Financial Assets and Liabilities

Financial Instruments Measured at Fair Value

The fair value of equities, options, on the run 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. The Company’s corporate bonds, derivative contracts and other U.S. and non-U.S. government obligations have been 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.

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 information 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 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.

Fair value measurements for those items measured on a recurring basis are summarized below as of March 31, 2018:



	March 31, 2018
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Total Fair Value
Assets
Financial instruments owned, at fair value:
Equity securities	$	956,518	$	1,139,469	$	—	$	—		$	2,095,987
U.S. and Non-U.S. government obligations	800		18,207		—		—			19,007
Corporate Bonds	—		75,534		—		—			75,534
Exchange traded notes	64,730		30,368		—		—			95,098
Currency forwards	—		702,889		—		(700,655		)	2,234
Options	9,210		—		—		—			9,210
	1,031,258		1,966,467		—		(700,655		)	2,297,070

Financial instruments owned, pledged as collateral:
Equity securities	$	309,313	$	262,684	$	—	$	—		$	571,997
U.S. and Non-U.S. government obligations	200		—		—		—			200
Exchange traded notes	22,418		15,921		—		—			38,339
	331,931		278,605		—		—			610,536

Other Assets
Equity investment	$	—	$	—	$	42,478	$	—		$	42,478
Exchange stock	2,154		—		—		—			2,154
Other⁽¹⁾	—		56,179		—		—			56,179
	2,154		56,179		42,478		—			100,811

Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equity securities	$	1,584,268	$	1,132,360	$	—	$	—		$	2,716,628
U.S. and Non-U.S. government obligations	1,998		25,207		—		—			27,205
Corporate Bonds	40,007		—		—		—			40,007
Exchange traded notes	3,714		38,393		—		—			42,107
Currency forwards	—		725,422		—		(720,464		)	4,958
Options	15,548		—		—		—			15,548
	$	1,645,535	$	1,921,382	$	—	$	(720,464	)	$	2,846,453


(1)	Other primarily consists of a $56.2 million receivable from Bats related to the sale of KCG Hotspot.

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



	December 31, 2017
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Total Fair Value
Assets
Financial instruments owned, at fair value:
Equity securities	$	758,596	$	1,167,995	$	—	$	—		$	1,926,591
Non-U.S. government obligations	5,968		16,815		—		—			22,783
Corporate Bonds	—		60,975		—		—			60,975
Exchange traded notes	13,576		68,819		—		—			82,395
Currency forwards	—		2,045,487		—		(2,027,697		)	17,790
Options	7,045		—		—		—			7,045
	$	785,185	$	3,360,091	$	—	$	(2,027,697	)	$	2,117,579
Financial instruments owned, pledged as collateral:
Equity securities	$	410,670	$	175,581	$	—	$	—		$	586,251
U.S. and Non-U.S. government obligations	99		—		—		—			99
Exchange traded notes	82		8,611		—		—			8,693
	$	410,851	$	184,192	$	—	$	—		$	595,043
Other Assets
Equity investment	$	—	$	—	$	40,588	$	—		$	40,588
Exchange stock	1,952		—		—		—			1,952
Other⁽²⁾	—		55,824		—		—			55,824
	$	1,952	$	55,824	$	40,588	$	—		$	98,364
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equity securities	$	847,816	$	1,355,616	$	—	$	—		$	2,203,432
Exchange traded notes	1,514		54,248		—		—			55,762
Currency forwards	—		2,032,017		—		(2,024,991		)	7,026
Options	5,839		—		—		—			5,839
	$	874,109	$	3,535,480	$	—	$	(2,024,991	)	$	2,384,598

(2) Other primarily consists of a $55.8 million receivable from Bats related to the sale of KCG Hotspot.

SBI Investment

As of March 31, 2018, the fair value of SBI Investment was determined using the discounted cash flow method, an income approach, with the discount rate of 15.0% applied to the cash flow forecasts. The Company also used a market approach based on 14x average price/earnings multiples of comparable companies to corroborate the income approach. The fair value of the SBI Investment at March 31, 2018 was determined by taking the weighted average of enterprise valuations based on discounted cash flow on projected income from the next five years, the implied enterprise valuations on comparable companies, and the implied enterprise valuations on comparable transactions. 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 the SBI Investment are reflected in other, net in the condensed consolidated statements of comprehensive income.

There were no transfers of financial instruments between levels during the three months ended March 31, 2018 and 2017.

Receivable from Bats Global Markets, Inc. (“Bats”)

In March 2015, KCG sold KCG Hotspot, an institutional spot foreign exchange electronic communications networks (“ECN”), to Bats, which is now a subsidiary of CBOE Holdings, Inc. KCG and Bats agreed to share certain tax benefits, which as of March 31, 2018 comprise a $50.0 million payment and an annual payment of up to $6.6 million, both of which were paid in April 2018.

The Company has elected the fair value option related to the receivable from Bats and considers the receivable to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable significant inputs such as contractual cash flows and market discount rates. The remaining additional potential payments of $56.6 million are recorded at a fair value of $56.2 million in other assets on the condensed consolidated statements of financial condition as of March 31, 2018.

Financial Instruments Not Measured at Fair Value

The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value on the condensed consolidated statement of financial condition. The table below excludes non-financial assets and liabilities. The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 and Level 2 approximates fair value due to the relatively short-term nature of the underlying assets. The fair value of the Company’s long-term borrowings is categorized as Level 2 in the fair value hierarchy, which is based on quoted prices from the market.

The table below summarizes financial assets and liabilities not measured at fair value on a recurring basis as of March 31, 2018:



	March 31, 2018
					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents	$	637,308	$	637,308	$	637,308	$	—	$	—
Securities borrowed	1,232,048		1,232,048		—		1,232,048		—
Securities purchased under agreements to resell	602		602		—		602		—
Receivables from broker dealers and clearing organizations	1,434,039		1,434,039		70,143		1,363,896		—
Total Assets	$	3,303,997	$	3,303,997	$	707,451	$	2,596,546	$	—

Liabilities
Short-term borrowings	$	20,944	$	20,944	$	—	$	20,944	$	—
Long-term borrowings	1,121,464		1,193,167		—		1,193,167		—
Securities loaned	936,061		936,061		—		936,061		—
Securities sold under agreements to repurchase	265,401		265,401		—		265,401		—
Payables to broker dealer and clearing organizations	648,788		648,788		861		647,927		—
Total Liabilities	$	2,992,658	$	3,064,361	$	861	$	3,063,500	$	—

The table below summarizes financial assets and liabilities not measured at fair value on a recurring basis as of December 31, 2017:



	December 31, 2017
					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents	$	532,887	$	532,887	$	532,887	$	—	$	—
Securities borrowed	1,471,172		1,471,172		—		1,471,172		—
Receivables from broker dealers and clearing organizations	972,018		972,018		36,513		935,505		—
Total Assets	$	2,976,077	$	2,976,077	$	569,400	$	2,406,677	$	—

Liabilities
Short-term borrowings	$	27,883	$	27,883	$	—	$	27,883	$	—
Long-term borrowings	1,388,548		1,465,489		—		1,465,489		—
Securities loaned	754,687		754,687		—		754,687		—
Securities sold under agreements to repurchase	390,642		390,642		—		390,642		—
Payables to broker dealer and clearing organizations	716,205		716,205		2,925		713,280		—
Total Liabilities	$	3,277,965	$	3,354,906	$	2,925	$	3,351,981	$	—

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



	March 31, 2018
(in thousands)	December 31, 2017		Purchases		Total Realized and Unrealized Gains / (Losses)		Net Transfers into (out of) Level 3		Settlement		March 31, 2018		Change in Net Unrealized Gains / (Losses) on Investments still held at March 31, 2018
Assets
Other assets:
Equity investment	$	40,588	$	—	$	1,890	$	—	$	—	$	42,478	$	1,890
Total	$	40,588	$	—	$	1,890	$	—	$	—	$	42,478	$	1,890



	December 31, 2017
(in thousands)	December 31, 2016		Purchases		Total Realized and Unrealized Gains / (Losses)		Net Transfers into (out of) Level 3		Settlement			December 31, 2017		Change in Net Unrealized Gains / (Losses) on Investments still held at December 31, 2017
Assets
Other assets:
Equity investment	$	36,031	$	—	$	4,557	$	—	$	—		$	40,588	$	4,557
Other	—		3,000		—		—		(3,000		)	—		—
Total	$	36,031	$	3,000	$	4,557	$	—	$	(3,000	)	$	40,588	$	4,557

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, 2018 and December 31, 2017.



	March 31, 2018
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Condensed Consolidated Statement of Financial Condition			Net Amounts of Assets Presented in the Condensed Consolidated Statement of Financial Condition
								Gross Amounts Not Offset In the Statement of Financial Condition
(in thousands)								Financial Instruments			Cash Collateral Received			Net Amount
Offsetting of Financial Assets:
Securities borrowed	$	1,232,048	$	—		$	1,232,048	$	(1,202,760	)	$	(2,624	)	$	26,664
Securities purchased under agreements to resell	602		—			602		(602		)	—			—
Trading assets, at fair value:
Currency forwards	702,889		(700,655		)	2,234		—			—			2,234
Options	9,210		—			9,210		(1		)	—			9,209
Total	$	1,944,749	$	(700,655	)	$	1,244,094	$	(1,203,363	)	$	(2,624	)	$	38,107



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Statement of Financial Condition			Net Amounts of Assets Presented in the Consolidated Statement of Financial Condition
								Gross Amounts Not Offset In the Statement of Financial Condition
(in thousands)								Financial Instruments			Cash Collateral Pledged			Net Amount
Offsetting of Financial Liabilities:
Securities loaned	$	936,061	$	—		$	936,061	$	(929,457	)	$	(884	)	$	5,720
Securities sold under agreements to repurchase	265,401		—			265,401		(265,401		)	—			—
Trading liabilities, at fair value:
Currency forwards	725,422		(720,464		)	4,958		—						4,958
Options	15,548		—			15,548		(1		)	—			15,547
Total	$	1,942,432	$	(720,464	)	$	1,221,968	$	(1,194,859	)	$	(884	)	$	26,225



	December 31, 2017
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Statement of Financial Condition			Net Amounts of Assets Presented in the Consolidated Statement of Financial Condition
								Gross Amounts Not Offset In the Statement of Financial Condition
(in thousands)								Financial Instruments			Cash Collateral Received			Net Amount
Offsetting of Financial Assets:
Securities borrowed	$	1,471,172	$	—		$	1,471,172	$	(1,418,672	)	$	(13,318	)	$	39,182
Trading assets, at fair value:
Currency forwards	2,045,487		(2,027,697		)	17,790		—			—			17,790
Options	7,045		—			7,045		(45		)	—			7,000
Total	$	3,523,704	$	(2,027,697	)	$	1,496,007	$	(1,418,717	)	$	(13,318	)	$	63,972



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Statement of Financial Condition			Net Amounts of Assets Presented in the Consolidated Statement of Financial Condition
								Gross Amounts Not Offset In the Statement of Financial Condition
(in thousands)								Financial Instruments			Cash Collateral Pledged			Net Amount
Offsetting of Financial Liabilities:
Securities loaned	$	754,687	$	—		$	754,687	$	(737,731	)	$	(10,776	)	$	6,180
Securities sold under agreements to repurchase	390,642		—			390,642		(390,642		)	—			—
Trading liabilities, at fair value:
Currency forwards	2,032,017		(2,024,991		)	7,026		—						7,026
Options	5,839		—			5,839		(56		)	—			5,783
Total	$	3,183,185	$	(2,024,991	)	$	1,158,194	$	(1,128,429	)	$	(10,776	)	$	18,989

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



	March 31, 2018
	Remaining Contractual Maturity
(in thousands)	Overnight and Continuous		Less than 30 days		30 - 60 days		61 - 90 Days		Total

Repurchase agreements:
Equity securities	$	401	$	—	$	65,000	$	200,000	$	265,401
U.S. and Non-U.S. government obligations			—		—		—		—
Total	$	401	$	—	$	65,000	$	200,000	$	265,401

Securities lending transactions:
Equity securities	$	936,061	$	—	$	—	$	—	$	936,061
Total	$	936,061	$	—	$	—	$	—	$	936,061



	December 31, 2017
	Remaining Contractual Maturity
(in thousands)	Overnight and Continuous		Less than 30 days		30 - 60 days		61 - 90 Days		Total

Repurchase agreements:
Equity securities	$	—	$	100,000	$	90,000	$	200,000	$	390,000
U.S. and Non-U.S. government obligations	642		—		—		—		642
Total	$	642	$	100,000	$	90,000	$	200,000	$	390,642

Securities lending transactions:
Equity securities	$	754,687	$	—	$	—	$	—	$	754,687
Total	$	754,687	$	—	$	—	$	—	$	754,687