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Fair value measurements | 6 Months Ended
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Jun. 30, 2018
Fair Value Disclosures [Abstract] |
Fair value measurements | Fair value measurements Securities owned, 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. 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. 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. 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. Corporate Debt and Other Obligations The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information. Mortgage and Other Asset-Backed Securities The Company values non-agency securities collateralized by home equity and various other types of collateral based on external pricing and spread data provided by independent pricing services. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds. Municipal Obligations The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information. 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. Corporate Equities Equity securities and options are generally valued based on quoted prices from the exchange or market where traded. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads. 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. As of June 30, 2018, the Company had $5.0 million in outstanding ARS purchase commitments related to the settlements with the Regulators. 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 June 30, 2018, the Company purchased and holds (net of redemptions) approximately $92.3 million in ARS from its clients. In addition, the Company is committed to purchase another $7.2 million in ARS from clients through 2020 under legal settlements and awards. The ARS positions that the Company owns and is committed to purchase primarily represent auction rate preferred securities issued by closed-end funds and, to a lesser extent, municipal auction rate securities that are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities that 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 classified 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. The ARS purchase commitment, or derivative asset or 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 ARS used is as follows:
(Expressed in thousands)
Quantitative Information about ARS Level 3 Fair Value Measurements as of June 30, 2018
Product |  | Principal |  | Valuation Adjustment |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average
Auction Rate Securities Owned (1)
Auction Rate Preferred Securities |  | $ | 73,275 |  |  | $ | 941 |  |  | $ | 72,334 |  |  | Discounted Cash Flow |  | Discount Rate (2) |  | 2.83% to 3.86% |  | 3.22%
|  |  |  |  |  |  |  |  |  | Duration |  | 2.5 Years |  | 2.5 Years
|  |  |  |  |  |  |  |  |  | Current Yield (3) |  | 2.36% to 3.21% |  | 2.68%
Auction Rate Preferred Securities |  | 18,725 |  |  | 1,123 |  |  | 17,602 |  |  | Tender Offer (4) |  | N/A |  | N/A |  | N/A
Municipal Auction Rate Securities |  | 25 |  |  | — |  |  | 25 |  |  | Par |  | N/A |  | N/A |  | N/A
Student Loan Auction Rate Securities |  | 275 |  |  | 13 |  |  | 262 |  |  | Discounted Cash Flow |  | Discount Rate (5) |  | 3.96% |  | 3.96%
|  |  |  |  |  |  |  |  |  | Duration |  | 5.5 Years |  | 5.5 Years
|  |  |  |  |  |  |  |  |  | Current Yield (3) |  | 2.95% |  | 2.95%
|  | $ | 92,300 |  |  | $ | 2,077 |  |  | $ | 90,223 |  |  |  |  |  |  |  |  |
Auction Rate Securities Commitments to Purchase (6) |  |  |  |  |  |  |  |
Auction Rate Preferred Securities |  | $ | 10,620 |  |  | $ | 130 |  |  | $ | 10,490 |  |  | Discounted Cash Flow |  | Discount Rate (2) |  | 2.83% to 3.86% |  | 3.22%
|  |  |  |  |  |  |  |  |  | Duration |  | 2.5 Years |  | 2.5 Years
|  |  |  |  |  |  |  |  |  | Current Yield (3) |  | 2.36% to 3.21% |  | 2.68%
Auction Rate Preferred Securities |  | 1,515 |  |  | 91 |  |  | 1,424 |  |  | Tender Offer (4) |  | N/A |  | N/A |  | N/A
Municipal Auction Rate Securities |  | 2 |  |  | — |  |  | 2 |  |  | Par |  | N/A |  | N/A |  | N/A
Student Loan Auction Rate Securities |  | 25 |  |  | 1 |  |  | 24 |  |  | Discounted Cash Flow |  | Discount Rate (5) |  | 3.96% |  | 3.96%
|  |  |  |  |  |  |  |  |  | Duration |  | 5.5 Years |  | 5.5 Years
|  |  |  |  |  |  |  |  |  | Current Yield (3) |  | 2.95% |  | 2.95%
|  | $ | 12,162 |  |  | $ | 222 |  |  | $ | 11,940 |  |  |  |  |  |  |  |  |
Total |  | $ | 104,462 |  |  | $ | 2,299 |  |  | $ | 102,163 |  |  |  |  |  |  |  |  |
(1) | Principal amount represents the par value of the ARS and is included in securities owned on the condensed consolidated balance sheet as of June 30, 2018. The valuation adjustment amount is included as a reduction to securities owned on the condensed consolidated balance sheet as of June 30, 2018.
(2) | Derived by applying a multiple to a spread between 110% to 150% to the U.S. Treasury rate of 2.58%.
(3) | Based on current yields for ARS positions owned.
(4) | ARS issuer announced tender offer at 94% of par. Included in Level 2 of the fair value hierarchy.
(5) | Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 2.76%.
(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 as of June 30, 2018.
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 June 30, 2018 would result in a decrease in the fair value of $493,000 (does not consider a corresponding reduction in duration as discussed above).
• | The impact of a 50 basis point increase in the discount rate at June 30, 2018 would result in a decrease in the fair value of $982,000 (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, ARS are primarily categorized in Level 3 of the fair value hierarchy. As of June 30, 2018, the Company had a valuation adjustment (unrealized loss) of $2.1 million for ARS owned which is included as a reduction to securities owned on the condensed consolidated balance sheet. As of June 30, 2018, the Company also had a valuation adjustment of $222,000 on ARS purchase commitments from settlements with the Regulators and legal settlements and awards, which is included in accounts payable and other liabilities on the condensed consolidated balance sheet. The total valuation adjustment was $2.3 million as of June 30, 2018. 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. The following table provides information about the Company's investments in Company-sponsored funds as of June 30, 2018:
(Expressed in thousands) |  |  |  |  |  |  |
| Fair Value |  | Unfunded Commitments |  | Redemption Frequency |  | Redemption Notice Period
Hedge funds (1) | $ | 2,624 |  |  | $ | — |  |  | Quarterly - Annually |  | 30 - 120 Days
Private equity funds (2) | 5,008 |  |  | 1,400 |  |  | N/A |  | N/A
| $ | 7,632 |  |  | $ | 1,400 |  |  |  |  |
(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 the consent of the general partner. The lock-up period of the private equity funds can extend to 10 years.
Valuation Process The Company's 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 an Operations Director 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 with ARS that are trading in the secondary market. Assets and Liabilities Measured at Fair Value The Company's assets and liabilities, recorded at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, 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 June 30, 2018
(Expressed in thousands) |  |  |  |  |  |  |
| Fair Value Measurements as of June 30, 2018
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 10,500 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,500 |
Deposits with clearing organizations | 31,135 |  |  | — |  |  | — |  |  | 31,135 |
Securities owned: |  |  |  |  |  |  |
U.S. Treasury securities | 690,988 |  |  | — |  |  | — |  |  | 690,988 |
U.S. Agency securities | 8,541 |  |  | 7,906 |  |  | — |  |  | 16,447 |
Sovereign obligations | — |  |  | 204 |  |  | — |  |  | 204 |
Corporate debt and other obligations | — |  |  | 24,813 |  |  | — |  |  | 24,813 |
Mortgage and other asset-backed securities | — |  |  | 6,870 |  |  | — |  |  | 6,870 |
Municipal obligations | — |  |  | 116,612 |  |  | — |  |  | 116,612 |
Convertible bonds | — |  |  | 41,135 |  |  | — |  |  | 41,135 |
Corporate equities | 33,112 |  |  | — |  |  | — |  |  | 33,112 |
Auction rate securities | — |  |  | 17,602 |  |  | 72,621 |  |  | 90,223 |
Securities owned, at fair value | 732,641 |  |  | 215,142 |  |  | 72,621 |  |  | 1,020,404 |
Investments (1) | — |  |  | — |  |  | 164 |  |  | 164 |
Derivative contracts: |  |  |  |  |  |  |
TBAs | — |  |  | 2,815 |  |  | — |  |  | 2,815 |
Total | $ | 774,276 |  |  | $ | 217,957 |  |  | $ | 72,785 |  |  | $ | 1,065,018 |
Liabilities |  |  |  |  |  |  |
Securities sold but not yet purchased: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 115,465 |  |  | $ | — |  |  | $ | — |  |  | $ | 115,465 |
U.S. Agency securities | — |  |  | 6 |  |  | — |  |  | 6 |
Corporate debt and other obligations | — |  |  | 5,289 |  |  | — |  |  | 5,289 |
Mortgage and other asset-backed securities | — |  |  | 6,808 |  |  | — |  |  | 6,808 |
Convertible bonds | — |  |  | 7,496 |  |  | — |  |  | 7,496 |
Corporate equities | 26,978 |  |  | — |  |  | — |  |  | 26,978 |
Securities sold but not yet purchased, at fair value | 142,443 |  |  | 19,599 |  |  | — |  |  | 162,042 |
Derivative contracts: |  |  |  |  |  |  |
Futures | 942 |  |  | — |  |  | — |  |  | 942 |
Foreign exchange forward contracts | 5 |  |  | — |  |  | — |  |  | 5 |
TBAs | — |  |  | 2,715 |  |  | — |  |  | 2,715 |
ARS purchase commitments | — |  |  | 91 |  |  | 131 |  |  | 222 |
Derivative contracts, total | 947 |  |  | 2,806 |  |  | 131 |  |  | 3,884 |
Total | $ | 143,390 |  |  | $ | 22,405 |  |  | $ | 131 |  |  | $ | 165,926 |
(1) | Included in other assets on the condensed consolidated balance sheet.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017
(Expressed in thousands) |  |  |  |  |  |  |
| Fair Value Measurements as of December 31, 2017
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 10,490 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,490 |
Deposits with clearing organizations | 34,293 |  |  | — |  |  | — |  |  | 34,293 |
Securities owned: |  |  |  |  |  |  |
U.S. Treasury securities | 640,337 |  |  | — |  |  | — |  |  | 640,337 |
U.S. Agency securities | 3,011 |  |  | 6,894 |  |  | — |  |  | 9,905 |
Sovereign obligations | — |  |  | 608 |  |  | — |  |  | 608 |
Corporate debt and other obligations | — |  |  | 12,538 |  |  | — |  |  | 12,538 |
Mortgage and other asset-backed securities | — |  |  | 4,037 |  |  | — |  |  | 4,037 |
Municipal obligations | — |  |  | 89,618 |  |  | 35 |  |  | 89,653 |
Convertible bonds | — |  |  | 23,216 |  |  | — |  |  | 23,216 |
Corporate equities | 34,067 |  |  | — |  |  | — |  |  | 34,067 |
Money markets | 383 |  |  | — |  |  | — |  |  | 383 |
Auction rate securities | — |  |  | 24,455 |  |  | 87,398 |  |  | 111,853 |
Securities owned, at fair value | 677,798 |  |  | 161,366 |  |  | 87,433 |  |  | 926,597 |
Investments (1) | — |  |  | — |  |  | 169 |  |  | 169 |
Derivative contracts: |  |  |  |  |  |  |  |  |  |  |
TBAs | — |  |  | 716 |  |  | — |  |  | 716 |
Total | $ | 722,581 |  |  | $ | 162,082 |  |  | $ | 87,602 |  |  | $ | 972,265 |
Liabilities |  |  |  |  |  |  |
Securities sold but not yet purchased: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 53,425 |  |  | $ | — |  |  | $ | — |  |  | $ | 53,425 |
U.S. Agency securities | — |  |  | 13 |  |  | — |  |  | 13 |
Sovereign obligations | — |  |  | 1,179 |  |  | — |  |  | 1,179 |
Corporate debt and other obligations | — |  |  | 4,357 |  |  | — |  |  | 4,357 |
Mortgage and other asset-backed securities | — |  |  | 10 |  |  | — |  |  | 10 |
Convertible bonds | — |  |  | 10,109 |  |  | — |  |  | 10,109 |
Corporate equities | 25,393 |  |  | — |  |  | — |  |  | 25,393 |
Securities sold but not yet purchased, at fair value | 78,818 |  |  | 15,668 |  |  | — |  |  | 94,486 |
Derivative contracts: |  |  |  |  |  |  |
Futures | 766 |  |  | — |  |  | — |  |  | 766 |
TBAs | — |  |  | 614 |  |  | — |  |  | 614 |
ARS purchase commitments | — |  |  | — |  |  | 8 |  |  | 8 |
Derivative contracts, total | 766 |  |  | 614 |  |  | 8 |  |  | 1,388 |
Total | $ | 79,584 |  |  | $ | 16,282 |  |  | $ | 8 |  |  | $ | 95,874 |
(1) | Included in other assets on the condensed consolidated balance sheet.
During the three and six months ended June 30, 2018, the Company transferred $17.6 million and $91,000 in ARS and ARS purchase commitments, respectively, from Level 3 to Level 2 of the fair value hierarchy due to tender offer announcements by issuer of auction rate preferred securities. There were no transfers between any of the levels during the three and six months ended June 30, 2017. The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2018 and 2017:
(Expressed in thousands)
| Level 3 Assets and Liabilities
| For the Three Months Ended June 30, 2018
| Beginning Balance |  | Total Realized and Unrealized Gains (Losses) (3)(4) |  | Purchases and Issuances |  | Sales and Settlements |  | Transfers In (Out) |  | Ending Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Auction rate securities (1) | $ | 87,350 |  |  | $ | (902 | ) |  | $ | 4,050 |  |  | $ | (275 | ) |  | $ | (17,602 | ) |  | $ | 72,621 |
Investments | 168 |  |  | (4 | ) |  | — |  |  | — |  |  | — |  |  | 164 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
ARS purchase commitments (2) | 183 |  |  | (39 | ) |  | — |  |  | — |  |  | 91 |  |  | 131 |
(1) | Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(3) | Included in principal transactions in the condensed consolidated statement of operations, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of operations.
(4) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(Expressed in thousands)
| Level 3 Assets and Liabilities
| For the Three Months Ended June 30, 2017
| Beginning Balance |  | Total Realized and Unrealized Gains (Losses) (3)(4) |  | Purchases and Issuances |  | Sales and Settlements |  | Transfers In (Out) |  | Ending Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Municipal obligations | $ | 36 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 36 |
Auction rate securities (1) | 89,743 |  |  | 502 |  |  | 17,050 |  |  | (125 | ) |  | — |  |  | 107,170 |
Investments | 164 |  |  | 4 |  |  | — |  |  | — |  |  | — |  |  | 168 |
ARS purchase commitments (2) | 878 |  |  | (878 | ) |  | — |  |  | — |  |  | — |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |
ARS purchase commitments (2) | 359 |  |  | 105 |  |  | — |  |  | — |  |  | — |  |  | 254 |
(1) | Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(3) | Included in principal transactions in the condensed consolidated statement of operations, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of operations.
(4) | 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 six months ended June 30, 2018 and 2017:
(Expressed in thousands)
| Level 3 Assets and Liabilities
| For the Six Months Ended June 30, 2018
| Beginning Balance |  | Total Realized and Unrealized Gains (Losses) (3)(4) |  | Purchases and Issuances |  | Sales and Settlements |  | Transfers In (Out) |  | Ending Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Municipal obligations | $ | 35 |  |  | $ | 14 |  |  | $ | 76 |  |  | $ | (125 | ) |  | $ | — |  |  | $ | — |
Auction rate securities (1) | 87,398 |  |  | (55 | ) |  | 4,100 |  |  | (1,220 | ) |  | (17,602 | ) |  | 72,621 |
Investments | 169 |  |  | (5 | ) |  | — |  |  | — |  |  | — |  |  | 164 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
ARS purchase commitments (2) | 8 |  |  | (214 | ) |  | — |  |  | — |  |  | 91 |  |  | 131 |
(1) | Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(3) | Included in principal transactions in the condensed consolidated statement of operations, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of operations.
(4) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(Expressed in thousands)
| Level 3 Assets and Liabilities
| For the Six Months Ended June 30, 2017
| Beginning Balance |  | Total Realized and Unrealized Gains (Losses) (3)(4) |  | Purchases and Issuances |  | Sales and Settlements |  | Transfers In (Out) |  | Ending Balance
Assets |  |  |  |  |  |  |  |  |  |  |
Municipal obligations | $ | 44 |  |  | $ | (8 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 36 |
Auction rate securities (1) | 84,926 |  |  | 1,144 |  |  | 22,050 |  |  | (950 | ) |  | — |  |  | 107,170 |
Investments | 158 |  |  | 10 |  |  | — |  |  | — |  |  | — |  |  | 168 |
ARS purchase commitments (2) | 849 |  |  | (849 | ) |  | — |  |  | — |  |  | — |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |
ARS purchase commitments (2) | 645 |  |  | 391 |  |  | — |  |  | — |  |  | — |  |  | 254 |
(1) | Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2) | Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(3) | Included in principal transactions in the condensed consolidated statement of operations, except for gains (losses) from investments which are included in other income in the condensed consolidated statement of operations.
(4) | Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
Financial Instruments Not Measured at Fair Value The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value on the condensed consolidated balance sheets. The table below excludes non-financial assets and liabilities (e.g., furniture, equipment and leasehold improvements 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 term nature of the underlying assets. The fair value of the Company's 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. Assets and liabilities not measured at fair value as of June 30, 2018
(Expressed in thousands) |  |  | Fair Value Measurement: Assets
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash | $ | 28,461 |  |  | $ | 28,461 |  |  | $ | — |  |  | $ | — |  |  | $ | 28,461 |
Deposits with clearing organization | 25,729 |  |  | 25,729 |  |  | — |  |  | — |  |  | 25,729 |
Receivable from brokers, dealers and clearing organizations: |  |  |  |  |  |  |  |  |
Securities borrowed | 122,238 |  |  | — |  |  | 122,238 |  |  | — |  |  | 122,238 |
Receivables from brokers | 31,962 |  |  | — |  |  | 31,962 |  |  | — |  |  | 31,962 |
Securities failed to deliver | 24,227 |  |  | — |  |  | 24,227 |  |  | — |  |  | 24,227 |
Clearing organizations | 23,459 |  |  | — |  |  | 23,459 |  |  | — |  |  | 23,459 |
Other | 1,603 |  |  | — |  |  | 1,603 |  |  | — |  |  | 1,603 |
| 203,489 |  |  | — |  |  | 203,489 |  |  | — |  |  | 203,489 |
Receivable from customers | 835,708 |  |  | — |  |  | 835,708 |  |  | — |  |  | 835,708 |
Securities purchased under agreements to resell | 6,738 |  |  | — |  |  | 6,738 |  |  | — |  |  | 6,738 |
Notes receivable, net | 42,410 |  |  | — |  |  | 42,410 |  |  | — |  |  | 42,410 |
Investments (1) | 65,601 |  |  | — |  |  | 65,601 |  |  | — |  |  | 65,601 |
(1) | Included in other assets on the condensed consolidated balance sheet.
(Expressed in thousands) |  |  | Fair Value Measurement: Liabilities
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Drafts payable | $ | 21,632 |  |  | $ | 21,632 |  |  | $ | — |  |  | $ | — |  |  | $ | 21,632 |
Bank call loans | 107,500 |  |  | — |  |  | 107,500 |  |  | — |  |  | 107,500 |
Payables to brokers, dealers and clearing organizations: |  |  |  |  |  |  |  |  |
Securities loaned | 199,598 |  |  | — |  |  | 199,598 |  |  | — |  |  | 199,598 |
Payable to brokers | 18,984 |  |  | — |  |  | 18,984 |  |  | — |  |  | 18,984 |
Securities failed to receive | 16,894 |  |  | — |  |  | 16,894 |  |  | — |  |  | 16,894 |
Other | 45,186 |  |  | — |  |  | 45,186 |  |  | — |  |  | 45,186 |
| 280,662 |  |  | — |  |  | 280,662 |  |  | — |  |  | 280,662 |
Payables to customers | 373,664 |  |  | — |  |  | 373,664 |  |  | — |  |  | 373,664 |
Securities sold under agreements to repurchase | 599,151 |  |  | — |  |  | 599,151 |  |  | — |  |  | 599,151 |
Senior secured notes | 200,000 |  |  | — |  |  | 204,174 |  |  | — |  |  | 204,174 |
Assets and liabilities not measured at fair value as of December 31, 2017
(Expressed in thousands) |  |  | Fair Value Measurement: Assets
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash | $ | 37,664 |  |  | $ | 37,664 |  |  | $ | — |  |  | $ | — |  |  | $ | 37,664 |
Deposits with clearing organization | 7,929 |  |  | 7,929 |  |  | — |  |  | — |  |  | 7,929 |
Receivable from brokers, dealers and clearing organizations: |  |  |  |  |  |  |  |  |
Securities borrowed | 132,368 |  |  | — |  |  | 132,368 |  |  | — |  |  | 132,368 |
Receivables from brokers | 19,298 |  |  | — |  |  | 19,298 |  |  | — |  |  | 19,298 |
Securities failed to deliver | 9,442 |  |  | — |  |  | 9,442 |  |  | — |  |  | 9,442 |
Clearing organizations | 24,361 |  |  | — |  |  | 24,361 |  |  | — |  |  | 24,361 |
Other | 930 |  |  | — |  |  | 930 |  |  | — |  |  | 930 |
| 186,399 |  |  | — |  |  | 186,399 |  |  | — |  |  | 186,399 |
Receivable from customers | 848,226 |  |  | — |  |  | 848,226 |  |  | — |  |  | 848,226 |
Securities purchased under agreements to resell | 658 |  |  | — |  |  | 658 |  |  | — |  |  | 658 |
Notes receivable, net | 40,520 |  |  | — |  |  | 40,520 |  |  | — |  |  | 40,520 |
Investments (1) | 65,404 |  |  | — |  |  | 65,404 |  |  | — |  |  | 65,404 |
(1) | Included in other assets on the condensed consolidated balance sheet.
(Expressed in thousands) |  |  | Fair Value Measurement: Liabilities
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Drafts payable | $ | 42,212 |  |  | $ | 42,212 |  |  | $ | — |  |  | $ | — |  |  | $ | 42,212 |
Bank call loans | 118,300 |  |  | — |  |  | 118,300 |  |  | — |  |  | 118,300 |
Payables to brokers, dealers and clearing organizations: |  |  |  |  |  |  |  |  |
Securities loaned | 180,270 |  |  | — |  |  | 180,270 |  |  | — |  |  | 180,270 |
Payable to brokers | 1,567 |  |  | — |  |  | 1,567 |  |  | — |  |  | 1,567 |
Securities failed to receive | 17,559 |  |  | — |  |  | 17,559 |  |  | — |  |  | 17,559 |
Other | 10,707 |  |  | — |  |  | 10,707 |  |  | — |  |  | 10,707 |
| 210,103 |  |  | — |  |  | 210,103 |  |  | — |  |  | 210,103 |
Payables to customers | 385,907 |  |  | — |  |  | 385,907 |  |  | — |  |  | 385,907 |
Securities sold under agreements to repurchase | 586,478 |  |  | — |  |  | 586,478 |  |  | — |  |  | 586,478 |
Senior secured notes | 200,000 |  |  | — |  |  | 206,380 |  |  | — |  |  | 206,380 |
Fair Value Option The Company elected the fair value option for 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. The Company has elected the fair value option for these instruments to reflect more accurately market and economic events in its earnings and to mitigate a potential mismatch in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. As of June 30, 2018, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. 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. 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 Shekel ("NIS"). Such hedges have not been designated as accounting hedges. Unrealized gains and losses on foreign exchange forward contracts are recorded in other assets on the condensed consolidated balance sheet and other income in the condensed consolidated statement of operations. 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 Company uses futures contracts, including U.S. Treasury notes, Federal Funds, General Collateral futures and Eurodollar contracts primarily as an economic hedge of interest rate risk associated with government trading activities. Unrealized gains and losses on futures contracts are recorded on the condensed consolidated balance sheet in payable to brokers, dealers and clearing organizations and in the condensed consolidated statement of operations as principal transactions revenue, net. To-be-announced 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. Net unrealized gains and losses on TBAs are recorded on the condensed consolidated balance sheet in receivable from brokers, dealers and clearing organizations or payable to brokers, dealers and clearing organizations and in the condensed consolidated statement of operations as principal transactions revenue, net. The notional amounts and fair values of the Company's derivatives as of June 30, 2018 and December 31, 2017 by product were as follows:
(Expressed in thousands) |  |  |  |  |
| Fair Value of Derivative Instruments as of June 30, 2018
| Description |  | Notional |  | Fair Value
Assets: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Other contracts | TBAs |  | $ | 821,000 |  |  | $ | 1,777 |
| Other TBAs (2) |  | 31,366 |  |  | 1,038 |
|  |  | $ | 852,366 |  |  | $ | 2,815 |
Liabilities: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Commodity contracts | Futures |  | $ | 4,981,000 |  |  | $ | 942 |
Other contracts | Foreign exchange forward contracts |  | 400 |  |  | 5 |
| TBAs |  | 821,000 |  |  | 1,749 |
| Other TBAs (2) |  | 31,366 |  |  | 966 |
| ARS purchase commitments |  | 12,162 |  |  | 222 |
|  |  | $ | 5,845,928 |  |  | $ | 3,884 |
(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) | Represents TBA purchase and sale contracts related to the legacy OMHHF business.
(Expressed in thousands) |  |  |  |  |
| Fair Value of Derivative Instruments as of December 31, 2017
| Description |  | Notional |  | Fair Value
Assets: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Other contracts | TBAs |  | $ | 26,000 |  |  | $ | 22 |
| Other TBAs (2) |  | 39,576 |  |  | 694 |
|  |  | $ | 65,576 |  |  | $ | 716 |
Liabilities: |  |  |  |  |
Derivatives not designated as hedging instruments (1) |  |  |  |  |
Commodity contracts | Futures |  | $ | 5,844,000 |  |  | $ | 766 |
Other contracts | TBAs |  | 26,000 |  |  | 22 |
| Other TBAs (2) |  | 39,576 |  |  | 592 |
| ARS purchase commitments |  | 10,992 |  |  | 8 |
|  |  | $ | 5,920,568 |  |  | $ | 1,388 |
(1) | See "Derivative Instruments and Hedging Activities" above for a description of derivative financial instruments.
(2) | Represents TBA purchase and sale contracts related to the legacy OMHHF business.
The following table presents the location and fair value amounts of the Company's derivative instruments and their effect in the condensed consolidated statements of operations for the three months ended June 30, 2018 and 2017:
(Expressed in thousands) |  |  |  |  |  |
|  | The Effect of Derivative Instruments in the Statement of Operations
|  | For the Three Months Ended June 30, 2018
|  |  |  | Recognized in Income on Derivatives (pre-tax)
Types |  | Description |  | Location |  | Net Gain (Loss)
Commodity contracts |  | Futures |  | Principal transactions revenue |  | $ | 322 |
Other contracts |  | Foreign exchange forward contracts |  | Other revenue |  | (5 | )
Other contracts |  | TBAs |  | Principal transactions revenue |  | 162 |
|  | Other TBAs |  | Other revenue |  | 72 |
|  | ARS purchase commitments |  | Principal transactions revenue |  | (39 | )
|  |  |  |  |  | $ | 512 |
(Expressed in thousands) |  |  |  |  |  |
|  | The Effect of Derivative Instruments in the Statement of Operations
|  | For the Three Months Ended June 30, 2017
|  |  |  | Recognized in Income on Derivatives (pre-tax)
Types |  | Description |  | Location |  | Net Gain (Loss)
Commodity contracts |  | Futures |  | Principal transactions revenue |  | $ | (8 | )
Other contracts |  | Foreign exchange forward contracts |  | Other revenue |  | 8 |
|  | TBAs |  | Principal transactions revenue |  | 204 |
|  | Other TBAs |  | Other revenue |  | 191 |
|  | ARS purchase commitments |  | Principal transactions revenue |  | (773 | )
|  |  |  |  |  | $ | (378 | )
The following table presents the location and fair value amounts of the Company's derivative instruments and their effect in the condensed consolidated statements of operations for the six months ended June 30, 2018 and 2017:
(Expressed in thousands) |  |  |  |  |  |
|  | The Effect of Derivative Instruments in the Statement of Operations
|  | For the Six Months Ended June 30, 2018
|  |  |  | Recognized in Income on Derivatives (pre-tax)
Types |  | Description |  | Location |  | Net Gain (Loss)
Commodity contracts |  | Futures |  | Principal transactions revenue |  | $ | 1,351 |
Other contracts |  | Foreign exchange forward contracts |  | Other revenue |  | (5 | )
Other contracts |  | TBAs |  | Principal transactions revenue |  | 196 |
|  | Other TBAs |  | Other revenue |  | 147 |
|  | ARS purchase commitments |  | Principal transactions revenue |  | (214 | )
|  |  |  |  |  | $ | 1,475 |
(Expressed in thousands) |  |  |  |  |  |
|  | The Effect of Derivative Instruments in the Statement of Operations
|  | For the Six Months Ended June 30, 2017
|  |  |  | Recognized in Income on Derivatives (pre-tax)
Types |  | Description |  | Location |  | Net Gain (Loss)
Commodity contracts |  | Futures |  | Principal transactions revenue |  | $ | 234 |
Other contracts |  | Foreign exchange forward contracts |  | Other revenue |  | 12 |
|  | TBAs |  | Principal transactions revenue |  | 77 |
|  | Other TBAs |  | Other revenue |  | 511 |
|  | ARS purchase commitments |  | Principal transactions revenue |  | (458 | )
|  |  |  |  |  | $ | 376 |

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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 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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