Notes to Consolidated Financial Statements
Note 1. Nature of Operations
Jefferies Financial Group Inc. ("Jefferies," "we," "our" or the "Company") is engaged in investment banking and capital markets, and asset management. Our strategy focuses on continuing to build out our investment banking effort, enhancing our capital markets businesses and further developing our Leucadia Asset Management alternative asset management platform, while returning excess capital to shareholders. Jefferies Group LLC ("Jefferies Group"), our largest subsidiary, was established in 1962 and is the largest independent U.S.-headquartered global full-service integrated investment banking and securities firm.
Jefferies Group operates in two business segments: Investment Banking and Capital Markets, and Asset Management. Investment Banking and Capital Markets includes investment banking, capital markets and other related services. Investment banking provides underwriting and financial advisory services to clients across most industry sectors in the Americas, Europe, the Middle East and Africa, and Asia Pacific. Capital markets businesses operate across the spectrum of equities and fixed income products.
Within Asset Management, we manage, invest in and provide services to a diverse group of alternative asset management platforms across a spectrum of investment strategies and asset classes. Asset Management offers institutional clients an innovative range of investment strategies through its affiliated managers.
We own a legacy portfolio of businesses and investments that we historically denominated as our "Merchant Banking" business and are reflected in our consolidated results as consolidated subsidiaries, equity investments, securities or in other ways. We are well along in the process of liquidating this portfolio, with the intention of selling to third parties, distributing to shareholders or transferring the balance of this portfolio to our Asset Management reportable segment over the next few years. Our Merchant Banking reportable segment primarily includes Linkem (fixed wireless broadband services in Italy); Vitesse Energy, LLC ("Vitesse Energy") (oil and gas production and development); real estate, primarily HomeFed LLC ("HomeFed"); Idaho Timber (manufacturing) and FXCM Group, LLC ("FXCM") (provider of online foreign exchange trading services).
On December 1, 2021, we made a $477 million contribution of net assets, including both Merchant Banking and Asset Management investments, to Jefferies Group. The transferred Merchant Banking investments are now being managed by a different management team, while the Asset Management investments continue to be managed by the co-Presidents of Asset Management who oversee all asset management activities across the Company. As a result, we transferred $194 million of net assets out of our Merchant Banking segment: $139 million of these net assets, including $48 million of net assets relating to Foursight Capital LLC ("Foursight"), were transferred into our Investment Banking and Capital Markets segment; the remaining $55 million of net assets transferred are now managed by the co-Presidents of Asset Management and are included in our Asset Management segment. Prior year amounts have been reclassified to conform to current segment reporting.
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 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 November 30, 2021 ("2021 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 ongoing basis, we evaluate all of these estimates and assumptions.
During the three months ended February 28, 2022, there were no significant changes made to the Company's significant accounting policies.
Receivables
At February 28, 2022 and November 30, 2021, Receivables include receivables from brokers, dealers and clearing organizations of $5.10 billion and $4.90 billion, respectively, and receivables from customers of securities operations of $1.90 billion and $1.62 billion, respectively.
Foursight, Jefferies Group's wholly-owned subsidiary, is an automobile loan originator and servicer. Foursight had automobile loan receivables, including accrued interest and related fees, of $836.1 million and $812.6 million at February 28, 2022 and November 30, 2021, respectively, which are classified as either held for investment or held for sale depending on the intent to hold the underlying collateral and which are collateralized by a security interest in the vehicles' titles. Of these amounts, $808.9 million and $682.7 million at February 28, 2022 and November 30, 2021, respectively, were in securitized vehicles. See Notes 6 and 7 for additional information on Foursight's securitization activities. Foursight's loan receivables held for investment consisted of approximately 18% and 19% with credit scores 680 and above, 49% and 51% with scores between 620 and 679 and 33% and 30% with scores below 620 at February 28, 2022 and November 30, 2021, respectively.
A rollforward of the allowance for credit losses related to receivables for the three months ended February 28, 2022 and 2021 is as follows (in thousands):
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| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
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Beginning balance | | | | | $ | 75,999 | | | $ | 53,926 | |
Adjustment for change in accounting principle for current expected credit losses | | | | | — | | | 26,519 | |
Provision for doubtful accounts | | | | | 9,001 | | | 3,267 | |
Charge-offs, net of recoveries | | | | | (5,631) | | | (7,320) | |
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Ending balance | | | | | $ | 79,369 | | | $ | 76,392 | |
Other Investments
At February 28, 2022 and November 30, 2021, 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 $91.8 million and $119.4 million, respectively. There were no impairments on these investments during the three months ended February 28, 2022 and 2021.
Capitalization of Interest
We capitalize interest on qualifying HomeFed real estate assets. Capitalized interest of $3.2 million and $1.9 million during the three months ended February 28, 2022 and 2021, respectively, was allocated among all of HomeFed's projects that are currently under development.
Payables, expense accruals and other liabilities
At February 28, 2022 and November 30, 2021, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $4.64 billion and $5.82 billion, respectively, and payables to customers of securities operations of $4.02 billion and $4.46 billion, respectively.
Supplemental Cash Flow Information | | | | | | | | | | | |
| For the Three Months Ended February 28, |
(In thousands) | 2022 | | 2021 |
Cash paid during the year for: | |
Interest | $ | 321,015 | | | $ | 242,027 | |
Income tax payments (refunds), net | $ | 16,715 | | | $ | 20,350 | |
During the three months ended February 28, 2022, we had $26.1 million in non-cash financing activities related to purchases of common shares for treasury which settled subsequent to February 28, 2022.
Note 3. Fair Value Disclosures
The following is a summary of our financial assets and liabilities that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") of $1.16 billion and $1.03 billion at February 28, 2022 and November 30, 2021, respectively, by level within the fair value hierarchy (in thousands):
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| February 28, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Counterparty and Cash Collateral Netting (1) | | Total |
Assets: | | | | | | | | | |
Financial instruments owned, at fair value: | | | | | | | | | |
Corporate equity securities | $ | 3,304,106 | | | $ | 162,651 | | | $ | 113,922 | | | $ | — | | | $ | 3,580,679 | |
Corporate debt securities | — | | | 3,625,783 | | | 42,358 | | | — | | | 3,668,141 | |
Collateralized debt obligations and collateralized loan obligations | — | | | 870,505 | | | 45,219 | | | — | | | 915,724 | |
U.S. government and federal agency securities | 3,767,868 | | | 50,574 | | | — | | | — | | | 3,818,442 | |
Municipal securities | — | | | 480,000 | | | — | | | — | | | 480,000 | |
Sovereign obligations | 1,177,045 | | | 932,076 | | | 23 | | | — | | | 2,109,144 | |
Residential mortgage-backed securities | — | | | 798,936 | | | 1,186 | | | — | | | 800,122 | |
Commercial mortgage-backed securities | — | | | 181,635 | | | 3,732 | | | — | | | 185,367 | |
Other asset-backed securities | — | | | 624,575 | | | 62,382 | | | — | | | 686,957 | |
Loans and other receivables | — | | | 3,428,850 | | | 137,942 | | | — | | | 3,566,792 | |
Derivatives | 4,659 | | | 3,666,288 | | | 13,144 | | | (3,246,638) | | | 437,453 | |
Investments at fair value | — | | | 4,565 | | | 169,808 | | | — | | | 174,373 | |
FXCM term loan | — | | | — | | | 50,335 | | | — | | | 50,335 | |
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Total financial instruments owned, at fair value, excluding investments at fair value based on NAV | $ | 8,253,678 | | | $ | 14,826,438 | | | $ | 640,051 | | | $ | (3,246,638) | | | $ | 20,473,529 | |
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Loans to and investments in associated companies | $ | — | | | $ | — | | | $ | 22,480 | | | $ | — | | | $ | 22,480 | |
Securities received as collateral, at fair value | $ | 973 | | | $ | — | | | $ | — | | | $ | — | | | $ | 973 | |
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Liabilities: | | | | | | | | | |
Financial instruments sold, not yet purchased, at fair value: | | | | | | | | | |
Corporate equity securities | $ | 2,031,781 | | | $ | 13,988 | | | $ | 5,666 | | | $ | — | | | $ | 2,051,435 | |
Corporate debt securities | — | | | 2,405,463 | | | 7,308 | | | — | | | 2,412,771 | |
U.S. government and federal agency securities | 4,615,370 | | | — | | | — | | | — | | | 4,615,370 | |
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Sovereign obligations | 1,302,485 | | | 888,806 | | | 1,159 | | | — | | | 2,192,450 | |
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Commercial mortgage-backed securities | — | | | — | | | 315 | | | — | | | 315 | |
Loans | — | | | 2,486,780 | | | 11,541 | | | — | | | 2,498,321 | |
Derivatives | 2,825 | | | 4,365,554 | | | 60,914 | | | (3,486,083) | | | 943,210 | |
Total financial instruments sold, not yet purchased, at fair value | $ | 7,952,461 | | | $ | 10,160,591 | | | $ | 86,903 | | | $ | (3,486,083) | | | $ | 14,713,872 | |
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Other secured financings | $ | — | | | $ | 125,631 | | | $ | 32,377 | | | $ | — | | | $ | 158,008 | |
Long-term debt | $ | — | | | $ | 967,703 | | | $ | 794,460 | | | $ | — | | | $ | 1,762,163 | |
Obligation to return securities received as collateral, at fair value | $ | 973 | | | $ | — | | | $ | — | | | $ | — | | | $ | 973 | |
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| November 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Counterparty and Cash Collateral Netting (1) | | Total |
Assets: | | | | | | | | | |
Financial instruments owned, at fair value: | | | | | | | | | |
Corporate equity securities | $ | 2,737,255 | | | $ | 257,318 | | | $ | 87,647 | | | $ | — | | | $ | 3,082,220 | |
Corporate debt securities | — | | | 3,836,341 | | | 11,803 | | | — | | | 3,848,144 | |
Collateralized debt obligations and collateralized loan obligations | — | | | 579,518 | | | 31,946 | | | — | | | 611,464 | |
U.S. government and federal agency securities | 3,045,295 | | | 68,784 | | | — | | | — | | | 3,114,079 | |
Municipal securities | — | | | 509,559 | | | — | | | — | | | 509,559 | |
Sovereign obligations | 899,086 | | | 654,199 | | | — | | | — | | | 1,553,285 | |
Residential mortgage-backed securities | — | | | 1,168,246 | | | 1,477 | | | — | | | 1,169,723 | |
Commercial mortgage-backed securities | — | | | 196,419 | | | 2,333 | | | — | | | 198,752 | |
Other asset-backed securities | — | | | 337,022 | | | 93,524 | | | — | | | 430,546 | |
Loans and other receivables | — | | | 3,363,050 | | | 135,239 | | | — | | | 3,498,289 | |
Derivatives | 4,429 | | | 3,861,551 | | | 10,248 | | | (3,305,756) | | | 570,472 | |
Investments at fair value | — | | | 11,369 | | | 154,373 | | | — | | | 165,742 | |
FXCM term loan | — | | | — | | | 50,455 | | | — | | | 50,455 | |
Total financial instruments owned, at fair value, excluding investments at fair value based on NAV | $ | 6,686,065 | | | $ | 14,843,376 | | | $ | 579,045 | | | $ | (3,305,756) | | | $ | 18,802,730 | |
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Loans to and investments in associated companies | $ | — | | | $ | — | | | $ | 30,842 | | | $ | — | | | $ | 30,842 | |
Securities received as collateral, at fair value | $ | 7,289 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,289 | |
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Liabilities: | | | | | | | | | |
Financial instruments sold, not yet purchased, at fair value: | | | | | | | | | |
Corporate equity securities | $ | 1,671,696 | | | $ | 19,654 | | | $ | 4,635 | | | $ | — | | | $ | 1,695,985 | |
Corporate debt securities | — | | | 2,111,777 | | | 482 | | | — | | | 2,112,259 | |
U.S. government and federal agency securities | 2,457,420 | | | — | | | — | | | — | | | 2,457,420 | |
Sovereign obligations | 935,801 | | | 593,040 | | | — | | | — | | | 1,528,841 | |
Residential mortgage-backed securities | — | | | 719 | | | — | | | — | | | 719 | |
Commercial mortgage-backed securities | — | | | — | | | 210 | | | — | | | 210 | |
Loans | — | | | 2,476,087 | | | 15,770 | | | — | | | 2,491,857 | |
Derivatives | 1,815 | | | 5,034,544 | | | 78,017 | | | (3,702,200) | | | 1,412,176 | |
Total financial instruments sold, not yet purchased, at fair value | $ | 5,066,732 | | | $ | 10,235,821 | | | $ | 99,114 | | | $ | (3,702,200) | | | $ | 11,699,467 | |
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Other secured financings | $ | — | | | $ | 76,883 | | | $ | 25,905 | | | $ | — | | | $ | 102,788 | |
Long-term debt | $ | — | | | $ | 961,866 | | | $ | 881,732 | | | $ | — | | | $ | 1,843,598 | |
Obligation to return securities received as collateral, at fair value | $ | 7,289 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,289 | |
(1)Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.
The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:
Corporate Equity Securities
•Exchange-Traded Equity Securities: Exchange-traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy. 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 from observed prices on 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 can be measured using third-party valuation services or 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
•Investment Grade Corporate Bonds: Investment grade 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. Investment grade 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. Investment grade corporate bonds measured using alternative valuation techniques are categorized within Level 2 or Level 3 of the fair value hierarchy and are a limited portion of our investment grade corporate bonds.
•High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed from recently executed market transactions of institutional size. Where pricing data is less observable, valuations are categorized within Level 3 of the fair value hierarchy and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer's subsequent financing or recapitalization, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.
Collateralized Debt Obligations and Collateralized Loan Obligations
Collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs") are measured based on prices observed from recently executed market transactions of the same or similar security or based on valuations received from third-party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs. Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria, including, but not limited to, collateral type, tranche type, rating, origination year, prepayment rates, default rates and loss severity.
U.S. Government and Federal Agency Securities
•U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices obtained from external pricing services 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, where available, or recently executed independent transactions of comparable size and are generally categorized within Level 2 of the fair value hierarchy.
Sovereign Obligations
Sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size. Sovereign government obligations, with consideration given to the country of issuance, are generally categorized within Level 1 or Level 2 of the fair value hierarchy. High price volatility was observed for certain sovereign bonds given the recent geopolitical tensions in Eastern Europe, which resulted in Level 3 classification for certain obligations given the wide price dispersion in available external pricing data.
Residential Mortgage-Backed Securities
•Agency Residential Mortgage-Backed Securities: Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and principal-only and interest-only (including inverse interest-only) securities. Agency residential mortgage-backed securities are generally measured using recent transactions, pricing data from external pricing services or expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral and are categorized within Level 2 or Level 3 of the fair value hierarchy. We use prices observed from recently executed transactions to develop market-clearing spread and yield assumptions. Valuation inputs with regard to the underlying collateral incorporate factors such as weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer and weighted average loan age.
•Non-Agency Residential Mortgage-Backed Securities: The fair value of non-agency residential mortgage-backed securities is determined primarily using pricing data from external pricing services, where available, and 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 ("Ginnie Mae") 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. Federal National Mortgage Association ("Fannie Mae") 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. Ginnie Mae project loan bonds and Fannie Mae DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.
•Non-Agency Commercial Mortgage-Backed Securities: Non-agency commercial mortgage-backed securities are measured using pricing data obtained from external pricing services, prices observed from recently executed market transactions or based on expected cash flow models that incorporate underlying loan collateral characteristics and performance. Non-agency commercial mortgage-backed securities are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability of the underlying inputs.
Other Asset-Backed Securities
Other asset-backed securities include, but are not limited to, securities backed by automobile loans, credit card receivables, student loans and other consumer loans and are categorized within Level 2 or Level 3 of the fair value hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services, broker quotes and prices observed from recently executed market transactions. In addition, recent transaction data from comparable deals is deployed to develop market clearing yields and cumulative loss assumptions. The cumulative loss assumptions are based on the analysis of the underlying collateral and comparisons to earlier deals from the same issuer to gauge the relative performance of the deal.
Loans and Other Receivables
•Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market consensus pricing service quotations. Where available, market price quotations from external pricing services are reviewed to ensure they are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, for example, derived using market prices for debt securities of the same creditor and estimates of future cash flows incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer's capital structure.
•Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans and data provider pricing. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.
•Project Loans and Participation Certificates in Ginnie Mae Project and Construction Loans: Valuations of participation certificates in Ginnie Mae 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 Claim Receivables: Escrow and claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent observations in the same receivable. Escrow and 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.
Derivatives
•Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted exchange prices, broker quotes or vanilla option valuation models, such as Black-Scholes, using observable valuation inputs from the principal market or consensus pricing services. Exchange quotes and/or valuation inputs are generally obtained from external vendors and pricing services. Broker quotes are validated directly through observable and tradeable quotes. Listed derivative contracts that use 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. Where available, valuation inputs are calibrated from observable market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.
OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as Black-Scholes, with key inputs including the underlying security price, foreign exchange spot rate, commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves. Credit default swaps include both index and single-name credit default swaps. Where available, external data is used 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 uses swaps and put options in order to reduce exposure to future oil price fluctuations. Vitesse Energy 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 include investments in hedge 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 internally or by third-party valuation services involving performance data, company ratios and multiples (e.g., price/EBITDA, price/book value) for comparable companies, 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.
The following tables present information about our investments in entities that have the characteristics of an investment company (in thousands):
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| Fair Value (1) | | Unfunded Commitments |
February 28, 2022 | | | |
Equity Long/Short Hedge Funds (2) | $ | 413,151 | | | $ | — | |
Equity Funds (3) | 51,341 | | | 41,532 | |
Commodity Fund (4) | 23,636 | | | — | |
Multi-asset Funds (5) | 366,855 | | | — | |
Other Funds (6) | 304,424 | | | 25,335 | |
Total | $ | 1,159,407 | | | $ | 66,867 | |
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November 30, 2021 | | | |
Equity Long/Short Hedge Funds (2) | $ | 466,231 | | | $ | — | |
Equity Funds (3) | 46,030 | | | 17,815 | |
Commodity Fund (4) | 24,401 | | | — | |
Multi-asset Funds (5) | 390,224 | | | — | |
Other Funds (6) | 99,054 | | | 36,090 | |
Total | $ | 1,025,940 | | | $ | 53,905 | |
(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 both public and private equity securities in domestic and international markets. At February 28, 2022 and November 30, 2021, approximately 73% and 74%, respectively, of the fair value of investments are redeemable quarterly with 90 days prior written notice on December 31, 2021. At both February 28, 2022 and November 30, 2021, approximately 21% of the fair value of investments in this category cannot be redeemed because these investments include restrictions that do not allow for redemption before November 30, 2023. The remaining investments are redeemable quarterly with 60 days prior written notice.
(3)The investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in a broad range of industries. These investments cannot be redeemed; instead distributions are received through the liquidation of the underlying assets of the funds, which are primarily expected to be liquidated in approximately one to thirteen years.
(4)This category includes investments in a hedge fund that invests, long and short, primarily in commodities. Investments in this category are redeemable quarterly with 60 days prior written notice.
(5)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 February 28, 2022 and November 30, 2021, investments representing approximately 82% and 78%, respectively, of the fair value of investments in this category are redeemable monthly with 60 days prior written notice. At February 28, 2022 and November 30, 2021, approximately 18% and 22%, respectively, of the fair value of investments in this category are redeemable quarterly with 90 days prior written notice.
(6)This category includes investments in a fund that invests in short-term trade receivables and payables that are expected to generally be outstanding between 90 to 120 days and short-term credit instruments. This category also includes investments
in a fund that invests in distressed and special situations long and short credit strategies across sectors and asset types. Investments in this category are redeemable quarterly with 90 days prior written notice.
Investment in FXCM
Our investment in FXCM and associated companies consists of a senior secured term loan due February 8, 2023 ($71.6 million principal outstanding at February 28, 2022), a 50% voting interest in FXCM and rights to a majority of all distributions in respect of the equity of FXCM. Our investment in the FXCM term loan is reported within Financial instruments owned, at fair value in the Consolidated Statements of Financial Condition. We classify our equity investment in FXCM in the Consolidated Statements of Financial Condition as Loans to and investments in associated companies, as we have the ability to significantly influence FXCM through our seats on the board of directors.
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.
Loans to and Investments in Associated Companies
Non-exchange-traded equity warrants with no pricing from external pricing services are generally categorized within Level 3 of the fair value hierarchy. The warrants are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, interest rate curve, strike price and maturity date.
Other Secured Financings
Other secured financings that are accounted for at fair value are classified within Level 2 or Level 3 of the fair value hierarchy. Fair value is based on estimates of future cash flows incorporating assumptions regarding recovery rates.
Securities Received as Collateral and Obligations to Return Securities Received as Collateral
In connection with securities-for-securities transactions in which we are the lender of securities and are permitted to sell or repledge the securities received as collateral, we report the fair value of the collateral received and the related obligation to return the collateral. Valuation is based on the price of the underlying security and is categorized within the corresponding leveling guidance above. These financial instruments are typically categorized within Level 1 of the fair value hierarchy.
Long-term Debt
Long-term debt includes variable rate, fixed-to-floating rate, equity-linked notes, 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 period or model pricing is available, otherwise the notes are categorized within Level 3.
Level 3 Rollforwards
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the three months ended February 28, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, November 30, 2021 | | Total gains/ losses (realized and unrealized) (1) | | Purchases | | Sales | | Settlements | | Issuances | | Net transfers into (out of) Level 3 | | Balance, February 28, 2022 | | Changes in unrealized gains/losses included in earnings relating to instruments still held at February 28, 2022 (1) |
Assets: | | | | | | | | | | | | | | | | | |
Financial instruments owned, at fair value: | | | | | | | | | | | | | | | | | |
Corporate equity securities | $ | 87,647 | | | $ | 1,824 | | | $ | 2,079 | | | $ | (706) | | | $ | (651) | | | $ | — | | | $ | 23,729 | | | $ | 113,922 | | | $ | 1,065 | |
Corporate debt securities | 11,803 | | | (1,176) | | | 118,970 | | | (103,602) | | | (9) | | | — | | | 16,372 | | | 42,358 | | | (1,929) | |
CDOs and CLOs | 31,946 | | | (671) | | | 13,523 | | | (7,740) | | | (1,643) | | | — | | | 9,804 | | | 45,219 | | | (906) | |
| | | | | | | | | | | | | | | | | |
Sovereign obligations | — | | | (306) | | | 3,780 | | | (3,451) | | | — | | | — | | | — | | | 23 | | | (60) | |
Residential mortgage-backed securities | 1,477 | | | (69) | | | — | | | (187) | | | (35) | | | — | | | — | | | 1,186 | | | (44) | |
Commercial mortgage-backed securities | 2,333 | | | 1,177 | | | — | | | — | | | — | | | — | | | 222 | | | 3,732 | | | 1,655 | |
Other asset-backed securities | 93,524 | | | 2,033 | | | 11,588 | | | (14,485) | | | (14,269) | | | — | | | (16,009) | | | 62,382 | | | (3,661) | |
Loans and other receivables | 135,239 | | | (4,737) | | | 11,549 | | | (17,710) | | | — | | | — | | | 13,601 | | | 137,942 | | | (4,585) | |
Investments at fair value | 154,373 | | | 32,034 | | | 14,249 | | | (6,826) | | | (615) | | | — | | | (23,407) | | | 169,808 | | | 28,557 | |
FXCM term loan | 50,455 | | | (120) | | | — | | | — | | | — | | | — | | | — | | | 50,335 | | | (120) | |
Loans to and investments in associated companies | 30,842 | | | (8,362) | | | — | | | — | | | — | | | — | | | — | | | 22,480 | | | (8,362) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Financial instruments sold, not yet purchased, at fair value: | | | | | | | | | | | | | | | | | |
Corporate equity securities | $ | 4,635 | | | $ | (3,447) | | | $ | (812) | | | $ | 5,050 | | | $ | — | | | $ | — | | | $ | 240 | | | $ | 5,666 | | | $ | 3,447 | |
Corporate debt securities | 482 | | | (8,866) | | | (63,714) | | | 66,976 | | | — | | | — | | | 12,430 | | | 7,308 | | | 5,210 | |
Sovereign obligations | — | | | (1,362) | | | (99,374) | | | 101,911 | | | — | | | — | | | (16) | | | 1,159 | | | 54 | |
Commercial mortgage-backed securities | 210 | | | — | | | — | | | 105 | | | — | | | — | | | — | | | 315 | | | — | |
Loans | 15,770 | | | (46) | | | (13,125) | | | 2,695 | | | — | | | — | | | 6,247 | | | 11,541 | | | (135) | |
Net derivatives (2) | 67,769 | | | (54,836) | | | — | | | — | | | — | | | 35,069 | | | (232) | | | 47,770 | | | 53,352 | |
Other secured financings | 25,905 | | | — | | | — | | | — | | | — | | | 6,472 | | | — | | | 32,377 | | | — | |
Long-term debt (1) | 881,732 | | | (92,871) | | | — | | | — | | | — | | | 23,753 | | | (18,154) | | | 794,460 | | | 60,739 | |
(1)Realized and unrealized gains/losses are primarily reported in Principal transactions revenues in the Consolidated Statements of Operations. Changes in instrument-specific credit risk related to structured notes within Long-term debt are included in the Consolidated Statements of Comprehensive Income (Loss), net of tax. Changes in unrealized gains/losses included in other comprehensive income (loss) for instruments still held at February 28, 2022 were gains of $32.1 million during the three months ended February 28, 2022.
(2)Net derivatives represent Financial instruments owned, at fair value - Derivatives and Financial instruments sold, not yet purchased, at fair value - Derivatives.
Analysis of Level 3 Assets and Liabilities for the three months ended February 28, 2022
During the three months ended February 28, 2022, transfers of assets of $64.8 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•CDOs and CLOs of $18.8 million, loans and other receivables of $16.1 million, other asset-backed securities of $12.9 million, corporate debt securities of $9.4 million and corporate equity securities of $7.4 million due to reduced pricing transparency.
During the three months ended February 28, 2022, transfers of assets of $40.5 million from Level 3 to Level 2 are primarily attributed to:
•Other asset-backed securities of $28.9 million, CDOs and CLOs of $9.0 million and loans and other receivables of $2.4 million due to greater pricing transparency supporting classification into Level 2.
During the three months ended February 28, 2022, transfers of liabilities of $72.6 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Net derivatives of $27.9 million, structured notes within long-term debt of $25.8 million, corporate debt securities of $12.4 million and loans of $6.2 million due to reduced pricing and market transparency.
During the three months ended February 28, 2022, transfers of liabilities of $72.1 million from Level 3 to Level 2 of the fair value hierarchy are primarily attributed to:
•Structured notes within long-term debt of $44.0 million and net derivatives of $28.1 million due to greater market and pricing transparency.
Net gains on Level 3 assets were $21.6 million and net gains on Level 3 liabilities were $161.4 million for the three months ended February 28, 2022. Net gains on Level 3 assets were primarily due to increased market values across investments at fair value, partially offset by decreases in loans to and investments in associated companies and loans and other receivables. Net gains on Level 3 liabilities were primarily due to decreased valuations of structured notes within long-term debt, certain derivatives and corporate debt securities.
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 February 28, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, November 30, 2020 | | Total gains/ losses (realized and unrealized) (1) | | Purchases | | Sales | | Settlements | | Issuances | | Net transfers into (out of) Level 3 | | Balance, February 28, 2021 | | Changes in unrealized gains/ losses included in earnings relating to instruments still held at February 28, 2021 (1) |
Assets: | | | | | | | | | | | | | | | | | |
Financial instruments owned, at fair value: | | | | | | | | | | | | | | | | | |
Corporate equity securities | $ | 75,904 | | | $ | 2,339 | | | $ | 4,805 | | | $ | (4,647) | | | $ | — | | | $ | — | | | $ | 23,664 | | | $ | 102,065 | | | $ | 1,165 | |
Corporate debt securities | 23,146 | | | 266 | | | 130 | | | (6) | | | — | | | — | | | (16,725) | | | 6,811 | | | 297 | |
CDOs and CLOs | 17,972 | | | 3,840 | | | 11,427 | | | (8,007) | | | (5,806) | | | — | | | 13,773 | | | 33,199 | | | 3,214 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | 21,826 | | | 1,327 | | | 791 | | | (627) | | | (514) | | | — | | | (1,111) | | | 21,692 | | | 1,347 | |
Commercial mortgage-backed securities | 2,003 | | | (29) | | | 1,105 | | | (393) | | | — | | | — | | | (15) | | | 2,671 | | | 97 | |
Other asset-backed securities | 79,995 | | | 2,361 | | | 14,604 | | | (20,909) | | | (8,449) | | | — | | | (7,008) | | | 60,594 | | | 1,721 | |
Loans and other receivables | 134,636 | | | 14,077 | | | 8,758 | | | (44,427) | | | (66) | | | — | | | 36,106 | | | 149,084 | | | 14,091 | |
Investments at fair value | 213,946 | | | 76,257 | | | 4,855 | | | (30,159) | | | (3,542) | | | — | | | (41,816) | | | 219,541 | | | 72,173 | |
FXCM term loan | 59,455 | | | 2,677 | | | — | | | — | | | — | | | — | | | — | | | 62,132 | | | 2,677 | |
Loans to and investments in associated companies | 40,185 | | | (788) | | | — | | | — | | | — | | | — | | | — | | | 39,397 | | | (788) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Financial instruments sold, not yet purchased, at fair value: | | | | | | | | | | | | | | | | | |
Corporate equity securities | $ | 4,434 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,443 | | | $ | (22) | |
Corporate debt securities | 141 | | | 1,430 | | | — | | | — | | | — | | | — | | | — | | | 1,571 | | | (1,430) | |
| | | | | | | | | | | | | | | | | |
Commercial mortgage-backed securities | 35 | | | — | | | (35) | | | 35 | | | — | | | — | | | — | | | 35 | | | — | |
Loans | 16,635 | | | 1,559 | | | (6,821) | | | 3,358 | | | — | | | — | | | 185 | | | 14,916 | | | (1,559) | |
Net derivatives (2) | 26,017 | | | 43,727 | | | — | | | 12,670 | | | (92) | | | — | | | 223,184 | | | 305,506 | | | (43,727) | |
Other secured financings | 1,543 | | | — | | | — | | | — | | | — | | | 625 | | | — | | | 2,168 | | | — | |
Long-term debt (1) | 676,028 | | | 25,357 | | | — | | | — | | | — | | | 21,730 | | | — | | | 723,115 | | | 15,501 | |
(1)Realized and unrealized gains/losses are primarily reported in Principal transactions revenues in the Consolidated Statements of Operations. Changes in instrument-specific credit risk related to structured notes within long-term debt are included in the Consolidated Statements of Comprehensive Income (Loss), net of tax. Changes in unrealized gains (losses) included in other comprehensive income (loss) for instruments still held at February 28, 2021 were losses of $40.9 million during the three months ended February 28, 2021.
(2)Net derivatives represent Financial instruments owned, at fair value - Derivatives and Financial instruments sold, not yet purchased, at fair value - Derivatives.
Analysis of Level 3 Assets and Liabilities for the three months ended February 28, 2021
During the three months ended February 28, 2021, transfers of assets of $75.8 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Loans and other receivables of $42.9 million, CDOs and CLOs of $14.6 million, corporate equity securities of $9.9 million and other asset-backed securities of $7.5 million due to reduced pricing transparency.
During the three months ended February 28, 2021, transfers of assets of $68.9 million from Level 3 to Level 2 or Level 1 are primarily attributed to:
•Investments at fair value of $24.2 million, corporate debt securities of $17.5 million, other asset-backed securities of $14.5 million and loans and other receivables of $6.8 million due to greater pricing transparency supporting classification into Level 2 or Level 1.
During the three months ended February 28, 2021, transfers of liabilities of $236.7 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Net derivatives of $236.5 million due to reduced pricing transparency.
During the three months ended February 28, 2021, transfers of liabilities of $13.3 million from Level 3 to Level 2 of the fair value hierarchy are primarily attributed to:
•Net derivatives of $13.3 million due to greater market and pricing transparency.
Net gains on Level 3 assets were $102.2 million and net losses on Level 3 liabilities were $72.1 million for the three months ended February 28, 2021. Net gains on Level 3 assets were primarily due to increased market values across investments at fair value, CDOs and CLOs, other asset-backed securities, loans and other receivables, residential mortgage-backed securities, corporate equity securities and the FXCM term loan. Net losses on Level 3 liabilities were primarily due to increased valuations of certain derivatives and structured note within long-term debt.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
February 28, 2022 |
| | Fair Value (in thousands) | | Valuation Technique | | Significant Unobservable Input(s) | | Input/Range | | Weighted Average |
Financial instruments owned, at fair value | | | | | | | | | | |
Corporate equity securities | | $ | 113,535 | | | | | | | | | | | |
Non-exchange-traded securities | | | | Market approach | | Price | | $0 | to | $344 | | $134 |
| | | | Volatility benchmarking | | Volatility | | 40 | % | to | 56% | | 55 | % |
| | | | | | | | | | | | |
Corporate debt securities | | $ | 42,358 | | | Market approach | | Price | | $13 | to | $100 | | $91 |
| | | | | | EBITDA multiple | | 3.4 | | — | |
| | | | | | | | | | | | |
CDOs and CLOs | | $ | 45,219 | | | Discounted cash flows | | Constant prepayment rate | | 20% | | — | |
| | | | | | Constant default rate | | 2% | | — | |
| | | | | | Loss severity | | 25 | % | to | 70% | | 38 | % |
| | | | | | Discount rate/yield | | 4 | % | to | 18% | | 13 | % |
| | | | Market approach | | Price | | $73 | to | $102 | | $93 |
| | | | | | | | | | |
| | | | | | | | | | | | |
Commercial mortgage- backed securities | | $ | 3,732 | | | Market approach | | Price | | $600 | | — | |
| | | | Scenario analysis | | Estimated recovery percentage | | 81% | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
Other asset-backed securities | | $ | 46,733 | | | Discounted cash flows | | Constant prepayment rate | | 0 | % | to | 9% | | 4 | % |
| | | | | | Constant default rate | | 2% | | — | |
| | | | | | Loss severity | | 50 | % | to | 88% | | 72 | % |
| | | | | | Discount rate/yield | | 1 | % | to | 23% | | 15 | % |
| | | | | | Cumulative loss rate | | 8 | % | to | 18% | | 14 | % |
| | | | | | Duration (years) | | 1.2 years | to | 7.0 years | | 5.0 years |
| | | | Market approach | | Price | | $37 | | — | |
| | | | | | | | | | | | |
Loans and other receivables | | $ | 136,716 | | | Market approach | | Price | | $29 | to | $102 | | $89 |
| | | | Scenario analysis | | Estimated recovery percentage | | 5 | % | to | 94% | | 33 | % |
| | | | | | | | | | | | |
Derivatives | | $ | 4,762 | | | | | | | | | | | |
Equity Options | | | | Volatility benchmarking | | Volatility | | 41% | | — | |
Interest rate swaps | | | | Market approach | | Basis points upfront | | 0.0 | to | 8.7 | | 4.4 |
Total return swaps | | | | | | Price | | $101 | | — | |
| | | | | | | | | | | | |
Investments at fair value | | $ | 151,693 | | | | | | | | | | | |
Private equity securities | | | | Market approach | | Price | | $1 | to | $15,852 | | $549 |
| | | | Discounted cash flows | | Discount rate/yield | | 10 | % | to | 14% | | 12 | % |
| | | | Scenario analysis | | Discount rate/yield | | 13% | | — | |
| | | | | | | | | | | | |
Investment in FXCM | | $ | 50,335 | | | | | | | | | | | |
Term loan | | | | Discounted cash flows | | Term based on the pay off (years) | | 0 months | to | 1.9 years | | 1.9 years |
| | | | | | | | | | | | |
Loans to and investments in associated companies | | | | | | | | |
Non-exchange-traded warrants | | $ | 22,480 | | | Market approach | | Underlying stock price | | $671 | | — | |
| | | | | | Underlying stock price | | €13 | to | €16 | | €15 |
| | | | | | Volatility | | 25 | % | to | 59% | | 30 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Financial instruments sold, not yet purchased, at fair value | | | | | | | | |
Corporate equity securities | | $ | 5,666 | | | | | | | | | | | |
Non-exchange-traded securities | | | | Market approach | | Price | | $1 | | — | |
| | | | | | | | | | |
Loans | | $ | 11,541 | | | Market approach | | Price | | $98 | | — | |
| | | | Scenario analysis | | Estimated recovery percentage | | 5% | | — | |
| | | | | | | | | | | | |
Derivatives | | $ | 56,329 | | | | | | | | | | | |
Equity options | | | | Volatility benchmarking | | Volatility | | 30 | % | to | 57% | | 45 | % |
Interest rate swaps | | | | Market approach | | Basis points upfront | | 0.7 | to | 17.5 | | 8.8 |
Total return swaps | | | | | | Price | | $101 | | — | |
| | | | | | | | | | | | |
Other secured financings | | $ | 32,377 | | | Scenario analysis | | Estimated recovery percentage | | 13 | % | to | 36% | | 29 | % |
| | | | Market approach | | Price | | $87 | | — | |
| | | | | | | | | | | | |
Long-term debt | | | | | | | | | | | | |
Structured notes | | $ | 794,460 | | | Market approach | | Price | | $66 | to | $106 | | $83 |
| | | | | | Price | | €73 | to | €106 | | €93 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
November 30, 2021 |
| | Fair Value (in thousands) | | Valuation Technique | | Significant Unobservable Input(s) | | Input/Range | | Weighted Average |
| | | | | | | | | | | | |
Financial instruments owned, at fair value | | | | | | | | | | |
Corporate equity securities | | $ | 86,961 | | | | | | | | | | | |
Non-exchange-traded securities | | | | Market approach | | Price | | $1 | to | $366 | | $183 |
| | | | Volatility benchmarking | | Volatility | | 40 | % | to | 53% | | 45 | % |
| | | | | | | | | | | | |
Corporate debt securities | | $ | 11,803 | | | Market approach | | Price | | $13 | to | $100 | | $86 |
| | | | | | | | | | | | |
CDOs and CLOs | | $ | 31,944 | | | Discounted cash flows | | Constant prepayment rate | | 20% | | — | |
| | | | | | Constant default rate | | 2% | | — | |
| | | | | | Loss severity | | 25 | % | to | 30% | | 26 | % |
| | | | | | Discount rate/yield | | 8 | % | to | 19% | | 16 | % |
| | | | Market approach | | Price | | $86 | to | $103 | | $93 |
| | | | | | | | | | | | |
Commercial mortgage- backed securities | | $ | 2,333 | | | Scenario analysis | | Estimated recovery percentage | | 81% | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
Other asset-backed securities | | $ | 86,099 | | | Discounted cash flows | | Constant prepayment rate | | 0 | % | to | 35% | | 31 | % |
| | | | | | Constant default rate | | 2 | % | to | 4% | | 4 | % |
| | | | | | Loss severity | | 60 | % | to | 85% | | 55 | % |
| | | | | | Discount rate/yield | | 3 | % | to | 16% | | 10 | % |
| | | | | | Cumulative loss rate | | 7 | % | to | 20% | | 14 | % |
| | | | | | Duration (years) | | 0.7 years | to | 1.4 years | | 1.1 years |
| | | | Market approach | | Price | | $37 | to | $100 | | $94 |
| | | | | | | | | | | | |
Loans and other receivables | | $ | 134,015 | | | Market approach | | Price | | $31 | to | $101 | | $54 |
| | | | Scenario analysis | | Estimated recovery percentage | | 9 | % | to | 100% | | 76 | % |
| | | | | | | | | | | | |
Derivatives | | $ | 6,501 | | | | | | | | | | | |
Equity options | | | | Volatility benchmarking | | Volatility | | 46% | | — | |
Interest rate swaps | | | | Market approach | | Basis points upfront | | 0.1 | to | 8.7 | | 3.3 |
Total return swaps | | | | | | Price | | $100 | | — | |
| | | | | | | | | | | | |
Investments at fair value | | $ | 128,152 | | | | | | | | | | | |
Private equity securities | | | | Market approach | | Price | | $1 | to | $152 | | $32 |
| | | | | | EBITDA multiple | | 16.9 | | — |
| | | | | | Revenue multiple | | 4.9 | to | 5.1 | | 5.0 |
| | | | Scenario analysis | | Estimated recovery percentage | | 7% | | — | |
| | | | | | Discount rate/yield | | 13 | % | to | 21% | | 17 | % |
| | | | | | Revenue growth | | 0% | | — | |
| | | | | | | | | | | | |
Investment in FXCM | | $ | 50,455 | | | | | | | | | | | |
Term loan | | | | Discounted cash flows | | Term based on the pay off (years) | | 0 months | to | 2.2 years | | 2.2 years |
| | | | | | | | | | | | |
Loans to and investments in associated companies | | | | | | | | |
Non-exchange-traded warrants | | $ | 30,842 | | | Market approach | | Underlying stock price | | $662 | | — | |
| | | | | | Underlying stock price | | €15 | to | €18 | | €16 |
| | | | | | Volatility | | 25 | % | to | 59% | | 31 | % |
| | | | | | | | | | | | |
| | | | | | | | | | |
Financial instruments sold, not yet purchased, at fair value | | | | | | | | |
Corporate equity securities | | $ | 4,635 | | | | | | | | | | | |
Non-exchange-traded securities | | | | Market approach | | Price | | $1 | | — | |
| | | | | | | | | | | | |
Loans | | $ | 15,770 | | | Market approach | | Price | | $31 | to | $100 | | $43 |
| | | | Scenario analysis | | Estimated recovery percentage | | 50% | | — | |
| | | | | | | | | | | | |
Derivatives | | $ | 76,533 | | | | | | | | | | | |
Equity options | | | | Volatility benchmarking | | Volatility | | 26 | % | to | 77% | | 40 | % |
Interest rate swaps | | | | Market approach | | Basis points upfront | | 0.1 | to | 8.7 | | 3.1 |
Total return swaps | | | | | | Price | | $100 | | — | |
| | | | | | | | | | | | |
Other secured financings | | $ | 25,905 | | | Scenario analysis | | Estimated recovery percentage | | 13 | % | to | 98% | | 92 | % |
| | | | | | | | | | | | |
Long-term debt | | | | | | | | | | | | |
Structured notes | | $ | 881,732 | | | Market approach | | Price | | $76 | to | $115 | | $94 |
| | | | | | Price | | €81 | to | €113 | | €103 |
The fair values of certain Level 3 assets and liabilities that were determined based on third-party pricing information, unadjusted past transaction prices or a percentage of the reported enterprise fair value are excluded from the above tables. At February 28, 2022 and November 30, 2021, asset exclusions consisted of $45.0 million and $40.8 million, respectively, primarily comprised of certain investments at fair value, other asset-backed securities, sovereign obligations, residential mortgage-backed securities, commercial mortgage-backed securities, certain derivatives, loans and other receivables and corporate equity securities. At February 28, 2022 and November 30, 2021, liability exclusions consisted of $13.4 million and $2.2 million, respectively, primarily comprised of certain derivatives, sovereign obligations, corporate debt securities and commercial mortgage-backed securities.
Uncertainty of Fair Value Measurement from Use of Significant Unobservable Inputs
For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the uncertainty of the fair value measurement due to the use of significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below:
• Non-exchange-traded securities, corporate debt securities, CDOs and CLOs, commercial mortgage-backed securities, loans and other receivables, other asset-backed securities, private equity securities, non-exchange-traded warrants, certain derivatives, other secured financings and structured notes using a market approach valuation technique. A significant increase (decrease) in the price of the private equity securities, non-exchange-traded securities, corporate debt securities, CDOs and CLOs, commercial mortgage-backed securities, other asset-backed securities, loans and other receivables, total return swaps, other secured financings or structured notes would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the EBITDA multiple related to corporate debt securities or private equity securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the revenue multiple related to private equity securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the underlying stock price of non-exchange-traded warrants would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the volatility of the underlying stock price of non-exchange-traded warrants would result in a significantly higher (lower) fair value measurement. Depending on whether we are a receiver or (payer) of basis points upfront, a significant increase in basis points would result in a significant increase (decrease) in the fair value measurement of interest rate swaps.
•Loans and other receivables, commercial mortgage-backed securities, private equity securities and other secured financings using scenario analysis. A significant increase (decrease) in the possible recovery rates of the cash flow outcomes underlying the financial instrument would result in a significantly higher (lower) fair value measurement for the financial instrument. A significant increase (decrease) in the discount rate/yield underlying the investment would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the revenue growth underlying the investment would result in a significantly higher (lower) fair value measurement.
•CDOs and CLOs, other asset-backed securities, private equity securities and the FXCM term loan 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. A significant increase (decrease) in term based on the time to pay off the loan would result in a lower (higher) fair value measurement.
•Derivative equity options and non-exchange-traded securities using volatility benchmarking. A significant increase (decrease) in volatility would result in a significantly higher (lower) fair value measurement.
Fair Value Option Election
We have elected the fair value option for all loans and loan commitments made by our investment banking and capital markets businesses. These loans and loan commitments include loans entered into by our investment banking division in connection with client bridge financing and loan syndications, loans purchased by our 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-backed and other asset-backed securitization activities. Loans and loan commitments originated or purchased by our leveraged credit and mortgage-backed businesses are managed on a fair value basis. Loans are included in Financial instruments owned, at fair value and loan commitments are included in Financial instruments owned, at fair value and Financial instruments sold, not yet purchased, at fair value in the Consolidated Statements of Financial Condition. 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. We have also elected the fair value option for certain of our structured notes, which are managed by our investment banking and capital markets businesses and are included in Long-term
debt in the Consolidated Statements of Financial Condition. We have elected the fair value option for certain financial instruments held by subsidiaries as the investments are risk managed on a fair value basis. The fair value option has been elected for certain other secured financings that arise in connection with our securitization activities and other structured financings. Other secured financings, receivables from brokers, dealers and clearing organizations, receivables from customers of securities operations, other receivables, 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, except for our automobile loans.
The following is a summary of 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 measured at fair value under the fair value option (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Financial instruments owned, at fair value: | | | | | | | |
Loans and other receivables | | | | | $ | (2,287) | | | $ | 10,696 | |
| | | | | | | |
Financial instruments sold, not yet purchased, at fair value: | | | | | | | |
Loans | | | | | $ | 1,548 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Long-term debt: | | | | | | | |
Changes in instrument-specific credit risk (1) | | | | | $ | 51,248 | | | $ | (91,982) | |
Other changes in fair value (2) | | | | | 94,551 | | | 80,819 | |
(1) Changes in instrument-specific credit risk related to structured notes are included in the Consolidated Statements of Comprehensive Income (Loss), net of taxes.
(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 amounts by which contractual principal is greater than (less than) fair value for loans and other receivables, long-term debt and other secured financings measured at fair value under the fair value option (in thousands):
| | | | | | | | | | | | | | |
| | February 28, 2022 | | November 30, 2021 |
Financial instruments owned, at fair value: | | | | |
Loans and other receivables (1) | | $ | 5,533,863 | | | $ | 5,600,648 | |
| | | | |
Loans and other receivables on nonaccrual status and/or 90 days or greater past due (1) (2) | | 51,601 | | | 64,203 | |
Long-term debt | | $ | 107,282 | | | $ | (38,391) | |
Other secured financings | | $ | 3,432 | | | $ | 3,432 | |
(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 loans and other receivables 90 days or greater past due by which contractual principal exceeds fair value of $16.8 million and $19.7 million at February 28, 2022 and November 30, 2021, respectively.
The aggregate fair value of loans and other receivables on nonaccrual status and/or 90 days or greater past due was $42.0 million and $56.9 million at February 28, 2022 and November 30, 2021, respectively, which includes loans and other receivables 90 days or greater past due of $11.9 million and $23.5 million at February 28, 2022 and November 30, 2021, respectively.
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 within Level 1 of the fair value hierarchy.
Note 4. Derivative Financial Instruments
Derivative Financial Instruments
Derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Financial instruments owned, at fair value and Financial instruments sold, not yet purchased, at fair value, 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, we enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities. In addition, we apply hedge accounting to (1) interest rate swaps that have been designated as fair value hedges of the changes in fair value due to the benchmark interest rate for certain fixed rate senior long-term debt and (2) forward foreign exchange contracts designated as hedges to offset the change in the value of certain net investments in foreign operations. See Notes 3 and 18 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. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firm wide risk management policies.
In connection with our derivative activities, we may enter into International Swaps and Derivatives Association, Inc. master netting agreements or similar agreements with counterparties.
The following tables present the fair value and related number of derivative contracts at February 28, 2022 and November 30, 2021 categorized by type of derivative contract and the platform on which these derivatives are transacted. 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 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 financial position (in thousands, except contract amounts).
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Liabilities |
| Fair Value | | Number of Contracts (2) | | Fair Value | | Number of Contracts (2) |
February 28, 2022 (1) | | | | | | | |
Derivatives designated as accounting hedges: | | | | | | | |
Interest rate contracts: | | | | | | | |
Cleared OTC | $ | 13,714 | | | 1 | | | $ | 56,705 | | | 2 | |
Foreign exchange contracts: | | | | | | | |
Bilateral OTC | 19,524 | | | 4 | | | — | | | — | |
Total derivatives designated as accounting hedges | 33,238 | | | | | 56,705 | | | |
| | | | | | | |
Derivatives not designated as accounting hedges: | | | | | | | |
Interest rate contracts: | | | | | | | |
Exchange-traded | 3,787 | | | 32,961 | | | 2,896 | | | 75,002 | |
Cleared OTC | 1,110,870 | | | 3,824 | | | 1,038,884 | | | 3,865 | |
Bilateral OTC | 336,238 | | | 791 | | | 434,723 | | | 958 | |
Foreign exchange contracts: | | | | | | | |
| | | | | | | |
| | | | | | | |
Bilateral OTC | 869,171 | | | 15,664 | | | 858,003 | | | 15,520 | |
Equity contracts: | | | | | | | |
Exchange-traded | 935,862 | | | 1,706,804 | | | 715,512 | | | 1,589,013 | |
| | | | | | | |
Bilateral OTC | 293,800 | | | 6,084 | | | 1,174,659 | | | 6,263 | |
Commodity contracts: | | | | | | | |
Exchange-traded | 78 | | | 1,931 | | | 30 | | | 1,860 | |
| | | | | | | |
Bilateral OTC | 754 | | | 423 | | | 31,899 | | | 1,550 | |
Credit contracts: | | | | | | | |
| | | | | | | |
Cleared OTC | 93,487 | | | 131 | | | 103,708 | | | 140 | |
Bilateral OTC | 6,806 | | | 14 | | | 12,274 | | | 14 | |
Total derivatives not designated as accounting hedges | 3,650,853 | | | | | 4,372,588 | | | |
| | | | | | | |
Total gross derivative assets/liabilities: | | | | | | | |
Exchange-traded | 939,727 | | | | | 718,438 | | | |
Cleared OTC | 1,218,071 | | | | | 1,199,297 | | | |
Bilateral OTC | 1,526,293 | | | | | 2,511,558 | | | |
Amounts offset in the Consolidated Statement of Financial Condition (3): | | | | | | | |
Exchange-traded | (716,499) | | | | | (716,499) | | | |
Cleared OTC | (1,189,030) | | | | | (1,199,297) | | | |
Bilateral OTC | (1,341,109) | | | | | (1,570,287) | | | |
Net amounts in the Consolidated Statement of Financial Condition (4) | $ | 437,453 | | | | | $ | 943,210 | | | |
(continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Liabilities |
| Fair Value | | Number of Contracts (2) | | Fair Value | | Number of Contracts (2) |
November 30, 2021 (1) | | | | | | | |
Derivatives designated as accounting hedges: | | | | | | | |
Interest rate contracts: | | | | | | | |
Cleared OTC | $ | 35,726 | | | 2 | | | $ | 32,200 | | | 1 | |
Foreign exchange contracts: | | | | | | | |
Bilateral OTC | 30,462 | | | 4 | | | — | | | — | |
Total derivatives designated as accounting hedges | 66,188 | | | | | 32,200 | | | |
| | | | | | | |
Derivatives not designated as accounting hedges: | | | | | | | |
Interest rate contracts: | | | | | | | |
Exchange-traded | 1,262 | | | 23,888 | | | 756 | | | 39,195 | |
Cleared OTC | 373,355 | | | 4,505 | | | 367,134 | | | 4,467 | |
Bilateral OTC | 322,353 | | | 1,037 | | | 283,481 | | | 967 | |
Foreign exchange contracts: | | | | | | | |
| | | | | | | |
| | | | | | | |
Bilateral OTC | 1,428,712 | | | 17,792 | | | 1,437,116 | | | 17,576 | |
Equity contracts: | | | | | | | |
Exchange-traded | 1,206,606 | | | 1,582,713 | | | 1,036,019 | | | 1,450,624 | |
| | | | | | | |
Bilateral OTC | 377,132 | | | 2,888 | | | 1,824,418 | | | 2,682 | |
Commodity contracts: | | | | | | | |
Exchange-traded | 448 | | | 1,394 | | | 223 | | | 1,457 | |
| | | | | | | |
Bilateral OTC | 2,703 | | | 616 | | | 9,862 | | | 825 | |
Credit contracts: | | | | | | | |
| | | | | | | |
Cleared OTC | 84,180 | | | 132 | | | 108,999 | | | 128 | |
Bilateral OTC | 13,289 | | | 14 | | | 14,168 | | | 17 | |
Total derivatives not designated as accounting hedges | 3,810,040 | | | | | 5,082,176 | | | |
| | | | | | | |
Total gross derivative assets/liabilities: | | | | | | | |
Exchange-traded | 1,208,316 | | | | | 1,036,998 | | | |
Cleared OTC | 493,261 | | | | | 508,333 | | | |
Bilateral OTC | 2,174,651 | | | | | 3,569,045 | | | |
Amounts offset in the Consolidated Statement of Financial Condition (3): | | | | | | | |
Exchange-traded | (1,008,091) | | | | | (1,008,091) | | | |
Cleared OTC | (483,339) | | | | | (508,333) | | | |
Bilateral OTC | (1,814,326) | | | | | (2,185,776) | | | |
Net amounts in the Consolidated Statement of Financial Condition (4) | $ | 570,472 | | | | | $ | 1,412,176 | | | |
(1) Exchange-traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty.
(2) Number of exchange-traded contracts may include open futures contracts. The unsettled fair value of these futures contracts is included in Receivables and Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition.
(3) Amounts netted include both netting by counterparty and for cash collateral paid or received.
(4) 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.
The following table provides information related to gains (losses) recognized in Interest expense of Jefferies Group in the Consolidated Statements of Operations related to fair value hedges (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Interest rate swaps | | | | | $ | (43,998) | | | $ | (43,791) | |
Long-term debt | | | | | 50,542 | | | 46,811 | |
Total | | | | | $ | 6,544 | | | $ | 3,020 | |
The following table provides information related to gains (losses) on net investment hedges recognized in Net unrealized foreign exchange gains (losses), a component of Other comprehensive income (loss), in the Consolidated Statements of Comprehensive Income (Loss) (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Foreign exchange contracts | | | | | $ | (10,938) | | | $ | (41,500) | |
Total | | | | | $ | (10,938) | | | $ | (41,500) | |
The following table presents unrealized and realized gains (losses) on derivative contracts which are primarily recognized in Principal transactions revenues 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 February 28, |
| | | | | 2022 | | 2021 |
Interest rate contracts | | | | | $ | (41,592) | | | $ | (42,124) | |
Foreign exchange contracts | | | | | 2,624 | | | 46,829 | |
Equity contracts | | | | | 210,937 | | | (89,697) | |
Commodity contracts | | | | | (34,305) | | | (18,349) | |
Credit contracts | | | | | 4,432 | | | 821 | |
Total | | | | | $ | 142,096 | | | $ | (102,520) | |
The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising our business activities and are before consideration of economic hedging transactions, which generally offset the net gains (losses) included above. We substantially mitigate our exposure to market risk on our cash instruments through derivative contracts, which generally provide offsetting revenues, and we manage the risk associated with these contracts in the context of our 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 February 28, 2022 (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 | $ | 76 | | | $ | 678 | | | $ | — | | | $ | (754) | | | $ | — | |
Equity options and forwards | 10,211 | | | 2,998 | | | — | | | (4,086) | | | 9,123 | |
Credit default swaps | — | | | 15 | | | — | | | — | | | 15 | |
Total return swaps | 80,255 | | | 44,438 | | | 158 | | | (8,263) | | | 116,588 | |
Foreign currency forwards, swaps and options | 339,685 | | | 4,081 | | | — | | | (4,111) | | | 339,655 | |
Fixed income forwards | 5,285 | | | — | | | — | | | — | | | 5,285 | |
Interest rate swaps, options and forwards | 59,302 | | | 155,998 | | | 84,286 | | | (45,314) | | | 254,272 | |
Total | $ | 494,814 | | | $ | 208,208 | | | $ | 84,444 | | | $ | (62,528) | | | 724,938 | |
Cross product counterparty netting | | | | | | | | | (8,869) | |
Total OTC derivative assets included in Financial instruments owned, at fair value | | | | | | | | | $ | 716,069 | |
(1)At February 28, 2022, we held net exchange-traded derivative assets and other credit agreements with a fair value of $226.9 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 February 28, 2022, cash collateral received was $505.5 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 | $ | 30,049 | | | $ | 1,850 | | | $ | — | | | $ | (754) | | | $ | 31,145 | |
Equity options and forwards | 9,871 | | | 534,211 | | | 33,407 | | | (4,086) | | | 573,403 | |
Credit default swaps | — | | | 10,236 | | | — | | | — | | | 10,236 | |
Total return swaps | 124,832 | | | 324,482 | | | — | | | (8,263) | | | 441,051 | |
Foreign currency forwards, swaps and options | 307,174 | | | 5,271 | | | — | | | (4,111) | | | 308,334 | |
Fixed income forwards | 2,879 | | | — | | | — | | | — | | | 2,879 | |
Interest rate swaps, options and forwards | 43,259 | | | 124,965 | | | 200,069 | | | (45,314) | | | 322,979 | |
Total | $ | 518,064 | | | $ | 1,001,015 | | | $ | 233,476 | | | $ | (62,528) | | | 1,690,027 | |
Cross product counterparty netting | | | | | | | | | (8,869) | |
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased, at fair value | | | | | | | | | $ | 1,681,158 | |
(1)At February 28, 2022, we held net exchange-traded derivative liabilities and other credit agreements with a fair value of $7.0 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 February 28, 2022, cash collateral pledged was $744.9 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 February 28, 2022, 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 | $ | 467,918 | |
BBB- to BBB+ | 15,109 | |
BB+ or lower | 119,477 | |
Unrated | 113,565 | |
Total | $ | 716,069 | |
(1) We utilize internal credit ratings determined by the Jefferies Group's Risk Management department. Credit ratings determined by Jefferies Group 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 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | External Credit Rating | | | | |
| | Investment Grade | | Non-investment grade | | Unrated | | Total Notional |
February 28, 2022 | | | | | | | | |
Credit protection sold: | | | | | | | | |
Index credit default swaps | | $ | 2,674.4 | | | $ | 1,262.8 | | | $ | — | | | $ | 3,937.2 | |
Single name credit default swaps | | — | | | — | | | 0.2 | | | 0.2 | |
| | | | | | | | |
November 30, 2021 | | | | | | | | |
Credit protection sold: | | | | | | | | |
Index credit default swaps | | $ | 2,612.0 | | | $ | 1,298.8 | | | $ | — | | | $ | 3,910.8 | |
Single name credit default swaps | | — | | | 17.6 | | | 0.2 | | | 17.8 | |
Contingent Features
Certain of Jefferies Group's derivative instruments contain provisions that require its debt to maintain an investment grade credit rating from each of the major credit rating agencies. If Jefferies Group's debt was 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 the 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 we would have been required to return and/or post additionally to our counterparties if the credit-risk-related contingent features underlying these agreements were triggered (in millions).
| | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
Derivative instrument liabilities with credit-risk-related contingent features | $ | 642.0 | | | $ | 821.5 | |
Collateral posted | (313.7) | | | (160.5) | |
Collateral received | 117.6 | | | 369.3 | |
Return of and additional collateral required in the event of a credit rating downgrade below investment grade (1) | 446.0 | | | 1,030.4 | |
(1) These potential 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 uses swaps and put options in order to reduce exposure to future oil price fluctuations. Vitesse Energy 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
Our repurchase agreements and securities borrowing and lending arrangements are generally recorded at cost in the Consolidated Statements of Financial Condition, which is a reasonable approximation of their fair values due to their short-term nature. We enter 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. We monitor the fair value of the securities loaned and borrowed on a daily basis as compared with the related payable or receivable, and request additional collateral or return excess collateral, as appropriate. We pledge financial instruments as collateral under repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. Our 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, at fair value, and noted parenthetically as Securities pledged in the Consolidated Statements of Financial Condition.
In instances where we receive securities as collateral in connection with securities-for-securities transactions in which we are the lender of securities and are permitted to sell or repledge the securities received as collateral, we report the fair value of the collateral received and the related obligation to return the collateral in the Consolidated Statements of Financial Condition.
The following tables set forth the carrying value of securities lending arrangements, repurchase agreements and obligation to return securities received as collateral, at fair value, by class of collateral pledged and remaining contractual maturity (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Collateral Pledged | | Securities Lending Arrangements | | Repurchase Agreements | | Obligation to Return Securities Received as Collateral, at Fair Value | | Total |
February 28, 2022 | | | | | | | | |
| | | | | | | | |
Corporate equity securities | | $ | 1,431,940 | | | $ | 429,316 | | | $ | 973 | | | $ | 1,862,229 | |
Corporate debt securities | | 347,323 | | | 2,521,386 | | | — | | | 2,868,709 | |
Mortgage-backed and asset-backed securities | | — | | | 1,869,580 | | | — | | | 1,869,580 | |
U.S. government and federal agency securities | | 21,530 | | | 9,787,873 | | | — | | | 9,809,403 | |
Municipal securities | | — | | | 294,824 | | | — | | | 294,824 | |
Sovereign obligations | | 8,103 | | | 3,493,773 | | | — | | | 3,501,876 | |
Loans and other receivables | | — | | | 905,073 | | | — | | | 905,073 | |
Total | | $ | 1,808,896 | | | $ | 19,301,825 | | | $ | 973 | | | $ | 21,111,694 | |
| | | | | | | | |
November 30, 2021 | | | | | | | | |
Corporate equity securities | | $ | 1,160,916 | | | $ | 150,602 | | | $ | 7,289 | | | $ | 1,318,807 | |
Corporate debt securities | | 321,356 | | | 2,684,458 | | | — | | | 3,005,814 | |
Mortgage-backed and asset-backed securities | | — | | | 1,209,442 | | | — | | | 1,209,442 | |
U.S. government and federal agency securities | | 6,348 | | | 8,426,536 | | | — | | | 8,432,884 | |
Municipal securities | | — | | | 413,073 | | | — | | | 413,073 | |
Sovereign obligations | | 37,101 | | | 2,422,901 | | | — | | | 2,460,002 | |
Loans and other receivables | | — | | | 712,388 | | | — | | | 712,388 | |
Total | | $ | 1,525,721 | | | $ | 16,019,400 | | | $ | 7,289 | | | $ | 17,552,410 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Contractual Maturity |
| | Overnight and Continuous | | Up to 30 Days | | 31 to 90 Days | | Greater than 90 Days | | Total |
February 28, 2022 | | | | | | | | | | |
Securities lending arrangements | | $ | 973,963 | | | $ | — | | | $ | 292,966 | | | $ | 541,967 | | | $ | 1,808,896 | |
Repurchase agreements | | 10,491,946 | | | 2,288,295 | | | 2,686,587 | | | 3,834,997 | | | 19,301,825 | |
Obligation to return securities received as collateral, at fair value | | 973 | | | — | | | — | | | — | | | 973 | |
Total | | $ | 11,466,882 | | | $ | 2,288,295 | | | $ | 2,979,553 | | | $ | 4,376,964 | | | $ | 21,111,694 | |
| | | | | | | | | | |
November 30, 2021 | | | | | | | | | | |
Securities lending arrangements | | $ | 595,628 | | | $ | 1,318 | | | $ | 539,623 | | | $ | 389,152 | | | $ | 1,525,721 | |
Repurchase agreements | | 6,551,934 | | | 1,798,716 | | | 4,361,993 | | | 3,306,757 | | | 16,019,400 | |
Obligation to return securities received as collateral, at fair value | | 7,289 | | | — | | | — | | | — | | | 7,289 | |
Total | | $ | 7,154,851 | | | $ | 1,800,034 | | | $ | 4,901,616 | | | $ | 3,695,909 | | | $ | 17,552,410 | |
We receive securities as collateral under resale agreements, securities borrowing transactions and customer margin loans. We also receive securities as collateral in connection with securities-for-securities transactions in which we are the lender of securities. In many instances, we are 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 February 28, 2022 and November 30, 2021, the approximate fair value of securities received as collateral by us that may be sold or repledged was $34.59 billion and $31.97 billion, respectively. At February 28, 2022 and November 30, 2021, a substantial portion of the securities received have been sold or repledged.
Offsetting of Securities Financing Agreements
To manage our exposure to credit risk associated with securities financing transactions, we may enter into master netting agreements and collateral arrangements with counterparties. Generally, transactions are executed under standard industry agreements, including, but not limited to, master securities lending agreements (securities lending transactions) and master repurchase agreements (repurchase transactions).
The following table provides information regarding repurchase agreements, securities borrowing and lending arrangements and securities received as collateral, at fair value, and obligation to return securities received as collateral, at fair value, 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 February 28, 2022 | | | | | | | | | | | |
Securities borrowing arrangements | $ | 7,110,757 | | | $ | — | | | $ | 7,110,757 | | | $ | (666,368) | | | $ | (1,374,501) | | | $ | 5,069,888 | |
Reverse repurchase agreements | 16,925,395 | | | (10,368,182) | | | 6,557,213 | | | (669,010) | | | (5,845,969) | | | 42,234 | |
Securities received as collateral, at fair value | 973 | | | — | | | 973 | | | — | | | (973) | | | — | |
| | | | | | | | | | | |
Liabilities at February 28, 2022 | | | | | | | | | | | |
Securities lending arrangements | $ | 1,808,896 | | | $ | — | | | $ | 1,808,896 | | | $ | (666,368) | | | $ | (1,091,177) | | | $ | 51,351 | |
Repurchase agreements | 19,301,825 | | | (10,368,182) | | | 8,933,643 | | | (669,010) | | | (7,788,211) | | | 476,422 | |
Obligation to return securities received as collateral, at fair value | 973 | | | — | | | 973 | | | — | | | (973) | | | — | |
| | | | | | | | | | | |
Assets at November 30, 2021 | | | | | | | | | | | |
Securities borrowing arrangements | $ | 6,409,420 | | | $ | — | | | $ | 6,409,420 | | | $ | (271,475) | | | $ | (1,528,206) | | | $ | 4,609,739 | |
Reverse repurchase agreements | 15,215,785 | | | (7,573,301) | | | 7,642,484 | | | (540,312) | | | (7,048,823) | | | 53,349 | |
Securities received as collateral, at fair value | 7,289 | | | — | | | 7,289 | | | — | | | (7,289) | | | — | |
| | | | | | | | | | | |
Liabilities at November 30, 2021 | | | | | | | | | | | |
Securities lending arrangements | $ | 1,525,721 | | | $ | — | | | $ | 1,525,721 | | | $ | (271,475) | | | $ | (1,213,563) | | | $ | 40,683 | |
Repurchase agreements (4) | 16,019,400 | | | (7,573,301) | | | 8,446,099 | | | (540,312) | | | (7,136,585) | | | 769,202 | |
Obligation to return securities received as collateral, at fair value | 7,289 | | | — | | | 7,289 | | | — | | | (7,289) | | | — | |
(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 Consolidated Statements of Financial Condition because other netting provisions of GAAP are not met.
(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 February 28, 2022, amounts include $5.01 billion of securities borrowing arrangements, for which we have received securities collateral of $4.87 billion, and $470.0 million of repurchase agreements, for which we have pledged securities collateral of $485.1 million, which are subject to master netting agreements, but we have not determined the agreements to be legally enforceable. At November 30, 2021, amounts include $4.51 billion of securities borrowing arrangements, for which we have received securities collateral of $4.35 billion, and $765.0 million of repurchase agreements, for which we have pledged securities collateral of $781.8 million, which are subject to master netting agreements, but we have not determined the agreements to be legally enforceable.
(4)There was an immaterial correction in the amount of available collateral, which resulted in a $200 million decrease in the available collateral and a $200 million increase in the net amount related to repurchase agreements at November 30, 2021.
Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited with Clearing and Depository Organizations
Cash and securities segregated in accordance with regulatory regulations and deposited with clearing and depository organizations totaled $838.1 million and $1.02 billion at February 28, 2022 and November 30, 2021, respectively. Segregated cash and securities consist of deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Jefferies LLC as a broker-dealer carrying customer accounts to requirements related to maintaining cash or qualified securities in segregated special reserve bank accounts for the exclusive benefit of its customers.
Other Assets
Restricted cash, which is comprised of cash reserve balances required by securitization agreements and cash collections associated with automobile loans pledged to warehouse credit facilities, is included in Other assets in the Consolidated Statements of Financial Condition. These restricted cash balances are held by trustees and are distributed monthly by the trustees per the various securitization and warehouse credit facility agreements. Restricted cash may also include amounts related to pre-funding arrangements put in place for securitizations, which are funds that remain in an escrow account managed by a trustee until we pledge additional automobile loans to meet the collateral requirements of the related notes, at which time the funds become available for our use.
Note 6. Securitization Activities
We engage in securitization activities related to corporate loans, mortgage loans, consumer loans and mortgage-backed and other asset-backed securities. In our securitization transactions, we transfer these assets to special purpose entities ("SPEs") and act as the placement or structuring agent for the beneficial interests sold to investors by the SPE. A significant portion of our securitization transactions are the securitization of assets issued or guaranteed by U.S. government agencies. These SPEs generally meet the criteria of variable interest entities ("VIEs"); however, we generally do not consolidate the SPEs as we are not considered the primary beneficiary for these SPEs.
We account for our securitization transactions as sales, provided we have 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. We generally receive cash proceeds in connection with the transfer of assets to an SPE. We 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-backed and other asset-backed securities or CLOs). These securities are included in Financial instruments owned, at fair value in the Consolidated Statements of Financial Condition and are generally initially categorized as Level 2 within the fair value hierarchy.
The following table presents activity related to our securitizations that were accounted for as sales in which we had continuing involvement (in millions):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Transferred assets | | | | | $ | 1,080.6 | | | $ | 3,583.5 | |
Proceeds on new securitizations | | | | | 1,080.6 | | | 3,583.1 | |
Cash flows received on retained interests | | | | | 8.9 | | | 6.3 | |
We have no explicit or implicit arrangements to provide additional financial support to these SPEs, have no liabilities related to these SPEs and do not have any outstanding derivative contracts executed in connection with these securitization activities at February 28, 2022 and November 30, 2021.
The following table summarizes our retained interests in SPEs where we transferred assets and have continuing involvement and received sale accounting treatment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
Securitization Type | Total Assets | | Retained Interests | | Total Assets | | Retained Interests |
U.S. government agency residential mortgage-backed securities | $ | 278.4 | | | $ | 4.9 | | | $ | 330.2 | | | $ | 4.9 | |
U.S. government agency commercial mortgage-backed securities | 1,842.3 | | | 54.0 | | | 2,201.8 | | | 69.2 | |
CLOs | 3,984.1 | | | 31.7 | | | 3,382.3 | | | 31.0 | |
Consumer and other loans | 2,541.2 | | | 141.7 | | | 2,271.4 | | | 136.4 | |
Total assets represent the unpaid principal amount of assets in the SPEs in which we have continuing involvement and are presented solely to provide information regarding the size of the transactions and the size of the underlying assets supporting our 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. Our risk of loss is limited to this fair value amount, which is included in total Financial instruments owned, at fair value in the Consolidated Statements of Financial Condition.
Although not obligated, in connection with secondary market-making activities we may make a market in the securities issued by these SPEs. In these market-making transactions, we buy these securities from and sell these securities to investors. Securities purchased through these market-making activities are not considered to be continuing involvement in these SPEs. To the extent we purchased securities through these market-making activities and we are not deemed to be the primary beneficiary of the VIE, these securities are included in agency and non-agency mortgage-backed and asset-backed securitizations in the nonconsolidated VIEs section presented in Note 7.
Note 7. 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;
•Acting as placement agent and/or underwriter in connection with client-sponsored securitizations;
•Financing of agency and non-agency mortgage-backed and other asset-backed securities;
•Acting as servicer for a fee to automobile loan financing vehicles;
•Warehouse funding arrangements for client-sponsored consumer and mortgage loan vehicles and CLOs through participation agreements, forward sale agreements, reverse repurchase 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 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 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 our consolidated VIEs (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.
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
| Secured Funding Vehicles | | Other | | Secured Funding Vehicles | | Other |
| | | | | | | |
Cash | $ | 11.6 | | | $ | — | | | $ | 3.8 | | | $ | — | |
Financial instruments owned, at fair value | 239.5 | | | 64.7 | | | 173.1 | | | 146.4 | |
Securities purchased under agreements to resell (1) | 2,554.8 | | | 18.0 | | | 3,697.1 | | | — | |
| | | | | | | |
Receivables (2) | 742.9 | | | 54.2 | | | 626.8 | | | 40.6 | |
| | | | | | | |
Other assets (3) | 133.7 | | | 56.3 | | | 114.6 | | | — | |
Total assets | $ | 3,682.5 | | | $ | 193.2 | | | $ | 4,615.4 | | | $ | 187.0 | |
| | | | | | | |
Financial instruments sold, not yet purchased, at fair value | $ | — | | | $ | 18.0 | | | $ | — | | | $ | 109.1 | |
Other secured financings (4) | 3,609.5 | | | — | | | 4,521.6 | | | — | |
| | | | | | | |
Repurchase agreements | — | | | 47.1 | | | — | | | — | |
Other liabilities (5) | 52.9 | | | 92.8 | | | 46.6 | | | 75.3 | |
Total liabilities | $ | 3,662.4 | | | $ | 157.9 | | | $ | 4,568.2 | | | $ | 184.4 | |
| | | | | | | |
Noncontrolling interests | $ | — | | | $ | 32.5 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1)Securities purchased under agreements to resell primarily represent amounts due under collateralized transactions on related consolidated entities, which are eliminated in consolidation. At February 28, 2022, approximately $18.0 million was not eliminated in consolidation.
(2)Approximately $1.4 million and $1.2 million of receivables at February 28, 2022 and November 30, 2021, respectively, are with related consolidated entities, which are eliminated in consolidation.
(3)Approximately $45.7 million and $56.5 million of the other assets at February 28, 2022 and November 30, 2021, respectively, represent intercompany receivables with related consolidated entities, which are eliminated in consolidation.
(4)Approximately $58.6 million and $36.7 million of the other secured financings at February 28, 2022 and November 30, 2021, respectively, are with related consolidated entities, which are eliminated in consolidation.
(5)Approximately $84.1 million and $75.3 million of the other liabilities at February 28, 2022 and November 30, 2021, respectively, represent intercompany payables with related consolidated entities, which are eliminated in consolidation.
Secured Funding Vehicles. We are the primary beneficiary of asset-backed financing vehicles to which we sell agency and non-agency residential and commercial mortgage loans and asset-backed securities pursuant to the terms of a master repurchase agreement. Our variable interests in these vehicles consist of our collateral margin maintenance obligations under the master repurchase agreement, which we manage, 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.
At February 28, 2022 and November 30, 2021, Foursight is the primary beneficiary of automobile loan financing vehicles to which we transfer automobile loans, act as servicer of the automobile loans for a fee and retain equity interests in the vehicles. The assets of these VIEs consist primarily of automobile loans, which are accounted for as loans held for investment at amortized cost and included within Receivables in the Consolidated Statements of Financial Condition. The liabilities of these VIEs consist of notes issued by the VIEs, which are accounted for at amortized cost and included within Other secured financings in the Consolidated Statements of Financial Condition and do not have recourse to our general credit. The automobile loans are pledged as collateral for the related notes and available only for the benefit of the note holders.
Other. We are the primary beneficiary of certain investment vehicles set up for the benefit of our employees. We manage and invest alongside our employees in these vehicles. The assets of these VIEs consist of private equity securities and are available for the benefit of the entities' equity holders. Our variable interests in these vehicles consist of equity securities. The creditors of these VIEs do not have recourse to our general credit and each such VIE's assets are not available to satisfy any other debt.
Additionally, HomeFed is the primary beneficiary of a real estate syndication entity that is developing a multi-family residential property. HomeFed invested in this property together with other third-party investors that have noncontrolling interests, and manages the property. Its assets consist primarily of the real estate being developed and its liabilities consist primarily of accrued capital expenditures and other payables. Our variable interests in the VIE consist primarily of our equity ownership interest, a sponsor promote, and development and asset management fees earned for managing the project.
Nonconsolidated VIEs
The following table presents information about our variable interests in nonconsolidated VIEs (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | Maximum Exposure to Loss | | VIE Assets |
| Assets | | Liabilities | | |
February 28, 2022 | | | | | | | |
CLOs | $ | 851.1 | | | $ | 2.9 | | | $ | 3,500.2 | | | $ | 8,461.2 | |
Asset-backed vehicles | 485.8 | | | — | | | 510.6 | | | 5,022.5 | |
Related party private equity vehicles | 26.2 | | | — | | | 36.9 | | | 74.7 | |
| | | | | | | |
Other investment vehicles | 1,276.5 | | | — | | | 1,371.5 | | | 16,757.1 | |
Total | $ | 2,639.6 | | | $ | 2.9 | | | $ | 5,419.2 | | | $ | 30,315.5 | |
| | | | | | | |
November 30, 2021 | | | | | | | |
CLOs | $ | 582.2 | | | $ | 2.0 | | | $ | 2,557.1 | | | $ | 10,277.5 | |
Asset-backed vehicles | 281.9 | | | — | | | 359.3 | | | 3,474.6 | |
Related party private equity vehicles | 27.1 | | | — | | | 37.8 | | | 78.9 | |
| | | | | | | |
Other investment vehicles | 1,111.5 | | | — | | | 1,201.6 | | | 15,101.4 | |
Total | $ | 2,002.7 | | | $ | 2.0 | | | $ | 4,155.8 | | | $ | 28,932.4 | |
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 our 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 our 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, sub-investment grade and senior secured U.S. loans and senior secured Euro denominated corporate leveraged loans and bonds. We underwrite securities issued in CLO transactions on behalf of sponsors and provide advisory services to the sponsors. We may also sell corporate loans to the CLOs. Our variable interests in connection with CLOs where we have been involved in providing underwriting and/or advisory services consist of the following:
•Forward sale agreements whereby we commit 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;
◦Reverse repurchase agreements with collateral margin maintenance obligations and commitments to fund such reverse repurchase agreements; and
◦Senior and subordinated notes issued in connection with CLO warehousing activities.
•Trading positions in securities issued in CLO transactions; and
•Investments in variable funding notes issued by CLOs.
Asset-Backed Vehicles. We provide financing and lending related services to certain client-sponsored VIEs in the form of revolving funding note agreements, revolving credit facilities, forward purchase agreements and reverse repurchase agreements. The underlying assets, which are collateralizing the vehicles, are primarily composed of unsecured consumer loans and mortgage loans. In addition, we may provide structuring and advisory services and act as an underwriter or placement agent for securities issued by the vehicles. We do not control the activities of these entities.
Related Party Private Equity Vehicles. We committed to invest in private equity funds (the "JCP Funds", including Jefferies Group's interests in Jefferies Capital Partners V L.P. and the Jefferies SBI USA Fund L.P. (together, "JCP Fund V")) managed by Jefferies Capital Partners, LLC (the "JCP Manager"). Additionally, we committed to invest in the general partners of the JCP Funds (the "JCP General Partners") and the JCP Manager. Our variable interests in the JCP Funds, JCP General Partners and JCP Manager (collectively, the "JCP Entities") consist of equity interests that, in total, provide us 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 both February 28, 2022 and November 30, 2021, our total equity commitment in the JCP Entities was $133.0 million, of which $122.3 million and $122.3 million, respectively, had been funded. The carrying value of our equity investments in the JCP Entities was $26.2 million and $27.1 million at February 28, 2022 and November 30, 2021, respectively. Our exposure to loss is limited to the total of our carrying value and unfunded equity commitment. The assets of the JCP Entities primarily consist of private equity and equity related investments.
Other Investment Vehicles. The carrying amount of our equity investment was $1.28 billion and $1.11 billion at February 28, 2022 and November 30, 2021, respectively. Our unfunded equity commitment related to these investments totaled $95.1 million and $90.0 million at February 28, 2022 and November 30, 2021, respectively. Our exposure to loss is limited to the total of our carrying value and unfunded equity commitment. These investment vehicles have assets primarily consisting of private and public equity investments, debt instruments, trade and insurance claims and various oil and gas assets.
Mortgage-Backed and Other Asset-Backed Secured Funding Vehicles. In connection with our secondary trading and market-making activities, we buy and sell 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, automobile loans and student loans. These securities are accounted for at fair value and included in Financial instruments owned, at fair value in the Consolidated Statements of Financial Condition. We have no other involvement with the related SPEs and therefore do not consolidate these entities.
We also engage in underwriting, placement and structuring activities for third-party-sponsored securitization trusts generally through agency (Fannie Mae, Federal Home Loan Mortgage Corporation ("Freddie Mac") or 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 automobile loans. We do not consolidate agency-sponsored securitizations as we do not have the power to direct the activities of the SPEs that most significantly impact their economic performance. Further, we are not the servicer of non-agency-sponsored securitizations and therefore do not have power to direct the most significant activities of the SPEs and accordingly, do not consolidate these entities. We may retain unsold senior and/or subordinated interests at the time of securitization in the form of securities issued by the SPEs.
At February 28, 2022 and November 30, 2021, we held $1.05 billion and $1.31 billion of agency mortgage-backed securities, respectively, and $207.0 million and $253.9 million of non-agency mortgage-backed and other asset-backed securities, respectively, as a result of our secondary trading and market-making activities, and underwriting, placement and structuring activities. Our maximum exposure to loss on these securities is limited to the carrying value of our investments in these securities. These mortgage-backed and other asset-backed secured funding vehicles discussed are not included in the above table containing information about our variable interests in nonconsolidated VIEs.
FXCM is considered a 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 under the equity method as an investment in an associated company. FXCM reported total assets of $407.1 million in its latest financial statements. Our maximum exposure to loss as a result of our involvement with FXCM is limited to the total of the carrying value of the term loan ($50.3 million) and the investment in associated company ($49.1 million) at February 28, 2022. FXCM is not included in the above table containing information about our variable interests in nonconsolidated VIEs.
Note 8. 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 three months ended February 28, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans to and investments in associated companies as of beginning of period | | Income (losses) related to associated companies | | Other income (losses) related to associated companies (1) | | Contributions to (distributions from) associated companies, net | | Other | | Loans to and investments in associated companies as of end of period |
| | | | | | | | | | | |
2022 | | | | | | | | | | | |
Jefferies Finance | $ | 776,162 | | | $ | — | | | $ | 19,011 | | | $ | 15,188 | | | $ | — | | | $ | 810,361 | |
Berkadia | 373,417 | | | | | 38,900 | | | 230 | | | (237) | | | 412,310 | |
| | | | | | | | | | | |
FXCM (2) | 48,986 | | | (9,547) | | | | | 10,000 | | | (368) | | | 49,071 | |
| | | | | | | | | | | |
Linkem | 133,778 | | | (22,971) | | | — | | | — | | | — | | | 110,807 | |
Asset Management companies (3) | 183,076 | | | — | | | 131 | | | (178) | | | — | | | 183,029 | |
Real estate companies | 122,720 | | | 2,000 | | | — | | | 10,263 | | | — | | | 134,983 | |
Other (3) (4) | 107,651 | | | 533 | | | (24) | | | (2,866) | | | (2,458) | | | 102,836 | |
Total | $ | 1,745,790 | | | $ | (29,985) | | | $ | 58,018 | | | $ | 32,637 | | | $ | (3,063) | | | $ | 1,803,397 | |
| | | | | | | | | | | |
2021 | | | | | | | | | | | |
Jefferies Finance | $ | 693,201 | | | $ | — | | | $ | 27,585 | | | $ | (40,542) | | | $ | — | | | $ | 680,244 | |
Berkadia | 301,152 | | | — | | | 30,018 | | | (316) | | | (61) | | | 330,793 | |
| | | | | | | | | | | |
FXCM (2) | 73,920 | | | (5,462) | | | — | | | — | | | 327 | | | 68,785 | |
| | | | | | | | | | | |
Linkem | 198,991 | | | (9,107) | | | — | | | (8,783) | | | — | | | 181,101 | |
Asset Management companies (3) | 139,707 | | | — | | | 30,184 | | | (11,434) | | | — | | | 158,457 | |
Real estate companies | 168,678 | | | 6,051 | | | — | | | (10,954) | | | — | | | 163,775 | |
Other (3) | 110,914 | | | (2,050) | | | 119 | | | (3,090) | | | — | | | 105,893 | |
Total | $ | 1,686,563 | | | $ | (10,568) | | | $ | 87,906 | | | $ | (75,119) | | | $ | 266 | | | $ | 1,689,048 | |
(1)Primarily related to Jefferies Group and classified in Other revenues.
(2)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 in Loans to and investments in associated companies and our term loan is included in Financial instruments owned, at fair value in the Consolidated Statements of Financial Condition.
(3)Certain prior year amounts have been reclassified to conform to the current year presentation.
(4)Loans to and investments in associated companies at February 28, 2022 and November 30, 2021 include loans and debt securities aggregating $15.2 million and $15.3 million, respectively.
Income (losses) related to associated companies includes the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
FXCM | | | | | $ | (9,547) | | | $ | (5,462) | |
| | | | | | | |
Linkem | | | | | (22,971) | | | (9,107) | |
| | | | | | | |
Real estate companies | | | | | 2,000 | | | 6,051 | |
Other | | | | | 533 | | | (2,050) | |
Total | | | | | $ | (29,985) | | | $ | (10,568) | |
Other income (losses) related to associated companies (primarily related to Jefferies Group and classified in Other revenues) includes the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Jefferies Finance | | | | | $ | 19,011 | | | $ | 27,585 | |
Berkadia | | | | | 38,900 | | | 30,018 | |
Asset Management companies (1) | | | | | 131 | | | 30,184 | |
Other (1) | | | | | (24) | | | 119 | |
Total | | | | | $ | 58,018 | | | $ | 87,906 | |
(1)Certain prior year amounts have been reclassified to conform to the current year presentation.
Jefferies Finance
Through Jefferies Group, we own a 50% equity interest in JFIN Parent LLC ("Jefferies Finance") and Jefferies Finance LLC is a direct subsidiary of JFIN Parent LLC. Jefferies Finance is a joint venture entity pursuant to an agreement with Massachusetts Mutual Life Insurance Company ("MassMutual"). Jefferies Finance is a commercial finance company that structures, underwrites and syndicates primarily senior secured loans to corporate borrowers; and manages proprietary and third-party investments for both broadly syndicated and direct lending loans. Jefferies Finance conducts its operations primarily through two business lines, Leveraged Finance Arrangement and Portfolio and Asset Management. Loans are originated primarily through Jefferies Group's investment banking efforts and Jefferies Finance typically syndicates to third-party investors substantially all of its arranged volume through Jefferies Group. The Portfolio and Asset Management business lines, collectively referred to as Jefferies Credit Partners, manages a broad portfolio of assets under management comprised of portions of loans it has arranged, as well as loan positions that it has purchased in the primary and secondary markets. Jefferies Credit Partners is comprised of three registered Investment Advisors: Jefferies Finance, Apex Credit Partners LLC and JFIN Asset Management LLC, which serve as a private credit platform managing proprietary and third-party capital across comingled funds, separately managed accounts and collateralized loan obligations.
At February 28, 2022, Jefferies Group and MassMutual each had equity commitments to Jefferies Finance of $750.0 million. The equity commitment is reduced quarterly based on Jefferies Group's share of any undistributed earnings from Jefferies Finance and the commitment is increased only to the extent the share of such earnings are distributed. At February 28, 2022, Jefferies Group's remaining commitment to Jefferies Finance was $15.4 million. The investment commitment is scheduled to expire on March 1, 2023 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 February 28, 2022. Advances are shared equally between Jefferies Group and MassMutual. The facility is scheduled to mature on March 1, 2023 with automatic one year extensions absent a 60 day termination notice by either party. At February 28, 2022, Jefferies Group had funded $0.0 million of its $250.0 million commitment. Jefferies Group recognized interest income and unfunded commitment fees related to the facility of $0.4 million and $0.6 million during the three months ended February 28, 2022 and 2021, respectively.
The following summarizes activity related to our other transactions with Jefferies Finance (in millions):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Origination and syndication fee revenues (1) | | | | | $ | 114.9 | | | $ | 70.3 | |
Origination fee expenses (1) | | | | | 15.9 | | | 12.3 | |
CLO placement fee revenues (2) | | | | | 0.7 | | | 2.4 | |
Underwriting fees (3) | | | | | — | | | 0.5 | |
Service fees (4) | | | | | 50.0 | | | 31.5 | |
(1) Jefferies Group engages in the origination and syndication of loans underwritten by Jefferies Finance. In connection with such services, Jefferies Group earned fees, 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, which are recognized in Selling, general and other expenses in the Consolidated Statements of Operations.
(2) Jefferies Group acts as a placement agent for CLOs managed by Jefferies Finance, for which Jefferies Group recognized fees, which are included in Investment banking revenues in the Consolidated Statements of Operations. At February 28, 2022 and November 30, 2021, Jefferies Group held securities issued by CLOs managed by Jefferies Finance, which are included in Financial instruments owned, at fair value.
(3) Jefferies Group acted as underwriter in connection with term loans issued by Jefferies Finance.
(4) Under a service agreement, Jefferies Group charges Jefferies Finance for services provided.
In connection with non-U.S. dollar loans originated by Jefferies Finance to borrowers who are investment banking clients of Jefferies Group, Jefferies Group has entered into an agreement to indemnify Jefferies Finance with respect to any foreign currency exposure.
At February 28, 2022 and November 30, 2021, we had receivables from Jefferies Finance, included in Other assets in the Consolidated Statements of Financial Condition of $37.2 million and $26.2 million, respectively. At February 28, 2022 and November 30, 2021, we had payables to Jefferies Finance, related to cash deposited with Jefferies Group, included in Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition of $2.5 million and $8.5 million, respectively.
Berkadia
Berkadia is a commercial mortgage banking and servicing joint venture that was 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% membership interest in Berkadia. We are entitled to receive 45% of the profits. Berkadia originates commercial/multifamily real estate loans that are sold to U.S. government agencies, or other investors. Berkadia also 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. At February 28, 2022, the aggregate amount of commercial paper outstanding was $1.47 billion.
FXCM
We have a 50% voting interest in FXCM, a provider of online foreign exchange trading services. 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 and tradename over their respective useful lives (weighted average life of 11 years).
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.
Linkem
We own approximately 42% of the common shares of Linkem, the largest fixed wireless broadband services provider in Italy. In addition, we own convertible preferred stock, which is automatically convertible to common shares in 2026, redeemable preferred stock with a redemption value of $107.3 million at February 28, 2022, and warrants. If all of our convertible preferred stock was converted and warrants were exercised, it would increase our ownership to approximately 57% of Linkem's common equity at February 28, 2022. We have approximately 48% of the total voting securities of Linkem. We account for our equity interest in Linkem on a two month lag.
Asset Management Companies
Through Jefferies Group, we have asset management equity method investments that consist of our shares in Monashee Holdings LLC ("Monashee") and Oak Hill Capital Management LLC, OHCP GenPar Holdco, LP, Oak Hill Capital Management Partners III, LP and Oak Hill Capital Partners IV (Management), LP (collectively the "Oak Hill entities"). Monashee, an investment management company, is a registered investment advisor and general partner of various investment management funds and provides us with a 50% voting rights interest and the rights to distributions of approximately 47.5% of the annual net profits of Monashee's operations if certain thresholds are met. The Asset Management companies investments also consist of membership interests and limited partnership interests of approximately 15% in the Oak Hill investment management company and registered investment advisor and the Oak Hill general partner entity, which is entitled to carried interest from certain Oak Hill managed funds. A portion of the carrying amount of these investments relates to contract and customer relationship and client relationship intangible assets and goodwill. The intangible assets are amortized over their useful life and the goodwill is not amortized.
Real Estate Companies
Real estate equity method investments primarily consist of HomeFed's interests in Brooklyn Renaissance Plaza and Hotel and 54 Madison. These equity interests are accounted for on a two month lag.
Brooklyn Renaissance Plaza is comprised of a hotel operated by Marriott, an office building complex and a parking garage located in Brooklyn, New York. HomeFed owns a 25.4% equity interest in the hotel and a 61.25% equity interest in the office building and garage. Although HomeFed has a majority interest in the office building and garage, it does not have control, but only has the ability to exercise significant influence on this investment. As such, HomeFed accounts for the office building and garage under the equity method of accounting. We are amortizing our basis difference between the estimated fair value and the underlying book value of Brooklyn Renaissance office building and garage over the respective useful lives (weighted average life of 39 years).
We own approximately 48.1% of 54 Madison, a fund that owns interests in three real estate projects and is in the process of being liquidated.
Note 9. Intangible Assets, Net and Goodwill
A summary of Intangible assets, net and goodwill is as follows (in thousands):
| | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
Indefinite-lived intangibles: | | | |
Exchange and clearing organization membership interests and registrations | $ | 7,727 | | | $ | 7,732 | |
| | | |
Amortizable intangibles: | | | |
Customer and other relationships, net of accumulated amortization of $130,192 and $128,012 | 40,726 | | | 42,808 | |
Trademarks and tradenames, net of accumulated amortization of $33,207 and $32,244 | 95,712 | | | 96,509 | |
| | | |
Other, net of accumulated amortization of $11,867 and $11,329 | 4,815 | | | 5,353 | |
Total intangible assets, net | 148,980 | | | 152,402 | |
| | | |
Goodwill: | | | |
Investment Banking and Capital Markets (1) | 1,562,571 | | | 1,561,928 | |
Asset Management | 143,000 | | | 143,000 | |
Real estate | 36,711 | | | 36,711 | |
Other operations | 3,459 | | | 3,459 | |
Total goodwill | 1,745,741 | | | 1,745,098 | |
| | | |
Total intangible assets, net and goodwill | $ | 1,894,721 | | | $ | 1,897,500 | |
(1) The increase in Investment Banking and Capital Markets goodwill during the three months ended February 28, 2022, primarily relates to translation adjustments.
Amortization expense on intangible assets was $3.5 million and $3.6 million for the three months ended February 28, 2022 and 2021, respectively.
The estimated aggregate future amortization expense for the intangible assets for each of the next five fiscal years is as follows (in thousands):
| | | | | |
Remainder of current year | $ | 7,558 | |
2023 | 9,900 | |
2024 | 9,143 | |
2025 | 8,633 | |
2026 | 8,606 | |
Note 10. Short-Term Borrowings
Our short-term borrowings, which mature in one year or less, are as follows (in thousands):
| | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
Bank loans (1) | $ | 461,053 | | | $ | 215,063 | |
| | | |
Floating rate puttable notes (1) | 6,800 | | | 6,800 | |
| | | |
Total short-term borrowings | $ | 467,853 | | | $ | 221,863 | |
(1) These short-term borrowings are recorded at cost in the Consolidated Statements of Financial Condition, which is a reasonable approximation of their fair values due to their liquid and short-term nature.
At February 28, 2022 and November 30, 2021, the weighted average interest rate on short-term borrowings outstanding was 1.52% and 1.41% per annum, respectively.
At February 28, 2022 and November 30, 2021, Jefferies Group's borrowings under credit facilities classified within bank loans in Short-term borrowings in the Consolidated Statements of Financial Condition were $400.0 million and $200.0 million, respectively. Jefferies Group's borrowings include credit facilities that contain certain covenants that, among other things, require it to maintain a specified level of tangible net worth, require a minimum regulatory net capital requirement for its U.S. broker-dealer, Jefferies LLC, and impose certain restrictions on the future indebtedness of certain of its subsidiaries that are borrowers. Interest is based on rates at spreads over the federal funds rate or other adjusted rates, as defined in the various credit agreements, or at a rate as agreed between the bank and Jefferies Group in reference to the bank's cost of funding. At February 28, 2022, Jefferies Group was in compliance with all covenants under these credit facilities.
Note 11. Long-Term Debt
Principal amounts included in the table below are shown net of unamortized discounts, premiums and debt issuance costs (dollars in thousands).
| | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
Parent Company Debt: | | | |
Senior Notes: | | | |
5.50% Senior Notes due October 18, 2023, $441,748 principal | $ | 440,330 | | | $ | 440,120 | |
6.625% Senior Notes due October 23, 2043, $250,000 principal | 246,904 | | | 246,888 | |
Total long-term debt – Parent Company | 687,234 | | | 687,008 | |
| | | |
Subsidiary Debt (non-recourse to Parent Company): | | | |
Jefferies Group Unsecured Long-term Debt: | | | |
1.00% Euro Medium Term Notes, due July 19, 2024, $560,975 and $566,150 principal | 559,925 | | | 564,985 | |
4.85% Senior Notes, due January 15, 2027, $750,000 principal (1) | 757,872 | | | 775,550 | |
6.45% Senior Debentures, due June 8, 2027, $350,000 principal | 365,909 | | | 366,556 | |
4.15% Senior Notes, due January 23, 2030, $1,000,000 principal | 990,769 | | | 990,525 | |
2.625% Senior Notes due October 15, 2031, $1,000,000 principal | 970,927 | | | 988,059 | |
2.75% Senior Notes, due October 15, 2032, $500,000 principal (1) | 445,542 | | | 460,724 | |
6.25% Senior Debentures, due January 15, 2036, $495,000 principal | 505,151 | | | 505,267 | |
6.50% Senior Notes, due January 20, 2043, $391,000 principal | 409,815 | | | 409,926 | |
Floating Rate Senior Notes, due October 29, 2071 | 61,706 | | | 61,703 | |
Jefferies Group Unsecured Revolving Credit Facility | 349,105 | | | 348,951 | |
Structured Notes (2) | 1,762,163 | | | 1,843,598 | |
Jefferies Group Secured Long-term Debt: | | | |
Jefferies Group Secured Credit Facilities (3) | 609,091 | | | 706,608 | |
Jefferies Group Secured Bank Loan | 100,000 | | | 100,000 | |
HomeFed EB-5 Program debt | 207,471 | | | 203,132 | |
HomeFed construction loans | 45,716 | | | 45,581 | |
| | | |
Vitesse Energy Revolving Credit Facility | 67,636 | | | 67,572 | |
| | | |
Total long-term debt – subsidiaries | 8,208,798 | | | 8,438,737 | |
| | | |
Long-term debt | $ | 8,896,032 | | | $ | 9,125,745 | |
(1) Amounts include net gains of $50.5 million and $46.8 million during the three months ended February 28, 2022 and 2021, respectively, associated with interest rate swaps based on designation as fair value hedges. See Note 4 for further information.
(2) 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 (loss) and changes in fair value resulting from non-credit components recognized in Principal transactions revenues. Gains and losses in the fair value of structured notes resulting from non-credit components are recognized within Other operating activities in the Consolidated Statements of Cash Flow.
(3) Amounts include $82.6 million at November 30, 2021 related to Foursight credit facilities. In the first quarter of 2022, Foursight was transferred to Jefferies Group.
Subsidiary Debt:
During the three months ended February 28, 2022, structured notes with a total principal amount of approximately $71.2 million, net of retirements, were issued by Jefferies Group.
At February 28, 2022 and November 30, 2021, borrowings under several of Jefferies Group's credit facilities classified within Long-term debt amounted to $958.2 million and $972.9 million, respectively. Interest on these credit facilities is based on adjusted LIBOR rates or other adjusted rates, as defined in the various credit agreements. The credit facility agreements contain certain covenants that, among other things, require Jefferies Group to maintain specified levels of tangible net worth and liquidity amounts, and impose certain restrictions on future indebtedness of and require specified levels of regulated capital and cash reserves for certain of its subsidiaries. At February 28, 2022, Jefferies Group was in compliance with all covenants under theses credit facilities.
In addition, one of Jefferies Group's subsidiaries has a Loan and Security Agreement with a bank for a term loan ("Jefferies Group Secured Bank Loan"). At both February 28, 2022 and November 30, 2021, borrowings under the Jefferies Group Secured Bank Loan amounted to $100.0 million and are also classified within Long-term debt. The Jefferies Group Secured Bank Loan matures on September 13, 2024 and is collateralized by certain trading securities with an interest rate of 1.25% plus LIBOR. The agreement contains certain covenants that, among other things, restricts lien or encumbrance upon any of the pledged collateral. At February 28, 2022, Jefferies Group was in compliance with all covenants under the Jefferies Group Secured Bank Loan.
HomeFed funds certain of its real estate projects in part by raising funds under the Immigrant Investor Program administered by the U.S. Citizenship and Immigration Services pursuant to the Immigration and Nationality Act ("EB-5 Program"). This program was created to stimulate the U.S. economy through the creation of jobs and capital investments in U.S. companies by foreign investors. This debt is secured by certain real estate of HomeFed. At February 28, 2022, HomeFed was in compliance with all debt covenants which include, among other requirements, limitations on incurrence of debt, collateral requirements and restricted use of proceeds. Primarily all of HomeFed's EB-5 Program debt matures in 2024 and 2025.
At February 28, 2022, HomeFed has construction loans with an aggregate committed amount of $148.6 million. The proceeds are being used for construction at certain of its real estate projects. The outstanding principal amount of the loans bear interest based on spreads of 2.15% to 3.15%, over the 30-day LIBOR, subject to adjustment on the first of each calendar month. At February 28, 2022, the weighted average interest rate on these loans was 3.39%. The loans mature between September 2022 and May 2024 and are collateralized by the property underlying the related project with a guarantee by HomeFed. At February 28, 2022 and November 30, 2021, $46.8 million and $46.8 million, respectively, was outstanding under the construction loan agreements.
Vitesse Energy has a revolving credit facility with a syndicate of banks that matures in April 2023 and has a maximum borrowing base of $140.0 million at February 28, 2022. Amounts outstanding under the facility at February 28, 2022 and November 30, 2021 were $68.0 million and $68.0 million, respectively. Borrowings under the facility have been made as Eurodollar loans that bear interest at adjusted LIBOR plus a spread ranging from 2.75% to 3.75% based on the borrowing base utilization percentage. The credit facility is guaranteed by Vitesse Energy's subsidiaries and is collateralized with a minimum of 85% of Vitesse Energy's proved reserve value of its oil and gas properties. Vitesse Energy's borrowing base is subject to regular re-determination on or about April 1 and October 1 of each year based on proved oil and gas reserves, hedge positions and estimated future cash flows from these reserves calculated using future commodity pricing provided by Vitesse Energy's lenders.
Note 12. Mezzanine Equity
Redeemable Noncontrolling Interests
At February 28, 2022 and November 30, 2021, redeemable noncontrolling interests include other redeemable noncontrolling interests of $14.0 million and $25.4 million, respectively, primarily related to our oil and gas exploration and development businesses.
Mandatorily Redeemable Convertible Preferred Shares
We have one series of callable mandatorily redeemable cumulative convertible preferred shares ("Preferred Shares"). Our 125,000 Preferred Shares are callable beginning January 2023 at a price of $1,000 per share, plus accrued interest and are mandatorily redeemable in 2038 for $125.0 million. The Preferred Shares have a dividend rate equal to the sum of 3.25% annual, cumulative cash dividend, plus an additional quarterly payment based on the amount by which our common stock dividends exceed $0.0625 per common share. The Preferred Shares are currently convertible into 4,440,863 common shares, an effective conversion price of $28.15 per share. Based on the quarterly dividend of $0.30 per common share, the effective rate on these Preferred Shares is approximately 6.6%.
Note 13. 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 incentive awards. Sign-on and retention awards are generally subject to annual ratable vesting over a multi-year service period and are amortized as compensation expense on a straight-line basis over the service period. Restricted stock and RSUs are granted to certain senior executives and may contain market, performance and/or 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 conditions are not met. Awards with performance conditions are amortized over the service period if, and to the extent, it is determined to be probable that the performance condition will be achieved. If awards are forfeited due to failure to achieve performance conditions or failure to satisfy service conditions, any previously recognized expense for such awards is reversed.
Senior Executive Compensation Plan.
In December 2021, our senior executives were granted RSUs containing service conditions, including a special leadership continuity grant, as well as RSUs that contain both service and performance conditions. For the three months ended February 28, 2022, we recorded $5.2 million of stock-based compensation related to these awards.
In December 2020, our senior executives were granted nonqualified stock options and stock appreciation rights ("SARs"). The total initial fair value of the stock options and SARs were recorded as expense at the time of the grant, as both awards have no future service requirements. For the three months ended February 28, 2021, we recorded $46.4 million of total Compensation and benefits expense relating to the stock options and SARs, of which $12.9 million was stock-based compensation and $33.5 million related to the SAR awards.
Share-Based Compensation Expense. Share-based compensation expense relating to grants made under our share-based compensation plans was $9.7 million and $20.7 million (including $12.9 million related to the senior executive stock option award, as discussed above) for the three months ended February 28, 2022 and 2021, respectively. Total compensation cost includes the amortization of sign-on, retention and senior executive awards, less forfeitures and clawbacks. At February 28, 2022, total unrecognized compensation cost related to nonvested share-based compensation plans was $113.1 million; this cost is expected to be recognized over a weighted average period of 3.7 years.
At February 28, 2022, there were 1,545,000 shares of restricted stock outstanding with future service required, 4,173,000 RSUs outstanding with future service required (including target RSUs that may be issued under the senior executive compensation plan), 12,293,000 RSUs outstanding with no future service required, 5,063,000 stock options outstanding and 1,088,000 shares issuable under other plans. Additionally, the Preferred Shares are currently convertible into 4,440,863 common shares at an effective conversion price of $28.15 per share. The maximum potential increase to common shares outstanding resulting from these outstanding awards and the Preferred Shares is 27,058,000 at February 28, 2022.
Restricted Cash Awards. Jefferies Group provides compensation to certain new and existing employees in the form of loans and/or other cash awards that are subject to ratable vesting terms with service requirements. These awards are amortized as compensation expense over the relevant service period, which is generally considered to start at the beginning of the annual compensation year. At February 28, 2022, the remaining unamortized amount of the restricted cash awards was $298.1 million and is included within Other assets in the Consolidated Statement of Financial Condition; this cost is expected to be recognized over a weighted average period of 3 years.
Note 14. Accumulated Other Comprehensive Income (Loss)
Activity in accumulated other comprehensive income (loss) 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 (loss), net of taxes is as follows (in thousands):
| | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
Net unrealized gains on available for sale securities | $ | 96 | | | $ | 269 | |
Net unrealized foreign exchange losses | (166,515) | | | (166,499) | |
Net unrealized losses on instrument-specific credit risk | (112,238) | | | (153,672) | |
| | | |
Net minimum pension liability | (51,651) | | | (52,241) | |
Total accumulated other comprehensive income (loss) | $ | (330,308) | | | $ | (372,143) | |
Amounts reclassified out of accumulated other comprehensive income (loss) to net income are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Income (Loss) Components | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | Affected Line Item in the Consolidated Statements of Operations |
| | For the Three Months Ended February 28, | | |
| | 2022 | | 2021 | | |
| | | | | | |
| | | | | | |
Net unrealized gains (losses) on instrument- specific credit risk, net of income tax provision (benefit) of $(7) and $71 | | $ | (22) | | | $ | 222 | | | Principal transactions revenues |
| | | | | | |
Amortization of defined benefit pension plan actuarial losses, net of income tax benefit of $(208) and $(261) | | (590) | | | (786) | | | Selling, general and other expenses, which includes pension expense |
Total reclassifications for the period, net of tax | | $ | (612) | | | $ | (564) | | | |
Note 15. 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 February 28, |
| | | | | 2022 | | 2021 |
Revenues from contracts with customers: | | | | | | | |
Commissions and other fees | | | | | $ | 229,316 | | | $ | 236,769 | |
Investment banking | | | | | 945,048 | | | 1,003,612 | |
| | | | | | | |
Other | | | | | 232,678 | | | 192,262 | |
Total revenues from contracts with customers | | | | | 1,407,042 | | | 1,432,643 | |
| | | | | | | |
Other sources of revenue: | | | | | | | |
Principal transactions | | | | | 249,155 | | | 919,901 | |
Interest income | | | | | 213,981 | | | 240,497 | |
Other | | | | | 72,622 | | | 110,547 | |
Total revenues from other sources | | | | | 535,758 | | | 1,270,945 | |
| | | | | | | |
Total revenues | | | | | $ | 1,942,800 | | | $ | 2,703,588 | |
Revenues from contracts with customers are 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. We earn commission and other fee 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. Commission revenues are generally paid on settlement date and we record a receivable between trade-date and payment on settlement date. We permit 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. We act as an agent in the soft dollar arrangements as the customer controls the use of the soft dollars and directs our payments to third-party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues in the Consolidated Statements of Operations. We also earn investment research fees for the sales of our proprietary investment research when a contract with a client has been identified. The delivery of investment research services represents a distinct performance obligation that is satisfied over time when the performance obligation is to provide ongoing access to a research platform or research analysts, with fees recognized on a straight-line basis over the period in which the performance obligation is satisfied. The performance obligation is satisfied at a point in time when the performance obligation is to provide individual interactions with research analysts or research events, with fees recognized on the interaction date.
We earn account advisory and distribution fees in connection with wealth management services. Account advisory fees are recognized over time using the time-elapsed method as we 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 the uncertainties with respect to the amounts are resolved.
Investment Banking. We provide our clients with a full range of financial advisory and underwriting services. 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 our clients simultaneously receive and consume the benefits of those services as they are provided. A significant portion of the fees we receive for our 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. We recognize 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 our clients are recognized as Investment banking revenues.
Underwriting 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 securities transactions and structuring, underwriting and distributing public and private debt, including investment grade debt, high yield bonds, leveraged loans, municipal bonds and mortgage-backed 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 underwriting offering at that point. Costs associated with underwriting transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded, and are recorded on a gross basis within underwriting costs in the Consolidated Statements of Operations as we are acting as a principal in the arrangement. Any expenses reimbursed by our clients are recognized as Investment banking revenues.
Asset Management Fees. We 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 our performance fees is annual or semi-annual. 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. Manufacturing revenues are included in Other revenues.
Disaggregation of Revenue
The following presents our revenues from contracts with customers disaggregated by major business activity and primary geographic regions (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments (1) | | | | |
| | Investment Banking and Capital Markets | | Asset Management | | Merchant Banking | | Corporate | | Reconciling Items -Consolidation Adjustments | | Total |
Three months ended February 28, 2022 | | | | | | | | | | |
Major Business Activity: | | | | | | | | | | | | |
Investment Banking - Advisory | | $ | 543,769 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 543,769 | |
Investment Banking - Underwriting | | 401,279 | | | — | | | — | | | — | | | — | | | 401,279 | |
Equities (2) | | 226,068 | | | — | | | — | | | — | | | (137) | | | 225,931 | |
Fixed Income (2) | | 3,385 | | | — | | | — | | | — | | | — | | | 3,385 | |
Asset Management | | — | | | 12,569 | | | — | | | — | | | — | | | 12,569 | |
Manufacturing revenues | | — | | | — | | | 141,108 | | | — | | | — | | | 141,108 | |
Oil and gas revenues | | — | | | — | | | 57,919 | | | — | | | — | | | 57,919 | |
Other revenues | | — | | | — | | | 21,082 | | | — | | | — | | | 21,082 | |
Total revenues from contracts with customers | | $ | 1,174,501 | | | $ | 12,569 | | | $ | 220,109 | | | $ | — | | | $ | (137) | | | $ | 1,407,042 | |
| | | | | | | | | | | | |
Primary Geographic Region: | | | | | | | | | | | | |
Americas | | $ | 937,070 | | | $ | 12,569 | | | $ | 219,229 | | | $ | — | | | $ | (137) | | | $ | 1,168,731 | |
Europe | | 166,172 | | | — | | | 558 | | | — | | | — | | | 166,730 | |
Asia Pacific | | 71,259 | | | — | | | 322 | | | — | | | — | | | 71,581 | |
Total revenues from contracts with customers | | $ | 1,174,501 | | | $ | 12,569 | | | $ | 220,109 | | | $ | — | | | $ | (137) | | | $ | 1,407,042 | |
| | | | | | | | | | | | |
Three months ended February 28, 2021 | | | | | | | | | | |
Major Business Activity: | | | | | | | | | | | | |
Investment Banking - Advisory | | $ | 311,439 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 311,439 | |
Investment Banking - Underwriting | | 692,173 | | | — | | | — | | | — | | | — | | | 692,173 | |
Equities (2) | | 233,539 | | | — | | | — | | | — | | | (169) | | | 233,370 | |
Fixed Income (2) | | 3,399 | | | — | | | — | | | — | | | — | | | 3,399 | |
Asset Management | | — | | | 7,426 | | | — | | | — | | | — | | | 7,426 | |
Manufacturing revenues | | — | | | — | | | 137,847 | | | — | | | — | | | 137,847 | |
Oil and gas revenues | | — | | | — | | | 32,009 | | | — | | | — | | | 32,009 | |
Other revenues | | — | | | — | | | 14,980 | | | — | | | — | | | 14,980 | |
Total revenues from contracts with customers | | $ | 1,240,550 | | | $ | 7,426 | | | $ | 184,836 | | | $ | — | | | $ | (169) | | | $ | 1,432,643 | |
| | | | | | | | | | | | |
Primary Geographic Region: | | | | | | | | | | | | |
Americas | | $ | 1,026,866 | | | $ | 7,097 | | | $ | 184,338 | | | $ | — | | | $ | (169) | | | $ | 1,218,132 | |
Europe | | 163,737 | | | 329 | | | 369 | | | — | | | — | | | 164,435 | |
Asia Pacific | | 49,947 | | | — | | | 129 | | | — | | | — | | | 50,076 | |
Total revenues from contracts with customers | | $ | 1,240,550 | | | $ | 7,426 | | | $ | 184,836 | | | $ | — | | | $ | (169) | | | $ | 1,432,643 | |
(1) In the first quarter of 2022, we transferred certain Merchant Banking net assets to our Investment Banking and Capital Markets and Asset Management segments. Prior year amounts have been reclassified to conform to current segment reporting.
(2) 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 February 28, 2022. 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 February 28, 2022.
We recognized $35.0 million and $33.6 million during the three months ended February 28, 2022 and 2021, respectively, of revenues related to performance obligations satisfied (or partially satisfied) in previous periods, mainly due to resolving uncertainties in variable consideration that was constrained in prior periods. In addition, we recognized $3.5 million and $2.9 million during the three months ended February 28, 2022 and 2021, respectively, of revenues primarily associated with distribution services, a portion of which relates to prior periods.
Contract Balances
The timing of our revenue recognition may differ from the timing of payment by customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment, and we record a contract asset when we have transferred goods, services or assets to a customer, but payment is contingent upon additional performance obligations. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.
We had receivables related to revenues from contracts with customers of $290.8 million and $298.7 million at February 28, 2022 and November 30, 2021, respectively, and we had contract assets related to revenues from contracts with customers of $21.0 million and $25.2 million at February 28, 2022 and November 30, 2021, respectively. We had no significant impairments related to these receivables or contract assets during the three months ended February 28, 2022 and 2021.
Our deferred revenue primarily includes deferred revenue related to our real estate operations and retainer and milestone fees received in investment banking advisory engagements where the performance obligations have not yet been satisfied. Deferred revenues were $30.5 million and $49.7 million at February 28, 2022 and November 30, 2021, respectively, which are recorded in Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition. During the three months ended February 28, 2022, we recognized $18.0 million of deferred revenue from the balance at November 30, 2021. During the three months ended February 28, 2021, we recognized $6.9 million of deferred revenue from the balance at November 30, 2020.
Contract Costs
We capitalize 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 February 28, 2022 and November 30, 2021, capitalized costs to fulfill a contract were $1.1 million and $1.6 million, respectively, which are recorded in Receivables in the Consolidated Statements of Financial Condition. We recognized expenses of $1.0 million and $1.2 million during the three months ended February 28, 2022 and 2021, respectively, related to costs to fulfill a contract that were capitalized as of the beginning of the period. There were no significant impairment charges recognized in relation to these capitalized costs during the three months ended February 28, 2022 and 2021.
Note 16. Income Taxes
The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions was $446.9 million (including $101.0 million for interest) at February 28, 2022, of which $287.1 million related to Jefferies Group, and was $436.9 million (including $97.9 million for interest) at November 30, 2021, of which $273.2 million related to Jefferies Group. If recognized, such amounts would lower our effective tax rate. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
The net deferred tax asset was $382.7 million and $327.5 million at February 28, 2022 and November 30, 2021, respectively. The deferred tax asset is predominately attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, the largest component of which relates to compensation and benefits. The deferred tax asset is included in Other assets in the Consolidated Statements of Financial Condition.
We are currently under examination by a number of taxing jurisdictions. Though we do not expect that resolution of these examinations will have a material effect on our consolidated financial position, they may have a material impact on our consolidated results of operations for the period in which resolution occurs.
The table below summarizes the earliest tax years that remain subject to examination in the major tax jurisdictions in which we operate:
| | | | | | | | |
Jurisdiction | | Tax Year |
United States | | 2018 |
New York State | | 2001 |
New York City | | 2006 |
United Kingdom | | 2020 |
Hong Kong | | 2015 |
Germany | | 2017 |
Our provision for income taxes for the three months ended February 28, 2022 was $64.4 million, representing an effective tax rate of 16.4%. The provision for income taxes for the three months ended February 28, 2022 includes the recognition of an excess tax benefit relating to the conversion of RSUs to common shares. Our provision for income taxes for the three months ended February 28, 2021 was $218.2 million, representing an effective tax rate of 27.3%.
Note 17. Common Share and Earnings Per Common Share
Basic and diluted earnings per share amounts were calculated by dividing net income by the weighted average number of common shares outstanding. The numerators and denominators used to calculate basic and diluted earnings per share are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Numerator for earnings per share: | | | | | | | |
Net income attributable to Jefferies Financial Group Inc. common shareholders | | | | | $ | 327,447 | | | $ | 582,435 | |
Allocation of earnings to participating securities (1) | | | | | (1,976) | | | (3,216) | |
Net income attributable to Jefferies Financial Group Inc. common shareholders for basic earnings per share | | | | | 325,471 | | | 579,219 | |
Adjustment to allocation of earnings to participating securities related to diluted shares (1) | | | | | 39 | | | 42 | |
Mandatorily redeemable convertible preferred share dividends | | | | | 2,070 | | | 1,626 | |
Net income attributable to Jefferies Financial Group Inc. common shareholders for diluted earnings per share | | | | | $ | 327,580 | | | $ | 580,887 | |
| | | | | | | |
Denominator for earnings per share: | | | | | | | |
Weighted average common shares outstanding | | | | | 241,963 | | | 249,352 | |
Weighted average shares of restricted stock outstanding with future service required | | | | | (1,557) | | | (1,461) | |
Weighted average RSUs outstanding with no future service required | | | | | 17,146 | | | 18,495 | |
Denominator for basic earnings per share – weighted average shares | | | | | 257,552 | | | 266,386 | |
Stock options and other share based awards | | | | | 1,892 | | | 208 | |
Senior executive compensation plan awards | | | | | 2,686 | | | 1,846 | |
Mandatorily redeemable convertible preferred shares | | | | | 4,441 | | | 4,441 | |
Denominator for diluted earnings per share | | | | | 266,571 | | | 272,881 | |
(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 1,571,000 and 1,482,000 for the three months ended February 28, 2022 and 2021, respectively. Dividends declared on
participating securities were not material during the three months ended February 28, 2022 and 2021. Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.
Our Board of Directors from time to time has authorized the repurchase of our common shares. In January 2022, the Board of Directors increased the share repurchase authorization by $87.5 million. During the first quarter of 2022, we purchased a total of 10,038,189 of our common shares for $364.2 million, or an average price of $36.28 per share, including 6,848,095 of our common shares in the open market for $250.0 million under our current Board of Director authorization, and 3,190,094 shares of our common stock for $114.2 million in connection with net-share settlements under our equity compensation plan. At February 28, 2022, we had no remaining authorization of future repurchases. In March 2022, the Board of Directors increased the share repurchase authorization back up to $250.0 million.
Note 18. Commitments, Contingencies and Guarantees
Commitments
The following table summarizes commitments associated with certain business activities at February 28, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expected Maturity Date (Fiscal Years) | | |
| 2022 | | 2023 | | 2024 and 2025 | | 2026 and 2027 | | 2028 and Later | | Maximum Payout |
Equity commitments (1) | $ | 93.8 | | | $ | 27.3 | | | $ | 2.7 | | | $ | 5.2 | | | $ | 35.2 | | | $ | 164.2 | |
Loan commitments (1) | — | | | 275.3 | | | — | | | 60.0 | | | — | | | 335.3 | |
| | | | | | | | | | | |
Underwriting commitments | 116.9 | | | — | | | — | | | — | | | — | | | 116.9 | |
Forward starting reverse repos (2) | 9,616.7 | | | — | | | — | | | — | | | — | | | 9,616.7 | |
Forward starting repos (2) | 6,215.0 | | | — | | | — | | | — | | | — | | | 6,215.0 | |
Other unfunded commitments (1) | 25.0 | | | 477.0 | | | 5.4 | | | — | | | — | | | 507.4 | |
Total | $ | 16,067.4 | | | $ | 779.6 | | | $ | 8.1 | | | $ | 65.2 | | | $ | 35.2 | | | $ | 16,955.5 | |
(1)Equity commitments, loan commitments and other unfunded commitments are generally presented by contractual maturity date. The amounts are however mostly available on demand.
(2)At February 28, 2022, $9.58 billion within forward starting securities purchased under agreements to resell and all of the forward starting securities sold under agreements to repurchase settled within three business days.
Equity Commitments. Equity commitments include a commitment 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 consists of a team led by our President and a Director. At February 28, 2022, Jefferies Group's outstanding commitments relating to Jefferies Capital Partners, LLC and its private equity funds were $10.7 million.
See Note 8 for additional information regarding Jefferies Group's investment in Jefferies Finance.
Additionally, at February 28, 2022, we had other outstanding equity commitments to invest up to $71.8 million in the Oak Hill entities and $66.3 million in various other investments.
Loan Commitments. From time to time we make commitments to extend credit to investment banking and other clients in loan syndication and acquisition finance, and to strategic affiliates. 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 February 28, 2022, we had $85.3 million of outstanding loan commitments to clients.
Loan commitments outstanding at February 28, 2022 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 February 28, 2022, $0.0 million of Jefferies Group's $250.0 million commitment was funded.
Underwriting Commitments. In connection with investment banking activities, we may from time to time provide underwriting commitments to our clients in connection with capital raising transactions.
Forward Starting Reverse Repos and Repos. We enter 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, warehouse financings and debt securities 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. Our dealer activities cause us to make markets and trade in a variety of derivative instruments. Certain derivative contracts that we have 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 our maximum potential payout under these contracts.
The following table summarizes the notional amounts associated with our derivative contracts meeting the definition of a guarantee under GAAP as of February 28, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expected Maturity Date (Fiscal Years) | | |
Guarantee Type | 2022 | | 2023 | | 2024 and 2025 | | 2026 and 2027 | | 2028 and Later | | Notional/ Maximum Payout |
Derivative contracts – non-credit related | $ | 13,370.4 | | | $ | 8,083.3 | | | $ | 6,874.9 | | | $ | 1,621.7 | | | $ | — | | | $ | 29,950.3 | |
Written derivative contracts – credit related | — | | | — | | | 0.2 | | | — | | | — | | | 0.2 | |
Total derivative contracts | $ | 13,370.4 | | | $ | 8,083.3 | | | $ | 6,875.1 | | | $ | 1,621.7 | | | $ | — | | | $ | 29,950.5 | |
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). We substantially mitigate our exposure to market risk on these contracts through hedges, such as other derivative contracts and/or cash instruments, and we manage the risk associated with these contracts in the context of our overall risk management framework. We believe notional amounts overstate our expected payout and that fair value of these contracts is a more relevant measure of our obligations. At February 28, 2022, the fair value of derivative contracts meeting the definition of a guarantee is approximately $398.1 million.
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 February 28, 2022, the aggregate amount of commercial paper outstanding was $1.47 billion.
HomeFed. For real estate development projects, HomeFed is generally required to obtain infrastructure improvement bonds at the beginning of construction work and warranty bonds upon completion of such improvements. These bonds are issued by surety companies to guarantee satisfactory completion of a project and provide funds primarily to a municipality in the event HomeFed is unable or unwilling to complete certain infrastructure improvements. As HomeFed develops the planned area and the municipality accepts the improvements, the bonds are released. Should the respective municipality or others draw on the
bonds for any reason, certain of HomeFed's subsidiaries would be obligated to pay. At February 28, 2022, the aggregate amount of infrastructure improvement bonds outstanding was $75.7 million.
Other Guarantees. We are members of various exchanges and clearing houses. In the normal course of business, we provide 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. Our obligations under such guarantees could exceed the collateral amounts posted. Our maximum potential liability under these arrangements cannot be quantified; however, the potential for us to be required to make payments under such guarantees is deemed remote. Accordingly, no liability has been recognized for these arrangements. Additionally, we provide certain indemnifications in connection with third-party clearing and execution arrangements whereby a third-party may clear and settle transactions on behalf of our clients. These indemnifications generally have standard contractual terms and are entered into in the ordinary course of business. Our obligations in respect of such transactions are secured by the assets in our client's account, as well as any proceeds received from the transactions cleared and settled on behalf of our client. However, we believe that it is unlikely we would have to make any material payments under these arrangements and no material liabilities related to these indemnifications have been recognized.
Standby Letters of Credit. At February 28, 2022, we provided guarantees to certain counterparties in the form of standby letters of credit totaling $6.7 million. Standby letters of credit commit us 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. Primarily all letters of credit expire within one year.
Note 19. Net Capital Requirements
Jefferies LLC operates as a broker-dealer registered with the U.S. Securities and Exchange Commission ("SEC") and a member firm of the Financial Industry Regulatory Authority ("FINRA"). Jefferies LLC is subject to the SEC 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. FINRA is the designated examining authority for Jefferies LLC and the National Futures Association ("NFA") is the designated self-regulatory organization for Jefferies LLC as an FCM.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (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. Jefferies Financial Services, Inc. ("JFSI"), a registered swap dealer, is subject to the CFTC's regulatory capital requirements and holds regulatory capital in excess of the minimum regulatory requirement. Additionally, JFSI is registered as a security-based swap dealer with the SEC and is subject to the SEC's security-based swap dealer regulatory rules. Further, JFSI is approved by the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC's net capital requirements. As a security-based swap dealer and swap dealer, JFSI is subject to the net capital requirements of the SEC, CFTC and the NFA, as a member of the NFA. JFSI is required to maintain minimum net capital, as defined under SEC Rule 18a-1 of not less than the greater of 2% of the risk margin amount, as defined, or $20 million.
Jefferies LLC's net capital and excess net capital at February 28, 2022 were $1.79 billion and $1.68 billion, respectively. JFSI's net capital and excess net capital at February 28, 2022 were $427.6 million and $407.6 million, respectively.
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 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 20. 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):
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Receivables: | | | | | | | |
Notes and loans receivable (1) | $ | 836,151 | | | $ | 868,717 | | | $ | 835,009 | | | $ | 866,163 | |
| | | | | | | |
Financial Liabilities: | | | | | | | |
Short-term borrowings (2) | $ | 467,853 | | | $ | 467,853 | | | $ | 221,863 | | | $ | 221,863 | |
Long-term debt (3) | 7,133,869 | | | 7,543,237 | | | 7,282,147 | | | 8,004,211 | |
(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 carried at cost 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 21. Related Party Transactions
Jefferies Capital Partners Related Funds. Jefferies Group has equity investments in the JCP Manager and in private equity funds (including JCP Fund V), which are managed by a team led by our President and a Director ("Private Equity Related Funds"). Reflected in the Consolidated Statements of Financial Condition at February 28, 2022 and November 30, 2021 are Jefferies Group's equity investments in Private Equity Related Funds of $26.2 million and $27.1 million, respectively. Net gains (losses) from Jefferies Group's investment in JCP Fund V aggregating $0.9 million and $(0.5) million for the three months ended February 28, 2022 and 2021, respectively, were recorded in Principal transactions revenues. Gains (losses) for other funds were not material. For further information regarding our commitments and funded amounts to the Private Equity Related Funds, see Notes 7 and 18.
Berkadia Commercial Mortgage, LLC. At February 28, 2022 and November 30, 2021, Jefferies Group has commitments to purchase $431.0 million and $425.6 million, respectively, in agency commercial mortgage-backed securities from Berkadia.
Asset Management Investments. Through Jefferies Group, we have entered into an investment management agreement whereby Monashee provides asset management services to us for certain separately managed accounts. Our net investment balance in the separately managed accounts was $8.0 million and $13.6 million at February 28, 2022 and November 30, 2021, respectively.
We own limited partnership interests in certain Oak Hill managed funds of $4.1 million and $6.0 million at February 28, 2022 and November 30, 2021, respectively, which are measured at the NAV of the funds and included within Financial instruments owned, at fair value, in the Consolidated Statements of Financial Condition.
FXCM. Jefferies Group entered into a foreign exchange prime brokerage agreement with FXCM in 2017. In connection with the foreign exchange contracts entered into under this agreement, Jefferies Group had $0.6 million and $0.7 million at February 28, 2022 and November 30, 2021, respectively, included in Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition.
Officers, Directors and Employees. We had $20.9 million and $23.1 million of loans outstanding to certain officers and employees (none of whom are an executive officer or director of the Company) at February 28, 2022 and November 30, 2021, 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.
Note 22. Segment Information
We are engaged in investment banking and capital markets and asset management. We also own a legacy portfolio of businesses and investments that we historically denominated as our "Merchant Banking" business.
On December 1, 2021, we made a $477 million contribution of net assets, including both Merchant Banking and Asset Management investments, to Jefferies Group. The transferred Merchant Banking investments are now being managed by a different management team, while the Asset Management investments continue to be managed by the co-Presidents of Asset Management who oversee all asset management activities across the Company. As a result, we transferred $194 million of net assets out of our Merchant Banking segment: $139 million of these net assets, including $48 million of net assets relating to Foursight, were transferred into our Investment Banking and Capital Markets segment; the remaining $55 million of net assets transferred are now managed by the co-Presidents of Asset Management and are included in our Asset Management segment. Prior year amounts have been reclassified to conform to current segment reporting.
The Investment Banking and Capital Markets reportable segment includes investment banking, capital markets and other related services. Investment banking provides underwriting and financial advisory services to clients across most industry sectors in the Americas, Europe, the Middle East and Africa, and Asia Pacific. Capital markets businesses operate across the spectrum of equities and fixed income products.
Within Asset Management, we manage, invest in and provide services to a diverse group of alternative asset management platforms across a spectrum of investment strategies and asset classes. Asset Management offers institutional clients an innovative range of investment strategies through its affiliated managers.
Our Merchant Banking reportable segment consists of our various merchant banking businesses and investments, primarily including Linkem, Vitesse Energy and JETX Energy, real estate, Idaho Timber and FXCM.
Corporate assets primarily consist of cash and cash equivalents. Corporate revenues primarily include interest income.
Certain information concerning our segments is presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
Net revenues: | | | | | | | |
Reportable Segments: | | | | | | | |
Investment Banking and Capital Markets | | | | | $ | 1,481,818 | | | $ | 1,987,496 | |
Asset Management | | | | | 59,956 | | | 229,202 | |
Merchant Banking | | | | | 189,535 | | | 267,004 | |
Corporate | | | | | 746 | | | 590 | |
Total net revenues related to reportable segments | | | | | 1,732,055 | | | 2,484,292 | |
| | | | | | | |
Reconciling items - Consolidation adjustments | | | | | (140) | | | 2,650 | |
Total consolidated revenues | | | | | $ | 1,731,915 | | | $ | 2,486,942 | |
| | | | | | | |
Income (loss) before income taxes: | | | | | | | |
Reportable Segments: | | | | | | | |
Investment Banking and Capital Markets | | | | | $ | 420,885 | | | $ | 556,231 | |
Asset Management | | | | | 16,009 | | | 183,932 | |
Merchant Banking | | | | | (24,407) | | | 92,202 | |
Corporate | | | | | (11,764) | | | (20,477) | |
Income before income taxes related to reportable segments | | | | | 400,723 | | | 811,888 | |
Reconciling items - Parent Company interest | | | | | (8,391) | | | (13,902) | |
Reconciling items - Consolidation adjustments | | | | | — | | | 2,799 | |
Total consolidated income before income taxes | | | | | $ | 392,332 | | | $ | 800,785 | |
| | | | | | | |
Depreciation and amortization expenses: | | | | | | | |
Reportable Segments: | | | | | | | |
Investment Banking and Capital Markets | | | | | $ | 23,555 | | | $ | 20,710 | |
Asset Management | | | | | 362 | | | 479 | |
Merchant Banking | | | | | 21,596 | | | 16,714 | |
Corporate | | | | | 424 | | | 864 | |
| | | | | | | |
| | | | | | | |
Total consolidated depreciation and amortization expenses | | | | | $ | 45,937 | | | $ | 38,767 | |
| | | | | | | |
| | | | | February 28, 2022 | | November 30, 2021 |
Identifiable Assets Employed: | | | | | | | |
Reportable Segments: | | | | | | | |
Investment Banking and Capital Markets | | | | | $ | 52,646,088 | | | $ | 52,903,374 | |
Asset Management | | | | | 3,312,921 | | | 3,205,799 | |
Merchant Banking | | | | | 2,277,138 | | | 2,263,050 | |
Corporate | | | | | 2,215,945 | | | 2,432,927 | |
Identifiable assets related to reportable segments | | | | | 60,452,092 | | | 60,805,150 | |
| | | | | | | |
Reconciling items - Consolidation adjustments | | | | | (415,641) | | | (401,040) | |
Total consolidated assets | | | | | $ | 60,036,451 | | | $ | 60,404,110 | |
Interest expense classified as a component of Net revenues relates to Jefferies Group. For the three months ended February 28, 2022 and 2021, interest expense classified as a component of Expenses was primarily comprised of parent company interest ($8.4 million and $13.9 million, respectively) and Merchant Banking ($0.7 million and $0.9 million, respectively). Additionally, for the three months ended February 28, 2021, interest expense classified as a component of Expenses in the Investment Banking and Capital Markets reportable segment includes $5.6 million related to Foursight.
| | | | | |
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 November 30, 2021 (the "2021 10-K").
Results of Operations
We are engaged in investment banking and capital markets and asset management, and own a legacy portfolio of businesses and investments that we have historically denominated as our "Merchant Banking" business. On December 1, 2021, we made a $477 million contribution of net assets, including both Merchant Banking and Asset Management investments, to Jefferies Group. The transferred Merchant Banking investments are now being managed by a different management team, while the Asset Management investments continue to be managed by the co-Presidents of Asset Management who oversee all asset management activities across the Company. As a result, we transferred $194 million of net assets out of our Merchant Banking segment: $139 million of these net assets, including $48 million of net assets relating to Foursight Capital LLC ("Foursight"), were transferred into our Investment Banking and Capital Markets segment; the remaining $55 million of net assets transferred are now managed by the co-Presidents of Asset Management and are included in our Asset Management segment. Prior year amounts have been reclassified to conform to current segment reporting. The following tables present a summary of our financial results.
A summary of results of operations for the first quarter of 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Banking and Capital Markets | | Asset Management | | Merchant Banking | | Corporate | | Parent Company Interest | | Consolidation Adjustments | | Total |
| | | | | | | | | | | | | |
Net revenues | $ | 1,481,818 | | | $ | 59,956 | | | $ | 189,535 | | | $ | 746 | | | $ | — | | | $ | (140) | | | $ | 1,731,915 | |
| | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | |
Cost of sales | — | | | — | | | 95,671 | | | — | | | — | | | — | | | 95,671 | |
Compensation and benefits | 724,276 | | | 19,936 | | | 39,323 | | | 6,149 | | | — | | | — | | | 789,684 | |
Non-compensation expenses: | | | | | | | | | | | | | |
Floor brokerage and clearing fees | 72,166 | | | 11,795 | | | — | | | — | | | — | | | — | | | 83,961 | |
Selling, general and other expenses | 240,936 | | | 11,854 | | | 26,670 | | | 5,937 | | | — | | | (140) | | | 285,257 | |
Interest expense | — | | | — | | | 697 | | | — | | | 8,391 | | | — | | | 9,088 | |
Depreciation and amortization | 23,555 | | | 362 | | | 21,596 | | | 424 | | | — | | | — | | | 45,937 | |
Total non-compensation expenses | 336,657 | | | 24,011 | | | 48,963 | | | 6,361 | | | 8,391 | | | (140) | | | 424,243 | |
Total expenses | 1,060,933 | | | 43,947 | | | 183,957 | | | 12,510 | | | 8,391 | | | (140) | | | 1,309,598 | |
Income (loss) before income taxes and loss related to associated companies | 420,885 | | | 16,009 | | | 5,578 | | | (11,764) | | | (8,391) | | | — | | | 422,317 | |
Loss related to associated companies | — | | | — | | | (29,985) | | | — | | | — | | | — | | | (29,985) | |
Income (loss) before income taxes | $ | 420,885 | | | $ | 16,009 | | | $ | (24,407) | | | $ | (11,764) | | | $ | (8,391) | | | $ | — | | | 392,332 | |
Income tax provision | | | | | | | | | | | | | 64,357 | |
Net income | | | | | | | | | | | | | $ | 327,975 | |
A summary of results for the first quarter of 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Banking and Capital Markets | | Asset Management | | Merchant Banking | | Corporate | | Parent Company Interest | | Consolidation Adjustments | | Total |
| | | | | | | | | | | | | |
Net revenues | $ | 1,987,496 | | | $ | 229,202 | | | $ | 267,004 | | | $ | 590 | | | $ | — | | | $ | 2,650 | | | $ | 2,486,942 | |
| | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | |
Cost of sales | — | | | — | | | 95,559 | | | — | | | — | | | — | | | 95,559 | |
Compensation and benefits | 1,109,695 | | | 22,785 | | | 24,529 | | | 15,534 | | | — | | | — | | | 1,172,543 | |
Non-compensation expenses: | | | | | | | | | | | | | |
Floor brokerage and clearing fees | 66,574 | | | 9,842 | | | — | | | — | | | — | | | — | | | 76,416 | |
Selling, general and other expenses | 228,733 | | | 12,164 | | | 26,520 | | | 4,669 | | | — | | | (149) | | | 271,937 | |
Interest expense (1) | 5,553 | | | — | | | 912 | | | — | | | 13,902 | | | — | | | 20,367 | |
Depreciation and amortization | 20,710 | | | 479 | | | 16,714 | | | 864 | | | — | | | — | | | 38,767 | |
Total non-compensation expenses | 321,570 | | | 22,485 | | | 44,146 | | | 5,533 | | | 13,902 | | | (149) | | | 407,487 | |
Total expenses | 1,431,265 | | | 45,270 | | | 164,234 | | | 21,067 | | | 13,902 | | | (149) | | | 1,675,589 | |
Income (loss) before income taxes and loss related to associated companies | 556,231 | | | 183,932 | | | 102,770 | | | (20,477) | | | (13,902) | | | 2,799 | | | 811,353 | |
Loss related to associated companies | — | | | — | | | (10,568) | | | — | | | — | | | — | | | (10,568) | |
Income (loss) before income taxes | $ | 556,231 | | | $ | 183,932 | | | $ | 92,202 | | | $ | (20,477) | | | $ | (13,902) | | | $ | 2,799 | | | 800,785 | |
Income tax provision | | | | | | | | | | | | | 218,236 | |
Net income | | | | | | | | | | | | | $ | 582,549 | |
(1) Interest expense within Investment Banking and Capital Markets relates to Foursight and interest expense within Merchant Banking relates to Vitesse Energy, LLC ("Vitesse Energy") for the first quarter of 2021.
The composition of our financial results has varied over time and we expect will continue to evolve. Our strategy is designed to transform Jefferies into a pure financial services firm and, as such, we are focused on the development of our Investment Banking and Capital Markets, and Asset Management segments, while we continue to realize the value of or otherwise transform our investments in Merchant Banking. The following factors and events should be considered in evaluating our financial results as they impact comparisons:
Our financial results for the first quarter of 2022 were impacted by:
•Investment Banking and Capital Markets net revenues of $1.48 billion:
◦Investment Banking net revenues of $1.00 billion, including advisory net revenues of $543.8 million, equity underwriting net revenues of $156.1 million and debt underwriting net revenues of $245.2 million;
◦Combined Capital Markets net revenues of $479.8 million, including equities net revenues of $277.0 million and fixed income net revenues of $202.8 million;
•Asset Management revenues (before allocated net interest) of $74.0 million; and
•Pre-tax loss of $24.4 million related to our Merchant Banking businesses reflecting:
◦Strong results at Idaho Timber;
◦Unrealized hedging losses at Vitesse; and
◦Mark-to-market declines in the value of several of our investments in public companies.
Our financial results for the first quarter of 2021 were impacted by:
•Investment Banking and Capital Markets net revenues of $1.99 billion:
◦Investment banking net revenues of $1.09 billion, including advisory net revenues of $311.4 million, equity underwriting net revenues of $494.8 million and debt underwriting net revenues of $197.4 million;
◦Combined capital markets net revenues of $894.4 million, including equities net revenues of $531.0 million and fixed income net revenues of $363.4 million;
•Asset Management revenues (before allocated net interest) of $239.6 million; and
•Pre-tax income of $92.2 million related to our Merchant Banking businesses reflecting strong results from Idaho Timber and mark-to-market increases in the value of several of our investments in public and private companies.
Investment Banking and Capital Markets
A summary of results of operations for our Investment Banking and Capital Markets segment is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
| | | | | | | |
Net revenues | | | | | $ | 1,481,818 | | | $ | 1,987,496 | |
| | | | | | | |
Expenses: | | | | | | | |
Compensation and benefits | | | | | 724,276 | | | 1,109,695 | |
Non-compensation expenses: | | | | | | | |
Floor brokerage and clearing fees | | | | | 72,166 | | | 66,574 | |
Selling, general and other expenses | | | | | 240,936 | | | 228,733 | |
Interest expense | | | | | — | | | 5,553 | |
Depreciation and amortization | | | | | 23,555 | | | 20,710 | |
Total non-compensation expenses | | | | | 336,657 | | | 321,570 | |
Total expenses | | | | | 1,060,933 | | | 1,431,265 | |
Income before income taxes | | | | | $ | 420,885 | | | $ | 556,231 | |
Our Investment Banking and Capital Markets reportable segment 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. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and our own activities and positions.
Revenues by Source
Net revenues presented for our Investment Banking and Capital Markets reportable segment include allocations of interest income and interest expense as we assess the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective activities, including the net interest cost of allocated long-term debt, which is a function of the mix of each business's associated assets and liabilities and the related funding costs. We have made a change to the presentation of our “Revenues by Source” to present Jefferies Group's share of the net earnings of Berkadia Commercial Mortgage Holding LLC ("Berkadia") within Other investment banking net revenues, which was previously presented within the Other business category. We believe that this change to our revenue reporting better aligns with management's current view of our business activities related to commercial real estate investment banking and management reporting. Previously reported results are presented on a comparable basis.
The following provides a summary of net revenues by source (in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended February 28, |
| | | | | 2022 | | 2021 |
| | | | | | | |
Advisory | | | | | $ | 543,769 | | | $ | 311,439 | |
| | | | | | | |
Equity underwriting | | | | | 156,100 | | | 494,806 | |
Debt underwriting | | | | | 245,179 | | | 197,367 | |
Total underwriting | | | | | 401,279 | | | 692,173 | |
| | | | | | | |
Other investment banking | | | | | 58,134 | | | 83,022 | |
Total investment banking | | | | | 1,003,182 | | | 1,086,634 | |
| | | | | | | |
Equities | | | | | 277,047 | | | 531,016 | |
Fixed income | | | | | 202,800 | | | 363,359 | |
Total capital markets | | | | | 479,847 | | | 894,375 | |
| | | | | | | |
Other | | | | | (1,211) | | | 6,487 | |
Total Investment Banking and Capital Markets (1) | | | | | $ | 1,481,818 | | | $ | 1,987,496 | |
(1)Allocated net interest is not separately disaggregated in presenting our Investment Banking and Capital Markets reportable segment within our Net Revenues by Source. This presentation is aligned to our Investment Banking and Capital Markets internal performance measurement.
Investment Banking Revenues
Investment banking is comprised of revenues from:
• advisory services with respect to mergers/acquisitions, restructurings/recapitalizations and private capital advisory transactions;
• underwriting services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage-backed and asset-backed securities, and equity and equity-linked securities and loan syndication;
• our 50% share of net earnings from Jefferies Group's corporate lending joint venture, Jefferies Finance LLC ("Jefferies Finance");
• our 45% share of net earnings from Jefferies Group's commercial real estate joint venture, Berkadia;
• the results of operations of Foursight, Jefferies Group's wholly-owned subsidiary engaged in the lending and servicing of automobile loans; and
• securities and loans received or acquired in connection with our investment banking activities.
The following table sets forth our investment banking activities (dollars in billions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deals Completed | | | | | | Aggregate Value |
| For the Three Months Ended February 28, | | | | | | For the Three Months Ended February 28, |
| 2022 | | 2021 | | | | | | | | | | 2022 | | 2021 |
| | | | | | | | | | | | | | | |
Advisory transactions | 132 | | | 65 | | | | | | | | | | | $ | 138.8 | | | $ | 82.2 | |
Public and private equity and convertible offerings | 47 | | | 116 | | | | | | | | | | | $ | 12.1 | | | $ | 43.8 | |
Public and private debt financings | 176 | | | 163 | | | | | | | | | | | $ | 88.1 | | | $ | 76.7 | |
Investment banking revenues for the first quarter of 2022 were $1.00 billion, compared with $1.09 billion for the first quarter of 2021, reflecting higher revenues in mergers and acquisitions and debt underwriting, more than offset by lower revenues in equity underwriting.
Our advisory revenues were $543.8 million for the first quarter of 2022, up $232.3 million, or 74.6% higher than the prior year comparable quarter, as activity in the mergers and acquisitions markets remained strong and the number of our completed transactions continued to increase.
Total underwriting revenues for the first quarter of 2022 were $401.3 million, a decrease of 42.0%, from $692.2 million in the prior year comparable quarter, reflecting lower net revenues of $156.1 million in equity underwriting, partially offset by strong quarterly net revenues of $245.2 million in debt underwriting. The decline in our equity underwriting net revenues was consistent with the substantial reduction in industry-wide deal activity, including a slowdown in Special Purpose Acquisition Companies ("SPACs") transactions as compared with the prior year comparable quarter.
Other investment banking revenues were $58.1 million for the first quarter of 2022, compared with net revenues $83.0 million for the first quarter of 2021. Other investment banking revenues during the first quarter of 2022 include net revenues of $19.0 million from our share of the net earnings of our Jefferies Finance joint venture, compared with net revenues of $27.6 million in the prior year comparable quarter. Results in the current year quarter also include net revenues of $38.9 million due to our share of the net income of Berkadia compared with net revenues of $30.0 million from Berkadia in the prior year comparable quarter, primarily due to increased mortgage origination at Berkadia. Revenues from our share of the net earnings of Jefferies Finance and Berkadia are partially offset by allocated interest expense associated with the investments in Jefferies Finance and Berkadia. In addition, our other investment banking results for the first quarter of 2022 include net revenues of $21.8 million from Foursight, compared with net revenues of $22.3 million in the prior year comparable quarter. Other investment banking net revenues also include net mark-to-market losses of $13.7 million related to certain investments compared with net mark-to-market gains of $8.5 million in the prior year comparable quarter.
At February 28, 2022, the new issue markets are somewhat sluggish and while Jefferies Group's investment banking backlog remains strong, its realization of this backlog is sensitive to market conditions. As an indicator of net revenues in a given future period, backlog is subject to limitations. The time frame for the realization of revenues from these expected transactions varies and is influenced by factors we do not control. Transactions not included in our backlog may be completed, and expected transactions may be modified or cancelled.
Equities Net Revenues
Equities are comprised of net revenues from:
•services provided to our clients from which we earn commissions or spread revenue by executing, settling and clearing transactions for clients;
•advisory services offered to clients;
•financing, securities lending and other prime brokerage services offered to clients, including capital introductions and outsourced trading; and
•wealth management services.
Total equities net revenues were $277.0 million for the first quarter of 2022, compared with $531.0 million for the first quarter of 2021, which included all-time record results in predominately all our equities businesses and across each of our regions.
Results in Jefferies Group's global cash equities business reflected lower client activity across regions versus strong market volumes in the prior year comparable quarter. The prior year comparable quarter also benefited from trading opportunities related to SPACs. Jefferies Group's global convertibles business also had lower revenues primarily driven by weaker equity markets and widening credit spreads compared to a strong issuance market in the prior year comparable quarter.
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, distressed, emerging markets, municipal and sovereign securities and bank loans, as well as foreign exchange execution on behalf of clients;
•interest rate derivatives and credit derivatives; and
•financing services offered to clients.
Fixed income net revenues totaled $202.8 million for the first quarter of 2022, a decrease of 44.2% from net revenues of $363.4 million for the first quarter of 2021, primarily due to lower trading volumes in the face of inflation concerns and interest rate uncertainty and a reduction in investor demand for securitized products. The prior year comparable quarter results were reflective of particularly strong client activity and robust revenues from high levels of volatility.
Results across most of Jefferies Group's credit franchise and emerging markets business were lower on a slowdown in trading opportunities, as results in the prior year comparable quarter reflected robust revenues across regions and products, due to increased client trading activity. Additionally, trading conditions were difficult for municipal securities as compared to strong results in the prior year comparable quarter.
The lower results were partially offset by higher revenues in Jefferies Group's global rates businesses due to an increase in trading opportunities, as increased inflation expectations drove an increase in rates during the current year quarter.
Other
Other is comprised of revenues from:
•principal investments in private equity and hedge funds managed by third-parties, which are not part of our asset management platform and other strategic investment positions; and
• investments held as part of employee benefit plans, including deferred compensation plans (for which we incur an equal and offsetting amount of compensation expenses).
Our other net revenues were a loss of $1.2 million for the first quarter of 2022, a decrease of $7.7 million compared with net revenues of $6.5 million for the first quarter of 2021.
Compensation and Benefits
Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation and share-based awards and the amortization of share-based and cash compensation awards to employees. Cash and 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 such awards granted at year end as part of annual compensation is recorded during the year of the award. Compensation and benefits expense also includes amortization expense related to awards granted where vesting is contingent on future service. In addition, the awards to our Chief Executive Officer and President contain market and performance conditions and the awards are amortized over their service periods.
The following table provides a summary of compensation and benefits expense (in thousands):