# JEFFERIES FINANCIAL SERVICES, INC. X-17A-5 (2022-01-28) — Broker-dealer annual report - Company: JEFFERIES FINANCIAL SERVICES, INC. - Form: X-17A-5 - Filed: 2022-01-28 - Period: 2021-11-30 - Accession: 0001891399-22-000002 - CIK: 1891399 - Material weakness: No - Auditor: Deloitte & Touche LLP - Auditor location: NEW YORK, NY - Contact: Joseph D'Auria - Phone: 212-284-2195 - Website: deloitte.com - Signed by: Matt Larson (Executive Vice President and Chief Financial Officer) Original filing: https://www.sec.gov/Archives/edgar/data/1891399/000189139922000002/jfsify2021public.pdf --- {0}------------------------------------------------ #### (SEC J.l) No. 026-00164) STATEMENT OF FINANCIAL CONDITION AS OF NOVEMBER 30, 202 1 AND INDEPENDENT AUDITORS' REPORT \*\*\*\*\*\* Filed pursuant to Rule 18a-7(d)(2) under the Securities Exchange Act of 1934 and Regulation 23.105(e) under the Commodity Exchange Act as a Public Document. {1}------------------------------------------------ # **Deloitte.** Deloitte & Touche **LLP** 30 Rockefeller Plaza New York, NY 10112 Tel: +1 212-492-4000 www.deloitte.com ## **INDEPENDENT AUDITORS' REPORT** To the Board of Directors and Stockholder of Jefferies Financial Services, Inc. : We have audited the accompanying statement of financial condition of Jefferies Financial Services, Inc. (the "Company") as of November 30, 2021, and the related notes (collectively referred to as the "financial statement"). #### **Management's Responsibility for the Financial Statements** Management is responsible for the preparation and fair presentation of this financial statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statement that is free from material misstatement, whether due to fraud or error. #### **Auditors' Responsibility** Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonab'le assurance about whether the financial statement is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the f inancial statement. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statement. We bel ieve that the aud it evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. #### **Opinion** In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Jefferies Financial Services, Inc. as of November 30, 2021, in accordance with accounting principles generally accepted in the United States of America . January 28, 2022 {2}------------------------------------------------ ## **JEFFERIES FINANCIAL SERVICES, INC. STATEMENT OF FINANCLAL CONDITION AT NOVEMBER** 30, **2021 (Dollars in thousands)** ## **ASSETS** | Cash and cash equivalents | \$ | 2,422 455 | |------------------------------------------------------------------------------------|------|-------------| | Financial instruments owned, at fair value | | 1,924 9·19 | | Securities purchased under agreements to resell | | 32,389 | | Receivables: | | | | Brokers, dealers and clearing organizations . | | 718,455 | | Fees, interest and other | | l 3 l I | | Due from affi I iates | | 1,344 | | Premises and equipment | | 111 | | Other assets | | 8,594 | | Total assets . | \$ | 5, 109,578 | | LIABELITLES AND STOCKHOLDER'S EQUITY | | | | LlABILITTES: | | | | Financial instruments sold, not yet purchased, at fair value | \$ | 2,079,822 | | Securities sold under agreements to repurchase | | 333,684 | | Payables: | | | | Brokers, dealers and clearing organizations | | 1,156,455 | | Due to Parent and affiliates | | 337,800 | | Accrued expenses and other liabilities | | 2,987 | | Total liabil ities | | 3,910,748 | | Subordinated liabilities . | | 400,000 | | Stockholder's equity: | | | | Class A Common Stock \$2 par value; authorized issued and outstanding I 000 shares | | 2 | | Additional paid-in-capital | | 990,371 | | Retained deficit | | ( 191 ,543) | | Total stockholder's equity | | 798,830 | | Total liabilities and stockholder's equity | . \$ | 5, 109,578 | See accompanying notes to tatement of Financial Condition. {3}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION NOVEMBER 30 2021 ## 1. ORGANIZATION AND BASIS OF PRESENTATION Organization and Business - Jefferies Financial Services, Inc. ("the Company") is a wholly owned subsidiary of Jefferies Group LLC (the "Parent"), which in turn is a wholly owned subsidiary of Jefferies Financial Group Inc. ("Jefferies" or the "Ultimate Parent"), a diversified holding company incorporated in the state of New York and engaged in a variety of businesses. On October 6, 202 l , the Company, a registered swap dealer with the Commodity Futures Trading Commission ("CFTC ), became subject to the CFTC's regulatory capital requirements and holds regulatory capital in excess of the minimum regulatory requirement. Additionally, the Company registered as a security-based swap dealer with the Securities Exchange Commission ("SEC" ) on November l , 202 I, and became subject to the SEC's security-based swap dealer regulatory rules. The Company is a member of the National Futures Association ("NFA"). The Company operates and is managed as a single reportable business segment Capital Markets. The Company transacts as a dealer in swap and security-based swap transactions with clients and counterparties. The Company is dependent on Jefferies LLC, a registered broker-dealer and subsidiary of the Parent, and Jefferies LLC employees provide the trade support, execution and settlement for transactions related to the Company's swaps business. Basis of Presentation - The accompanying Statement of Financial Condition has been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). These principles require management to make a number of estimates and assumptions that may affect the amounts reported in the Statement of Financial Condition and accompanying notes. The most important of these estimates and assumptions relate to fair value measurements, related party transactions, compensation and benefits, the ability to realize deferred tax assets and the recognition and measurement of uncertain tax positions. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates. Subsequent events - Management has evaluated events and transactions that occurred subsequent to November 30, 2021 through the date this Statement of Financial Condition was issued. On December 16, 2021 , the Company was approved by the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC's net capital requirements. Refer to Note 14, Regulatory Requirements, for further information. The Company determined that there were no other events or transactions during such period requiring recognit on or disclosure in this Statement of Financial Condition. #### 2. SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents - Cash equivalents include highly liquid investments, including money market funds, not held for resale with original maturities of three months or less. Financial Instruments and Fair Value - Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value as required by accounting pronouncements. These instruments primarily represent the Company's trading activities and include both cash and derivative products. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). {4}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 *Fair Value Hierarchy.* Tn determining fair value the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market pa1ticipants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company applies a hierarchy to categorize its fair value measurements broken down into three lev els based on the transparency of inputs as follows: Level 1 - Quoted price are available in active markets for identical assets or liabilities at the reported dlate. Valuation adjustments and block discounts are not applied to Level I instruments. Level 2 - Pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable at tl1e reported date. The mature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments for which fair values have been derived using model inputs that are directly observable in the market, or can be derived principally from, or corroborated by, observable market data, and instruments that are fair valued by using other financial instruments, the parameters of which can be directly observed. Level 3 - Instruments that have little to no pricing observability at the reported date. These financial instruments are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, the financial instrument is valued at the point within the bid-ask range that meets the Company's best estimate of fair value. The Company uses prices and inputs that are current at the measurement date. For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based on the best available information, taking into account the types of financial instruments, current financial information, restrictions (if any) on dispositions, fair values of underlying financial instruments and quotations for similar instruments. The valuation of financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models are permitted based on management's judgment, which takes into consideration the features of the financial instrument such as its complexity, the market in which the financial instrument is traded and underlying risk uncertainties about market conditions. Adjustments from the price derived from a valuation model reflect management's judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument. To the extent that valuation is based on models or inputs that are le ob ervable or unobservable in the market, the determination of fair value require more judgment. The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions. As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels. The degree of judgment exercised in determining fair value is greatest for instruments categorized within Level 3. {5}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 Receivable from and Payable to Brokers, Dealers and Clearing Organizations - Receivables from and payables to brokers, dealers and clearing organizations include deposits of cash and/or securities with exchange clearing organizations to meet margin requirements, amounts due to or from clearing organizations for daily variation ettlements, receivables and payables for fees and commissions and net receivables or payables arising from unsettled security transactions. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase - Securities purchased under agreements to resell and Securities sold under agreements to repurchase (collectively ' repos" ) are accounted for as collateralized financing transactions and are recorded at their contracted resale or repurchase amount plus accrued interest. Repos are presented in the Statement of Financial Condition on a net basis by counterparty, where permitted by U.S. GAAP. The Company monitors the fair value of the underlying securities daily versus the related receivable or payable balances. Should the fair va lue of the unde1·lying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate. Offsetting of Derivative Financial Instruments and Securities Financing Agreements - To manage the Company's exposure to credit risk associated with its derivative activities and securities financing transactions, the Company may enter into International Swaps and Derivative Association Inc. (" ISDA") master netting agreements, master repurchase agreements or similar agreements and collateral arrangements with counterparties. A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. Under the Company's lSDA master netting agreements, it typically a lso executes credit support annexes, which provide for collateral, either in the fom1 of cash or securities, to be posted by or paid to a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of the counterparty's default provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized pa1ty has a right to liquidate the collateral. Any residual c la im after netting is treated along with other unsecured c laims in bankruptcy court. The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy law of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. In cases where the Company has not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of the Company's risk management processes as part of reducing counterparty credit risk and managing liquidity risk. Refer to ote 5, Derivative Financial Instruments and Note 6, Collateralized Transactions, for fu1ther information. {6}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 Intangible Assets - An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. Tf it is detem1ined that it is not more likely than not that an impairment exists, a quantitative impairrnent test is not necessary. lf it is concluded otherwise, the Company is required to perform a quantitative impairment test. Intangible assets are included in Other assets in the Statement of Financial Condition. The Company's annual indefinite-lived intangible asset impairment testing date is August 11 • To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losse is not permitted. Refer to Note 8, fntangible Assets, for further information. Income Taxes - The Company's results of operations are included in the consolidated Federal and applicable state income tax returns filed by the Ultimate Parent. Amounts provided for income taxe are based on income repo1ted for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existi\_ng assets and I iabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. The Company records uncertain tax positions using a two-step process: (i) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for tbose tax positions that meet the more-likely-than-not recognition threshold , it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Legal Reserves - In the normal course of business, the Company has been named, from time to time as a defendant in legal and regulatory proceedings. The Company is also involved, from time to time in other exams, investigations and similar reviews (both formal and informal) by governmental and selfregulatory agencies regarding its businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions. The Company recognizes a liability for a contingency in Accrued expenses and other liabilities when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company accrues the most likely amount of such loss, and if such amount is not determinable, then the Company accrues the minimum in the range as the loss accrual. The determination of the outcome and loss estimates requires significant judgment on the part of management. The Company believes that any other matters for which it has determined a loss to be probable and reasonably estimable are not material to the Statement of Financial Condition. {7}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 In many instances, it is not possible to detennine whether any loss is probable or even possible or to estimate the amount of any loss or the size of any range of loss. Management believes that, in the aggregate, the pe11ding legal actions or regulatory proceedings and any other exams investigations or similar reviews (both formal and informal) should not have a material adverse effect on the Statement of Financial Condition. In addition, management believes that any amount of potential loss or range of potential loss in excess of what has been provided in the Statement of Financia l Condition that cou ld be reasonably estimated is not material. ## Recent Accounting Developments ## *Adopted Accounting Standards* *Financial Instruments* - *Credit Losses.* In June 20] 6, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016- 13, Measurement of Credit Losses. 011 Financial Instruments. The guidance provides for estimating credit losses on financial assets measured at amortized cost by introducing an approach based on expected losses over the financial asset's entire life, recorded at inception or purchase. The Company adopted the new credit loss guidance on December I, 2020 and the adoption did not have a material impact on the Company's Statement of Financial Condition. The impact upon adoption for the Company's reverse repurchase agreements was immaterial because of the contractual collateral maintenance provisions that require that the counterparty continually adjust the amount of collateralization securing the credit exposure on these contracts. For the remaining financial instruments within the guidance's scope, the expected credit losses were also determined to be immaterial considering the counterparty's credit quality, an insignificant history of credit losses, or the short-term nature of the credit exposures. ## *Credit losses on Financial Assets Measured al Amortized Cost* Financial assets measured at amortized cost are presented at the net amount expected to be collected. The estimate of expected credit losses involves judgment and based on an assessment over the life of the financial instrument taking into consideration foreca ts of expected future economic conditions. In evaluating reverse repurchases agreements, the underlying collateral maintenance provisions are taken into consideration. The underlying contractual collateral maintenance requires that the counterparty continually adjust the collateralization amount, securing the credit exposure on these contracts. Collatera lization levels are initially established based upon the counterparty, the type of acceptable collateral that i monitored daily and adjusted to mitigate the potential of any credit losses. Credit losses are not recognized where the underlying collateral's fair value is equal to or exceeds the asset's amortized cost basis. In cases where the collateral's fair value does not equal or exceed the amortized cost basis, the allowance for credit losses, if any, is limited to the difference between the fair value oft:he collatera l at the repo1ting date and the amortized cost basis of the fmancial assets. The Company's receivables from brokers, dealers, and clearing organizations include deposits of cash with exchange clearing organizations to meet margin requirements and amounts due from clearing organizations for daily variation settlements. These receivables generally do not give rise to material credit risk and have a remote probability of default either because of their short-term nature or due to the credit protection framework inherent in the design and operations of brokers dealers and clearing organizations. As s uch, generally, no allowance for credit losses is held against these receivables. For all other financial assets measured at amo1tized cost, the Company estimates expected credit losses over the financial assets' life as of the reporting date based on relevant information about past events current conditions, and reasonable and supportable forecasts. {8}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30, 2021 ## 3. CASH AND CASH EQUIVALENTS Financial assets classified as cash and cash equivalents that are deemed by the Company's management to be generally readily convertible into cash at November 30, 2021 are as follows (in thousands): | Cash in banks. | 127.455 | |----------------------------------|-----------| | Money market investments | 2,295,000 | | Total cash and cash equivalents. | 2,422,455 | ## 4. FAIR VALUE DISCLOSURES The following is a summary of the Company's financial assets and liabilities that are accounted for at fair value on a recurring basis at November 30, 2021, by level within the fair value hierarchy (in thousands): | | | Level 1 | | Level 2 | | Level 3 | | Counterparty and
Cash Collateral
Netting (1) | Total | | |--------------------------------------------------------------------------------|--|---------|---|-----------|-----|---------|---|----------------------------------------------------|-------|--------------| | Assets: | | | | | | | | | | | | Financial instruments owned: | | | | | | | | | | | | Corporate equity securities \$ 1,230,641 | | | S | 1.780 | ్రి | | S | | | \$ 1,232,421 | | U.S. government securities | | 336.489 | | | | | | | | 336.489 | | Derivatives | | | | 3,083.765 | | 7.786 | | (2,735,542) | | 356.009 | | Total financial instruments owned \$1,567,130 \$3,085,545 | | | | | A | 7.786 | A | (2.735.542) | | \$ 1.924.919 | | Liabilities: | | | | | | | | | | | | Financial instruments sold, not yet purchased: | | | | | | | | | | | | Corporate equity securities \$ 656.743 | | | ಕ | | S | | S | | S | 656.743 | | Corporate debt securities | | | | 531.744 | | | | | | 531,744 | | U.S. government securities | | 7,292 | | | | | | | | 7.292 | | Derivatives | | | | 4.226.475 | | 74.759 | | (3,417,191) | | 884.043 | | Total financial instruments sold,
not yet purchased \$ 664,035 \$4,758,219 | | | | | a | 74.759 | A | (3,417,191) \$2,079,822 | | | (1) Represents counterparty and cash collateral netting across the fair value hierarchy for positions with the same counterparty. The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring the Company's financial assets and liabilities that are accounted for at fair value on a recurring basis: ## Corporate Equity Securities · Exchange-Traded Equity Securities: Exchange-traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy. To the extent these securities are actively traded, valuation adjustments are not applied. {9}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 ## *Corporate Debt Securities* - Investment Grade Corporate Bonds: Investment grade corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed from recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Investment grade corporate bonds measured using these valuation methods are categorized within Level 2 of the fair va lue hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Investment grade corporate bonds measured using alternative valuation techniques are categorized within Level 2 of the fair value hierarchy and are a limited portion of the Company s investment grade corporate bonds. - High Yield Corporate and Convertible Bonds: A significant portion of the Company's high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed from recently executed market transactions of institutional size. ## *US. Government Securities* • U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices obtained from external pricing services and categorized within Level 1 of the fair value hierarchy. ## *Derivatives* - Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted exchange prices, broker quotes or vanilla option valuation models such as Black-Scholes, using observable valuation inputs from the principal market or consensus pricing services. Exchange quotes and/or valuation inputs are generally obtained from externa l vendors and pricing services. Broker quotes are validated directly through observable and tradeable quotes. Listed derivative contracts are generally categorized within Level 2 of the fair value hierarchy. - Over-the-Counter ("OTC") Derivative Contracts: OTC derivative contracts are generally valued using models, whose inputs reflect assumptions that the Company believes market participants would use in valuing the derivative in a current transaction. Where available valuation inputs are calibrated from observable market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to va luation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and sign ificance of the inputs to the valuation models. Where significant inputs to the valuation are unobservabl.e, derivative instruments are categorized within Level 3 of the fair value hierarchy. OTC options include OTC equity, foreign exchange and interest rate options measured using various valuation models, such as Black-Scholes, with key inputs including the underlying security price, foreign exchange spot rate, implied volati lity, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of the Company's interest rate swaps, which incorporate observable inputs related to interest rate curves, and valuations of the Company's foreign exchange forwards, which incorporate observable inputs related to foreign currency spot rates and forward curves. {10}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBER 30 2021 # *Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair V(l/11e Measurements at November 30, 2021* The table below presents information on the valuation techniques, significant unobservable inputs and their ranges for the Company's financial assets and liabilities, subject to threshold levels related to the market alue of the positions held measured at fair value on a recurring basis with a significant Level 3 balance. The range of unob ervable input could differ sign ificantly acros different firms given the range of products aero s different firms in the financial services sector. The inputs are not representative of the inputs that could have been used in the valuation of an one financial instrument *(i.e.,* the input used for valuing one financial instrument with in a particular class of financial instruments may not be appropriate for valuing other financial instruments within that g iven class). Additionally the ranges of inputs presented below should not be construed to represent uncertainty regarding the fair value of the Company s financial instruments; rather, the range of inputs is reflective of the difference in the underly ing characteristics of the financial instruments in each category. For certain categories, the Company has provided a weighted average of the inputs allocated based on the fair values of the financial instruments comprising the category. The Company does not believe that the range or weighted average of the inputs is indicative of the reasonablene s of uncertainty of its Level 3 fair values. The range and weighted average are driven by the individual financial instruments within each category and their relative distribution in the population. The disclosed inputs when compared with the inputs as disclosed in other periods should not be expected to necessarily be indicative of changes in the Company s estimates of unobservable inputs for a particular financial instrument as the population of financial instrument compri ing the category will vary from period to period ba ed on purchase and sales of financial instruments during the period as well as transfer into and out of Level 3 each period. | Financial Instruments Owned
\$
Derivatives | | Fa ir Value
(in thousands) | Valuation Technique | Sign i fic:i n f
nobservablc
lnput(s) | Input/
Range | Weighted
Average | | |--------------------------------------------------|----|-------------------------------|-------------------------|---------------------------------------------|-----------------|---------------------|--| | | | 4,97 1 | | | | | | | lntere t rate swaps | | | Market approach | Basi points upfront | 0. 1 - 8.7 | 3.3 | | | Equity options | | | Volatility benchmarking | Volatility | 46% | | | | Financial Instruments | | ot Yet Purcha ·ed | | | | | | |
Derivatives | \$ | 74, 135 | | | | | | | Interest rate swaps | | | Market approach | Basis points upfront | 0. I - 8.7 | 3.3 | | | Equity option | | | Volatility benchmarking | Volatilit | 26%-77% | 40% | | The fair values of certain Level 3 assets and liabilities that were d termined ba ed on third-party pricing infonnation are excluded from the above table. At ovember 30, 2021 , asset and liability exclusions consisted of \$2.8 million and \$0.6 million respectively comprised of certain derivatives. ## *Uncertainty of Fair Value Measurement from Use of Significant Unobservable Inputs* For recuJTing fair value measurements categorized within Level 3 of the fair value hi rarchy, the uncertainty of the fair value measurement to changes in significant unobservable inputs and interrelationship between those unobservable inputs (if any) are de cribed below: Interest rate swaps using a market approach valuation technique. Depending on whether the Company is a receiver or (payer) of basis points upfront, a significant increase in basis points would result in a significant increase (decrease) in the fair value measurement of interest rate swaps. {11}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 Derivative equity options using volatility benchmarking. A significant increase (decrease) m volatility would result in a significantly higher (lower) fair value measurement. ## *Financial I11strume11ts Not Measured at Fair Value* Certain of tJ1e Company's financial instruments are not carried at fair value but are recorded at amounts that approximate fair value due to their liquid or short-term nature and generally negligible credit risk. These financial assets include Cash and cash equiva lents and would gen·erally be presented within Level I of the fair value hierarchy. Receivables - Brokers, dealers and clearing organizations, Receivables - Fees interest and other, Receivables - Due from affiliates, Payables - Brokers and dealers and Payables - Due to Parent and affiliates are accounted for at cost plus accrued interest rather than fair value· however, the recorded amounts approximate fair value due to their liquid or short-term nature. ## 5. DERIVATIVE FINANCIAL INSTRUMENTS Off-Balance Sheet Risk - The Company has contractual commitments arising in the ordinary course of business for securities purchased under agreements to resell, or sold under repurchase agreements and future purchases and sales of foreign currencies. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect on the Statement of Financial Condition. Derivative Financial Instruments - The Company's derivative activities are recorded at fair value in the Statement of Financial Condition in Financial instruments owned and Financial instruments sold, not yet purchased, net of cash paid or received under credit support agreements and on a net counterparty basis when a legally enforceable right to offset exists under a master netting agreement. The Company enters into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from its trading activities. (See Note 4, Fair Value Disclosures and Note 11 , Guarantees for additional disclosures about derivative financial instruments.) Derivatives are subject to various risks simi lar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with the Company s other trading-related activities. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of its firm wide risk management policies. In connection with its derivative activities, the Company may enter into ISDA master netting agreements or simi lar agreements with counterparties. See Note 2 Significant Accounting Policies, for additional information regarding the offsetting of derivative contracts. The following table presents the fair value and related number of derivative contracts at November 30, 2021 categorized by type of d!erivative contract and the platform on which these derivatives are transacted. The fair value of assets/liabilities represents the Company's receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged. The following table al o provides information regarding I) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Statement of Financial Condition as appropriate under U.S. GAAP and 2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on the Company's financial position (in thousands, except contract amounts). {12}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30, 2021 | | November 30, 2021 (1) | | | | | | | | | |--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|-------------|----------------------------|------------|-------------|----------------------------|--|--|--| | | | | Assets | | Liabilities | | | | | | | | Fair Value | Number of
Contracts (2) | Fair Value | | Number of
Contracts (2) | | | | | Equity contracts: | | | | | | | | | | | Exchange-traded | | 494,510 | 73,032 | S | 304,024 | 150,259 | | | | | Bilateral OTC ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | | 406,805 | 3,398 | | 1,842,052 | 3.080 | | | | | Interest rate contracts: | | | | | | | | | | | Exchange-traded | | | 490 | | | 89 | | | | | Cleared OTC | | 384,782 | 3,209 | | 377,664 | 3,095 | | | | | Bilateral OTC | | 265,560 | 189 | | 214,327 | 159 | | | | | Foreign exchange contracts: | | | | | | | | | | | Bilateral OTC | | 1.456.476 | 17,751 | | 1,454,421 | 17,537 | | | | | Credit contracts: | | | | | | | | | | | Cleared OTC | | 83.418 | 77 | | 108.740 | 96 | | | | | Bilateral OTC | | | 2 | | 6 | 1 | | | | | Total gross derivative assets/liabilities: | | | | | | | | | | | Exchange-traded | | 494,510 | | | 304,024 | | | | | | Cleared OTC wounders would would and with the | | 468,200 | | | 486,404 | | | | | | Bilateral OTC | | 2,128,841 | | | 3,510,806 | | | | | | Amounts offset in the Statement
of Financial Condition (3): | | | | | | | | | | | Exchange-traded | | (302,781) | | | (302,781) | | | | | | Cleared OTC | | (461.082) | | | (486,404) | | | | | | Bilateral OTC | | (1,971,679) | | | (2,628,006) | | | | | | Net amounts per Statement of
Financial Condition (4) | | 356,009 | | S | 884,043 | | | | | (1) Exchange-traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty. - (2) Number of exchange-traded contracts may include open futures contracts. The unsettled fair value of these futures contracts is included in Receivables from/Payables to brokers, dealers and clearing organizations in the Statement of Financial Condition. - (3) Amounts netted include both netting by counterparty and for cash collateral paid or received. (4) The Company has not received or pledged additional collateral under master netting agreements and or other credit support agreements that is eligible to be offset beyond what has been offset in the Statement of Financial Condition. {13}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBE:R 30 202 1 *OTC Derivatives.* The table below sets forth by remaining contract maturity the fair value of OTC derivative assets and liabilities at ovember 30, 2021 (in thousands): | | | 12 Months | 1 - 5 Years | | Greater Than
5 Years | Cross
Maturity
etting (4) | Total | |----------------------------------------------------------------------------|----|-----------|-------------|----------|-------------------------|---------------------------------|---------------| | Equity options and forwards | \$ | 10 647 | \$ | | \$ | \$
(10 647) \$ | | | Total return swaps | | 114,346 | | 34,702 | | (14,332) | 134,716 | | Foreign currency waps and
forwards | | 158,008 | | 4,933 | | (1 ,959) | 160,982 | | Interest rate swap , option and
forwards | | 9,626 | | 84 473 | 103,813 | (20,425) | 177 487 | | Total | \$ | 292,627 | \$ | 124, 108 | \$
103,813 | \$
(47,363) | 473,185 | | Cross-product counterpa1ty
netting | | | | | | | (79,411) | | Total OTC derivatives assets
included in Financial
instruments owned | | | | | | | \$
393,774 | (I) At November 30, 2021 , the Company he ld exchange-traded derivative assets with a fair value of \$ 19 l.7 mi ll ion, which are not included in this table. (2) OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received in the Statement of Financial Condition. At November 30, 202 1, cash coll atera l received was \$229.5 million . (3) Derivative fair values include counterparty netting within product category. (4) Amounts represent tl1e netting of receivable balances with payable balances for the same counterpa1ty within product category across maturity categories. {14}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBER 30 202 1 | | 12 Months
0 - | I - 5 Years | Greater Than
5 Years | Cross
Maturity
Netting ( 4) | Total | |------------------------------------------------------------------------------------------------------|------------------|---------------|-------------------------|-----------------------------------|-----------------| | Equity options and forwards | \$
2,602 | \$
648,831 | \$
43 372 | \$
(10,647) \$ | 684, 158 | | Credit default swaps | 6 | 13 690 | l L 632 | | 25,328 | | Total return swaps | 123,542 | 775, I 56 | I 441 | (61 1) | 899,528 | | Foreign currency waps and
forwards | 154,350 | 6 536 | | ( 15 680) | 145,206 | | Fixed income forwards | | | 2 679 | | 2 679 | | lnterest rate swaps, options and
forwards | 1,001 | 36,884 | 99,004 | (20,425) | 116,464 | | Total | \$
281,501 | I 2481 ,097 | \$
158 128 | \$
{47,3632 | 1,873,363 | | Cross-product counterpaity
netting | | | | | (79,411) | | Total OTC derivatives liabilities
included in Financial
instruments sold, yet not
purchased | | | | | \$
l,793,952 | - (1) At November 30, 2021 the Company held exchange-traded derivative liabilities with a fair va lue of \$1.2 mi ll ion which are not included in this table. - (2) OTC derivative liabilities in the table above are gross of collateral received. OTC derivative liabilities are recorded net of collateral pledlged in the Consolidated Statement of Financial Condition. At ovember 30, 2021 , cash collateral pledged was \$9 11.2 million - (3) Derivative fair values include counterparty netting within product category. - (4) Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories. The fo llowing table presents the counterparty credit quality with respect to the fair value of the Company's OTC derivative as ets at ovember 30, 2021 (in thousands): Counterparty credit quality (I): | Tot a I .
| \$
-----'---
393,774
======= | |-----------------|---------------------------------------| | | | | Unrated

| 3,408 | | BB+ or lower | 132,460 | | BBB- to BBB+ | 126, 139 | | A- or higher | \$
131 ,767 | (1) The Company utilizes internal credit ratings determined by its Risk Management department. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by externa l rating agencies. {15}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBE:R 30 2021 ## *Credit Related Derivative Contr<1cts* The external credit ratings of the underlyings or referenced a set for the Company's written credit related derivative contracts (in millions): | | ovember 30, 202 1 | | | | | | | | | | |-----------------------------------|---------------------|-------------------------|----|---------|------------------|----------|--|--|--|--| | | | External Credit Rating | | | | | | | | | | | Investment
Grade | Non-investment
Grade | | Unrated | Total
otional | | | | | | | Credit protection sold: | | | | | | | | | | | | Index credit default swaps. | \$
2,583.7 | \$
1,053.8 | \$ | | \$ | 3 63 7.5 | | | | | | Single name cred it default swaps | | | | 0.2 | | 0.2 | | | | | ## *Contingent Features* Certain of the Company' derivative in trument conta in provisions that require it debt to maintain an inve tment grade credit rating from each of the major credit rating agencie . If the Parent's debt were to fal I below investment grade it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on the Company's derivative in truments in liability positions. The following table presents the aggregate fa ir value of all derivative instruments with uch credit-risk-related contingent features that are in a liability position\_, the collateral amounts the Company has posted or received in the normal course of busines and the potential collateral it would have been required to return and/or post additionally to its cmmterparties if the credit-risk-related contingent features underlying these agreements were triggered (in million ): | | November 30 2021 | | | | |-----------------------------------------------------------------------------------------------------------------------|------------------|---------|--|--| | Derivative instrument liabil ities with credit-risk-related contingent features
| \$ | 811.3 | | | | Coll ateral posted.
. . | | (152.5) | | | | Collateral received . | | 276.7 | | | | Return of and additional collateral required in the event of a credit rating downgrade below
investment grade (ti) | | 935.4 | | | ( l) These potential outflows include in itial margin received from counterpa1ties at the execution of the derivative contract. The initial margin wi l I be returned if counterparties elect to term in ate the contract after a downgrade. ## 6. COLLATERALIZED TRANSACTIONS The Company's repurchase agreements are generally recorded at cost in the Statement of Financial Condition which is a reasonable approximation of their fair values due to their shoti-term nature. The Company monitors its exposure to credit risk associated with these transactions by entering into master netting agreements. The Company pledges financial instrument as collateral under repurchase agreements and other secured arrangement including clearing arrangement . The agreement with counterparties generally contain contractual provisions allowing the counterparty the right to sell or repledge the collateral. {16}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBER 30 2021 The following tables set fo1th the carrying value of repurchase agreement by class of collateral pledged and remaining contractual maturity at ovember 30 2021 (in thousands): Coll ateral Pledged: | U government and federa l agency securities
Total | | | | | | | | | \$
\$ | 333,684
333,684 | | |------------------------------------------------------|-----------------------------|---------|---------------|--|------------|----------------------|-------------------------|--|----------|--------------------|--| | | | | | | | Contractual Maturity | | | | | | | | Overnight and
Continuous | | Up to 30 Days | | 31-90 Days | | Greater than
90 Days | | | Total | | | Repurchase agreements | \$ | 333,684 | | | | | \$ | | \$ | 333,684 | | The Company receives securities as collateral under resale agreements. In many instances, the Company is permitted by contract to rehypothecate the ecuritie received as collateral. The e securities may be used to secure repurchase agreement sati fy margin requirements on derivative transactions or cover short positions. ## *Offsetting of Securitie* · *Financing Agreements* To manage the Company's exposure to credit risk associated with ecurities financing transactions, it may enter into ma te1· nettino- ao-reements and collateral arrangements with counterparties. Generally transaction are executed under standard industry agreements including but not limited to master repurchase agreements. See ote 2 Significant Accounting Policies, for additional information regarding the offsetting of securities tinanci ng agreements. The fo llowing table provides information regarding repurcha e agreements that are recognized in the Statement of Financial Cond ition and 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Statement of Financial Condition as appropriate under U.S. GAAP and 2) the extent to which other rights of etoff a ociated with the e arrangements exist and could have an effect on the Company's financial po ition (in thou ands): | | | ovember 30, 2021 | | | | | | | | | | | | |-------------------------------|----------------|------------------|-----------------------------------------------------|--|----------------------------------------------|---------|------------------------------------------------------|-------------|------------------------------|----------------|------------|--|--| | Assets | Gro
Amounts | | ctting in
Statement of
·inancial
Condition | | in
Statement of
Financial
Condition | | Additional
Amounts
Available for
'etoff (I) | | Avai lable
Collateral (2) | | Net Amount | | | | | | | | | | | | | | | | | | | Reverse repurchase agreements | \$ | 32 389 | \$ | | | 32.389 | | (32.389) \$ | | | \$ | | | | Liabilities | | | | | | | | | | | | | | | Repurcha e agreements | | \$ 333.684 | \$ | | | 333.684 | | (32.389) \$ | | (30 I ,295) \$ | | | | - (1) Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty s outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by a counterparty in the event of a counterparty's defau It, but which are not netted in the balance sheet because other netting provisions of U.S. GAAP are not met. - (2) l.ncludes securities received or paid under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements. {17}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30, 2021 ## 7. RECEIVABLE FROM, AND PAYABLE TO, BROKERS, DEALERS AND CLEARING ORGANIZATIONS The following is a summary of the major categories of receivable from, and payable to, brokers, dealers and clearing organizations at November 30, 2021 (in thousands): | | | Receivable | Payable | | | |------------------------------------------------------------------------------------|--|------------|---------|-----------|--| | Trades in process of settlement, net | | 1 | | 6.376 | | | Margin from affiliates and brokers | | 691,519 | | 1,140,046 | | | Other
がありますので、その他のお気になると、その他のお気になると、その他のお気になると、この時間があると、この時間があるのです。 この時間には、その他の | | 26,936 | | 10,033 | | | | | 718.455 | | 1,156,455 | | #### 8. INTANGIBLE ASSENS Intangible assets are included in Other assets in the Statement of Financial Condition. The Company has a swap dealer registration of \$1.4 million at November 30, 2021, which is included in identifiable intangible assets. The Company performed its annual impairment testing of intangible assets with an indefinite useful life, which consists of its swap dealer registration, at August 1, 2021. The Company elected to perform qualitative assessments of its swap dealer registration. In applying the qualitative assessments, the Company concluded that it is not more likely than not this registration is impaired. #### 9. LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS At November 30, 2021, the Company has outstanding borrowings of \$400.0 million from the Parent under a cash subordinated loan agreement. This agreement matures on October 31, 2031, bears interest at a rate of 3.25% per annum and automatically extends for additional one year periods, unless specified actions are taken prior to the maturity date by the Company or Parent. Amounts borrowed by the Company under the subordinated loan agreements have been approved by the SEC, and therefore, qualify as capital in computing net capital under SEC Rule 18a-1 (Net Capital) under the Act. To the extent that such borrowings are required for the Company's continued compliance with minimum net capital requirements, they may not be repaid. #### 10. INCOME TAXES The Company's results of operations are included in the consolidated Federal and applicable state combined or unitary income tax returns filed by the Ultimate Parent. In states that neither accept nor require combined or unitary tax returns, the Company files separate state income tax returns. Deferred income tax assets and liabilities are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the Statement of Financial Condition. These temporary differences result in taxable or deductible amounts in future years and are measured utilizing tax rates that will be in effect when such differences are expected to reverse. {18}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBER 30 2021 The cumulative tax effects of temporary differences that give rise to significant portion of the defened tax assets and liabilities are presented below (in thousands): | | | ovember 30, 2021 | | | |-----------------------------------------------------|----|-------------------|--|--| | Deferred tax assets: | | | | | | Bad debt reserve | \$ | 7,460 | | | | Other assets . | | 22 | | | | Total deferred tax assets | | 7,482 | | | | Deferred tax liabilities: | | | | | | Other liabilities
. . | | 375 | | | | Total deferred tax Liabilities . | | 375 | | | | et deferred tax asset, included in Other assets . | \$ | 7 107 | | | | | | ================= | | | Management believes it is more Eikely than not that the Company will generate sufficient taxable income in the future to realize the deferred tax asset and therefore, no valuation allowance is required at ovember 30 202 l. At November 30, 202 l the Company has not recorded any material unrecognized tax benefits. The table below summarizes the earliest tax year that remain ubject to examination in the major tax jurisdictions in which the Company operates: | Jurisd iction | Tax Year | |------------------------|----------| | United States | 2018 | | New Jersey
| 2018 | | New York State | 2011 | |
New York City
. | 2011 | ## 11. GUARANTEES *Derivative ontracts* - Certain derivative contract that the Company has entered into meet the accounting definition of a guarantee under U.S. GAAP. Such derivative contract include written foreign currency options a1Jd written equity put options. On certain of these contracts, such as foreign currency options the maximum payout on these contracts cannot be quantified since the i111crease in foreign currency rates are not contractually limited by the terms of the contract. As such, the Company has di closed notional values a a measure of the maximum potential payout under these contracts. {19}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITJON - CONTINUED NOVEMBER 30 2021 The following table ummarizes the notiona l amounts associated with the Company's derivative contract meeting the definition of a guarantee under U.S. GAAP at ovember 30, 2021 (in millions): | | xpected Maturity Date | | | | | | | | | | | |-----------------------------------------------------|-----------------------|---------|----|---------|----|------------------|----|------------------|----|-------------------|-------------------| | G uaratitee Type: | | 2022 | | 2023 | | 2024 and
2025 | | 2026 and
2027 | | 2028 and
Later | Total
Notional | | Derivative cotitracts - non-credit
re lated | \$ | 6,245.3 | \$ | 7 524.6 | \$ | 2 674.4 | \$ | 40.l | \$ | | 16,484.4 | | Written derivative contracts -
·credit related . | | | | | | 0.2 | | | | | 0.2 | | Total derivative contracts | | 6,245.3 | \$ | 7,524.6 | \$ | 2,674.6 | \$ | 40.l | \$ | ===== | 16,484.6 | It is management's b lief that notional amounts generally overstate expected payout and that fair value of these contracts is a more relevant measure of the Company's obligations. At ovember 30 2021 , the fair value of derivative contracts meeting the definition ofa guarantee is a liability of approximately \$135.3 mi Ilion. The Company substantially mitigates its exposure to market risk on these contracts through hedges, such as other derivative contracts and/or cash in truments. The Company manage risk associated with derivative contracts meeting the defin ition of a guarantee con istent with its risk management policies. ## 12. RISK MANAGEMENT Risk is an inherent part of the Company's business and act1v1t1es. Risks are managed by the Risk Management group of the Company's Parent. Accordingly, the Company has a comprehensiv risk management approach, with a formal governance structure and processes to identify, assess, monitor and manage risk. Principal ri ks involved in the Company's business activitie include market credit operational and model risk. ## *Market Risk* Market risk is defined as the risk of loss due to fluctuations in the market value of financial assets and liabilities attributable to changes in market variables. Market risk is identified, measured, monitored and controlled by diversifying exposures controlling position ize , and e tabli hing economic hedges in related securities or derivatives. The Company s market risk principally arises from underlying price, market liquidity, interest rates, credit spreads and foreign currency rates. ## *Counterparty Cre,dit Risk* Counterparties to the Company' proprietary tran actions are primarily institutional clients. Credit ri k i the risk of lo s due to adverse changes in a counterparty s credit worthiness or its ability or willingness to meet its financial obligations in accordance with the terms and conditions of a financial contract. The Company is expo ed to credit risk as a trading counterparty to other broker-dealer and client , a a holder of securities and as a member of exchanges and clearing organizations. Credit losses could arise should counterparties fail to perform under the terms of the contracts and the value of collateral to the extent there is any, proves inadequate. The Company manage credit risk by dealing with creditworthy counterpa1ties monitoring net exposure to individual counterpatties monitoring compliance with established credit limits, and obtaining collateral where appropriate. {20}------------------------------------------------ ## NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30 2021 ## *Concentration of Credit Risk* Concentrations of credit risk exist for groups of counterparties when they have similar economic characteristics that would cause their ability to meet obligations to be similarly affected by economic, industry or geographic factors. In its trade facilitation activities the Company is actively involved in trading with a broad range of institutional clients. The Company's exposure to credit risk associated with the nonperformance of these counterparties in fulfilling their contractual obligations can be directly impacted by volatile trading markets which may impair the countei·parties' abilities to satisfy their obligations to the Company. From time to time the Company may have significant exposure to specific counterparties, but the Company monitors and manages its exposure and seeks to control its concentration of credit risk through a variety of reporting and control procedures described u1 preceding discussions of market and credit risk. ## *Operational Risk* Operational risk refers to the risk of loss resulting from the Company's operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in its operating systems business disruptions and inadequacies or breaches in its internal control processes. The Company's business is highly dependent on its ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies. The Company i·elies primarily on its affiliate, Jefferies LLC, for operational support or services in connection with its swaps business. The Company does not have any employees. Jefferies LLC provides services to the Company under a service level agreement. As a result, from a practical perspective, the Company is wholly dependent on Jefferies LLC and its employees to run its swaps business. The Company's operational risk framework includes governance, collection of operational risk incidents, proactive operational risk management, and periodic review and analysis of business metrics to identify and recommend controls and process-related enhancements. ## *Mode/Risk* Model risk refers to the risk of losses resulting from decisions that are based on the output of models, due to errors or weaknesses in the design and development, implementation, or improper use of models. The Company uses quantitative models primarily to value ce1tain financial assets and liabilities and to monitor and manage its risk. Model risk is a function of the model materiality, frequency of use, complexity and uncertainty around inputs and assumptions used in a given model. Robust model risk management is a core part of the Company's risk management approach and is overseen through its risk governance structure and risk management controls. {21}------------------------------------------------ #### NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED NOVEMBER 30, 2021 ## 13. RELATED PARTY TRANSACTIONS Balances with related parties reflected in the Statement of Financial Condition are set forth below (in thousands): | | | November 30,
2021 | |-----------------------------------------------------------|--|----------------------| | Assets: | | | | Financial instruments owned, at fair value | | 2 | | Securities purchased under agreements to resell | | 32.389 | | Receivables - Brokers, dealers and clearing organizations | | 456.855 | | Receivables - Due from affiliates | | 1.344 | #### Liabilities: | Financial instruments sold, not yet purchased, at fair value | 313 | |--------------------------------------------------------------|---------| | Securities sold under agreements to repurchase | 333.684 | | Payables - Brokers and dealers | 31,827 | | Payables - Due to Parent and affiliates | 337,800 | Trading, Clearance and Administrative Activities - Management believes amounts arising through related party transactions are reasonable and approximate amounts that would have been recorded if the Company operated as an unaffiliated entity. Amounts Due from affiliates are periodically settled in cash. The Company has entered into service level agreements with Jefferies LLC and securities clearing agreements with Jefferies LLC and Jefferies International Limited. In connection with foreign exchange contracts entered into under a prime brokerage agreement with an affiliate of the Ultimate Parent, the Company has \$0.7 million included in Payables-brokers and clearing organizations, in the Statement of Financial Condition at November 30, 2021. ## 14. REGULATORY REQUIREMENTS The Company is registered as a security-based swap dealer and, accordingly, is subject to the net capital requirements of the SEC, CFTC and NFA. The Company is required to maintain minimum net capital, as defined under SEC Rule 18a-1 of not less than the greater of 2% of the risk margin amount, as defined, or \$20 million. At November 30, 2021, the Company had net capital, as defined under such rules, of \$452.3 million, which exceeded the minimum regulatory capital requirement by \$432.3 million. Further, subsequent to year-end, on December 16, 2021, the Company was approved by the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC's net capital requirements. In addition, advances to the Parent and its affiliates, capital distributions and other equity withdrawals are subject to certain notification requirements and other provisions of the SEC, CFTC and NFA. \*\*\*\*\*\*\* Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.