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Financial Instruments | 9 Months Ended
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Sep. 30, 2014
Fair Value Disclosures [Abstract] |
Financial Instruments | 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. Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value
(Expressed in thousands) |  |  |  |  |  |  |
| As of September 30, 2014 |  | As of December 31, 2013
| Owned |  | Sold |  | Owned |  | Sold
U.S. Government, agency and sovereign obligations | $ | 522,010 |  |  | $ | 67,496 |  |  | $ | 596,114 |  |  | $ | 11,889 |
Corporate debt and other obligations | 19,922 |  |  | 3,010 |  |  | 14,673 |  |  | 4,847 |
Mortgage and other asset-backed securities | 4,792 |  |  | — |  |  | 3,395 |  |  | 7 |
Municipal obligations | 62,250 |  |  | 55 |  |  | 40,166 |  |  | 72 |
Convertible bonds | 58,795 |  |  | 8,229 |  |  | 53,719 |  |  | 13,922 |
Corporate equities | 49,012 |  |  | 49,457 |  |  | 61,634 |  |  | 45,336 |
Money markets | 2,668 |  |  | 15 |  |  | 1,263 |  |  | 241 |
Auction rate securities | 87,323 |  |  | — |  |  | 85,124 |  |  | — |
Total | $ | 806,772 |  |  | $ | 128,262 |  |  | $ | 856,088 |  |  | $ | 76,314 |
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, 2014 are corporate equities with estimated fair values of approximately $15.4 million ($15.3 million at December 31, 2013), which are related to deferred compensation liabilities to certain employees included in accrued compensation on the condensed consolidated balance sheet. 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. Government 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 of 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 and 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 home equity and various other 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 fair value 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 fair value 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 of the fair value hierarchy. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads, and these securities are generally categorized in Level 2 of the fair value hierarchy. Loans Held for Sale The loans held for sale are reported at fair value. The Company determines the fair value of the loans held for sale using both a discounted cash flow model and quoted observable prices from market participants. Therefore, the Company categorizes these loans held for sale in Level 2 of the fair value hierarchy. Interest Rate Lock Commitments OMHHF records an interest rate lock commitment upon the commitment to originate a loan with a borrower. This commitment, which can be an asset or a liability, is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan. The interest rate lock commitments are valued using a discounted cash flow model developed based on U.S. Treasury rate changes and other observable market data. The fair value is determined after considering the potential impact of collateralization, and the Company categorizes these commitments within Level 3 of the fair value hierarchy. To-Be-Announced (“TBA”) sale contracts TBA sale contracts of permanent loans originated or purchased at OMHHF are based on observable market prices of recently executed purchases of similar loans which are then used to derive a market implied spread, which in turn is used as the primary input in estimating the fair value of loans at the measurement date. TBA sale contracts of construction loans originated or purchased at OMHHF are based on observable market prices of recently executed purchases. TBA sale contracts are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions. Mortgage Servicing Rights (“MSRs”) The Company’s MSRs are measured at fair value on a nonrecurring basis. The MSRs are initially measured at fair value on the loan securitization date and subsequently measured on the amortized cost basis subject to quarterly impairment testing. MSRs do not trade in active open markets with readily observable pricing. Therefore the Company uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model calculates the present value of estimated future net servicing income using inputs such as contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the model to reflect observable and unobservable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or estimated fair value. The following key assumptions were used in determining the initial fair value of MSRs: Discount Rate – The discount rate used for originated permanent and construction loans averaged approximately 12%. Estimated Life – The estimated life of the MSRs is derived using a continuous prepayment (“CPR”) assumption which estimates projected prepayments of the loan portfolio by considering factors such as note rates, lockouts, and prepayment penalties at the loan level. The CPR rates used are 0% until such time that a loan's prepayment penalty rate hits 4% of the unpaid principal balance of the loan with the vast majority of CPR speeds ranging from 10% to 15% thereafter, with an average of 12%. Servicing Costs – The estimated future cost to service the loans on an annual basis per loan averages approximately $1,250 for a permanent loan, with a considerably higher cost to service during the construction phase. The Company does not anticipate any credit losses on the commercial mortgages it services since all of the mortgages are insured for and guaranteed against credit losses by the Federal Housing Administration (“FHA”) and the Government National Mortgage Association (“GNMA”) and are thus guaranteed by the U.S. government. Auction Rate Securities ("ARS") 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 the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions more fully described below. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers (as defined) under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of September 30, 2014, the Company purchased and holds (net of redemptions) approximately $94.8 million in ARS from its clients. In addition, the Company is committed to purchase another $13.1 million in ARS from clients through 2016 under legal settlements and awards. The ARS positions that the Company owns and are committed to purchase 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 of 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. Due to liquidity problems associated with the ARS market, ARS that lack liquidity are setting their interest rates according to a maximum rate formula. For example, an auction rate preferred security maximum rate may be set at 200% of a short-term index such as LIBOR or U.S. Treasury yield. For fair value purposes, the Company has determined that the maximum spread would be an adequate risk premium to account for illiquidity in the market. Accordingly, the Company applies a spread to the short-term index for each asset class to derive the discount rate. The Company uses short-term U.S. Treasury yields as its benchmark short-term index. The risk of non-performance is typically reflected in the prices of ARS positions where the fair value is derived from recent trades in the secondary market. Accordingly, the Company adds a spread to the short-term index for each asset class to derive the discount rate. The Company uses short-term U.S. Treasury yields as its benchmark short-term index. The ARS purchase commitment, or derivative liability, arises from both the settlements with the Regulators and legal settlements and awards. The ARS purchase commitment represents the difference between the principal value and the fair value of the ARS the Company is committed to purchase. The Company utilizes the same valuation methodology for the ARS purchase commitment as it does for the ARS it owns. Additionally, the present value of the future principal value of ARS purchase commitments under legal settlements and awards is used in the discounted valuation model to reflect the time value of money over the period of time that the commitments are outstanding. The amount of the ARS purchase commitment only becomes determinable once the Company has met with its primary regulator and the NYAG and agreed upon a buyback amount, commenced the ARS buyback offer to clients, and received notice from its clients which ARS they are tendering. As a result, it is not possible to observe the current yields actually paid on the ARS until all of these events have happened which is typically very close to the time that the Company actually purchases the ARS. For ARS purchase commitments pursuant to legal settlements and awards, the criteria for purchasing ARS from clients is based on the nature of the settlement or award which will stipulate a time period and amount for each repurchase. The Company will not know which ARS will be tendered by the client until the stipulated time for repurchase is reached. Therefore, the Company uses the current yields of ARS owned in its discounted valuation model to determine a fair value of ARS purchase commitments. The Company also uses these current yields by asset class (i.e., auction rate preferred securities, municipal auction rate securities, and student loan auction rate securities) in its discounted valuation model to determine the fair value of ARS purchase commitments. In addition, the Company uses the discount rate and duration of ARS owned, by asset class, as a proxy for the duration of ARS purchase commitments. Additional information regarding the valuation technique and inputs for level 3 financial instruments used is as follows:
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |
Quantitative Information about Level 3 Fair Value Measurements at September 30, 2014
Product | Principal |  | Valuation Adjustment |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average
Auction Rate Securities Owned (1) |  |  |  |  |  |  |  |  |  |  |  |  |
Auction Rate Preferred Securities | $ | 74,400 |  |  | $ | 4,392 |  |  | $ | 70,008 |  |  | Discounted Cash Flow |  | Discount Rate (2) |  | 1.54% to 2.1% |  | 1.82%
|  |  |  |  |  |  |  |  | Duration |  | 4.0 years |  | 4.0 years
|  |  |  |  |  |  |  |  | Current Yield (3) |  | 0.09% to 0.46% |  | 0.28%
Municipal Auction Rate Securities | 10,400 |  |  | 1,118 |  |  | 9,282 |  |  | Discounted Cash Flow |  | Discount Rate (4) |  | 2.76% |  | 2.76%
|  |  |  |  |  |  |  |  | Duration |  | 4.5 years |  | 4.5 years
|  |  |  |  |  |  |  |  | Current Yield (3) |  | 0.19% |  | 0.19%
| 5,975 |  |  | 624 |  |  | 5,351 |  |  | Secondary Market Trading Activity |  | Observable trades in inactive market for in portfolio securities |  | 89.60% of par |  | 89.60% of par
Student Loan Auction Rate Securities | 400 |  |  | 60 |  |  | 340 |  |  | Discounted Cash Flow |  | Discount Rate (5) |  | 3.40% |  | 3.40%
|  |  |  |  |  |  |  |  | Duration |  | 7.0 years |  | 7.0 years
|  |  |  |  |  |  |  |  | Current Yield (3) |  | 0.98% |  | 0.98%
Other (7) | 3,625 |  |  | 1,283 |  |  | 2,342 |  |  | Secondary Market Trading Activity |  | Observable trades in inactive market for in portfolio securities |  | 64.60% of par |  | 64.60% of par
| $ | 94,800 |  |  | $ | 7,477 |  |  | $ | 87,323 |  |  |  |  |  |  |  |  |
Auction Rate Securities Commitments to Purchase (6) |  |  |  |  |  |  |  |  |  |  |  |  |
Auction Rate Preferred Securities | $ | 7,582 |  |  | $ | 424 |  |  | $ | 7,158 |  |  | Discounted Cash Flow |  | Discount Rate (2) |  | 1.54% to 2.1% |  | 1.82%
|  |  |  |  |  |  |  |  | Duration |  | 4.0 years |  | 4.0 years
|  |  |  |  |  |  |  |  | Current Yield (3) |  | 0.09% to 0.46% |  | 0.28%
Municipal Auction Rate Securities | 4,952 |  |  | 533 |  |  | 4,419 |  |  | Discounted Cash Flow |  | Discount Rate (4) |  | 2.76% |  | 2.76%
|  |  |  |  |  |  |  |  | Duration |  | 4.5 years |  | 4.5 years
|  |  |  |  |  |  |  |  | Current Yield (3) |  | 0.19% |  | 0.19%
Student Loan Auction Rate Securities | 538 |  |  | 80 |  |  | 458 |  |  | Discounted Cash Flow |  | Discount Rate (5) |  | 3.40% |  | 3.40%
|  |  |  |  |  |  |  |  | Duration |  | 7.0 years |  | 7.0 years
|  |  |  |  |  |  |  |  | Current Yield (3) |  | 0.98% |  | 0.98%
| $ | 13,072 |  |  | $ | 1,037 |  |  | $ | 12,035 |  |  |  |  |  |  |  |  |
Total | $ | 107,872 |  |  | $ | 8,514 |  |  | $ | 99,358 |  |  |  |  |  |  |  |  |
(1) | Principal amount represents the par value of the ARS and is included in securities owned in the condensed consolidated balance sheet at September 30, 2014. The valuation adjustment amount is included as a reduction to securities owned in the condensed consolidated balance sheet as well as principal transactions revenue in the statements of income at September 30, 2014.
(2)Derived by applying a multiple to the spread between 110% to 150% to the U.S. Treasury rate of 1.40%. (3)Based on current auctions in comparable securities that have not failed. (4)Derived by applying a multiple to the spread of 175% to the U.S. Treasury rate of 1.58%. (5)Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 2.20%.
(6) | Principal amount represents the present value of the ARS par value that the Company is committed to purchase at a future date. This principal amount is presented as an off-balance sheet item. The valuation adjustment amount is included in accounts payable and other liabilities on the condensed consolidated balance sheet at September 30, 2014.
(7) | Represents ARS issued by a credit default obligation structure that the Company has purchased and is committed to purchase as a result of a legal settlement.
The fair value of ARS and ARS purchase commitments 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 effect 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. For example, see the following sensitivities:
• | The impact of a 25 basis point increase in the discount rate at September 30, 2014 would result in a decrease in the fair value of $910,000 does not consider a corresponding reduction in duration as discussed above.
• | The impact of a 50 basis point increase in the discount rate at September 30, 2014 would result in a decrease in the fair value of $1.8 million does not consider a corresponding reduction in duration as discussed above.
These sensitivities are hypothetical and are based on scenarios where they are “stressed” and should be used with caution. These estimates do not include all of the interplay among assumptions and are estimated as a portfolio rather than as individual assets. 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, 2014, the Company had a valuation adjustment (unrealized loss) of $7.5 million for ARS owned which is included in principal transactions on the condensed consolidated statement of income. As of September 30, 2014, the Company also had a valuation adjustment of $1.0 million on ARS purchase commitments from settlements with the Regulators and legal settlements and awards which is included in other revenue on the condensed consolidated statement of income. The total valuation adjustment was $8.5 million as of September 30, 2014. The valuation adjustment represents the difference between the principal value and the fair value of the ARS owned and ARS purchase commitments. 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, 2014:
(Expressed in thousands) |  |  |  |  |  |  |
| Fair Value |  | Unfunded Commitments |  | Redemption Frequency |  | Redemption Notice Period
Hedge funds(1) | $ | 1,540 |  |  | $ | — |  |  | Quarterly - Annually |  | 30 - 120 Days
Private equity funds(2) | 6,178 |  |  | 1,996 |  |  | N/A |  | N/A
| $ | 7,718 |  |  | $ | 1,996 |  |  |  |  |
(1) | Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies. Each hedge fund has various restrictions regarding redemption; no investment is locked-up for a period greater than one year.
(2) | Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources. Due to the illiquid nature of these funds, investors are not permitted to make withdrawals without consent of the general partner. The lock-up period of the private equity fund is expected to be 10 years.
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 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 an underwriting agent in leveraged financing transactions where it utilizes a warehouse facility provided by a commercial bank 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. Valuation Process The Finance & Accounting (“F&A”) group is responsible for the Company’s fair value policies, processes and procedures. F&A is independent from the business units and trading desks and is headed by the Company’s Chief Financial Officer ("CFO"), who has final authority over the valuation of the Company’s financial instruments. The Finance Control Group (“FCG”) within F&A is responsible for daily profit and loss reporting, front-end trading system position reconciliations, monthly profit and loss reporting, and independent price verification procedures. For financial instruments categorized in Levels 1 and 2 of the fair value hierarchy, the FCG performs a monthly independent price verification to determine the reasonableness of the prices provided by the Company’s independent pricing vendor. The FCG uses its third-party pricing vendor, executed transactions, and broker-dealer quotes for validating the fair values of financial instruments. For financial instruments categorized in Level 3 of the fair value hierarchy measured on a recurring basis, primarily for ARS, a group comprised of the CFO, the Controller, and a financial analyst are responsible for the ARS valuation model and resulting fair valuations. Procedures performed include aggregating all ARS owned by type from firm inventory accounts and ARS purchase commitments from regulatory and legal settlements and awards provided by the Legal Department. Observable and unobservable inputs are aggregated from various sources and entered into the ARS valuation model. For unobservable inputs, the group reviews the appropriateness of the inputs to ensure consistency with how a market participant would arrive at the unobservable input. For example, for the duration assumption, the group would consider recent policy statements regarding short-term interest rates by the Federal Reserve and recent ARS issuer redemptions and announcements for future redemptions. The model output is reviewed for reasonableness and consistency. Where available, comparisons are performed between ARS owned or committed to purchase to ARS that are trading in the secondary market. For financial instruments categorized in Level 3 of the fair value hierarchy measured on a non-recurring basis, primarily for MSRs, the OMHHF Valuation Committee, which is comprised of the OMHHF President & Chief Executive Officer, OMHHF CFO, OMHHF Chief Operating Officer, and OMHHF Asset Manager, is responsible for the MSR model and resulting fair valuations. The OMHHF Valuation Committee performs its review of the model and assumptions and its impairment analysis on a quarterly basis. On an annual basis, the Company utilizes an external valuation consultant to validate that the internal MSR model is functioning appropriately. The OMHHF Valuation Committee compares assumptions used for unobservable inputs, such as for discount rates, estimated life, and costs of servicing, to that used by the external valuation consultant for reasonableness. The model output and resulting valuation multiples are reviewed for reasonableness and consistency. Where available, comparisons are performed to recent MSR sales in the secondary market. The Company’s management reviews the results of both the quarterly reviews and annual impairment analysis. Assets and Liabilities Measured at Fair Value The Company’s assets and liabilities, recorded at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, 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, 2014
(Expressed in thousands) |  |  |  |  |  |  |
| Fair Value Measurements at September 30, 2014
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 33,364 |  |  | $ | — |  |  | $ | — |  |  | $ | 33,364 |
Deposits with clearing organizations | 16,595 |  |  | — |  |  | — |  |  | 16,595 |
Securities owned: |  |  |  |  |  |  |
U.S. Treasury securities | 503,509 |  |  | — |  |  | — |  |  | 503,509 |
U.S. Agency securities | — |  |  | 15,067 |  |  | — |  |  | 15,067 |
Sovereign obligations | — |  |  | 3,434 |  |  | — |  |  | 3,434 |
Corporate debt and other obligations | — |  |  | 19,922 |  |  | — |  |  | 19,922 |
Mortgage and other asset-backed securities | — |  |  | 4,792 |  |  | — |  |  | 4,792 |
Municipal obligations | — |  |  | 62,121 |  |  | 129 |  |  | 62,250 |
Convertible bonds | — |  |  | 58,795 |  |  | — |  |  | 58,795 |
Corporate equities | 49,012 |  |  | — |  |  | — |  |  | 49,012 |
Money markets | 2,668 |  |  | — |  |  | — |  |  | 2,668 |
Auction rate securities | — |  |  | — |  |  | 87,323 |  |  | 87,323 |
Securities owned, at fair value | 555,189 |  |  | 164,131 |  |  | 87,452 |  |  | 806,772 |
Investments (1) | 98 |  |  | 49,597 |  |  | 8,423 |  |  | 58,118 |
Loans held for sale | — |  |  | 20,095 |  |  | — |  |  | 20,095 |
Securities purchased under agreements to resell (2) | — |  |  | 250,000 |  |  | — |  |  | 250,000 |
Derivative contracts: |  |  |  |  |  |  |
TBAs | — |  |  | 1,774 |  |  | — |  |  | 1,774 |
Interest rate lock commitments | — |  |  | — |  |  | 5,511 |  |  | 5,511 |
Derivative contracts, total | — |  |  | 1,774 |  |  | 5,511 |  |  | 7,285 |
Total | $ | 605,246 |  |  | $ | 485,597 |  |  | $ | 101,386 |  |  | $ | 1,192,229 |
Liabilities |  |  |  |  |  |  |
Securities sold, but not yet purchased: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 67,472 |  |  | $ | — |  |  | $ | — |  |  | $ | 67,472 |
U.S. Agency securities | — |  |  | 24 |  |  | — |  |  | 24 |
Corporate debt and other obligations | — |  |  | 3,010 |  |  | — |  |  | 3,010 |
Municipal obligations | — |  |  | 55 |  |  | — |  |  | 55 |
Convertible bonds | — |  |  | 8,229 |  |  | — |  |  | 8,229 |
Corporate equities | 49,457 |  |  | — |  |  | — |  |  | 49,457 |
Money markets | 15 |  |  | — |  |  | — |  |  | 15 |
Securities sold, but not yet purchased at fair value | 116,944 |  |  | 11,318 |  |  | — |  |  | 128,262 |
Derivative contracts: |  |  |  |  |  |  |
U.S. treasury futures | 87 |  |  | — |  |  | — |  |  | 87 |
Federal funds futures | 135 |  |  | — |  |  |  |  | 135 |
Eurodollars futures | 60 |  |  | — |  |  | — |  |  | 60 |
General collateral futures | 2 |  |  | — |  |  | — |  |  | 2 |
TBAs | — |  |  | 33 |  |  | — |  |  | 33 |
Interest rate lock commitments | — |  |  | — |  |  | 3,188 |  |  | 3,188 |
ARS purchase commitments | — |  |  | — |  |  | 1,037 |  |  | 1,037 |
Derivative contracts, total | 284 |  |  | 33 |  |  | 4,225 |  |  | 4,542 |
Total | $ | 117,228 |  |  | $ | 11,351 |  |  | $ | 4,225 |  |  | $ | 132,804 |
(1) | Included in other assets on the condensed consolidated balance sheet.
(2) | Included in securities purchased under agreements to resell where the Company has elected fair value option treatment.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2013
(Expressed in thousands) |  |  |  |  |  |  |
| Fair Value Measurements at December 31, 2013
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 60,268 |  |  | $ | — |  |  | $ | — |  |  | $ | 60,268 |
Securities segregated for regulatory and other purposes | 11,495 |  |  | — |  |  | — |  |  | 11,495 |
Deposits with clearing organizations | 10,492 |  |  | — |  |  | — |  |  | 10,492 |
Securities owned: |  |  |  |  |  |  |
U.S. Treasury securities | 566,346 |  |  | — |  |  | — |  |  | 566,346 |
U.S. Agency securities | — |  |  | 29,448 |  |  | — |  |  | 29,448 |
Sovereign obligations | — |  |  | 320 |  |  | — |  |  | 320 |
Corporate debt and other obligations | — |  |  | 14,673 |  |  | — |  |  | 14,673 |
Mortgage and other asset-backed securities | — |  |  | 3,395 |  |  | — |  |  | 3,395 |
Municipal obligations | — |  |  | 39,930 |  |  | 236 |  |  | 40,166 |
Convertible bonds | — |  |  | 53,719 |  |  | — |  |  | 53,719 |
Corporate equities | 61,634 |  |  | — |  |  | — |  |  | 61,634 |
Money markets | 1,263 |  |  | — |  |  | — |  |  | 1,263 |
Auction rate securities | — |  |  | — |  |  | 85,124 |  |  | 85,124 |
Securities owned, at fair value | 629,243 |  |  | 141,485 |  |  | 85,360 |  |  | 856,088 |
Investments (1) | 10,775 |  |  | 47,726 |  |  | 5,946 |  |  | 64,447 |
Loans held for sale | — |  |  | 75,989 |  |  | — |  |  | 75,989 |
Securities purchased under agreements to resell (2) | — |  |  | 184,000 |  |  | — |  |  | 184,000 |
Derivative contracts: |  |  |  |  |  |  |
TBAs | — |  |  | 2,155 |  |  | — |  |  | 2,155 |
Interest rate lock commitments | — |  |  | — |  |  | 2,375 |  |  | 2,375 |
Derivative contracts, total | — |  |  | 2,155 |  |  | 2,375 |  |  | 4,530 |
Total | $ | 722,273 |  |  | $ | 451,355 |  |  | $ | 93,681 |  |  | $ | 1,267,309 |
Liabilities |  |  |  |  |  |  |
Securities sold, but not yet purchased: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 11,837 |  |  | $ | — |  |  | $ | — |  |  | $ | 11,837 |
U.S. Agency securities | — |  |  | 52 |  |  | — |  |  | 52 |
Corporate debt and other obligations | — |  |  | 4,847 |  |  | — |  |  | 4,847 |
Mortgage and other asset-backed securities | — |  |  | 7 |  |  | — |  |  | 7 |
Municipal obligations | — |  |  | 72 |  |  | — |  |  | 72 |
Convertible bonds | — |  |  | 13,922 |  |  | — |  |  | 13,922 |
Corporate equities | 45,336 |  |  | — |  |  | — |  |  | 45,336 |
Money markets | 241 |  |  | — |  |  | — |  |  | 241 |
Securities sold, but not yet purchased at fair value | 57,414 |  |  | 18,900 |  |  | — |  |  | 76,314 |
Investments | 648 |  |  | — |  |  | — |  |  | 648 |
Derivative contracts: |  |  |  |  |  |  |
U.S. treasury futures | 186 |  |  | — |  |  | — |  |  | 186 |
Federal funds futures | 18 |  |  | — |  |  | — |  |  | 18 |
Eurodollars futures | 44 |  |  | — |  |  | — |  |  | 44 |
TBAs | — |  |  | 73 |  |  | — |  |  | 73 |
Interest rate lock commitments | — |  |  | — |  |  | 3,653 |  |  | 3,653 |
ARS purchase commitments | — |  |  | — |  |  | 2,600 |  |  | 2,600 |
Derivative contracts, total | 248 |  |  | 73 |  |  | 6,253 |  |  | 6,574 |
Total | $ | 58,310 |  |  | $ | 18,973 |  |  | $ | 6,253 |  |  | $ | 83,536 |
(1) | Included in other assets on the condensed consolidated balance sheet.
(2) | Included in securities purchased under agreements to resell where the Company has elected fair value option treatment.
There were no transfers between Level 1 and Level 2 financial assets and liabilities in the three months ended September 30, 2014. 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, 2014 and 2013:
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
| Level 3 Assets and Liabilities
| For the Three Months Ended September 30, 2014
|  |  | Total Realized |  |  |  |  |  |  |  |
|  |  | and Unrealized |  |  |  |  |  |  |  |
| Beginning |  | Gains |  | Purchases |  | Sales and |  | Transfers |  | Ending
| Balance |  | (Losses) (5)(6) |  | and Issuances (7) |  | Settlements |  | In (Out) |  | Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Municipals | $ | 52 |  |  | $ | 77 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 129 |
Auction rate securities (1)(8) | 92,548 |  |  | (645 | ) |  | 2,375 |  |  | (6,955 | ) |  | — |  |  | 87,323 |
Interest rate lock commitments (2) | 10,528 |  |  | (5,017 | ) |  | — |  |  | — |  |  | — |  |  | 5,511 |
Investments (3) | 8,779 |  |  | (254 | ) |  | 180 |  |  | (282 | ) |  | — |  |  | 8,423 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments (2) | 3,833 |  |  | 645 |  |  | — |  |  | — |  |  | — |  |  | 3,188 |
ARS purchase commitments (4) | 1,514 |  |  | 477 |  |  | — |  |  | — |  |  | — |  |  | 1,037 |
(1) | Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2) | Interest rate lock commitment assets and liabilities are recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The commitment assets and liabilities are recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan.
(3) | Primarily represents general partner ownership and limited partner interests in hedge funds and private equity funds sponsored by the Company.
(4) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(5) | Included in principal transactions on the condensed consolidated statement of income, except for investments which are included in other income on the condensed consolidated statement of income.
(6) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(7) | Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(8) | Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
| Level 3 Assets and Liabilities
| For the Three Months Ended September 30, 2013
|  |  | Total Realized |  |  |  |  |  |  |  |
|  |  | and Unrealized |  |  |  |  |  |  |  |
| Beginning |  | Gains |  | Purchases |  | Sales and |  | Transfers |  | Ending
| Balance |  | (Losses) (5)(6) |  | and Issuances (7) |  | Settlements |  | In (Out) |  | Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities (1) | $ | 67 |  |  | $ | — |  |  | $ | — |  |  | $ | (8 | ) |  | $ | (59 | ) |  | $ | — |
Municipals | 236 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 236 |
Auction rate securities (2)(8) | 78,076 |  |  | (245 | ) |  | 2,750 |  |  | (150 | ) |  | — |  |  | 80,431 |
Investments (3) | 12,974 |  |  | (413 | ) |  | 1,000 |  |  | (7,435 | ) |  | — |  |  | 6,126 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
ARS purchase commitments (4) | 2,329 |  |  | (83 | ) |  | — |  |  | — |  |  | — |  |  | 2,412 |
(1) | Represents private placements of non-agency collateralized mortgage obligations.
(2) | Represents auction rate preferred securities, municipal auction rate securities and student loan 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) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(5) | Included in principal transactions on the condensed consolidated statement of income, except for investments which are included in other income on the condensed consolidated statement of income.
(6) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(7) | Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(8) | Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.
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, 2014 and 2013:
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
| Level 3 Assets and Liabilities
| For the Nine Months Ended September 30, 2014
|  |  | Total Realized |  |  |  |  |  |  |  |
|  |  | and Unrealized |  |  |  |  |  |  |  |
| Beginning |  | Gains |  | Purchases |  | Sales and |  | Transfers |  | Ending
| Balance |  | (Losses) (5)(6) |  | and Issuances (7) |  | Settlements |  | In (Out) |  | Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Municipals | $ | 236 |  |  | $ | (107 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 129 |
Auction rate securities (1)(8) | 85,124 |  |  | (971 | ) |  | 16,550 |  |  | (13,380 | ) |  | — |  |  | 87,323 |
Interest rate lock commitments (2) | 2,375 |  |  | 3,136 |  |  | — |  |  | — |  |  | — |  |  | 5,511 |
Investments (3) | 5,946 |  |  | (341 | ) |  | 4,444 |  |  | (1,006 | ) |  | (620 | ) |  | 8,423 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments (2) | 3,653 |  |  | 465 |  |  | — |  |  | — |  |  | — |  |  | 3,188 |
ARS purchase commitments (4) | 2,600 |  |  | 1,563 |  |  | — |  |  | — |  |  | — |  |  | 1,037 |
(1) | Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2) | Interest rate lock commitments assets and liabilities are recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The commitment assets and liabilities are recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan.
(3) | Primarily represents general partner ownership and limited partner interests in hedge funds and private equity funds sponsored by the Company.
(4) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(5) | Included in principal transactions on the condensed consolidated statement of income, except for investments which are included in other income on the condensed consolidated statement of income.
(6) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(7) | Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(8) | Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
| Level 3 Assets and Liabilities
| For the Nine Months Ended September 30, 2013
|  |  | Total Realized |  |  |  |  |  |  |  |
|  |  | and Unrealized |  |  |  |  |  |  |  |
| Beginning |  | Gains |  | Purchases |  | Sales and |  | Transfers |  | Ending
| Balance |  | (Losses) (5)(6) |  | and Issuances (7) |  | Settlements |  | In (Out) |  | Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Mortgage and other asset-backed securities (1) | $ | 40 |  |  | $ | — |  |  | $ | — |  |  | $ | (8 | ) |  | $ | (32 | ) |  | $ | — |
Municipals | 239 |  |  | (3 | ) |  | — |  |  | — |  |  | — |  |  | 236 |
Auction rate securities (2)(8) | 72,118 |  |  | (437 | ) |  | 13,175 |  |  | (4,425 | ) |  | — |  |  | 80,431 |
Investments (3) | 12,954 |  |  | 210 |  |  | 1,000 |  |  | (8,038 | ) |  | — |  |  | 6,126 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Auction rate securities (2) | 100 |  |  | — |  |  | 100 |  |  | — |  |  | — |  |  | — |
ARS purchase commitments (4) | 2,647 |  |  | 235 |  |  | — |  |  | — |  |  | — |  |  | 2,412 |
(1) | Represents private placements of non-agency collateralized mortgage obligations.
(2) | Represents auction rate preferred securities, municipal auction rate securities and student loan 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) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(5) | Included in principal transactions on the condensed consolidated statement of income, except for investments which are included in other income on the condensed consolidated statement of income.
(6) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(7) | Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(8) | Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.
Financial Instruments Not Measured at Fair Value The tables below present the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the condensed consolidated balance sheets. The tables below exclude non-financial assets and liabilities (e.g., office facilities and accrued compensation). The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 or Level 2 (e.g., cash and receivables from customers) approximates fair value because of the relatively short period of time between their origination and expected maturity. The fair value of the Company’s 8.75% Senior Secured Notes, categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the Notes trade. The fair value of MSRs is based on observable and unobservable inputs and thus categorized as Level 3 in the fair value hierarchy. The fair value of MSRs is based on a discounted cash flow valuation methodology on a loan level basis that determines the present value of future cash flows expected to be realized. The fair value considers estimated future servicing fees and ancillary revenue, offset by the estimated costs to service the loans. The discounted cash flow model considers portfolio characteristics, contractually specified servicing fees, prepayment speed assumptions, delinquency rates, costs to service, late charges, and other ancillary revenue, and other economic factors such as interest rates. The fair value of MSRs is sensitive to changes in interest rates, including the effect on prepayment speeds. MSRs typically decrease in value when interest rates decline as declining interest rates tend to increase prepayments and therefore reduce the expected life of the net servicing cash flows that make up the MSR asset. Assets and liabilities not measured at fair value on a recurring basis as of September 30, 2014
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Fair Value Measurement: Assets
| As of September 30, 2014 |  | As of September 30, 2014
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash | $ | 44,578 |  |  | $ | 44,578 |  |  | $ | 44,578 |  |  | $ | — |  |  | $ | — |  |  | $ | 44,578 |
Cash segregated for regulatory and other purposes | 19,106 |  |  | 19,106 |  |  | 19,106 |  |  | — |  |  | — |  |  | 19,106 |
Deposits with clearing organization | 15,016 |  |  | 15,016 |  |  | 15,016 |  |  | — |  |  | — |  |  | 15,016 |
Receivable from brokers, dealers and clearing organizations |  |  |  |  |  |  |  |  |  |  |
Securities borrowed | 267,643 |  |  | 267,643 |  |  | — |  |  | 267,643 |  |  | — |  |  | 267,643 |
Receivables from brokers | 52,616 |  |  | 52,616 |  |  | — |  |  | 52,616 |  |  | — |  |  | 52,616 |
Securities failed to deliver | 24,476 |  |  | 24,476 |  |  | — |  |  | 24,476 |  |  | — |  |  | 24,476 |
Clearing organizations | 21,705 |  |  | 21,705 |  |  | — |  |  | 21,705 |  |  | — |  |  | 21,705 |
Other | 14,503 |  |  | 14,503 |  |  | — |  |  | 14,503 |  |  | — |  |  | 14,503 |
| 380,943 |  |  | 380,943 |  |  | — |  |  | 380,943 |  |  | — |  |  | 380,943 |
Receivable from customers | 883,133 |  |  | 883,133 |  |  | — |  |  | 883,133 |  |  | — |  |  | 883,133 |
Mortgage servicing rights (“MSRs”) | 29,496 |  |  | 41,768 |  |  | — |  |  | — |  |  | 41,768 |  |  | 41,768 |
Escrow deposit (1) | 25,014 |  |  | 25,014 |  |  | 25,014 |  |  | — |  |  | — |  |  | 25,014 |
(1) | Included in other assets on the condensed consolidated balance sheet. Represents escrow monies deposited with a commercial bank. Corresponds with payable to third party in accounts payable and other liabilities on the condensed consolidated balance sheet (see note 3 below).
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Fair Value Measurement: Liabilities
| As of September 30, 2014 |  | As of September 30, 2014
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Drafts payable | $ | 24,316 |  |  | $ | 24,316 |  |  | $ | 24,316 |  |  | $ | — |  |  | $ | — |  |  | $ | 24,316 |
Bank call loans | 135,500 |  |  | 135,500 |  |  | 135,500 |  |  | — |  |  | — |  |  | 135,500 |
Payables to brokers, dealers and clearing organizations |  |  |  |  |  |  |  |  |  |  |
Securities loaned | 164,095 |  |  | 164,095 |  |  | — |  |  | 164,095 |  |  | — |  |  | 164,095 |
Securities failed to receive | 32,297 |  |  | 32,297 |  |  | — |  |  | 32,297 |  |  | — |  |  | 32,297 |
Clearing organizations and other | 8,558 |  |  | 8,558 |  |  | — |  |  | 8,558 |  |  | — |  |  | 8,558 |
| 204,950 |  |  | 204,950 |  |  | — |  |  | 204,950 |  |  | — |  |  | 204,950 |
Payables to customers | 689,363 |  |  | 689,363 |  |  | — |  |  | 689,363 |  |  | — |  |  | 689,363 |
Securities sold under agreements to repurchase | 688,310 |  |  | 688,310 |  |  | — |  |  | 688,310 |  |  | — |  |  | 688,310 |
Accounts payable and other liabilities |  |  |  |  |  |  |  |  |  |  |
Warehouse payable (2) | 17,540 |  |  | 17,540 |  |  | — |  |  | 17,540 |  |  | — |  |  | 17,540 |
Payable to third party (3) | 25,014 |  |  | 25,014 |  |  | 25,014 |  |  | — |  |  | — |  |  | 25,014 |
Senior secured notes | 150,000 |  |  | 158,063 |  |  | — |  |  | 158,063 |  |  | — |  |  | 158,063 |
(2) | Warehouse payable represents loans outstanding under a warehouse facility provided by a commercial bank but prior to GNMA securitization. The borrowing rate on the warehouse facility is based upon a variable interest rate of 1 month LIBOR plus a spread. The carrying amounts approximate fair value because of the short maturity of these instruments. This warehouse facility is used to fund loans held for sale on the condensed consolidated balance sheet.
(3) | Corresponds with escrow deposit in other assets on the condensed consolidated balance sheet (see note 1 above).
Assets and liabilities not measured at fair value on a recurring basis as of December 31, 2013
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Fair Value Measurement: Assets
| As of December 31, 2013 |  | As of December 31, 2013
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash | $ | 38,026 |  |  | $ | 38,026 |  |  | $ | 38,026 |  |  | $ | — |  |  | $ | — |  |  | $ | 38,026 |
Cash segregated for regulatory and other purposes | 24,828 |  |  | 24,828 |  |  | 24,828 |  |  | — |  |  | — |  |  | 24,828 |
Deposits with clearing organization | 13,187 |  |  | 13,187 |  |  | 13,187 |  |  | — |  |  | — |  |  | 13,187 |
Receivable from brokers, dealers and clearing organizations |  |  |  |  |  |  |  |  |  |  |
Deposits paid for securities borrowed | 274,127 |  |  | 274,127 |  |  | — |  |  | 274,127 |  |  | — |  |  | 274,127 |
Receivables from brokers | 49,803 |  |  | 49,803 |  |  | — |  |  | 49,803 |  |  | — |  |  | 49,803 |
Securities failed to deliver | 9,628 |  |  | 9,628 |  |  | — |  |  | 9,628 |  |  | — |  |  | 9,628 |
Clearing organizations | 27 |  |  | 27 |  |  | — |  |  | 27 |  |  | — |  |  | 27 |
Omnibus accounts | 18,086 |  |  | 18,086 |  |  | — |  |  | 18,086 |  |  | — |  |  | 18,086 |
Other | 13,202 |  |  | 13,202 |  |  | — |  |  | 13,202 |  |  | — |  |  | 13,202 |
| 364,873 |  |  | 364,873 |  |  | — |  |  | 364,873 |  |  | — |  |  | 364,873 |
Receivable from customers | 868,869 |  |  | 868,869 |  |  | — |  |  | 868,869 |  |  | — |  |  | 868,869 |
Securities purchased under agreements to resell | 825 |  |  | 825 |  |  | 825 |  |  | — |  |  | — |  |  | 825 |
Mortgage servicing rights (“MSRs”) | 28,879 |  |  | 40,084 |  |  | — |  |  | — |  |  | 40,084 |  |  | 40,084 |
Escrow deposit (1) | 25,006 |  |  | 25,006 |  |  | 25,006 |  |  | — |  |  | — |  |  | 25,006 |
(1) | Included in other assets on the condensed consolidated balance sheet. Represents escrow monies deposited with a commercial bank. Corresponds with payable to third party in accounts payable and other liabilities on the condensed consolidated balance sheet (see note 3 below).
(Expressed in thousands) |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Fair Value Measurement: Liabilities
| As of December 31, 2013 |  | As of December 31, 2013
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Drafts payable | $ | 48,198 |  |  | $ | 48,198 |  |  | $ | 48,198 |  |  | $ | — |  |  | $ | — |  |  | $ | 48,198 |
Bank call loans | 118,200 |  |  | 118,200 |  |  | 118,200 |  |  | — |  |  | — |  |  | 118,200 |
Payables to brokers, dealers and clearing organizations |  |  |  |  |  |  |  |  |  |  |
Deposits received for securities loaned | 211,621 |  |  | 211,621 |  |  | — |  |  | 211,621 |  |  | — |  |  | 211,621 |
Securities failed to receive | 5,346 |  |  | 5,346 |  |  | — |  |  | 5,346 |  |  | — |  |  | 5,346 |
Clearing organizations and other | 6,348 |  |  | 6,348 |  |  | — |  |  | 6,348 |  |  | — |  |  | 6,348 |
| 223,315 |  |  | 223,315 |  |  | — |  |  | 223,315 |  |  | — |  |  | 223,315 |
Payables to customers | 626,564 |  |  | 626,564 |  |  | — |  |  | 626,564 |  |  | — |  |  | 626,564 |
Securities sold under agreements to repurchase | 757,491 |  |  | 757,491 |  |  | — |  |  | 757,491 |  |  | — |  |  | 757,491 |
Accounts payable and other liabilities |  |  |  |  |  |  |  |  |  |  |
Warehouse payable (2) | 54,614 |  |  | 54,614 |  |  | — |  |  | 54,614 |  |  | — |  |  | 54,614 |
Payable to third party (3) | 25,006 |  |  | 25,006 |  |  | 25,006 |  |  | — |  |  | — |  |  | 25,006 |
Senior secured notes | 195,000 |  |  | 208,529 |  |  | — |  |  | 208,529 |  |  | — |  |  | 208,529 |
(2) | Warehouse payable represents loans outstanding under a warehouse facility provided by a commercial bank but prior to GNMA securitization. The borrowing rate on the warehouse facility is based upon a variable interest rate of 1 month LIBOR plus a spread. The carrying amounts approximate fair value because of the short maturity of these instruments. This warehouse facility is used to fund loans held for sale on the condensed consolidated balance sheet.
(3) | Corresponds with escrow deposit in other assets on the consolidated balance sheet (see note 1 above).
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, 2014 or December 31, 2013. The Company elected the fair value option for repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. 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, 2014, the fair value of the reverse repurchase agreements and repurchase agreements were $250.0 million and $nil, respectively. On October 1, 2013, the Company also elected the fair value option for loans held for sale which reside in OMHHF and are reported on the condensed consolidated balance sheet. Loans held for sale represent originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded. Electing to use fair value allows a better offset of the change in fair value of the loan and the change in fair value of the derivative instruments used as economic hedges. During the period prior to its sale, interest income on a loan held for sale is calculated in accordance with the terms of the individual loan. At September 30, 2014, the Company did not carry any loans held for sale for a period longer than 90 days. At September 30, 2014, the book value and fair value of loans held for sale was $20.0 million and $20.1 million, respectively. Derivative Instruments and Hedging Activities 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. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the condensed consolidated balance sheet. 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. At September 30, 2014, there were no derivative instruments that were designated and qualified as a cash flow hedge. 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. 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 uses including U.S. Treasury notes, Federal funds, General collateral futures and Eurodollar contracts are used primarily as an economic hedge of interest rate risk associated with government trading activities. Derivatives used for commercial mortgage banking In the normal course of business, OMHHF enters into contractual commitments to originate (purchase) and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by OMHHF. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, OMHHF’s policy is to enter into a TBA sale contract with the investor simultaneously with the rate lock commitment with the borrower. The TBA sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. TBA sale contracts with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment. Both the rate lock commitments to borrowers and the TBA sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through earnings. The fair value of the Company’s rate lock commitments to borrowers and loans held for sale and the related input includes, as applicable:
• | the assumed gain/loss of the expected resultant loan sale to the buyer;
• | the expected net future cash flows associated with servicing the loan;
• | the effects of interest rate movements between the date of the rate lock and the balance sheet date; and
• | the nonperformance risk of both the counterparty and the Company.
The fair value of the Company’s TBA sale contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the TBA sale contracts to measure the fair value. The assumed gain/loss considers the amount that the Company has discounted the price to the borrower from par for competitive reasons, if at all, and the expected net cash flows from servicing to be received upon securitization of the loan. The fair value of the expected net future cash flows associated with servicing the loan is calculated pursuant to the valuation techniques described previously for MSRs. To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. The fair value of the Company’s TBA sale contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the TBA sale contracts to measure the fair value. The fair value of the Company’s interest rate lock commitments and TBA sale contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in rate lock and TBA sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties, the short duration of interest rate lock commitments and TBA sale contracts, and the Company’s historical experience with the agreements, the risk of nonperformance by the Company’s counterparties is not significant. TBA Securities The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the TBA market as economic hedges against mortgage-backed securities that it owns or has sold but not yet purchased. 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 sheets in receivable from brokers, dealers and clearing organizations and payable to brokers, dealers and clearing organizations, respectively, and in the condensed consolidated statements of income as principal transactions revenue, net. The notional amounts and fair values of the Company’s derivatives at September 30, 2014 and December 31, 2013 by product were as follows:
(Expressed in thousands) |  |  |  |  |
| Fair Value of Derivative Instruments at September 30, 2014
| Description |  | Notional |  | Fair Value
Assets: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Other contracts | TBAs |  | $ | 86,631 |  |  | $ | 63 |
| TBA sale contracts |  | 213,371 |  |  | 1,711 |
| Interest rate lock commitments |  | 139,947 |  |  | 5,511 |
|  |  | $ | 439,949 |  |  | $ | 7,285 |
Liabilities: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Commodity contracts (2) | U.S. Treasury futures |  | $ | 72,000 |  |  | $ | 87 |
| Federal funds futures |  | 3,950,000 |  |  | 135 |
| Eurodollars futures |  | 300,000 |  |  | 60 |
| General collateral futures |  | 225,000 |  |  | 2 |
Other contracts | TBAs |  | 81,973 |  |  | 33 |
| Interest rate lock commitments |  | 51,106 |  |  | 3,188 |
| Forward start repurchase agreements |  | 181,000 |  |  | — |
| ARS purchase commitments (3) |  | 13,072 |  |  | 1,037 |
|  |  | $ | 4,874,151 |  |  | $ | 4,542 |
(1) | See “Derivative Instruments and Hedging Activities” above for description of derivative financial instruments. Such derivative instruments are not subject to master netting agreements, thus the related amounts are not offset.
(2) | Included in payable to brokers, dealers and clearing organizations on the condensed consolidated balance sheet.
(3) | Included in accounts payable and other liabilities on the condensed consolidated balance sheet.
(Expressed in thousands) |  |  |  |  |
| Fair Value of Derivative Instruments at December 31, 2013
| Description |  | Notional |  | Fair Value
Assets: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Other contracts | TBAs |  | $ | 25,262 |  |  | $ | 134 |
| TBA sale contracts |  | 266,415 |  |  | 2,021 |
| Interest rate lock commitments |  | 115,569 |  |  | 2,375 |
|  |  | $ | 407,246 |  |  | $ | 4,530 |
Liabilities: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Commodity contracts (2) | U.S. Treasury futures |  | $ | 60,000 |  |  | $ | 186 |
| Federal funds futures |  | 6,155,000 |  |  | 18 |
| Eurodollars futures |  | 347,000 |  |  | 44 |
Other contracts | TBAs |  | 14,547 |  |  | 73 |
| Interest rate lock commitments |  | 76,604 |  |  | 3,653 |
| Forward start repurchase agreements |  | 506,000 |  |  | — |
| ARS purchase commitments (3) |  | 29,056 |  |  | 2,600 |
|  |  | $ | 7,188,207 |  |  | $ | 6,574 |
(1) | See “Derivative Instruments and Hedging Activities” above for description of derivative financial instruments. Such derivative instruments are not subject to master netting agreements, thus the related amounts are not offset.
(2) | Included in payable to brokers, dealers and clearing organizations on the condensed consolidated balance sheet.
(3) | Included in accounts payable and other liabilities 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 condensed consolidated statements of income for the three months ended September 30, 2014 and 2013:
(Expressed in thousands) |  |  |  |  |
| The Effect of Derivative Instruments on the Statement of Income
| For the Three Months Ended September 30, 2014
|  |  | Recognized in Income on Derivatives (pre-tax)
Types | Description |  | Location |  | Gain (Loss)
Commodity contracts | U.S. Treasury futures |  | Principal transactions revenue |  | $ | 20 |
| Federal funds futures |  | Principal transactions revenue |  | (119 | )
| Eurodollars futures |  | Principal transactions revenue |  | (4 | )
| General collateral futures |  | Principal transactions revenue |  | (2 | )
Other contracts | TBAs |  | Principal transactions revenue |  | 156 |
| TBAs sale contracts |  | Other |  | 3,461 |
| Interest rate lock commitments |  | Other |  | (4,372 | )
| ARS purchase commitments |  | Principal transactions revenue |  | 477 |
|  |  |  |  | $ | (383 | )
(Expressed in thousands) |  |  |  |  |
| The Effect of Derivative Instruments on the Statement of Income
| For the Three Months Ended September 30, 2013
|  |  | Recognized in Income on Derivatives (pre-tax)
Types | Description |  | Location |  | Gain (Loss)
Commodity contracts | U.S. Treasury futures |  | Principal transactions revenue |  | $ | (356 | )
| Federal funds futures |  | Principal transactions revenue |  | (235 | )
| Eurodollars futures |  | Principal transactions revenue |  | (36 | )
Other contracts | TBAs |  | Principal transactions revenue |  | (243 | )
| TBA sale contracts |  | Other |  | (6,518 | )
| ARS purchase commitments |  | Principal transactions revenue |  | (83 | )
|  |  |  |  | $ | (7,471 | )
The following table presents the location and fair value amounts of the Company’s derivative instruments and their effect on the condensed consolidated statements of income for the nine months ended September 30, 2014 and 2013:
(Expressed in thousands) |  |  |  |  |
| The Effect of Derivative Instruments on the Statement of Income
| For the Nine Months Ended September 30, 2014
|  |  | Recognized in Income on Derivatives (pre-tax)
Types | Description |  | Location |  | Gain (Loss)
Commodity contracts | U.S. Treasury futures |  | Principal transactions revenue |  | $ | (1,040 | )
| Federal funds futures |  | Principal transactions revenue |  | (272 | )
| Eurodollars futures |  | Principal transactions revenue |  | (120 | )
| General Collateral Futures |  | Principal transactions revenue |  | (2 | )
Other contracts | TBAs |  | Principal transactions revenue |  | 132 |
| TBAs sale contracts |  | Other |  | (310 | )
| Interest rate lock commitments |  | Other |  | 3,601 |
| ARS purchase commitments |  | Principal transactions revenue |  | 1,563 |
|  |  |  |  | $ | 3,552 |
(Expressed in thousands) |  |  |  |  |
| The Effect of Derivative Instruments on the Statement of Income
| For the Nine Months Ended September 30, 2013
|  |  | Recognized in Income on Derivatives (pre-tax)
Types | Description |  | Location |  | Gain (Loss)
Commodity contracts | U.S. Treasury futures |  | Principal transactions revenue |  | $ | 446 |
| Federal funds futures |  | Principal transactions revenue |  | (287 | )
| Eurodollars futures |  | Principal transactions revenue |  | 35 |
Other contracts | TBAs |  | Principal transactions revenue |  | 12 |
| TBA sale contracts |  | Other |  | (5,926 | )
| ARS purchase commitments |  | Principal transactions revenue |  | 235 |
|  |  |  |  | $ | (5,485 | )

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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