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Financial Instruments | 9 Months Ended
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Sep. 30, 2012
Financial Instruments | 6. Financial Instruments Securities owned and securities sold but not yet purchased, investments and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period. The Company's other financial instruments are generally short-term in nature or have variable interest rates and as such their carrying values approximate fair value, with the exception of notes receivable from employees which are carried at cost. Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value Expressed in thousands of dollars.
|  | September 30, 2012 |  |  | December 31, 2011 |
|  | Owned |  |  | Sold |  |  | Owned |  |  | Sold |
U.S. Treasury, agency and sovereign obligations |  | $ | 754,288 |  |  | $ | 60,559 |  |  | $ | 682,805 |  |  | $ | 27,509 |
Corporate debt and other obligations |  |  | 24,345 |  |  |  | 3,370 |  |  |  | 27,188 |  |  |  | 3,696 |
Mortgage and other asset-backed securities |  |  | 2,793 |  |  |  | 34 |  |  |  | 4,609 |  |  |  | 14 |
Municipal obligations |  |  | 103,656 |  |  |  | 933 |  |  |  | 54,963 |  |  |  | 485 |
Convertible bonds |  |  | 44,654 |  |  |  | 9,847 |  |  |  | 50,157 |  |  |  | 8,533 |
Corporate equities |  |  | 42,592 |  |  |  | 27,665 |  |  |  | 38,634 |  |  |  | 29,056 |
Other |  |  | 69,262 |  |  |  | 127 |  |  |  | 66,185 |  |  |  | 122 |
Total |  | $ | 1,041,590 |  |  | $ | 102,535 |  |  | $ | 924,541 |  |  | $ | 69,415 |
Securities owned and securities sold, but not yet purchased, consist of trading and investment securities at fair values. Included in securities owned at September 30, 2012 are mutual funds with estimated fair values of approximately $13.8 million ($13.2 million at December 31, 2011), which are related to deferred compensation liabilities to certain employees included in accrued compensation on the condensed consolidated balance sheet. As of September 30, 2012, the Company did not have any exposure to European sovereign debt. Valuation Techniques A description of the valuation techniques applied and inputs used in measuring the fair value of the Company’s financial instruments is as follows: U.S. Treasury Obligations U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers and, accordingly, are categorized in Level 1 in the fair value hierarchy. U.S. Agency Obligations U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable To-be-announced (“TBA”) security. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities and mortgage pass-through securities are generally categorized in Level 2 of the fair value hierarchy. Sovereign Obligations The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs. Sovereign obligations are categorized in Level 1 or 2 of the fair value hierarchy. Corporate Debt & Other Obligations The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy. Mortgage and Other Asset-Backed Securities The Company holds non-agency securities collateralized by various types of collateral which are valued based on external pricing and spread data provided by independent pricing services and are generally categorized in Level 2 of the fair value hierarchy. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds and, consequently, the positions are categorized in Level 3 of the fair value hierarchy. Municipal Obligations The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information. These obligations are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy. Convertible Bonds The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined based on cash flow models using yield curves and bond spreads as key inputs. Convertible bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy. Corporate Equities Equity securities and options are generally valued based on quoted prices from the exchange or market where traded and categorized as Level 1 in the fair value hierarchy. To the extent quoted prices are not available, prices are generally derived using bid/ask spreads, and these securities are generally categorized in Level 2 of the fair value hierarchy. Other In February 2010, Oppenheimer finalized settlements with each of the New York Attorney General’s office (“NYAG”) and the Massachusetts Securities Division (“MSD” and, together with the NYAG, the “Regulators”) concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer’s marketing and sale of ARS. Pursuant to those settlements and legal settlements, as of September 30, 2012, the Company purchased and holds approximately $79.6 million in ARS from its clients pursuant to several purchase offers and legal settlements. The Company’s purchases of ARS from its clients will continue on a periodic basis pursuant to the settlements with the Regulators. In addition, the Company is committed to purchase another $40.5 million in ARS from clients through 2016. See “Legal Proceedings-Auction Rate Securities Matters” herein. The ultimate amount of ARS to be repurchased by the Company cannot be predicted with any certainty and will be impacted by redemptions by issuers and legal and other actions by clients during the relevant period, which cannot be predicted. The Company also held $150,000 in ARS in its proprietary trading account as of September 30, 2012 as a result of the failed auctions in February 2008. These ARS positions primarily represent Auction Rate Preferred Securities issued by closed-end funds and, to a lesser extent, Municipal Auction Rate Securities which are municipal bonds wrapped by municipal bond insurance and Student Loan Auction Rate Securities which are asset-backed securities backed by student loans. Interest rates on ARS typically reset through periodic auctions. Due to the auction mechanism and generally liquid markets, ARS have historically been categorized as Level 1 in the fair value hierarchy. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Once the auctions failed, the ARS could no longer be valued using observable prices set in the auctions. The Company has used less observable determinants of the fair value of ARS, including the strength in the underlying credits, announced issuer redemptions, completed issuer redemptions, and announcements from issuers regarding their intentions with respect to their outstanding ARS. The Company has also developed an internal methodology to discount for the lack of liquidity and non-performance risk of the failed auctions. Key inputs include spreads on comparable Treasury yields to derive a discount rate, an estimate of the ARS duration, and yields based on current auctions in comparable securities that have not failed. Additional information regarding the valuation technique and inputs used is as follows: Expressed in thousands of dollars. Quantitative Information about Level 3 Fair Value Measurements at September 30, 2012
Product |  | Principal |  |  | Valuation Adjustment |  |  | Fair Value |  |  | Valuation Technique |  | Unobservable Input |  | Range
Auction Rate Securities(1) |  | $ | 120,306 |  |  | $ | 5,256 |  |  | $ | 115,050 |  |  | Discounted Cash Flow |  | Discount Rate |  | 1.14% to 3.01%
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Duration |  | 5 to 8 Years
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Current Yield(2) |  | 0.27% to 1.37%
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) | Includes ARS owned by the Company of $79.8 million included in the condensed consolidated balance sheet at September 30, 2012 as well as additional commitments to purchase ARS from clients of $40.5 million which is disclosed in the notes to the co
(2) | Based on current auctions in comparable securities that have not failed
The fair value of ARS is particularly sensitive to movements in interest rates. Increases in short-term interest rates would increase the discount rate input used in the ARS valuation and thus reduce the fair value of the ARS (increase the valuation adjustment). Conversely, decreases in short-term interest rates would decrease the discount rate and thus increase the fair value of ARS (decrease the valuation adjustment). However, an increase (decrease) in the discount rate input would be partially mitigated by an increase (decrease) in the current yield earned on the underlying ARS asset increasing the cash flows and thus the fair value. Furthermore, movements in short term interest rates would likely impact the ARS duration (i.e., sensitivity of the price to a change in interest rates), which would also have a mitigating affect on interest rate movements. For example, as interest rates increase, issuers of ARS have an incentive to redeem outstanding securities as servicing the interest payments gets prohibitively expensive which would lower the duration assumption thereby increasing the ARS fair value. Alternatively, ARS issuers are less likely to redeem ARS in a lower interest rate environment as it is a relatively inexpensive source of financing which would increase the duration assumption thereby decreasing the ARS fair value. Due to the less observable nature of these inputs, the Company categorizes ARS in Level 3 of the fair value hierarchy. As of September 30, 2012, the Company had a valuation adjustment of $5.3 million for ARS. Investments In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment. Due to the illiquid nature of these investments and difficulties in obtaining observable inputs, these investments are included in Level 3 of the fair value hierarchy. The following table provides information about the Company’s investments in Company-sponsored funds at September 30, 2012. Expressed in thousands of dollars.
|  | Fair Value |  |  | Unfunded Commit - ments |  |  | Redemption Frequency |  | Redemption Notice Period
Hedge Funds(1) |  | $ | 881 |  |  | $ | — |  |  | Quarterly - Annually |  | 30 - 120 Days
Private Equity Funds(2) |  |  | 3,408 |  |  |  | 1,018 |  |  | N/A |  | N/A
Distressed Opportunities Investment Trust(3) |  |  | 7,558 |  |  |  | — |  |  | N/A |  | N/A
Total |  | $ | 11,847 |  |  | $ | 1,018 |  |  |  |  |
(1) | Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies.
(2) | Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources.
(3) | Special purpose vehicle that invests in distressed debt of U.S. companies.
Derivative Contracts From time to time, the Company transacts in exchange-traded and over-the-counter derivative transactions to manage its interest rate risk. Exchange-traded derivatives, namely U.S. Treasury futures, Federal funds futures, and Eurodollar futures, are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Over-the-counter derivatives, namely interest rate swap and interest rate cap contracts are valued using a discounted cash flow model and the Black-Scholes model, respectively, using observable interest rate inputs and are categorized in Level 2 of the fair value hierarchy. As described below in “Credit Concentrations”, the Company participates in loan syndications and operates as underwriting agent in leveraged financing transactions where it utilizes a warehouse facility to extend financing commitments to third-party borrowers identified by the Company. The Company uses broker quotations on loans trading in the secondary market as a proxy to determine the fair value of the underlying loan commitment which is categorized in Level 3 of the fair value hierarchy. The Company also purchases and sells loans in its proprietary trading book. The Company uses broker quotations to determine the fair value of loan positions held which are categorized in Level 2 of the fair value hierarchy. The Company from time to time enters into securities financing transactions that mature on the same date as the underlying collateral (referred to as “repo-to-maturity” transactions). Such transactions are treated as a sale of financial assets and a forward repurchase commitment, or conversely as a purchase of financial assets and a forward reverse repurchase commitment. The forward repurchase and reverse repurchase commitments are valued based on the spread between the market value of the government security and the underlying collateral and are categorized in Level 2 of the fair value hierarchy. Fair Value Measurements The Company’s assets and liabilities, recorded at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 have been categorized based upon the above fair value hierarchy as follows: Assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 Expressed in thousands of dollars.
|  | Fair Value Measurement: Assets |
|  | As of September 30, 2012 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Cash equivalents |  | $ | 40,702 |  |  | $ | — |  |  | $ | — |  |  | $ | 40,702 |
Cash and securities segregated for regulatory and other purposes |  |  | 11,498 |  |  |  | — |  |  |  | — |  |  |  | 11,498 |
Deposits with clearing organization |  |  | 9,091 |  |  |  | — |  |  |  | — |  |  |  | 9,091 |
Securities owned: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 699,535 |  |  |  | — |  |  |  | — |  |  |  | 699,535 |
U.S. Agency securities |  |  | 38,155 |  |  |  | 16,565 |  |  |  | — |  |  |  | 54,720 |
Sovereign obligations |  |  | — |  |  |  | 33 |  |  |  | — |  |  |  | 33 |
Corporate debt and other obligations |  |  | 12,060 |  |  |  | 12,285 |  |  |  | — |  |  |  | 24,345 |
Mortgage and other asset-backed securities |  |  | — |  |  |  | 2,767 |  |  |  | 26 |  |  |  | 2,793 |
Municipal obligations |  |  | — |  |  |  | 92,984 |  |  |  | 10,672 |  |  |  | 103,656 |
Convertible bonds |  |  | — |  |  |  | 44,654 |  |  |  | — |  |  |  | 44,654 |
Corporate equities |  |  | 34,165 |  |  |  | 8,427 |  |  |  | — |  |  |  | 42,592 |
Other |  |  | 2,883 |  |  |  | — |  |  |  | 66,379 |  |  |  | 69,262 |
Securities owned, at fair value |  |  | 786,798 |  |  |  | 177,715 |  |  |  | 77,077 |  |  |  | 1,041,590 |
Investments(1) |  |  | 433 |  |  |  | 36,678 |  |  |  | 12,805 |  |  |  | 49,916 |
Derivative contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
TBAs |  |  | — |  |  |  | 4,203 |  |  |  | — |  |  |  | 4,203 |
Securities purchased under agreements to resell |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 848,522 |  |  | $ | 218,596 |  |  | $ | 89,882 |  |  | $ | 1,157,000 |
|  | Fair Value Measurement: Liabilities As of September 30, 2012 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Securities sold, not yet purchased: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 59,445 |  |  | $ | — |  |  | $ | — |  |  | $ | 59,445 |
U.S. Agency securities |  |  | 1,073 |  |  |  | 41 |  |  |  | — |  |  |  | 1,114 |
Corporate debt and other obligations |  |  | — |  |  |  | 3,370 |  |  |  | — |  |  |  | 3,370 |
Mortgage and other asset-backed securities |  |  | — |  |  |  | 34 |  |  |  | — |  |  |  | 34 |
Municipal obligations |  |  | — |  |  |  | 933 |  |  |  | — |  |  |  | 933 |
Convertible bonds |  |  | — |  |  |  | 9,847 |  |  |  | — |  |  |  | 9,847 |
Corporate equities |  |  | 18,615 |  |  |  | 9,050 |  |  |  | — |  |  |  | 27,665 |
Other |  |  | 127 |  |  |  | — |  |  |  | — |  |  |  | 127 |
Securities sold, not yet purchased at fair value |  |  | 79,260 |  |  |  | 23,275 |  |  |  | — |  |  |  | 102,535 |
Investments |  |  | 125 |  |  |  | — |  |  |  | — |  |  |  | 125 |
Derivative contracts |  |  | 290 |  |  |  | 215 |  |  |  | 2,253 |  |  |  | 2,758 |
TBAs |  |  | — |  |  |  | 1,219 |  |  |  | — |  |  |  | 1,219 |
Securities sold under agreements to repurchase(2) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 79,675 |  |  | $ | 24,709 |  |  | $ | 2,253 |  |  | $ | 106,637 |
(1) | Included in other assets on the condensed consolidated balance sheet.
(2) | Includes securities sold under agreements to repurchase agreements where the Company has elected fair value option treatment.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 Expressed in thousands of dollars.
|  | Fair Value Measurement: Assets |
|  | As of December 31, 2011 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Cash equivalents |  | $ | 30,924 |  |  | $ | — |  |  | $ | — |  |  | $ | 30,924 |
Cash and securities segregated for regulatory and other purposes |  |  | 11,500 |  |  |  | — |  |  |  | — |  |  |  | 11,500 |
Deposits with clearing organizations |  |  | 9,095 |  |  |  | — |  |  |  | — |  |  |  | 9,095 |
Securities owned: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 627,870 |  |  |  | — |  |  |  | — |  |  |  | 627,870 |
U.S. Agency securities |  |  | 32,663 |  |  |  | 21,695 |  |  |  | — |  |  |  | 54,358 |
Sovereign obligations |  |  | — |  |  |  | 577 |  |  |  | — |  |  |  | 577 |
Corporate debt and other obligations |  |  | 12,538 |  |  |  | 14,650 |  |  |  | — |  |  |  | 27,188 |
Mortgage and other asset-backed securities |  |  | — |  |  |  | 4,593 |  |  |  | 16 |  |  |  | 4,609 |
Municipal obligations |  |  | — |  |  |  | 51,401 |  |  |  | 3,562 |  |  |  | 54,963 |
Convertible bonds |  |  | — |  |  |  | 50,157 |  |  |  | — |  |  |  | 50,157 |
Corporate equities |  |  | 29,150 |  |  |  | 9,484 |  |  |  | — |  |  |  | 38,634 |
Other |  |  | 1,184 |  |  |  | — |  |  |  | 65,001 |  |  |  | 66,185 |
Securities owned, at fair value |  |  | 703,405 |  |  |  | 152,557 |  |  |  | 68,579 |  |  |  | 924,541 |
Investments(1) |  |  | 1,512 |  |  |  | 32,964 |  |  |  | 12,482 |  |  |  | 46,958 |
Derivative contracts |  |  | — |  |  |  | 20 |  |  |  | — |  |  |  | 20 |
TBAs |  |  | — |  |  |  | 5,791 |  |  |  | — |  |  |  | 5,791 |
Securities purchased under agreements to resell (2) |  |  | — |  |  |  | 847,610 |  |  |  | — |  |  |  | 847,610 |
Total |  | $ | 756,436 |  |  | $ | 1,038,942 |  |  | $ | 81,061 |  |  | $ | 1,876,439 |
|  | Fair Value Measurement: Liabilities As of December 31, 2011 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Securities sold, not yet purchased: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 27,462 |  |  | $ | — |  |  | $ | — |  |  | $ | 27,462 |
U.S. Agency securities |  |  | — |  |  |  | 47 |  |  |  | — |  |  |  | 47 |
Sovereign obligations |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Corporate debt and other obligations |  |  | — |  |  |  | 3,696 |  |  |  | — |  |  |  | 3,696 |
Mortgage and other asset-backed securities |  |  | — |  |  |  | 14 |  |  |  | — |  |  |  | 14 |
Municipal obligations |  |  | — |  |  |  | 485 |  |  |  | — |  |  |  | 485 |
Convertible bonds |  |  | — |  |  |  | 8,533 |  |  |  | — |  |  |  | 8,533 |
Corporate equities |  |  | 16,467 |  |  |  | 12,589 |  |  |  | — |  |  |  | 29,056 |
Other |  |  | 72 |  |  |  | — |  |  |  | 50 |  |  |  | 122 |
Securities sold, not yet purchased at fair value |  |  | 44,001 |  |  |  | 25,364 |  |  |  | 50 |  |  |  | 69,415 |
Investments |  |  | 26 |  |  |  | — |  |  |  | — |  |  |  | 26 |
Derivative contracts |  |  | 66 |  |  |  | 8 |  |  |  | 2,347 |  |  |  | 2,421 |
TBAs |  |  | — |  |  |  | 2,254 |  |  |  | — |  |  |  | 2,254 |
Total |  | $ | 44,093 |  |  | $ | 27,626 |  |  | $ | 2,397 |  |  | $ | 74,116 |
(1) | Included in other assets on the condensed consolidated balance sheet.
(2) | Includes securities purchased under agreements to resell where the Company has elected fair value option treatment.
There were no significant transfers between Level 1 and Level 2 assets and liabilities in the three months ended September 30, 2012. The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2012 and 2011. Expressed in thousands of dollars.
|  | Level 3 Assets and Liabilities |
|  | For the Three-Month Period Ended September 30, 2012 |
|  | Beginning Balance |  |  | Realized Gains (Losses)(4) |  |  | Unrealized Gains (Losses)(5) |  |  | Purchases & Issuances |  |  | Sales & Settlements |  |  | Transfers In / Out |  |  | Ending Balance |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | 12 |  |  |  | — |  |  |  | 3 |  |  |  | 11 |  |  |  | — |  |  |  | — |  |  | $ | 26 |
Municipals |  |  | 10,120 |  |  |  | — |  |  |  | (13 | ) |  |  | 655 |  |  |  | (90 | ) |  |  | — |  |  |  | 10,672 |
Other(2) |  |  | 64,644 |  |  |  | — |  |  |  | 410 |  |  |  | 5,950 |  |  |  | (4,625 | ) |  |  | — |  |  |  | 66,379 |
Investments(3) |  |  | 12,760 |  |  |  | (9 | ) |  |  | (32 | ) |  |  | 231 |  |  |  | (145 | ) |  |  | — |  |  |  | 12,805 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  | $ | — |
Other(2) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Derivative contracts |  |  | 2,334 |  |  |  | — |  |  |  | (81 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,253 |
(1) | Represents private placements of non-agency collateralized mortgage obligations.
(2) | Represents auction rate securities that failed in the auction rate market.
(3) | Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company.
(4) | Included in principal transactions on the consolidated statement of operations, except for investments which are included in other income on the consolidated statement of operations.
(5) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
Expressed in thousands of dollars.
|  | Level 3 Assets and Liabilities |
|  | For the Three-Month Period Ended September 30, 2011 |
|  | Beginning Balance |  |  | Realized Gains (Losses)(4) |  |  | Unrealized Gains (Losses)(5) |  |  | Purchases & Issuances |  |  | Sales & Settlements |  |  | Transfers In / Out |  |  | Ending Balance |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | 105 |  |  |  | 1 |  |  |  | (3 | ) |  |  | 893 |  |  |  | (230 | ) |  |  | 0 |  |  | $ | 766 |
Municipals |  |  | 3,829 |  |  |  | (12 | ) |  |  | (143 | ) |  |  | 575 |  |  |  | (119 | ) |  |  | — |  |  |  | 4,129 |
Other(2) |  |  | 63,098 |  |  |  | — |  |  |  | 543 |  |  |  | 4,028 |  |  |  | (2,450 | ) |  |  | — |  |  |  | 65,219 |
Investments(3) |  |  | 16,141 |  |  |  | — |  |  |  | (793 | ) |  |  | 126 |  |  |  | — |  |  |  | (1 | ) |  |  | 15,473 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | 11 |  |  |  | — |  |  |  | — |  |  |  | (11 | ) |  |  | — |  |  |  | — |  |  | $ | — |
Other(2) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,502 |  |  |  | — |  |  |  | — |  |  |  | 1,502 |
Derivative contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
(1) | Represents private placements of non-agency collateralized mortgage obligations.
(2) | Represents auction rate securities that failed in the auction rate market.
(3) | Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company.
(4) | Included in principal transactions on the consolidated statement of operations, except for investments which are included in other income on the condensed consolidated statement of operations.
(5) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2012 and 2011. Expressed in thousands of dollars.
|  | Level 3 Assets and Liabilities |
|  | For the Nine-Month Period Ended September 30, 2012 |
|  | Beginning Balance |  |  | Realized Gains (Losses)(4) |  |  | Unrealized Gains (Losses)(5) |  |  | Purchases & Issuances |  |  | Sales & Settlements |  |  | Transfers In / Out |  |  | Ending Balance |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | 16 |  |  |  | (8 | ) |  |  | 5 |  |  |  | 95 |  |  |  | (80 | ) |  |  | (2 | ) |  | $ | 26 |
Municipals |  |  | 3,562 |  |  |  | (5 | ) |  |  | (505 | ) |  |  | 9,960 |  |  |  | (2,340 | ) |  |  | — |  |  |  | 10,672 |
Other(2) |  |  | 65,001 |  |  |  | — |  |  |  | (351 | ) |  |  | 20,675 |  |  |  | (18,946 | ) |  |  | — |  |  |  | 66,379 |
Investments(3) |  |  | 12,482 |  |  |  | (9 | ) |  |  | 405 |  |  |  | 358 |  |  |  | (442 | ) |  |  | 11 |  |  |  | 12,805 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  | $ | — |
Other(2) |  |  | 50 |  |  |  | — |  |  |  | — |  |  |  | (50 | ) |  |  | — |  |  |  | — |  |  |  | — |
Derivative contracts |  |  | 2,347 |  |  |  | — |  |  |  | (94 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,253 |
(1) | Represents private placements of non-agency collateralized mortgage obligations
(2) | Represents auction rate securities that failed in the auction rate market
(3) | Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company
(4) | Included in principal transactions on the consolidated statement of operations, except for investments which are included in other income on the consolidated statement of operations
(5) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date
Expressed in thousands of dollars.
|  | Level 3 Assets and Liabilities |
|  | For the Nine-Month Period Ended September 30, 2011 |
|  | Beginning Balance |  |  | Realized Gains (Losses)(4) |  |  | Unrealized Gains (Losses)(5) |  |  | Purchases & Issuances |  |  | Sales & Settlements |  |  | Transfers In / Out |  |  | Ending Balance |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | 14 |  |  |  | 1 |  |  |  | (0 | ) |  |  | 995 |  |  |  | (244 | ) |  |  | 0 |  |  | $ | 766 |
Municipals |  |  | 1,787 |  |  |  | (12 | ) |  |  | (334 | ) |  |  | 2,982 |  |  |  | (294 | ) |  |  | — |  |  |  | 4,129 |
Other(2) |  |  | 35,909 |  |  |  | — |  |  |  | (393 | ) |  |  | 38,178 |  |  |  | (8,475 | ) |  |  | — |  |  |  | 65,219 |
Investments(3) |  |  | 17,208 |  |  |  | — |  |  |  | (794 | ) |  |  | 572 |  |  |  | (1,500 | ) |  |  | (13 | ) |  |  | 15,473 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities(1) |  | $ | — |  |  |  | 0 |  |  |  | — |  |  |  | 11 |  |  |  | (11 | ) |  |  | — |  |  | $ | — |
Other(2) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,502 |  |  |  | — |  |  |  | — |  |  |  | 1,502 |
Derivative contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
(1) | Represents non-agency securities primarily collateralized by home equity and manufactured housing
(2) | Represents auction rate preferred securities that failed in the auction market. Fair value approximates par due to strength in the underlying credits and the recent trend in issuer redemptions
(3) | Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company
(4) | Included in principal transactions, net on the condensed consolidated statement of operations, except for investments which is included in other income on the condensed consolidated statement of operations.
(5) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date
Fair Value Option The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company may make a fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected to apply the fair value option to its loan trading portfolio which resides in OPY Credit Corp. and is included in other assets on the condensed consolidated balance sheet. Management has elected this treatment as it is consistent with the manner in which the business is managed as well as the way that financial instruments in other parts of the business are recorded. There were no loan positions held in the secondary loan trading portfolio at September 30, 2012 (none at December 31, 2011). The Company also elected the fair value option for those securities sold under agreements to repurchase (“repurchase agreements”) and securities purchased under agreements to resell (“reverse repurchase agreements”) that do not settle overnight or have an open settlement date or that are not accounted for as purchase and sale agreements (such as repo-to-maturity transactions). The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At September 30, 2012, the fair value of the reverse repurchase agreements and repurchase agreements was $nil and $nil, respectively. Fair Value of Derivative Instruments The Company transacts, on a limited basis, in exchange traded and over-the-counter derivatives for both asset and liability management as well as for trading and investment purposes. Risks managed using derivative instruments include interest rate risk and, to a lesser extent, foreign exchange risk. Interest rate swaps and interest rate caps are entered into to manage the Company’s interest rate risk associated with floating-rate borrowings. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the condensed consolidated balance sheet. The Company designates interest rate swaps and interest rate caps as cash flow hedges of floating-rate borrowings. Cash flow hedges used for asset and liability management For derivative instruments that were designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. On January 20, 2009, the Company entered into an interest rate cap contract, incorporating a series of purchased caplets with fixed maturity dates ending December 31, 2012, to hedge the interest payments associated with its floating rate Subordinated Note, which was subject to change due to changes in 3-Month LIBOR. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge. The Company recorded $nil in interest expense with respect to the interest rate cap for both the three and nine months ended September 30, 2012. Foreign exchange hedges From time to time, the Company also utilizes forward and options contracts to hedge the foreign currency risk associated with compensation obligations to Oppenheimer Israel (OPCO) Ltd. employees denominated in New Israeli Shekels. Such hedges have not been designated as accounting hedges. At September 30, 2012, the Company did not have any such hedges in place. “To-be-announced” securities” The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the "To-Be-Announced" or TBA market. TBAs provide for the forward or delayed delivery of the underlying instrument with settlement up to 180 days. The contractual or notional amounts related to these financial instruments reflect the volume of activity and do not reflect the amounts at risk. Unrealized gains and losses on TBAs are recorded in the condensed consolidated balance sheet in receivable from brokers and clearing organizations and payable to brokers and clearing organizations, respectively, and in the condensed consolidated statement of operations as principal transactions revenue. The following table summarizes the notional and fair values of the TBAs as of September 30, 2012 and December 31, 2011. Expressed in thousands of dollars.
|  | September 30, 2012 |  |  | December 31, 2011 |
|  | Notional |  |  | Fair Value |  |  | Notional |  |  | Fair Value |
Sale of TBAs (1) |  | $ | 551,897 |  |  | $ | 4,203 |  |  | $ | 574,365 |  |  | $ | 5,791 |
Purchase of TBAs |  | $ | 203,439 |  |  | $ | 1,219 |  |  | $ | 137,572 |  |  | $ | 2,254 |
(1) | TBAs are used to offset exposures related to commitments to provide funding for FHA loans at OMHHF. At September 30, 2012, the loan commitments balance was $297.5 million ($326.7 million at December 31, 2011). In addition, at September 30, 2012, OMHHF had a loan receivable balance (included in other assets) of $56.3 million ($109.3 million at December 31, 2011) which relates to prior loan commitments that have been funded but have not yet been securitized. The “when issued” securitizations of these loans have been sold to market counter-parties.
Derivatives used for trading and investment purposes Futures contracts represent commitments to purchase or sell securities or other commodities at a future date and at a specified price. Market risk exists with respect to these instruments. Notional or contractual amounts are used to express the volume of these transactions, and do not represent the amounts potentially subject to market risk. The futures contracts the Company used include U.S. Treasury notes, Federal Funds and Eurodollar contracts. At September 30, 2012, the Company had 420 open short contracts for Treasury notes with a fair value of $290,000 used primarily as an economic hedge of interest rate risk associated with a portfolio of fixed income investments. At September 30, 2012, the Company had 7.7 billion open contracts for Federal Funds futures with a fair value of approximately $209,808 used primarily as an economic hedge of interest rate risk associated with government trading activities. From time-to-time, the Company enters into securities financing transactions that mature on the same date as the underlying collateral (referred to as “repo-to-maturity” transactions). These transactions are treated as a sale of financial assets and a forward repurchase commitment, or conversely as a purchase of financial assets and a forward reverse repurchase commitment. At September 30, 2012, the Company did not have any repo-to-maturity transactions outstanding. The notional amounts and fair values of the Company’s derivatives at September 30, 2012 and December 31, 2011 by product were as follows: Expressed in thousands of dollars. Fair Value of Derivative Instruments As of September 30, 2012
|  | Description |  | Notional |  |  | Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | Cap (2) |  | $ | 10,000 |  |  | $ | 0 |
Total Assets |  |  |  | $ | 10,000 |  |  | $ | 0 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | U.S Treasury Futures (3) |  | $ | 64,000 |  |  | $ | 290 |
|  | Federal Funds Futures (3) |  |  | 7,745,000 |  |  |  | 210 |
|  | Euro Dollars Futures |  |  | 13,000 |  |  |  | 5 |
Other contracts |  | Auction rate securities purchase commitment (4) |  |  | 40,541 |  |  |  | 2,253 |
Total Liabilities |  |  |  | $ | 7,862,541 |  |  | $ | 2,758 |
(1) | See “Fair Value of Derivative Instruments” below for description of derivative financial instruments.
(2) | Included in receivable from brokers and clearing organizations on the condensed consolidated balance sheet.
(3) | Included in payable from brokers and clearing organizations on the condensed consolidated balance sheet.
(4) | Included in other liabilities on the condensed consolidated balance sheet.
Expressed in thousands of dollars. Fair Value of Derivative Instruments As of December 31, 2011
|  | Description |  | Notional |  |  | Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | Cap (2) |  | $ | 100,000 |  |  | $ | 20 |
Total Assets |  |  |  | $ | 100,000 |  |  | $ | 20 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | U.S Treasury Futures (3) |  | $ | 20,000 |  |  | $ | 66 |
|  | Federal Funds Futures (3) |  |  | 5,985,000 |  |  |  | 8 |
Other contracts |  | Auction rate securities purchase commitment (4) |  |  | 57,292 |  |  |  | 2,347 |
Total Liabilities |  |  |  | $ | 6,062,292 |  |  | $ | 2,421 |
(1) | See “Fair Value of Derivative Instruments” below for description of derivative financial instruments.
(2) | Included in receivable from brokers and clearing organizations on the condensed consolidated balance sheet.
(3) | Included in payable from brokers and clearing organizations on the condensed consolidated balance sheet.
(4) | Included in other liabiilities on the condensed consolidated balance sheet.
The following table presents the location and fair value amounts of the Company’s derivative instruments and their effect on the statement of operations for the three months ended September 30, 2012. Expressed in thousands of dollars.
|  |  |  | Recognized in Income on Derivatives (pre-tax) |  |  | Reclassified from Accumulated Other Comprehensive Income into Income -Effective Portion (2) (after–tax) |
Hedging Relationship |  | Description |  | Location |  | Gain/ (Loss) |  |  | Location |  |  | Gain/ (Loss) |
Interest rate contracts |  | Caps (3) |  | N/A |  | $ | — |  |  |  | Interest expense |  |  | $ | — |
Commodity contracts |  | U.S Treasury Futures |  | Principal transaction revenue |  |  | (395 | ) |  |  | None |  |  |  | — |
|  | Federal Funds Futures |  | Principal transaction revenue |  |  | (334 | ) |  |  | None |  |  |  | — |
|  | Euro-Dollars Futures |  | Principal transaction revenue |  |  | 18 |  |  |  |  |  |  |  | — |
Other contracts |  | Auction rate securities purchase commitment |  | Principal transaction revenue |  |  | 81 |  |  |  | None |  |  |  | — |
Total |  |  |  |  |  | $ | (630 | ) |  |  |  |  |  | $ | — |
(1) | See “Fair Value of Derivative Instruments” above for description of derivative financial instruments.
(2) | There is no ineffective portion included in income for the period ended September 30, 2012.
(3) | As noted above in “Cash flow hedges used for asset and liability management”, interest rate caps are used to hedge interest rate risk associated with the Subordinated Note. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge.
The following table presents the location and fair value amounts of the Company’s derivative instruments and their effect on the statement of operations for the nine months ended September 30, 2012. Expressed in thousands of dollars.
|  |  |  | Recognized in Income on Derivatives (pre-tax) |  |  | Reclassified from Accumulated Other Comprehensive Income into Income -Effective Portion (2) (after–tax) |
Hedging Relationship |  | Description |  | Location |  | Gain/ (Loss) |  |  | Location |  |  | Gain/ (Loss) |
Interest rate contracts |  | Caps (3) |  | N/A |  |  | (12 | ) |  |  | Interest expense |  |  |  | — |
Commodity contracts |  | U.S Treasury Futures |  | Principal transaction revenue |  |  | (1,032 | ) |  |  | None |  |  |  | — |
|  | Federal Funds Futures |  | Principal transaction revenue |  |  | (74 | ) |  |  | None |  |  |  | — |
|  | Euro-dollar Futures |  | Principal transaction revenue |  |  | (9 | ) |  |  | None |  |  |  | — |
Other contracts |  | Auction rate securities purchase commitment |  | Principal transaction revenue |  |  | 94 |  |  |  | None |  |  |  | — |
Total |  |  |  |  |  | $ | (1033 | ) |  |  |  |  |  | $ | — |
(1) | See “Fair Value of Derivative Instruments” above for description of derivative financial instruments.
(2) | There is no ineffective portion included in income for the period ended September 30, 2012.
(3) | As noted above in “Cash flow hedges used for asset and liability management”, interest rate caps are used to hedge interest rate risk associated with the Subordinated Note. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge
Collateralized Transactions The Company enters into collateralized borrowing and lending transactions in order to meet customers’ needs and earn residual interest rate spreads, obtain securities for settlement and finance trading inventory positions. Under these transactions, the Company either receives or provides collateral, including U.S. government and agency, asset-backed, corporate debt, equity, and non-U.S. government and agency securities. The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates but not exceeding the broker call rate. At September 30, 2012, bank call loans were $94.6 million ($27.5 million at December 31, 2011). At September 30, 2012, the Company had collateralized loans, collateralized by firm and customer securities with market values of approximately $111.5 million and $46.4 million, respectively, primarily with two U.S. money center banks. At September 30, 2012, the Company had approximately $1.1 billion of customer securities under customer margin loans that are available to be pledged, of which the Company has repledged approximately $198.2 million under securities loan agreements. At September 30, 2012, the Company had deposited $46.4 million of customer securities directly with the Options Clearing Corporation to secure obligations and margin requirements under option contracts written by customers. At September 30, 2012, the Company had no outstanding letters of credit. The Company finances its government trading operations through the use of repurchase agreements and reverse repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, principally involving government and agency securities, are carried at amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in “book entry” form and certain other requirements are met. Certain of the Company’s repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company’s fair value option election. The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date or that are not accounted for as purchase and sale agreements (such as the repo-to-maturity transactions described above). The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At September 30, 2012, the fair value of the reverse repurchase agreements and repurchase agreements was $nil and $nil, respectively. At September 30, 2012, the gross balances of reverse repurchase agreements and repurchase agreements were $4.3 billion and $5.1 billion, respectively ($5.5 billion and $6.1 billion, respectively, at December 31, 2011). The Company receives collateral in connection with securities borrowed and reverse repurchase agreement transactions and customer margin loans. Under many agreements, the Company is permitted to sell or repledge the securities received (e.g., use the securities to enter into securities lending transactions, or deliver to counterparties to cover short positions). At September 30, 2012, the fair value of securities received as collateral under securities borrowed transactions and reverse repurchase agreements was $183.2 million ($209.9 million at December 31, 2011) and $4.4 billion ($5.5 billion at December 31, 2011), respectively, of which the Company has sold and re-pledged approximately $10.4 million ($44.0 million at December 31, 2011) under securities loaned transactions and $4.4 billion under repurchase agreements ($5.5 billion at December 31, 2011). The Company pledges certain of its securities owned for securities lending and repurchase agreements and to collateralize bank call loan transactions. The carrying value of pledged securities owned that can be sold or re-pledged by the counterparty was $725.4 million, as presented on the face of the condensed consolidated balance sheet at September 30, 2012 ($653.7 million at December 31, 2011). The carrying value of securities owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or re-pledge the collateral was $171.3 million as at September 30, 2012 ($119.8 million at December 31, 2011). The Company manages credit exposure arising from repurchase and reverse repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a customer default, the right to liquidate and the right to offset a counterparty’s rights and obligations. The Company also monitors the market value of collateral held and the market value of securities receivable from others. It is the Company's policy to request and obtain additional collateral when exposure to loss exists. In the event the counterparty is unable to meet its contractual obligation to return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices. As of December 31, 2011, the interest in securities formerly held by one of the Company’s funds which utilized Lehman Brothers International (Europe) as a prime broker was transferred to an investment trust. As of September 30, 2012, the fair value of the Company’s investment in the securities held by Lehman Brothers International (Europe) that were segregated and not re-hypothecated was $7.5 million. This investment has been included in the condensed consolidated financial statements of the Company. Credit Concentrations Credit concentrations may arise from trading, investing, underwriting and financing activities and may be impacted by changes in economic, industry or political factors. In the normal course of business, the Company may be exposed to risk in the event customers, counterparties including other brokers and dealers, issuers, banks, depositories or clearing organizations are unable to fulfill their contractual obligations. The Company seeks to mitigate these risks by actively monitoring exposures and obtaining collateral as deemed appropriate. Included in receivable from brokers and clearing organizations as of September 30, 2012 are receivables from four major U.S. broker-dealers totaling approximately $112.9 million. Through OPY Credit Corp., the Company utilized a warehouse facility provided by CIBC to extend financing commitments to third-party borrowers identified by the Company. As of September 30, 2012, the Company utilized $61.2 million ($65.9 million as of December 31, 2011) under such warehouse facility and had $nil in Excess Retention ($nil as of December 31, 2011). This warehouse arrangement terminated on July 15, 2012. However, the Company will remain liable for some minimal expenses in relation to this facility related to commitments made by CIBC to borrowers introduced by the Company until such borrowings are repaid by the borrower or until 2016, whichever is the sooner to occur. All such owed amounts will continue to be reflected in the Company’s income statement as incurred. The Company reached an agreement with RBS Citizens, NA (“Citizens”) that was announced in July 2012, whereby the Company, through OPY Credit Corp., will introduce lending opportunities to Citizens, which Citizens can elect to accept and in which the Company will participate in the fees earned from any related commitment by Citizens. The Company can also in certain circumstances assume a portion of Citizen’s syndication and lending risk under such loans, and if it does so it shall be obligated to secure such obligations via a cash deposit determined through risk based formulas. Neither the Company nor Citizens is obligated to make any specific loan or to commit any minimum amount of lending capacity to the relationship. The agreement also calls for Citizens and the Company at their option to jointly participate in the arrangement of various loan syndications. At September 30, 2012, there were no loans in place. The Company is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Company. Clients are required to complete their transactions on settlement date, generally one to three business days after trade date. If clients do not fulfill their contractual obligations, the Company may incur losses. The Company has clearing/participating arrangements with the National Securities Clearing Corporation (“NSCC”), the Fixed Income Clearing Corporation (“FICC”), R.J. O’Brien & Associates (commodities transactions) and others. With respect to its business in reverse repurchase and repurchase agreements, substantially all open contracts at September 30, 2012 are with the FICC. In addition, the Company recently began clearing its non-U.S. international equities business carried on by Oppenheimer Europe Ltd. through BNP Paribas Securities Services. The clearing corporations have the right to charge the Company for losses that result from a client's failure to fulfill its contractual obligations. Accordingly, the Company has credit exposures with these clearing brokers. The clearing brokers can re-hypothecate the securities held on behalf of the Company. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing brokers, the Company believes there is no maximum amount assignable to this right. At September 30, 2012, the Company had recorded no liabilities with regard to this right. The Company's policy is to monitor the credit standing of the clearing brokers and banks with which it conducts business. OMHHF, which is engaged in mortgage brokerage and servicing, has obtained an uncommitted warehouse facility line through PNC Bank (“PNC”) under which OMHHF pledges Federal Housing Administration (“FHA”) guaranteed mortgages for a period of up to 10 business days and PNC table funds the principal payment to the mortgagee. OMHHF repays PNC upon the securitization of the mortgage by the Government National Mortgage Association (“GNMA”) and the delivery of the security to the counter party for payment pursuant to a contemporaneous sale on the date the mortgage is funded. At September 30, 2012, OMHHF had $27 million outstanding under the warehouse facility line at a variable interest rate of 1 month LIBOR plus 1.85%. Interest expense for the three and nine months ended September 30, 2012 was $305,000 and $705,000, respectively ($332,000 and $1.1 million, respectively, for the three and nine months ended September 30, 2011). As discussed in note 6, Financial Instruments, the Company enters into TBA transactions to offset exposures related to commitments to provide funding for FHA loans at OMHHF. In the normal course of business, the Company may be exposed to the risk that counterparties to these TBAs are unable to fulfill their contractual obligations. Variable Interest Entities (VIEs) VIEs are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests. The enterprise that is considered the primary beneficiary of a VIE consolidates the VIE. A subsidiary of the Company serves as general partner of hedge funds and private equity funds that were established for the purpose of providing investment alternatives to both its institutional and qualified retail clients. The Company holds variable interests in these funds as a result of its right to receive management and incentive fees. The Company’s investment in and additional capital commitments to these hedge funds and private equity funds are also considered variable interests. The Company's additional capital commitments are subject to call at a later date and are limited in amount. The Company assesses whether it is the primary beneficiary of the hedge funds and private equity funds in which it holds a variable interest in the context of the total general and limited partner interests held in these funds by all parties. In each instance, the Company has determined that it is not the primary beneficiary and therefore need not consolidate the hedge funds or private equity funds. The subsidiaries’ general partnership interests, additional capital commitments, and management fees receivable represent its maximum exposure to loss. The subsidiaries’ general partnership interests and management fees receivable are included in other assets on the condensed consolidated balance sheet. The following tables set forth the total VIE assets, the carrying value of the subsidiaries’ variable interests, and the Company’s maximum exposure to loss in Company-sponsored non-consolidated VIEs in which the Company holds variable interests and other non-consolidated VIEs in which the Company holds variable interests at September 30, 2012 and December 31, 2011: As of September 30, 2012 Expressed in thousands of dollars.
|  | Total VIE Assets (1) |  |  | Carrying Value of the Company’s Variable Interest |  |  | Capital Commitments |  |  | Maximum Exposure to Loss in Non- consolidated VIEs |
|  |  | Assets (2) |  |  | Liabilities |  |  |
Hedge Funds |  | $ | 1,995,924 |  |  | $ | 317 |  |  | $ | — |  |  | $ | — |  |  | $ | 317 |
Private Equity Funds |  |  | 171,681 |  |  |  | 30 |  |  |  | — |  |  |  | 10 |  |  |  | 40 |
Total |  | $ | 2,167,605 |  |  | $ | 347 |  |  | $ | — |  |  | $ | 10 |  |  | $ | 357 |
As of December 31, 2011 Expressed in thousands of dollars.
|  | Total VIE Assets (1) |  |  | Carrying Value of the Company’s Variable Interest |  |  | Capital Commitments |  |  | Maximum Exposure to Loss in Non- consolidated VIEs |
|  |  | Assets (2) |  |  | Liabilities |  |  |
Hedge Funds |  | $ | 1,668,508 |  |  | $ | 393 |  |  | $ | — |  |  | $ | — |  |  | $ | 393 |
Private Equity Funds |  |  | 142,275 |  |  |  | 27 |  |  |  | — |  |  |  | 13 |  |  |  | 40 |
Total |  | $ | 1,810,783 |  |  | $ | 420 |  |  | $ | — |  |  | $ | 13 |  |  | $ | 433 |
(1) | Represents the total assets of the VIEs and does not represent the Company’s interests in the VIEs.
(2) | Represents the Company’s interests in the VIEs and is included in other assets on the condensed consolidated balance sheet.

X
- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. 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