with the Ken Garff Automotive Group, including all the Garcadia dealerships. At or prior to closing, we will pay approximately $52 million to retire the mortgage debt on the real estate to be sold. This transaction is expected to close in the third quarter of 2018. At June 30, 2018 , our investment in Garcadia is reflected as Assets held for sale in our Consolidated Statement of Financial Condition.

Linkem

We own approximately 42% of the common shares of Linkem, a fixed wireless broadband services provider in Italy. In addition, we own approximately 63% of the 5% convertible preferred stock, which is automatically convertible to common shares in 2022. If all of our convertible preferred stock was converted, it would increase our ownership to approximately 54% of Linkem’s common equity at June 30, 2018 . We have approximately 48% of the total voting securities of Linkem.

HomeFed

At June 30, 2018 , we own 10,852,123 shares of HomeFed’s common stock, representing approximately 70% of HomeFed’s outstanding common shares; however, we have contractually agreed to limit our voting rights such that we will not be able to vote more than 45% of HomeFed’s total voting securities voting on any matter, assuming all HomeFed shares not owned by us are voted. HomeFed develops and owns residential and mixed-use real estate properties. HomeFed is a public company traded on the NASD OTC Bulletin Board (Symbol: HOFD). As a result of a 1998 distribution to all of our shareholders, approximately 5% of HomeFed is beneficially owned by our Chairman at June 30, 2018 . Three of our executives serve on the board of directors of HomeFed, including our Chairman who serves as HomeFed’s Chairman, and our President. Since we do not control HomeFed, our investment in HomeFed is accounted for under the equity method as an investment in an associated company.

Golden Queen Mining Company

Since 2014, we invested $93.0 million , net in cash in a limited liability company (Gauss LLC) to partner with the Clay family and Golden Queen Mining Co. Ltd., to jointly fund, develop and operate the Soledad Mountain gold and silver mine project. Previously 100% owned by Golden Queen Mining Co. Ltd., the project is a fully-permitted, open pit, heap leach gold and silver project located in Kern County, California, which commenced gold and silver production in March 2016. In exchange for a noncontrolling ownership interest in Gauss LLC, the Clay family contributed $34.5 million , net in cash. Gauss LLC invested both our and the Clay family’s net contributions totaling $127.5 million to the joint venture, Golden Queen, in exchange for a 50% ownership interest. Golden Queen Mining Co. Ltd. contributed the Soledad Mountain project to the joint venture in exchange for the other 50% interest.

As a result of our consolidating Gauss LLC, our Loans to and investments in associated companies reflects Gauss LLC’s net investment of $127.5 million in the joint venture, which includes both the amount we contributed and the amount contributed by the Clay family. The joint venture, Golden Queen, is considered a VIE as the voting rights of the investors are not proportional to their obligations to absorb the expected losses and their rights to receive the expected residual returns, given the provision of services to the joint venture by Golden Queen Mining Co. Ltd. Golden Queen Mining Co. Ltd. has entered into an agreement with the joint venture for the provision of executive officers, financial, managerial, administrative and other services, and office space and equipment. We have determined that we are not the primary beneficiary of the joint venture and are therefore not consolidating its results.

Our maximum exposure to loss as a result of our involvement with the joint venture is limited to our investment. The excess of Gauss LLC's investment in Golden Queen's underlying book value is being amortized to expense over the estimated life of mine gold and silver sales.

Other

The following table provides summarized data for certain associated companies (Jefferies Finance, National Beef for the period subsequent to the closing of the transaction with Marfrig on June 5, 2018 and Berkadia) (in thousands):



	For the Six Months Ended June 30,
	2018		2017
Revenues	$	1,154,927	$	479,598
Income from continuing operations before extraordinary items	$	296,620	$	163,952
Net income	$	296,620	$	163,952

Note 10. Financial Statement Offsetting

In connection with Jefferies Group's derivative activities and securities financing activities, Jefferies Group may enter into master netting agreements and collateral arrangements with counterparties. Generally, transactions are executed under standard industry agreements, including, but not limited to: derivative transactions – ISDA master netting agreements; master securities lending agreements (securities lending transactions); and master repurchase agreements (repurchase transactions). A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due to a counterparty against all or a portion of an amount due from the counterparty or a third party.

Under Jefferies Group's derivative ISDA master netting agreements, Jefferies Group typically will also execute credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted by or paid to a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. In cases where Jefferies Group has not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of Jefferies Group's risk management processes as part of reducing counterparty credit risk and managing liquidity risk.

Jefferies Group is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open contracts or transactions.

The following table provides information regarding derivative contracts, repurchase agreements and securities borrowing and lending arrangements that are recognized in the Consolidated Statements of Financial Condition and (1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and (2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our consolidated financial position.



(In thousands)	Gross Amounts		Netting in Consolidated Statements of Financial Condition			Net Amounts in Consolidated Statements of Financial Condition		Additional Amounts Available for Setoff (1)			Available Collateral (2)			Net Amount (3)
Assets at June 30, 2018
Derivative contracts	$	3,402,819	$	(3,102,888	)	$	299,931	$	—		$	—		$	299,931
Securities borrowing arrangements	$	7,599,043	$	—		$	7,599,043	$	(434,474	)	$	(966,570	)	$	6,197,999
Reverse repurchase agreements	$	12,105,967	$	(8,283,735	)	$	3,822,232	$	(286,116	)	$	(3,508,358	)	$	27,758

Liabilities at June 30, 2018
Derivative contracts	$	3,714,992	$	(3,239,346	)	$	475,646	$	—		$	—		$	475,646
Securities lending arrangements	$	2,555,701	$	—		$	2,555,701	$	(434,474	)	$	(2,056,484	)	$	64,743
Repurchase agreements	$	17,057,241	$	(8,283,735	)	$	8,773,506	$	(286,116	)	$	(7,269,369	)	$	1,218,021

Assets at December 31, 2017
Derivative contracts	$	3,497,969	$	(3,318,481	)	$	179,488	$	—		$	—		$	179,488
Securities borrowing arrangements	$	7,721,803	$	—		$	7,721,803	$	(966,712	)	$	(1,032,629	)	$	5,722,462
Reverse repurchase agreements	$	14,858,297	$	(11,168,738	)	$	3,689,559	$	(463,973	)	$	(3,207,147	)	$	18,439

Liabilities at December 31, 2017
Derivative contracts	$	3,745,908	$	(3,490,514	)	$	255,394	$	—		$	—		$	255,394
Securities lending arrangements	$	2,843,911	$	—		$	2,843,911	$	(966,712	)	$	(1,795,408	)	$	81,791
Repurchase agreements	$	19,829,249	$	(11,168,738	)	$	8,660,511	$	(463,973	)	$	(7,067,512	)	$	1,129,026


(1)	Under master netting agreements with our counterparties, we have the legal right of offset with a counterparty, which incorporates all of the counterparty’s outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by a counterparty in the event of a counterparty’s default, but which are not

netted in the balance sheet because other netting provisions of GAAP are not met. Further, for derivative assets and liabilities, amounts netted include cash collateral paid or received.


(2)	Includes securities received or paid under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty’s rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.

(3)

At June 30, 2018 , amounts include $6,148.2 million of securities borrowing arrangements, for which we have received securities collateral of $5,972.9 million , and $1,205.5 million of repurchase agreements, for which we have pledged securities collateral of $1,244.0 million , which are subject to master netting agreements but we have not determined the agreements to be legally enforceable. At December 31, 2017 , amounts include $5,678.6 million of securities borrowing arrangements, for which we have received securities collateral of $5,516.7 million , and $1,084.4 million of repurchase agreements, for which we have pledged securities collateral of $1,115.9 million , which are subject to master netting agreements but we have not determined the agreements to be legally enforceable.

Note 11. Intangible Assets, Net and Goodwill

A summary of Intangible assets, net and goodwill is as follows (in thousands):



	June 30, 2018		December 31, 2017
Indefinite-lived intangibles:
Exchange and clearing organization membership interests and registrations	$	8,550	$	8,551

Amortizable intangibles:
Customer and other relationships, net of accumulated amortization of $98,672 and $230,074	72,397		347,767
Trademarks and tradenames, net of accumulated amortization of $19,358 and $95,627	109,694		293,851
Supply contracts, net of accumulated amortization of $0 and $57,440	—		86,160
Other, net of accumulated amortization of $3,850 and $3,885	5,100		4,701
Total intangible assets, net	195,741		741,030

Goodwill:
National Beef	—		14,991
Jefferies Group	1,701,752		1,703,300
Other operations	3,859		3,859
Total goodwill	1,705,611		1,722,150

Total intangible assets, net and goodwill	$	1,901,352	$	2,463,180

Amortization expense on intangible assets included in Income (loss) from continuing operations was $3.3 million and $3.2 million for the three months ended June 30, 2018 and 2017 , respectively, and $6.5 million and $6.5 million for the six months ended June 30, 2018 and 2017 , respectively.

The estimated aggregate future amortization expense for the intangible assets for each of the next five years is as follows (in thousands):



Remainder of current year	$	6,718
2019	$	13,439
2020	$	13,439
2021	$	13,052
2022	$	13,052

As further discussed in Note 1, on June 5, 2018, we sold 48% of National Beef to Marfrig. Upon closing of the transaction with Marfrig, we deconsolidated our investment in National Beef, including its Intangible assets, net and goodwill. Intangible assets, net and goodwill at December 31, 2017 includes $539.6 million of intangibles and $15.0 million of goodwill related to National Beef.

Note 12. Short-Term Borrowings

Jefferies Group's short-term borrowings, which mature in one year or less, are as follows (in thousands):



	June 30, 2018		December 31, 2017
Bank loans (1)	$	378,930	$	304,651
Floating rate puttable notes	58,470		108,240
Equity-linked notes	68,818		23,324
Total short-term borrowings	$	506,218	$	436,215

(1) Bank loans include loans entered into, pursuant to a Master Loan Agreement, between the Bank of New York and Jefferies Group.

At June 30, 2018 and December 31, 2017 , the weighted average interest rate on short-term borrowings outstanding was 3.99% and 2.51% per annum, respectively.

During the six months ended June 30, 2018 , Jefferies Group issued equity-linked notes due July 12, 2018 with a principal amount of $70.5 million . These notes were repaid with cash on hand on the maturity date. In addition, during the six months ended June 30, 2018 , Jefferies Group's floating rate puttable notes with principal amounts of €41.0 million and Jefferies Group's equity-linked notes with a principal amount of $23.3 million matured. See Note 3 for further information.

The Bank of New York Mellon has agreed to make revolving intraday credit advances ("Intraday Credit Facility") for an aggregate committed amount of $150.0 million . The Intraday Credit Facility contains financial covenants, which includes a minimum regulatory net capital requirement for Jefferies Group. Interest is based on the higher of the Federal funds effective rate plus 0.5% or the prime rate. During the six months ended June 30, 2018 , Jefferies Group was in compliance with debt covenants under the Intraday Credit Facility.

Note 13. Long-Term Debt

The principal amount (net of unamortized discounts, premiums and debt issuance costs), stated interest rate and maturity date of outstanding debt are as follows (dollars in thousands):



	June 30, 2018		December 31, 2017
Parent Company Debt:
Senior Notes:
5.50% Senior Notes due October 18, 2023, $750,000 principal	$	742,914	$	742,348
6.625% Senior Notes due October 23, 2043, $250,000 principal	246,697		246,673
Total long-term debt – Parent Company	989,611		989,021

Subsidiary Debt (non-recourse to Parent Company):
Jefferies Group:
5.125% Senior Notes, due April 13, 2018, $0 and $678,300 principal (1)	—		682,338
8.50% Senior Notes, due July 15, 2019, $680,800 principal	714,411		728,872
2.375% Euro Medium Term Notes, due May 20, 2020, $584,700 and $594,725 principal	583,602		593,334
6.875% Senior Notes, due April 15, 2021, $750,000 principal	800,075		808,157
2.25% Euro Medium Term Notes, due July 13, 2022, $4,678 and $4,758 principal	4,351		4,389
5.125% Senior Notes, due January 20, 2023, $600,000 principal	614,331		615,703
4.85% Senior Notes, due January 15, 2027, $750,000 principal (2)	713,764		736,357
6.45% Senior Debentures, due June 8, 2027, $350,000 principal	374,746		375,794
3.875% Convertible Senior Debentures, due November 1, 2029, $0 and $324,779 principal	—		324,779
4.15% Senior Notes, due January 23, 2030, $1,000,000 and $0 principal	987,365		—
6.25% Senior Debentures, due January 15, 2036, $500,000 principal	511,854		512,040
6.50% Senior Notes, due January 20, 2043, $400,000 principal	420,810		420,990
Structured Notes (3)	708,256		614,091
Jefferies Group Revolving Credit Facility	158,335		—
National Beef Reducing Revolver Loan	—		120,000
National Beef Revolving Credit Facility	—		76,809
Foursight Capital Credit Facilities	54,151		170,455
Other	79,308		112,654
Total long-term debt – subsidiaries	6,725,359		6,896,762

Long-term debt	$	7,714,970	$	7,885,783


(1)	On April 13, 2018, these 5.125% Senior Notes were redeemed by Jefferies Group with cash on hand.


(2)	Amount includes a gain of $22.8 million and a loss of $4.9 million during the six months ended June 30, 2018 and 2017 , respectively, associated with an interest rate swap based on its designation as a fair value hedge. See Note 4 for further information.

(3)

Includes $708.3 million and $607.0 million at fair value at June 30, 2018 and December 31, 2017 , respectively. These structured notes contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument specific credit risk presented in Accumulated other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transactions revenues.

Subsidiary Debt :

In November 2017, all of Jefferies Group's 3.875% Convertible Senior Debentures due 2029 were called for optional redemption, with a redemption date of January 5, 2018, at a redemption price equal to 100% of the principal amount of the convertible debentures redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. All of these remaining convertible debentures were redeemed in January 2018. In addition, Jefferies Group's 5.125% senior notes with a principal of $668.3 million were redeemed in April 2018.

In January 2018, Jefferies Group issued 4.15% senior notes with a principal amount of $1.0 billion , due 2030. Additionally, structured notes with a total principal amount of approximately $165.6 million , net of retirements were issued during the six months ended June 30, 2018 .

On May 16, 2018, Jefferies Group entered into a senior secured revolving credit facility ("Jefferies Group Revolving Credit Facility") with a group of commercial banks for an aggregate principal amount of $160.0 million . The borrower under Jefferies Group Revolving Credit Facility is Jefferies Leveraged Credit Products, LLC, with a guarantee from Jefferies Group LLC. Jefferies Group Revolving Credit Facility contains certain financial covenants, including, but not limited to, restrictions on future indebtedness of Jefferies Leveraged Credit Products, LLC and its minimum tangible net worth, liquidity requirements and minimum capital requirements. Interest is based on an annual alternative base rate or an adjusted London Interbank Offered Rate, as defined in Jefferies Group Revolving Credit Facility agreement. The obligations of Jefferies Leveraged Credit Products, LLC under Jefferies Group Revolving Credit Facility are secured by substantially all its assets. At June 30, 2018 , Jefferies Group was in compliance with debt covenants under Jefferies Group Revolving Credit Facility.

As further discussed in Note 1, on June 5, 2018, we sold 48% of National Beef to Marfrig. Upon closing of the transaction with Marfrig, we deconsolidated our investment in National Beef, including its long-term debt. Long-term debt at December 31, 2017 includes $199.2 million related to National Beef.

At June 30, 2018 , Foursight Capital's credit facilities consisted of two warehouse credit commitments aggregating $225.0 million , which mature in March 2020 and July 2020. The March 2020 credit facility bears interest based on the three-month LIBOR plus a credit spread fixed through its maturity and the July 2020 credit facility bears interest based on the one-month LIBOR plus a credit spread fixed through its maturity. As a condition of the March 2020 credit facility, Foursight Capital is obligated to maintain cash reserves in an amount equal to the quoted price of an interest rate cap sufficient to meet the hedging requirements of the credit commitment. The credit facilities are secured by first priority liens on auto loan receivables owed to Foursight Capital of approximately $68.4 million at June 30, 2018 .

Note 14. Mezzanine Equity

Redeemable Noncontrolling Interests

At December 31, 2017 , the redeemable noncontrolling interests primarily relate to National Beef and were held by its minority owners, USPB, NBPCo Holdings and the chief executive officer of National Beef. The holders of these interests shared in the profits and losses of National Beef on a pro rata basis with us. As discussed in Note 1, we deconsolidated National Beef as a result of the 48% sale to Marfrig on June 5, 2018. Immediately prior to the deconsolidation, the cumulative increase in fair value of $237.7 million recorded to the redeemable noncontrolling interest since the initial acquisition of National Beef was reversed through Additional paid-in capital in the Consolidated Statement of Financial Condition.

Redeemable noncontrolling interests in National Beef are reflected in the Consolidated Statements of Financial Condition at fair value. The following table rolls forward National Beef’s redeemable noncontrolling interests activity (in thousands):



	For the Six Months Ended June 30,
	2018			2017
As of January 1,	$	412,128		$	321,962
Income allocated to redeemable noncontrolling interests	37,141			28,458
Distributions to redeemable noncontrolling interests	(70,681		)	(17,062		)
Increase (decrease) in fair value of redeemable noncontrolling interests	21,404			(39,965		)
Reversal of cumulative National Beef redeemable noncontrolling interests fair value adjustment prior to deconsolidation	(237,669		)	—
Deconsolidation of National Beef	(162,323		)	—
Balance, June 30,	$	—		$	293,393

At June 30, 2018 and December 31, 2017 , redeemable noncontrolling interests also include other redeemable noncontrolling interests of $14.3 million and $14.5 million , respectively, primarily related to our oil and gas exploration and development businesses.

Mandatorily Redeemable Convertible Preferred Shares

In connection with our acquisition of Jefferies Group in March 2013, we issued a new series of 3.25% Cumulative Convertible Preferred Shares ("Preferred Shares") ( $125.0 million at mandatory redemption value) in exchange for Jefferies Group's outstanding 3.25% Series A-1 Cumulative Convertible Preferred Stock. The Preferred Shares have a 3.25% annual, cumulative cash dividend and are currently convertible into 4,162,200 common shares, an effective conversion price of $30.03 per share. The holders of the Preferred Shares are also entitled to an additional quarterly payment in the event we declare and pay a dividend on our common stock in an amount greater than $0.0625 per common share per quarter. The additional quarterly payment would be paid to the holders of Preferred Shares on an as converted basis and on a per share basis would equal the quarterly dividend declared and paid to a holder of a share of common stock in excess of $0.0625 per share. In the third quarter of 2017, we increased our quarterly dividend from $0.0625 to $0.10 per common share. This increased the preferred stock dividend from $2.0 million for the six months ended June 30, 2017 to $2.3 million for the six months ended June 30, 2018 . The Preferred Shares are callable beginning in 2023 at a price of $1,000 per share plus accrued interest and are mandatorily redeemable in 2038.

Note 15. Compensation Plans

Restricted Stock and Restricted Stock Units. Restricted stock and restricted stock units ("RSUs") may be granted to new employees as "sign-on" awards, to existing employees as "retention" awards and to certain executive officers as awards for multiple years. Sign-on and retention awards are generally subject to annual ratable vesting over a four -year service period and are amortized as compensation expense on a straight-line basis over the related four years. Restricted stock and RSUs are granted to certain senior executives with market, performance and service conditions. Market conditions are incorporated into the grant-date fair value of senior executive awards using a Monte Carlo valuation model. Compensation expense for awards with market conditions is recognized over the service period and is not reversed if the market condition is not met. Awards with performance conditions are amortized over the service period if it is determined that it is probable that the performance condition will be achieved.

Senior Executive Compensation Plan. The Compensation Committee of the Jefferies Board of Directors approved an executive compensation plan effective January 1, 2018 that extends Jefferies prior compensation plans for our CEO and our President (together, our "Senior Executives") for compensation years 2018, 2019 and 2020. For each Senior Executive, the Compensation Committee has targeted long-term compensation of $25.0 million per year under the plan with a target of $16.0 million in long-term equity in the form of RSUs and a target of $9.0 million in long-term cash, subject to performance targets over the three -year measurement period for each compensation year. To receive targeted long-term equity, our Senior Executives will have to achieve 8% growth on an annual and multi-year compounded basis in Jefferies Total Shareholder Return ("TSR") and to receive targeted long-term cash, our Senior Executives will have to achieve 8% growth on an annual and multi-year compounded basis in Jefferies Return on Tangible Deployable Equity ("ROTDE"). If TSR and ROTDE are less than 5% , our Senior Executives will receive no long-term compensation. If TSR and ROTDE growth rates are greater than 8% , our Senior Executives are eligible to receive up to 50% additional incentive compensation on a pro rata basis up to 12% growth rates. TSR is based on annualized rate of return reflecting price appreciation plus reinvestment of dividends and distributions to shareholders. ROTDE is net income adjusted for

amortization of intangible assets divided by tangible book value at the beginning of year adjusted for intangible assets and deferred tax assets.

Stock-Based Compensation Expense. Compensation and benefits expense included $12.8 million and $10.4 million for the three months ended June 30, 2018 and 2017 , respectively, and $25.2 million and $20.4 million for the six months ended June 30, 2018 and 2017 , respectively, for share-based compensation expense relating to grants made under our share-based compensation plans. Total compensation cost includes the amortization of sign-on, retention and senior executive awards, less forfeitures and clawbacks. The total tax benefit recognized in results of operations related to share-based compensation expenses was $3.1 million and $3.6 million for the three months ended June 30, 2018 and 2017 , respectively, and $6.0 million and $7.3 million for the six months ended June 30, 2018 and 2017 , respectively. As of June 30, 2018 , total unrecognized compensation cost related to nonvested share-based compensation plans was $144.7 million ; this cost is expected to be recognized over a weighted average period of 2.5 years.

At June 30, 2018 , there were 1,903,000 shares of restricted stock outstanding with future service required, 9,371,000 RSUs outstanding with future service required (including target RSUs issuable under the senior executive compensation plan), 10,278,000 RSUs outstanding with no future service required and 861,000 shares issuable under other plans. Excluding shares issuable pursuant to outstanding stock options, the maximum potential increase to common shares outstanding resulting from these outstanding awards is 20,510,000 .

Restricted Cash Awards. Jefferies Group provides compensation to certain new and existing employees in the form of loans and/or other cash awards which are subject to ratable vesting terms with service requirements. The restricted cash awards are amortized to compensation expense over the relevant service period. At June 30, 2018 , the remaining unamortized amount of the restricted cash awards was $490.9 million ; this cost is expected to be recognized over a weighted average period of three years.

Note 16. Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income is reflected in the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Equity but not in the Consolidated Statements of Operations. A summary of accumulated other comprehensive income, net of taxes is as follows (in thousands):



	June 30, 2018			December 31, 2017
Net unrealized gains on available for sale securities	$	543,990		$	572,085
Net unrealized foreign exchange losses	(153,266		)	(101,400		)
Net unrealized losses on instrument specific credit risk	(19,984		)	(34,432		)
Net unrealized gains (losses) on cash flow hedges	361			(1,138		)
Net minimum pension liability	(56,128		)	(62,391		)
	$	314,973		$	372,724

For the six months ended June 30, 2018 and 2017 , significant amounts reclassified out of accumulated other comprehensive income to net income are as follows (in thousands):



Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Consolidated Statements of Operations
	2018			2017
Net unrealized losses on available for sale securities, net of income tax provision of $37 and $271	$	103		$	467		Other revenues
Net unrealized foreign exchange losses, net of income tax provision (benefit) of $(16) and $1,097	20,459			(5,290		)	Other income and other expenses
Net unrealized losses on instrument specific credit risk, net of income tax provision of $78 and $0	270			—			Principal transactions
Amortization of defined benefit pension plan actuarial losses, net of income tax benefit of $(339) and $(403)	(919		)	(859		)	Selling, general and other expenses, which includes pension expense
Other pension, net of income tax benefit of $0 and $(1,231)	(5,344		)	1,231			Compensation and benefits expense and Income tax provision (benefit)
Total reclassifications for the period, net of tax	$	14,569		$	(4,451	)

In connection with the acquisition of Jefferies Bache from Prudential on July 1, 2011, Jefferies Group acquired a defined benefit pension plan located in Germany (the "German Pension Plan") for the benefit of eligible employees of Jefferies Bache in that territory. On December 28, 2017, a Liquidation Insurance Contract was entered into between Jefferies Bache Limited and Generali Lebensversicherung AG ("Generali") to transfer the defined benefit pension obligations and insurance contracts to Generali, for approximately €6.5 million , which was paid in January 2018 and released Jefferies Group from any and all obligations under the German Pension Plan. This transaction was completed in the first quarter of 2018. In connection with the transfer of the German Pension Plan, $5.3 million was reclassified to Compensation and benefits expense in the Consolidated Statements of Operations from Accumulated other comprehensive income during the six months ended June 30, 2018 .

Note 17. Revenues from Contracts with Customers

The following table presents our total revenues separated for our revenues from contracts with customers and our other sources of revenues (in thousands):



	For the Three Months Ended June 30, 2018		For the Six Months Ended June 30, 2018

Revenues from contracts with customers:
Commissions and other fees	$	157,704	$	305,606
Investment banking	500,297		940,288
Manufacturing revenues	114,735		213,100
Other	61,817		103,975
Total revenue from contracts with customers	834,553		1,562,969

Other sources of revenue:
Principal transactions	53,755		199,418
Interest income	327,314		602,536
Other	28,204		40,014
Total revenue from other sources	409,273		841,968

Total revenues	$	1,243,826	$	2,404,937

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that

depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (the "transaction price"). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties.

The following provides detailed information on the recognition of our revenues from contracts with customers:

Commissions and Other Fees. Jefferies Group earns commission revenue by executing, settling and clearing transactions for clients primarily in equity, equity-related and futures products. Trade execution and clearing services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, are recognized at a point in time on trade-date. Commissions revenues are generally paid on settlement date and Jefferies Group records a receivable between trade-date and payment on settlement date. Jefferies Group permits institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Jefferies Group acts as an agent in the soft dollar arrangements as the customer controls the use of the soft dollars and directs Jefferies Group's payments to third party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues in our Consolidated Statements of Operations.

Jefferies Group earns account advisory and distribution fees in connection with wealth management services. Account advisory fees are recognized over time using the time-elapsed method as Jefferies Group determined that the customer simultaneously receives and consumes the benefits of investment advisory services as they are provided. Account advisory fees may be paid in advance of a specified service period or in arrears at the end of the specified service period (e.g., quarterly). Account advisory fees paid in advance are initially deferred within Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition. Distribution fees are variable and recognized when uncertainties with respect to the amounts are resolved.

Investment Banking Fees. Jefferies Group provides its clients with a full range of capital markets and financial advisory services. Capital markets services include underwriting and placement agent services in both the equity and debt capital markets, including private equity placements, initial public offerings, follow-on offerings and equity-linked convertible securities transactions and structuring, underwriting and distributing public and private debt, including investment grade debt, high yield bonds, leveraged loans, municipal bonds and mortgage- and asset-backed securities. Underwriting and placement agent revenues are recognized at a point in time on trade-date, as the client obtains the control and benefit of the capital markets offering at that point. Costs associated with capital markets transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded, and are recorded on a gross basis within Selling, general and other expenses in the Consolidated Statements of Operations as Jefferies Group is acting as a principal in the arrangement. Any expenses reimbursed by its clients are recognized as Investment banking revenues.

Revenues from financial advisory services primarily consist of fees generated in connection with merger, acquisition and restructuring transactions. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction. Fees received prior to the completion of the transaction are deferred within Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition. Advisory fees from restructuring engagements are recognized over time using a time elapsed measure of progress as Jefferies Group's clients simultaneously receive and consume the benefits of those services as they are provided. A significant portion of the fees Jefferies Group receives for its advisory services are considered variable as they are contingent upon a future event (e.g., completion of a transaction or third party emergence from bankruptcy) and are excluded from the transaction price until the uncertainty associated with the variable consideration is subsequently resolved, which is expected to occur upon achievement of the specified milestone. Payment for advisory services are generally due promptly upon completion of a specified milestone or, for retainer fees, periodically over the course of the engagement. Jefferies Group recognizes a receivable between the date of completion of the milestone and payment by the customer. Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred. All investment banking advisory expenses are recognized within their respective expense category in the Consolidated Statements of Operations and any expenses reimbursed by Jefferies Group's clients are recognized as Investment banking revenues.

Asset Management Fees. Jefferies Group and LAM earn management and performance fees, recorded in Other revenues, in connection with investment advisory services provided to various funds and accounts, which are satisfied over time and measured using a time elapsed measure of progress as the customer receives the benefits of the services evenly throughout the term of the contract. Management and performance fees are considered variable as they are subject to fluctuation (e.g., changes in assets under management, market performance) and/ or are contingent on a future event during the measurement period (e.g., meeting a specified benchmark) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Management fees are generally based on month-end assets under management or an agreed upon notional amount and are included in the transaction price at the end of each month when the assets under management or notional amount is known. Performance fees are received when the return on assets under management for a specified performance period exceed certain benchmark returns, "high-water marks" or other performance targets. The performance period related to performance fees is annual, semi-annual or quarterly. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met.

Manufacturing Revenues. Idaho Timber's primary business consists of the sale of lumber that is manufactured or remanufactured at one of its locations. Agreements with customers for these sales specify the type, quantity and price of products to be delivered as well as the delivery date and payment terms. The transaction price is fixed at the time of sale and revenue is generally recognized when the customer takes control of the product.

Disaggregation of Revenue

The following presents our revenues from contracts with customers disaggregated by major business activity and primary geographic regions for the three and six months ended June 30, 2018 (in thousands):



	Three months ended June 30, 2018
	Reportable Segments
	Jefferies Group		Corporate		All Other		Total

Major Business Activity:
Jefferies Group:
Equities (1)	$	159,960	$	—	$	—	$	159,960
Fixed Income (1)	4,546		—		—		4,546
Investment Banking	500,297		—		—		500,297
Asset Management	6,016		—		—		6,016
Manufacturing revenues	—		—		114,735		114,735
Oil and gas revenues	—		—		39,905		39,905
Other revenues	—		—		9,094		9,094
Total revenues from contracts with customers	$	670,819	$	—	$	163,734	$	834,553

Primary Geographic Region:
Americas	$	571,976	$	—	$	163,454	$	735,430
Europe, Middle East and Africa	78,861		—		207		79,068
Asia	19,982		—		73		20,055
Total revenues from contracts with customers	$	670,819	$	—	$	163,734	$	834,553



	Six months ended June 30, 2018
	Reportable Segments
	Jefferies Group		Corporate		All Other		Total

Major Business Activity:
Jefferies Group:
Equities (1)	$	311,590	$	—	$	—	$	311,590
Fixed Income (1)	7,504		—		—		7,504
Investment Banking	940,288		—		—		940,288
Asset Management	10,946		—		—		10,946
Manufacturing revenues	—		—		213,100		213,100
Oil and gas revenues	—		—		60,235		60,235
Other revenues	—		—		19,306		19,306
Total revenues from contracts with customers	$	1,270,328	$	—	$	292,641	$	1,562,969

Primary Geographic Region:
Americas	$	1,092,830	$	—	$	292,031	$	1,384,861
Europe, Middle East and Africa	140,189		—		462		140,651
Asia	37,309		—		148		37,457
Total revenues from contracts with customers	$	1,270,328	$	—	$	292,641	$	1,562,969


(1)	Revenues from contracts with customers associated with the equities and fixed income businesses primarily represent commissions and other fee revenue.

Information on Remaining Performance Obligations and Revenue Recognized from Past Performance

We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at June 30, 2018 . Investment banking advisory fees that are contingent upon completion of a specific milestone and fees associated with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price at June 30, 2018 .

During the three and six months ended June 30, 2018 , Jefferies Group recognized $15.0 million and $17.1 million , respectively, of revenue related to performance obligations satisfied (or partially satisfied) in previous periods, mainly due to resolving uncertainties in consideration that was constrained in prior periods. In addition, Jefferies Group recognized $4.3 million and $8.9 million , respectively, of revenues primarily associated with distribution services during the three and six months ended June 30, 2018 , a portion of which relates to prior periods.

Contract Balances

The timing of revenue recognition may differ from the timing of payment by customers. We record a receivable when revenue is recognized prior to payment and it has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied. Jefferies Group deferred revenue primarily relates to retainer and milestone fees received in investment banking advisory engagements where the performance obligation has not yet been satisfied.

We had receivables related to revenues from contracts with customers of $238.0 million and $469.3 million at June 30, 2018 and December 31, 2017 , respectively. We had no significant impairments related to these receivables during the three and six months ended June 30, 2018 .

Our deferred revenue, which primarily relates to Jefferies Group, was $14.7 million and $15.5 million at June 30, 2018 and December 31, 2017 , respectively. During the three months ended June 30, 2018, we recognized $9.6 million of deferred revenue from the balance at March 31, 2018 . During the six months ended June 30, 2018, we recognized $14.5 million of deferred revenue from the balance at December 31, 2017 .

Contract Costs

Jefferies Group capitalizes costs to fulfill contracts associated with investment banking advisory engagements where the revenue is recognized at a point in time and the costs are determined to be recoverable. Capitalized costs to fulfill a contract are recognized at the point in time that the related revenue is recognized.

At June 30, 2018 , Jefferies Group's capitalized costs to fulfill a contract were $3.3 million , which are recorded in Receivables in the Consolidated Statement of Financial Condition. For the three and six months ended June 30, 2018 , Jefferies Group recognized $1.2 million and $1.3 million , respectively, of expenses related to costs capitalized to fulfill a contract. There were no significant impairment charges recognized in relation to these capitalized costs during the three and six months ended June 30, 2018 . At June 30, 2018 , capitalized costs related to our other subsidiaries were not material.

Note 18. Income Taxes

The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions at June 30, 2018 was $233.4 million (including $60.0 million for interest), of which $179.3 million related to Jefferies Group. The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions at December 31, 2017 was $226.4 million (including $57.4 million for interest), of which $177.8 million related to Jefferies Group. If recognized, such amounts would lower our effective tax rate. Accrued interest is included in Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition. No material penalties were accrued for the six months ended June 30, 2018 and the year ended December 31, 2017.

The statute of limitations with respect to our federal income tax returns has expired for all years through 2012. While the statute of limitations remains open, we have settled our 2013 Internal Revenue Service examination. The settlement had an immaterial impact on our effective tax rate. Our New York State and New York City income tax returns are currently being audited for the 2012 to 2014 period and 2011 to 2012 period, respectively. Prior to becoming a wholly-owned subsidiary, Jefferies Group filed a consolidated U.S. federal income tax return with its qualifying subsidiaries and was subject to income tax in various states, municipalities and foreign jurisdictions. Jefferies Group is currently under examination by various major tax jurisdictions. The statute of limitations with respect to Jefferies Group's federal income tax returns has expired for all years through 2012. We do not expect that resolution of these examinations will have a significant effect on our Consolidated Statements of Financial Condition, but could have a significant impact on the Consolidated Statements of Operations for the period in which resolution occurs.

Our provision for income taxes for continuing operations for the six months ended June 30, 2018 was reduced by a $43.9 million benefit resulting from a reversal of our valuation allowance with respect to certain federal and state net operating loss carryforwards ("NOLs") which we now believe are more likely than not to be utilized before they expire. Our provision for income taxes from continuing operations for the six months ended June 30, 2017 was reduced by a $31.9 million benefit resulting from the repatriation of Jefferies Group's earnings from certain of its foreign subsidiaries, along with their associated foreign tax credits.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the "Tax Act"). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740, Income Taxes ("ASC 740"). While the initial estimated impact of the Tax Act was calculated using all available information, we anticipate modifications based on the procedures set forth under SAB 118. This process is applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, taxes are reflected in accordance with the law prior to the enactment of the Tax Act.

Due to the complex nature of the Tax Act, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of certain elements for which our analysis is not yet complete, we recorded a provisional estimate in the financial statements. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to refinement of our calculations based on updated information, changes in interpretations and assumptions, and guidance that may be issued and actions we may take in response to the Tax Act. We note that the Tax Act is complex and we continue to assess the impact that various provisions will have on our business. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next several quarters, we consider the accounting for the deferred tax asset remeasurements, the transition tax, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. During the six months ended June 30, 2018 , we revised our prior estimate and recorded a $1.8 million reduction in our tax expense related to the Tax Act.

Note 19. Common Share and Earnings (Loss) Per Common Share

Basic and diluted earnings (loss) per share amounts were calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The numerators and denominators used to calculate basic and diluted earnings (loss) per share are as follows (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Numerator for earnings per share:
Net income attributable to Jefferies Financial Group Inc. common shareholders	$	725,529		$	58,193		$	850,054		$	339,601
Allocation of earnings to participating securities (1)	(3,870		)	(219		)	(3,831		)	(1,338		)
Net income attributable to Jefferies Financial Group Inc. common shareholders for basic earnings per share	721,659			57,974			846,223			338,263
Adjustment to allocation of earnings to participating securities related to diluted shares (1)	37			(2		)	29			5
Mandatorily redeemable convertible preferred share dividends	—			—			—			2,031
Net income attributable to Jefferies Financial Group Inc. common shareholders for diluted earnings per share	$	721,696		$	57,972		$	846,252		$	340,299

Denominator for earnings per share:
Weighted average common shares outstanding	342,719			359,519			349,647			359,543
Weighted average shares of restricted stock outstanding with future service required	(1,868		)	(1,380		)	(1,578		)	(1,406		)
Weighted average RSUs outstanding with no future service required	11,198			11,073			11,168			11,069
Denominator for basic earnings per share – weighted average shares	352,049			369,212			359,237			369,206
Stock options	7			25			18			20
Senior executive compensation plan awards	4,019			2,315			3,430			2,296
Mandatorily redeemable convertible preferred shares	—			—			—			4,162
Denominator for diluted earnings per share	356,075			371,552			362,685			375,684

(1)

Represents dividends declared during the period on participating securities plus an allocation of undistributed earnings to participating securities. Net losses are not allocated to participating securities. Participating securities represent restricted stock and RSUs for which requisite service has not yet been rendered and amounted to weighted average shares of 1,887,100 and 1,435,400 for the three months ended June 30, 2018 and 2017 , respectively, and 1,603,500 and 1,467,500 for the six months ended June 30, 2018 and 2017 , respectively. Dividends declared on participating securities were not material during three and six months ended June 30, 2018 and 2017 . Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.

For the six months ended June 30, 2018 and the three and six months ended June 30, 2017 , shares related to the 3.875% Convertible Senior Debentures were not included in the computation of diluted per share amounts as the conversion price exceeded the average market price. All of these convertible debentures were redeemed in January 2018. For the three months ended June 30, 2017 and the three and six months ended June 30, 2018 , shares related to the mandatorily redeemable convertible preferred shares were not included in the computation of diluted per share amounts as the effect was antidilutive.

The Board of Directors from time to time has authorized the repurchase of our common shares. In April 2018, the Board of Directors approved an increase to our share repurchase program to 25,000,000 common shares from the 12,500,000 million remaining under its prior authorization. In the second quarter of 2018, we purchased a total of 24,084,080 of our common shares under this authorization. As of June 30, 2018, 915,920 common shares remained authorized for repurchase. In July 2018, the Board of Directors approved an increase to our share repurchase program of 25,000,000 common shares, bringing our total authorization to 25,915,920 common shares.

Note 20. Commitments, Contingencies and Guarantees

Commitments

The following table summarizes commitments associated with certain business activities (in millions):



	Expected Maturity Date
	2018		2019		2020 and 2021		2022 and 2023		2024 and Later		Maximum Payout
Equity commitments (1)	$	276.4	$	62.7	$	18.8	$	—	$	10.4	$	368.3
Loan commitments (1)	12.0		250.0		54.4		29.2		—		345.6
Mortgage-related and other purchase commitments	—		177.7		—		—		—		177.7
Underwriting commitments	65.0		—		—		—		—		65.0
Forward starting reverse repos (2)	3,634.7		—		—		—		—		3,634.7
Forward starting repos (2)	3,040.7		—		—		—		—		3,040.7
Other unfunded commitments (1)	145.3		116.8		19.2		110.5		5.1		396.9
	$	7,174.1	$	607.2	$	92.4	$	139.7	$	15.5	$	8,028.9


(1)	Equity commitments, loan commitments and other unfunded commitments are presented by contractual maturity date. The amounts are however mostly available on demand.


(2)	At June 30, 2018 , $3,628.6 million of the forward starting securities purchased under agreements to resell and all of the securities sold under agreements to repurchase settled within three business days.

Equity Commitments. Equity commitments include commitments to invest in Jefferies Group's joint venture, Jefferies Finance, and commitments to invest in private equity funds and in Jefferies Capital Partners, LLC, the manager of the private equity funds, which consist of a team led by Brian P. Friedman, our President and a Director. At June 30, 2018 , Jefferies Group's outstanding commitments relating to Jefferies Capital Partners, LLC and its private equity funds were $18.4 million .

See Note 9 for additional information regarding Jefferies Group's investment in Jefferies Finance.

Additionally, as of June 30, 2018 , we had other outstanding equity commitments to invest up to $287.5 million in various other investments, which include $250.0 million as part of the further development of our alternative asset management platforms.

Loan Commitments. From time to time Jefferies Group makes commitments to extend credit to investment banking and other clients in loan syndication, acquisition finance and securities transactions and to SPE sponsors in connection with the funding of CLO and other asset-backed transactions. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual conditions applicable to the borrower. At June 30, 2018 , Jefferies Group had $86.1 million of outstanding loan commitments to clients.

Loan commitments outstanding at June 30, 2018 , also include Jefferies Group's portion of the outstanding secured revolving credit facility provided to Jefferies Finance to support loan underwritings by Jefferies Finance. At June 30, 2018 , none of Jefferies Group's $250.0 million commitment was funded.

Mortgage-Related and Other Purchase Commitments. Jefferies Group enters into forward contracts to purchase mortgage participation certificates, mortgage-backed securities and consumer loans. The mortgage participation certificates evidence interests in mortgage loans insured by the Federal Housing Administration and the mortgage-backed securities are insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Jefferies Group frequently securitizes the mortgage participation certificates and mortgage-backed securities. The fair value of mortgage-related and other purchase commitments recorded in the Consolidated Statement of Financial Condition at June 30, 2018 was $0.9 million .

Underwriting Commitments . In connection with investment banking activities, Jefferies Group may from time to time provide underwriting commitments to its clients in connection with capital raising transactions.

Forward Starting Reverse Repos and Repos. Jefferies Group enters into commitments to take possession of securities with agreements to resell on a forward starting basis and to sell securities with agreements to repurchase on a forward starting basis that are primarily secured by U.S. government and agency securities.

Other Unfunded Commitments. Other unfunded commitments include obligations in the form of revolving notes to provide financing to asset-backed and CLO vehicles. Upon advancing funds, drawn amounts are collateralized by the assets of an entity.

Contingencies

We and our subsidiaries are parties to legal and regulatory proceedings that are considered to be either ordinary, routine litigation incidental to their business or not significant to our consolidated financial position. We and our subsidiaries are also involved, from time to time, in other exams, investigations and similar reviews (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions. We do not believe that any of these actions will have a significant adverse effect on our consolidated financial position or liquidity, but any amounts paid could be significant to results of operations for the period.

Guarantees

Derivative Contracts. Jefferies Group dealer activities cause it to make markets and trade in a variety of derivative instruments. Certain derivative contracts that Jefferies Group has entered into meet the accounting definition of a guarantee under GAAP, including credit default swaps, written foreign currency options and written equity put options. On certain of these contracts, such as written interest rate caps and foreign currency options, the maximum payout cannot be quantified since the increase in interest or foreign exchange rates are not contractually limited by the terms of the contract. As such, we have disclosed notional values as a measure of Jefferies Group's maximum potential payout under these contracts.

The following table summarizes the notional amounts associated with Jefferies Group derivative contracts meeting the definition of a guarantee under GAAP as of June 30, 2018 (in millions):



	Expected Maturity Date
Guarantee Type	2018		2019		2020 and 2021		2022 and 2023		2024 and Later		Notional/ Maximum Payout
Derivative contracts – non-credit related	$	15,858.9	$	3,454.3	$	2,486.5	$	494.1	$	458.2	$	22,752.0
Written derivative contracts – credit related	—		—		48.2		23.9		—		72.1
Total derivative contracts	$	15,858.9	$	3,454.3	$	2,534.7	$	518.0	$	458.2	$	22,824.1

The derivative contracts deemed to meet the definition of a guarantee under GAAP are before consideration of hedging transactions and only reflect a partial or "one-sided" component of any risk exposure. Written equity options and written credit default swaps are often executed in a strategy that is in tandem with long cash instruments (e.g., equity and debt securities). Jefferies Group substantially mitigates its exposure to market risk on these contracts through hedges, such as other derivative contracts and/or cash instruments and Jefferies Group manages the risk associated with these contracts in the context of its overall risk management framework. Jefferies Group believes notional amounts overstate its expected payout and that fair value of these contracts is a more relevant measure of its obligations. The fair value of derivative contracts meeting the definition of a guarantee is approximately $299.5 million at June 30, 2018 .

Berkadia. We have agreed to reimburse Berkshire Hathaway for up to one-half of any losses incurred under a $1.5 billion surety policy securing outstanding commercial paper issued by an affiliate of Berkadia. At June 30, 2018 , the aggregate amount of commercial paper outstanding was $1.47 billion .

Other Guarantees. Jefferies Group is a member of various exchanges and clearing houses. In the normal course of business, Jefferies Group provides guarantees to securities clearing houses and exchanges. These guarantees generally are required under the standard membership agreements, such that members are required to guarantee the performance of other members. Additionally, if a member becomes unable to satisfy its obligations to the clearing house, other members would be required to meet these shortfalls. To mitigate these performance risks, the exchanges and clearing houses often require members to post collateral. Jefferies Group's obligations under such guarantees could exceed the collateral amounts posted. Jefferies Group's maximum potential liability under these arrangements cannot be quantified; however, the potential for Jefferies Group to be required to make payments under such guarantees is deemed remote. Accordingly, no liability has been recognized for these arrangements.

Indemnification. In connection with the 2013 sale of Empire Insurance Company, we agreed to indemnify the buyer for certain of Empire’s lease obligations that were assumed by another subsidiary of ours as part of the sale of Empire. Our subsidiary was subsequently sold in 2014 to HomeFed as part of the real estate transaction with HomeFed. Although HomeFed has agreed to

indemnify us for these lease obligations, our indemnification obligation under the Empire transaction remains. The primary lease expires in October 2018 and the aggregate amount of lease obligation as of June 30, 2018 was approximately $3.4 million . Substantially all of the space under the primary lease has been sublet to various third-party tenants for the full length of the lease term in amounts in excess of the obligations under the primary lease.

Standby Letters of Credit. At June 30, 2018 , Jefferies Group provided guarantees to certain counterparties in the form of standby letters of credit in the amount of $51.8 million . Standby letters of credit commit Jefferies Group to make payment to the beneficiary if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary. Since commitments associated with these collateral instruments may expire unused, the amount shown does not necessarily reflect the actual future cash funding requirement. Other subsidiaries of ours have outstanding letters of credit aggregating $1.1 million at June 30, 2018 . Primarily all letters of credit expire within one year.

Note 21. Net Capital Requirements

Jefferies Group operates as a broker-dealer registered with the SEC and member firms of the Financial Industry Regulatory Authority ("FINRA"). Jefferies LLC is subject to the Securities and Exchange Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital and has elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Jefferies LLC, as a dually-registered U.S. broker-dealer and futures commission merchant ("FCM"), is also subject to Rule 1.17 of the CFTC, which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17.

Jefferies LLC’s net capital and excess net capital at June 30, 2018 were $1,666.9 million and $1,560.7 million , respectively.

FINRA is the designated examining authority for Jefferies Group's U.S. broker-dealer and the National Futures Association is the designated self-regulatory organization for Jefferies LLC as an FCM.

The regulatory capital requirements referred to above may restrict our ability to withdraw capital from Jefferies Group's regulated subsidiaries. Some of our other consolidated subsidiaries also have credit agreements which may restrict the payment of cash dividends, or the ability to make loans or advances to the parent company.

Note 22. Other Fair Value Information

The carrying amounts and estimated fair values of our principal financial instruments that are not recognized at fair value on a recurring basis are as follows (in thousands):



	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Receivables:
Notes and loans receivable (1)	$	644,760	$	627,208	$	579,071	$	565,285

Financial Liabilities:
Short-term borrowings (2)	$	437,400	$	437,400	$	412,891	$	412,891
Long-term debt (3)	$	7,006,714	$	7,076,485	$	7,278,827	$	7,678,210


(1)	Notes and loans receivable: The fair values are estimated principally based on a discounted future cash flows model using market interest rates for similar instruments. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.


(2)	Short-term borrowings: The fair values of short-term borrowings are estimated to be the carrying amount due to their short maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.


(3)	Long-term debt: The fair values are estimated using quoted prices, pricing information obtained from external data providers and, for certain variable rate debt, is estimated to be the carrying amount. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 and Level 3 in the fair value hierarchy.

Note 23. Related Party Transactions

Jefferies Capital Partners Related Funds. Jefferies Group has equity investments in the JCP Manager and in private equity funds, which are managed by a team led by Brian P. Friedman, our President and a Director ("Private Equity Related Funds"). Reflected in our Consolidated Statements of Financial Condition at June 30, 2018 and December 31, 2017 are Jefferies Group's equity investments in Private Equity Related Funds of $33.9 million and $23.7 million , respectively. Net gains (losses) aggregating $3.0 million and $(8.1) million for the three months ended June 30, 2018 and 2017 , respectively, and $10.0 million and $(9.4) million for the six months ended June 30, 2018 and 2017 , respectively, were recorded in Other revenues related to the Private Equity Related Funds. For further information regarding our commitments and funded amounts to the Private Equity Related Funds, see Notes 8 and 20 .

Berkadia Commercial Mortgage, LLC. At June 30, 2018 and December 31, 2017 , Jefferies Group has commitments to purchase $795.2 million and $864.1 million , respectively, in agency commercial mortgage-backed securities from Berkadia.

FXCM . Jefferies Group entered into OTC foreign exchange contracts with FXCM. In connection with these contracts, Jefferies Group had $13.7 million and $17.0 million at June 30, 2018 and December 31, 2017 , respectively, included in Payables, expense accruals and other liabilities and $0.4 million at June 30, 2018 in Trading liabilities at fair value in our Consolidated Statements of Financial Condition.

Officers, Directors and Employees. We have $42.9 million and $45.6 million of loans outstanding to certain officers and employees (none of whom are an executive officer or director of the Company) at June 30, 2018 and December 31, 2017 , respectively.

Receivables from and payables to customers include balances arising from officers, directors and employees' individual security transactions. These transactions are subject to the same regulations as all customer transactions and are provided on substantially the same terms.

HomeFed. During 2014, we sold to HomeFed substantially all of our then-owned real estate properties and operations as well as cash of approximately $14.0 million , in exchange for 7,500,000 newly issued unregistered HomeFed common shares. As discussed in Note 9, as a result of a 1998 distribution to all of our shareholders, approximately 5% of HomeFed is beneficially owned by our Chairman at June 30, 2018 . Three of our executives serve on the board of directors of HomeFed, including our Chairman who serves as HomeFed’s Chairman, and our President.

See Note 9 for information on transactions with Jefferies Finance.

Note 24. Discontinued Operations and Assets Held for Sale

On June 5, 2018, we sold 48% of National Beef to Marfrig for $907.7 million in cash, reducing our ownership in National Beef to 31% . Marfrig has also acquired an additional 3% of National Beef from other equity owners and now owns 51% of National Beef. Jefferies will continue to designate two board members and have a series of other rights in respect of our continuing equity interest, with a lockup period of five years and thereafter fair market value liquidity protections. As of the closing of the sale on June 5, 2018, we have deconsolidated our investment in National Beef and account for our remaining interest under the equity method of accounting.

The sale of National Beef meets the GAAP criteria to be classified as a discontinued operation as the sale represents a strategic shift that has a major effect in our operations and financial results. As such, we have classified the results of National Beef prior to June 5, 2018 as a discontinued operation and reported those results in Income from discontinued operations, net of income tax provision in the Consolidated Statements of Operations.

A summary of the results of discontinued operations for National Beef is as follows (in thousands):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018 (1)		2017		2018 (1)		2017
Revenues:
Beef processing services	$	1,355,691	$	1,874,495	$	3,137,611	$	3,433,518
Interest income	63		55		131		172
Other	959		969		4,329		3,285
Total revenues	1,356,713		1,875,519		3,142,071		3,436,975

Expenses:
Compensation and benefits	7,207		9,832		17,414		19,144
Cost of sales	1,214,207		1,750,569		2,884,983		3,214,407
Interest expense	2,207		2,254		4,316		4,068
Depreciation and amortization	18,440		24,459		43,959		46,858
Selling, general and other expenses	6,435		9,980		14,291		16,970
Total expenses	1,248,496		1,797,094		2,964,963		3,301,447

Income from discontinued operations before income taxes	108,217		78,425		177,108		135,528
Income tax provision	31,111		24,435		47,045		37,366
Income from discontinued operations, net of income tax provision	$	77,106	$	53,990	$	130,063	$	98,162

(1) Discontinued operations for the three and six months ended June 30, 2018 include National Beef results through the June 5, 2018 transaction with Marfrig.

Net income attributable to the redeemable noncontrolling interests in the Consolidated Statements of Operations includes $22.7 million and $16.4 million for the three months ended June 30, 2018 and 2017 , respectively, and $37.1 million and $28.5 million for the six months ended June 30, 2018 and 2017 , respectively, related to National Beef's noncontrolling interests. Pre-tax income from discontinued operations attributable to Jefferies Financial Group Inc. common shareholders was $85.5 million and $62.0 million for the three months ended June 30, 2018 and 2017 , respectively, and $140.0 million and $107.1 million for the six months ended June 30, 2018 and 2017 , respectively.

As discussed above, we account for our retained 31% ownership of National Beef subsequent to the sale to Marfrig under the equity method. From June 5, 2018 through June 30, 2018, we recorded $24.4 million in Income (loss) related to associated companies from our 31% ownership in National Beef and we received distributions from National Beef of $13.1 million . The pre-tax income of 100% National Beef from June 5, 2018 through June 30, 2018 was $80.4 million .

During the three and six months ended June 30, 2018 , we have also recorded a pre-tax gain on the National Beef transaction of $873.5 million ( $643.9 million after-tax) which is reported in Gain on disposal of discontinued operations, net of income tax provision in the Consolidated Statements of Operations. Included in the $873.5 million pre-tax gain on the sale of National Beef is approximately $352.4 million related to the remeasurement of our retained 31% interest in National Beef to fair value. The

$592.3 million fair value of our retained 31% interest in National Beef was based on the implied equity value of 100% of National Beef from the transaction with Marfrig and is considered a Level 3 input. The transaction with Marfrig was based on a $1.9 billion equity valuation and a $2.3 billion enterprise valuation.

Assets Held for Sale

In April 2018, we entered into an agreement to sell 100% of our equity interests in Garcadia and our associated real estate to our current partners, the Garff family. At closing, we will receive $435 million in cash and $50 million in senior preferred equity of an entity that will own all of the automobile dealerships associated broadly with the Ken Garff Automotive Group, including all of the Garcadia dealerships. At or prior to closing, we will pay approximately $52 million to retire the mortgage debt on the real estate to be sold. This transaction is expected to close in the third quarter of 2018. The sale of Garcadia does not meet the GAAP criteria to be classified as a discontinued operation as it does not represent a strategic shift in our operations and financial results.

Assets held for sale at June 30, 2018 , which relate to Garcadia, include Loans to and investments in associated companies of $177.2 million and Other assets of $72.6 million . Liabilities held for sale at June 30, 2018 were $52.4 million and are included in Payables, expense accruals and other liabilities.

Note 25. Segment Information

Our operating segments consist of our consolidated businesses, which offer different products and services and are managed separately. Our reportable segments, based on qualitative and quantitative requirements, are Jefferies Group and Corporate. Jefferies Group is a global full-service, integrated securities and investment banking firm.

Corporate assets primarily consist of financial instruments owned, the deferred tax asset (exclusive of Jefferies Group's deferred tax asset), cash and cash equivalents. Corporate revenues primarily include interest income. We do not allocate Corporate revenues or overhead expenses to the operating units.

All other consists of our other financial services businesses and investments and our merchant banking businesses and investments. Our other financial services businesses and investments include the Leucadia Asset Management platform, Foursight Capital, and our investments in Berkadia, HomeFed and FXCM. Our merchant banking businesses and investments primarily includes Vitesse Energy Finance, JETX Energy, Idaho Timber and our investments in HRG, National Beef, Garcadia, Linkem and Golden Queen. As a result of the announced transactions and operating strategy, we have made changes to the corporate segment to reflect the way we currently manage our business, and have reclassified the prior periods to conform to current presentation.

As discussed further in Notes 1 and 24, on June 5, 2018, we sold 48% of National Beef to Marfrig and deconsolidated our investment in National Beef. Results prior to June 5, 2018 are classified in discontinued operations and are not included in the table below. Our retained 31% interest in National Beef is accounted for under the equity method and results subsequent to the June 5, 2018 closing are included in All other in the table below.

Certain information concerning our segments is presented in the following table. Consolidated subsidiaries are reflected as of the date a majority controlling interest was acquired. As discussed above, Jefferies Group is reflected in our consolidated financial statements utilizing a one month lag.



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
Net revenues:
Reportable Segments:
Jefferies Group	$	823,742		$	781,672		$	1,644,661		$	1,579,058
Corporate	2,994			1,236			6,061			2,342
Total net revenues related to reportable segments	826,736			782,908			1,650,722			1,581,400
All other (1)	84,423			73,953			155,872			581,987
Total consolidated net revenues	$	911,159		$	856,861		$	1,806,594		$	2,163,387

Income (loss) from continuing operations before income taxes:
Reportable Segments:
Jefferies Group	$	125,038		$	122,712		$	250,768		$	254,982
Corporate	(20,199		)	(18,838		)	(41,145		)	(40,505		)
Income from continuing operations before income taxes related to reportable segments	104,839			103,874			209,623			214,477
All other (1)	(52,574		)	(42,883		)	(104,849		)	202,238
Parent Company interest	(14,750		)	(14,734		)	(29,496		)	(29,464		)
Total consolidated income from continuing operations before income taxes	$	37,515		$	46,257		$	75,278		$	387,251

Depreciation and amortization expenses:
Reportable Segments:
Jefferies Group	$	17,288		$	15,348		$	33,654		$	30,949
Corporate	877			867			1,747			1,734
Total depreciation and amortization expenses related to reportable segments	18,165			16,215			35,401			32,683
All other	13,740			10,043			24,664			20,686
Total consolidated depreciation and amortization expenses	$	31,905		$	26,258		$	60,065		$	53,369

(1)

All other Net revenues and Income from continuing operations before income taxes include realized and unrealized gains (losses) relating to our investment in FXCM of $6.5 million and $(0.3) million , respectively, for the three months ended June 30, 2018 ; $15.1 million and $0.0 million , respectively, for the six months ended June 30, 2018 ; $4.4 million and $(7.7) million , respectively, for the three months ended June 30, 2017 ; and $15.3 million and $(146.7) million , respectively, for the six months ended June 30, 2017 .

Interest expense classified as a component of Net revenues relates to Jefferies Group. For the three months ended June 30, 2018 and 2017 , interest expense classified as a component of Expenses was primarily comprised of parent company interest ( $14.8 million and $14.7 million , respectively) and all other ( $9.5 million and $10.8 million , respectively). For the six months ended June 30, 2018 and 2017 , interest expense classified as a component of Expenses was primarily comprised of parent company interest ( $29.5 million and $29.5 million , respectively) and all other ( $16.3 million and $21.7 million , respectively).

Conwed Plastics ("Conwed") was our consolidated subsidiary that manufactured and marketed lightweight plastic netting. 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 in 2019, 2020 and 2021 totaling up to $40 million in cash to the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. We recognized a $178.2 million pre-tax gain on the sale of Conwed in Other revenues primarily during the six months ended June 30, 2017 . The gain on the sale of Conwed is included within All other above.



Item 2 .	Management’s Discussion and Analysis of Financial Condition and Results of Operations .

Statements included in this report may contain forward-looking statements. See "Cautionary Statement for Forward-Looking Information" below. The following should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors and the description of our businesses included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the " 2017 10-K").

Results of Operations

We are a diversified financial services company engaged in investment banking and capital markets, merchant banking, and the early stages of building an alternative asset management platform. During the second quarter, we closed two previously announced transactions that impact our results for the three and six months ended June 30, 2018. These include the sale of 48% of National Beef in June 2018, reducing our ownership to 31%. We have deconsolidated National Beef and are accounting for our remaining investment as an equity method investment within the Merchant Banking portfolio. Vitesse Energy Finance also acquired a package of non-operated Bakken assets for $190 million in April 2018, of which approximately $144 million was funded as equity. In addition, we agreed to sell 100% of our equity interest in Garcadia, which we expect to close during the third quarter.

Results for the three months ended June 30, 2018 include the pre-tax gain of $873.5 million, or $643.9 million net of tax expense, from the National Beef transaction. This gain is reflected in our results as a gain on disposal of discontinued operations. Our share of the results of National Beef prior to the transaction have also been reflected as discontinued operations, including prior year amounts. Our pre-tax income from continuing and discontinued operations was $1.02 billion for the three months ended June 30, 2018, significantly higher than $124.7 million for the same period last year as a result of this gain. Income from continuing operations before income taxes was $37.5 million for the three months ended June 30, 2018, in comparison to $46.3 million for the same period in 2017. Income from continuing operations compared to last year reflects another strong quarter from Jefferies Group, continued momentum in Berkadia's debt origination and investment sales, favorable margins at Idaho Timber and income from assets held at fair value, offset by a mark-to-market write-down on our investment in HRG during the second quarter.

Results for the six months ended June 30, 2018 also include the gain from the National Beef transaction. Our pre-tax income from continuing and discontinued operations was $1.13 billion for the six months ended June 30, 2018, significantly higher than $522.8 million in the same period last year. The six months ended June 30, 2017 include a pre-tax gain on the sale of Conwed of $178.2 million. Income from continuing operations before income taxes was $75.3 million for the six months ended June 30, 2018. Excluding the gain on the sale of Conwed, this compares to $209.1 million for the same period last year. A number of items impacted comparability with last year, including a $130.2 million impairment loss related to FXCM, recorded in the first quarter of last year, which did not recur in 2018, and a mark-to-market increase in the value of our investment in HRG during the first six months of 2017, in comparison to a write-down during 2018. The six months ended June 30, 2018, was also impacted by a net loss at Leucadia Asset Management and continued strong performance by Berkadia.

A summary of results for the three months ended June 30, 2018 is as follows (in thousands):



	Financial Services
	Jefferies Group		Other Financial Services		Merchant Banking Portfolio			Corporate			Parent Company Interest			Total
Net revenues	$	823,742	$	35,770	$	48,653		$	2,994		$	—		$	911,159

Expenses:
Compensation and benefits	444,094		9,320		10,782			14,319			—			478,515
Cost of sales	—		—		90,690			—			—			90,690
Floor brokerage and clearing fees	45,046		—		—			—			—			45,046
Interest expense	—		7,874		1,655			—			14,750			24,279
Depreciation and amortization	17,288		1,624		12,116			877			—			31,905
Selling, general and other expenses	192,276		15,297		20,992			7,997			—			236,562
Total expenses	698,704		34,115		136,235			23,193			14,750			906,997
Income (loss) from continuing operations before income taxes and income related to associated companies	125,038		1,655		(87,582		)	(20,199		)	(14,750		)	4,162
Income related to associated companies	—		11,657		21,696			—			—			33,353
Income (loss) from continuing operations before income taxes	$	125,038	$	13,312	$	(65,886	)	$	(20,199	)	$	(14,750	)	37,515
Income tax provision from continuing operations														9,598
Income from discontinued operations, net of income tax provision														77,106
Gain on disposal of discontinued operations, net of income tax provision														643,921
Net income														$	748,944

A summary of results for the six months ended June 30, 2018 is as follows (in thousands):



	Financial Services
	Jefferies Group		Other Financial Services			Merchant Banking Portfolio			Corporate			Parent Company Interest			Total
Net revenues	$	1,644,661	$	7,840		$	148,032		$	6,061		$	—		$	1,806,594

Expenses:
Compensation and benefits	898,854		19,962			20,084			29,274			—			968,174
Cost of sales	—		—			172,625			—			—			172,625
Floor brokerage and clearing fees	87,222		—			—			—			—			87,222
Interest expense	—		13,644			2,637			—			29,496			45,777
Depreciation and amortization	33,654		3,458			21,206			1,747			—			60,065
Selling, general and other expenses	374,163		38,073			34,485			16,185			—			462,906
Total expenses	1,393,893		75,137			251,037			47,206			29,496			1,796,769
Income (loss) from continuing operations before income taxes and income related to associated companies	250,768		(67,297		)	(103,005		)	(41,145		)	(29,496		)	9,825
Income related to associated companies	—		41,702			23,751			—			—			65,453
Income (loss) from continuing operations before income taxes	$	250,768	$	(25,595	)	$	(79,254	)	$	(41,145	)	$	(29,496	)	75,278
Income tax (benefit) from continuing operations															(38,831		)
Income from discontinued operations, net of income tax provision															130,063
Gain on disposal of discontinued operations, net of income tax provision															643,921
Net income															$	888,093

A summary of results for the three months ended June 30, 2017 is as follows (in thousands):



	Financial Services
	Jefferies Group		Other Financial Services		Merchant Banking Portfolio			Corporate			Parent Company Interest			Total
Net revenues	$	781,672	$	45,054	$	28,899		$	1,236		$	—		$	856,861

Expenses:
Compensation and benefits	450,522		8,893		10,459			11,013			—			480,887
Cost of sales	—		—		69,982			—			—			69,982
Floor brokerage and clearing fees	44,435		—		—			—			—			44,435
Interest expense	—		4,691		6,155			—			14,734			25,580
Depreciation and amortization	15,348		2,472		7,571			867			—			26,258
Selling, general and other expenses	148,655		9,530		11,187			8,194			—			177,566
Total expenses	658,960		25,586		105,354			20,074			14,734			824,708
Income (loss) from continuing operations before income taxes and income related to associated companies	122,712		19,468		(76,455		)	(18,838		)	(14,734		)	32,153
Income related to associated companies	—		13,555		549			—			—			14,104
Income (loss) from continuing operations before income taxes	$	122,712	$	33,023	$	(75,906	)	$	(18,838	)	$	(14,734	)	46,257
Income tax provision from continuing operations														26,185
Income from discontinued operations, net of income tax provision														53,990
Net income														$	74,062

A summary of results for the six months ended June 30, 2017 is as follows (in thousands):



	Financial Services
	Jefferies Group		Other Financial Services			Merchant Banking Portfolio		Corporate			Parent Company Interest			Total
Net revenues	$	1,579,058	$	86,542		$	495,445	$	2,342		$	—		$	2,163,387

Expenses:
Compensation and benefits	911,194		17,176			22,325		24,207			—			974,902
Cost of sales	—		—			139,238		—			—			139,238
Floor brokerage and clearing fees	90,293		—			—		—			—			90,293
Interest expense	—		8,864			12,822		—			29,464			51,150
Depreciation and amortization	30,949		5,191			15,495		1,734			—			53,369
Selling, general and other expenses	291,640		20,700			23,468		16,906			—			352,714
Total expenses	1,324,076		51,931			213,348		42,847			29,464			1,661,666
Income (loss) from continuing operations before income taxes and income (loss) related to associated companies	254,982		34,611			282,097		(40,505		)	(29,464		)	501,721
Income (loss) related to associated companies	—		(118,957		)	4,487		—			—			(114,470		)
Income (loss) from continuing operations before income taxes	$	254,982	$	(84,346	)	$	286,584	$	(40,505	)	$	(29,464	)	387,251
Income tax provision from continuing operations														117,428
Income from discontinued operations, net of income tax provision														98,162
Net income														$	367,985

Jefferies Group

Jefferies Group is reflected in our consolidated financial statements and disclosures utilizing a one month lag; Jefferies Group's fiscal year ends on November 30 and its fiscal quarters end one month prior to our reporting periods. A summary of results of operations for Jefferies Group is as follows (in thousands):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Net revenues	$	823,742	$	781,672	$	1,644,661	$	1,579,058

Expenses:
Compensation and benefits	444,094		450,522		898,854		911,194
Floor brokerage and clearing fees	45,046		44,435		87,222		90,293
Depreciation and amortization	17,288		15,348		33,654		30,949
Selling, general and other expenses	192,276		148,655		374,163		291,640
Total expenses	698,704		658,960		1,393,893		1,324,076

Income from continuing operations before income taxes	$	125,038	$	122,712	$	250,768	$	254,982

Jefferies Group comprises many business units, with many interactions and much integration among them. Business activities include the sales, trading, origination and advisory effort for various equity, fixed income, commodities, foreign exchange and advisory services. Jefferies Group's business, by its nature, does not produce predictable or necessarily recurring revenues or earnings. Jefferies Group's results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and its own activities and positions.

Revenues by Source

Net revenues presented for Jefferies Group's equities and fixed income businesses include allocations of interest income and interest expense as it assesses the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective activities, which is a function of the mix of each business’s associated assets and liabilities and the related funding costs.

In connection with the adoption of the new revenue standard in the first quarter of 2018, Jefferies Group has made changes to the presentation of its "Revenues by Source" to better align the manner in which we describe and present the results of Jefferies Group's performance with the manner in which it manages its business activities and serves its clients. We believe that the reorganization of Jefferies Group's revenue reporting will enable us to describe the business mix more clearly and provide greater transparency in the communication of Jefferies Group's results. Additionally, the results of the investment banking business now include a new subcategory "Other investment banking", which contains Jefferies Group's share of net earnings from its corporate lending joint venture, Jefferies Finance LLC ("Jefferies Finance"), as well as any gains and losses from any securities or loans received or acquired in connection with its investment banking efforts. Previously reported results are presented on a comparable basis in the tables below.

The following is a description of the changes that have been made:


•	Equities revenues now represent the activities of Jefferies Group's core equities sales and trading, securities finance, prime brokerage and wealth management businesses. Revenues from other activities previously presented within the Equities business have been disaggregated as follows:


◦	Jefferies Group's share of net earnings from its Jefferies Finance joint venture, as well as any revenues from securities and loans received or acquired in connection with its investment banking efforts, are now presented as part of Jefferies Group's investment banking business.


◦	Jefferies Group's share of net earnings from its historic Jefferies LoanCore LLC ("Jefferies LoanCore") joint venture is presented as part of its fixed income business through its sale in October 2017.

◦

Revenues related to Jefferies Group's principal investments in certain private equity funds and hedge funds managed by third parties or related parties, investments in strategic ventures (including KCG Holdings, Inc. ("KCG") through its sale in July 2017), certain other securities owned, and investments held as part of obligations under employee benefit plans, including deferred compensation arrangements, are now presented as part of its other business.


◦	Revenue related to Jefferies Group's capital invested in asset management funds that are managed by Jefferies Group is now presented within Jefferies Group's asset management business.


•	Revenues from Jefferies Group's legacy Futures business and revenues associated with structured notes issued by Jefferies Group are now presented as part of its other business. Additionally, revenues derived from securities or loans received or acquired in connection with Jefferies Group's investment banking efforts are now presented as part of investment banking revenues.


•	Revenues from principal investments in certain private equity and asset management funds managed by related parties, are now presented as part of its other business.

The changes to the manner in which we describe and disclose the performance of Jefferies Group's business activities has no effect on its historical consolidated results of operation. The composition of Jefferies Group's net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary from period to period due to fluctuations in economic and market conditions, and its own performance.

The following provides a summary of net revenues by source (in thousands):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Equities	$	175,059	$	174,937	$	330,758	$	331,402
Fixed income	120,621		157,158		333,543		379,122
Total sales and trading	295,680		332,095		664,301		710,524

Equity	107,553		74,902		187,393		136,468
Debt	175,762		125,847		344,756		288,475
Capital markets	283,315		200,749		532,149		424,943
Advisory	216,982		151,114		408,139		334,941
Other investment banking	6,390		3,959		105		8,022
Total investment banking	506,687		355,822		940,393		767,906
Other	3,988		92,951		13,754		86,873
Total capital markets	806,355		780,868		1,618,448		1,565,303

Asset Management	17,387		804		26,213		13,755

Total net revenues	$	823,742	$	781,672	$	1,644,661	$	1,579,058

Equities Net Revenues

Equities are comprised of net revenues from:


•	services provided to Jefferies Group's clients from which it earns commissions or spread revenue by executing, settling and clearing transactions for clients;


•	financing, securities lending and other prime brokerage services offered to clients; and


•	wealth management services, which includes providing clients access to all of its institutional execution capabilities.

Equities net revenues during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 , improved across certain of Jefferies Group's core global equities sales and trading business, offset by losses in certain block positions. The increase in its core global equities sales and trading business was primarily driven by higher revenues in its equity derivatives, electronic trading and convertibles businesses, primarily due to higher equity volatility, overall improved market trading volumes and an increase in commissions. This was partially offset by a decrease in the U.S. and European cash equities businesses, primarily due to lower customer activity. The securities finance business saw a decline as compared to the prior year quarter, driven by decreased trading revenues. Equities posted record quarterly revenues across the overall sales and trading business, as well as across several core businesses, including its equity derivatives, global electronic trading, European securities finance, and prime brokerage businesses.

Equities net revenues during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 , improved across Jefferies Group's core global equities sales and trading business, offset by losses in certain block positions. The increase in its core global equities sales and trading business was primarily driven by higher revenues in its equity derivatives, electronic trading, convertibles, and Asian cash equities businesses, primarily due to higher equity volatility, overall improved market trading volumes and an increase in commissions. This was partially offset by a decrease in the U.S. and European cash equities businesses, primarily due to lower customer activity. European revenues were also lower as a result of the delay in advisory payments and the impact of unbundling due to the Market in Financial Instruments Directive ("MiFID II") regulation. The securities finance business saw a decline as compared with the prior year period, driven by decreased trading revenues.

Fixed Income Net Revenues

Fixed income is comprised of net revenues from:


•	executing transactions for clients and making markets in securitized products, investment grade, high-yield, emerging markets, municipal and sovereign securities and bank loans;


•	foreign exchange execution on behalf of clients; and


•	interest rate derivatives and credit derivatives (used primarily for hedging activities).

Fixed income net revenues during the three months ended June 30, 2018 decreased $36.5 million as compared to the three months ended June 30, 2017 , as the uncertainty surrounding the direction of central bank policy and global interest rates reduced market activity and trading volumes. Revenues in Jefferies Group's global investment grade corporates businesses declined due to lower

volatility and reduced supply resulting in lower trading activity, particularly in the beginning of the quarter. Revenues in the municipals businesses were down on lower secondary trading activity consistent with lower new issuance activity and an overhang of excess dealer inventory at the beginning of the period, which dampened the market.

Results in Jefferies Group's securitized markets groups were down as results from CLO secondary trading activity were lower as the business focused on primary issuance, which increased as compared to the prior year quarter and is reflected in the investment banking results, while most of the other securitized markets businesses improved on increased activity and market share. The performance of the leveraged credit business continued to improve as Jefferies Group further repositioned its secondary trading businesses. Results improved in the global emerging markets sales and trading business as Jefferies Group has continued to expand its European franchise resulting in increased market share.

The prior year quarter also included revenues from Jefferies Group's share of Jefferies LoanCore, which was sold in October 2017, as well as revenues from non-core fixed income products that have now been deemphasized.

Fixed income net revenues during the six months ended June 30, 2018 decreased $45.6 million as compared to the six months ended June 30, 2017 , primarily due to soft market conditions in the beginning of the second quarter. This is compared to performance in the first quarter of 2017, which was bolstered by robust trading activity following the 2016 U.S. presidential election.

Global rates revenues in the six months ended June 30, 2018 declined as the opportunities from volatility from the U.S. presidential election and European election cycles, primarily in the first quarter of 2017, were not replicated in the current year period. Revenues declined in the global investment grade corporates business due to decreased trading activity and increased competition as market participants crowded into limited trading opportunities. Revenues in the municipal securities business were lower as activity declined meaningfully after changes in tax legislation, as compared to favorable performance in the first half of 2017.

Revenues in the U.S. securitized markets group were significantly improved, primarily as Jefferies Group was more profitable in its agency products as more favorable trading conditions prevailed. Additionally, increased securitization activity contributed to the period’s results. Revenues in the leveraged credit business were strong, as Jefferies Group increased its market share in high yield, leveraged loan and distressed products.

The six months ended June 30, 2017 also included revenues from Jefferies Group's share of Jefferies LoanCore, which was sold in October 2017, as well as revenues from non-core fixed income products that have now been deemphasized.

Investment Banking Revenues

Investment banking is comprised of revenues from:


•	capital markets services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities and loan syndication;


•	advisory services with respect to mergers and acquisitions and restructurings and recapitalizations;


•	Jefferies Group's share of net earnings from its corporate lending joint venture Jefferies Finance; and


•	securities and loans received or acquired in connection with Jefferies Group's investment banking activities.

Total investment banking revenues were $506.7 million for the three months ended June 30, 2018 , 42.4% higher than the three months ended June 30, 2017 , led by strong growth in the mergers and acquisition, leveraged finance and equity capital markets businesses. The results in the quarter also include an increase of $32.3 million in investment banking net revenues as a result of the new revenue standard.

Capital markets revenues for the three months ended June 30, 2018 increased 41.1% from the prior year quarter. Advisory revenues for the three months ended June 30, 2018 increased 43.6% compared to the prior year quarter.

From equity and debt capital raising activities, Jefferies Group generated $107.6 million and $175.8 million in revenues, respectively, for the three months ended June 30, 2018 . During the three months ended June 30, 2018 , Jefferies Group completed 218 public and private debt financings that raised $68.6 billion in aggregate and Jefferies Group completed 48 public and private equity and convertible offerings that raised $13.5 billion (46 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $217.0 million, including revenues from 46 merger and acquisition transactions and three restructuring and recapitalization transactions with an aggregate transaction value of $31.0 billion.

Investment banking revenues were $355.8 million for the three months ended June 30, 2017 . From equity and debt capital raising activities, Jefferies Group generated $74.9 million and $125.8 million in revenues, respectively. During the three months ended June 30, 2017 , Jefferies Group completed 238 public and private debt financings that raised $66.9 billion in aggregate and Jefferies

Group completed 51 public equity and private equity and convertible offerings that raised $13.9 billion (48 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $151.1 million, including revenues from 33 merger and acquisition transactions and two restructuring and recapitalization transactions with an aggregate transaction value of $36.9 billion.

Total investment banking revenues were $940.4 million for the six months ended June 30, 2018 , 22.5% higher than the six months ended June 30, 2017 . This increase primarily reflects higher advisory and capital markets revenues, resulting from continued strength in Jefferies Group's mergers and acquisitions business and strong equity issuance in its life science business. Results also include an increase of $64.8 million in investment banking net revenues as a result of the new revenue standard and strong equity and debt issuance activity in the healthcare and energy sectors and continued strength in our mergers and acquisitions business.

Capital markets revenues for the six months ended June 30, 2018 increased 25.2% from the prior year period. Advisory revenues for the six months ended June 30, 2018 increased 21.9% compared to the prior year period. Other investment banking revenues were $0.1 million for the six months ended June 30, 2018 compared with revenues of $8.0 million in the prior year period.

From equity and debt capital raising activities, Jefferies Group generated $187.4 million and $344.8 million in revenues, respectively, for the six months ended June 30, 2018 . During the six months ended June 30, 2018 , Jefferies Group completed 463 public and private debt financings that raised $136.6 billion in aggregate and Jefferies Group completed 85 public and private equity and convertible offerings that raised $20.3 billion (82 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $408.1 million, including revenues from 81 merger and acquisition transactions and nine restructuring and recapitalization transactions with an aggregate transaction value of $93.8 billion.

Investment banking revenues were $767.9 million for the six months ended June 30, 2017 . From equity and debt capital raising activities, Jefferies Group generated $136.5 million and $288.5 million in revenues, respectively. During the six months ended June 30, 2017 , Jefferies Group completed 436 public and private debt financings that raised $118.9 billion in aggregate and Jefferies Group completed 91 public equity and private equity and convertible offerings that raised $34.4 billion (85 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $334.9 million, including revenues from 71 merger and acquisition transactions and six restructuring and recapitalization transactions with an aggregate transaction value of $77.1 billion.

Other Net Revenues

Other net revenues are comprised of revenues from:

• principal investments in private equity and hedge funds managed by third parties or related parties;

• strategic investments other than Jefferies Finance (such as KCG through its sale in July 2017);

• investments held as part of employee benefit plans, including deferred compensation plans;

• structured note activities on behalf of the firm; and

• Jefferies Group's legacy Futures business.

Other net revenues totaled $4.0 million for the three months ended June 30, 2018 , as compared with $93.0 million for the three months ended June 30, 2017 , as results in the prior year quarter included a net gain of $95.8 million from Jefferies Group's investment in KCG, which was sold in July 2017, partially offset by foreign currency gains.

Other net revenues totaled $13.8 million for the six months ended June 30, 2018 , as compared with $86.9 million for the six months ended June 30, 2017 , as results in the prior year period included a net gain of $91.2 million from Jefferies Group's investment in KCG, which was sold in July 2017, partially offset by foreign currency gains.

Asset Management Net Revenues

Asset management revenues include the following:

• management and performance fees from funds and accounts managed by Jefferies Group; and

• investment income from capital invested in and managed by Jefferies Group's asset management business.

Asset management fees revenues were $17.4 million for the three months ended June 30, 2018 , as compared with $0.8 million for the three months ended June 30, 2017 . Asset management fees revenues were $26.2 million for the six months ended June 30, 2018 , as compared with $13.8 million for the six months ended June 30, 2017 .The key components of asset management revenues are the level of assets under management and the performance return, whether on an absolute basis or relative to a benchmark or hurdle. These components can be affected by financial markets, profits and losses in the applicable investment portfolios and client

capital activity. Further, asset management fees vary with the nature of investment management services. The terms under which clients may terminate Jefferies Group's investment management authority, and the requisite notice period for such termination, varies depending on the nature of the investment vehicle and the liquidity of the portfolio assets.

Compensation and Benefits

Compensation and benefits expense consists of salaries, benefits, cash bonuses, commissions, annual cash compensation awards, and the amortization of certain share-based and cash compensation awards to employees. Cash and historical share-based awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded in the year of the award.

Included in Compensation and benefits expense are share-based amortization expense for senior executive awards granted in February 2016, January 2017 and January 2018, cash-based amortization expense for senior executive awards granted in January 2018, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting, all of which are being amortized over their respective future service periods. In addition, the senior executive awards contain market and performance conditions. Compensation expense related to the amortization of share-based and cash-based awards amounted to $61.9 million and $67.3 million for the three months ended June 30, 2018 and 2017 , respectively, and $137.6 million and $134.8 million for the six months ended June 30, 2018 and 2017 , respectively. Compensation and benefits as a percentage of Net revenues was 53.9% and 57.6% for the three months ended June 30, 2018 and 2017 , respectively, and 54.7% and 57.7% for the six months ended June 30, 2018 and 2017 , respectively.

Non-Compensation Expenses

Non-compensation expenses include floor brokerage and clearing fees, underwriting costs, technology and communications expense, occupancy and equipment rental expense, business development, professional services, bad debt provision, impairment charges, depreciation and amortization expense and other costs. All of these expenses, other than floor brokerage and clearing fees and depreciation and amortization expense, are included in Selling, general and other expenses in the Consolidated Statements of Operations.

The increase in non-compensation expenses during the three and six months ended June 30, 2018 as compared to the three and six months ended June 30, 2017 was essentially due to an increase in business development expenses and underwriting costs, as a result of applying the new revenue standard to results of operations for the three and six months ended June 30, 2018 .

Other Financial Services

A summary of results for other financial services is as follows (in thousands):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018			2017
Net revenues	$	35,770	$	45,054	$	7,840		$	86,542

Expenses:
Compensation and benefits	9,320		8,893		19,962			17,176
Interest expense	7,874		4,691		13,644			8,864
Depreciation and amortization	1,624		2,472		3,458			5,191
Selling, general and other expenses	15,297		9,530		38,073			20,700
Total expenses	34,115		25,586		75,137			51,931

Income (loss) from continuing operations before income taxes and income (loss) related to associated companies	1,655		19,468		(67,297		)	34,611
Income (loss) related to associated companies	11,657		13,555		41,702			(118,957		)
Income (loss) from continuing operations before income taxes	$	13,312	$	33,023	$	(25,595	)	$	(84,346	)

Our other financial services include our share of the income of Berkadia, the consolidated results of certain Leucadia Asset Management fund managers, the returns on our investments in these funds, the consolidated results of Foursight Capital and

Chrome Capital (vehicle finance), our share of the income of HomeFed and the results of our investment in FXCM. Interest and gains related to the note receivable component of our FXCM investment are included in net revenues, while income (loss) related to our equity method investment in FXCM is included in Income (loss) related to associated companies.

Three Months Ended June 30, 2018

Net revenues for the three months ended June 30, 2018 , declined $9.3 million from the three months ended June 30, 2017 . The year-over-year decrease in revenues primarily reflects lower principal transactions revenues related to Leucadia Asset Management investments.

Income (loss) related to associated companies during the three months ended June 30, 2018 decreased by $1.9 million, reflecting strong results at Berkadia offset by losses at HomeFed. Income (loss) related to associated companies includes $25.5 million and $16.2 million attributable to Berkadia, $(7.2) million and $9.3 million attributable to HomeFed, and $(6.8) million and $(12.1) million attributable to our equity method investment in FXCM, for the three months ended June 30, 2018 and 2017 , respectively.

Our income (loss) from continuing operations before income taxes for the three months ended June 30, 2018 decreased by $19.7 million in comparison to the same period last year, primarily related to a decline in income from Leucadia Asset Management as compared to the prior year. Pre-tax income (losses) related to our Leucadia Asset Management investments totaled $(5.5) million and $15.3 million for the three months ended June 30, 2018 and 2017 , respectively. The largest portion of the current losses relate to costs associated with the pending merger of Folger Hill Asset Management with Schonfeld Strategic Advisors LLC.

Six Months Ended June 30, 2018

Net revenues for the six months ended June 30, 2018 , declined $78.7 million from the six months ended June 30, 2017 . The year-over-year decrease in revenues primarily reflects lower principal transactions revenues related to Leucadia Asset Management investments.

Income (loss) related to associated companies during the six months ended June 30, 2018 , excluding the $130.2 million impairment loss related to our equity investment in FXCM in the first quarter of 2017, increased by $30.5 million, reflecting strong results at Berkadia. Income (loss) related to associated companies includes $51.7 million and $33.1 million attributable to Berkadia, $4.4 million and $9.7 million attributable to HomeFed, and $(15.0) million and $(162.0) million attributable to our equity method investment in FXCM, for the six months ended June 30, 2018 and 2017 , respectively.

Our income (loss) from continuing operations before income taxes for the six months ended June 30, 2018 increased by $58.8 million in comparison to the same period last year, primarily related to a $130.2 million impairment loss related to our equity investment in FXCM in the first quarter of 2017, which did not recur in 2018. In addition, 2018 was impacted by a net loss at Leucadia Asset Management and continued strong performance by Berkadia. Pre-tax income (losses) related to our Leucadia Asset Management investments totaled $(82.4) million and $22.3 million for the six months ended June 30, 2018 and 2017 , respectively. The loss in 2018 is primarily due to two strategies impacted by exceptional volatility during the first quarter.

Merchant Banking Portfolio

A summary of results for our merchant banking portfolio is as follows (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Net revenues	$	48,653		$	28,899		$	148,032		$	495,445

Expenses:
Compensation and benefits	10,782			10,459			20,084			22,325
Cost of sales	90,690			69,982			172,625			139,238
Interest expense	1,655			6,155			2,637			12,822
Depreciation and amortization	12,116			7,571			21,206			15,495
Selling, general and other expenses	20,992			11,187			34,485			23,468
Total expenses	136,235			105,354			251,037			213,348

Income (loss) from continuing operations before income taxes and income related to associated companies	(87,582		)	(76,455		)	(103,005		)	282,097
Income related to associated companies	21,696			549			23,751			4,487
Income (loss) from continuing operations before income taxes	$	(65,886	)	$	(75,906	)	$	(79,254	)	$	286,584

Our merchant banking portfolio includes our ownership of HRG shares, which is accounted for at fair value and impacts our results through mark-to-market adjustments reflected in net revenues, and the consolidated results of Vitesse Energy Finance and JETX Energy (oil and gas) and Idaho Timber (manufacturing). It also includes our equity investments in National Beef (beef processing), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy) and Golden Queen (a gold and silver mining project).

Three Months Ended June 30, 2018

Net revenues for the three months ended June 30, 2018 increased $19.8 million in comparison to the same period during 2017. The increase reflects increased manufacturing revenues, increased revenues related to our oil and gas businesses, increased income of $37.1 million related to a trading asset which is held at fair value and increased income of $14.1 million from an investment in a managed fund, offset by the mark-to-market reduction of $158.4 million in the value of our HRG position during the second quarter of 2018, in comparison to a mark-to-market reduction of $75.0 million during the same quarter last year. We classify HRG as a trading asset for which the fair value option was elected and we reflect mark-to-market adjustments through Principal transactions revenues.

For the three months ended June 30, 2018 and 2017 , net revenues for manufacturing were $114.8 million and $79.7 million, respectively. Net revenues for manufacturing increased $35.1 million due to an increase in revenues at Idaho Timber.

Net revenues for the three months ended June 30, 2018 and 2017 for our oil and gas businesses were $44.7 million and $11.6 million, respectively. As discussed further in Note 3 to our consolidated financial statements, Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Net unrealized gains (losses) of $(10.4) million and $1.7 million were recorded related to these derivatives during the three months ended June 30, 2018 and 2017 , respectively. JETX revenues during the three months ended June 30, 2018 and 2017 were impacted by $17.9 million and $(3.3) million, respectively, of unrealized gains (losses) on a trading asset which is held at fair value.

For the three months ended June 30, 2018 and 2017 , total expenses for manufacturing were $96.0 million and $73.3 million, respectively. The increase in total expense for manufacturing primarily relates to an increase of $20.7 million in cost of sales as a result of the increase in revenues. Total expenses for our oil and gas businesses were $28.6 million and $13.5 million during the three months ended June 30, 2018 and 2017 , respectively.

related to Garcadia was $9.6 million and $12.7 million for the three months ended June 30, 2018 and 2017 , respectively. Losses related to Linkem were $5.3 million and $8.9 million for the three months ended June 30, 2018 and 2017 , respectively.

Income (loss) from continuing operations before income taxes for three months ended June 30, 2018 includes a $158.4 million unrealized loss related to our investment in HRG offset partially by $18.8 million of pre-tax income from manufacturing, $16.2 million of pre-tax income from the oil and gas businesses, $33.4 million of income related to a trading asset which is held at fair value, $14.1 million of income from an investment in a managed fund and $21.7 million of income from associated companies. Income (loss) from continuing operations before income taxes for three months ended June 30, 2017 includes a $75.0 million unrealized loss related to our investment in HRG and pre-tax losses from the oil and gas businesses of $1.9 million, offset partially by $6.3 million of income from manufacturing and $0.5 million of income related to associated companies.

Six Months Ended June 30, 2018

Net revenues for the six months ended June 30, 2018 , excluding the gain on the sale of Conwed of $178.2 million during 2017, decreased $169.2 million in comparison to the same period during 2017. The decrease is due to the mark-to-market reduction of $179.9 million in the value of our HRG position during the six months ended June 30, 2018 , in comparison to a mark-to-market increase of $100.2 million during the same period last year. We classify HRG as a trading asset for which the fair value option was elected and we reflect mark-to-market adjustments through Principal transactions revenues. This decrease was offset by increased manufacturing revenues, increased revenues related to our oil and gas businesses, increased income of $33.2 million related to a trading asset which is held at fair value and increased income of $12.2 million from an investment in a managed fund.

For the six months ended June 30, 2018 and 2017 , net revenues for manufacturing were $213.1 million and $339.8 million (including the gain on the sale of Conwed of $178.2 million), respectively. 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 in 2019, 2020 and 2021 totaling up to $40 million in cash to the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. Excluding the gain on the sale of Conwed, net revenues for manufacturing increased $51.6 million due primarily to an increase in revenues at Idaho Timber.

Net revenues for the six months ended June 30, 2018 and 2017 for our oil and gas businesses were $61.8 million and $14.8 million, respectively. As discussed further in Note 3 to our consolidated financial statements, Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Net unrealized gains (losses) of $(14.1) million and $5.0 million were recorded related to these derivatives during the six months ended June 30, 2018 and 2017 , respectively. JETX revenues during the six months ended June 30, 2018 and 2017 were impacted by $19.5 million and $(18.7) million, respectively, of unrealized gains (losses) on a trading asset which is held at fair value.

For the six months ended June 30, 2018 and 2017 , total expenses for manufacturing were $181.9 million and $147.3 million, respectively. The increase in total expense for manufacturing primarily relates to an increase of $33.4 million in cost of sales as a result of the increase in revenues. Total expenses for our oil and gas businesses were $45.4 million and $27.3 million during the six months ended June 30, 2018 and 2017 , respectively.

Income related to associated companies primarily relates to our investments in National Beef (subsequent to June 5, 2018), Garcadia and Linkem. Income related to National Beef was $24.4 million for the period from June 5, 2018 through June 30, 2018. Income related to Garcadia was $21.0 million and $26.0 million for the six months ended June 30, 2018 and 2017 , respectively. Losses related to Linkem were $12.8 million and $17.0 million for the six months ended June 30, 2018 and 2017 , respectively.

Income (loss) from continuing operations before income taxes for six months ended June 30, 2018 includes a $179.9 million unrealized loss related to our investment in HRG offset partially by $31.3 million of pre-tax income from manufacturing, $16.3 million from the oil and gas businesses, $33.2 million of income related to a trading asset which is held at fair value, $12.2 million of income from an investment in a managed fund and $23.8 million of income related to associated companies. Income (loss) from continuing operations before income taxes for six months ended June 30, 2017 includes $192.6 million from manufacturing, including the gain on the sale of Conwed of $178.2 million, $4.5 million of income related to associated companies and $100.2 million related to our investment in HRG, offset partially by pre-tax losses from the oil and gas production and development businesses of $12.5 million.

Corporate

A summary of results of operations for corporate is as follows (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Net revenues	$	2,994		$	1,236		$	6,061		$	2,342

Expenses:
Compensation and benefits	14,319			11,013			29,274			24,207
Depreciation and amortization	877			867			1,747			1,734
Selling, general and other expenses	7,997			8,194			16,185			16,906
Total expenses	23,193			20,074			47,206			42,847

Loss from continuing operations before income taxes and income (loss) related to associated companies	$	(20,199	)	$	(18,838	)	$	(41,145	)	$	(40,505	)

For the three months ended June 30, 2018 and 2017 , corporate compensation and benefits includes incentive bonus expense of $4.3 million and $2.1 million, respectively and share-based compensation expense of $6.1 million and $4.7 million, respectively.

For the six months ended June 30, 2018 and 2017 , corporate compensation and benefits includes incentive bonus expense of $8.6 million and $6.3 million, respectively and share-based compensation expense of $12.0 million and $8.9 million, respectively.

Parent Company Interest

Parent company interest expense totaled $14.8 million and $14.7 million for the three months ended June 30, 2018 and 2017 , respectively, and $29.5 million for both the six months ended June 30, 2018 and 2017 .

Income Taxes

For the three and six months ended June 30, 2018 , our provision (benefit) for income taxes from continuing operations were $9.6 million and $(38.8) million, respectively, representing an effective tax rate of 25.6% and (51.6)%, respectively. Our provision for income taxes for the six months ended June 30, 2018 was reduced by a $43.9 million benefit resulting from a reversal of our valuation allowance with respect to certain federal and state net operating loss carryforwards ("NOLs") which we now believe are more likely than not to be utilized before they expire. This benefit reduced our effective tax rate for the six months ended June 30, 2018 by approximately 58.3%.

For the three and six months ended June 30, 2017 , our provisions for income taxes from continuing operations were $26.2 million and $117.4 million, respectively, representing an effective tax rate of 56.6% and 30.3%, respectively. Our provisions for income taxes for the three and six months ended June 30, 2017 include a $9.0 million charge resulting from the revaluation of our deferred tax asset to take into account then enacted New York State and City tax legislation. The legislation will reduce the income apportioned to these jurisdictions in the future thereby reducing our effective rate. This charge increased our effective tax rates for the three and six months ended June 30, 2017 by approximately 19.5% and 2.3%, respectively. Our provision for income taxes for the six months ended June 30, 2017 was also reduced by a $31.9 million benefit resulting from the repatriation of Jefferies Group's earnings from certain of its foreign subsidiaries, along with their associated foreign tax credits. This benefit reduced our effective tax rate for the six months ended June 30, 2017 by approximately 8.2%.

Discontinued Operations

On June 5, 2018, we sold 48% of National Beef to Marfrig for $907.7 million in cash, reducing our ownership in National Beef to 31%. The sale of National Beef meets the GAAP criteria to be classified as a discontinued operation as the sale represents a strategic shift in our operations and financial results. As such, we have classified the results of National Beef prior to June 5, 2018 as a discontinued operation and it is reported in Income from discontinued operations, net of income tax provision in the Consolidated Statements of Operations. In addition, we recognized a pre-tax gain as a result of the transaction of $873.5 million ($643.9 million after-tax) for the three and six months ended June 30, 2018, which has been recognized as Gain on disposal of discontinued operations, net of income tax provision in our Consolidated Statements of Operations.

A summary of results of discontinued operations for National Beef is as follows (in thousands):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018 (1)		2017		2018 (1)		2017
Net revenues	$	1,356,713	$	1,875,519	$	3,142,071	$	3,436,975

Expenses:
Compensation and benefits	7,207		9,832		17,414		19,144
Cost of sales	1,214,207		1,750,569		2,884,983		3,214,407
Interest expense	2,207		2,254		4,316		4,068
Depreciation and amortization	18,440		24,459		43,959		46,858
Selling, general and other expenses	6,435		9,980		14,291		16,970
Total expenses	1,248,496		1,797,094		2,964,963		3,301,447

Income from discontinued operations before income taxes	108,217		78,425		177,108		135,528
Income tax provision	31,111		24,435		47,045		37,366
Income from discontinued operations, net of income tax provision	$	77,106	$	53,990	$	130,063	$	98,162

(1) Discontinued operations for the three and six months ended June 30, 2018 include National Beef results through the June 5, 2018 transaction with Marfrig.

National Beef’s profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw material for its business, and the value received from selling boxed beef and other products, coupled with its overall volume. National Beef operates in a large and liquid commodity market and it does not have much influence over the price it pays for cattle or the selling price it receives for the products it produces. National Beef’s profitability typically fluctuates seasonally, with relatively higher margins in the spring and summer months and during times of ample cattle availability. Throughout 2018, demand for beef and cattle supply remained strong, supporting favorable margin conditions.

Selected Balance Sheet Data

In addition to preparing our Consolidated Statements of Financial Condition in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we also review the tangible capital associated with each of our businesses and investments, which is a non-GAAP presentation and may not be comparable to similar non-GAAP presentations used by other companies. We believe that this information is useful to investors as it allows them to view our businesses and investments through the eyes of management while facilitating a comparison across historical periods. We define tangible capital as Total Jefferies Financial Group Inc. shareholders' equity less Intangible assets, net and goodwill. As a result of the announced transactions and operating strategy, we have made changes to the corporate segment to reflect the way we currently manage our business, and have reclassified the December 31, 2017 balances to conform to current year presentation.

The tables below reconcile tangible capital to our GAAP balance sheet (in thousands):



	June 30, 2018
	Financial Services
	Jefferies Group			Other Financial Services			Merchant Banking Portfolio			Corporate		Inter-company Eliminations			Total
Assets
Cash and cash equivalents	$	4,549,214		$	21,082		$	39,265		$	131,496	$	—		$	4,741,057
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	709,646			—			—			—		—			709,646
Financial instruments owned	15,705,657			1,518,820			1,094,515			1,242,475		—			19,561,467
Loans to and investments in associated companies	740,804			736,995			1,045,145			—		—			2,522,944
Securities borrowed	7,599,043			—			—			—		—			7,599,043
Securities purchased under agreements to resell	3,822,232			—			—			—		—			3,822,232
Receivables	4,831,168			921,017			99,623			24,581		—			5,876,389
Property, equipment and leasehold improvements, net	304,859			1,031			30,278			17,385		—			353,553
Intangible assets, net and goodwill	1,891,133			1,368			8,851			—		—			1,901,352
Deferred tax asset, net	273,926			—			—			263,137		—			537,063
Assets held for sale	—			—			249,825			—		—			249,825
Other assets	717,855			81,652			715,818			55,248		(43,346		)	1,527,227
Total Assets	41,145,537			3,281,965			3,283,320			1,734,322		(43,346		)	49,401,798

Liabilities
Long-term debt (1)	6,591,900			60,573			72,886			989,611		—			7,714,970
Other liabilities	28,948,512			1,776,831			132,064			166,074		(43,346		)	30,980,135
Total liabilities	35,540,412			1,837,404			204,950			1,155,685		(43,346		)	38,695,105

Redeemable noncontrolling interests	—			—			14,252			—		—			14,252
Mandatorily redeemable convertible preferred shares	—			—			—			125,000		—			125,000
Noncontrolling interests	750			1,056			27,443			—		—			29,249
Total Jefferies Financial Group Inc. Shareholders' Equity	$	5,604,375		$	1,443,505		$	3,036,675		$	453,637	$	—		$	10,538,192

Reconciliation to Tangible Capital
Total Jefferies Financial Group Inc. shareholders' equity	$	5,604,375		$	1,443,505		$	3,036,675		$	453,637	$	—		10,538,192
Less: Intangible assets, net and goodwill	(1,891,133		)	(1,368		)	(8,851		)	—		—			(1,901,352		)
Tangible Capital, a non-GAAP measure	$	3,713,242		$	1,442,137		$	3,027,824		$	453,637	$	—		$	8,636,840


(1)	Long-term debt within Other financial services businesses and investments of $60.6 million at June 30, 2018 includes $54.2 million for Foursight Capital and $6.4 million for Chrome Capital. Long-term debt within the Merchant banking portfolio of $72.9 million at June 30, 2018 relates to Vitesse Energy Finance.



	December 31, 2017
	Financial Services						Merchant Banking Portfolio
	Jefferies Group			Other Financial Services			National Beef			Other Merchant Banking			Corporate		Inter-company Eliminations			Total
Assets
Cash and cash equivalents	$	5,164,492		$	13,681		$	18,516		$	42,240		$	36,551	$	—		$	5,275,480
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	578,014			—			—			—			—		—			578,014
Financial instruments owned	14,193,352			779,306			2,880			1,195,624			628,075		—			16,799,237
Loans to and investments in associated companies	682,790			715,892			—			668,147			—		—			2,066,829
Securities borrowed	7,721,803			—			—			—			—		—			7,721,803
Securities purchased under agreements to resell	3,689,559			—			—			—			—		—			3,689,559
Receivables	4,459,827			677,211			201,675			77,355			2,947		—			5,419,015
Property, equipment and leasehold improvements, net	297,750			2,681			401,148			29,927			18,897		—			750,403
Intangible assets, net and goodwill	1,899,093			1,561			554,541			7,985			—		—			2,463,180
Deferred tax asset, net	212,954			—			—			—			530,857		—			743,811
Other assets	676,098			79,993			281,779			612,713			81,515		(70,321		)	1,661,777
Total Assets	39,575,732			2,270,325			1,460,539			2,633,991			1,298,842		(70,321		)	47,169,108

Liabilities
Long-term debt (1)	6,416,844			187,478			199,221			93,219			989,021		—			7,885,783
Other liabilities	27,514,235			656,996			332,111			56,333			103,399		(70,321		)	28,592,753
Total liabilities	33,931,079			844,474			531,332			149,552			1,092,420		(70,321		)	36,478,536

Redeemable noncontrolling interests	—			—			412,128			14,465			—		—			426,593
Mandatorily redeemable convertible preferred shares	—			—			—			—			125,000		—			125,000
Noncontrolling interests	737			1,382			—			30,903			—		—			33,022
Total Jefferies Financial Group Inc. Shareholders' Equity	$	5,643,916		$	1,424,469		$	517,079		$	2,439,071		$	81,422	$	—		$	10,105,957

Reconciliation to Tangible Capital
Total Jefferies Financial Group Inc. shareholders' equity	$	5,643,916		$	1,424,469		$	517,079		$	2,439,071		$	81,422	$	—		10,105,957
Less: Intangible assets, net and goodwill	(1,899,093		)	(1,561		)	(554,541		)	(7,985		)	—		—			(2,463,180		)
Tangible Capital, a non-GAAP measure	$	3,744,823		$	1,422,908		$	(37,462	)	$	2,431,086		$	81,422	$	—		$	7,642,777

(1) Long-term debt within Other financial services businesses and investments of $187.5 million at December 31, 2017 includes $170.5 million for Foursight Capital and $17.0 million for Chrome Capital. Long-term debt within Other merchant banking of $93.2 million at December 31, 2017 includes $53.4 million for real estate associated with the Garcadia investment and $39.8 million for Vitesse Energy Finance.

The table below presents our tangible capital by significant business and investment (in thousands):



	Tangible Capital as of
	June 30, 2018		December 31, 2017
Financial Services:
Jefferies Group	$	3,713,242	$	3,744,823

Other Financial Services:
Leucadia Asset Management	528,487		571,264
Berkadia	243,763		210,594
HomeFed	346,319		310,264
FXCM	219,882		231,656
Foursight Capital and Chrome Capital	103,686		99,130
Total Other Financial Services	1,442,137		1,422,908

Merchant Banking Portfolio:
HRG	609,994		789,870
National Beef	603,541		(37,462		)
Vitesse Energy Finance	475,680		315,829
JETX	117,849		100,792
Garcadia	197,369		199,541
Linkem	177,593		192,136
Idaho Timber	77,450		81,542
Golden Queen	83,125		74,480
Other merchant banking	685,223		676,896
Total Merchant Banking	3,027,824		2,393,624

Corporate liquidity and other assets, net of all Corporate liabilities including long-term debt	453,637		81,422

Total Tangible Capital (1)	$	8,636,840	$	7,642,777

(1) Tangible Capital, a non-GAAP measure, is defined as Jefferies Financial Group Inc. shareholders' equity less Intangible assets, net and goodwill. See reconciliation of Tangible Capital to Jefferies Financial Group Inc. shareholders' equity in the tables above.

Below is a brief description of the captions in the table above:

Our Financial Services include:


•	Jefferies Group is our consolidated wholly-owned global full-service, integrated securities and investment banking firm.


•	Other Financial Services include:


◦	Leucadia Asset Management supports and develops focused alternative asset management businesses led by distinct management teams.


◦	Berkadia, our 50-50 equity method joint venture with Berkshire Hathaway Inc., is a U.S. commercial real estate finance 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.


◦	Our investment in FXCM currently consists of a senior secured term loan due January 2019 ( $70.4 million outstanding at June 30, 2018 ) and a 50% voting interest in FXCM and up to 75% of all distributions. FXCM is a provider of online foreign exchange trading, contract for difference trading, spread betting and related services.


◦	Foursight Capital purchases automobile installment contracts originated by franchised and independent dealerships in conjunction with the sale of new and used automobiles and services these loans throughout the life cycle. Chrome Capital owns and manages a portfolio of leases on used Harley-Davidson motorcycles and is in the process of winding down. We consolidate both of these subsidiaries.

Our Merchant Banking portfolio includes:

◦

We own approximately 14% of Spectrum Brands Holdings, Inc. ("Spectrum Brands"), a publicly traded global consumer products company on the NYSE, and we reflect this investment at fair value based on quoted market prices. On July 13, 2018, HRG merged into its 62% owned subsidiary, Spectrum Brands. Our approximately 23% interest in HRG thereby converted into approximately 14% of Spectrum Brands outstanding shares.

◦

We own an approximate 31% interest in National Beef, which processes and markets fresh and chilled boxed beef, ground beef and beef by-products, consumer-ready beef and pork, and wet blue leather for domestic and international markets. On June 5, 2018, we sold 48% of our interest in National Beef to Marfrig and deconsolidated our investment in National Beef. Our retained 31% interest is accounted for under the equity method.


◦	Vitesse Energy Finance is our 97% owned consolidated subsidiary that acquires and invests in 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 is our 98% owned consolidated subsidiary that engages in the development and production of oil and gas from onshore, unconventional resource areas. JETX currently has non-operated working interests and acreage in east Texas.


◦	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 54% of Linkem’s common equity at June 30, 2018 . 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.


◦	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 38% and is accounted for under the equity method.


•	Corporate liquidity and other assets, net of Corporate liabilities, primarily consist of financial instruments owned, the deferred tax asset (exclusive of Jefferies Group's deferred tax asset), cash and cash equivalents, net of long-term debt, trade payables and accruals, as well as our outstanding mandatorily redeemable convertible preferred shares.

Liquidity and Capital Resources

Parent Company Liquidity

We are a diversified financial services company whose parent company assets principally consist of the stock or membership interests of our subsidiary businesses, cash and cash equivalents and other noncontrolling investments in debt and equity securities. We continuously evaluate the retention and disposition of our existing operations and investments, and investigate possible acquisitions of new businesses and investments in order to maximize shareholder value. Accordingly, further acquisitions, divestitures, investments and changes in capital structure are possible. Our principal sources of funds are distributions from subsidiaries, proceeds from divestitures of existing businesses and investments, repayment of subsidiary advances, available cash resources, liquid investments, funds distributed from subsidiaries as tax sharing payments, public and private capital market transactions, and management and other fees.

During the six months ended June 30, 2018 , we received $545.0 million of distributions from our existing subsidiary businesses, including $351.0 million from Jefferies Group. We also received $1,109.0 million from divestitures and repayments of advances, primarily from the sale of 48% of National Beef. Proceeds from the sale of 48% of National Beef and total distributions received from National Beef for the six months ended June 30, 2018 were $1,171.8 million.

Our cash resources and investments that are easily convertible into cash within a relatively short period of time total $1,788.9 million at June 30, 2018 , and are primarily comprised of cash, short-term bonds and notes of the U.S. Government and its agencies, and other publicly traded debt and equity securities. These are classified in our balance sheet as cash and cash equivalents, trading assets, available for sale securities and receivables.

Our short-term recurring cash requirements, which are principally the payment of interest on our debt, dividends and corporate cash overhead expenses, approximate $299 million on an annual basis. Dividends paid during the six months ended June 30, 2018 of $70.1 million include quarterly dividends of $0.10 per share. In July 2018, our Board of Directors declared a quarterly cash dividend equal to $0.125 per Jefferies common share, an increase of 25% from recent levels, payable on September 28, 2018 to record holders of Jefferies common shares on September 17, 2018. The payment of dividends is subject to the discretion of the Board of Directors and depends upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant. Our recurring cash requirements typically do not include significant amounts for tax payments, as we have NOLs and other tax attributes which offset federal tax liabilities.

The parent company’s primary long-term cash requirement is to make principal payments on its long-term debt ($1.0 billion principal outstanding as of June 30, 2018 ), of which $750.0 million is due in 2023 and $250.0 million in 2043. We continue to use our available liquidity to make acquisitions of new businesses and other investments, additional contributions to existing businesses, and from time to time, repurchases of our outstanding common shares. The timing of these events is influenced by many factors and therefore cannot be predicted.

In April 2018, Vitesse Energy Finance acquired a package of non-operated Bakken assets from a private equity fund for $190 million in cash, of which approximately $144 million was funded as equity by Jefferies and the balance was drawn under Vitesse Energy Finance’s credit line. The assets purchased include interests in mineral rights associated with future oil and gas development, as well as interests in existing cash flows from producing wells through revenue sharing arrangements.

In May 2018, we expanded our asset management efforts by forming a strategic relationship with Weiss Multi-Strategy Advisers LLC. We invested $250.0 million in Weiss' strategy and will receive a profit share in the first year, and a revenue share thereafter.

In June 2018, we completed the sale of 48% of National Beef to Marfrig for approximately $907.7 million in cash, reducing our ownership in National Beef to 31%.

Shares Outstanding

In November 2012, our Board of Directors had authorized the purchase of up to 25,000,000 common shares. Between 2012 and 2017 we bought 12,500,000 common shares under this authorization. In April 2018, the Board of Directors approved an increase

to our share repurchase program to 25,000,000 common shares from the 12,500,000 million remaining under its prior authorization. During the six months ended June 30, 2018 , we purchased a total of 24,084,080 of our common shares for $582.2 million (including $23.9 million which settled in July 2018) at an average price of $24.17 per share under this authorization. As of June 30, 2018 , 915,920 common shares remained authorized for repurchase. In July 2018, the Board of Directors approved an increase to our share repurchase program of 25,000,000 common shares, bringing our total authorization to 25,915,920 common shares.

In February 2009, the Board of Directors authorized, from time to time, the purchase of our outstanding debt securities through cash purchases in open market transactions, privately negotiated transactions or otherwise. Such repurchases, if any, depend upon prevailing market conditions, our liquidity requirements and other factors; such purchases may be commenced or suspended at any time without notice.

At June 30, 2018 , we had outstanding 333,310,944 common shares and 20,510,000 share-based awards that do not require the holder to pay any exercise price (potentially an aggregate of 353,820,944 outstanding common shares if all awards become outstanding common shares). The 20,510,000 share-based awards include the target number of shares under the senior executive award plan, which is more fully discussed in Note 15.

Credit Ratings

From time to time in the past, we have accessed public and private credit markets and raised capital in underwritten bond financings. In addition, the ratings of Jefferies are a factor considered by rating agencies that rate the debt of our subsidiary companies, including Jefferies Group, whose access to external financing is important to its day to day operations. Ratings issued by bond rating agencies, subject to change at any time, are as follows:



	Rating	Outlook
Moody’s Investors Service	Ba1	Positive
Standard and Poor’s	BBB-	Stable
Fitch Ratings	BBB	Stable

We target specific concentration, leverage and liquidity principles, expressed in the form of certain ratios and percentages, although there is no legal requirement to do so.

Concentration Target: As a diversification measure, we limit cash investments such that our single largest investment does not exceed 20% of equity excluding Jefferies Group, and that our next largest investment does not exceed 10% of equity excluding Jefferies Group, in each case measured at the time the investment was made. On this basis, HRG is our largest investment excluding Jefferies Group and Vitesse Energy Finance is our next largest investment excluding Jefferies Group. National Beef is no longer considered our largest investment because we have received back cash in excess of our cumulative investments. There were no investments made during the year that approached 10% of equity excluding Jefferies Group.

Liquidity Target: We hold a liquidity reserve calculated as a minimum of twenty-four months of holding company expenses (excluding non-cash components), parent company interest, and dividends. Maturities of parent company debt within the upcoming year are also included in the target; however, our next maturity is during 2023 so there is no current inclusion.



Liquidity reserve (in thousands):	June 30, 2018
Minimum reserve under liquidity target	$	597,241
Actual liquidity	$	1,788,890

Leverage Target: We target a maximum parent debt to stressed equity ratio of .50, with stressed equity defined as equity (excluding Jefferies Group) assuming the loss of our two largest investments.



Leverage target (dollars in thousands):	June 30, 2018
Total Jefferies Financial Group Inc. shareholders' equity	$	10,538,192
Less, investment in Jefferies Group	(5,604,375		)
Equity excluding Jefferies Group	4,933,817
Less, our two largest investments:
National Beef	(603,541		)
HRG, at cost	(475,600		)
Equity in a stressed scenario	3,854,676
Less, net deferred tax asset excluding Jefferies Group's amount	(263,137		)
Equity in a stressed scenario less net deferred tax asset	$	3,591,539
Parent company debt (see Note 13 to our consolidated financial statements)	$	989,611
Ratio of parent company debt to stressed equity:
Maximum	0.50			x
Actual, equity in a stressed scenario	0.26			x
Actual, equity in a stressed scenario excluding net deferred tax asset	0.28			x

Consolidated Statements of Cash Flows

As discussed above, we have historically relied on our available liquidity to meet short-term and long-term needs, and to make acquisitions of new businesses and investments. Except as otherwise disclosed herein, our operating businesses do not generally require significant funds to support their operating activities, and we do not depend on positive cash flow from our operating segments to meet our liquidity needs. The mix of our operating businesses and investments can change frequently as a result of acquisitions or divestitures, the timing of which is impossible to predict but which often have a significant impact on our Consolidated Statements of Cash Flows in any one period. Further, the timing and amounts of distributions from investments in associated companies may be outside our control. As a result, reported cash flows from operating, investing and financing activities do not generally follow any particular pattern or trend, and reported results in the most recent period should not be expected to recur in any subsequent period.

Net cash of $524.1 million was used for operating activities and $473.5 million was provided by operating activities during the six months ended June 30, 2018 and 2017 , respectively.


•	Jefferies Group used funds of $579.2 million and generated funds of $600.3 million during the six months ended June 30, 2018 and 2017 , respectively. Included in these amounts are distributions received from associated companies of $1.9 million and $6.2 million during 2018 and 2017 , respectively.

•

Within Other Financial Services, net cash of $55.7 million and $124.6 million, respectively, was used during the six months ended June 30, 2018 and 2017 to make additional investments in the Leucadia Asset Management platform. We received distributions from Berkadia, an associated company, of $17.0 million during 2018 and $4.3 million during 2017 . Cash used for operating activities also includes net cash used of $75.2 million during 2018 and $62.0 million during 2017 relating to automobile installment contracts, which is reflected in the net change in other receivables.

•

Within our Merchant Banking portfolio, manufacturing generated funds of $31.2 million and $13.6 million during the six months ended June 30, 2018 and 2017 , respectively. Cash of $13.6 million and $28.0 million was used to make additional investments in our trading portfolio during the six months ended June 30, 2018 and 2017 , respectively. We received distributions from Garcadia, an associated company, of $22.4 million during 2018 and $22.4 million during 2017 .


•	Net cash provided by operating activities of discontinued operations reflects funds generated by National Beef of $164.7 million and $77.6 million during the six months ended June 30, 2018 and 2017 , respectively.

Net cash of $8.1 million and $195.8 million was provided by investing activities during the six months ended June 30, 2018 and 2017 , respectively.


•	Acquisitions of property, equipment and leasehold improvements, and other assets related to Jefferies Group include $36.1 million during 2018 and $39.9 million during 2017 . Jefferies Group made loans to and investments in associated

companies of $1,906.1 million during 2018 and $2,642.6 million during 2017 . Jefferies Group received capital distributions and loan repayments from its associated companies of $1,873.0 million during 2018 and $2,579.7 million during 2017 .

•

Within Other Financial Services, acquisitions of property, equipment and leasehold improvements, and other assets were $0.5 million during 2018 and $0.9 million during 2017 . Collections on notes, loans and other receivables during 2018 and 2017 include $11.8 million and $50.8 million, respectively, related to FXCM. Loans to and investments in associated companies during 2017 include $31.3 million in HomeFed.

•

Within our Merchant Banking portfolio, acquisitions of property, equipment and leasehold improvements, and other assets primarily reflect activity in our oil and gas businesses. They totaled $204.0 million during 2018 and $22.8 million during 2017 . Proceeds from sale of subsidiary during 2017 relates to the sale of Conwed. Advances on notes, loans and other receivables during 2017 primarily relate to real estate projects in 54 Madison. Collections on notes, loans and other receivables during 2017 include $102.1 million related to real estate projects in 54 Madison. Loans to and investments in associated companies include $11.0 million to Golden Queen during 2018 , and $32.0 million to Linkem and $35.4 million to 54 Madison, of which $19.9 million was contributed by noncontrolling interests, during 2017 . We received capital distributions and loan repayments from associated companies of $13.1 million from National Beef, $2.6 million from Golden Queen, $7.9 million from 54 Madison and $0.6 million from Garcadia during 2018 and $7.0 million from Garcadia and $8.3 million from 54 Madison during 2017 .


•	Net cash provided by (used for) investing activities of discontinued operations includes acquisitions of property, equipment and leasehold improvements, and other assets related to National Beef of $33.7 million during 2018 and $24.0 million during 2017 , and net proceeds from sale of National Beef of $898.8 million during 2018 .

Net cash of $198.9 million and $243.3 million was provided by financing activities during the six months ended June 30, 2018 and 2017 , respectively.

•

Issuance of debt includes $1,694.2 million during 2018 and $866.6 million during 2017 related to Jefferies Group. Repayment of debt includes $1,320.3 million during 2018 and $75.7 million during 2017 related to Jefferies Group. Other changes in short-term borrowings, net all related to Jefferies Group. Net change in bank overdrafts of $2.7 million in 2018 and $1.5 million in 2017 related to Jefferies Group. Net change in other secured financings includes proceeds of $246.7 million during 2018 and payments of $369.6 million during 2017 related to Jefferies Group.


•	Within Other Financial Services, issuance of debt includes $122.2 million during 2018 and $124.1 million during 2017 . Their repayment of debt includes $249.7 million during 2018 and $186.0 million during 2017 . Net change in other secured financings includes proceeds of $187.5 million during 2018 and $105.6 million during 2017 related to Foursight Capital.


•	Within our Merchant Banking portfolio, issuance of debt includes $46.9 million during 2018 and $23.1 million during 2017 . Their repayment of debt includes $15.2 million during 2018 and $85.1 million during 2017 . During 2017 , contributions from noncontrolling interests include $24.4 million and distributions to noncontrolling interests include $9.3 million related to 54 Madison.


•	Purchases of common shares for treasury relate to shares purchased in the open market and shares received from participants in our stock compensation plans in 2018 and 2017 .


•	Net cash provided by (used for) financing activities of discontinued operations includes the issuance of debt by National Beef of $366.1 million during 2018 and $82.9 million during 2017 of borrowings under its bank credit facility and repayment of debt by National Beef of $175.1 million in 2018 and $77.6 million during 2017 .

Jefferies Group Liquidity

General

The Chief Financial Officer and Global Treasurer of Jefferies Group are responsible for developing and implementing liquidity, funding and capital management strategies for Jefferies Group's businesses. These policies are determined by the nature and needs of day to day business operations, business opportunities, regulatory obligations and liquidity requirements.

The actual levels of capital, total assets, and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long-term and short-term funding.

Jefferies Group has historically maintained a balance sheet consisting of a large portion of total assets in cash and liquid marketable securities, arising principally from traditional securities brokerage and trading activity. The liquid nature of these assets provides flexibility in financing and managing Jefferies Group's business.

A business unit level balance sheet and cash capital analysis is prepared and reviewed with senior management on a weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross balance sheet limits are adjusted, as necessary. This process ensures that the allocation of capital and costs of capital are incorporated into business decisions. The goals of this process are to protect Jefferies Group's platform, enable the businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage.

Jefferies Group actively monitors and evaluates its financial condition and the composition of its assets and liabilities. The overall securities inventory is continually monitored by Jefferies Group, including the inventory turnover rate, which confirms the liquidity of overall assets. Substantially all of Jefferies Group's financial instruments are valued on a daily basis and Jefferies Group monitors and employs balance sheet limits for its various businesses.

At June 30, 2018 , our Consolidated Statement of Financial Condition includes Jefferies Group's Level 3 trading assets that are approximately 2% of total trading assets.

Securities financing assets and liabilities include financing for financial instruments trading activity, matched book transactions and mortgage finance transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions.

The following table presents Jefferies Group's period end balance, average balance and maximum balance at any month end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (in millions):



	Six Months Ended June 30, 2018		Year Ended December 31, 2017
Securities purchased under agreements to resell:
Period end	$	3,822	$	3,690
Month end average	5,470		6,195
Maximum month end	7,593		7,814

Securities sold under agreements to repurchase:
Period end	$	8,774	$	8,661
Month end average	12,735		11,273
Maximum month end	15,579		13,679

Fluctuations in the balance of Jefferies Group's repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. Additionally, the fluctuations in the balances of Jefferies Group's securities purchased under agreements to resell over the periods presented are influenced in any given period by its clients’ balances and its clients' desires to execute collateralized financing arrangements via the repurchase market or via other financing products. Average balances and period end balances will fluctuate based on market and liquidity conditions and Jefferies Group considers the fluctuations intraperiod to be typical for the repurchase market.

Liquidity Management

The key objectives of Jefferies Group's liquidity management framework are to support the successful execution of its business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. The liquidity management policies are designed to mitigate the potential risk that adequate financing may not be accessible to service financial obligations without material franchise or business impact.

The principal elements of Jefferies Group's liquidity management framework are the Contingency Funding Plan, the Cash Capital Policy and the assessment of Maximum Liquidity Outflow.

Contingency Funding Plan . Jefferies Group's Contingency Funding Plan is based on a model of a potential liquidity contraction over a one year time period. This incorporates potential cash outflows during a liquidity stress event, including, but not limited to, the following:


•	Repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;


•	Maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;


•	Higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements;


•	Liquidity outflows related to possible credit downgrade;


•	Lower availability of secured funding;


•	Client cash withdrawals;


•	The anticipated funding of outstanding investment and loan commitments; and


•	Certain accrued expenses and other liabilities and fixed costs.

Cash Capital Policy . A cash capital model is maintained that measures long-term funding sources against requirements. Sources of cash capital include equity and the noncurrent portion of long-term borrowings. Uses of cash capital include the following:


•	Illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments;


•	A portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and


•	Drawdowns of unfunded commitments.

To ensure that Jefferies Group does not need to liquidate inventory in the event of a funding crisis, Jefferies Group seeks to maintain surplus cash capital, which is reflected in the leverage ratios Jefferies Group maintains. Jefferies Group's total long-term capital of $12.0 billion at June 30, 2018 exceeded its cash capital requirements.

Maximum Liquidity Outflow. Jefferies Group's businesses are diverse, and liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. As a result of Jefferies Group's policy to ensure it has sufficient funds to cover estimates of what may be needed in a liquidity crisis, Jefferies Group holds more cash and unencumbered securities and has greater long-term debt balances than the businesses would otherwise require. As part of this estimation process, Jefferies Group calculates a Maximum Liquidity Outflow that could be experienced in a liquidity crisis. Maximum Liquidity Outflow is based on a scenario that includes both a market-wide stress and firm-specific stress.

Based on the sources and uses of liquidity calculated under the Maximum Liquidity Outflow scenarios, Jefferies Group determines, based on its calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and considers any adjustments that may be necessary to Jefferies Group's inventory balances and cash holdings. At June 30, 2018 , Jefferies Group had sufficient excess liquidity to meet all contingent cash outflows detailed in the Maximum Liquidity Outflow. Jefferies Group regularly refines its model to reflect changes in market or economic conditions and the firm’s business mix.

Sources of Liquidity

Within Jefferies Group, the following are financial instruments that are cash and cash equivalents or are deemed by Jefferies Group's management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time, as reflected in our Consolidated Statements of Financial Condition (in thousands):



	June 30, 2018		Average Balance Second Quarter 2018 (1)		December 31, 2017
Cash and cash equivalents:
Cash in banks	$	2,160,424	$	2,362,348	$	2,244,207
Money market investments	2,388,790		1,473,341		2,920,285
Total cash and cash equivalents	4,549,214		3,835,689		5,164,492

Other sources of liquidity:
Debt securities owned and securities purchased under agreements to resell (2)	940,374		914,819		1,031,252
Other (3)	360,842		492,922		513,293
Total other sources	1,301,216		1,407,741		1,544,545

Total cash and cash equivalents and other liquidity sources	$	5,850,430	$	5,243,430	$	6,709,037


(1)	Average balances are calculated based on weekly balances.

(2)

Consists of high quality sovereign government securities and reverse repurchase agreements collateralized by U.S. government securities and other high quality sovereign government securities; deposits with a central bank within the European Economic Area, Canada, Australia, Japan, Switzerland or the U.S.; and securities issued by a designated multilateral development bank and reverse repurchase agreements with underlying collateral comprised of these securities.


(3)	Other includes unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably expected to be obtained from financial instruments owned that are currently not pledged after considering reasonable financing haircuts.

In addition to the cash balances and liquidity pool presented above, the majority of trading assets and liabilities are actively traded and readily marketable. Repurchase financing can be readily obtained for approximately 79.9% of Jefferies Group's inventory at haircuts of 10% or less, which reflects the liquidity of the inventory. In addition, as a matter of Jefferies Group's policy, all of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. Additionally, certain of Jefferies Group's trading assets primarily consisting of bank loans, consumer loans and investments are predominantly funded by Jefferies Group's long-term capital. Under Jefferies Group's cash capital policy, capital allocation levels are modeled that are more stringent than the haircuts used in the market for secured funding; and surplus capital is maintained at these more stringent levels. Jefferies Group continually assesses the liquidity of its inventory based on the level at which Jefferies Group could obtain financing in the market place for a given asset. Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less.

The following summarizes Jefferies Group's trading assets by asset class that are considered to be of a liquid nature and the amount of such assets that have not been pledged as collateral as reflected in the Consolidated Statements of Financial Condition (in thousands):



	June 30, 2018				December 31, 2017
	Liquid Financial Instruments		Unencumbered Liquid Financial Instruments (2)		Liquid Financial Instruments		Unencumbered Liquid Financial Instruments (2)
Corporate equity securities	$	1,644,030	$	218,548	$	1,718,617	$	272,380
Corporate debt securities	2,643,298		127,353		2,475,291		57,290
U.S. Government, agency and municipal securities	2,752,626		150,705		1,954,697		185,481
Other sovereign obligations	2,326,809		804,334		2,050,942		996,421
Agency mortgage-backed securities (1)	2,921,338		—		1,742,977		—
Loans and other receivables	261,127		—		243,664		—
	$	12,549,228	$	1,300,940	$	10,186,188	$	1,511,572


(1)	Consists solely of agency mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. These securities include pass-through securities, securities backed by adjustable rate mortgages ("ARMs"), collateralized mortgage obligations, commercial mortgage-backed securities and interest- and principal-only securities.


(2)	Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been.

In addition to being able to be readily financed at modest haircut levels, it is estimated that each of the individual securities within each asset class above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral.

Sources of Funding

Secured Financing

Readily available secured funding is used to finance Jefferies Group's financial instruments inventory. The ability of Jefferies Group to support increases in total assets is largely a function of the ability to obtain short and intermediate term secured funding, primarily through securities financing transactions. Repurchase or reverse repurchase agreements (collectively "repos"), respectively, are used to finance a portion of long inventory and cover a portion of short inventory through pledging and borrowing securities. Approximately 66.4% of Jefferies Group's cash and non-cash repurchase financing activities use collateral that is considered eligible collateral by central clearing corporations. Central clearing corporations are situated between participating members who borrow cash and lend securities (or vice versa); accordingly, repo participants contract with the central clearing corporation and not one another individually. Therefore, counterparty credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and variation margin calls from repo participants. The comparatively large proportion of Jefferies Group's total repo activity that is eligible for central clearing reflects the high quality and liquid composition of its trading inventory. For those asset classes not eligible for central clearing house financing, bi-lateral financings are sought on an extended term basis and the tenor of Jefferies Group's repurchase and reverse repurchase agreements generally exceeds the expected holding period of the assets Jefferies Group is financing. The weighted average maturity of cash and non-cash repurchase agreements for non-clearing corporation eligible funded inventory is approximately four months at June 30, 2018 .

Jefferies Group's ability to finance inventory via central clearinghouses and bi-lateral arrangements is augmented by Jefferies Group's ability to draw bank loans on an uncommitted basis under its various banking arrangements. As of June 30, 2018 , short-term borrowings, which must be repaid within one year or less and include bank loans and overdrafts, borrowings under revolving credit facilities and structured notes totaled $506.2 million. Interest under the bank lines is generally at a spread over the federal funds rate. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Average daily short-term borrowings outstanding for Jefferies Group were $584.7 million and $536.9 million for the three and six months ended June 30, 2018 , respectively.

Jefferies Group's short-term borrowings include an Intraday Credit Facility, whereby the Bank of New York Mellon has agreed to make revolving intraday credit advances for an aggregate committed amount of $150.0 million. The Intraday Credit Facility contains financial covenants, which includes a minimum regulatory net capital requirement for its U.S. broker-dealer. Interest is based on the higher of the Federal funds effective rate plus 0.5% or the prime rate. During the six months ended June 30, 2018 , Jefferies Group was in compliance with all debt covenants under the Intraday Credit Facility.

In addition to the above financing arrangements, Jefferies Group issues notes backed by eligible collateral under a master repurchase agreement, which provides an additional financing source for its inventory ("repurchase agreement financing program"). The outstanding amount of the notes issued under the program was $968.8 million in aggregate, which is presented within Other secured financings in the Consolidated Statement of Financial Condition at June 30, 2018 . All of the notes bear interest at a spread over one month LIBOR. Of the $968.8 million aggregate notes, $101.3 million matures in July 2018, but is currently redeemable at Jefferies Group's option or the option of the noteholders; $75.0 million matures in July 2018; $125.0 million matures in August 2018, but is currently redeemable at Jefferies Group's option or the option of the noteholders; $160.0 million matures in November 2018, but is currently redeemable at Jefferies Group's option; $150.0 million matures in March 2019; $80.0 million matures in April 2019, but is currently redeemable at Jefferies Group's option; $125.0 million matures in July 2019; and $152.5 million matures in July 2019, but is currently redeemable at the option of the noteholders;.

Long-Term Debt

Jefferies Group's long-term debt reflected in the Consolidated Statement of Financial Condition at June 30, 2018 is $6.6 billion. Jefferies Group's long-term debt has a weighted average maturity of approximately 9.0 years. Jefferies Group's next scheduled maturity is the $680.8 million principal amount of 8.5% Senior Notes that mature in July 2019.

On May 16, 2018, Jefferies Group entered into a senior secured revolving credit facility ("Jefferies Group Revolving Credit Facility") with a group of commercial banks for an aggregate principal amount of at $160.0 million. The borrower under Jefferies Group Revolving Credit Facility is Jefferies Leveraged Credit Products, LLC, with a guarantee from Jefferies Group. At June 30, 2018 , borrowings under Jefferies Group Revolving Credit Facility amounted to $158.3 million. Interest is based on an annual alternative base rate or an adjusted LIBOR, as defined in Jefferies Group Revolving Credit Facility agreement. Jefferies Group Revolving Credit Facility contains certain covenants that, among other things, imposes restrictions on the future indebtedness of Jefferies Leveraged Credit Products, LLC, requires Jefferies Group to maintain specified level of tangible net worth and liquidity amounts, and requires certain of its subsidiaries to maintain specified levels of regulated capital. Throughout the period and at June 30, 2018 , no instances of noncompliance with Jefferies Group Revolving Credit Facility covenants occurred and Jefferies Group expects to remain in compliance given its current liquidity, and anticipated funding requirements given its business plan and profitability expectations.

Jefferies Group's long-term debt ratings are as follows:



	Rating	Outlook
Moody’s Investors Service	Baa3	Stable
Standard and Poor’s	BBB-	Stable
Fitch Ratings	BBB	Stable

Jefferies Group's access to external financing to finance its day to day operations, as well as the cost of that financing, is dependent upon various factors, including its debt ratings. Jefferies Group's current debt ratings are dependent upon many factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and liquidity management, capital structure, overall risk management, business diversification and market share and competitive position in the markets in which it operates. Deteriorations in any of these factors could impact Jefferies Group's credit ratings. While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact on its business and trading results in future periods is inherently uncertain and depends on a number of factors, including the magnitude of the downgrade, the behavior of individual clients and future mitigating action taken by Jefferies Group.

In connection with certain OTC derivative contract arrangements and certain other trading arrangements, Jefferies Group may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of a credit rating downgrade. At June 30, 2018 , the amount of additional collateral that could be called by counterparties, exchanges and clearing organizations under the terms of such agreements in the event of a downgrade of Jefferies Group's long-term credit rating below investment grade was $58.6 million. For certain foreign clearing organizations, credit rating is only one of several factors employed in determining collateral that could be called. The above represents management’s best estimate for additional collateral to be

called in the event of credit rating downgrade. The impact of additional collateral requirements is considered in Jefferies Group's Contingency Funding Plan and calculation of Maximum Liquidity Outflow, as described above.

Ratings issued by credit rating agencies are subject to change at any time.

Net Capital

Jefferies Group operates a broker-dealer registered with the SEC and member firms of the Financial Industry Regulatory Authority ("FINRA"). Jefferies LLC is subject to the Securities and Exchange Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital and has elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Jefferies LLC, as a dually-registered U.S. broker-dealer and futures commission merchant ("FCM"), is also subject to Rule 1.17 of the Commodity Futures Trading Commission ("CFTC"), which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17. Jefferies LLC’s net capital and excess net capital as of June 30, 2018 were $1,666.9 million and $1,560.7 million, respectively. FINRA is the designated examining authority for Jefferies Group's U.S. broker-dealer and the National Futures Association is the designated self-regulatory organization for Jefferies LLC as an FCM.

Certain other U.S. and non-U.S. subsidiaries of Jefferies Group are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject to the regulatory supervision and requirements of the Financial Conduct Authority in the United Kingdom. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010. The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. While entities that register under these provisions will be subject to regulatory capital requirements, these regulatory capital requirements have not yet been finalized. Jefferies Group expects that these provisions will result in modifications to the regulatory capital requirements of some of its entities, and will result in some of its other entities becoming subject to regulatory capital requirements for the first time, including Jefferies Financial Services, Inc., which registered as a swap dealer with the CFTC during January 2013 and Jefferies Financial Products LLC, which registered during August 2014. The regulatory capital requirements referred to above may restrict Jefferies Group's ability to withdraw capital from its regulated subsidiaries. Some of our other consolidated subsidiaries also have credit agreements which may restrict the payment of cash dividends, or the ability to make loans or advances to the parent company.

Off-Balance Sheet Risk

Jefferies Group has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon our consolidated financial statements.

Cautionary Statement for Forward-Looking Information

This report contains or incorporates by reference "forward-looking statements" within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include statements about our future and statements that are not historical facts. These forward-looking statements are usually preceded by the words "believe," "intend," "may," "will," or similar expressions. Forward-looking statements may contain expectations regarding revenues, earnings, operations and other results, and may include statements of future performance, plans and objectives. Forward-looking statements include expectations relating to the Garcadia transaction disclosed in this report. Forward-looking statements also include statements pertaining to our strategies for future development of our businesses and products. Forward-looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:


•	The description of our business and risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2017 and filed with the Securities and Exchange Commission on February 26, 2018;


•	The discussion and analysis of financial condition and result of operations contained in this report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein;


•	The notes to the consolidated financial statements in this report; and


•	Cautionary statements we make in our public documents, reports and announcements.

Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law.

Item 3 . Quantitative and Qualitative Disclosures About Market Risk .

The following includes "forward-looking statements" that involve risk and uncertainties. See "Cautionary Statement for Forward-Looking Information" above. Actual results could differ materially from those projected in the forward-looking statements. The discussion of risk is presented separately for Jefferies Group and the balance of our company. Exclusive of Jefferies Group, our market risk arises principally from interest rate risk related to our financial instruments owned and equity price risk. Information related thereto required under this Item is contained in Item 7A in our 2017 10-K, and is incorporated by reference herein.

As more fully discussed elsewhere in this Report, at June 30, 2018 , we owned approximately 46.6 million common shares of HRG, representing approximately 23% of HRG’s outstanding common shares, which are accounted for under the fair value option and included within Trading assets at fair value of $610.0 million at June 30, 2018 . Assuming a decline of 10% in market prices, the value of our investment in HRG could decrease by approximately $61.0 million. Excluding Jefferies Group and HRG, Trading assets at fair value include corporate equity securities with an aggregate fair value of $1,491.2 million at June 30, 2018 . Assuming a decline of 10% in market prices, the value of these investments could decrease by approximately $149.1 million.

Jefferies Group

The potential for changes in the value of financial instruments is referred to as market risk. Jefferies Group's market risk generally represents the risk of loss that may result from a change in the value of a financial instrument as a result of fluctuations in interest rates, credit spreads, equity prices, commodity prices and foreign exchange rates, along with the level of volatility. Interest rate risks result primarily from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads. Equity price risks result from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. Commodity price risks result from exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices. Market risk arises from market making, proprietary trading, underwriting, specialist and investing activities. Jefferies Group seeks to manage its exposure to market risk by diversifying exposures, controlling position sizes, and establishing economic hedges in related securities or derivatives. Due to imperfections in correlations, gains and losses can occur even for positions that are hedged. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and results of the trading groups.

Value-at-Risk

Within Jefferies Group, Value-at-Risk ("VaR") is used as a measurement of market risk using a model that simulates revenue and loss distributions on its trading portfolios by applying historical market changes to the current portfolio. Using the results of this simulation, VaR measures the potential loss in value of its financial instruments due to adverse market movements over a specified time horizon at a given confidence level. Jefferies Group calculates a one-day VaR using a one year look-back period measured at a 95% confidence level.

As with all measures of VaR, the estimate has inherent limitations due to the assumption that historical changes in market conditions are representative of the future. Furthermore, the VaR model measures the risk of a current static position over a one-day horizon and might not capture the market risk of positions that cannot be liquidated or offset with hedges in a one-day period. Published VaR results reflect past trading positions while future risk depends on future positions.

While Jefferies Group believes the assumptions and inputs in its risk model are reasonable, Jefferies Group could incur losses greater than the reported VaR because the historical market prices and rates changes may not be an accurate measure of future market events and conditions. Consequently, this VaR estimate is only one of a number of tools Jefferies Group uses in its daily risk management activities. When comparing the VaR numbers to those of other firms, it is important to remember that different methodologies and assumptions could produce significantly different results.

The following table illustrates each separate component of VaR for each component of market risk by interest rate, equity, currency and commodity products, as well as for Jefferies Group's overall trading positions using the past 365 days of historical data. The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories and arises because the market risk categories are not perfectly correlated. Since we consolidate Jefferies Group on a one month lag, all amounts reported are for Jefferies Group's quarterly and annual fiscal periods.



	Daily VaR (1) Value-at-Risk in Trading Portfolios
	(In millions)
Risk Categories	VaR at June 30, 2018			Daily VaR for the Three Months Ended June 30, 2018							VaR at March 31, 2018			Daily VaR for the Three Months Ended March 31, 2018
				Average			High		Low					Average			High		Low
Interest Rates	$	4.24		$	4.64		$	5.76	$	3.56	$	4.36		$	4.97		$	6.82	$	3.24
Equity Prices	3.31			4.82			8.05		3.25		4.70			4.23			6.23		3.08
Currency Rates	0.13			0.11			0.17		0.04		0.07			0.14			0.24		0.02
Commodity Prices	0.86			0.50			0.73		0.29		0.36			0.41			0.95		0.26
Diversification Effect (2)	(3.33		)	(3.29		)	N/A		N/A		(3.27		)	(3.45		)	N/A		N/A
Firmwide	$	5.21		$	6.78		$	10.32	$	5.21	$	6.22		$	6.30		$	7.58	$	4.76


(1)	For the VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used.


(2)	The diversification effect is not applicable for the maximum and minimum VaR values as Jefferies Group's VaR and VaR values for the four risk categories might have occurred on different days during the period.

Average daily VaR increased to $6.78 million for the three months ended June 30, 2018 from $6.30 million for the three months ended March 31, 2018. The increase was primarily driven by higher market volatility causing an increase in equity price risk. This increase was partially offset by a decrease in interest rate risk and a lower diversification benefit.

The primary method used to test the efficacy of the VaR model is to compare actual daily net revenue for those positions included in the VaR calculation with the daily VaR estimate. This evaluation is performed at various levels of the trading portfolio, from the holding company level down to specific business lines. For the VaR model, trading related revenue is defined as principal transactions revenue, trading related commissions, revenue from securitization activities and net interest income. For a 95% confidence one day VaR model (i.e., no intra-day trading), assuming current changes in market value are consistent with the historical changes used in the calculation, net trading losses would not be expected to exceed the VaR estimates more than twelve times on an annual basis (i.e., once in every 20 days). During the three months ended June 30, 2018 , results of the evaluation at the aggregate level demonstrated one day when the net trading loss exceeded the 95% one day VaR.

Certain positions within financial instruments are not included in the VaR model because VaR is not the most appropriate measure of risk. Accordingly, Jefferies Group's Risk Management has additional procedures in place to assure that the level of potential loss that would arise from market movements are within acceptable levels. Such procedures include performing stress tests, monitoring concentration risk and tracking price target/stop loss levels. The table below presents the potential reduction in net income associated with a 10% stress of the fair value of the positions that are not included in the VaR model at June 30, 2018 (in thousands):



	10% Sensitivity
Private investments	$	16,372
Corporate debt securities in default	$	16,388
Trade claims	$	3,165

VaR also excludes the impact of changes in Jefferies Group's own credit spreads on its structured notes for which the fair value option was elected. The estimated credit spread risk sensitivity for each one basis point widening in Jefferies Group's own credit spreads on financial liabilities for which the fair value option was elected was an increase in value of approximately $1.0 million at June 30, 2018 , which is included in Accumulated other comprehensive income.

There were nine days with trading losses out of a total of 64 trading days in the three months ended June 30, 2018 .

Scenario Analysis and Stress Tests

While VaR measures potential losses due to adverse changes in historical market prices and rates, Jefferies Group uses stress testing to analyze the potential impact of specific events or moderate or extreme market moves on its current portfolio both firm wide and within business segments. Stress scenarios comprise both historical market price and rate changes and hypothetical market environments, and generally involve simultaneous changes of many risk factors. Indicative market changes in Jefferies Group's scenarios include, but are not limited to, a large widening of credit spreads, a substantial decline in equities markets, significant moves in selected emerging markets, large moves in interest rates, changes in the shape of the yield curve and large moves in European markets. In addition, Jefferies Group also performs ad hoc stress tests and adds new scenarios as market conditions dictate. Because Jefferies Group's stress scenarios are meant to reflect market moves that occur over a period of time, its estimates of potential loss assume some level of position reduction for liquid positions. Unlike Jefferies Group's VaR, which measures potential losses within a given confidence interval, stress scenarios do not have an associated implied probability; rather, stress testing is used to estimate the potential loss from market moves that tend to be larger than those embedded in the VaR calculation.

Stress testing is performed and reported regularly as part of the risk management process. Stress testing is used to assess Jefferies Group's aggregate risk position as well as for limit setting and risk/reward analysis.

Counterparty Credit Risk and Issuer Country Exposure

Counterparty Credit Risk

Credit risk is the risk of loss due to adverse changes in a counterparty’s credit worthiness or its ability or willingness to meet its financial obligations in accordance with the terms and conditions of a financial contract. Jefferies Group is exposed to credit risk as a trading counterparty to other broker-dealers and customers, as a direct lender and through extending loan commitments, as a holder of securities and as a member of exchanges and clearing organizations.

It is critical to Jefferies Group's financial soundness and profitability that Jefferies Group properly and effectively identify, assess, monitor and manage the various credit and counterparty risks inherent in its businesses. Credit is extended to counterparties in a controlled manner in order to generate acceptable returns, whether such credit is granted directly or is incidental to a transaction. All extensions of credit are monitored and managed on a Jefferies Group enterprise level in order to limit exposure to loss related to credit risk.

Jefferies Group employs a Credit Risk Framework, which is responsible for identifying credit risks throughout its operating businesses, establishing counterparty limits and managing and monitoring those credit limits. Jefferies Group's framework includes:


•	Defining credit limit guidelines and credit limit approval processes;


•	Providing a consistent and integrated credit risk framework across the enterprise;


•	Approving counterparties and counterparty limits with parameters set by its Risk Management Committee;


•	Negotiating, approving and monitoring credit terms in legal and master documentation;


•	Delivering credit limits to all relevant sales and trading desks;


•	Maintaining credit reviews for all active and new counterparties;


•	Operating a control function for exposure analytics and exception management and reporting;


•	Determining the analytical standards and risk parameters for on-going management and monitoring of global credit risk books;


•	Actively managing daily exposure, exceptions, and breaches;


•	Monitoring daily margin call activity and counterparty performance (in concert with the Margin Department); and


•	Setting the minimum global requirements for systems, reports, and technology.

Jefferies Group Credit Exposures

Credit exposure exists across a wide-range of products, which includes the following:


•	Loans and lending, arising in connection with Jefferies Group's capital markets activities and forward settling traded loans;


•	Securities and margin finance, which represents securities financing transactions (reverse repurchase agreements, repurchase agreements and securities lending agreements);


•	OTC derivatives, which are reported net by counterparty when a legal right of setoff exists under an enforceable master netting agreement, and includes forward settling trades; and


•	Cash and cash equivalents, which include both interest-bearing and non-interest bearing deposits at banks.

Current counterparty credit exposures are summarized in the tables below and provided by credit quality, region and industry. Credit exposures presented take netting and collateral into consideration by counterparty and master agreement. Collateral taken into consideration includes

100

both collateral received as cash as well as collateral received in the form of securities or other arrangements. Current exposure is the loss that would be incurred on a particular set of positions in the event of default by the counterparty, assuming no recovery. Current exposure equals the fair value of the positions less collateral. Issuer risk is the credit risk arising from inventory positions (for example, corporate debt securities and secondary bank loans). Issuer risk is included in Jefferies Group's country risk exposure tables below. Of Jefferies Group's counterparty credit exposure at June 30, 2018 , excluding cash and cash equivalents, the percentage of investment grade counterparties decreased to 91% from 92% when compared with December 31, 2017 , with a majority concentrated in North America.

When comparing Jefferies Group's credit exposure at June 30, 2018 with credit exposure at December 31, 2017 , excluding cash and cash equivalents, current exposure decreased to approximately $1,303 million from $1,353 million. Counterparty credit exposure from securities and margin finance decreased by 6%, primarily driven by investment grade European banks and broker-dealers, and exposure from loans and lending decreased by 9%, while exposure from OTC derivatives increased by 6% during the period.

The amounts in the tables below are for amounts included in our Consolidated Statements of Financial Condition at June 30, 2018 and December 31, 2017 (in millions).



Counterparty Credit Exposure by Credit Rating
	Loans and Lending				Securities and Margin Finance				OTC Derivatives				Total				Cash and Cash Equivalents				Total with Cash and Cash Equivalents
	At				At				At				At				At				At
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
AAA Range	$	—	$	—	$	3.5	$	6.4	$	—	$	—	$	3.5	$	6.4	$	2,360.3	$	2,924.2	$	2,363.8	$	2,930.6
AA Range	45.0		47.7		50.6		61.3		2.5		3.8		98.1		112.8		122.1		158.6		220.2		271.4
A Range	1.0		1.2		621.3		603.0		257.3		260.6		879.6		864.8		1,861.6		1,751.9		2,741.2		2,616.7
BBB Range	0.3		0.5		160.7		232.5		48.2		28.5		209.2		261.5		26.6		152.3		235.8		413.8
BB or Lower	9.3		12.5		17.3		8.1		21.3		16.7		47.9		37.3		101.4		100.6		149.3		137.9
Unrated	64.6		70.1		—		—		—		—		64.6		70.1		77.2		76.9		141.8		147.0
Total	$	120.2	$	132.0	$	853.4	$	911.3	$	329.3	$	309.6	$	1,302.9	$	1,352.9	$	4,549.2	$	5,164.5	$	5,852.1	$	6,517.4



Counterparty Credit Exposure by Region
	Loans and Lending				Securities and Margin Finance				OTC Derivatives				Total				Cash and Cash Equivalents				Total with Cash and Cash Equivalents
	At				At				At				At				At				At
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Asia/Latin America/Other	$	—	$	3.0	$	40.5	$	45.8	$	0.2	$	0.3	$	40.7	$	49.1	$	242.2	$	280.7	$	282.9	$	329.8
Europe	0.5		1.0		361.5		403.5		56.9		54.0		418.9		458.5		290.8		540.0		709.7		998.5
North America	119.7		128.0		451.4		462.0		272.2		255.3		843.3		845.3		4,016.2		4,343.8		4,859.5		5,189.1
Total	$	120.2	$	132.0	$	853.4	$	911.3	$	329.3	$	309.6	$	1,302.9	$	1,352.9	$	4,549.2	$	5,164.5	$	5,852.1	$	6,517.4



Counterparty Credit Exposure by Industry
	Loans and Lending				Securities and Margin Finance				OTC Derivatives				Total				Cash and Cash Equivalents				Total with Cash and Cash Equivalents
	At				At				At				At				At				At
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Asset Managers	$	—	$	—	$	6.7	$	15.9	$	0.3	$	7.1	$	7.0	$	23.0	$	2,438.8	$	2,920.3	$	2,445.8	$	2,943.3
Banks, Broker-dealers	0.8		1.7		565.4		620.8		307.3		282.6		873.5		905.1		2,110.4		2,244.2		2,983.9		3,149.3
Corporates	99.8		87.5		—		—		12.8		14.7		112.6		102.2		—		—		112.6		102.2
Other	19.6		42.8		281.3		274.6		8.9		5.2		309.8		322.6		—		—		309.8		322.6
Total	$	120.2	$	132.0	$	853.4	$	911.3	$	329.3	$	309.6	$	1,302.9	$	1,352.9	$	4,549.2	$	5,164.5	$	5,852.1	$	6,517.4

For additional information regarding credit exposure to OTC derivative contracts, see Note 4 in our consolidated financial statements.

101

Jefferies Group Country Risk Exposure

Country risk is the risk that events or developments that occur in the general environment of a country or countries due to economic, political, social, regulatory, legal or other factors, will affect the ability of obligors of the country to honor their obligations. Jefferies Group defines the country of risk as the country of jurisdiction or domicile of the obligor.

The following tables reflect Jefferies Group's top exposures to the sovereign governments, corporations and financial institutions in those non-U.S. countries in which Jefferies Group has a net long issuer and counterparty exposure (in millions):



	June 30, 2018
	Issuer Risk								Counterparty Risk								Issuer and Counterparty Risk
	Fair Value of Long Debt Securities		Fair Value of Short Debt Securities			Net Derivative Notional Exposure			Loans and Lending		Securities and Margin Finance		OTC Derivatives		Cash and Cash Equivalents		Excluding Cash and Cash Equivalents		Including Cash and Cash Equivalents
Germany	$	173.1	$	(469.7	)	$	656.4		$	—	$	84.1	$	2.2	$	89.3	$	446.1	$	535.4
United Kingdom	444.6		(246.6		)	(37.9		)	0.5		67.8		50.1		49.2		278.5		327.7
Canada	109.1		(61.1		)	(80.9		)	—		2.4		229.2		7.9		198.7		206.6
Japan	53.2		(32.4		)	—			—		20.1		—		126.1		40.9		167.0
Belgium	130.3		(101.3		)	—			—		—		—		104.0		29.0		133.0
Italy	1,167.5		(998.8		)	(36.8		)	—		—		0.5		—		132.4		132.4
Austria	175.5		(54.7		)	—			—		—		—		—		120.8		120.8
Switzerland	101.8		(29.7		)	—			—		25.6		2.7		3.7		100.4		104.1
Brazil	161.6		(58.8		)	(0.2		)	—		—		—		0.2		102.6		102.8
Finland	84.0		(12.5		)	—			—		—		—		0.6		71.5		72.1
Total	$	2,600.7	$	(2,065.6	)	$	500.6		$	0.5	$	200.0	$	284.7	$	381.0	$	1,520.9	$	1,901.9



	December 31, 2017
	Issuer Risk								Counterparty Risk								Issuer and Counterparty Risk
	Fair Value of Long Debt Securities		Fair Value of Short Debt Securities			Net Derivative Notional Exposure			Loans and Lending		Securities and Margin Finance		OTC Derivatives		Cash and Cash Equivalents		Excluding Cash and Cash Equivalents			Including Cash and Cash Equivalents
Germany	$	493.3	$	(396.2	)	$	98.2		$	—	$	78.9	$	2.1	$	181.9	$	276.3		$	458.2
United Kingdom	634.6		(394.4		)	(72.1		)	0.7		97.8		26.9		45.0		293.5			338.5
Spain	217.9		(181.3		)	7.5			—		—		—		151.6		44.1			195.7
Japan	100.1		(81.3		)	4.1			—		25.8		—		136.3		48.7			185.0
Canada	205.3		(164.7		)	(128.5		)	—		17.3		222.8		7.4		152.2			159.6
Netherlands	315.9		(210.9		)	0.9			—		44.1		2.2		—		152.2			152.2
Switzerland	31.0		(16.9		)	(1.1		)	—		54.3		3.3		4.5		70.6			75.1
Hong Kong	23.0		(25.1		)	—			—		1.0		—		58.7		(1.1		)	57.6
Australia	50.5		(14.0		)	0.3			—		15.0		0.3		4.7		52.1			56.8
Singapore	36.0		(4.2		)	—			—		—		—		24.7		31.8			56.5
Total	$	2,107.6	$	(1,489.0	)	$	(90.7	)	$	0.7	$	334.2	$	257.6	$	614.8	$	1,120.4		$	1,735.2

Jefferies Group's net issuer and counterparty risk exposure to Puerto Rico of $16.6 million, as reflected in our Consolidated Statement of Financial Condition at June 30, 2018 , is in connection with its municipal securities market-making activities. The government of Puerto Rico is seeking to restructure much of its $74.1 billion in debt on a voluntary basis. At June 30, 2018 , Jefferies Group had no other material exposure to countries where either sovereign or non-sovereign sectors potentially pose potential default risk as the result of liquidity concerns.

102

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of June 30, 2018 . Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2018 .

Changes in internal control over financial reporting

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended June 30, 2018 , that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The information set forth in response to this Item 1 is incorporated by reference from the "Contingencies" section in Note 20, Commitments, Contingencies and Guarantees, in the notes to consolidated financial statements in Item 1 of Part I of this Quarterly Report, which is incorporated herein by reference.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.

The following table presents information on our purchases of our common shares during the three months ended June 30, 2018 :



	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1, 2018 to April 30, 2018	11,819,310	$	24.37	11,819,310	13,180,690
May 1, 2018 to May 31, 2018	8,180,690	$	24.44	8,180,690	5,000,000
June 1, 2018 to June 30, 2018 (3)	4,148,552	$	23.08	4,084,080	915,920
Total	24,148,552			24,084,080

(1)

Includes an aggregate 64,472 shares repurchased other than as part of our publicly announced Board authorized repurchase program. We repurchased these securities in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units. The total number of shares purchased does not include unvested shares forfeited back to us pursuant to the terms of our share compensation plans.

(2)

In November 2012, our Board of Directors authorized the repurchase of up to 25,000,000 of our common shares. Between 2012 and 2017 we bought 12,500,000 common shares under this authorization. In April 2018, the Board of Directors approved an increase to our share repurchase program to 25,000,000 common shares from the 12,500,000 remaining under its prior authorization. In July 2018, the Board of Directors approved an increase to our share repurchase program of 25,000,000 common shares, bringing our total authorization to 25,915,920 common shares.


(3)	Includes 1,041,000 shares that settled in July 2018.

103



Item 6.	Exhibits.

See Exhibit Index.

Exhibit Index




3.1	Restated Certificate of Incorporation of Jefferies Financial Group Inc.

3.2	Amended and Restated By-Laws of Jefferies Financial Group Inc. (effective May 23, 2018).

10.1*	Letter of Intent between Leucadia National Corporation and Garff Ventures, LLC, Garff Ventures II, LLC, Garff Ventures Auto, LLC, Garff Ventures Auto II, LLC and Garff Enterprises, Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 10, 2018).

10.2*	Purchase and Sale Agreement, dated as of April 9, 2018, by and among NBM US Holdings, Inc., a Delaware corporation, Marfrig Global Foods S.A., a Brazilian corporation (sociedade por ações), Leucadia National Corporation, a New York corporation, NBPCo Holdings, LLC, a South Dakota limited liability company, Leucadia, in its capacity as the Sellers’ Representative, and National Beef Packing Company, LLC, a Delaware limited liability company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 10, 2018).

10.3*	Amendment to Purchase and Sale Agreement, dated as of June 5, 2018, by and among NBM US Holdings, Inc., a Delaware corporation, Marfrig Global Foods S.A., a Brazilian corporation (sociedade por ações), Jefferies Financial Group Inc. (f/k/a Leucadia National Corporation), a New York corporation, NBPCo Holdings, LLC, a South Dakota limited liability company and National Beef Packing Company, LLC, a Delaware limited liability company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 11, 2018).

10.4*	Third Amended and Restated Limited Liability Company Agreement of National Beef Packing Company, LLC, a Delaware limited liability company (the “Company”), dated as of June 5, 2018, by and among the Company, Jefferies Financial Group Inc. (f/k/a Leucadia National Corporation), NBM US Holdings, Inc., a Delaware corporation, U.S. Premium Beef, LLC, a Delaware limited liability company, NBPCo Holdings, LLC, a South Dakota limited liability company and TMK Holdings, LLC, a Missouri limited liability company (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 11, 2018).

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	Financial statements from the Quarterly Report on Form 10-Q of Jefferies Financial Group Inc. for the quarter ended June 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity and (vi) the Notes to Consolidated Financial Statements.

* Incorporated by reference.

104

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	JEFFERIES FINANCIAL GROUP INC.
		(Registrant)

Date: August 1, 2018	By:	/s/ John M. Dalton
		Name: John M. Dalton
		Title: Vice President and Controller
		(Chief Accounting Officer)

105

Exhibit 3.1

RESTATED
CERTIFICATE OF INCORPORATION
OF
JEFFERIES FINANCIAL GROUP INC.
Under Section 807 of the Business Corporation Law
_______________

Pursuant to the provisions of Section 807 of the Business Corporation Law, the undersigned hereby certify:

FIRST : The name of the corporation is JEFFERIES FINANCIAL GROUP INC. The name under which the Corporation was formed is Talcott National Corporation.

SECOND : The date of the filing of the Certificate of Incorporation of the Corporation by the Department of State of the State of New York was May 24, 1968.

THIRD : The text of the Certificate of Incorporation is hereby restated without amendments or changes to read as herein set forth in full.

FIRST: The name of the corporation is JEFFERIES FINANCIAL GROUP INC. (the “Corporation”).

SECOND: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be engaged under the Business Corporation Law. The Corporation is not being formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained.

THIRD: The office of the Corporation in the State of New York is to be located in The City of New York, County of New York.

FOURTH: The aggregate number of shares of capital stock of all classes which the Corporation shall have authority to issue is 606,000,000, divided into 6,000,000 shares, having a par value of $1 each, which are designated Preferred Stock and are issuable in series, and 600,000,000 shares, having a par value of $1 each, which are designated Common Stock.

No holder of shares of any class or series of stock of the Corporation, whether now or hereafter authorized or outstanding, shall have any pre-emptive, preferential or other right to subscribe for or purchase any shares of any class or series of capital stock of the Corporation, whether now or hereafter authorized or outstanding, or any bonds, notes, obligations, options, warrants, rights or other securities which the Corporation may at any time issue or sell, whether or not the same be convertible into or exercisable for the purchase of any class or series of capital stock of the Corporation, it being intended by this paragraph that all pre-emptive rights of any kind applicable to the securities of the Corporation are eliminated.

The designations, relative rights, preferences and limitations of each class of the Corporation’s capital stock and each series thereof, to the extent fixed in the Corporation’s Certificate of Incorporation, and the authority vested in the Board of Directors of the Corporation to establish and designate series of the Preferred Stock and to fix variations in the relative rights, preferences and limitations between such series, are as follows:

I.

PREFERRED STOCK

GENERAL PROVISIONS RELATING TO ALL SERIES

1. The Preferred Stock shall consist of one class, may be issued from time to time in one or more series, and the shares of any one series thereof may be issued from time to time. All shares of the Preferred Stock of the same series shall be identical in all respects, except that shares of any one series issued at different times may differ as to the dates, if any, from which dividends thereon may accumulate. All shares of Preferred Stock of all series shall be identical in all respects set forth in sections 1 through 5 hereof (except as otherwise permitted in such sections) and shall be of equal rank as set forth in sections 2 and 3 below. Subject to the foregoing, (i) the designations, relative rights, preferences and limitations of the shares of each such series may differ from those of any and all other such series authorized and/or outstanding and (ii) the Board of Directors of the Corporation is hereby expressly granted authority to establish and designate series and to fix with respect to any such series, or alter in any one or more respects from time to time, by resolution or resolutions adopted prior to the issuance of any shares of such series, and by filing a certificate under Section 805 of the Business Corporation Law, (a) the number of

shares constituting such series and the designation thereof, (b) the rate of dividends, (c) redemption terms (including purchase and sinking funds provisions), (d) conversion rights into any class or series of capital stock of the Corporation, (e) liquidation preferences, (f) voting rights and (g) any other lawful rights, preferences and limitations.

2. Unless otherwise provided in the resolutions creating or altering a series, the holders of Preferred Stock of each series shall be entitled to receive, as and when declared by the Board of Directors, out of funds or other assets of the Corporation legally available therefor, cumulative dividends at the annual rate fixed by the Board of Directors with respect to such series, and no more, payable in cash, on such dates in each year as the Board of Directors may determine, such dividends with respect to each series to be cumulative from the date or dates fixed by the Board of Directors with respect to such series. The first dividend or distribution with respect to shares of any particular series not issued on a dividend date may be fixed by the Board of Directors at more or less than the regular periodic dividend or distribution thereon. In the event Preferred Stock of more than one series is outstanding, the Corporation in making any dividend payment upon Preferred Stock shall make dividend payments ratably upon all outstanding shares of Preferred Stock of all series in proportion to the respective amounts of dividends accrued and payable thereon to the date of such dividend payment. If the dividends or distributions on any shares of Preferred Stock shall be in arrears, the holders thereof shall not be entitled to any interest, or sum of money in lieu of interest, thereon. In no event, so long as any Preferred Stock shall be outstanding, shall any dividend whatsoever, whether in cash, stock or otherwise, other than a dividend payable in stock of the Corporation of a class junior to the Preferred Stock, be declared or paid, or any distribution made, on any stock of the Corporation of a class ranking junior to the Preferred Stock, nor shall any shares of any such junior class of stock be purchased or acquired for a consideration by the Corporation or be redeemed by the Corporation, nor shall any moneys be paid to the holders of, or set aside or made available for a sinking fund for the purchase or redemption of, any shares of any such junior class of stock unless (i) all dividends and distributions on all outstanding shares of Preferred Stock of all series for all past dividend periods shall have been paid and all dividends payable on or before the date of such dividend, distribution, purchase, acquisition, redemption, setting aside or making available shall have been paid or declared and a sum sufficient for the payment thereof set apart, and (ii) the Corporation shall have paid or set aside all amounts, if any, theretofore required to be paid or set aside as and for all matured purchase fund and sinking fund obligations, if any, for the shares of Preferred Stock of all series or to satisfy any distributions declared with respect to any shares of Preferred Stock of any series. The holders of Preferred Stock shall not be entitled to participate in any dividends payable on junior stock or to share in the earnings or profits of the Corporation other than or in excess of that hereinabove provided.

3. In the event of any dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, the holders of each series of Preferred Stock shall be entitled to receive, before any distribution or payment is made upon any stock ranking junior to the Preferred Stock, such amount of cash, shares, bonds or other property (which amount may vary depending on whether such dissolution, liquidation or winding-up is voluntary or involuntary) to which each such outstanding series of Preferred Stock shall be entitled in accordance with the provisions thereof together with an amount in cash equal to all dividends accrued and unpaid thereon to the date of such distribution or payment, and shall be entitled to no further payment. If, upon any such liquidation, dissolution or winding-up, the assets of the Corporation distributable among the holders of the Preferred Stock shall be insufficient to permit the payment in full to such holders of the amounts to which they are respectively entitled, the assets so distributable shall be distributed among the holders of the Preferred Stock then outstanding ratably in proportion to the amounts to which they are respectively entitled. For the purposes of this Section 3, neither the voluntary sale, lease, exchange or transfer of all or substantially all of the Corporation’s

property or assets to, nor the consolidation or merger of the Corporation with, one or more corporations, nor a reduction of the capital stock or stated capital of the Corporation, shall be deemed to be a dissolution, liquidation or winding-up, voluntary or involuntary.

4. The Corporation, at the option of the Board of Directors, may, subject to the provisions applicable to such series, redeem at any time or times, and from time to time, all or any part of the shares of any series of Preferred Stock subject to redemption by paying for each share such price or prices as shall have been fixed by the Board of Directors prior to the issuance of such series, plus an amount equal to dividends accrued and unpaid thereon to the date fixed for redemption, plus premiums in the amounts, if any, so fixed with respect to such series (the total amount per share so payable upon any redemption of shares of any series of Preferred Stock being herein referred to as the “redemption price”). Except as otherwise provided in the provisions relating to a particular series of Preferred Stock, not less than 15 days nor more than 60 days prior written notice shall be given to the holders of record of the shares so to be redeemed, which notice shall be given by mail, postage prepaid, addressed to such holders at their respective addresses as shown on the books of the Corporation. Such notice shall specify the shares called for redemption, the redemption price and the place at which, and the date on which, the shares called for redemption will, upon presentation and surrender of the stock certificates evidencing such shares, be redeemed. In case of redemption of less than all of the outstanding Preferred Stock of any one series, such redemption (unless otherwise stated in the provisions relating to such series) may be made pro rata or the shares to be redeemed may be chosen by lot, in such manner as the Board of Directors may determine. No failure to deliver or mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares so to be redeemed.

If such notice of redemption shall have been duly given, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside so as to be available therefor, then, notwithstanding that any certificate for the shares of such Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall, from and after the date fixed for redemption, no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue from and after the date of redemption so fixed, and all rights with respect to such shares of Preferred Stock so called for redemption shall forthwith at the close of business on such redemption date cease and terminate, except the right of the holders thereof to receive the amount payable upon redemption thereof, but without interest; provided, however, that the Corporation may, after giving such notice of any such redemption and prior to the redemption date specified in such notice, deposit in trust, for the account of the holders of such Preferred Stock to be redeemed, with a bank or trust company having an office in the Borough of Manhattan, City, County and State of New York and having a capital, undivided profits and surplus aggregating at least $50,000,000, all funds necessary for such redemption, and, upon such deposit in trust, all shares of such Preferred Stock with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of such Preferred Stock shall forthwith cease and terminate, except (a) the right of the holders thereof to receive the amount payable upon the redemption thereof, but without interest, and (b) the right of the holders thereof to exercise on or before the date fixed for redemption the rights, if any, not having theretofore expired, which the holders thereof shall have to convert the shares so called for redemption into, or exchange such shares for, shares of stock of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation.

Any funds so deposited which shall not be required for such redemption because of the exercise of any right of conversion or exchange or otherwise subsequent to the date of such deposit shall be returned to the Corporation forthwith. Any interest accrued on any funds so deposited shall belong to the Corporation and be paid to it from time to time. Any funds so deposited by the Corporation and

unclaimed at the end of six years from the date fixed for such redemption shall be repaid to the Corporation, upon its request, after which repayment the holders of such shares so called for redemption shall look only to the Corporation for the payment of the redemption price thereof.

If at any time the Corporation shall have failed to pay dividends in full on all series of Preferred Stock then outstanding, thereafter and until such dividends, including all accrued and unpaid dividends, shall have been paid in full, or declared and funds sufficient for the payment thereof set aside for payment, the Corporation shall not redeem or purchase less than all of the Preferred Stock at such time outstanding; provided, however, that nothing shall prevent the Corporation from completing the purchase of shares of Preferred Stock for which a purchase contract has been entered into, or the redemption of any shares of Preferred Stock for which notice of redemption has been given, prior to such default.

5. Except as otherwise specifically provided with respect to a particular series of Preferred Stock, as hereinafter in this section 5 provided, and as required by law, the Preferred Stock shall have no voting rights.

Whenever dividends payable on the Preferred Stock shall be in default in an aggregate amount equivalent to at least six quarterly dividends on any of the shares of Preferred Stock then outstanding, the number of directors constituting the Board of Directors of the Corporation shall be increased by two, and the holders of the Preferred Stock, voting as a class (whether or not otherwise entitled to vote for the election of directors), shall be entitled to elect two directors of the Corporation to fill such newly-created directorships. Such directors shall serve (subject to the last sentence of the next paragraph of this section 5) until the next annual meeting of shareholders and until their successors are elected and qualify. Whenever such right of the holders of the Preferred Stock shall have vested, such right may be exercised initially either at a special meeting of such holders called as provided herein, or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders. The right of the holders of the Preferred Stock, voting as a class, to elect members of the Board of Directors of the Corporation as aforesaid shall continue until such time as the dividends accumulated on the Preferred Stock shall have been paid in full, at which time the special right of the holders of the Preferred Stock so to vote separately as a class for the election of directors shall terminate, subject to renewal and divestment from time to time upon the same terms and conditions.

At any time after the voting power to elect two additional members of the Board of Directors of the Corporation has become vested in the holders of the Preferred Stock, the Secretary of the Corporation may, and upon the request of the holders of record of at least 5% of the Preferred Stock then outstanding addressed to him, shall, call a special meeting of the holders of Preferred Stock for the purpose of electing such directors, to be held within 50 days after the receipt of such request; provided, however, that the Secretary need not call any such special meeting if the annual meeting of shareholders is to convene within 90 days after the receipt by the Secretary of such request. Such meeting shall be held at such place as shall be specified in the notice and upon notice as provided in the By-Laws of the Corporation for the holding of special meetings of shareholders. If such meeting shall not be so called within 20 days after the receipt of such request (not including, however, a request falling within the proviso of the second preceding sentence), then the holders of record of at least 5% of the Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated shall call such meeting at the place and upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation. At any such special or annual meeting at which the holders of the Preferred Stock shall have the right to vote for the election of such two directors as aforesaid, the holders of 33 1/3% of the then outstanding Preferred Stock present in person or represented by proxy shall be sufficient to constitute a quorum of said class for the election of such two directors and for no other

purpose, and the vote of the holders of a plurality of the Preferred Stock so present at any such meeting at which there shall be such a quorum shall be sufficient to elect two directors. Whenever the holders of the Preferred Stock shall be divested of such voting right hereinabove provided, the directors so elected by the Preferred Stock shall thereupon cease to be directors of the Corporation and thereupon the number of directors shall be reduced by two.

Every shareholder entitled to vote at any particular time in accordance with the foregoing two paragraphs shall have one vote for each share of Preferred Stock held of record by him and entitled to vote.

6. As used in connection with any series of Preferred Stock, the terms “junior stock”, “junior class of stock” and “stock ranking junior to the Preferred Stock” shall mean and refer to the Common Stock and any other class or series of stock of the Corporation hereafter authorized which shall rank junior to the Preferred Stock with respect to the declaration and payment of dividends thereon and the distribution of amounts with respect thereto payable in the event of any liquidation, dissolution or winding-up of the Corporation.

II.

COMMON STOCK

Subject to all of the rights of the Preferred Stock, dividends may be paid upon the Common Stock as and when declared by the Board of Directors out of funds and other assets legally available for the payment of dividends. The Board of Directors may declare a dividend or distribution upon the Common Stock in shares of any class or series of capital stock of the Company.

In the event of any liquidation, dissolution or other winding-up of the Corporation, whether voluntary or involuntary, and after the holders of the Preferred Stock shall have been paid in full the amounts to which they respectively shall be entitled, or an amount sufficient to pay the aggregate amount to which such holders shall be entitled shall have been deposited in trust with a bank or trust company having its principal office in the Borough of Manhattan, City, County and State of New York, having a capital, undivided profits and surplus aggregating at least $50,000,000, for the benefit of the holders of the Preferred Stock, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock.

Except as otherwise expressly provided with respect to the Preferred Stock and except as otherwise may be required by law, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes and each holder of Common Stock shall be entitled to one vote for each share held.

III.

TRANSFER RESTRICTIONS

(a) Certain Definitions. As used in this Part III of Article FOURTH, the following terms have the following respective meanings:

“Acquisition Issuance” means any delivery, issuance, or grant of Corporation Securities by the Corporation in connection with the acquisition, directly or indirectly, of (i) a majority, by vote or value, of

the capital stock, partnership interests, membership interests, or other equity interests of another Person or (ii) all or substantially all of the assets of another Person.

“Corporation Securities” means (i) shares of common stock of the Corporation, (ii) shares of preferred stock of the Corporation, (iii) warrants, rights, or options (within the meaning of Treasury Regulation ss.1.382-2T(h)(4)(v)) to purchase stock of the Corporation, and (iv) any other interests that would be treated as “stock” of the Corporation pursuant to Treasury Regulation ss.1.382-2T(f)(18).

“Percentage Stock Ownership” means percentage stock ownership as determined in accordance with Treasury Regulation ss.1.382-2T(g), (h), (j), and (k).

“Five-Percent Shareholder” means a Person or group of Persons that (i) is identified as a “5-percent shareholder” of the Corporation pursuant to Treasury Regulation ss.1.382-2T(g)(1) or (ii) would be treated, under Treasury Regulation ss.1.382-2T(g), (h), (j), and (k), as owning 5% of the common stock of the Corporation.

“Person” means an individual, corporation, estate, trust, association, company, partnership, joint venture or similar organization.

“Prohibited Distributions” means any dividends or other distributions that were received from the Corporation by a Purported Transferee or Purported Holder with respect to Excess Securities.

“Prohibited Transfer” means any purported Transfer of Corporation Securities to the extent that such Transfer is prohibited and void under this Part III of Article FOURTH.

“Restriction Release Date” means the earlier of December 31, 2024, the repeal of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) (and any comparable successor provision) (“Section 382”), or the beginning of a taxable year of the Corporation (or any successor thereof) to which no Tax Benefits may be carried forward.

“Tax Benefits” means the net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any “net unrealized built-in loss” within the meaning of Section 382, of the Corporation or any direct or indirect subsidiary thereof.

“Transfer” means any direct or indirect sale, transfer, assignment, conveyance, pledge, or other disposition. A Transfer also shall include the creation or grant of an option (within the meaning of Treasury Regulation ss.1.382-2T(h)(4)(v)). A Transfer shall not include an issuance or grant of Corporation Securities by the Corporation.

“Treasury Regulation ss.1.382-2T” means the temporary income tax regulations promulgated under Section 382, and any successor regulations. References to any subsection of such regulations include references to any successor subsection thereof.

(b) Restrictions.

(i) Any attempted Transfer of Corporation Securities prior to the Restriction Release Date, or any attempted Transfer of Corporation Securities pursuant to an agreement entered into prior to the Restriction Release Date, shall be prohibited and void ab initio to the extent that, as a result of such Transfer (or any series of Transfers of which such Transfer is a part), either (1) any Person or group of

Persons shall become a Five-Percent Shareholder, or (2) the Percentage Stock Ownership interest in the Corporation of any Five-Percent Shareholder shall be increased; provided, however, that nothing herein contained shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange, Inc. in the Corporation Securities.

(ii) If, as a result of an Acquisition Issuance prior to the Restriction Release Date, any Person or group of Persons would become a Five-Percent Shareholder, then, notwithstanding anything in the agreement governing the terms of the relevant acquisition to the contrary, the Corporation shall not deliver to the Person that would otherwise be entitled to receive the Corporation Securities in such Acquisition Issuance (the “Purported Holder”) the minimum number of Corporation Securities otherwise deliverable in the Acquisition Issuance such that such Person or group of Persons shall not become a Five-Percent Shareholder (“Excess Issued Securities”). Any and all such Excess Issued Securities shall instead be delivered to the Agent for sale in accordance with paragraph (d)(ii) of this Article FOURTH. Any attempted or purported delivery of Excess Issued Securities in violation of this clause (ii) shall be void ab initio .

(c) Certain Exceptions. The restrictions set forth in paragraph (b) of this Part III of Article FOURTH shall not apply to (1) an attempted Transfer if the transferor or the transferee obtains, or (2) a delivery of Excess Issued Securities if the Purported Holder or the Corporation obtains, the approval of the Board of Directors of the Corporation. Any such approval must expressly waive the applicability of the restrictions set forth in this Part III of Article FOURTH. As a condition to granting its approval, the Board of Directors may, in its discretion, require an opinion of counsel selected by the Board of Directors that the Transfer or delivery of Excess Issued Securities shall not result in the application of any Section 382 limitation on the use of the Tax Benefits.

(d) Treatment of Excess Transferred Securities and Excess Issued Securities.

(i) No employee or agent of the Corporation shall record any delivery of Excess Issued Securities to a Purported Holder or any Prohibited Transfer, and the Purported Holder and the purported transferee of such a Prohibited Transfer (the “Purported Transferee”) shall not be recognized as a shareholder of the Corporation for any purpose whatsoever in respect of the Excess Issued Securities or the Corporation Securities which are the subject of the Prohibited Transfer (the “Excess Transferred Securities”, and together with the Excess Issued Securities, the “Excess Securities”). The Purported Transferee and the Purported Holder shall not be entitled with respect to such Excess Securities to any rights of shareholders of the Corporation, including without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any. Once the Excess Securities have been acquired in a Transfer that is not a Prohibited Transfer, the Corporation Securities shall cease to be Excess Securities.

(ii) If the Board of Directors determines that a Transfer of Corporation Securities constitutes a Prohibited Transfer or that Excess Issued Securities have been delivered to a Purported Holder, then, upon written demand by the Corporation, the Purported Transferee or Purported Holder shall transfer or cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the Purported Transferee’s or Purported Holder’s possession or control, together with any Prohibited Distributions, to an agent designated by the Board of Directors (the “Agent”). The Agent shall promptly sell to a buyer or buyers, which may include the Corporation, the Excess Securities transferred to it pursuant to the preceding sentence or paragraph (b)(ii) of this Article FOURTH, in one or more arm’s-length transactions (over the New York Stock Exchange, if possible); provided, however, that the Agent shall effect such sale or sales in an orderly fashion and shall not be required to effect any such

sale within any specific time frame if, in the Agent’s discretion, such sale or sales would disrupt the market for the Corporation Securities or otherwise would adversely affect the value of the Corporation Securities. If the Purported Transferee or Purported Holder has sold the Excess Securities before receiving the Corporation’s demand to surrender the Excess Securities to the Agent, the Purported Transferee or Purported Holder shall be deemed to have sold the Excess Securities on behalf of the Agent, and shall be required to transfer to the Agent any Prohibited Distributions and the proceeds of such sale, except to the extent that the Agent grants written permission to the Purported Transferee or Purported Holder to retain a portion of such Prohibited Distributions or sales proceeds not exceeding the amount that the Purported Transferee or Purported Holder would have received from the Agent pursuant to paragraph (d)(iii) of this Article FOURTH if the Agent rather than the Purported Transferee or Purported Holder had sold the Excess Securities.

(iii) The Agent shall apply any proceeds of a sale by it of Excess Securities, and any amounts received by the Agent from a Purported Transferee or Purported Holder pursuant to paragraph (d)(ii) of this Article FOURTH, as follows: (1) first, in the case of Excess Transferred Securities, such amounts shall be paid to the Agent to the extent necessary to cover its costs and expenses incurred in connection with its duties hereunder; (2) second, any remaining amounts shall be paid to the Purported Transferee or Purported Holder, up to either (i) the amount paid by the Purported Transferee for the Excess Securities, or (ii) the fair market value, calculated on the basis of the closing market price for Corporation Securities on the day before the Acquisition Issuance or attempted Transfer, of the Excess Securities at the time of the Acquisition Issuance or attempted Transfer to the Purported Transferee by gift, inheritance, or similar Transfer, which amount or fair market value shall be determined in the discretion of the Board of Directors; and (3) third, any remaining amounts, subject to the limitations imposed by the following proviso, shall be paid to the Leucadia Foundation; provided, however, that (x) if the Leucadia Foundation shall have terminated prior to its receipt of such amounts, such remaining amounts shall be paid to one or more organizations qualifying under Section 501(c)(3) of the Code (and any comparable successor provision) (“Section 501(c)(3)”) selected by the Board of Directors, and (y) to the extent that the receipt of such amounts could result in the Leucadia Foundation or any other organization qualifying under Section 501(c)(3) becoming a Five-Percent Shareholder, then such remaining amounts may be paid to one or more other organizations qualifying under Section 501(c)(3) selected by the Board of Directors. The recourse of any Purported Transferee or Purported Holder in respect of any Prohibited Transfer or delivery of Excess Issued Securities shall be limited to the amount payable to the Purported Transferee or Purported Holder pursuant to clause (2) of the preceding sentence. In no event shall the proceeds of any sale of Excess Securities pursuant to this Part III of Article FOURTH inure to the benefit of the Corporation.

(iv) If the Purported Transferee or Purported Holder fails to surrender the Excess Securities or the proceeds of a sale thereof to the Agent within thirty business days from the date on which the Corporation makes a demand pursuant to paragraph (d)(ii) of this Article, then the Corporation shall institute legal proceedings to compel the surrender.

(v) The Corporation shall make the demand described in paragraph (d)(ii) of this Part III of Article FOURTH within thirty days of the date on which the Board of Directors determines that the attempted Transfer would result in Excess Transferred Securities or that a Purported Holder received Excess Issued Securities; provided, however, that if the Corporation makes such demand at a later date, the provisions of this Part III of Article FOURTH shall apply nonetheless.

(e) Bylaws, Legends, etc.

(i) The Bylaws of the Corporation shall make appropriate provisions to effectuate the requirements of this Part III of Article FOURTH.

(ii) All certificates representing Corporation Securities issued after the effectiveness of this Part III of Article FOURTH shall bear a conspicuous legend as follows:

THE TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO RESTRICTIONS PURSUANT TO PART III OF ARTICLE FOURTH OF THE CERTIFICATE OF INCORPORATION OF LEUCADIA NATIONAL CORPORATION REPRINTED IN ITS ENTIRETY ON THE BACK OF THIS CERTIFICATE.

(iii) The Board of Directors of the Corporation shall have the power to determine all matters necessary to determine compliance with this Part III of Article FOURTH, including without limitation (1) whether a new Five-Percent Shareholder would be required to be identified in certain circumstances, (2) whether a Transfer is a Prohibited Transfer, (3) the Percentage Stock Ownership in the Corporation of any Five-Percent Shareholder, (4) whether an instrument constitutes a Corporation Security, (5) the amount or fair market value due to a Purported Transferee or Purported Holder pursuant to clause (2) of paragraph (d)(iii) of this Part III of Article FOURTH, (6) whether an issuance of Corporation Securities is an Acquisition Issuance, (7) the number of Excess Issued Securities with respect to any Purported Holder, and (8) any other matters which the Board of Directors determines to be relevant; and the good faith determination of the Board of Directors on such matters shall be conclusive and binding for all the purposes of this Part III of Article FOURTH.

FIFTH: The Corporation’s Board of Directors has designated 10 shares of Preferred Stock as Series A Non-Voting Convertible Preferred Stock, which shall have the following designations, rights and preferences:

Section 1. Designation and Amount. The shares of such series shall be designated as the “ Series A Non-Voting Convertible Preferred Stock ” (the “ Convertible Preferred Stock ”) and the number of shares constituting such series shall be ten (10).

Section 2. Dividends and Distribution . (1) The holders of Convertible Preferred Stock, in preference to the holders of common shares, par value $1.00 per share of the Company (the “ Common Shares ”), shall be entitled to receive, subject to Section 510 of the New York Business Corporation Law (“ NYBCL ”), when, as and if declared by the Board of Directors out of surplus of the Company legally available for the payment of dividends, a pro rata share of any dividends declared and paid with respect to Common Shares (determined as if the Convertible Preferred Stock had been fully converted into Common Shares as provided herein). The Board of Directors may fix a record date for the determination of holders of Convertible Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall coincide with the record date selected with respect to the dividends declared and to be paid to holders of Common Shares.

(a) If any dividend payment on the Convertible Preferred Stock is not paid as required herein, the Company shall be prohibited from declaring, paying or setting apart for payment any dividends or making any other distributions on any Common Shares, and from redeeming, purchasing or otherwise acquiring (or making any payment to or available for a sinking fund for the redemption,

purchase or other acquisition of any shares of such stock) (either directly or through any Subsidiary) any Common Shares, until all such dividends that are due are paid in full. Dividends paid on the Convertible Preferred Stock in an amount less than the total amount of such dividends payable and due on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding.

(b) The holders of Convertible Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein.

Section 3. Voting Rights . The holders of shares of Convertible Preferred Stock shall have no voting rights, and their consent shall not be required for the taking of any corporate action, except as is required by the NYBCL.

Section 4. Conversion . Each share of Convertible Preferred Stock shall automatically and immediately be converted into a number of Common Shares equal to the Conversion Number on the earlier to occur of (i) the date the Company determines (with the concurrence of the Initial Holders of the Convertible Preferred Stock) that the approval required from the Federal Reserve Board with respect to the conversion of the Convertible Preferred Stock held by the Initial Holders into Common Shares has been obtained, (ii) the sale in accordance with the terms hereof to a Person that is not an Affiliate of the Initial Holders of the Convertible Preferred Stock and (iii) 90 days following the issuance of the Convertible Preferred Stock to the Initial Holders of the Convertible Preferred Stock .

Section 5. Adjustment of Conversion Number . (1) Share Dividends, Subdivisions, Reclassifications, Combinations . If the Company declares a dividend or makes a distribution on the outstanding Common Shares in Common Shares, or subdivides or reclassifies the outstanding Common Shares into a greater number of Common Shares, or combines the outstanding Common Shares into a smaller number of Common Shares, then, in each such event,

(i) the then applicable Conversion Number shall be adjusted so that the registered holder of each Convertible Preferred Stock shall be entitled to receive, upon the conversion thereof, the number of Common Shares which such holder would have been entitled to receive immediately after the happening of any of the events described above had such Convertible Preferred Stock been converted immediately prior to the happening of such event or the record date therefor, whichever is earlier; and

(ii) an adjustment to the Conversion Number made pursuant to this clause (a) shall become effective (A) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of Common Shares entitled to receive such dividend or distribution or (B) in the case of any such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective.

(b) Issuances upon Merger, Amalgamation, Consolidation or Sale of Company . If the Company shall be a party to any transaction (including a merger, amalgamation, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Common Shares and excluding any transaction to which Section 5(a) applies) in which the previously outstanding Common Shares shall be changed into or, pursuant to the operation of law or the terms of the transaction to which the Company is a party, exchanged for different securities of the Company or common shares or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing, then, as a condition of the consummation of such transaction, lawful and adequate provision shall be made so that each holder of Convertible Preferred Stock shall be

entitled, upon conversion, to an amount per Convertible Preferred Stock equal to (A) the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as applicable, into which or for which each Common Share is changed or exchanged multiplied by (B) the Conversion Number in effect immediately prior to the consummation of such transaction.

(c) Adjustment to Certificate . Irrespective of any adjustments in the Conversion Number or the kind of shares into which of the Convertible Preferred Stock will automatically convert pursuant hereto, certificates theretofore or thereafter issued may continue to express the same Conversion Number and kind of shares as are stated on the certificates initially issuable pursuant to the provisions hereof, but such Conversion Number and number and kind of shares shall be understood to be adjusted as provided herein.

(d) Notices of Adjustment . (i) Upon any adjustment of the Conversion Number pursuant to Section 5, the Company shall promptly, but in any event within 10 days thereafter, cause to be given to each registered holder of a Convertible Preferred Stock, at its address appearing on the share register by registered mail, postage prepaid, a certificate signed by an executive officer setting forth the Conversion Number and/or the number of shares of other securities or assets issuable upon the conversion of each Convertible Preferred Stock as so adjusted and describing in reasonable detail the facts accounting for such adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 5. (ii) In the event the Company proposes to take (or receives notice of) any action which would require an adjustment of the Conversion Number pursuant to Section 5, then the Company shall cause to be given to each registered holder of Convertible Preferred Stock at its address appearing on the share register, at least 10 days prior to the applicable record date or effective date for such action, a written notice in accordance with Section 5: (A) stating such record date or effective date, (B) describing such action in reasonable detail and (C) stating the date as of which it is expected that holders of record of Common Shares shall be entitled to receive any applicable dividends or distributions or to exchange their shares for securities or other property, if any, deliverable upon such action. The failure to give the notice required by this Section 5(d) or any defect therein shall not affect the legality or validity of any such action or the vote upon any such action.

Section 6. Liquidation, Dissolution or Winding Up . (1) If the Company shall adopt a plan of liquidation or of dissolution, or commence a voluntary case under applicable bankruptcy, insolvency or similar laws, or consent to the entry of an order for relief of any involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due and on account of such event the Company shall liquidate, dissolve or wind up, or upon any other liquidation, dissolution or winding up of the Company, the holders of Convertible Preferred Stock shall be entitled to receive a pro rata share (determined as if the Convertible Preferred Stock had been fully converted into Common Shares as provided herein) of any distributions made to the holders of Common Shares (“Liquidating Distributions”); provided, however, that each holder of Convertible Preferred Stock shall not receive less than $10.00 per share of Convertible Preferred Stock owned of record by such holder together with an amount in cash equal to all dividends accrued and unpaid thereon to the date of such distribution or payment (the “Liquidation Preference”).

(a) Neither the consolidation, merger, amalgamation or other business combination of the Company with or into any other Person or Persons nor the sale, lease, exchange or conveyance of

all or any part of the property, assets or business of the Company to a Person or Persons shall be deemed to be a liquidation, dissolution or winding up of the Company for purposes of this Section 6.

Section 7. Rank . The Convertible Preferred Stock shall rank, with respect to preferences and relative, participating, optional and other special rights of the shares of such series and the qualifications, limitations and restrictions thereof, including, without limitation, with respect to the payment of dividends and redemption payments and the distribution of assets, prior to all Common Shares of the Company only to the extent provided herein and otherwise shall rank pari passu with the Common Shares. As provide in Section 6, with respect to any event that would require payment of the Liquidation Preference pursuant to Section 6(a), the Convertible Preferred Stock shall rank prior to all Common Shares with respect to distributions up to an amount equal to such Liquidation Preference, and with respect to all other distributions, pari passu with all Common Shares of the Company.

Section 8. Transfer . Except to the extent required by applicable law, Convertible Preferred Stock may not be transferred, other than (i) with the prior written consent of the Company, which consent shall not be unreasonably withheld or (ii) by any Initial Holder to one of its Affiliates. The Convertible Preferred Stock has not been registered under the Securities Act and may not be offered or sold in the United States or to any citizen or resident of the United States in the absence of a valid registration under the Securities Act except in reliance on an exemption from the registration requirements of the Securities Act.

Section 9. Definitions . For the purposes of this Exhibit:

“ Affiliate ” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “ control ” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

“ Board of Directors ” means the Board of Directors of the Company.

“ Company ” means Leucadia National Corporation.

“ Conversion Number ” means initially 134,772 and thereafter shall be subject to adjustment from time to time pursuant to the terms of Section 5 hereof.

“ Initial Holders ” means each purchaser of Convertible Preferred Stock pursuant to the Subscription Agreement, dated as of December 23, 2002, among such purchasers and the Company.

“ Person ” means any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a Company, a partnership, a trust or other entity.

“ Securities Act ” shall mean the United States Securities Act of 1933, and the rules and regulations promulgated thereunder.

“ Subsidiary ” of any Person means any Company or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person.

SIXTH: The Corporation’s Board of Directors has designated 125,000 shares of Preferred Shares as 3.25% Series A Cumulative Convertible Preferred Shares, which shall have the following designations, rights and preferences:

Section 1. Designation and Amount . The shares of such series shall be designated as the “3.25% Series A Cumulative Convertible Preferred Shares” (the “ Series A Cumulative Convertible Preferred Shares ”) and the number of shares constituting such series shall be 125,000.

Section 2. Certain Definitions . As used in this Article SIXTH, the following terms shall have the following meanings, unless the context otherwise requires:

“ Acquisition Stock Price ” shall have the meaning assigned to it in Section 8(b) hereof.

“ Additional Shares ” shall have the meaning assigned to it in Section 8(a) hereof.

“ Adjustment Event Date ” shall have the meaning assigned to it in Section 9(k) hereof.

“ Affiliate ” of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“ Base Dividend ” shall have the meaning assigned to it in Section 9(a)(iv) hereof.

“ Board of Directors ” means either the board of directors of the Corporation or any duly authorized committee of such board.

“ Business Day ” means any day other than a Saturday, Sunday or a day on which state or U.S. federally chartered banking institutions in New York, New York are not required to be open.

“ Capital Stock ” of any Person means any and all shares, interests, participations or other equivalents however designated of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person and any rights (other than debt securities convertible or exchangeable into an equity interest), warrants or options to acquire an equity interest in such Person.

“ Certificate ” means this Certificate of Amendment of the Certificate of Incorporation.

“ Change of Control Transaction ” means any of the following: (i) any acquisition by any person or “group” (as defined in Rule 13d-5 under the Exchange Act) (other than (x) any ESOP or other employee benefit plan of the Corporation (unless such ESOPs and other employee benefit plans in the aggregate own greater than 80% of the Corporation’s outstanding voting stock) or (y) holders of the Series A Cumulative Convertible Preferred Shares and their Affiliates) of (a) more than 50% of the outstanding voting stock of the Corporation (whether by merger, stock purchase, recapitalization, reorganization, redemption, issuance of capital stock or otherwise), unless the Corporation’s management, directors or their appointees constitute at least 50% of the acquiror’s or the surviving company’s board of directors or similar governing body, or (b) assets constituting all or substantially all of the assets of the Corporation and its subsidiaries, unless the Corporation’s management, directors or their appointees constitute at least 50% of the acquiror’s board of directors or similar governing body, or (ii) continuing directors (i.e., members of the Board of Directors currently or individuals who become such members on

the basis of appointment, election or nomination for election duly approved by a majority of the continuing directors on the Board of Directors at such time) cease to constitute a majority of the Board of Directors.

“ Closing Sale Price ” of the shares of Common Stock or other capital stock or similar equity interests on any date means the closing sale price per share or interest (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported on the principal United States securities exchange or inter· dealer quotation system on which such shares of Common Stock or such other capital stock or similar equity interests are traded. In the absence of such a quotation, the Corporation shall be entitled to determine in good faith the Closing Sale Price· on such basis as it considers appropriate. The Closing Sale Price shall be determined without reference to extended or after hours trading.

“ Common Stock ” means any stock of any class of the Corporation that has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and that is not subject to redemption by the Corporation. Subject to the provisions of Section 10, however, shares issuable on conversion of the Series A Cumulative Convertible Preferred Shares shall include only shares of the class designated as common stock of the Corporation at the date of this Certificate (namely, the Common Stock, par value $1 per share) or shares of any class or classes resulting from any reclassification or reclassifications thereof and that have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which are not subject to redemption by the Corporation; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable on conversion shall be substantially in the proportion that the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.

“ Conversion Agent ” shall have the meaning assigned to it in Section l 8(a) hereof.

“ Conversion Date ” shall have the meaning assigned to it in Section 7(b) hereof.

“ Conversion Price ” per share of the Series A Cumulative Convertible Preferred Shares means, on any date, the Liquidation Preference divided by the Conversion Rate in effect on such date.

“ Conversion Rate ” per share of the Series A Cumulative Convertible Preferred Shares means 32.4231 shares of Common Stock, subject to adjustment pursuant to Section 9 hereof.

“ Conversion Transaction Expiration Date ” shall mean either (a) the date that is 75 days after the latest date any holder of shares of Series A Cumulative Convertible Preferred Shares shall have made an HSR Filing in connection with the conversion of such shares into Common Stock in anticipation or as a result of such transaction or (b) 30 days after the date of such transaction, if no such filing shall have been made.

“ Corporation ” shall have the meaning assigned to it in the preamble to this Certificate, and shall include any successor to such Corporation.

“ Corporation Option Redemption ” shall have the meaning assigned to it in Section 6(a).

1 “ Default Event ” shall mean any of the following events shall have occurred:


(i)	the Corporation shall fail to pay in full accrued and unpaid dividends for an aggregate of twenty (20) or more Dividend Payment Dates; or

(ii)

a failure of the Corporation to comply in any material respect with its obligations set forth in this Certificate or a failure of Jefferies Group, Inc. (or its successor-in-interest) to comply in any material respect with its obligations set forth in the Purchase Agreement, which failure is not remedied within 10 days upon either the Corporation’s receipt of notice from any holder of the Series A Cumulative Convertible Preferred Shares or actual knowledge of the failure by any Officer, or the occurrence under the Registration Rights Agreement of a Registration Default, as defined under Section 2(g) of such agreement, which failure is not remedied within 60 days upon either the Corporation’s receipt of notice from any holder of the Series A Cumulative Convertible Preferred Shares or actual knowledge of the Registration Default by any Officer; or

(iii)

the Corporation or any of its material subsidiaries shall (A) apply for or consent to the appointment of a receiver, trustee or liquidator for itself or any of its property; (8) admit in writing its inability to pay debts as they mature; (C) make a general assignment for the benefit of creditors; (D) be adjudicated bankrupt or insolvent; (E) file a voluntary petition in bankruptcy, a petition or answer seeking reorganization or an arrangement with creditors to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law; (F) have failed to have in involuntary petition in bankruptcy filed against it dismissed and discharged within sixty (60) calendar days after the date of such filing; (G) corporate actions shall be taken for the purpose of effecting any of the foregoing; or (H) an order judgment or decree shall be entered without the application, approval or consent of the Corporation or such material subsidiary, by any court of competent jurisdiction, approving a petition seeking reorganization of the Corporation or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for sixty (60) calendar days; or


(iv)	the Termination of Trading; or


(v)	any of the representations and warranties contained in the Purchase Agreement in relation thereto shall be false or misleading in any material respect.

“ Default Rate ” shall mean 4.0% per annum.

“ Designated Event ” means an event or condition that shall be deemed to have occurred upon a Fundamental Change or a Termination of Trading.

“ Determination Date ” shall have the meaning assigned to it in Section 9(k) hereof.

“ Dividend Payment Date ” shall have the meaning assigned to it in Section 4(a) hereof.

“ Dividend Period ” shall mean the period beginning on, and including, a Dividend Payment Date and ending on, and excluding, the immediately succeeding Dividend Payment Date.

“ ESOP ” shall mean an Employee Stock Ownership Plan established and maintained solely for the benefit of the employees of the Corporation.

“ Exchange Act ” shall mean the U. S. Securities Exchange Act of 1934, as amended.

“ Fair Market Value ” shall mean, at any date of determination and with respect to any property, the sale value of such property that would be realized in an arm’s-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell).

“ Fundamental Change ” means the occurrence of any transaction or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) in connection with which 90% or more of the shares of Common Stock are exchanged for, converted into, acquired for or constitute solely the right to receive, consideration which is not at least 90% of the shares of common stock of the Person which is conducting the business of the Corporation immediately after such transaction or event that (i) is listed on, or immediately after such transaction or event will be listed on, a United States national securities exchange or (ii) is approved, or immediately after such transaction or event will be approved, for quotation thereof in an inter-dealer quotation system of any registered United States national securities association. (For the avoidance of doubt, any merger, stock purchase, recapitalization, reorganization, redemption, issuance of stock or similar transaction pursuant to which the holders of Common Stock will receive, or have the right to receive, primarily cash or Illiquid Securities in exchange for or in consideration of, their shares of Common Stock shall constitute a Fundamental Change.)

“ GAAP ” shall mean generally accepted accounting principles as in effect from time to time in the United States of America.

“ Hart Scott Rodino Act ” shall mean the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended.

“ Holder’s Redemption Notice ” shall have the meaning assigned to it in Section 6(d)(i) hereof.

“ HSR Filing ” shall have the meaning assigned to it in Section 17.

“ Illiquid Securities ” shall mean shares of Capital Stock or other interests (a) which are not listed on a United States national securities exchange or approved for quotation thereof in an inter-dealer quotation system of any registered United States national securities association or (b) in respect of which, there is no liquid market for the purchase and sale of such shares or other interests.

“ Issue Date ” means March 1, 2013.

“ Junior Stock ” shall have the meaning assigned to it in Section 3(a) hereof.

“ Letter Agreement ” shall mean the Letter Agreement, dated as of February 15, 2013, by and among Jefferies Group, Inc., JSP Holdings, Inc., the Corporation, Massachusetts Mutual Life Insurance Company, C.M. Life Insurance Company.

“ Liquidation Preference ” shall have the meaning assigned to it in Section S(a) hereof.

“ Mandatory Redemption Events ” shall mean any one or more of a Change of Control Transaction, Designated vent or a Default Event.

“ Officer ” means the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Treasurer, any Assistant Treasurer, the Comptroller, any Assistant Comptroller, the Secretary or any Assistant Secretary of the Corporation.

“ outstanding ” means, when used with respect to the Series A Cumulative Convertible Preferred Shares, as of any date of determination, all shares of the Series A Cumulative Convertible Preferred Shares outstanding as of such date; provided , however , that, if such Series A Cumulative Convertible Preferred Shares is to be redeemed or repurchased, notice of such redemption or repurchase has been duly given pursuant to this Certificate end a sufficient sum set apart for the payment of the Redemption Price for the shares of the Series A Cumulative Convertible Preferred Shares to be redeemed, then immediately after such Redemption Date such shares of the Series A cumulative Convertible Preferred Shares shell cease.to be outstanding; provided further that, in determining whether the holders of the Series A Cumulative Convertible Preferred Shares have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Series A Cumulative Convertible Preferred Shares owned by the Corporation or a Subsidiary or Affiliate thereof shall be deemed not to be outstanding, except that, in determining whether any Registrar or Transfer Agent shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Series A Cumulative Convertible Preferred Shares which such Registrar has actual knowledge of being so owned by the Corporation or a Subsidiary or Affiliate thereof shall be deemed not to be outstanding.

“ Parity Stock ” shall have the meaning assigned to it in Section 3(b) hereof.

“ Paying Agent ” shall have the meaning assigned to it in Section l 8(a) hereof.

“ Person ” shall mean an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

“ Proposed Redemption Date ” shall have the meaning assigned to it in Section 6(c)(i).

“ Purchase Agreement ” shall mean the Purchase Agreement, dated as of February 17, 2006, by and among Jefferies Group, Inc., Massachusetts Mutual Life Insurance Company and C.M. Life Insurance Company.

“ Record Date ” means (i) with respect to the dividends payable on January 15, April 15, July 15 and October 15 of each year, the January 1, April 1, July 1 and October 1, respectively, immediately preceding such date and (ii) solely for the purpose of adjustments to the Conversion Rate pursuant to Section 9, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

“ Redemption Date ” shall mean (a) in the case of a Corporation Option Redemption, the date that is fixed for redemption of the Series A Cumulative Convertible Preferred Shares by the Corporation in accordance with Section 6(a) hereof and (b) in the case of a redemption in accordance with Section 6(b), the date as specified in Section 6(b).

“ Redemption Price ” means $1,000.00 per share, plus accrued and unpaid dividends (whether or not declared) to the date of payment.

“ Registrar ” shall mean the Person responsible for recordation and registration of the name, addresses and amounts of the registered holders of the Series A Cumulative Convertible Preferred Shares.

“ Registration Rights Agreement ” shall mean the Registration Rights Agreement, dated as of the date hereof, among the Corporation, Massachusetts Mutual Life Insurance Company and C.M. Life Insurance Company.

“ Related Fund ” shall mean, with respect to any holder of Series A Cumulative Convertible Preferred Shares, any fund or entity that (a) invests in securities or bank loans and (b) is advised or managed by such holder, the same investment advisor of such holder or by an affiliate of such holder or advisor.

“ Right of First Refusal ” shall have the meaning assigned to it in Section 15(b)(i) hereof.

“ Rights Plan ” shall have the meaning assigned to it in Section 9(n) hereof.

“ Securities Act ” means the U.S. Securities Act of 1933, as amended.

“ Series A Cumulative Convertible Preferred Shares ” shall have the meaning assigned to it in Section 1 hereof.

“ Spin-Off’’ shall have the meaning assigned to it in Section 9(a)(iii) hereof.

“ Stated Value ” means $1,000 per share.

“ Subsidiary ” means, with respect to any Person, (a) any corporation, association, business entity or other Person of which more than 50% of the total voting power of shares of capital stock or equity interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (b) any partnership (i) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (ii) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof).

“ Termination of Trading ” shall mean that shares of Common Stock (or other shares of common stock or other securities or rights into which the Series A Cumulative Convertible Preferred Shares is then convertible) are, for a period of more than 15 consecutive Business Days, neither listed for trading on a United States national or regional securities exchange nor approved for listing on a United States national securities exchange or for quotation on an inter-dealer quotation system of any registered United States national securities association.

“ Trading Day ” means, in respect of Common Stock or other securities as the context requires, a day during which trading in securities generally occurs on the principal national or regional securities exchange on which such Common Stock or other security is then listed, or, if such Common Stock or other security is not listed on a national or regional securities exchange, on the Nasdaq National Market, or if such Common Stock or other security is not quoted on the Nasdaq National Market, on the principal other market on which such Common Stock or other security is then traded.

“ Transfer Agent ” shall mean the Person assigned to transfer the Series A Cumulative Convertible Preferred Shares in accordance with Section 12 hereof.

“ Transaction Consideration” shall have the meaning assigned to it in Section 8(a) hereof.

“ Voluntary Acquisition Transaction ” shall mean a Change of Control Transaction or Fundamental Change in respect of which the Corporation voluntarily enters into one or more agreements to effect such transaction and such agreements shall have been approved by the Board of Directors.

Section 3. Rank . The Series A Cumulative Convertible Preferred Shares shall, with respect to dividend rights or rights upon liquidation, winding-up or dissolution (after payment of amounts owing to creditors of the Corporation), rank:

(a) senior to the Common Stock and any other class or series of Capital Stock of the Corporation, the terms of which do not expressly provide that such class or series ranks on a parity with the Series A Cumulative Convertible Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Corporation (collectively, the “ Junior Stock ”); and

(b) on a parity with any other class or series of Capital Stock of the Corporation, the terms of which expressly provide that such class or series ranks on a parity with the Series A Cumulative Convertible Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Corporation (collectively, the “ Parity Stock ”).

Section 4. Dividends . (i) Quarterly Dividends . Holders of the Series A Cumulative Convertible Preferred Shares shall be entitled to receive, whether or not earned or declared by the Board of Directors, out of funds legally available for payment, cumulative cash dividends at the rate per annum of 3.25% of the Stated Value per share, subject in each case to the provisions of Section 6(f). Such dividends shall be cumulative from the Issue Date and shall be payable quarterly in arrears on January 15, April 15, July 15 and October 15 (each a “ Dividend Payment Date ”); provided that, if any Dividend Payment Date falls on a day that is not a Business Day, the related dividend will be paid on the next day that is a Business Day, with the same force and effect as if the dividend payment had been made on such Dividend Payment Date and without any interest or other payment with respect to the delay. Dividends shall also be payable upon any Redemption Date and upon the final distribution date relating to the liquidation, dissolution or winding-up of the Corporation. The first Dividend Payment Date shall be April 15, 2013. Dividends on the Series A Cumulative Convertible Preferred Shares shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends shall be payable to holders of record as they appear in the records of the Corporation at the close of business on the applicable Record Date.

(a) Cumulative Dividends . Dividends on the Series A Cumulative Convertible Preferred Shares shall accumulate from and including the Issue Date. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the Series A Cumulative Convertible

Preferred Shares which may be in arrears. Subject to Section 4(d), holders of the Series A Cumulative Convertible Preferred Shares shall not be entitled to any dividends in excess of the full cumulative dividends as described above.

(b) Dividend Priority . No dividend shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Series A Cumulative Convertible Preferred Shares with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid or declared and a sufficient sum set apart for the payment of such dividend, upon all outstanding shares of the Series A Cumulative Convertible Preferred Shares.

(c) Dividend Preference . No dividends or other distributions (other than a dividend or distribution payable solely in shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of fractional shares) may be declared, made or paid, or set apart for payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any Parity Stock or Junior Stock) by or on behalf of the Corporation (except by conversion into or exchange for shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock)), other than in connection with the purchase by the Corporation of any shares of Common Stock upon the exercise or deemed exercise of options or rights to purchase shares of Common Stock which were issued pursuant to any present or future employee, director or consultant incentive or benefit plan or program of or assumed by the Corporation or any of its subsidiaries, in each case, adopted in good faith and approved by a majority of the independent directors of the Board of Directors, unless all accumulated and unpaid dividends have been or contemporaneously are declared and paid, or are declared and a sum sufficient for the payment thereof is set apart for such payment, on the Series A Cumulative Convertible Preferred Shares and any Parity Stock for all dividend payment periods terminating on or prior to the date of such declaration, payment, redemption, purchase or acquisition. Notwithstanding the foregoing, if full dividends have not been paid on the Series A Cumulative Convertible Preferred Shares and any Parity Stock, dividends may be declared and paid on the Series A Cumulative Convertible Preferred Shares and such Parity Stock so long as the dividends are declared and paid pro rata so that the amounts of dividends declared per share on the Series A Cumulative Convertible Preferred Shares and such Parity Stock will in all cases bear to each other the same ratio that accumulated and unpaid dividends per share on the shares of the Series A Cumulative Convertible Preferred Shares and such Parity Stock bear to each other. Holders of shares of the Series A Cumulative Convertible Preferred Shares will not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends.

Section 5. Liquidation Preference . (i) In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the Corporation’s assets (whether capital or surplus) shall be made to or set apart for the holders of Junior Stock, holders of the Series A Cumulative Convertible Preferred Shares shall be entitled to receive $1,000.00 per share of the Series A Cumulative Convertible Preferred Shares plus an amount equal to all dividends (whether or not earned or declared) accumulated and unpaid thereon to the date of final distribution to such holders (such amounts which are entitled to be received herein referred to as the “ Liquidation Preference ”); but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding-up of the Corporation, the Corporation’s assets, or proceeds thereof, distributable among the holders of the Series A Cumulative Convertible Preferred Shares are insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Stock, then such assets, or the i:roceeds thereof, shall be distributed among the holders of the Series A Cumulative Convertible Preferred Shares and any other Parity Stock ratably in accordance with the respective

amounts that would be payable on such shares of the Series A Cumulative Convertible Preferred Shares and any such other Parity Stock if all amounts payable thereon were paid in full.

(a) Certain Transactions not a Liquidation . Neither the voluntary sale, conveyance, exchange or transfer, for cash, shares of stock, securities or other consideration, of all or substantially all of the Corporation’s property or assets nor the consolidation, merger or amalgamation of the Corporation with or into any corporation or other entity or the consolidation, merger or amalgamation of any corporation or other entity with or into the Corporation shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Corporation.

(b) Liquidating Distributions on Junior Stock . Subject to the rights of the holders of any Parity Stock, after payment has been made in full to the holders of the Series A Cumulative Convertible Preferred Shares, as provided in this Section S, holders of Junior Stock shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid Or distributed, and the holders of the Series A Cumulative Convertible Preferred Shares shall not be entitled to share therein.

Section 6. Redemption of the Series A Cumulative Convertible Preferred Shares . Shares of the Series A cumulative Convertible Preferred Shares shall be redeemable by the Corporation in accordance with this Section 6.

(a) Redemption at the Corporation’s Option . The Corporation shall have no option to redeem any shares of the Series A Cumulative Convertible Preferred Shares before January 15, 2023. On or after January 15, 2023, the Corporation shall have the option to redeem, (each a “ Corporation Option Redemption ”), subject to Section 6(n) hereof, in whole or in part (if in part, in an amount equal to at least 10% of the then outstanding shares of the Series A Cumulative Convertible Preferred Shares) at the Redemption Price on the Redemption Date specified by the Corporation, but in any event the Corporation must redeem any outstanding shares of the Series A Cumulative Convertible Preferred Shares on January 15, 2038 at the Redemption Price.

(b) Redemption at Holder’s Option . In the event of a Mandatory Redemption Even each holder of the Series A Cumulative Convertible Preferred Shares will have the right to require the Corporation to redeem all or any portion of the Series A Cumulative Convertible Preferred Shares held by it at the Redemption Price. In the event of a Mandatory Redemption Event in respect of which any such holder elects to require the Corporation to make such a redemption, the Redemption Date shall be (i) in the case of a Voluntary Acquisition Transaction giving rise to such election, the date of closing of such Voluntary Acquisition Transaction or (ii) in all other cases the date which is the 30th day after such holder’s Holder’s Redemption Notice in respect thereto.

(c) Redemption Procedure . Within 15 days after an Officer becomes aware of any event or condition which could reasonably be expected to give rise to a Mandatory Redemption Event (other than a Voluntary Acquisition Transaction), within five Business Days after a Voluntary Acquisition Transaction shall have been announced to the public or becomes a matter of public record and in the event the Corporation elects a Corporation Option Redemption, not less than 30 days nor more than 60 days prior to the Redemption Date specified by the Corporation, the Corporation shall send a written notice by first class mail to each holder of record of the Series A Cumulative Convertible Preferred Shares at such holder’s registered address, stating:

(i) in the case of a Corporation Option Redemption, the Redemption Date and, in the case of the occurrence or potential occurrence of a Mandatory Redemption Event, the events causing such Mandatory Redemption Event and the date upon which such Mandatory Redemption Event occurred or is expected to occur (the “ Proposed Redemption Date ”);

(ii) the Redemption Price that will be payable with respect to the shares of the Series A Cumulative Convertible Preferred Shares as of the Redemption Date or the Proposed Redemption Date, and whether such Redemption Price will be paid, subject to the provisions of Section 6(f) in cash or, if applicable, in shares of Common Stock or if a combination of cash and Common Stock, the portions of the Redemption Price in respect of which the Corporation will pay in cash and shares of Common Stock;

(iii) the Conversion Price, the Conversion Rate and any adjustments thereto made after the Issue Date, in each case as of the date of such notice;

(iv) if such Mandatory Redemption Event is proposed to be made in connection with, or in anticipation of, a Fundamental Change that occurs prior to January 16, 2023, the Transaction Consideration, the number of Additional Shares and the additional Transaction Consideration which such holder would be entitled to receive pursuant to the provisions of Section 8.

(v) that shares of the Series A Cumulative Convertible Preferred Shares which are the subject of such redemption may be converted at any time before 5:00 p.m., New York City time on the Business Day immediately preceding the Redemption Date;

(vi) if applicable, that holders who want to convert shares of the Series A Cumulative Convertible Preferred Shares must satisfy the requirements set forth in Section 7 of this Certificate;

(vii) that certificates evidencing the shares of the Series A Cumulative Convertible Preferred Shares to be redeemed must be surrendered to the Corporation to collect the Redemption Price;

(viii) if fewer than all the outstanding shares of the Series A Cumulative Convertible Preferred Shares are to be redeemed by the Corporation, the number of shares to be redeemed of the Series A Cumulative Convertible Preferred Shares;

(ix) that, unless the Corporation defaults in making payment of such Redemption Price, dividends in respect of the shares of the Series A Cumulative Convertible Preferred Shares which are the subject of such redemption will cease to accumulate on and after the Redemption Date;

(x) the private placement number of the Series A Cumulative Convertible Preferred Shares; and

(xi) any other information the Corporation wishes to present.

(d) Conditions to All Redemptions

(i) With respect to a redemption at the option of a holder in connection with a Mandatory Redemption Event, such holder of shares of the Series A Cumulative Convertible Preferred Shares that are outstanding at the time of such Mandatory Redemption Event shall exercise its rights in Section 6(b) to have all or any portion of its Series A Cumulative Convertible Preferred Shares redeemed by the Corporation by sending a written notice (which shall be in substantially the form of Exhibit B by first class U.S. mail, overnight courier, hand delivery or facsimile transmission) (a “ Holder’s Redemption Notice ”) to the Corporation at any time prior to the close of business on (A) in the case of a Voluntary Acquisition Transaction, the tenth Business Day immediately before the applicable Redemption Date or (B) in all other cases, (x) the 30th day after the date such holder shall have received the Corporation’s notice described in Section 6(c) above or (y) if no such notice shall have been given, the 60th day after such holder shall have become aware of the existence of such Mandatory Redemption Event. Upon receipt by the Corporation of the Holder’s Redemption Notice, the holder of the shares of the Series A Cumulative Convertible Preferred Shares in respect of which such Holder’s Redemption Notice was given shall (unless such Holder’s Redemption Notice is withdrawn as specified below) thereafter be entitled, subject to legally available funds, to receive the Redemption Price with respect to such shares of the Series A Cumulative Convertible Preferred Shares, subject to this Section 6.

(ii) With respect to any redemption pursuant to this Section 6, the delivery to the Corporation of the certificates evidencing such shares of the Series A Cumulative Convertible Preferred Shares to be redeemed (together with all necessary endorsements) at the office of the Corporation or such other place as the Corporation may specify shall be a condition to the receipt by the holder of the Redemption Price.

(iii) Any redemption by the Corporation contemplated pursuant to the provisions of this Section 6 shall be consummated by the delivery of the consideration to be received by the holder whose shares of Series A Cumulative Convertible Preferred Shares are to be redeemed promptly following the later of the Redemption Date and the time of delivery of the certificates evidencing such shares of the Series A Cumulative Convertible Preferred Shares to the Corporation in accordance with this Section 6.

(e) Withdrawal of Holder’s Redemption Notice . Notwithstanding anything herein to the contrary, any holder of the Series A Cumulative Convertible Preferred Shares that remains outstanding after a Mandatory Redemption Event who shall have delivered to the Corporation the Holder’s Redemption Notice shall have the right to withdraw such Holder’s Redemption Notice in whole or as to a portion thereof that is at least a full share of the Series A Cumulative Convertible Preferred Shares at any time prior to the close of business on the Business Day before the Redemption Date by delivery of a written notice of withdrawal to the Corporation in accordance with provisions of this Section 6(e) specifying:

(i) the certificate numbers for such shares in respect of which such notice of withdrawal is being submitted;

(ii) the number of whole shares of the Series A Cumulative Convertible Preferred Shares with respect to which such notice of withdrawal is being submitted; and

(iii) the number of shares of the Series A Cumulative Convertible Preferred Shares, if any, that remain subject to the original Holder’s Redemption Notice and have been or will be delivered for redemption by the Corporation.

The Corporation will promptly return to the respective holders thereof all certificates representing any shares of the Series A Cumulative Convertible Preferred Shares with respect to which a Holder’s Redemption Notice has been withdrawn in compliance with this Certificate, in which case, upon such return, the Holder’s Redemption Notice with respect thereto shall be deemed to have been withdrawn.

(f) Payment of Redemption Price . The Redemption Price shall be paid, at the option of the Corporation, in cash, shares of Common Stock, or any combination thereof; provided , that if the Corporation is redeeming Series A Cumulative Convertible Preferred Shares at a holder’s request upon the occurrence of a Mandatory Redemption Event, the Redemption Price shall be payable only in cash; provided further , that if upon the Redemption Date, the Corporation is prohibited from paying the Redemption Price in cash under the terms of any indebtedness of the Corporation or by applicable law. the Corporation shall, if permitted under the terms of such indebtedness and under applicable laws. elect to pay the Redemption Price in shares of Common Stock; and provided further that the Corporation shall not be permitted to pay all or any portion of the Redemption Price in shares of Common Stock in the case of a Default Event and provided further that the Corporation shall not be permitted to pay all or any portion of the Redemption Price in shares of Common Stock in the case of a Change of Control Transaction or a Designated Event unless:

(i) the Corporation shall have given timely notice pursuant to Section 6(c) hereof of its intention to redeem all or a specified portion of the Series A Cumulative Convertible Preferred Shares with shares of Common Stock as provided herein;

(ii) the Corporation shall have registered such shares of Common Stock under the Securities Act and the Exchange Act, in each case, if required or desirable to permit such holder to freely sell or transfer such shares without any restrictions as to time, amount or other factors which limit the ability of such holder to freely trade such shares in recognized liquid markets;

(iii) such shares of Common Stock have been approved for listing on a national securities exchange or have been approved for quotation in an inter-dealer quotation system of any registered United States national securities association; and

(iv) any necessary qualification or registration under applicable state securities laws have been obtained, if required or desirable to permit such holder to freely sell or transfer such shares without any restrictions as to time, amount or other factors which limit the ability of such holder to freely trade such shares in recognized liquid markets; provided further that if the Corporation shall be prohibited under any agreements applicable to it from paying the Redemption Price in cash, or an event of default (howsoever described) shall arise under any such agreement upon the payment of the Redemption Price in cash, then, notwithstanding any notice by the Corporation to the contrary, the Corporation shall, to the extent not prohibited by such agreements and applicable law, pay the Redemption Price in Common Stock or, in the case of a merger in which the Corporation is not the surviving Person, common stock of the surviving Person or its direct or indirect parent company which is the equivalent of Common Stock.

If each of the foregoing conditions to pay the Redemption Price in shares of Common Stock are not satisfied with respect to any holder or holders of the Series A Cumulative Convertible Preferred Shares prior to the close of business on the last day prior to the Redemption Date and the Corporation has elected to redeem the Series A Cumulative Convertible Preferred Shares pursuant to this Section 6 through the issuance of shares of Common Stock, then, notwithstanding any election by the Corporation to the contrary, subject to there being legally available funds therefor, the Corporation shall pay the entire

Redemption Price of the Series A Cumulative Convertible Preferred Shares of such holder or holders in cash provided if the Corporation does not (whether prohibited by applicable law, agreements in respect of its indebtedness or otherwise) pay the Redemption Price in the form and on the date required hereunder the dividend rate on each share of Series A Cumulative Convertible Preferred Shares which is the subject of such redemption shall be increased, commencing on the applicable Redemption Date, to the Default Rate and shall thereafter accrue on the Liquidation Preference per share for each such share. Except as provided in the preceding sentence, the Corporation may not change the form of consideration to be paid for the Series A Cumulative Convertible Preferred Shares after the mailing of written notice of the Redemption Date pursuant to Section 6(c).

(g) Payments in Common Stock . Payment of the specified portion of the Redemption Price in shares of Common Stock pursuant to Section 6(f) hereof shall be made by the issuance of a number of shares of Common Stock equal to the quotient obtained by dividing (i) the portion of the Redemption Price, as the case may be, to be paid in shares of Common Stock by (ii) 97.5% of the average of the Closing Sale Prices of the Common Stock for the 20 Trading Days immediately preceding and including the second Trading Day prior to the Redemption Date (appropriately adjusted to take into account the occurrence, during such period of any event described in Section 9). The Corporation will not issue fractional shares of Common Stock in payment of the Redemption Price. Instead, the Corporation will pay cash based on the average of the Closing Sale Prices of the Common Stock for the 20 Trading Days immediately preceding and including the second Trading Day prior to the Redemption Date (appropriately a:ljusted to take into account the occurrence, during such period of any event described in Section 9) for all fractional shares on the Redemption Date.

(h) Time of Payment . If the Corporation gives notice of redemption, then by 11:00 a.m. (New York City time) on the Redemption Date, the Corporation shall, subject to there being legally available funds therefor, pay to the holders of the Series A Cumulative Convertible Preferred Shares a sufficient sum of cash or, if applicable, Common Stock or a combination of cash and Common Stock, sufficient to pay the aggregate Redemption Price of all shares of the Series A Cumulative Convertible Preferred Shares which are to be redeemed as of the Redemption Date.

(i) No Dividends on Preferred Shares. If on the Redemption Date, the Corporation has paid the Redemption Price as aforesaid for the shares of the Series A Cumulative Convertible Preferred Shares delivered for redemption as set forth herein, dividends shall cease to accumulate as of the Redemption Date on those shares of the Series A Cumulative Convertible Preferred Shares called for redemption and all rights of holders of such shares shall terminate, except for the right to receive the Redemption Price pursuant to this Section 6.

(j) Condition to Redemption Payment . Payment of the Redemption Price for shares of the Series A Cumulative Convertible Preferred Shares is conditioned upon physical delivery of certificates representing the Series A Cumulative Convertible Preferred Shares, together with necessary endorsements, to the Corporation at its office or at such other place as the Corporation may designate at any time after delivery of the notice of redemption.

(k) Payment of Dividends in Certain Circumstances . If the Redemption Date falls after a Record Date and before the related Dividend Payment Date, holders of the shares of the Series A Cumulative Convertible Preferred Shares at the close of business on that Record Date shall be entitled to receive the dividends to be paid on those shares on the corresponding Dividend Payment Date.

(l) Series A Cumulative Convertible Preferred Shares Redeemed in Part . If fewer than all the outstanding shares of the Series A Cumulative Convertible Preferred Shares are to be redeemed at the option of the Corporation, the particular shares to be redeemed shall be redeemed pro rata among the holders thereof (based on the respective outstanding Redemption Prices for such shares held by each holder).

(m) New Stock Certificates . Upon surrender of a certificate or certificates representing shares of the Series A Cumulative Convertible Preferred Shares which are to be redeemed in part and part of such shares shall remain outstanding after a Redemption Date, the Corporation shall execute and deliver to such holder of such outstanding shares, a new certificate representing such shares in an amount equal to the unredeemed portion of the shares of the Series A Cumulative Convertible Preferred Shares surrendered for partial redemption.

(n) Arrears in Dividends . Notwithstanding the foregoing provisions of this Section 6, unless full cumulative dividends (whether or not declared) on all outstanding shares of the Series A Cumulative Convertible Preferred Shares have been paid or contemporaneously are declared and paid for all Dividend Periods terminating on or before the Redemption Date, the Corporation shall have no right to exercise its option to redeem the shares of the Series A Cumulative Convertible Preferred Shares, and no sum shall be set aside for such redemption, unless pursuant to a purchase or exchange offer made on the same terms to all holders pf the Series A Cumulative Convertible Preferred Shares.

(o) Compliance with Laws . The Corporation will comply with all the applicable provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act, if required, in connection with any offer by the Corporation to redeem the Series A Cumulative Convertible Preferred Shares and to the extent necessary to comply therewith, the time periods specified herein shall be extended accordingly.

Section 7. Conversion .

(a) Right to Convert . Each share of the Series A Cumulative Convertible Preferred Shares shall be convertible at the option of each holder thereof at any time in accordance with, and subject to, this Section 7 into a number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) equal to the Conversion Rate in effect at such time. Notwithstanding the foregoing, if any shares of the Series A Cumulative Convertible Preferred Shares are to be redeemed pursuant to Section 6, such conversion right shall cease and terminate, as to the shares of the Series A Cumulative Convertible Preferred Shares to be redeemed, at 5:00 p.m., New York City time on the Business Day immediately preceding the Redemption Date, unless the Corporation shall default in the payment of the Redemption Price therefor, as provided herein.

If the Corporation is a party to a consolidation, merger, amalgamation, binding share exchange or other transaction pursuant to which shares of Common Stock would be converted into cash, securities or other property as set forth in Section 10, each share of the Series A Cumulative Convertible Preferred Shares may be surrendered for conversion at any time from and after the date that is 30 days prior to the anticipated effective date of the transaction until the Conversion Transaction Expiration Date in respect of such transaction and. at the effective time of the transaction, the right to convert Series A Cumulative Convertible Preferred Shares into shares of Common Stock shall be changed into a right to convert such Series A Cumulative Convertible Preferred Shares into the kind and amount of cash, securities or other property of the Corporation or another Person that the holder would have received if such holder had converted such Series A Cumulative Convertible Preferred Shares immediately prior to the transaction.

Upon such change, all references herein to shares of Common Stock shall be references to such cash, securities or other property in each case as the context requires.

(b) Conversion Procedures . Conversion of shares of the Series A Cumulative Convertible Preferred Shares may be effected by any holder thereof upon the surrender to the Corporation, at the principal office of the Corporation or at such other office or agency as may be directed by the Board of Directors, of the certificate or certificates for such shares of the Series A Cumulative Convertible Preferred Shares to be converted accompanied by a complete and manually signed Notice of Conversion (attached hereto as Exhibit A) along with (A) appropriate endorsements and transfer documents as required by the Board of Directors and (B) if required pursuant to Section 7(c) funds equal to the dividend payable on the next Dividend Payment Date. In case such Notice of Conversion shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issuance of shares of Common Stock in such name or names. Other than such taxes, the Corporation shall pay any documentary, stamp or similar issue or transfer taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of the Series A Cumulative Convertible Preferred Shares pursuant hereto. The conversion of the Series A Cumulative Convertible Preferred Shares will be deemed to have been made on the date (the “ Conversion Date ”) such certificate or certificates have been surrendered and the receipt of such Notice of Conversion and payment of all required transfer taxes, if any (or the demonstration to the satisfaction of the Corporation that such taxes have been paid). Promptly (but no later than 10 Business Days) following the Conversion Date, the Corporation shall deliver or cause to be delivered (i) certificates representing the number of validly issued, fully paid and nonassessable full shares of Common Stock to which the holder of shares of the Series A Cumulative Convertible Preferred Shares being converted (or such holder’s transferee) shall be entitled, and (ii) if less than the full number of shares of the Series A Cumulative Convertible Preferred Shares evidenced by the surrendered certificate or certificates is being converted, a new certificate or certificates, of like tenor, for the number of shares evidenced by such surrendered certificate or certificates less the number of shares being converted. On the Conversion Date, the rights of the holder of the Series A Cumulative Convertible Preferred Shares as to the shares being converted shall cease except for the right to receive shares of Common Stock and the Person entitled to receive the shares of Common Stock shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time.

(i) If a holder of shares of the Series A Cumulative Convertible Preferred Shares exercises conversion rights, such shares will cease to accumulate dividends as of the end of the day immediately preceding the Conversion Date. On conversion of the Series A Cumulative Convertible Preferred Shares, except for conversion during the period from the close of business on any Record Date corresponding to a Dividend Payment Date to the close of business on the Business Day immediately preceding such Dividend Payment Date, in which case the holder on such Dividend Record Date shall receive the dividends payable on such Dividend Payment Date, accumulated and unpaid dividends on the converted shares of the Series A Cumulative Convertible Preferred Shares shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the holder thereof through delivery of the Common Stock (together with the cash payment, if any, in lieu of fractional shares) in exchange for the Series A Cumulative Convertible Preferred Shares being converted pursuant to the provisions hereof. If a holder of Series A Cumulative Convertible Preferred Shares elects to have its shares converted into Common Stock, shares of the Series A Cumulative Convertible Preferred Shares surrendered for conversion after the close of business on any Record Date for the payment of dividends declared and before the opening of business on the Dividend Payment Date corresponding to that Record

Date must be accompanied by a payment to the Corporation in cash of an amount equal to the dividend payable in respect of those shares on such Dividend Payment Date; provided that a holder of shares of the Series A Cumulative Convertible Preferred Shares on a Record Date who converts such shares into shares of Common Stock on the corresponding Dividend Payment Date shall be entitled to receive the dividend payable on such shares of the Series A Cumulative Convertible Preferred Shares on such Dividend Payment Date, and such holder need not include payment to the Corporation of the amount of such dividend upon surrender of shares of the Series A Cumulative Convertible Preferred Shares for conversion.

(ii) Notwithstanding the foregoing, if shares of the Series A Cumulative Convertible Preferred Shares are converted during the period between the close of business on any Record Date and the opening of business on the corresponding Dividend Payment Date and the Corporation has called such shares of the Series A Cumulative Convertible Preferred Shares for redemption during such period, or the Corporation has specified a Redemption Date during such period, then, in each case, the holder who tenders such shares for conversion shall receive the dividend payable on such Dividend Payment Date and need not include any such cash payment of the amount of such dividend upon surrender of shares of the Series A Cumulative Convertible Preferred Shares for conversion.

(d) Fractional Shares . In connection with the conversion of any shares of the Series A Cumulative Convertible Preferred Shares, no fractions of shares of Common Stock shall be issued, but the Corporation shall pay a cash adjustment in respect of any fractional interest in an amount equal to the fractional interest multiplied by the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the Conversion Date, rounded to the nearest whole cent.

(e) Total Shares . If more than one share of the Series A Cumulative Convertible Preferred Shares shall be surrendered for conversion by the same holder at the same time, the number of full shares of Common Stock issuable on conversion of those shares shall be computed on the basis of the total number of shares of the Series A Cumulative Convertible Preferred Shares so surrendered.

(f) Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock . The Corporation shall:

(i) at all times reserve and keep available, free from preemptive rights, for issuance upon the conversion of shares of the Series A Cumulative Convertible Preferred Shares such number of its authorized but unissued shares of Common Stock as shall from time to time be sufficient if necessary to permit the conversion of all outstanding shares of the Series A Cumulative Convertible Preferred Shares;

(ii) prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Series A Cumulative Convertible Preferred Shares, comply with all applicable federal, state and foreign laws and regulations that require action to be taken by the Corporation (including, without limitation, the registration or approval, if required under such laws and regulations, of any shares of Common Stock to be provided for the purpose of conversion of the Series A Cumulative Convertible Preferred Shares hereunder); and

(iii) ensure that all shares of Common Stock delivered upon conversion of the Series A Cumulative Convertible Preferred Shares, upon delivery, be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights and will be listed upon the New York Stock Exchange or such other securities exchange or interdealer

quotation system of any registered United States national securities association on which the Common Stock of the Corporation may be then be listed or included.

Section 8. Additional Shares Issuable Upon Conversion Following the Occurrence of a Designated Event that is Also a Fundamental Change .

(a) General . If a holder exercises its right pursuant to Section 7 hereof to convert its Series A Cumulative Convertible Preferred Shares upon the occurrence of a Fundamental Change that occurs prior to January 16, 2023 then (i) at the effective date of the transaction constituting such Fundamental Change, the right to convert Series A Cumulative Convertible Preferred Shares into shares of Common Stock shall be changed into a right to convert such Series A Cumulative Convertible Preferred Shares into the kind and amount of cash, securities or other property of the Corporation or another Person (the “ Transaction Consideration ”) that the holder would have received if the holder had converted such Series A Cumulative Convertible Preferred Shares immediately prior to such transaction constituting a Fundamental Change and (ii) in the circumstances set forth in Section 8(b) hereof, upon conversion, such holder will be entitled to receive, in addition to the Transaction Consideration in respect of a number of shares of Common Stock equal to the applicable Conversion Rate, an additional Transactional Consideration in respect of an additional number of shares of Common Stock of the Corporation (the “ Additional Shares ”) determined as set forth in Section 8(b)..

(b) Determination of Additional Shares . The number of Additional Shares referred to in Section 8(a)(ii) shall be determined for the Series A Cumulative Convertible Preferred Shares by reference to the table below, based on the price per share at which the Common Stock of the Corporation is being acquired (the “ Acquisition Stock Price ”).

(i) The Acquisition Stock Prices set forth in the first row of each table below (i.e., column headers) will be adjusted as of each date on which the Conversion Rate of the Series A Cumulative Convertible Preferred Shares is adjusted. The adjusted Acquisition Stock Prices will equal the Acquisition Stock Prices applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to such Acquisition Stock Price adjustment and the denominator of which is the Conversion Rate as so adjusted. The initial number of Additional Shares set forth in the table will be adjusted from time to time in the same manner as the Conversion Rate is adjusted from time to time in the manner provided under Section 9.

(ii) Upon a Fundamental Change which takes place prior to January 16, 2023 the holder of each share of Series A Cumulative Convertible Preferred Shares shall be entitled to receive upon conversion of each share, in addition to shares of Common Stock to which it is entitled based on the Conversion Rate, a number of Additional Shares per $1,000.00 of Liquidation Preference per share of the Series A Cumulative Convertible Preferred Shares so converted which corresponds to the Acquisition Stock Price then in effect and date of such Fundamental Change as set forth in the table below:

Acquisition Stock Price



Year	$24.19	$27.50	$30.84	$35.00	$40.00	$50.00	$60.00	$75.00	$90.00	$110.00	$130.00	$150.00	$175.00	$200.00
1/29/2013	8.905	7.347	6.172	5.078	4.117	2.868	2.104	1.402	0.974	0.619	0.399	0.256	0.141	0.070
1/15/2014	8.905	6.875	5.752	4.711	3.803	2.632	1.922	1.274	0.881	0.556	0.355	0.225	0.121	0.058
1/15/2015	8.905	6.387	5.315	4.330	3.476	2.387	1.734	1.143	0.786	0.492	0.311	0.194	0.101	0.045
1/15/2016	8.905	5.891	4.870	3.939	3.141	2.136	1.542	1.010	0.691	0.429	0.268	0.164	0.082	0.034
1/15/2017	8.905	5.402	4.426	3.546	2.803	1.883	1.349	0.878	0.598	0.369	0.228	0.137	0.066	0.025
1/15/2018	8.905	4.931	3.991	3.156	2.464	1.629	1.158	0.749	0.509	0.312	0.191	0.112	0.052	0.017
1/15/2019	8.905	4.457	3.544	2.751	2.109	1.363	0.959	0.618	0.419	0.256	0.155	0.090	0.039	0.010
1/15/2020	8.905	3.958	3.062	2.305	1.717	1.073	0.746	0.480	0.327	0.200	0.120	0.068	0.027	0.005
1/15/2021	8.905	3.408	2.511	1.788	1.262	0.745	0.512	0.333	0.229	0.142	0.085	0.047	0.017	0.001
1/15/2022	8.905	2.758	1.819	1.126	0.695	0.369	0.256	0.172	0.121	0.076	0.045	0.024	0.007	0.000
1/15/2023	8.905	2.106	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000

(iii) The exact Acquisition Stock Prices and Effective Dates may not be set forth in the table above, in which case:

(A) If the Acquisition Stock Price is between two Acquisition Stock Price amounts in the table or the Effective Date is between two Effective Dates in the table, the number of Additional Shares will be determined by a straight-line interpolation between the number of Additional Shares set forth for the higher and lower Acquisition Stock Price amounts and the two dates, as applicable, based on a 365-day year.

(B) If the Acquisition Stock Price is in excess of $200.00 per share (subject to adjustment), no Additional Shares will be issued upon conversion.

(C) If the Acquisition Stock Price is less than $24.19 per share (subject to adjustment), the number of Additional Shares issued on conversion will be the amount set forth in the farthest column on the left of the table which contains Additional Share numbers.

(iv) If the Transaction Consideration includes securities or other property other than cash, the value thereof for purposes of determining the Acquisition Stock Price shall be determined in good faith by the Board of Directors.

Section 9. Adjustments in the Shares of Series A Cumulative Convertible Preferred Shares .

(a) Conversion Rate Adjustments . Each share of the Series A Cumulative Convertible Preferred Shares shall be convertible into a number shares of Common Stock equal to the Conversion Rate, subject to adjustment from time to time by the Corporation in accordance with the provisions of this Section 9. References to Conversion Rate in this Certificate means the Conversion Rate in effect on the relevant date. Notwithstanding anything in this Section 9, the Conversion Rate may not be reduced below the initial Conversion Rate as of the date hereof, except for adjustments made under Section 9(a)(i) as a result of a share split or share combination. The Conversion Rate shall be adjusted from time to time by the Corporation as follows:

(i) If the Corporation issues shares of Common Stock as a dividend or distribution on shares of Common Stock, or if a share split or share combination is effected, the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR O times OS 1 divided by OS O

where,

CR O = the Conversion Rate in effect immediately prior to such event

CR 1 = the Conversion Rate in effect immediately after such event

OS O = the number of shares of Common Stock outstanding immediately prior to such event

OS 1 = the number of shares of Common Stock outstanding immediately after such event

An adjustment made pursuant to this Section 9(a)(i) shall become effective on the date immediately after (x) the date fixed for the determination of stockholders entitled to receive such dividend or other distribution or (y) the date on which such split or combination becomes effective, as applicable. If any dividend or distribution described in this Section 9(a)(i) is declared but not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(ii) If the Corporation issues to all or substantially all holders of Common Stock any rights, warrants, options or other securities entitling them for a period of not more than 20 days after the date of issuance thereof to subscribe for or purchase shares of the Common Stock, or securities convertible into shares of Common Stock within 20 days after the issuance thereof, in either case at an exercise price per share or a conversion price per share less than the Closing Sale Price of shares of the Common Stock on the business day immediately preceding the time of announcement of such issuance, the Conversion Rate will be adjusted based on the following formula (provided that the Conversion Rate will be readjusted to the extent that such rights, warrants options, or other securities or convertible securities are not exercised or converted prior to the expiration of the exercisability or convertibility thereof):

CR 1 = CR O times (OS O +X) divided by (OS O +Y)

where,

CR O = the Conversion Rate in effect immediately prior to such event

CR l = the Conversion Rate in effect immediately after such event

OS O = the number of shares of Common Stock outstanding immediately prior to such event

X = the total number of shares of Common Stock issuable pursuant to such rights. warrants, options, other securities or convertible securities

Y = the quotient of(A) the aggregate price payable to exercise such rights, warrants, options, other securities or convertible securities and (8) the average of the Closing Sale Prices of the Common Stock for the 20 consecutive Trading Days ending two Trading Days prior to the date of announcement for the issuance of such rights, warrants, options, other securities or convertible securities

An adjustment made pursuant to this Section 9(a)(ii) shall be made successively whenever such rights, warrants, options, other securities or convertible securities are issued, and shall become effective on the day following the date of announcement of such issuance. If, at the end of the period during which such rights, warrants, options, other securities or convertible securities are exercisable or convertible, not all rights, warrants, options, other securities or convertible securities have been exercised or converted, as the case may be, the adjusted Conversion Rate shall be immediately readjusted to what it would have been based upon the number of additional shares of Common Stock actually issued (or the number of shares of Common Stock actually issued upon conversion of convertible securities actually issued).

For purposes of this Section 9(a)(ii), in determining whether such rights, warrants, options, other securities or convertible securities entitle the holder to subscribe for or purchase or exercise a conversion right for shares of . Common Stock at less than the average Closing Sale Price of the Common Stock, and in determining the aggregate exercise or conversion price payable for such shares of Common Stock, there shall be taken into account any consideration received by the Corporation for such rights, warrants, options, other securities or convertible securities and any amount payable on exercise or conversion thereof, with the value of such consideration if other than cash to be determined by the Board of Directors.

(iii) If the Corporation distributes shares of the Corporation’s Capital Stock, evidences of the Corporation’s indebtedness or other assets or property of the Corporation or any of its Subsidiaries to all or substantially all of the holders of the Corporation’s Common Stock, excluding:


(1)	dividends, distributions and rights, warrants, options, other securities or convertible securities referred to in Sections 9(a)(i)or 9(a)(ii);


(2)	dividends or distributions paid exclusively in cash; and


(3)	Spin-Offs described in this Section 9(a)(iii) below,

then the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR O times SP O divided by (SP O -FMV) where,

CR O = the Conversion Rate in effect immediately prior to such distribution

CR 1 = the Conversion Rate in effect immediately after such distribution

SP O = the average of the Closing Sale Prices of the Common Stock for the 20 consecutive Trading Days ending two Trading Days prior to the record date for such distribution

FMV = the Fair Market Value (as determined in good faith by the Board of Directors) of the shares of Capital Stock, evidences of indebtedness, assets or property distributed with respect to each outstanding share of Common Stock on the record date for such distribution

An adjustment made pursuant to the above paragraph shall be made successively whenever any such distribution is made and shall become effective on the day immediately after the dated fixed for the determination of stockholders entitled to receive such distribution.

With respect to an adjustment pursuant to this Section 9(a)(iii) where there has been a payment of a dividend or other distribution on the Common Stock or shares of capital stock of any class or series, or similar equity interest, of or relating to a subsidiary or other business unit of the Corporation which have Closing Sale Prices for the first 20 Trading Days after the payment of such dividend or distribution shall have been made (such transaction herein. referred to as a “ Spin-Off ”), including, for the avoidance of doubt, the Spin-Off of the Crimson Wine Group, the Conversion Rate in effect immediately before the close of business on the record date fixed for determination of holders of Common Stock entitled to receive such payment of such dividend or distribution will be increased based on the following formula:

CR 1= CR O times (FMV O +MP O) divided by MP O

where,

CR O = the Conversion Rate in effect immediately prior to such distribution

CR 1 = the Conversion Rate in effect immediately after such distribution

FMV O = the average of the Closing Sale Prices of the capital stock or similar equity interest distributed to holders of Common Stock applicable to one share of Common Stock over the first 20 Trading Days after the effective date of such Spin-Off

MP O = the average of the Closing Sale Prices of the Common Stock over the first 20 consecutive Trading

Days after the effective date of such Spin-Off

The adjustment to the Conversion Rate under the preceding paragraph will occur on the 20th Trading Day from, and including, the effective date of such Spin-Off. Notwithstanding anything to the contrary herein, the Conversion Price shall not be reduced by more than $0.81 as a result of the Spin-Off of the Crimson Wine Group.

If any such dividend or distribution described in this Section 9(a)(iii) is declared but not paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(iv) lf the Corporation makes any cash dividend or distribution during any of the Corporation’s quarterly fiscal periods to all or substantially all holders of Common Stock, in an aggregate amount that, together with other cash dividends or distributions made during such quarterly fiscal period, exceeds $0.0625 per share (the “ Base Dividend ”) (appropriately adjusted from time to time for any share dividends on or subdivisions of the Common Stock), the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR O times SP O divided by (SP O –C)

where,

CR O = the Conversion Rate in effect immediately prior to the record date for such distribution CR 1 = the Conversion Rate in effect immediately after the record date for such distribution

SP O = the average of the Closing Sale Prices of the Common Stock for the 20 consecutive Trading Days ending two Trading Days prior to the record date of such distribution

C = the amount in cash per share the Corporation distributes to holders of Common Stock that exceeds the Base Dividend

An adjustment made pursuant to this Section 9(a)(iv) shall become effective on the date immediately after the Record Date for the determination of stockholders entitled to receive such dividend or distribution. If any dividend or distribution described in this Section 9(a)(iv) is declared but not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

No adjustment to the Conversion Rate pursuant to this Section 9(a)(iv) shall be made, if the Corporation distributes, no later than 20 days after the payment date for any aforesaid cash dividend or distribution in excess of the Base Dividend, to each holder of the Series A Cumulative Convertible Preferred Shares an amount in cash equal to the product of(A) the amount in cash per share the Corporation distributes to holders of Common Stock that exceeds the Base Dividend, multiplied by (B) the number of shares of Common Stock in which the shares of the Series A Cumulative Convertible Preferred Shares held by such holder is convertible on the date preceding the date of such payment to such holder.

The Base Dividend shall be subject to adjustment on account of any of the events set forth in Section 9(a)(i). Any such adjustment will be effected by multiplying the Base Dividend by a fraction, the numerator of which will equal OS O and the denominator of which will equal OS 1, in each case, within the meaning of Section 9(a)(i).

(b) Adjustments to Conversion Rate/or Diluting Issues.

(i) For purposes of this Section 9(b), the following definitions shall apply:

“ New Shares of Common Stock ” shall mean all shares of Common Stock issued (or, pursuant to Section 9(b)(ii) below, deemed to be issued) by the Corporation after the Issue Date, other than the following shares of Common Stock, and shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (collectively “ Exempted Securities ”):

(1) shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Series A Cumulative Convertible Preferred Shares;

(2) shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock in respect of which an adjustment of the Conversion Price is made pursuant to Section 9(a); or

(3) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities. in each case provided such issuance is pursuant to the terms of such Option or Convertible Security, in each case in respect of which an adjustment of the Conversion Price shall have been made under this Section (b) upon issuance of such Options or Convertible Stock;

“ Convertible Securities ” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

“ Market Value Price ” shall mean, in respect of any share of Common Stock on any date, (a) the Closing Sale Price on the date the Corporation enters into a binding agreement to issue shares of Common Stock, Options or Convertible Securities or if such date is not a Trading Day, on the immediately preceding Trading Day, if under the terms of such binding agreement such shares of Common Stock, Options or Convertible Securities are to be issued within six Trading Days following the execution of such binding agreement, otherwise, (b) the Closing Sale Price on the Trading Day immediately preceding such date or (c) if the shares of such Common Stock are not traded on a principal national or regional stock exchange or not listed on the Nasdaq National Market or other similar market. the Fair Market Value of such share of Common Stock (as determined in good faith by the majority of the independent directors of the Board of Directors).

“ Option ” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(ii) The circumstances described below shall apply to issues of New Shares of Common Stock:

(1)

If the Corporation at any time or from time to time after the Issue Date shall issue any Options or Convertible Securities (other than Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be New Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

(2)

If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Conversion Price pursuant to the terms of Section 9(b)(iii) below, are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (A) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (B) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (i) shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (x) the Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (y) the Conversion Price that would have resulted from any issuances of New Shares of Common Stock (other than deemed issuances of New Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

(3)

If the terms of any Option or Convertible Security, the issuance of which did not result in an adjustment to the Conversion Price pursuant to the terms of Section 9(b)(iii) (either because the consideration per share (determined pursuant to Section 9(b)(iv)) of the New Shares of Common Stock subject thereto was equal to or greater than the Conversion Price then in effect. or because such Option or Convertible Security was issued before the Issue Date) or Section 9(g), are revised after the Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (A) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (B) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the New Shares of Common Stock subject thereto (determined in the manner provided in Section 9(b)(ii)(l) above) shall be deemed to have been issued effective upon such increase or decrease becoming effective.

(4)

Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Conversion Price pursuant to the terms of Section 9(b)(iii), the Conversion Price shall be readjusted to such Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

(5)

If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon Subsequent events, any adjustment to the Conversion Price provided for in this Section 9(b)(ii) shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (2) and (3) of this Section 9(b)(ii)). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Conversion Price that would result under the terms of this Section 9(b)(ii) at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

(iii) In the event the Corporation shall on any date after the Issue Date issue New Shares of Common Stock (including New Shares of Common Stock deemed to be issued pursuant to Subsection 9(b)(ii)), without consideration or for a consideration per share less than the Market Value Price on such date, then the Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:

CP2 = CP1 times (A + B) divided by (A + C).

For purposes of the foregoing formula, the following definitions shall apply:

“ CP2 ” shall mean the Conversion Price in effect immediately after such issue of New Shares of Common Stock;

“ CPI ” shall mean the Conversion Price in effect immediately prior to such issue of New Shares of Common Stock;

“ A ” shall mean the number of shares of Common Stock outstanding immediately prior to such issue of New Shares of Common Stock (treating for this purpose as outstanding all shares of Common Stock issuable upon exercise of Options outstanding immediately prior to such issue or upon conversion or exchange of Convertible Securities (including the Series A Cumulative Convertible Preferred Shares) outstanding (assuming exercise of any outstanding Options therefor) immediately prior to such issue);

“ B ” shall mean the number of shares of Common Stock that would have been issued if such New Shares of Common Stock had been issued at a price per share equal to the Market Value Price of such date (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by such Market Value Price); and

C” shall mean the number of such New Shares of Common Stock actually issued in such transaction.

(iv) For purposes of this Section 9(b), the consideration received by the Corporation for the issue of any New Shares of Common Stock shall be computed as follows:


(1)	Consideration which consists of cash or property shall:


(A)	insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest and calculated without reduction for any customary fees, commissions, discounts or allowances payable by the Corporation in connection with the issuance and sale of New Shares of Common Stock;


(B)	insofar as it consists of property other than cash, be computed at the Fair Market Value thereof at the time of such issue, as determined in good faith by the Board of Directors; and


(C)	in the event New Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors.


(2)	The consideration per share received by the Corporation for New Shares of Common Stock deemed to have been issued pursuant to Section 9(b)(i), relating to Options and Convertible Securities, shall be determined by dividing

(A)

the total amount, if any, received or receivable by the Corporation as consideration and calculated without reduction for any customary fees, commissions, discounts or allowances payable by the Corporation in connection with the issuance and sale of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

(B)

the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.

(v) Upon each adjustment to the Conversion Price as provided in Section 9(b)(iii) the Conversion Rate shall be automatically adjusted by multiplying the Conversion Rate then in effect by a

fraction whose numerator is the Conversion Price in effect immediately prior to such adjustment and the denominator of which is the Conversion Price as so adjusted.

(c) Reclassification . The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon an event to which Section 6(b) applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be “the date fixed for the determination of stockholders entitled to receive such distribution” within the meaning of Section 9(a)(iii)), and (b) a subdivision, split or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be ‘‘the day upon which such split or combination becomes effective” within the meaning of Section 9(a)(i)).

(d) No Adjustments . Notwithstanding the foregoing provisions of Section 9(a)(i), no adjustment shall be made thereunder, nor shall an adjustment be made to the ability of a holder of shares of the Series A Cumulative Convertible Preferred Shares to convert, for any distribution described therein if the holder will otherwise, by virtue of it being a holder of the Series A Cumulative Convertible Preferred Shares, participate in the distribution without conversion of such holder’s shares of the Series A Cumulative Convertible Preferred Shares.

(e) Increases in Conversion Rate for Tax Purposes . The Corporation may make such increases in the Conversion Rate, in addition to those required by Section 9(a), as the Board of Directors deems advisable to avoid or diminish any income tax to holders of shares of Capital Stock of the Corporation (or rights to acquire such Capital Stock) resulting from any dividend or distribution of such Capital Stock (or rights to acquire Common Stock) or from any event treated as such for income tax purposes.

(f) Other Increases in Conversion Rate . To the extent permitted by applicable law, the Corporation from time to t me may increase the Conversion Rate by any amount for any period of time if the increase is irrevocable during the period and the Board of Directors shall have made a determination that such increase would be in the best interests of the Corporation, which determination shall be conclusive. Whenever the Conversion Rate is increased pursuant to the preceding sentence, the Corporation shall mail to holders of record of the Series A Cumulative Convertible Preferred a notice of the increase at least fifteen (15) days prior to the date the increased Conversion· Rate takes effect and in accordance with applicable law and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

(g) No Adjustments in Certain Circumstances . No adjustment to the Conversion Rate need be made:

(i) upon the issuance. of any shares of Common Stock pursuant to any present or future plan, in each case adopted in good faith and approved by a majority of the independent directors of the Board of Directors, providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in shares of Common Stock under any plan;

(ii) upon the issuance of any shares of Common Stock or options or rights to purchase shares of Common Stock pursuant to any present or future employee, director or consultant incentive benefit plan or program of or assumed by the Corporation or any of its

subsidiaries, in each case adopted in good faith and approved by a majority of the independent directors of the Board of Directors;

(iii) upon the issuance of any shares or options or rights to purchase shares of Common Stock in connection with any bona fide acquisition by the Corporation or any of its subsidiaries (whether effected as a purchase of stock or assets, a consolidation, merger, or share exchange), or the formation of a strategic alliance or a venture;

(iv) upon the issuance of any shares of Common Stock pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security not described in the preceding Section 9(g)(ii) and outstanding as of the Issue Date;

(v) upon the repurchase by the Corporation of shares of Common Stock or rights or options to purchase such Common Stock from any employee compensation plan or trust or employees upon or following their resignation or termination of employment, which repurchase shall have been approved by a majority of the independent directors of the Board of Directors;

(vi) for a change in the par value of the Common Stock;

(vii) which would result in a duplicate adjustment being made as a result of the application of more than one clause of this Section 9; or

(viii) for accumulated and unpaid dividends.

(h) Required Adjustments . No adjustment to the Conversion Rate shall be required in connection with any event, transaction or other occurrence unless the terms of this Certificate specifically require that such an adjustment be made in connection with such event, transaction or other occurrence.

(i) Rounding . All adjustments to the Conversion Rate under this Section 9 shall be made by the Corporation and shall be calculated to the nearest one ten thousandth (1/10,000) of a share.

(j) Notice of Adjustments . Whenever the Conversion Rate is adjusted as herein provided, the Corporation shall promptly prepare a notice of such adjustment of the Conversion Rate setting forth the adjusted Conversion Rate and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Rate to the holder of each share of the Series A Cumulative Convertible Preferred Shares at its last address appearing on the records of the Corporation within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.

(k) Effective Time of Adjustments . In any case in which this Section 9 provides that an adjustment shall become effective immediately after (A) a record date for an event, (B) the date fixed for the determination of stockholders entitled to receive a dividend or distribution pursuant to Section 9(a)(i) or (C) a date fixed for the determination of stockholders entitled to receive rights, warrants, options or other securities pursuant to Section 9(a)(ii) (each date referred to in clause (A), (B) or (C) herein “ Determination Date ”), the Corporation may elect to defer the actual adjustment contemplated thereby until the applicable Adjustment Event Date (x) by issuing to the holder of any shares of the Series A Cumulative Convertible Preferred Shares (or portion thereof) converted after such Determination Date and before such Adjustment Event Date, the additional shares of Common Stock or other securities issuable upon such conversion by reason of the applicable required adjustment over and above the

Common Stock issuable upon such conversion before giving effect to such adjustment and (y) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 7(d); provided that in the case of an adjustment made pursuant to Section 9(a)(iii) with respect to a Spin-Off, the Corporation may defer the issuance of such additional shares and cash payment, if any, until the third (3rd) Business Day immediately following the last day of the twenty (20) consecutive Trading Day period commencing on the fifth (5th) Trading Day after the relevant ex dividend date.

For purposes of this Section 9(k), the term “ Adjustment Event Date ” shall mean:

(i) in any case referred to in Section 9(k)(A) hereof, date of the occurrence of such event;

(ii) in any case referred to in Section 9(k)(B).hereof, the date any such dividend or distribution is paid or made; and

(iii) in any case referred to in Section 9(k)(C) hereof, the date of expiration of such rights, warrants, options or other securities (or the conversion period of any convertible securities issued upon exercise thereof).

(l) Par Value . Notwithstanding anything in this Certificate to the contrary, in no event shall the Conversion Rate be adjusted so that the Conversion Price would be less than $1.00.

(m) Notice of Certain Actions . In case:

(i) the Corporation shall declare a dividend (or any other distribution) on its Common Stock that would require an adjustment in the Conversion Rate pursuant to Section 9(a); or

(ii) the Corporation shall authorize the granting to the holders of all or substantially all of the shares of Common Stock of rights, warrants, options or other securities to subscribe for or purchase any share of any class of capital stock of the Corporation or any other rights, warrants, options or other securities of the Corporation; or

(iii) of any reclassification or reorganization of the Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par. value, or from no par value to par value), or of any consolidation, merger or amalgamation to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation;

(iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; or

(v) any other event or condition giving rise to an adjustment in the Conversion Rate;

the Corporation shall cause to be mailed to each holder of shares of the Series A Cumulative Convertible Preferred Shares at its address appearing in the records of the Corporation, as promptly as possible but in any event at least ten (10) days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or grant, or, if a record

is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or grant are to be determined, or (B) the date on which such reclassification, consolidation, merger, amalgamation, sale, transfer, dissolution, liquidation or winding up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, grant, reclassification, consolidation, merger, amalgamation, sale, transfer, dissolution, liquidation or winding up.

(n) Adoption of Rights Plan . If the Corporation adopts a plan or other arrangement which grants rights or other benefits to the holders of Common Stock (herein referred to as a “ Rights Plan ”) while any Series A Cumulative Convertible Preferred Shares remains outstanding, holders of the Series A Cumulative Convertible Preferred Shares will receive, upon conversion of their Series A Cumulative Convertible Preferred Shares, the rights and benefits granted by such Rights Plan in addition to shares of Common Stock to be received upon conversion, unless, prior to conversion, the entitlement to such rights or benefits have expired, terminated or been redeemed or unless such rights or benefits have separated from the Common Stock. If the rights and benefits provided for in the Rights Plan adopted have separated from the Common Stock in accordance with the provisions of such Rights Plan so that holders of the Series A Cumulative Convertible Preferred Shares would not be entitled to receive any rights or benefits in respect of Common Stock issuable upon conversion of shares of the Series A Cumulative Convertible Preferred Shares, the Conversion Rate will be adjusted at the time of separation as if the Corporation had distributed, to all holders of Common Stock such rights and benefits which shall be assumed to be the equivalent of shares of capital stock, evidences of indebtedness or other assets or property pursuant to Section 9(a)(iii), subject to readjustment upon the subsequent expiration, termination or redemption of such rights or benefits. In lieu of any such adjustment, the Corporation may amend such applicable Rights Plan to provide that upon conversion of the Series A Cumulative Convertible Preferred Shares the holders thereof will receive, in addition to shares of Common Stock issuable upon such conversion, the rights which would have attached to such shares of Common Stock if such rights or benefits had not become separated from the Common Stock under such Rights Plan. To the extent that the Corporation adopts any future Rights Plan, upon conversion of the Series A Cumulative Convertible Preferred Shares into shares of Common Stock, a holder of the Series A Cumulative Convertible Preferred Shares shall receive, in addition to shares of Common Stock, the rights under the future Rights Plan whether or not such rights or benefits have separated from shares of Common Stock at the time of conversion and no adjustment will be made in accordance with Section 9(a)(iii) or otherwise.

(o) Additional Obligations of the Corporation.

(i) The Corporation shall not, by amendment to its certificate of incorporation, as in effect on the date hereof, or through any reorganization, transfer of assets, consolidation, merger, dissolution, liquidation, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, or which would have the effect of circumventing or avoiding the provisions of this Certificate (including, without limitation, this Section 9 hereof), but shall at all times in good faith assist in the carrying out of all the provisions of this Certificate and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the holders of the Series A Cumulative Convertible Stock against dilution or other impairment.

(ii) Before taking any action that would result in an adjustment to the Conversion Rate the Corporation will take or cause to be taken any and all necessary corporate or other action that may be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock upon payment of the applicable Conversion Price.

(iii) lf the Corporation shall amend the provisions of any Common Stock, Preferred Shares or other rights, options or securities or make any adjustment to any of them (pursuant to any antidilution provision or otherwise) so as to reduce the consideration per share applicable thereto, increase the number of shares issuable upon exercise thereof or otherwise change the economic terms (such as the purchase price, exercise price, conversion price or conversion ratio thereof), then the Corporation shall make appropriate adjustment, as nearly as practical to those that would be required by the provisions of this Section 9 most nearly analogous to the effect of such amendment or adjustment, to the Conversion Rate, and to the number of shares of Common Stock issuable upon conversion of the Series A Cumulative Convertible Preferred Shares, as shall be fair and equitable; provided . however , that no such adjustment shall duplicate any adjustment required to be made in respect thereof by virtue of the other provisions of this Section 9.

(iv) In the event that any of the events or conditions described in this Section give rise to an adjustment to the Conversion Rate, then the adjustments provided for in this Section 9 in respect of such event or condition shall give effect both to the event or condition giving rise to such adjustment and to all such adjustments made in respect of other rights, warrants, options, securities and similar securities; provided , however , that no such adjustment shall duplicate any adjustment required to be made in respect thereof by virtue of the provisions of this Section 9.

(p) For the avoidance of doubt, there shall be no adjustment to the Conversion Rate or the Conversion Price in connection with the First Merger or the Second Merger (as such capitalized terms are defined in the Letter Agreement).

Section 10. Consolidation, Merger, Amalgamation and Sale of Assets .

(a) General . The Corporation without the consent or vote of the holders of any of the outstanding Series A Cumulative Convertible Preferred Shares, may consolidate or amalgamate with or merge into any other Person or convey, transfer or lease all or substantially all its assets to any Person or may permit any Person to consolidate or amalgamate with or merge into, or transfer or lease all or substantially all its properties to, the Corporation so long as the Corporation at least 10 days prior to such transaction shall have given each such holder a notice of such transaction setting forth the general terms thereof and the amount and nature of the cash, securities or other property to be delivered to the holders of Common Stock in connection therewith; provided, however , that (a) the shares of the Series A Cumulative Convertible Preferred Shares will become shares of such successor, transferee or lessee or Person of which such successor, transferee or lessee or Person is a Subsidiary, having in respect of such successor, transferee, lessee or Person the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series A Cumulative Convertible Preferred Shares had immediately prior to such transaction; and (b) the Corporation delivers to the holders a certificate executed by two Officers and an opinion of nationally recognized independent counsel stating that such transaction complies with this Certificate.

(b) Preservation of Rights and Powers . Upon any consolidation by the Corporation with, or merger by the Corporation into, any other Person or any conveyance, transfer or lease of all or substantially all the assets of the Corporation as described in Section 10(a), the successor resulting from

such consolidation or into which the Corporation is merged or the transferee or lessee to which such conveyance, transfer or lease is made, will succeed to, and be substituted for, and may exercise every right and power of, the Corporation under the shares of the Series A Cumulative Convertible Preferred Shares, including, without limitation, the right and power to redeem the Series A Cumulative Convertible Preferred Shares as set forth in Section 6, and thereafter, except in the case of a lease, the predecessor (if still in existence) will be released from its obligations and covenants with respect to the Series A Cumulative Convertible Preferred Shares.

Section 11. Voting Rights .

(a) General . The holders of shares of the Series A Cumulative Convertible Preferred Shares shall not be entitled to any voting rights except as hereinafter provided in this Section 11 or as otherwise required by applicable law.

(b) Vote Required for Amendment of the Certificate . The affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series A Cumulative Convertible Preferred Shares, voting separately as a series, in person or by proxy, at a special meeting called for the purpose, or by written consent in lieu of meeting, is required in order to amend any provisions of this Certificate or the Corporation’s Certificate of Incorporation to affect adversely the rights, preferences or voting power of the holders of shares of the Series A Cumulative Convertible Preferred Shares. However, the Corporation may create additional classes of Parity Stock and Junior Stock, increase the authorized number of shares of Parity Stock and Junior Stock and issue additional series of Parity Stock and Junior Stock without the consent of any holder of shares of the Series A Cumulative Convertible Preferred Shares or Parity Stock. Any such issuance of Parity Stock or Junior Stock shall not be deemed to affect· adversely the rights of the holders of the Series A Cumulative Convertible Preferred Shares. The separate votes of the holders of the outstanding shares of the Series A Cumulative Convertible Preferred Shares provided for in this Section (11)(b) will, in each case, be in addition to any required vote of the holders of other classes and series of the Corporation’s stock necessary to authorize the action in question.

(c) Voting Rights Per Share of Series A Cumulative Convertible Preferred Shares . In all cases on which the holders of the Series A Cumulative Convertible Preferred Shares shall be entitled to vote, each share of the Series A Cumulative Convertible Preferred Shares shall be entitled to one vote.

Section 12. Transfer Agent and Registrar . The Corporation, at its sole discretion, may appoint a Transfer Agent and Registrar for the Series A Cumulative Convertible Preferred Shares.

Section 13. Currency . All shares of the Series A Cumulative Convertible Preferred Shares shall be denominated in U.S. currency, and all payments and distributions thereon or with respect thereto shall be made in U.S. currency. All references herein to “$” or “dollars” refer to U.S. currency.

Section 14. Form . Stock certificates evidencing the Series A Cumulative Convertible Preferred Shares shall be issued, unless the Board of Directors otherwise determines, in definitive, fully registered form and shall be in the form approved by the Board of Directors, with appropriate legends reflecting the restrictions on transferability of the Corporation’s capital stock set out in Article FOURTH of the Corporation’s Certificate of Incorporation and restricting the transfer of the Series A Cumulative Convertible Preferred Shares under the Securities Act.

Section 15. Transfer .

(a) Subject to the provisions of Article FOURTH of the Corporation’s Certificate of Incorporation, neither the Series A Cumulative Convertible Preferred Shares nor any beneficial ownership therein (as determined in accordance with Rule 13d-3 under the Exchange Act) may be sold, pledged or otherwise transferred except (i) to an affiliate or a Related Fund of the transferor or (ii) sold or transferred in compliance with Section 15(b) hereof.

(b) Right of First Refusal . Notwithstanding the foregoing Section 15(a) or any other provision to the contrary herein (but subject to the provisions of Article FOURTH of the Corporation’s Certificate of Incorporation):

(i) if a holder of the Series A Cumulative Convertible Preferred Shares has received a bona fide offer from a Person who is not an Affiliate of such holder to purchase or acquire any or all of the shares of its Series A Cumulative Convertible Preferred Shares, or to acquire any beneficial ownership in any such shares, which such holder wishes to accept, it shall give the Corporation at least 30 days’ notice of such proposed transaction (which notice shall include the identity of the proposed transferee, all terms of the proposed transaction and any other information the Corporation reasonably requests) and offer to sell or transfer such shares, or the beneficial ownership therein, as applicable, to the Corporation or its designee upon the same terms and conditions as has been offered to such holder (a “ Right of First Refusal ”). If the Corporation accepts such offer, the transaction shall occur within five Business Days after the Corporation accepts the offer; if the Corporation fails to respond to or accept such offer within 30 days after receipt of the notice (including the aforesaid information}, such holder shall be free to sell or transfer such shares (and only such shares), or the specified beneficial ownership therein, within five Business Days after the conclusion of such 30 day period, subject, however, to the provisions of Section 15(b)(ii); and

(ii) whether or not the Corporation exercises the Right of First Refusal pursuant to Section IS(b)(i), the Corporation may reject, within the 30-day period specified in Section 15(b)(i), any proposed sale or transfer of any shares of the Series A Cumulative Convertible Preferred Shares, or any beneficial ownership interest therein to any Person (a) who is in the reasonable good faith judgment of a majority of the full Board of Directors (and not a committee thereof) a competitor of the Corporation or any of its subsidiaries, or whom a majority of the full Board of Directors (and not a committee thereof) reasonably and in good faith determines to be unacceptable as a holder of the Series A Cumulative Convertible Preferred Shares.

(c) The Corporation may refuse to register any sale, pledge or transfer of the Series A Cumulative Convertible Preferred Shares or any Common Stock issuable upon conversion of the shares of the Series A Cumulative Convertible Preferred Shares that is not made in accordance with the provisions of this Section 15.

Section 16. Ratings . So long as the Series A Cumulative Convertible Preferred Shares remains outstanding, the Corporation will pay annually, the fees and expenses incurred in obtaining and will maintain at all times ratings for such Series A Cumulative Convertible Preferred Shares as established by at least two of Moody’s Investor Services, Standard & Poor’s or Fitch Ratings.

Section 17. Hart-Scott-Rodino Compliance . At the request of any holder of shares of Series A Cumulative Convertible Preferred Shares then outstanding, the Corporation shall cooperate with such holder in the filing of a Notification and Report Form under the Hart-Scott-Rodino Act with the Federal Trade Commission and the Antitrust Division of the Department of Labor (an “ HSR Filing ”), so long as

such filing relates to a prospective conversion or redemption of such shares in accordance with the terms hereof. The provisions regarding the payment of the costs and expenses for the HSR Filing are set forth in the Letter Agreement and the Purchase Agreement.

Section 18. Paying Agent and Conversion Agent .

(a) General . The Corporation may, at its sole discretion, elect to appoint an (i) an office or agency where Series A Cumulative Convertible Preferred Shares may be presented for payment (the “ Paying Agent ”) and (ii) an office or agency where Series A Cumulative Convertible Preferred Shares may be presented for conversion (the “ Conversion Agent ”). The Transfer Agent, if one is appointed, may act as Paying Agent and Conversion Agent, unless another Paying Agent or Conversion Agent is appointed by the Corporation. The Corporation may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more additional paying agents and one or more additional conversion agents in such other locations as it shall reasonably determine. The term “Paying Agent” includes any additional paying agent and the term “ Conversion Agent ” includes any additional conversion agent. The Corporation may change any Paying Agent or Conversion Agent without prior notice to any holder. The Corporation shall notify the Registrar of the name and address of any Paying Agent or Conversion Agent appointed by the Corporation and instruct the Registrar to notify each holder of the name and address of such Paying Agent or Conversion Agent. The Corporation or any of its Affiliates may act tis Paying Agent, Registrar, coregistrar or Conversion Agent. Until each holder is notified to the contrary, the Corporation will be the Paying Agent, Registrar and Conversion Agent.

(b) Place of Payments . Payments due to the holders of the Series A Cumulative Convertible Preferred Shares shall be payable at the office or agency of the Corporation maintained for such purpose in The City of New York and at any other office or agency maintained by the Corporation for such purpose. Payments shall be payable by wire transfer (provided, that appropriate wire instructions have been received by the Corporation at least 15 days prior to the applicable date of payment) of immediately available funds to a U.S. dollar account maintained by the holder with a bank located in New York City. Unless notified to the contrary, such wire instructions for the initial holders will be set forth in the Purchase Agreement.

Section 19. Financial and Business Information . The Corporation shall deliver to each holder of Series A Cumulative Convertible Preferred Shares:

(a) Quarterly Statements - within 60 days after the end of each quarterly fiscal period in each fiscal year of the Corporation (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,

(i) a consolidated balance sheet of the Corporation and its Subsidiaries as at the end of such quarter, and

(ii) consolidated statements of income, changes in shareholders’ equity and cash flows of the Corporation and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,

setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a senior financial officer of the Corporation as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of

operations and cash flows, subject to changes resulting from year-end adjustments, provided that the Corporation shall be deemed to have satisfied the requirements of this Section 19(a) if it shall have timely made its Form 10-Q (prepared in accordance with the requirements therefor) available on “EDGAR”;

(b) Annual Statements - within 105 days after the end of each fiscal year of the Corporation, duplicate copies of.

(i) a consolidated balance sheet of the Corporation and its Subsidiaries as at the end of such year, and

(ii) consolidated statements of income, changes in shareholders’ equity and cash flows of the Corporation and its Subsidiaries for such year,

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and provided that the Corporation shall be deemed to have satisfied the requirements of this Section 19(b) if it shall have timely made its Form 10-K (prepared in accordance with the requirements therefor) available on “ EDGAR ”.

Section 20. Taxes . The Corporation shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion or re emption of the Series A Cumulative Convertible Preferred Shares.

Headings . The headings of the Sections of this Certificate are for convenience of reference only and shall not define, limit or affect any of the provisions hereof.

SEVENTH: The Secretary of State of the State of New York is designated as an agent of the Corporation upon whom process against it may be served, and the post office address to which the Secretary of State shall mail a copy of such process served upon him is to CT Corporation System, 111 Eighth Avenue, New York, New York 10011.

EIGHTH: No director shall be personally liable to the Corporation or its shareholders for damages for any breach of duty, as a director, except for any matter in respect of which such director shall be liable by reason that, in addition to any and all other requirements for such liability, there shall have been a judgment or other final adjudication adverse to him that establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated Section 719 of the New York Business Corporation Law. Neither the amendment nor repeal of this Article shall eliminate or reduce the effect of this Article in respect to any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. This Article shall neither eliminate nor limit the liability of a director for any act or omission occurring prior to the adoption of this Article. If the New York Business Corporation Law is amended hereafter to expand or limit, without specific shareholder approval therefor,

the liability of a director, then the liability of a director of the Corporation shall be expanded to the extent required or limited to the extent permitted by the New York Business Corporation Law, as so amended.

NINTH: A majority vote of the outstanding Common Stock shall be required to authorize any merger, consolidation, or dissolution of the Corporation or any sale, lease, exchange or other disposition of all or substantially all of the Corporation’s assets.

* * *

FOURTH : The foregoing Restated Certificate of Incorporation was authorized by the affirmative vote of the Board of Directors of the Corporation.

IN WITNESS WHEREOF, we have signed this Restated Certificate of Incorporation on the 31 ^st day of July, 2018 and we affirm the statements contained herein as true, under penalties of perjury.

/s/ Laura Ulbrandt
Laura Ulbrandt

Authorized Person

/s/ Roland Kelly
Roland Kelly

Authorized Person

Exhibit 3.2

AMENDED AND RESTATED

BY-LAWS

(Effective February 23, 2017)

(Revised May 23, 2018 to reflect name change to Jefferies Financial Group Inc.)

JEFFERIES FINANCIAL GROUP INC.

ARTICLE I. SHAREHOLDERS MEETING

Section 1. The annual meeting of shareholders of the Corporation shall be held at the principal office of the Corporation, or at such other place within or without the State of New York, on such date and at such time as shall be determined by the Board of Directors in each year for the purpose of electing directors, and for the transaction of such other business as may be brought before the meeting.

Section 2. Special meetings of shareholders may be called at any time by the Board of Directors.

Section 3. Written notice of meetings of shareholders shall be given whenever shareholders are to take any action at a meeting. Such notice shall state the place, date and hour of the meeting and, unless it is the annual meeting, indicate that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall, in addition, state the purpose or purposes for which the meeting was called.

A copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders, or, if he shall have filed with the Secretary of the Corporation a written request that such notices to him be mailed to some other address, then directed to him at such other address.

Section 4. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board shall fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action.

Section 5. Except as may be otherwise required by laws of the State of New York, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares entitled to vote thereat present in person or by proxy shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or a series, voting as a class, the holders of a majority of shares of such class or series present in person or by proxy shall constitute a quorum for the transaction of such specified item of business.

Section 6. In order to properly submit any business to an annual meeting of shareholders, a shareholder must give timely notice in writing to the Secretary of the Corporation of such shareholder’s intention to present such business. To be considered timely, a shareholder’s notice must be delivered, either in person or by United States certified mail, postage prepaid, and received at the principal executive office of the Corporation, not less than one hundred twenty (120) days prior to the first anniversary date of the Corporation’s proxy statement in connection with the last annual meeting or if no annual meeting was held in the previous year, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable annual meeting.

Each notice to the Secretary shall set forth (i) the name and address of the shareholder, (ii) a representation that the shareholder is entitled to vote at such meeting, indicating the number of shares owned of record and beneficially by such shareholder, together with a statement that such shareholder intends to appear in person or by proxy at the meeting to present such proposal or proposals, (iii) a description of the proposal or proposals to be presented, including the complete text of any resolutions to be presented at the meeting and the reasons for conducting such business at the meeting and (iv) any material interest of the shareholder in the business to be submitted at the meeting. In addition, the shareholder shall promptly provide any other information reasonably requested by the Corporation.

The presiding officer of the meeting may, if the facts warrant, determine that a proposal was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective proposal shall be disregarded.

Notwithstanding the foregoing provisions of this Section 6, a shareholder who seeks to have any proposal included in the Corporation’s proxy statement shall comply with applicable state law and the requirements of the rules and regulations promulgated by the Securities and Exchange Commission.

ARTICLE II. DIRECTORS

Section 1. The number of the directors of the Corporation shall be such number not less than three, as is designated from time to time by resolution adopted by a majority of the members of the Board of Directors, plus the number of directors, if any, elected by the holders of the Preferred Stock, voting as a class, pursuant to Section 5 of the General Provisions Relating to All Series of the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the Corporation. The terms of the directors, if any, elected by the holders of the Preferred Stock, voting as a class, pursuant to Section 5 of the General Provisions Relating to All Series of the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the Corporation shall be as set forth in such Section 5. The directors other than those, if any, elected by the holders of the Preferred Stock, voting as a class, shall, except as otherwise set forth herein, be elected for one year terms which shall expire at each annual meeting of shareholders and when their successors shall have been elected and qualified. Such election shall be by ballot by the shareholders entitled to vote and present in person or by proxy at such meeting. In case of any vacancy in the Board of Directors (including any vacancy due to an increase in the size of the Board of Directors), the remaining directors, although less than a quorum, by affirmative vote of

a majority thereof, may elect a successor to fill such vacancy to serve until the next annual meeting of shareholders and when such director’s successor shall have been elected and qualified. Any director or directors (other than a director or directors elected by the holders of the Preferred Stock pursuant to Section 5 of the General Provisions Relating to All Series of the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the Corporation) may be removed for cause by the affirmative vote of a majority of the directors present (including by means of a conference telephone or similar communications equipment) at a meeting at which such action is considered, provided a quorum is present.

A nominee for director shall be elected to the Board of Directors if the votes cast for such nominee’s election exceed the number of against votes in respect of such nominee’s election; provided, however, that directors shall be elected by a plurality of the votes cast at any meeting of shareholders for which the number of director nominees exceeds the number of directors to be elected. If directors are to be elected by a plurality of the votes cast, shareholders shall not be permitted to vote against a nominee.

Section 2. Nominations of persons for election to the Board of Directors may be made in the following manner:

A. Committee or Board Nomination . A committee appointed by the Board of Directors (or, in the absence of such committee, the Board of Directors) may nominate persons for election to the Board of Directors.

B. Shareholder Nomination at an Annual or Special Meeting . Any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election to the Board of Directors at a meeting only if written notice of such shareholder’s intention to make such nomination or nominations has been received by the Secretary of the Corporation at the principal executive office of the Corporation (1) with respect to an election to be held at an annual meeting of shareholders, (a) not less than 120 days nor more than 150 days prior to the first anniversary date of the Corporation’s proxy statement in connection with the preceding year’s annual meeting or (b) in the event that the date of the annual meeting is more than 30 days before or more than 60 days after the first anniversary date of the preceding year’s annual meeting, not more than 190 days prior to the date of such annual meeting and not less than the later of 160 days prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made and (2) with respect to an election to be held at a special meeting of shareholders, not less than the tenth day following the date on which public announcement of the date of such Special Meeting is first made. In no event shall the public announcement of any adjournment or postponement of a meeting commence a new time period (or extend any time period) for the giving of a notice as described above.

Each such notice to the Secretary shall set forth: (1) the name and address of the shareholder and his or her nominees; (2) a representation that the shareholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (3) a description of all arrangements or understandings between the shareholder and each such nominee; and (4) the consent of each nominee to serve as a director of

the Corporation if so elected. The Corporation may require such shareholder and any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if so determined, shall so declare to the meeting and the defective nomination shall be disregarded.

C. Shareholder Nomination - Proxy Access . Any Eligible Shareholder (as defined below) is entitled to nominate one or more persons for election to the Board of Directors and have such nomination included in the Corporation’s proxy statement in connection with an annual meeting of shareholders if such nomination is made pursuant to the provisions of this ARTICLE II, Section 2.C.

(1) Subject to the provisions of this Section 2.C., the Corporation shall include in its proxy statement (including its form of proxy) for an annual meeting of shareholders the name of any shareholder nominee for election to the Board of Directors submitted pursuant to this Section 2.C. (each, a “Proxy Access Nominee”) provided (a) timely written notice of such Proxy Access Nominee satisfying this Section 2.C. (“Proxy Access Notice”) is delivered to the Secretary of the Corporation by or on behalf of a shareholder or shareholders that, at the time the Proxy Access Notice is delivered, satisfy the ownership and other requirements of this Section 2.C. (such shareholder or shareholders, and any person on whose behalf they are acting, the “Eligible Shareholder”), (b) the Eligible Shareholder expressly elects in writing at the time of providing the Proxy Access Notice to have its nominee included in the Corporation’s proxy statement pursuant to this Section 2.C., and (c) the Eligible Shareholder and the Proxy Access Nominee otherwise satisfy the requirements of this Section 2.C. and the Proxy Access Nominee satisfies the director qualification requirements set forth in the Corporation’s Corporate Governance Guidelines and any other documents setting forth qualifications for directors.

(2) To be timely, a Proxy Access Notice must be received by the Secretary of the Corporation at the principal executive office of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary date of the Corporation’s proxy statement in connection with the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after the first anniversary date of the preceding year’s annual meeting, a Proxy Access Notice to be timely must be so received not more than 190 days prior to the date of such annual meeting and not less than the later of 160 days prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of any adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a Proxy Access Notice as described above.

(3) In addition to including the name of the Proxy Access Nominee in the Corporation’s proxy statement for the annual meeting, the Corporation also shall include (a) the information concerning the Proxy Access Nominee and the Eligible Shareholder that is required to be disclosed in the Corporation’s proxy statement pursuant to Section 14 of the Securities Exchange

Act of 1934 and the rules and regulations promulgated thereunder (“Exchange Act”) and (b) if the Eligible Shareholder so elects, a Statement (as defined below) (collectively, the “Required Information”). Nothing in this Section 2.C. shall limit the Corporation’s ability to solicit against and include in its proxy statement its own statements relating to any Proxy Access Nominee.

(4) The number of Proxy Access Nominees (including Proxy Access Nominees that were submitted by an Eligible Shareholder for inclusion in the Corporation’s proxy statement pursuant to this Section 2.C. but either are subsequently withdrawn or that the Board of Directors decides to nominate (a “Board Nominee”)) appearing in the Corporation’s proxy statement with respect to an annual meeting of shareholders shall not exceed the greater of (i) two or (ii) 20% of the number of directors in office as of the last day on which a Proxy Access Notice may be delivered pursuant to this Section 2.C. (the “Nomination Deadline”) or, if such amount is not a whole number, the closest whole number below 20% (the “Permitted Number”); provided, however, that (a) any director in office as of the Nomination Deadline who was included in the Corporation’s proxy statement as a Proxy Access Nominee for any of the two preceding annual meetings and whom the Board of Directors decides to nominate for election to the Board of Directors will be counted against the Permitted Number, (b) any individual who will be included in the Corporation's proxy materials as a nominee recommended by the Board of Directors pursuant to an agreement, arrangement or other understanding with a shareholder or group of shareholders (other than any such agreement, arrangement or understanding entered into in connection with an acquisition of stock from the Corporation by such shareholder or group of shareholders) will be counted against the Permitted Number, and (c) in the event that one or more vacancies for any reason occurs on the Board of Directors at any time after the Nomination Deadline and before the date of the applicable annual meeting of shareholders and the Board of Directors resolves to reduce the size of the Board of Directors in connection therewith, the Permitted Number shall be calculated based on the number of directors in office as so reduced. In the event that the number of Proxy Access Nominees submitted by Eligible Shareholders pursuant to this Section 2.C. exceeds the Permitted Number, each Eligible Shareholder shall select one Proxy Access Nominee for inclusion in the Corporation’s proxy statement until the Permitted Number is reached, going in order of the amount (greatest to least) of voting power of the capital stock of the Corporation entitled to vote on the election of directors as disclosed in the Proxy Access Notice. If the Permitted Number is not reached after each Eligible Shareholder has selected one Proxy Access Nominee, this selection process shall continue as many times as necessary, following the same order each time, until the Permitted Number is reached.

(5) An Eligible Shareholder must have owned (as defined below) continuously for at least three years a number of shares that represents 3% or more of the total voting power of the Corporation’s outstanding shares of capital stock entitled to vote in the election of directors (the “Required Shares”) as of both the date the Proxy Access Notice is received by the Corporation in accordance with this Section 2.C. and the record date for determining shareholders entitled to vote at the annual meeting and must continue to own the Required Shares through the meeting date. For purposes of satisfying the ownership requirement under this Section 2.C., the shares of the capital stock of the Corporation owned by one or more shareholders, or by the person or persons who own shares of the capital stock of the Corporation and on whose behalf any shareholder is acting, may be aggregated, provided that (a) the number of shareholders and other

persons whose ownership of shares is aggregated for such purposes shall not exceed 20, (b) each shareholder and other persons whose shares are aggregated shall have held such shares continuously for at least three years, and (c) a group of two or more funds that are (1) under common management and investment control, (2) under common management and funded primarily by the same employer (or by a group of related employers that are under common control), or (3) a “group of investment companies,” as such term is defined in Section 12(d)(1)(G)(ii) of the Investment Company Act of 1940, as amended, shall be treated as one shareholder or person for this purpose. Whenever an Eligible Shareholder consists of a group of shareholders and/or other persons, any and all requirements and obligations for an Eligible Shareholder set forth in this Section 2.C. must be satisfied by and as to each such shareholder or other person, except that shares may be aggregated to meet the Required Shares as provided in this Section 2.C. With respect to any one particular annual meeting, no shareholder or other person may be a member of more than one group of persons constituting an Eligible Shareholder under this Section 2.C.

(6) For purposes of this Section 2.C., an Eligible Shareholder shall be deemed to “own” only those outstanding shares of the capital stock of the Corporation as to which the person possesses both (a) the full voting and investment rights pertaining to the shares and (b) the full economic interest in (including the opportunity for profit and risk of loss on) such shares; provided that the number of shares calculated in accordance with clauses (a) and (b) shall not include any shares (x) sold by such person or any of its affiliates in any transaction that has not been settled or closed, (y) borrowed by such person or any of its affiliates for any purposes or purchased by such person or any of its affiliates pursuant to an agreement to resell, or (z) subject to any option, warrant, forward contract, swap, contract of sale, other derivative or similar instrument or agreement entered into by such person or any of its affiliates, whether any such instrument or agreement is to be settled with shares or with cash based on the notional amount or value of outstanding shares of the capital stock of the Corporation, in any such case which instrument or agreement has, or is intended to have, the purpose or effect of (1) reducing in any manner, to any extent or at any time in the future, such person’s or affiliates’ full right to vote or direct the voting of any such shares, and/or (2) hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such person or affiliate. A person shall “own” shares held in the name of a nominee or other intermediary so long as the person retains the right to instruct how the shares are voted with respect to the election of directors and possesses the full economic interest in the shares. A person’s ownership of shares shall be deemed to continue during any period in which (i) the person has loaned such shares, provided that the person has the power to recall such loaned shares on five business days’ notice and provides a representation that it will promptly recall such loaned shares upon being notified that any of its Proxy Access Nominees will be included in the Corporation’s proxy statement, or (ii) the person has delegated any voting power by means of a proxy, power of attorney or other instrument or arrangement that is revocable at any time by the person. The terms “owned,” “owning” and other variations of the word “own” shall have correlative meanings. For purposes of this Section 2.C., the term “affiliate” shall have the meaning ascribed thereto in the regulations promulgated under the Exchange Act.

(7) An Eligible Shareholder’s Proxy Access Notice must include: (a) one or more written statements from the record holder of the shares (and from each intermediary through which the shares are or have been held during the requisite three-year holding period) verifying that, as of a date within seven days prior to the date the Proxy Access Notice is received by the Corporation, the Eligible Shareholder owns, and has owned continuously for the preceding three years, the Required Shares, and the Eligible Shareholder’s agreement to provide (1) within five business days after the record date for the meeting, written statements from the record holder and intermediaries verifying the Eligible Shareholder’s continuous ownership of the Required Shares through the record date and (2) immediate notice if the Eligible Shareholder ceases to own any of the Required Shares prior to the date of the applicable annual meeting of shareholders; (b) documentation satisfactory to the Corporation demonstrating that a group of funds qualifies to be treated as one shareholder or person for purposes of this Section 2.C.; (c) a representation that the Eligible Shareholder (including each member of any group of shareholders that together is an Eligible Shareholder hereunder): (1) intends to continue to own the Required Shares through the date of the annual meeting, (2) acquired the Required Shares in the ordinary course of business and not with the intent to change or influence control of the Corporation, and does not presently have such intent, (3) has not nominated and will not nominate for election to the Board of Directors at the annual meeting any person other than the Proxy Access Nominee(s) being nominated pursuant to this Section 2.C., (4) has not engaged and will not engage in, and has not and will not be, a “participant” in another person’s “solicitation” within the meaning of Rule 14a-1(l) under the Exchange Act in support of the election of any individual as a director at the annual meeting other than its Proxy Access Nominee(s) or a Board Nominee, (5) will not distribute to any shareholder any form of proxy for the meeting other than the form distributed by the Corporation, and (6) has provided and will provide facts, statements and other information in all communications with the Corporation and its shareholders that are or will be true and correct and not misleading; (d) the written consent of each Proxy Access Nominee to be named in the Corporation’s proxy statement as a nominee and to serve as a director if elected; (e) a copy of the Schedule 14N that has been filed with the SEC as required by Rule 14a-18 under the Exchange Act; (f) in the case of a nomination by a group of shareholders that together is an Eligible Shareholder, the designation by all group members of one group member that is authorized to act on behalf of all members of the nominating shareholder group with respect to the nomination and matters related thereto, including withdrawal of the nomination; and (g) an undertaking that the Eligible Shareholder agrees to (1) assume all liability stemming from any legal or regulatory violation arising out of the Eligible Shareholder’s communications with the Corporation’s shareholders or out of the information that the Eligible Shareholder provides to the Corporation, (2) in a form satisfactory to the Corporation, indemnify and hold harmless the Corporation and each of its directors, officers and employees individually against any liability, loss or damages in connection with any threatened or pending action, suit or proceeding, whether legal, administrative or investigative, against the Corporation or any of its directors, officers or employees arising out of any nomination submitted by the Eligible Shareholder pursuant to this Section 2.C. or any solicitation or other activity in connection therewith, (3) file with the SEC any solicitation relating to the annual meeting at which the Proxy Access Nominee will be nominated, regardless of whether any such filing is required under Section 14 of the Exchange Act or whether any exemption from filing is available for such solicitation, and (4) comply with all other applicable laws, rules, regulations and listing standards with respect to any solicitation

in connection with the meeting. An Eligible Shareholder’s Proxy Access Notice must also include a written representation and agreement from its Proxy Access Nominee (in a form deemed satisfactory to the Corporation) that the Proxy Access Nominee (1) is not and will not become a party to any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such Proxy Access Nominee, if elected as a director of the Corporation, will act or vote on any issue or question (“Voting Commitment”) that has not been disclosed in writing to the Corporation, (2) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director of the Corporation (“Compensation Arrangement”) that has not been disclosed in writing to the Corporation, and (3) in the Proxy Access Nominee’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with, applicable law and all corporate governance, conflict of interest, corporate opportunities, confidentiality and stock ownership and trading policies and guidelines of the Corporation applicable to the Corporation’s directors.

(8) The Eligible Shareholder may include with its Proxy Access Notice, a written statement for inclusion in the Corporation’s proxy statement for the meeting, not to exceed 500 words, in support of the Proxy Access Nominee’s candidacy (the “Statement”). Notwithstanding anything to the contrary contained herein, the Corporation may omit from its proxy statement any information or Statement that it believes would violate any applicable law, rule, regulation or listing standard.

(9) Each Proxy Access Nominee must:


(a)	complete, sign and submit all questionnaires required of the Corporation’s Board of Directors within five business days of receipt of each such questionnaire from the Corporation; and

(b)

provide within five business days of the Corporation’s request such additional information as the Corporation determines may be necessary to permit the Board of Directors to determine whether such Proxy Access Nominee meets the requirements of this Section 2.C. and/or the Corporation’s requirements with regard to director qualifications and policies and guidelines applicable to directors, including whether (1) such Proxy Access Nominee is independent under the listing standards of each U.S. exchange upon which the capital stock of the Corporation is listed, any applicable rules of the SEC, and any publicly disclosed standards used by the Board of Directors in determining and disclosing the independence of the directors (the “Independence Standards”), (2) such Proxy Access Nominee has any direct or indirect relationship with the Corporation, and (3) such Proxy Access Nominee is not and has not been subject to (A) any event specified in Item 401(f) of Regulation S-K under the Securities Act of 1933, as amended (the “Securities Act”), or (B) any order of the type specified in Rule 506(d) of Regulation D under the Securities Act.

(10) In the event that any information or communications provided by the Eligible Shareholder or Proxy Access Nominee to the Corporation or its shareholders ceases to be true and correct in any respect or misleading, each Eligible Shareholder or Proxy Access Nominee, as the case may be, shall promptly notify the Secretary of the Corporation of any such inaccuracy or omission in such previously provided information and of the information that is required to make such information or communication true and correct; it being understood that providing any such notification shall not be deemed to cure any defect or limit the Corporation’s right to omit a Proxy Access Nominee from its proxy materials as provided in this Section 2.C.

(11) The Corporation shall not be required to include, pursuant to this Section 2.C., a Proxy Access Nominee in its proxy statement (or, if the proxy statement has already been filed, to allow the nomination of a Proxy Access Nominee, notwithstanding that proxies in respect of such vote may have been received by the Corporation) (a) for any meeting for which the

Secretary of the Corporation receives a notice that any shareholder has nominated a person for election to the Board of Directors pursuant to Section 2.B. of these By-Laws, (b) if the Eligible Shareholder who has nominated such Proxy Access Nominee has nominated for election to the Board of Directors at the meeting any person other than pursuant to this Section 2.C., or has or is engaged in, or has been or is a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Exchange Act in support of the election of any individual as a director at the meeting other than its Proxy Access Nominee(s) or a Board Nominee, (c) who is not independent under the Independence Standards, (d) who does not meet the audit committee independence requirements under the listing standards of each U.S. exchange upon which the Corporation’s capital stock is listed, is not a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act or is not an “outside director” for purposes of Section 162(m) of the Internal Revenue Code, (e) whose election as a member of the Board of Directors would violate or cause the Corporation to be in violation of these By-Laws, the Certificate of Incorporation, any applicable publicly disclosed corporate governance, conflict of interest, corporate opportunities, confidentiality and stock ownership and trading policies and guidelines of the Corporation (including, without limitation, policies and guidelines relating to Voting Commitments and Compensation Arrangements applicable to the Corporation’s directors) or other document setting forth qualifications for directors, the listing standards of each exchange upon which the capital stock of the Corporation is listed, or any applicable state or federal law, rule or regulation, (f) if the Proxy Access Nominee is or becomes a party to any Voting Commitment that has not been disclosed in writing to the Corporation, (g) if the Proxy Access Nominee is or becomes a party to any Compensation Arrangement that has not been disclosed in writing to the Corporation, (h) who is or has been, within the past three years, an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, as amended, (i) who is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or has been convicted in such a criminal proceeding within the past 10 years, (j) who is subject to any order of the type specified in Rule 506(d) of Regulation D under the Securities Act, or (k) if such Proxy Access Nominee or the applicable Eligible Shareholder shall have provided untrue or misleading information to the Corporation in respect of such nomination or shall have breached its or their agreements, representations, undertakings and/or obligations pursuant to this Section 2.C.

(12) Any Proxy Access Nominee who is included in the Corporation’s proxy statement for a particular annual meeting of shareholders but either (a) withdraws from or becomes ineligible or unavailable for election at the meeting or (b) does not receive a number of votes cast in favor of his or her election at least equal to 20% of the shares present in person or represented by proxy at the annual meeting and entitled to vote on the Proxy Access Nominee’s election (excluding abstentions and broker non-votes, if applicable), shall be ineligible to be included in the Corporation’s proxy statement as a Proxy Access Nominee pursuant to this Section 2.C. for the next two annual meetings of shareholders following the meeting for which the Proxy Access Nominee has been nominated for election.

(13) The Board of Directors (and any other person or body authorized by the Board of Directors) shall have the power and authority to interpret this Section 2.C. and to make any and all determinations necessary or advisable to apply this Section 2.C. to any persons, facts or circumstances, including the power to determine (a) whether a person or group of persons qualifies as an Eligible Shareholder, (b) whether outstanding shares of the capital stock of the Corporation are “owned” for purposes of meeting the ownership requirements of this Section 2.C., (c) whether a notice complies with the requirements of this Section 2.C., (d) whether a person satisfies the qualifications and requirements to be a Proxy Access Nominee, (e) whether inclusion of the Required Information in the Corporation’s proxy statement is consistent with all applicable laws, rules, regulations and listing standards, and (f) whether any and all requirements of this Section 2.C. have been satisfied.

(14) This Section 2.C. provides the exclusive method for a shareholder to include nominees for election to the Board of Directors in the Corporation’s proxy materials.

Section 3. The Board of Directors may adopt such rules and regulations for the conduct of their meetings and management of the affairs of the Corporation, as they may deem proper, not inconsistent with the laws of the State of New York, the Certificate of Incorporation or these By-Laws.

Section 4. The regular meetings of the Board of Directors shall be held as determined by the Board of Directors. Special meetings shall be held whenever called by direction of the Chairman of the Board, or the Chief Executive Officer or of any two of the directors, on at least two days previous notice by mail, email or facsimile or twenty-four hours previous notice by telephone, followed by email or facsimile to each director; provided that no notice need be given of any special meeting at which all the members shall be present or notice of which shall be waived by all absent members before or after the meeting. Notice of such meeting shall be effective as of the sending of the notice by mail, email or facsimile, or the date of the telephone call. Unless otherwise indicated in the notice thereof or otherwise provided by the laws of the State of New York, the Certificate of Incorporation or these By-Laws, any and all business may be transacted at a special meeting. One-third of the directors shall constitute a quorum at any meeting of the Board of Directors. At the first meeting of the Board of Directors held after the annual meeting of shareholders, the Board shall proceed to the election of the officers of the Corporation.

Section 5. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors consent in writing (including by electronic means) to the adoption of a resolution authorizing such action.

Section 6. Any one or more members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment allowing all persons participating in such meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting.

ARTICLE III. COMMITTEES OF THE BOARD

Section 1. The Board of Directors may, by resolution or resolutions adopted by a majority of the members of the Board of Directors designate a committee of the Board to be known as the Finance Committee of the Board (“Finance Committee”) and to consist of the Chairman of the Board and such number of other directors as shall be designated from time to time by resolution adopted by a majority of the members of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of the Finance Committee, who may replace any absent member or members of the Committee at any meeting of the Finance Committee. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve the Finance Committee. The Finance Committee shall have and may exercise, when the Board is not in session, all authority of the Board of Directors with respect to designating as a depository any bank, banker or trust company, opening lines of credit with any bank, banker or trust company and all matters appertaining thereto, including, but not limited to, the authorization of all resolutions and agreements and the execution of all instruments required by any bank, banker or trust company in connection therewith, including the certification thereof by the Secretary of the Corporation, the designation of officers and employees of the Corporation authorized to withdraw or charge any of the funds of the Corporation so deposited upon checks, notes, drafts, bills of exchange, acceptances, undertakings or other instruments or orders for the payment of money drawn against the account of the Corporation, the designation of officers authorized to borrow or obtain credit for the Corporation from any bank, banker or trust company or to endorse for discount or otherwise, negotiable or non-negotiable instruments held by the Corporation, the authorization of leases of safe deposit boxes, the designation of officers and employees authorized to have access to said boxes, and the authorization of guarantees required by symbol endorsement.

Section 2. The Board of Directors may, by resolution or resolutions, passed by a majority of the

members of the Board of Directors designate a committee of the Board to be known as the Executive Committee of the Board (“Executive Committee”) and to consist of the Chairman of the Board of Directors, who shall be Chairman of the Executive Committee, and such number of other directors as shall be designated from time to time by resolution adopted by a majority of the members of the Board of Directors. The Executive Committee shall have and may exercise when the Board of Directors is not in session, all authority of the Board of Directors, except as may be limited by Section 712 of the Business Corporation Law of New York State. The Board of Directors may designate one or more directors as alternate members of such committee who may replace any absent member or members at any meeting of the Executive Committee.

Section 3. The Board of Directors shall, by resolution or resolutions passed by a majority of the members of the Board of Directors, designate at least three of its members, none of whom are members of management, as the Audit Committee of the Board (“Audit Committee”), and will further designate one member as Chairman of the Audit Committee. The Audit Committee shall have the responsibilities set out in the Audit Committee Charter and such other responsibilities as the Board may from time to time delegate to the Audit Committee, as well as responsibility for such other matters pertaining to internal controls, audit, or reporting of the financial affairs of the company as the Audit Committee, in its sole discretion, deems advisable and necessary. A full report of the activities of the Audit Committee will be made by the Chairman or his designee to each meeting of the Board of Directors.

Section 4. The Board of Directors may, by resolution or resolutions, passed by a majority of the members of the Board of Directors designate not less than two of its members to serve as the Nominating and Corporate Governance Committee of the Board (“Nominating Committee”), and will further designate one member as Chairman of the Nominating Committee. The Nominating Committee shall meet at least annually for the purpose of considering and presenting to the Board its nominations for officers and directors and shall such other responsibilities as are set forth in the Nominating and Corporate Governance Committee Charter, as well as such other responsibilities as the Board may from time to time delegate to the Nominating Committee.

Section 5. The Board of Directors may, by resolution or resolutions, passed by a majority of the members of the Board of Directors designate not less than two of its members to serve as the Compensation Committee of the Board (“Compensation Committee”), and will further designate one member as Chairman of the Compensation Committee. The Compensation Committee shall meet at least annually and shall have such responsibilities as are set forth in the Compensation Committee Charter, as well as such other responsibilities as the Board may from time to time delegate to the Compensation Committee.

Section 6. The Board of Directors may, by resolution or resolutions adopted by a majority of the members of the Board of Directors designate such other committees of the Board as shall be designated from time to time. Such committees shall have such number of directors as are designated by the Board and shall have such powers designated by the Board as are consistent with the provisions of the Business Corporation Law of New York State. The Board of Directors may designate one or more directors as alternate members of such committee who may replace any absent member or members at any meeting of any such committee. Any such committee shall have and exercise the authority of the Board of Directors.

Section 7. Such committees may meet either regularly at stated times or specially on notice given twenty-four hours in advance by any member thereof by mail, email, facsimile or telephone to all the other members thereof provided such notice is received before the meeting takes place; but no notice of any regular meeting need be given; and no notice need be given of any special meeting at which all the members shall be present or notice of which shall be waived by all the absent members before or after such meeting. Such committees may make rules for the holding and conduct of their meetings and may appoint such subcommittees and assistants, as they shall from time to time deem necessary. A number of regular members or alternate members or both

equal to a majority of the number of regular members of a committee shall constitute a quorum and the act of a majority of those present at a meeting at which a quorum is present and action shall be the act of a committee. All action taken by a committee shall be reported to the Board of Directors at its meeting next succeeding such action. The Secretary or an Assistant Secretary shall attend and act as secretary of all meetings of a committee and keep the minutes thereof.

Section 8. Any action required or permitted to be taken by any committee of the Board may be taken without a meeting if all members of the committee consent in writing (including by electronic means) to the adoption of a resolution authorizing such action.

Section 9. Any one or more members of any committee of the Board may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in such meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting.

ARTICLE IV. OFFICERS

Section 1. The officers of the Corporation shall be a Chairman of the Board of Directors, a Chief Executive Officer, a President, one or more Vice Presidents, one or more of whom may be designated Executive Vice President and one or more of whom may be designated Senior Vice President, a Treasurer, a Secretary and a Controller, all of whom may be appointed by the Board of Directors, and such other officers as the Board of Directors, from time to time may appoint and each officer shall serve at the discretion of the Board of Directors until the next annual election of officers. One person may serve as more than one of such officers, except that the same person shall not serve both as Chief Executive Officer and Secretary.

Section 2. The Board of Directors may appoint from their number a Chairman of the Board of Directors who shall preside at all meetings of the Board of Directors and of the shareholders of the Corporation, and shall have such other powers and duties as may be delegated to him or her by the Board of Directors.

Section 3. The Board of Directors shall appoint a Chief Executive Officer who shall, subject to the supervision of the Board of Directors, have general charge of the management of the affairs of the Corporation. In the absence of the Chairman of the Board (or if there be none), he or she shall preside at all meetings of the Board of Directors and of the shareholders. In the absence or incapacity of the Chairman of the Board, the Chief Executive Officer shall exercise all of the powers and duties of the Chairman of the Board.

Section 4. The Board of Directors shall appoint a President who shall have such powers and shall perform such duties as may be assigned by the Board of Directors. In the absence or incapacity of the Chief Executive Officer, the President shall exercise all of the powers and duties of the Chief Executive Officer.

Section 5. The Board of Directors may appoint a chief operating officer of the Corporation who need not be a member of the Board of Directors of the Corporation. The chief operating officer

shall be subject to the direction of the Chief Executive Officer and the President, and shall direct and supervise the administration of the business and affairs of the Corporation.

Section 6. The Board of Directors shall appoint one or more Vice Presidents, one or more of whom may be designated Executive Vice President or Senior Vice President, and one of whom may be designated Vice President-Finance, who shall have such powers and shall perform such duties as may be assigned by the Board of Directors. In the absence or incapacity of the President, the Executive Vice Presidents, in order of seniority determined by time of appointment to office, shall exercise all of the powers and duties of the President.

Section 7. The Board of Directors shall elect a Treasurer who shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors.

Section 8. The Board of Directors shall appoint a Secretary who shall keep the minutes of all meetings of the Board of Directors and of the shareholders of the Corporation. The Secretary shall give or cause to be given notice of all meetings of the shareholders and of such meetings of the Board of Directors as may require notice. The Secretary shall keep in safe custody the seal of the Corporation and shall affix the same to all instruments requiring it when authorized by the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer. The Secretary shall have such further powers and shall perform such further duties as may be assigned to the Secretary by the Board of Directors. The Secretary shall enforce the restrictions on the transfer of the capital stock of the Corporation set forth in Part III of Article FOURTH of the Certificate of Incorporation. In connection therewith, the Secretary shall supervise the Corporation’s transfer agent and/or registrar for the capital stock.

Section 9. The Board of Directors shall elect a Controller who shall be the chief accounting officer of the Corporation and shall be in charge of its books of account and accounting records and of its accounting procedures. The Controller shall have such further powers and shall perform such further duties as may be assigned to the Controller by the Board of Directors.

Section 10. The Board of Directors shall from time to time appoint such other officers to have such powers and to perform such duties as may be assigned to them by the Board of Directors.

ARTICLE V. INDEMNIFICATION

The Corporation, to the full extent permitted and in the manner required by the laws of the State of New York as in effect at the time of the adoption of this Article V or as the law may be amended from time to time, shall (i) indemnify any person (and the heirs and legal representatives of such person) made, or threatened to be made, a party in an action or proceeding (including, without limitation, one by or in the right of the Corporation to procure a judgment in its favor), whether civil, criminal, administrative or investigative, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the Corporation served in any capacity at the request the Corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the Corporation or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in

any capacity and (ii) provide to any such person (and their heirs and legal representatives of such person) advances for expenses incurred in pursuing such action or proceeding, upon receipt of an undertaking by or on behalf of such director or officer to repay such amount as, and to the extent, required by Section 725(a) of the Business Corporation Law.

The indemnification and advancement of expenses provided herein shall not be deemed exclusive of any other rights to which the person seeking indemnification or advancement of expenses may be entitled (i) under the Certificate of Incorporation or By-Laws of this or any other corporation, or (ii) by any resolution of shareholders, resolution of directors or agreement providing for such indemnification or advancement, all of which are authorized by these By-Laws (except with respect to matters which at the time of indemnification is sought are prohibited by applicable law), or (iii) otherwise.

ARTICLE VI. CAPITAL STOCK

Section 1. The shares of stock of the Corporation shall be represented by certificates, provided that the Board may allow by resolution or resolutions that some or all of any or all classes or series of its stock may be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to this Corporation. Subject to Part III of Article FOURTH of the Certificate of Incorporation, certificates for each class and series of stock shall be in such form as shall be adopted by the Board of Directors, shall be duly numbered and registered in the order issued and shall be signed by the Chairman of the Board or the Chief Executive Officer or the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation, and may be sealed with the seal of the Corporation or facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue.

Section 2. Subject to Part III of Article FOURTH of the Certificate of Incorporation, transfers of shares shall only be made upon the books of the Corporation by the registered holder in person or by attorney, duly authorized and upon surrender of the certificate or certificates, if any, for such shares, properly signed for transfer (or, with respect to uncertificated shares, by delivery of duly executed instructions or in any other manner permitted by applicable law), and new certificates (or uncertificated shares, as the case may be) shall thereupon be issued.

Section 3. A new certificate of stock may in the discretion of the Board of Directors, and under such regulations with respect to indemnification and otherwise as they may prescribe, be issued in place of the certificate claimed to have been lost, stolen or destroyed.

Section 4. So long as the restrictions set forth in Part III of Article FOURTH of the Certificate of Incorporation shall not have lapsed, all share certificates representing shares of capital stock shall bear a conspicuous legend as follows:

“THE TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO RESTRICTIONS PURSUANT TO PART III OF ARTICLE FOURTH OF THE CERTIFICATE OF INCORPORATION OF JEFFERIES FINANCIAL GROUP INC. REPRINTED IN ITS ENTIRETY ON THE BACK OF THIS CERTIFICATE.”

With respect to uncertificated shares, the full text of such legend and Part III of Article Fourth of the Certificate of Incorporation may be recorded upon the books of the Corporation, sent to the registered holder thereof, or communicated to the registered holder by any other means in accordance with the laws of the State of New York.

Section 5. Subject to Part III of Article FOURTH of the Certificate of Incorporation, the Corporation shall be entitled to treat the registered holder of any share or shares as the holder thereof in fact and law and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as otherwise expressly provided by statute.

ARTICLE VII. DIVIDENDS

Dividends shall be declared and paid out of the surplus of the Corporation as often and at such times as the Board of Directors may determine, and in accordance with the New York Business Corporation Law.

ARTICLE VIII. INSPECTORS OF ELECTION

The Board of Directors, in advance of any shareholders’ meeting, shall appoint two inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders’ meeting shall appoint two inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat.

ARTICLE IX. DIRECTOR EMERITUS

The Board of Directors may from time to time elect one or more individuals to serve as a Director Emeritus whose duty shall be to consult with and advise the Board of Directors and members of management of the Corporation, as requested. An individual serving as a Director Emeritus shall serve at the pleasure of the Board of Directors and shall have the right to receive notice of and attend all meetings of the Board of Directors (although no Director Emeritus shall be required to attend meetings of the Board of Directors, or to attend any such meetings in person), to participate in discussions held during the meetings of the Board of Directors (but not meetings of the committees of the Board of Directors), and to receive compensation as is from time to time determined to be appropriate by the Board of Directors. No Director Emeritus shall be entitled to vote on any business coming before the Board of Directors, nor shall he or she be counted as a member of the Board of Directors for any purpose including for the purpose of determining the number of directors necessary to constitute a quorum, for the purpose of determining whether a quorum is present, or otherwise. The position of Director Emeritus does not carry with it any rights, duties, privileges, liabilities or obligations otherwise associated with

being a member of the Board of Directors; and accordingly no “Director Emeritus” shall be a “director” nor shall any “Director Emeritus” be deemed to be a “director” as that term is used in these By-Laws or otherwise.

ARTICLE X. SEAL

The seal of the Corporation shall be in the form of a circle and shall bear the name of the Corporation and the year of its incorporation.

ARTICLE XI. AMENDMENTS

By-Laws of the Corporation may be adopted, amended or repealed by vote of the holders of the shares at the time entitled to vote in the election of any directors. By-Laws may also be adopted, amended or repealed by the Board of Directors by vote of a majority of the directors present at the time of the vote if a quorum is then present. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of Directors the By-Law so adopted, amended or repealed, together with a concise statement of the changes made.

ARTICLE XII. WAIVERS OF NOTICE

Whenever the Corporation or the Board of Directors or any committee of the Board is authorized to take any action after notice to any person or persons or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of such period of time, if at any time before or after such action is completed the person or persons entitled to such notice or entitled to participate in the action to be taken or, in the case of a shareholder, his attorney-in-fact or proxy, submits a signed waiver of notice of such requirement.

* * *

Exhibit 31.1

CERTIFICATIONS

I, Richard B. Handler, certify that:



1.	I have reviewed this quarterly report on Form 10-Q of Jefferies Financial Group Inc.;



2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and



5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.




Date: August 1, 2018	By:	/s/ Richard B. Handler
		Richard B. Handler
		Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Teresa S. Gendron, certify that:



1.	I have reviewed this quarterly report on Form 10-Q of Jefferies Financial Group Inc.;



2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and



5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.





Date: August 1, 2018	By:	/s/ Teresa S. Gendron
		Teresa S. Gendron
		Chief Financial Officer

Exhibit 32.1

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard B. Handler, as Chief Executive Officer of Jefferies Financial Group Inc. (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the accompanying Form 10-Q report for the period ending June 30, 2018 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




Date: August 1, 2018	By:	/s/ Richard B. Handler
		Richard B. Handler
		Chief Executive Officer

Exhibit 32.2

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Teresa S. Gendron, as Chief Financial Officer of Jefferies Financial Group Inc. (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




Date: August 1, 2018	By:	/s/ Teresa S. Gendron
		Teresa S. Gendron
		Chief Financial Officer