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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-14947
 
JEFFERIES GROUP LLC
(Exact name of registrant as specified in its charter)
 
Delaware
95-4719745
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
520 Madison Avenue, New York, New York
10022
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 284-2550
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  
The Registrant is a wholly-owned subsidiary of Leucadia National Corporation and meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with a reduced disclosure format as permitted by Instruction H(2).
 



Table of Contents

JEFFERIES GROUP LLC
INDEX TO QUARTERLY REPORT ON FORM 10-Q
May 31, 2017
 
Page
 
 
 


1

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands)
 
May 31, 2017
 
November 30, 2016
ASSETS
 
 
 
Cash and cash equivalents ($6,265 and $16,805 at May 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)
$
4,356,793

 
$
3,529,069

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
919,011

 
857,337

Financial instruments owned, at fair value, (including securities pledged of $10,705,731 and $9,706,881 at May 31, 2017 and November 30, 2016, respectively; and $36,740 and $87,153 at May 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)
13,881,283

 
13,809,512

Investments in managed funds
169,476

 
186,508

Loans to and investments in related parties
765,039

 
653,872

Securities borrowed
7,900,395

 
7,743,562

Securities purchased under agreements to resell
4,345,461

 
3,862,488

Receivables:
 
 
 
Brokers, dealers and clearing organizations
2,850,938

 
2,009,163

Customers
1,215,410

 
843,114

Fees, interest and other ($217 and $1,547 at May 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)
399,378

 
310,894

Premises and equipment
290,046

 
265,553

Goodwill
1,643,271

 
1,640,653

Other assets ($2 and $0 at May 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)
1,342,506

 
1,229,551

Total assets
$
40,079,007

 
$
36,941,276

LIABILITIES AND EQUITY
 
 
 
Short-term borrowings
$
439,140

 
$
525,842

Financial instruments sold, not yet purchased, at fair value
9,004,535

 
8,359,202

Collateralized financings:
 
 
 
Securities loaned
3,446,853

 
2,819,132

Securities sold under agreements to repurchase
8,621,427

 
6,791,676

Other secured financings (includes $0 and $41,768 at fair value at May 31, 2017 and November 30, 2016, respectively; and $365,200 and $755,544 at May 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)
385,950

 
755,576

Payables:
 
 
 
Brokers, dealers and clearing organizations
2,330,452

 
3,290,404

Customers
2,598,073

 
2,297,292

Accrued expenses and other liabilities ($906 and $735 at May 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)
1,383,164

 
1,248,200

Long-term debt (includes $392,807 and $248,856 at fair value at May 31, 2017 and November 30, 2016, respectively)
6,304,032

 
5,483,355

Total liabilities
34,513,626

 
31,570,679

EQUITY
 
 
 
Member’s paid-in capital
5,721,873

 
5,538,103

Accumulated other comprehensive loss:
 
 
 
Currency translation adjustments
(129,121
)
 
(152,305
)
Changes in instrument specific credit risk
(18,872
)
 
(6,494
)
Additional minimum pension liability
(9,190
)
 
(9,358
)
Total accumulated other comprehensive loss
(157,183
)
 
(168,157
)
Total Jefferies Group LLC member’s equity
5,564,690

 
5,369,946

Noncontrolling interests
691

 
651

Total equity
5,565,381

 
5,370,597

Total liabilities and equity
$
40,079,007

 
$
36,941,276

See accompanying notes to consolidated financial statements.

2

Table of Contents

JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands)
 
Three Months Ended 
 May 31,
 
Six Months Ended 
 May 31,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Commissions and other fees
$
152,643

 
$
146,157

 
$
298,465

 
$
301,981

Principal transactions
287,070

 
318,180

 
508,027

 
214,807

Investment banking
351,863

 
253,046

 
759,884

 
483,976

Asset management fees and investment income (loss) from managed funds
(2,697
)
 
4,336

 
6,229

 
13,866

Interest
227,804

 
220,175

 
429,827

 
442,120

Other
22,272

 
(4,977
)
 
46,320

 
(26,728
)
Total revenues
1,038,955

 
936,917

 
2,048,752

 
1,430,022

Interest expense
259,661

 
217,509

 
473,945

 
411,627

Net revenues
779,294

 
719,408

 
1,574,807

 
1,018,395

Non-interest expenses:
 
 
 
 
 
 
 
Compensation and benefits
450,522

 
415,316

 
910,694

 
765,059

Non-compensation expenses:
 
 
 
 
 
 
 
Floor brokerage and clearing fees
47,494

 
43,591

 
93,352

 
84,070

Technology and communications
67,478

 
66,499

 
132,985

 
131,488

Occupancy and equipment rental
23,594

 
24,926

 
49,409

 
49,511

Business development
26,466

 
22,587

 
49,098

 
47,441

Professional services
26,413

 
29,526

 
58,537

 
53,038

Other
21,146

 
14,366

 
40,352

 
35,067

Total non-compensation expenses
212,591

 
201,495

 
423,733

 
400,615

Total non-interest expenses
663,113

 
616,811

 
1,334,427

 
1,165,674

Earnings (loss) before income taxes
116,181

 
102,597

 
240,380

 
(147,279
)
Income tax expense (benefit)
46,391

 
48,655

 
56,570

 
(34,452
)
Net earnings (loss)
69,790

 
53,942

 
183,810

 
(112,827
)
Net earnings attributable to noncontrolling interests
39

 
44

 
40

 
88

Net earnings (loss) attributable to Jefferies Group LLC
$
69,751

 
$
53,898

 
$
183,770

 
$
(112,915
)
See accompanying notes to consolidated financial statements.

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Table of Contents

JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
Three Months Ended 
 May 31,
 
Six Months Ended 
 May 31,
 
2017
 
2016
 
2017
 
2016
Net earnings (loss)
$
69,790

 
$
53,942

 
$
183,810

 
$
(112,827
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation and other adjustments
25,882

 
25,811

 
23,352

 
(23,859
)
Changes in instrument specific credit risk (1)
(2,683
)
 
(2,003
)
 
(12,378
)
 
(2,305
)
Total other comprehensive income (loss), net of tax (2)
23,199

 
23,808

 
10,974

 
(26,164
)
Comprehensive income (loss)
92,989

 
77,750

 
194,784

 
(138,991
)
Net earnings attributable to noncontrolling interests
39

 
44

 
40

 
88

Comprehensive income (loss) attributable to Jefferies Group LLC
$
92,950

 
$
77,706

 
$
194,744

 
$
(139,079
)

(1)
Includes income tax benefit of approximately $1.1 million and $7.4 million for the three and six months ended May 31, 2017, respectively, and approximately $1.5 million and $1.5 million for the three and six months ended May 31, 2016, respectively.
(2)
None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.
See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In thousands)
 
Six Months Ended 
 May 31, 2017
 
Year Ended 
 November 30, 2016
Member’s paid-in capital:
 
 
 
Balance, beginning of period
$
5,538,103

 
$
5,526,855

Net earnings attributable to Jefferies Group LLC
183,770

 
15,434

Tax detriment for issuance of share-based awards

 
(4,186
)
Balance, end of period
$
5,721,873

 
$
5,538,103

Accumulated other comprehensive income (loss) (1) (2):
 
 
 
Balance, beginning of period
$
(168,157
)
 
$
(44,946
)
Currency adjustments
23,184

 
(115,494
)
Changes in instrument specific credit risk, net of tax
(12,378
)
 
(6,494
)
Pension adjustments, net of tax
168

 
(1,223
)
Balance, end of period
(157,183
)
 
(168,157
)
Total Jefferies Group LLC member’s equity
$
5,564,690

 
$
5,369,946

Noncontrolling interests:
 
 
 
Balance, beginning of period
$
651

 
$
27,468

Net earnings (loss) attributable to noncontrolling interests
40

 
(28
)
Contributions

 
9,390

Distributions

 
(563
)
Deconsolidation of asset management company

 
(35,616
)
Balance, end of period
$
691

 
$
651

Total equity
$
5,565,381

 
$
5,370,597


(1)
The components of other comprehensive income (loss) are attributable to Jefferies Group LLC. None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.
(2)
There were no material reclassifications out of Accumulated other comprehensive income (loss) during the six months ended May 31, 2017 and the year ended November 30, 2016.
See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended 
 May 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
183,810

 
$
(112,827
)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
752

 
(2,945
)
(Income) loss on loans to and investments in related parties
(54,495
)
 
31,252

Distributions received on investments in related parties
6,189

 
8,108

Other adjustments
40,160

 
17,085

Net change in assets and liabilities:
 
 
 
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
(61,097
)
 
(85,446
)
Receivables:
 
 
 
Brokers, dealers and clearing organizations
(832,729
)
 
(339,496
)
Customers
(372,368
)
 
94,471

Fees, interest and other
(87,192
)
 
(89,147
)
Securities borrowed
(143,554
)
 
(604,046
)
Financial instruments owned
(25,941
)
 
1,388,017

Investments in managed funds
17,032

 
(124,398
)
Securities purchased under agreements to resell
(452,154
)
 
612,660

Other assets
(109,591
)
 
(346,414
)
Payables:
 
 
 
Brokers, dealers and clearing organizations
(969,230
)
 
(246,180
)
Customers
300,774

 
(367,505
)
Securities loaned
616,701

 
(28,625
)
Financial instruments sold, not yet purchased
598,801

 
1,201,318

Securities sold under agreements to repurchase
1,818,042

 
(1,531,853
)
Accrued expenses and other liabilities
116,605

 
82,055

Net cash provided by (used in) operating activities
590,515

 
(443,916
)
Cash flows from investing activities:
 
 
 
Contributions to loans to and investments in related parties
(2,642,607
)
 
(163,560
)
Distributions from loans to and investments in related parties
2,579,746

 
313,411

Net payments on premises and equipment
(39,918
)
 
(35,181
)
Payment on purchase of aircraft

 
(27,500
)
Deconsolidation of asset management entity

 
(39
)
Cash received from contingent consideration
1,250

 
826

Net cash provided by (used in) investing activities
(101,529
)
 
87,957

Continued on next page.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (UNAUDITED)
(In thousands)
 
Six Months Ended 
 May 31,
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from short-term borrowings
16,887,408

 
4,840,438

Payments on short-term borrowings
(16,972,566
)
 
(4,753,891
)
Net payments on other secured financings
(369,626
)
 
(122,789
)
Net proceeds from issuance of long-term debt, net of issuance costs
866,600

 
127,941

Repayment of long-term debt
(75,730
)
 
(350,600
)
Net change in bank overdrafts
(1,544
)
 
(54,508
)
Net proceeds from noncontrolling interests

 
3,937

Net cash provided by (used in) financing activities
334,542

 
(309,472
)
Effect of exchange rate changes on cash and cash equivalents
4,196

 
(5,903
)
Net increase (decrease) in cash and cash equivalents
827,724

 
(671,334
)
Cash and cash equivalents at beginning of period
3,529,069

 
3,510,163

Cash and cash equivalents at end of period
$
4,356,793

 
$
2,838,829

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for
 
 
 
Interest
$
488,705

 
$
422,558

Income taxes, net
3,576

 
(7,596
)
See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Index
Note
Page

8

Table of Contents
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Note 1. Organization and Basis of Presentation
Organization
Jefferies Group LLC and its subsidiaries operate as a global full service, integrated securities and investment banking firm. The accompanying Consolidated Financial Statements represent the accounts of Jefferies Group LLC and all our subsidiaries (together “we” or “us”). The subsidiaries of Jefferies Group LLC include Jefferies LLC (“Jefferies”), Jefferies Execution Services, Inc. (“Jefferies Execution”), Jefferies International Limited, Jefferies Hong Kong Limited, Jefferies Financial Services, Inc., Jefferies Funding LLC, Jefferies Leveraged Credit Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary. On April 9, 2015, we entered into an agreement to transfer certain of the client activities of our Futures business to Société Générale S.A. and initiated a plan to substantially exit the remaining aspects of our Futures business. During the second quarter of 2016, we completed the exit of the Futures business. For further information on the exit of the Futures business, refer to Note 19, Exit Costs.
Jefferies Group LLC is an indirect wholly owned subsidiary of Leucadia National Corporation (“Leucadia”). Leucadia does not guarantee any of our outstanding debt securities. Our 3.875% Convertible Senior Debentures due 2029 are convertible into Leucadia common shares (see Note 12, Long-Term Debt, for further details). Jefferies Group LLC is a Securities and Exchange Commission (“SEC”) reporting company, filing annual, quarterly and periodic financial reports. Richard Handler, our Chief Executive Officer and Chairman, is the Chief Executive Officer of Leucadia, as well as a Director of Leucadia. Brian P. Friedman, our Chairman of the Executive Committee, is Leucadia’s President and a Director of Leucadia.
We operate in two reportable business segments, Capital Markets and Asset Management. For further information on our reportable business segments, refer to Note 17, Segment Reporting.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2016. Certain footnote disclosures included in our Annual Report on Form 10-K for the year ended November 30, 2016 have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results presented in the Consolidated Financial Statements for interim periods are not necessarily indicative of the results for the entire year.
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, goodwill and intangible assets, the ability to realize certain deferred tax assets and the recognition and measurement of uncertain tax positions. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Consolidation
Our policy is to consolidate all entities that we control by ownership of a majority of the outstanding voting stock. In addition, we consolidate entities that meet the definition of a variable interest entity (“VIE”) for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has 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. For consolidated entities that are less than wholly owned, the third-party’s holding of equity interest is presented as Noncontrolling interests in our Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity. The portion of net earnings attributable to the noncontrolling interests is presented as Net earnings to noncontrolling interests in our Consolidated Statements of Earnings.
In situations in which we have significant influence, but not control, of an entity that does not qualify as a VIE, we apply either the equity method of accounting or fair value accounting pursuant to the fair value option election under U.S. GAAP, with our portion of net earnings or gains and losses recorded within Other revenues or Principal transaction revenues, respectively. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies and are carried at fair value. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights.
Intercompany accounts and transactions are eliminated in consolidation.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Note 2. Summary of Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2016. During the six months ended May 31, 2017, other than the following, there were no significant updates made to the Company’s significant accounting policies. The accounting policy updates are attributable to the implementation of hedge accounting in connection with an interest rate swap entered into during the six months ended May 31, 2017 and the adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on December 1, 2016.
Principal Transactions Revenues
Financial instruments owned and Financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in Principal transaction revenues in our Consolidated Statements of Earnings, except for derivatives accounted for as hedges (see “Hedge Accounting” section herein and Note 5, Derivative Financial Instruments). Fees received on loans carried at fair value are also recorded within Principal transaction revenues.
Hedge Accounting
Hedge accounting is applied using interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior long-term debt. The interest rate swaps are included in Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased—Derivatives in our Consolidated Statements of Financial Position. We use regression analysis to perform ongoing prospective and retrospective assessments of the effectiveness of these hedging relationships. A hedging relationship is deemed effective if the change in fair value of the interest rate swap and the change in the fair value of the long-term debt due to changes in the benchmark interest rate offset within a range of 80% - 125%. The impact of valuation adjustments related to our own credit spreads and counterparty credit spreads are included in the assessment of effectiveness.
For qualifying fair value hedges of benchmark interest rates, the change in the fair value of the derivative and the change in fair value of the long-term debt provide offset of one another, and together with any resulting ineffectiveness, are recorded in Interest expense.
Refer to Note 5, Derivative Financial Instruments, for further information.
Share-based Compensation
Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. Effective upon our adoption of ASU 2016-09, we account for forfeitures as they occur. Prior to the adoption of ASU 2016-09, expected forfeitures were included in determining share-based compensation expense. See Note 3, Accounting Developments, for further information on the adoption of ASU 2016-09.

Note 3. Accounting Developments
Accounting Standards to be Adopted in Future Periods
Stock Compensation. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation: Scope of Modification Accounting. The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Retirement Benefits. In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance impacts the presentation of net periodic pension costs in the statement of income. The update also allows the service cost to be eligible for capitalization, when applicable. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We plan to adopt in the first quarter of fiscal 2018. We are currently evaluating the impact of the new guidance on our Consolidated Statements of Earnings.
Goodwill. In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies goodwill impairment testing. The guidance is effective in the first quarter of fiscal 2021 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We plan to adopt in the first quarter of fiscal 2018. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We plan to adopt in the first quarter of fiscal 2018. We are currently evaluating the impact of these new ASUs on our Consolidated Statements of Cash Flows.
Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance provides for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective in the first quarter of fiscal 2021 and early adoption is permitted in the first quarter of fiscal 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance affects the accounting for leases and provides for a lessee model that brings substantially all leases onto the balance sheet. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. We are currently evaluating the impact of the new guidance related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option and we adopted this guidance in the first quarter of fiscal 2016. The adoption of this accounting guidance did not have a material effect on our consolidated financial statements.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The accounting guidance defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. We intend to adopt the new guidance on December 1, 2017 with a cumulative-effect adjustment to opening member’s equity. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, we do not expect the guidance to have a material impact on the elements of our Consolidated Statements of Earnings most closely associated with financial instruments, including Principal transaction revenues, Interest income and Interest expense. Our implementation efforts include the identification of revenue streams within the scope of the guidance, the evaluation of certain revenue contracts, education and discussions with our control functions, and periodic discussions with our audit committee. Our evaluation of the impact of the new guidance on our consolidated financial statements is ongoing, and we continue to evaluate the timing of recognition for each revenue stream within scope, which may be accelerated or deferred depending on the features of the client arrangements, and the presentation of certain contract costs (whether presented gross or offset against revenues).
Adopted Accounting Standards
Employee Share-Based Payments. In March 2016, the FASB issued ASU No. 2016-09, which simplifies various aspects related to how share-based payments are accounted for and presented in the consolidated financial statements. The amendments include the recognition of all excess tax benefits and tax deficiencies as income tax expense or benefit in our Consolidated Statement of Earnings and changes to the timing of recognition of excess tax benefits, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the Consolidated Statement of Cash Flows. We early adopted this standard on December 1, 2016 and the adoption did not have a material effect on our consolidated financial statements. We elected to account for forfeitures as they occur, which results in dividends and dividend equivalents originally charged against retained earnings for forfeited shares to be reclassified to compensation cost in the period in which the forfeiture occurs. In addition, the current period’s excess tax benefit related to stock-based compensation is presented as an operating activity rather than a financing activity in our Consolidated Statements of Cash Flows on a retrospective basis.


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JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Note 4. 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 $23.7 million and $24.3 million at May 31, 2017 and November 30, 2016, respectively, by level within the fair value hierarchy (in thousands):
 
May 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Counterparty and
Cash Collateral
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
1,956,279

 
$
190,005

 
$
20,548

 
$

 
$
2,166,832

Corporate debt securities

 
2,922,772

 
24,727

 

 
2,947,499

Collateralized debt obligations and collateralized loan obligations

 
23,519

 
27,255

 

 
50,774

U.S. government and federal agency securities
1,531,038

 
90,785

 

 

 
1,621,823

Municipal securities

 
600,039

 

 

 
600,039

Sovereign obligations
1,326,731

 
1,055,853

 

 

 
2,382,584

Residential mortgage-backed securities

 
1,419,269

 
33,032

 

 
1,452,301

Commercial mortgage-backed securities

 
433,958

 
16,263

 

 
450,221

Other asset-backed securities

 
141,908

 
43,349

 

 
185,257

Loans and other receivables
1,677

 
1,681,753

 
49,365

 

 
1,732,795

Derivatives
45,866

 
2,997,903

 
6,860

 
(2,872,198
)
 
178,431

Investments at fair value

 

 
89,006

 

 
89,006

Total financial instruments owned, excluding Investments at fair value based on NAV
$
4,861,591

 
$
11,557,764

 
$
310,405

 
$
(2,872,198
)
 
$
13,857,562

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
1,398,522

 
$
29,538

 
$
354

 
$

 
$
1,428,414

Corporate debt securities

 
1,786,165

 
522

 

 
1,786,687

U.S. government and federal agency securities
1,354,488

 

 

 

 
1,354,488

Sovereign obligations
1,502,643

 
1,194,090

 

 

 
2,696,733

Residential mortgage-backed securities

 
1,078

 

 

 
1,078

Commercial mortgage-backed securities

 

 
70

 

 
70

Loans

 
1,291,694

 
4,967

 

 
1,296,661

Derivatives
42,617

 
3,247,585

 
9,882

 
(2,859,680
)
 
440,404

Total financial instruments sold, not yet purchased
$
4,298,270

 
$
7,550,150

 
$
15,795

 
$
(2,859,680
)
 
$
9,004,535

Short-term borrowings
$

 
$
28,044

 
$

 
$

 
$
28,044

Long-term debt
$

 
$
392,807

 
$

 
$

 
$
392,807

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

 
November 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Counterparty and
Cash Collateral
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
1,742,463

 
$
90,662

 
$
21,739

 
$

 
$
1,854,864

Corporate debt securities

 
2,675,020

 
25,005

 

 
2,700,025

Collateralized debt obligations and collateralized loan obligations

 
54,306

 
54,354

 

 
108,660

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

 
56,726

 

 

 
2,446,123

Municipal securities

 
708,469

 
27,257

 

 
735,726

Sovereign obligations
1,432,556

 
990,492

 

 

 
2,423,048

Residential mortgage-backed securities

 
960,494

 
38,772

 

 
999,266

Commercial mortgage-backed securities

 
296,405

 
20,580

 

 
316,985

Other asset-backed securities

 
63,587

 
40,911

 

 
104,498

Loans and other receivables

 
1,557,233

 
81,872

 

 
1,639,105

Derivatives
3,825

 
4,606,278

 
6,429

 
(4,255,998
)
 
360,534

Investments at fair value

 

 
96,369

 

 
96,369

Total financial instruments owned, excluding Investments at fair value based on NAV
$
5,568,241

 
$
12,059,672

 
$
413,288

 
$
(4,255,998
)
 
$
13,785,203

Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
1,577,405

 
$
16,806

 
$
313

 
$

 
$
1,594,524

Corporate debt securities

 
1,718,424

 
523

 

 
1,718,947

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

 

 

 

 
976,497

Sovereign obligations
1,375,590

 
1,253,754

 

 

 
2,629,344

Loans

 
801,977

 
378

 

 
802,355

Derivatives
568

 
4,856,310

 
9,870

 
(4,229,213
)
 
637,535

Total financial instruments sold, not yet purchased
$
3,930,060

 
$
8,647,271

 
$
11,084

 
$
(4,229,213
)
 
$
8,359,202

Other secured financings
$

 
$
41,350

 
$
418

 
$

 
$
41,768

Long-term debt
$

 
$
248,856

 
$

 
$

 
$
248,856

(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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Non-Exchange-Traded Equity Securities: Non-exchange-traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange-traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization (“EBITDA”), price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the Company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).
Equity Warrants: Non-exchange-traded equity warrants are measured primarily using pricing data from external pricing services, prices observed for recently executed market transactions and broker quotations are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange-traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.
Corporate Debt Securities
Corporate Bonds: Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed for recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited portion of our corporate bonds.
High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.
Collateralized Debt Obligations and Collateralized Loan Obligations
Collateralized debt obligations (“CDOs”) and collateralized loan obligations (“CLOs”) are measured based on prices observed for recently executed market transactions of the same or similar security or based on valuations received from third party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs. Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria, including, but not limited to, collateral type, tranche type, rating, origination year, prepayment rates, default rates and loss severity.
U.S. Government and Federal Agency Securities
U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized within Level 1 of the fair value hierarchy.
U.S. Agency Issued Debt Securities: Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services and are generally categorized within Level 1 or Level 2 of the fair value hierarchy.
Municipal Securities
Municipal securities are measured based on quoted prices obtained from external pricing services and are generally categorized within Level 2 of the fair value hierarchy.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Sovereign Obligations
Foreign sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size. To the extent external price quotations are not available or recent transactions have not been observed, valuation techniques incorporating interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value of sovereign bonds or obligations. Foreign sovereign government obligations are classified in Level 1, Level 2 or Level 3 of the fair value hierarchy, primarily based on the country of issuance.
Residential Mortgage-Backed Securities
Agency Residential Mortgage-Backed Securities (“RMBS”): Agency RMBS include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and interest-only and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy.
Agency Residential Interest-Only and Inverse Interest-Only Securities (“Agency Inverse IOs”): The fair value of Agency Inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer and weighted average loan age. Agency Inverse IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.
Non-Agency RMBS: Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.
Commercial Mortgage-Backed Securities
Agency Commercial Mortgage-Backed Securities (“CMBS”): Government National Mortgage Association (“GNMA”) project loans are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation for various factors, including prepayment speeds, default rates and cash flow structures, as well as the likelihood of pricing levels in the current market environment. Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.
Non-Agency CMBS: Non-agency CMBS are measured using pricing data obtained from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.
Other Asset-Backed Securities
Other asset-backed securities (“ABS”) include, but are not limited to, securities backed by auto loans, credit card receivables, student loans and other consumer loans and are categorized within Level 2 and Level 3 of the fair value hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services and broker quotes and prices observed for recently executed market transactions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Loans and Other Receivables
Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.
Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.
Project Loans and Participation Certificates in GNMA Project and Construction Loans:  Valuations of participation certificates in GNMA project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations of assets with similar underlying loan collateral to derive an implied spread.  Securitization prices are adjusted to estimate the fair value of the loans incorporating an evaluation for various factors, including prepayment speeds, default rates and cash flow structures, as well as the likelihood of pricing levels in the current market environment.  The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.
Consumer Loans and Funding Facilities: Consumer and small business whole loans and related funding facilities are valued based on observed market transactions incorporating additional valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy.
Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent trade activity in the same security.
Derivatives
Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy. Listed derivatives for which there is limited trading activity are measured based on incorporating the closing auction price of the underlying equity security, use similar valuation approaches as those applied to over-the-counter derivative contracts and are categorized within Level 2 of the fair value hierarchy.
OTC Derivative Contracts: Over-the-counter (“OTC”) derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.
OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as the Black-Scholes, with key inputs impacting the valuation including the underlying security, foreign exchange spot rate or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves. Credit default swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from external pricing services.

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JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Investments at Fair Value and Investments in Managed Funds
Investments at fair value based on NAV and Investments in Managed Funds include investments in hedge funds, fund of funds and private equity funds, which are measured at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy. Investments at fair value also include direct equity investments in private companies, which are measured at fair value using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy. Additionally, investments at fair value include investments in insurance contracts relating to our defined benefit plan in Germany. Fair value for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy.
The following tables present information about our investments in entities that have the characteristics of an investment company (in thousands):
 
May 31, 2017
 
Fair Value (1)
 
Unfunded
Commitments
 
Redemption Frequency
(if currently eligible)
Equity Long/Short Hedge Funds (2)
$
34,924

 
$

 
Monthly, Quarterly
Fixed Income and High Yield Hedge Funds (3)
420

 

 
Fund of Funds (4)
183

 

 
Equity Funds (5)
32,878

 
20,040

 
Multi-asset Funds (6)
124,792

 

 
Total
$
193,197

 
$
20,040

 
 
 
November 30, 2016
 
Fair Value (1)
 
Unfunded
Commitments
 
Redemption Frequency
(if currently eligible)
Equity Long/Short Hedge Funds (2)
$
34,446

 
$

 
Monthly, Quarterly
Fixed Income and High Yield Hedge Funds (3)
772

 

 
Fund of Funds (4)
230

 

 
Equity Funds (5)
42,179

 
20,295

 
Multi-asset Funds (6)
133,190

 

 
Total
$
210,817

 
$
20,295

 
 
(1)
Where fair value is calculated based on NAV, fair value has been derived from each of the funds’ capital statements.
(2)
This category includes investments in hedge funds that invest, long and short, primarily in equity securities in domestic and international markets in both the public and private sectors. At May 31, 2017 and November 30, 2016, approximately 1% and 2%, respectively, of the fair value of investments in this category are classified as being in liquidation.
(3)
This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt and private equity investments. There are no redemption provisions.
(4)
This category includes investments in fund of funds that invest in various private equity funds. The investments in this category are managed by us and have no redemption provisions. These investments are gradually being liquidated or we have requested redemption, however, we are unable to estimate when these funds will be received.
(5)
At May 31, 2017 and November 30, 2016, the investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries. These investments cannot be redeemed; instead, distributions are received through the liquidation of the underlying assets of the funds which are expected to liquidate in one to six years.
(6)
This category includes investments in hedge funds that invest, long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At May 31, 2017 and November 30, 2016, investments representing approximately 17% and 12%, respectively, of the fair value of investments in this category are redeemable with 30-90 days prior written notice.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Other Secured Financings
Other secured financings that are accounted for at fair value include notes issued by consolidated VIEs, which are classified as Level 2 or Level 3 within the fair value hierarchy. Fair value is based on recent transaction prices for similar assets.
Short-term Borrowings / Long-term Debt
Short-term borrowings that are accounted for at fair value include equity-linked notes, which are generally categorized as Level 2 within the fair value hierarchy, as the fair value is based on the price of the underlying equity security. Long-term debt includes variable rate and fixed-to-floating rate structured notes that contain various interest rate payment terms and are generally measured using valuation models for the derivative and debt portions of the notes. These models incorporate market price quotations from external pricing sources referencing the appropriate interest rate curves and are generally categorized within Level 2 of the fair value hierarchy. The impact of the Company’s own credit spreads is also included based on observed secondary bond market spreads and asset-swap spreads.
Transfers Between Levels 1 and 2 for Instruments Carried at Fair Value
There were no material transfers between Level 1 and Level 2 for the three and six months ended May 31, 2017 and May 31, 2016.
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 May 31, 2017 (in thousands):
 
Three Months Ended May 31, 2017
 
Balance at February 28, 2017
 
Total gains/losses (realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers into/
 (out of) Level 3
 
Balance at May 31, 2017
 
Change in unrealized gains/(losses) relating to instruments still held at May 31, 2017 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
20,580

 
$
(1,198
)
 
$
490

 
$
(1,263
)
 
$
(281
)
 
$

 
$
2,220

 
$
20,548

 
$
(1,428
)
Corporate debt securities
33,467

 
(1,420
)
 
8,789

 
(9,181
)
 
(6,986
)
 

 
58

 
24,727

 
(1,983
)
CDOs and CLOs
45,354

 
(2,721
)
 
16,334

 
(33,546
)
 

 

 
1,834

 
27,255

 
(131
)
Municipal securities
26,554

 
(70
)
 

 
(26,484
)
 

 

 

 

 

RMBS
39,259

 
(2,188
)
 
3,176

 
(6,636
)
 
(4
)
 

 
(575
)
 
33,032

 
(1,024
)
CMBS
20,653

 
98

 
534

 
(4,111
)
 
(1
)
 

 
(910
)
 
16,263

 
(546
)
Other ABS
37,702

 
(3,663
)
 
13,476

 

 
(2,241
)
 

 
(1,925
)
 
43,349

 
(3,642
)
Loans and other receivables
53,172

 
3,226

 
20,054

 
(19,378
)
 
(7,181
)
 

 
(528
)
 
49,365

 
1,687

Investments at fair value
83,785

 
5,194

 
300

 

 
(273
)
 

 

 
89,006

 
5,194

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
324

 
$
30

 
$

 
$

 
$

 
$

 
$

 
$
354

 
$
(30
)
Corporate debt securities
523

 
(1
)
 

 

 

 

 

 
522

 
1

CMBS

 
70

 

 

 

 

 

 
70

 
(70
)
Net derivatives (2)
6,413

 
(3,617
)
 

 

 
(3
)
 
218

 
11

 
3,022

 
(147
)
Loans
1,036

 
3,867

 

 

 

 

 
64

 
4,967

 
(3,867
)
Other secured financings
87

 
(87
)
 

 

 

 

 

 

 

(1)
Realized and unrealized gains/losses are reported in Principal transaction revenues in our Consolidated Statements of Earnings.
(2)
Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased —Derivatives.

18

Table of Contents
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Analysis of Level 3 Assets and Liabilities for the Three Months Ended May 31, 2017
During the three months ended May 31, 2017, transfers of assets of $23.9 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
RMBS of $12.0 million due to a lack of observable market transactions.
During the three months ended May 31, 2017, transfers of assets of $23.8 million from Level 3 to Level 2 are primarily attributed to:
RMBS of $12.6 million due to greater pricing transparency supporting classification into Level 2.
Net losses on Level 3 assets were $2.7 million and net losses on Level 3 liabilities were $0.3 million for the three months ended May 31, 2017. Net losses on Level 3 assets were primarily due to decreased valuations of other ABS, RMBS, CDOs and CLOs and corporate debt and equity securities, partially offset by increased valuations of certain investments at fair value and loans and other receivables.
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the six months ended May 31, 2017 (in thousands):
 
Six Months Ended May 31, 2017
 
Balance at November 30, 2016
 
Total gains/losses (realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers into/
 (out of) Level 3
 
Balance at May 31, 2017
 
Change in unrealized gains/(losses) relating to instruments still held at May 31, 2017 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
21,739

 
$
(489
)
 
$
1,056

 
$
(1,117
)
 
$
(1,907
)
 
$

 
$
1,266

 
$
20,548

 
$
(1,215
)
Corporate debt securities
25,005

 
(3,300
)
 
15,133

 
(15,295
)
 
(1,693
)
 

 
4,877

 
24,727

 
(3,571
)
CDOs and CLOs
54,354

 
(10,102
)
 
24,741

 
(44,725
)
 

 

 
2,987

 
27,255

 
(204
)
Municipal securities
27,257

 
(1,547
)
 

 
(25,710
)
 

 

 

 

 

RMBS
38,772

 
(3,000
)
 
5,886

 
(11,750
)
 
(16
)
 

 
3,140

 
33,032

 
(1,667
)
CMBS
20,580

 
(1,119
)
 
534

 
(4,523
)
 
(2
)
 

 
793

 
16,263

 
(907
)
Other ABS
40,911

 
(5,489
)
 
17,029

 
(300
)
 
(5,576
)
 

 
(3,226
)
 
43,349

 
(5,461
)
Loans and other receivables
81,872

 
10,062

 
63,616

 
(61,423
)
 
(17,017
)
 

 
(27,745
)
 
49,365

 
3,679

Investments at fair value
96,369

 
2,995

 
300

 
(10,119
)
 
(539
)
 

 

 
89,006

 
5,019

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
313

 
$
41

 
$

 
$

 
$

 
$

 
$

 
$
354

 
$
(41
)
Corporate debt securities
523

 
(1
)
 

 

 

 

 

 
522

 
1

CMBS

 
70

 

 

 

 

 

 
70

 
(70
)
Net derivatives (2)
3,441

 
(6,154
)
 

 

 
1,534

 
404

 
3,797

 
3,022

 
(614
)
Loans
378

 
4,091

 
(364
)
 

 

 

 
862

 
4,967

 
(4,091
)
Other secured financings
418

 
(418
)
 

 

 

 

 

 

 

(1)
Realized and unrealized gains/losses are reported in Principal transaction revenues in our Consolidated Statements of Earnings.
(2)
Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased —Derivatives.

19

Table of Contents
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Analysis of Level 3 Assets and Liabilities for the Six Months Ended May 31, 2017
During the six months ended May 31, 2017, transfers of assets of $36.6 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
CDOs and CLOs of $12.4 million and RMBS of $11.5 million due to a lack of observable market transactions.
During the six months ended May 31, 2017, transfers of assets of $54.5 million from Level 3 to Level 2 are primarily attributed to:
Loans and other receivables of $30.8 million due to greater pricing transparency supporting classification into Level 2.
Net losses on Level 3 assets were $12.0 million and net gains on Level 3 liabilities were $2.4 million for the six months ended May 31, 2017. Net losses on Level 3 assets were primarily due to decreased valuations of other ABS, RMBS, CDOs and CLOs, municipal securities and corporate debt securities, partially offset by increased valuations of certain loans and receivables and investments at fair value. Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives, partially offset by decreased valuations of certain loans.
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 May 31, 2016 (in thousands):
 
Three Months Ended May 31, 2016
 
Balance at February 29, 2016
 
Total gains/losses (realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers into/
(out of)Level 3
 
Balance at May 31, 2016
 
Change in unrealized gains/(losses) relating to instruments still held at May 31, 2016 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
30,540

 
$
(927
)
 
$
200

 
$
(508
)
 
$
(2,455
)
 
$

 
$
21,966

 
$
48,816

 
$
(849
)
Corporate debt securities
25,634

 
474

 
15

 
(789
)
 

 

 
(1,221
)
 
24,113

 
347

CDOs and CLOs
67,348

 
1,797

 
943

 
(21,233
)
 

 

 
3,855

 
52,710

 
2,534

Sovereign obligations
119

 
1

 

 

 

 

 

 
120

 
1

RMBS
68,019

 
(4,915
)
 
3,422

 
(2,837
)
 
(122
)
 

 
(259
)
 
63,308

 
(2,233
)
CMBS
21,994

 
(1,140
)
 

 

 
(311
)
 

 
4,440

 
24,983

 
(1,306
)
Other ABS
33,124

 
(7,284
)
 
3,549

 
(1,068
)
 
(52
)
 

 
14,764

 
43,033

 
(7,275
)
Loans and other receivables
155,442

 
(7,792
)
 
20,836

 
(13,347
)
 
(55,541
)
 

 
4,801

 
104,399

 
(6,231
)
Investments at fair value
63,582

 
(1,574
)
 
40

 

 
(283
)
 

 
(4,000
)
 
57,765

 
(6
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
38

 
$

 
$

 
$

 
$

 
$

 
$
(38
)
 
$

 
$

Net derivatives (2)
11,757

 
3

 

 

 
(83
)
 
451

 
(7,704
)
 
4,424

 
(3
)
Loans
7,744

 
(261
)
 

 

 
(71
)
 

 
(5,516
)
 
1,896

 
261

Other secured financings
538

 
(70
)
 

 

 

 

 

 
468

 
70

(1)
Realized and unrealized gains/losses are reported in Principal transaction revenues in our Consolidated Statements of Earnings.
(2)
Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased —Derivatives.

20

Table of Contents
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Analysis of Level 3 Assets and Liabilities for the three months ended May 31, 2016
During the three months ended May 31, 2016, transfers of assets of $107.1 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
Other ABS $30.7 million and RMBS of $19.3 million, for which no recent trade activity was observed for purposes of determining observable inputs;
Corporate equity securities of $22.0 million due to a lack of observable market transactions;
Loans and other receivables of $15.9 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2.
During the three months ended May 31, 2016, transfers of assets of $62.7 million from Level 3 to Level 2 are primarily attributed to:
Non-agency RMBS of $19.5 million and other ABS of $16.0 million, for which market trades were observed in the period for either identical or similar securities.
Net losses on Level 3 assets were $21.4 million and net losses on Level 3 liabilities were $0.3 million for the three months ended May 31, 2016. Net losses on Level 3 assets were primarily due to decreased valuations in loans and other receivables, other ABS, RMBS, corporate equity securities, investments at fair value and CMBS, partially offset by an increase in valuation of CDOs and CLOs 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 six months ended May 31, 2016 (in thousands):
 
Six Months Ended May 31, 2016
 
Balance at November 30, 2015
 
Total gains/losses (realized and unrealized) (1)
 
Purchases
 
Sales
 
Settlements
 
Issuances
 
Net transfers into/
(out of)Level 3
 
Balance at May 31, 2016
 
Change in unrealized gains/(losses) relating to instruments still held at May 31, 2016 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity securities
$
40,906

 
$
1,571

 
$
2,287

 
$
(508
)
 
$
(2,455
)
 
$

 
$
7,015

 
$
48,816

 
$
2,080

Corporate debt securities
25,876

 
(2,378
)
 
16,564

 
(16,613
)
 
(245
)
 

 
909

 
24,113

 
(2,474
)
CDOs and CLOs
85,092

 
(20,455
)
 
24,024

 
(43,696
)
 
(473
)
 

 
8,218

 
52,710

 
(12,002
)
Sovereign obligations
120

 

 

 

 

 

 

 
120

 

RMBS
70,263

 
(8,337
)
 
1,483

 
(4,843
)
 
(235
)
 

 
4,977

 
63,308

 
(4,011
)
CMBS
14,326

 
(2,589
)
 
2,951

 
(2,023
)
 
(1,208
)
 

 
13,526

 
24,983

 
(3,140
)
Other ABS
42,925