9. Financial Assets and Liabilities

At March 31, 2017 and December 31, 2016, substantially all of Company's financial assets and liabilities, except for the long-term borrowings, short-term borrowings, securities borrowed and loaned, and certain exchange memberships, which would all be categorized as Level 2, were carried at fair value based on published market prices and are marked to market daily or were short-term in nature and were carried at amounts that approximate fair value. The Company determined that the carrying value of the Company’s long-term borrowings approximates fair value as of March 31, 2017 and December 31, 2016 based on the recent transaction date of the SBI Bonds and the quoted over-the-counter market prices provided by the issuer of the senior secured credit facility, and would be categorized as Level 2.

As of March 31, 2017, the Company began pricing certain financial instruments held for trading at fair value based on theoretical prices which can differ from quoted market prices. The theoretical prices reflect price adjustments primarily caused by the fact that the Company continuously prices its financial instruments based on all available information. This includes prices for identical and near-identical positions, as well as the prices for securities underlying the Company’s positions, on other exchanges that are open after the exchange on which the financial instruments is traded closes. The Company’s middle office department validates that all price adjustments can be substantiated with market inputs and checks the theoretical prices independently. Consequently, such financial instruments are classified as Level 2. The Company concluded that this is a change in accounting estimate and no retrospective adjustments were necessary.

The fair value of equities, U.S. government obligations and exchange traded notes is estimated using recently executed transactions and market price quotations in active markets and are categorized as Level 1 with the exception of inactively traded equities and certain financial instruments noted in the preceding paragraph which are categorized as Level 2. Fair value of the Company’s derivative contracts is based on the indicative prices obtained from broadly distributed bank and broker dealers, as well as management’s own analyses. The indicative prices have been independently validated through the Company’s risk management systems, which are designed to check prices with information independently obtained from exchanges and venues where such financial instruments are listed or to compare prices of similar instruments with similar maturities for listed financial futures in foreign exchange. At March 31, 2017 and December 31, 2016, the Company’s derivative contracts and non-U.S. government obligations have been categorized as Level 2.

In July 2016, the Company made an additional minority investment in SBI, a proprietary trading system based in Tokyo, which is further described later in this footnote. The Company elected the fair value option to account for this equity method investment because it believes that fair value is the most relevant measurement attribute for this investment, as well as to reduce operational and accounting complexity. This investment has been categorized as Level 3. The valuation process involved for Level 3 measurements is completed on a quarterly basis. The Company employs two valuation methodologies when determining the fair value of investments categorized as Level 3, market comparable analysis and discounted cash flow analysis. The market comparable analysis considers key financial inputs, recent public and private transactions and other available measures. The discounted cash flow analysis incorporates significant assumptions and judgments and the estimates of key inputs used in this methodology include the discount rate for the investment and assumed inputs used to calculate terminal values, such as price/earnings multiples. Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method and the ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected holding period.

There were no transfers of financial instruments between levels during the three months ended March 31, 2017 and 2016.

Fair value measurements for those items measured on a recurring basis are summarized below as of March 31, 2017:


	March 31, 2017
	Quoted Prices		Significant
	in Active		Other		Significant		Counterparty
	Markets for		Observable		Unobservable		and Cash
	Identical Assets		Inputs		Inputs		Collateral		Total Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Netting		Value
Assets
Financial instruments owned, at fair value:
Equity securities	$	184,003	$	1,414,065	$	—	$	—	$	1,598,068
Non-U.S. government obligations		—		9,007		—		—		9,007
Exchange traded notes		1,081		21,103		—		—		22,184
Currency forwards		—		1,756,179		—		(1,755,123)		1,056
Options		—		266		—		—		266
	$	185,084	$	3,200,620	$	—	$	(1,755,123)	$	1,630,581
Financial instruments owned, pledged as collateral:
Equity securities	$	32,168	$	232,318	$	—	$	—	$	264,486
Exchange traded notes		—		4,903		—		—		4,903
	$	32,168	$	237,221	$	—	$	—	$	269,389
Other Assets
Equity investment	$	—	$	—	$	37,588	$	—	$	37,588
Exchange stock		467		—		—		—		467
	$	467	$	—	$	37,588	$	—	$	38,055
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equity securities	$	604,260	$	1,014,410	$	—	$	—	$	1,618,670
Exchange traded notes		—		54,904		—		—		54,904
Currency forwards		—		1,792,466		—		(1,792,466)		—
Options		—		228		—		—		228
	$	604,260	$	2,862,008	$	—	$	(1,792,466)	$	1,673,802

Fair value measurements for those items measured on a recurring basis are summarized below as of December 31, 2016:


	December 31, 2016
	Quoted
	Prices in
	Active		Significant
	Markets for		Other		Significant		Counterparty
	Identical		Observable		Unobservable		and Cash
	Assets		Inputs		Inputs		Collateral		Total Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Netting		Value
Assets
Financial instruments owned, at fair value:
Equity securities	$	1,597,049	$	31,988	$	—	$	—	$	1,629,037
Non-U.S. government obligations		—		10,765		—		—		10,765
Exchange traded notes		37,034		—		—		—		37,034
Currency forwards		—		1,147,261		—		(1,140,239)		7,022
Options		—		141		—		—		141
	$	1,634,083	$	1,190,155	$	—	$	(1,140,239)	$	1,683,999
Financial instruments owned, pledged as collateral:
Equity securities	$	128,202	$	—	$	—	$	—	$	128,202
Exchange traded notes		15,681		—		—		—		15,681
	$	143,883	$	—	$	—	$	—	$	143,883
Other Assets
Equity investment	$	—	$	—	$	36,031	$	—	$	36,031
Exchange stock		449		—		—		—		449
	$	449	$	—	$	36,031	$	—	$	36,480
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equity securities	$	1,323,693	$	6,638	$	—	$	—	$	1,330,331
Exchange traded notes		18,744		—		—		—		18,744
Currency forwards		—		1,009,038		—		(1,009,038)		—
Options		—		80		—		—		80
	$	1,342,437	$	1,015,756	$	—	$	(1,009,038)	$	1,349,155

Investment in SBI Japannext Co., Ltd.

On July 27, 2016, the Company purchased an additional minority interest (29.4%) in SBI Japannext (“SBI”), a proprietary trading system based in Tokyo, for $38.8 million in cash. In connection with the investment, VFH issued bonds to certain affiliates of SBI Japannext and used the proceeds to finance the transaction (Note 8).

As of March 31, 2017, the Company determined the fair value of SBI using the discounted cash flow method, an income approach, with the discount rate of 15.9% applied to the cash flow forecasts. The Company also used a market approach based on 19x average price/earnings multiples of comparable companies to corroborate the income approach. The fair value of SBI at December 31, 2016 was determined to approximate the purchase price paid for the SBI investment, adjusted for the changes in the Japanese Yen currency rate, given the proximity to the transaction date and lack of significant events subsequent to the transaction date. The fair value measurement is highly sensitive to significant changes in the unobservable inputs and significant increases (decreases) in discount rate or decreases (increases) in price/earnings multiples would result in a significantly lower (higher) fair value measurement. Changes in the fair value of SBI are reflected in other revenues, net in the consolidated statements of comprehensive income.

The following presents the changes in Level 3 financial instruments measured at fair value on a recurring basis:


		Three Months Ended March 31, 2017
											Change in Net
											Unrealized Gains
											/ (Losses) on
											Investments
	Balance at				Total Realized		Net Transfers		Balance at		still held at
	December 31,				and Unrealized		into (out of)		March 31,		March 31,
(in thousands)	2016		Purchases		Gains / (Losses)		Level 3		2017		2017
Assets
Other assets:
Equity investment	$	36,031	$	—	$	1,557	$	—	$	37,588	$	1,557
Total	$	36,031	$	—	$	1,557	$	—	$	37,588	$	1,557

Offsetting of Financial Assets and Liabilities

The Company does not net securities borrowed and securities loaned, or securities purchased under agreements to resell and securities sold under agreements to repurchase. These financial instruments are presented on a gross basis in the condensed consolidated statements of financial condition. In the tables below, the amounts of financial instruments owned that are not offset in the condensed consolidated statements of financial condition, but could be netted against financial liabilities with specific counterparties under legally enforceable master netting agreements in the event of default, are presented to provide financial statement readers with the Company’s estimate of its net exposure to counterparties for these financial instruments.

The following tables set forth the gross and net presentation of certain financial assets and financial liabilities as of March 31, 2017 and December 31, 2016


	March 31, 2017

					Net Amounts of
			Gross Amounts		Assets Presented
			Offset in the		in the		Gross Amounts Not Offset In the
	Gross Amounts		Consolidated		Consolidated		Statement of Financial Condition
	of Recognized		Statement of		Statement of		Financial		Cash Collateral
(in thousands)	Assets		Financial Condition		Financial Condition		Instruments		Received		Net Amount
Offsetting of Financial Assets:
Securities borrowed	$	358,463	$	—	$	358,463	$	(350,923)	$	(1,272)	$	6,268
Trading assets, at fair value:
Currency forwards		1,756,179		(1,755,123)		1,056		—		—		1,056
Options		266		—		266		(214)		(2)		50
Total	$	2,114,908	$	(1,755,123)	$	359,785	$	(351,137)	$	(1,274)	$	7,374



					Net Amounts of
			Gross Amounts		Liabilities Presented
			Offset in the		in the		Gross Amounts Not Offset In the
	Gross Amounts		Consolidated		Consolidated		Statement of Financial Condition
	of Recognized		Statement of		Statement of		Financial		Cash Collateral
	Liabilities		Financial Condition		Financial Condition		Instruments		Pledged		Net Amount
Offsetting of Financial Liabilities:
Securities loaned	$	423,672	$	—	$	423,672	$	(423,408)	$	—	$	264
Trading liabilities, at fair value:
Currency forwards		1,792,466		(1,792,466)		—		—		—		—
Options		228		—		228		(214)		—		14
Total	$	2,216,366	$	(1,792,466)	$	423,900	$	(423,622)	$	—	$	278


	December 31, 2016

					Net Amounts of
			Gross Amounts		Assets Presented
			Offset in the		in the		Gross Amounts Not Offset In the
	Gross Amounts		Consolidated		Consolidated		Statement of Financial Condition
	of Recognized		Statement of		Statement of		Financial		Cash Collateral
(in thousands)	Assets		Financial Condition		Financial Condition		Instruments		Received		Net Amount
Offsetting of Financial Assets:
Securities borrowed	$	220,005	$	—	$	220,005	$	(216,778)	$	(248)	$	2,979
Trading assets, at fair value:
Currency forwards		1,147,261		(1,140,239)		7,022		—		—		7,022
Options		141		—		141		(80)		(13)		48
Total	$	1,367,407	$	(1,140,239)	$	227,168	$	(216,858)	$	(261)	$	10,049



					Net Amounts of
					Liabilities
			Gross Amounts		Presented		Gross Amounts Not Offset In the
			Offset in the		in the		Consolidated
			Condensed		Condensed		Condensed Consolidated
	Gross Amounts		Consolidated		Consolidated		Statement of Financial Condition
	of Recognized		Statement of		Statement of		Financial		Cash Collateral
(in thousands)	Liabilities		Financial Condition		Financial Condition		Instruments		Pledged		Net Amount
Offsetting of Financial Liabilities:
Securities loaned	$	222,203	$	—	$	222,203	$	(221,792)	$	—	$	411
Trading liabilities, at fair value:
Currency forwards		1,009,038		(1,009,038)		—		—		—		—
Options		80		—		80		(80)		—		—
Total	$	1,231,321	$	(1,009,038)	$	222,283	$	(221,872)	$	—	$	411

Excluded from the fair value and offsetting tables above is net unsettled fair value on long and short futures contracts in the amounts of $(10.4) million and $18.0 million, which are included within receivables from broker-dealers and clearing organizations as of March 31, 2017 and December 31, 2016, respectively, and $(4.7) million and $(3.5) million, which are included within payables to broker-dealers and clearing organizations as of March 31, 2017 and December 31, 2016, respectively, and would be categorized as Level 1.

The following table presents gross obligations for securities lending transactions by remaining contractual maturity and the class of collateral pledged.


		March 31, 2017
		Remaining Contractual Maturity
	Overnight and		Less than		30 - 90		Over 90
(in thousands)	Continuous		30 days		days		Days		Total

Securities lending transactions:
Equity securities	$	423,672	$	—	$	—	$	—	$	423,672
Total	$	423,672	$	—	$	—	$	—	$	423,672


		December 31, 2016
		Remaining Contractual Maturity
	Overnight and		Less than		30 - 90		Over 90
(in thousands)	Continuous		30 days		days		Days		Total

Repurchase agreements:
Equity securities	$	222,203	$	—	$	—	$	—	$	222,203
Total	$	222,203	$	—	$	—	$	—	$	222,203