EDGAR 10-K Filing

Company CIK: 1084580
Filing Year: 2022
Filename: 1084580_10-K_2022_0001084580-22-000006.json

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ITEM 1. BUSINESS
Item 1. Business
Introduction
Jefferies Group LLC is the largest independent U.S.-headquartered global full service, integrated investment banking and securities firm. Our largest subsidiary, Jefferies LLC, was founded in the U.S. in 1962 and our first international operating subsidiary, Jefferies International Limited, was established in the U.K. in 1986. On March 1, 2013, we combined with and became an indirect wholly-owned subsidiary of publicly traded Jefferies Financial Group Inc. (“Jefferies”). Richard Handler, our Chief Executive Officer and Chairman, is Chief Executive Officer of Jefferies and Brian P. Friedman, our Chairman of the Executive Committee, is President of Jefferies. Messrs. Handler and Friedman are also Directors of Jefferies.
Our global headquarters and executive offices are located at 520 Madison Avenue, New York, New York 10022. We also have regional headquarters in London and Hong Kong. Our primary telephone number is 212-284-2550 and our Internet address is jefferies.com.
The following documents and reports are available on our public website:
•Code of Business Practice
•Reportable waivers, if any, from our Code of Business Practice by our executive officers
•Board of Directors (“Board”) Corporate Governance Guidelines
•Charter of the Audit Committee of the Board
•Charter of the Nominating and Corporate Governance Committee of the Board
•Charter of the Compensation Committee of the Board
•Charter of the ESG, Diversity, Equity and Inclusion Committee of the Board
•Charter of the Risk and Liquidity Oversight Committee of the Board
•Charters of other Committees of the Board
•Annual reports on Form 10-K
•Quarterly reports on Form 10-Q
•Current reports on Form 8-K
•Any amendments to the above-mentioned documents and reports
We expect to use our website as a main form of communication of significant news. We encourage you to visit our website for additional information. In addition, you may also obtain a printed copy of any of the above documents or reports by sending a request to Investor Relations, Jefferies Group LLC, 520 Madison Avenue, New York, NY 10022, by calling 212-284-2550 or by sending an email to info@jefferies.com.
Business Segments
We report our activities in two business segments: (1) Investment Banking and Capital Markets and (2) Asset Management.
•Investment Banking and Capital Markets includes our investment banking, capital markets and other related services. Investment banking provides underwriting and financial advisory services to our clients across most industry sectors in the Americas; Europe, the Middle East and Africa; and Asia Pacific. Our capital markets businesses operate across the spectrum of equities and fixed income products. Related services include, among other things, prime brokerage and equity finance, research and strategy, corporate lending and real estate finance.
•Asset Management provides alternate investment management services to investors globally. In addition, through our asset management efforts, we often invest seed or additional strategic capital for our own account in the strategies offered by us and affiliated asset managers.
Financial information regarding our reportable business segments for the years ended November 30, 2021, 2020 and 2019 is set forth in Note 20, Segment Reporting in our consolidated financial statements included in this Annual Report on Form 10-K in Part II, Item 8.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our Businesses
Investment Banking and Capital Markets
Our Investment Banking and Capital Markets segment focuses on Investment Banking, Equities and Fixed Income. We primarily serve institutional investors, corporations and government entities.
Investment Banking
We provide our clients around the world with a full range of financial advisory, equity underwriting and debt underwriting services. Our services are enhanced by our deep industry expertise, our global distribution capabilities and our senior level commitment to our clients.
Over 1,200 investment banking professionals operate in the Americas, Europe and Asia Pacific, and are organized into industry, product and geographic coverage groups. Our industry coverage groups include: Consumer; Energy; Financial Services; Healthcare; Industrials; Technology, Media & Telecommunications; Real Estate, Gaming & Lodging; Financial Sponsors and Public Finance. Our product coverage groups include advisory (which comprises both mergers and acquisitions and restructuring and recapitalization expertise), equity underwriting and debt underwriting. Our geographic coverage groups include teams based in major cities in the United States, London, Frankfurt, Paris, Milan, Madrid, Warsaw, Amsterdam, Stockholm, Mumbai, Hong Kong, Singapore, Sydney, Tokyo and Zurich.
Advisory Services
We provide mergers/acquisitions, restructurings/recapitalizations and private capital advisory services to companies, financial sponsors and government entities. In the mergers and acquisitions area, we advise business owners and corporations on mergers and acquisitions, divestitures, strategic ventures and corporate defense activities. In the restructuring and recapitalization area, we provide companies, bondholders and lenders a full range of restructuring advisory capabilities as well as expertise in the structuring, valuation and placement of securities issued in recapitalizations. As part of our private capital advisory business, we advise financial sponsors on the creation and structuring of funds and fund offerings, and we also advise large institutional investors on the sale of private equity limited partnership and co-investment interests.
Equity Underwriting
We provide a broad range of equity financing capabilities to companies and financial sponsors. These capabilities include private placements of equity, initial public offerings, including initial public offerings for special purpose acquisition companies, follow-on offerings, at the market offerings, block trades and equity-linked securities transactions.
Debt Underwriting
We provide a wide range of debt and acquisition financing capabilities to companies, financial sponsors and government entities. We focus on structuring, underwriting and distributing public and private debt, including investment grade debt, high yield bonds, leveraged loans, municipal debt, mortgage-backed and other asset-backed securities and liability management solutions.
Corporate Lending
JFIN Parent LLC (“Jefferies Finance”), our 50/50 joint venture with Massachusetts Mutual Life Insurance Company, is a commercial finance company that structures, underwrites and syndicates primarily senior secured loans to corporate borrowers; and manages proprietary and third-party investments for both broadly syndicated and direct lending loans. Jefferies Finance conducts its operations primarily through two business lines, Leveraged Finance Arrangement and Portfolio and Asset Management. Loans are originated primarily through our investment banking efforts and Jefferies Finance typically syndicates to third-party investors substantially all of its arranged volume through us. The Portfolio and Asset Management business lines, collectively referred to as Jefferies Credit Partners, manages a broad portfolio of assets under management comprised of portions of loans it has arranged, as well as loan positions that it has purchased in the primary and secondary markets. Jefferies Credit Partners is comprised of three registered Investment Advisors: Jefferies Finance, Apex Credit Partners LLC and JFIN Asset Management LLC, which serve as a private credit platform managing proprietary and third-party capital across comingled funds, separately managed accounts and collateralized loan obligations.
Strategic Alliance with SMBC Group
In July 2021, we entered into a strategic alliance with Sumitomo Mitsui Financial Group, Inc., Sumitomo Mitsui Banking Corporation and SMBC Nikko Securities Inc. (together referred to as “SMBC Group”), which will support continued growth of our Investment Banking franchise enhancing our ability to support clients’ needs and expanding our client access. We aim to, among other things, coordinate efforts in the U.S. leveraged finance business to expand and scale existing offerings; form a global strategic partnership to seek cross-border mergers and acquisition opportunities involving Japanese companies; and jointly pursue investment banking, capital markets and financing opportunities by leveraging our shared strengths.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Equities
Equities Research, Capital Markets
We provide our clients full-service equities research, sales and trading capabilities across global equities markets. We earn commissions or spread revenue by executing, settling and clearing transactions for clients across these markets in equity and equity-related products, including common stock, American depository receipts, global depository receipts, exchange-traded funds, exchange-traded and over-the-counter (“OTC”) equity derivatives, convertible and other equity-linked products and closed-end funds. Our equity research, sales and trading efforts are organized across three geographical regions: the Americas; Europe and the Middle East and Africa; and Asia Pacific. Our clients are primarily institutional market participants such as mutual funds, hedge funds, investment advisors, pension and profit sharing plans, and insurance companies. Through our global research team and sales force, we maintain relationships with our clients, distribute investment research and insights, trading ideas, market information and analyses across a range of industries and receive and execute client orders. Our equity research covers 2,800 companies around the world and a further more than 600 international companies are covered by our leading co-branded partner firms in local regions.
Equity Finance
Our Equity Finance business provides financing, securities lending and other prime brokerage services. We offer prime brokerage services in the U.S. that provide hedge funds, money managers and registered investment advisors with execution, financing, clearing, outsourced trading, reporting and administrative services. We finance our clients’ securities positions through margin loans that are collateralized by securities, cash or other acceptable liquid collateral. We earn an interest spread equal to the difference between the amount we pay for funds and the amount we receive from our clients. We also operate a matched book in equity and corporate bond securities, whereby we borrow and lend securities versus cash or liquid collateral and earn a net interest spread. We offer selected prime brokerage clients the option of custodying their assets at an unaffiliated U.S. broker-dealer that is a subsidiary of a bank holding company. Under this arrangement, we directly provide our clients with all customary prime brokerage services.
Wealth Management
We provide tailored wealth management services designed to meet the needs of high net worth individuals, their families and their businesses, private equity and venture funds and small institutions. Our advisors provide access to all of our institutional execution capabilities and deliver other financial services. Our open architecture platform affords clients access to products and services from both our firm and from a variety of other major financial services institutions.
Fixed Income
Fixed Income Capital Markets
We provide our clients with sales and trading of investment grade corporate bonds, U.S. and European government and agency securities, municipal bonds, mortgage-backed and asset-backed securities, leveraged loans, consumer loans, high yield and distressed securities, emerging markets debt, interest rate and credit derivative products, as well as foreign exchange trade execution and securitization capabilities. Jefferies LLC is designated as a Primary Dealer by the Federal Reserve Bank of New York and Jefferies GmbH is designated in similar capacities for several countries in Europe. Additionally, through the use of repurchase agreements, we act as an intermediary between borrowers and lenders of short-term funds and obtain funding for various of our inventory positions. We trade and make markets globally in cleared and uncleared swaps and forwards referencing, among other things, interest rates, investment grade and non-investment grade corporate credits, credit indexes and asset-backed security indexes.
Our strategists and economists provide ongoing commentary and analysis of the global fixed income markets. In addition, our fixed income desk strategists provide ideas and analysis to clients across a variety of fixed income products.
Other
We make principal investments in private equity and hedge funds managed by third-parties as well as, from time to time, take on strategic investment positions.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Real Estate
Berkadia Commercial Mortgage Holding LLC (“Berkadia”) is our 50/50 joint venture with Berkshire Hathaway, Inc. that provides capital solutions, investment sales advisory and mortgage servicing for multifamily and commercial real estate. Berkadia originates commercial real estate loans, primarily in respect of multifamily housing units, for the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal Housing Authority using their underwriting guidelines and will typically sell the loans to such entities shortly after the loans are funded with Berkadia retaining the mortgage servicing rights. For loans sold to Fannie Mae, Berkadia assumes a shared loss position throughout the term of each loan, with a maximum loss percentage of approximately one-third of the original principal balance. Berkadia also originates and brokers commercial/multifamily mortgage loans, which are not part of the government agency programs.
In addition, Berkadia originates loans for its own balance sheet. These loans provide interim financing to borrowers who intend to refinance the loan with longer-term loans from an eligible government agency or other third-party. Berkadia also provides services related to the acquisition and disposition of multifamily real estate projects, including brokerage services, asset review, market research, financial analysis and due diligence support and is a servicer of U.S. commercial real estate loans, performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions.
Asset Management
Under the Leucadia Asset Management (“LAM”) umbrella, we manage and provide services to a diverse group of alternative asset management platforms across a spectrum of investment strategies and asset classes. LAM offers institutional clients an innovative range of investment strategies through its affiliated managers. Our products are currently offered to pension funds, insurance companies, sovereign wealth funds, and other institutional investors globally. The investment products under LAM range from multi-manager products to niche equity long/short strategies to credit strategies. We offer our affiliated asset managers access to capital, operational infrastructure and global marketing and distribution. We often invest seed or additional strategic capital for our own account in the strategies offered by us and associated third-party asset managers in which we have an interest.
We continue to expand our asset management efforts and establish further strategic relationships to expand our offerings including sector and region specific long/short equity and quantitative strategies.
Human Capital
Our people make up the fabric of our firm, which is comprised of diverse and innovative teams. We are focused on the durability, health and long-term growth and development of our business, as well as our long-term contribution to our shareholders, our clients, our employees, the communities in which we live and work, and society in general. Instrumental to all of this is our culture, which derives from our employees.
We have employees located throughout the world. At November 30, 2021, we had 4,508 employees globally with approximately 64.1%, 24.2% and 11.7% of our workforce distributed across the Americas, Europe and Asia Pacific, respectively.
Our employees are predominantly in our Investment Banking and Capital Markets segment or the support thereof. During fiscal 2021, our overall employee count increased by 14.9%, primarily as a result the growth of our investment banking business, as well as due to additions in technology and other corporate services staff to support our increased regulatory requirements and overall growth.
Talent Acquisition and Development
In order to compete effectively and continue to provide best in class service to our clients, we must attract, retain, and motivate qualified professionals. Our workforce is predominately composed of employees in roles such as investment bankers, salespeople, trading professionals, research professionals and other revenue producing or specialized personnel. During 2021, we hired over 1,200 professionals globally. Our voluntary turnover rate was approximately 12.2%, which makes our overall retention rate very high in our view. We believe our culture, our effort to maintain a meritocracy in terms of opportunity and our continued evolution and growth contribute to our success in attracting and retaining strong talent.
We also value continued training and development for all employees at the firm. We seek to equip our people at all stages in their careers with the tools necessary to become thoughtful and effective leaders. In 2021, we introduced a number of additional development programs, including our inaugural Women in Leadership Series, a program focused on providing learning and development opportunities to position our female leaders for success. We also launched a leadership development program sponsored by our Jefferies Black & Latino Network (J-NOBLE) and Jefferies Ethnic Minority Society (JEMS) that is aimed at providing professional development and career advancement training to participants. Additionally, we offered customized
JEFFERIES GROUP LLC AND SUBSIDIARIES
training courses centered around Project Management, Communicating with Clarity and Impact, Managing in the New Normal, Finding and Using Your Strengths and Effective Sales Training for our employees.
Wellness
In addition to training and development programs, we’ve been incredibly focused on the well-being of our employees. We host frequent wellness webinars and offer confidential, 1:1 wellness counseling. To support our employee’s physical well-being, we host virtual fitness classes and have partnered with a fitness app our employees can utilize.
Diversity, Equity, and Inclusion
The foundation of our culture is our approach to employee engagement, diversity, equity and inclusion, which is summed up in our Corporate Social Responsibility Principle: Respect People. We embrace diversity and inclusion, which we believe fosters creativity, innovation and thought leadership through the infusion of new ideas and perspectives. We have implemented a number of policies and measures focused on non-discrimination, sexual harassment prevention, health and safety, and training and education. We have strong internal partnerships with eight Employee Resource Groups that are fostering a diverse, inclusive workplace. Our Diversity Council, chaired by Rich Handler, gives our Employee Resource Groups a platform to come together and discuss best practices, as well as collaborate on firmwide diversity initiatives.
In conjunction with the Employee Resource Groups, firmwide Diversity and Inclusion initiatives are focused on open firm-wide dialogues, promotion of allyship and bias mitigation, and providing resources for development and recruiting the best talent from a diverse pool. In 2021, 100% of our employees participated in Unconscious Bias Training. We have focused on improving the collection and transparency of diversity metrics and the information flow to senior leadership. An inaugural firmwide inclusion-focused employee engagement survey was launched in January 2021 enabling staff to provide feedback on an anonymous basis.
We are focused on broadening the pipeline from which we recruit and hiring diverse talent through both campus and lateral hiring initiatives. For campus recruiting, we have partnered with several organizations globally to broaden our pipeline of candidates. We host insight days and symposiums that describe Jefferies and Investment Banking to candidates that come from a diverse range of backgrounds. In 2021, we hired interns from over 100 colleges, universities, and business schools across the globe. For all roles, we recommend both a diverse slate of candidates to be considered for roles and a diverse panel of interviewers. Interviewing guides and resources are provided to hiring managers in an effort to support inclusive hiring. In 2021, we launched two targeted recruiting programs aimed at diversifying the pipeline of our lateral hires, including a career relaunch program, aimed at those who have taken a break from the workforce, and a job switch program aimed at recruiting individuals who are interested in changing careers into Equity Research.
Our Board has underscored our commitment to diversity by committing to appoint diverse candidates to fill the seats of at least one-third of our independent directors. In July 2021, we appointed two new female directors to our Board, which resulted in 55.6% of our independent directors being diverse.
Our Board has established an Environmental, Social and Governance (“ESG”) Oversight Committee, which, among other things, oversees the sustainability matters arising from our business. In the beginning of 2021, the Board expanded the responsibilities of the ESG Committee to also include oversight over diversity and inclusion, and rebranded the Committee as the ESG, Diversity, Equity and Inclusion (“ESG/DEI”) Committee. Establishing the ESG/DEI Committee demonstrates our and the Board’s ongoing commitment of driving and fostering diversity in the workforce and in the communities in which we operate.
We have also made a commitment to building a culture that provides opportunities for all employees regardless of our differences. As a result, we are able to pool our collective insights and intelligence to provide fresh and innovative thinking for our clients.
We encourage you to review the ESG Report of our ultimate parent company, Jefferies Financial Group, Inc. (located on our website) for more detailed information regarding our human capital programs and initiatives. Nothing on our website, including the ESG Report or sections thereof is deemed incorporated by reference into this Report. In addition, for discussion of the risks relating our ability to attract, develop and retain highly skilled and productive employees, see “Part 1. Item 1A. Risk Factors.”
Employee Benefits
Our benefits are designed to attract and retain employees by providing employees and their spouses, partners and families with health and wellness programs (medical, dental, vision and behavioral), retirement wealth accumulation, paid time off, income replacement (paid sick and disability leaves and life insurance) and family oriented benefits (parental leaves and child care assistance). We also endeavor to provide location specific health club, transportation and employee discounts.
Giving Back to Community
JEFFERIES GROUP LLC AND SUBSIDIARIES
The firm is committed to giving back to our communities. In 2021, we donated $13.2 million to approximately 175 organizations across two “Doing Good” trading days. Additionally, through our Employee Resource Groups, employees have created lasting partnerships by volunteering time to support several of these charitable partners.
Competition
All aspects of our business are intensely competitive. We compete primarily with large global bank holding companies that engage in capital markets activities, but also with other broker-dealers, asset managers and boutique investment banking firms. The large global bank holding companies have substantially greater capital and resources than we do. We believe that the principal factors affecting our competitive standing include the quality, experience and skills of our professionals, the depth of our relationships, the breadth of our service offerings, our ability to deliver consistently our integrated capabilities, and our culture, tenacity and commitment to serve our clients.
Regulation
Regulation in the United States. The financial services industry in which we operate is subject to extensive regulation. In the U.S., the Securities and Exchange Commission (“SEC”) is the federal agency responsible for the administration of federal securities laws, and the Commodity Futures Trading Commission (“CFTC”) is the federal agency responsible for the administration of laws relating to commodity interests (including futures, commodity options and swaps). In addition, the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the National Futures Association (“NFA”) are self-regulatory organizations (“SROs”) that are actively involved in the regulation of financial services businesses (securities businesses in the case of FINRA and commodities/futures businesses in the case of the NFA). In addition, broker-dealers that conduct securities activities involving municipal securities are subject to regulation by the Municipal Securities Rulemaking Board (“MSRB”). In addition to federal regulation, we are subject to state securities regulations in each state and U.S. territory in which we conduct securities or investment advisory activities. The SEC, FINRA, CFTC, NFA and state securities regulators conduct periodic examinations of broker-dealers, investment advisors, futures commission merchants (“FCMs”), swap dealers and security-based swap dealers (“SBS dealers”). The designated examining authority under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) for Jefferies LLC’s activities as a broker-dealer is FINRA, and the designated self-regulatory organization under the U.S. Commodity Exchange Act for Jefferies LLC’s non-clearing FCM activities is the NFA. Financial services businesses are also subject to regulation and examination by state securities regulators and attorneys general in those states in which they do business. In addition, broker-dealers, investment advisors, FCMs, swap dealers and SBS dealers must also comply with the rules and regulation of clearing houses, exchanges, swap execution facilities and trading platforms of which they are a member.
Broker-dealers are subject to SEC, FINRA, MSRB and, state securities regulations that cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure and requirements, anti-money laundering efforts, recordkeeping and the conduct of broker-dealer personnel including officers and employees (although state securities regulations are, in a number of cases, more limited). Registered investment advisors are subject to, among other requirements, SEC regulations concerning marketing, transactions with affiliates, custody of client assets, disclosures to clients, conflict of interest, insider trading and recordkeeping; and investment advisors that are also registered as commodity trading advisors or commodity pool operators are also subject to regulation by the CFTC and the NFA. FCMs, introducing brokers and swap dealers that engage in commodity options, futures or swap transactions are subject to regulation by the CFTC and the NFA, and SBS dealers are subject to regulation by the SEC. Additional legislation, changes in rules promulgated by the SEC, FINRA, CFTC, NFA, other SROs of which the broker-dealer is a member, and state securities regulators, or changes in the interpretation or enforcement of existing laws or rules may directly affect the operations and profitability of broker-dealers, investment advisors, FCMs, commodity trading advisors, commodity pool operators, swap dealers and SBS dealers. The SEC, CFTC, FINRA, NFA, state securities regulators and state attorneys general may conduct administrative proceedings or initiate civil litigation that can result in adverse consequences for Jefferies LLC, its affiliates, including affiliated investment advisors, as well as its and their officers and employees (including, without limitation, injunctions, censures, fines, suspensions, directives that impact business operations (including proposed expansions), membership expulsions, or revocations of licenses and registrations).
SEC Regulation Best Interest (“Reg BI”) requires that a broker-dealer and its associated persons act in a retail customer’s best interest and not place their own financial or other interests ahead of a retail customer’s interests when recommending securities transactions or investment strategies, including recommendations of types of accounts. To meet this best interest standard, a broker-dealer must satisfy four component obligations including a disclosure obligation, a care obligation, a conflict of interest obligation, and a compliance obligation and both broker-dealers and investment advisors are required to provide disclosures about their standard of conduct and conflicts of interest.
In addition, certain states, have proposed or adopted measures that would make broker-dealers, sales agents and investment advisors and their representatives subject to a fiduciary duty when providing products and services to customers. The SEC did
JEFFERIES GROUP LLC AND SUBSIDIARIES
not indicate an intent to pre-empt state regulation in this area, and some of the state proposals would allow for a private right of action. Since our Wealth Management division makes recommendations to retail customers, it is required to comply with the obligations imposed under Reg BI and applicable state laws.
Regulatory Capital Requirements. Several of our entities are subject to financial capital requirements that are set by regulation. Jefferies LLC is a dually registered broker-dealer and FCM and is required to maintain net capital in excess of the greater of the SEC or CFTC minimum financial requirements. As a broker-dealer, Jefferies LLC is subject to the SEC’s Uniform Net Capital Rule (the “Net Capital Rule”). Jefferies LLC has elected to compute its minimum net capital requirement in accordance with the “Alternative Net Capital Requirement” as permitted by the Net Capital Rule, which provides that a broker-dealer shall not permit its net capital, as defined, to be less than the greater of 2% of its aggregate debit balances (primarily customer-related receivables) or $250,000 ($1.5 million for prime brokers). Compliance with the Net Capital Rule could limit Jefferies LLC’s operations, such as underwriting and trading activities, and financing customers’ prime brokerage or other margin activities, in each case, that could require the use of significant amounts of capital, limit its ability to engage in certain financing transactions, such as repurchase agreements, and may also restrict its ability (i) to make payments of dividends, withdrawals or similar distributions or payments to a stockholder/parent or other affiliate, (ii) to make a redemption or repurchase of shares of stock, or (iii) to make an unsecured loan or advance to such shareholders or affiliates. As a carrying/clearing broker-dealer, under FINRA Rule 4110, FINRA could impose higher minimum net capital requirements than required by the SEC, and could restrict a broker-dealer from expanding business or require the broker-dealer to reduce its business activities. If the broker dealer also carries accounts for other broker dealers which are engaged in proprietary trading, it may need net capital of $7 million or tentative net capital of $25 million, depending on circumstances. As a non-clearing FCM, Jefferies LLC is also required to maintain minimum adjusted net capital of $1.0 million.
SEC registered broker-dealers that also register with the SEC as security-based swap dealers engaging in principal transactions of security-based swaps (“SBS”) are subject to rules regarding capital, segregation and margin requirements. The SEC rules establish similar standards for an entity registering as a standalone SBS dealer. The CFTC and NFA have also adopted swap dealer capital rules. Under the rules there is a minimum net capital requirement for, among others, an entity that acts as a dealer in SBS or swaps, which is the greater of $20 million or 2% (that the SEC could, in the future, increase up to 4% or 8%) of a risk margin amount. The risk margin amount for the SEC means the sum of (i) the total initial margin required to be maintained by the SEC-registered SBS dealer at each clearinghouse with respect to SBS or swap transactions cleared for SBS or swap customers and (ii) the total initial margin amount calculated by the SEC-registered SBS dealer with respect to non-cleared SBS and swaps under the SEC rules. The risk margin amount for the CFTC means the total initial margin amount calculated by the CFTC-registered swap dealer with respect to non-cleared SBS and swaps under the CFTC rules.
Jefferies Financial Services, Inc. (“JFSI”), one of our subsidiaries, is registered with the CFTC as a swap dealer and registered with the SEC as an SBS. As of late 2021, JFSI is now required to comply with the SEC and CFTC capital rules for SBS dealers and swap dealers, respectively. Further, subsequent to year-end, on December 16, 2021, JFSI was approved by the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC’s net capital requirements.
Under the Exchange Act, state securities regulators are not permitted to impose capital, margin, custody, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements on registered broker-dealers that differ from, or are in addition to, the requirements in those areas established under the Exchange Act, including the rules and regulations promulgated thereunder.
For additional information see Item 1A. Risk Factors - “New legislation and regulation may significantly affect our business.”
Jefferies Group LLC is not subject to any regulatory capital rules.
See Net Capital within Item 7. Management’s Discussion and Analysis and Note 19, Net Capital Requirements in this Annual Report on Form 10-K for additional discussion of net capital calculations.
Regulation outside the United States. We are an active participant in the international capital markets and provide investment banking services internationally, primarily in Europe and Asia Pacific. As in the U.S., our international subsidiaries are subject to extensive regulations proposed, promulgated and enforced by, among other regulatory bodies, the European Commission and European Supervisory Authorities (including the European Banking Authority and European Securities and Market Authority), U.K. Financial Conduct Authority, German Federal Financial Supervisory Authority (“BaFin”), Investment Industry Regulatory Organization of Canada, Hong Kong Securities and Futures Commission, the Japan Financial Services Agency, the Monetary Authority of Singapore and the Australian Securities and Investments Commission. Every country in which we do business imposes upon us laws, rules and regulations similar to those in the U.S., including with respect to some form of capital adequacy rules, customer protection rules, data protection regulations, anti-money laundering and anti-bribery rules, compliance with other applicable trading and investment banking regulations and similar regulatory reform.
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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Factors Affecting Our Business
The following factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could necessitate unforeseen changes to the ways we operate our businesses or could otherwise result in changes that differ materially from our expectations. In addition to the specific factors mentioned in this report, we may also be affected by other factors that affect businesses generally such as global or regional changes in economic, business or political conditions, acts of war, terrorism, pandemics, climate change and natural disasters.
Market and Liquidity Risks
Our business is subject to significant credit risk.
In the normal course of our businesses, we are involved in the execution, settlement and financing of various customer and principal securities and derivative transactions. These activities are transacted on a cash, margin or delivery-versus-payment basis and are subject to the risk of counterparty or customer nonperformance. Even when transactions are collateralized by the underlying security or other securities, we still face the risks associated with changes in the market value of the collateral through settlement date or during the time when margin is extended and collateral has not been secured or the counterparty defaults before collateral or margin can be adjusted. We may also incur credit risk in our derivative transactions to the extent such transactions result in uncollateralized credit exposure to our counterparties.
We seek to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. We may require counterparties to deposit additional collateral or return collateral pledged. In certain circumstances, we may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty. However, there can be no assurances that our risk controls will be successful.
We are exposed to market risk and our principal trading and investments expose us to risk of loss.
Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with our operations and activities, including trading account assets and liabilities, loans, securities, short-term borrowings, corporate debt, and derivatives. Market conditions that change from time to time, thereby exposing us to market risk, include fluctuations in interest rates, equity prices, relative exchange rates, and price deterioration or changes in value due to changes in market perception or actual credit quality of an issuer.
In addition, disruptions in the liquidity or transparency of the financial markets may result in our inability to sell, syndicate, or realize the value of security positions, thereby leading to increased concentrations. The inability to reduce our positions in specific securities may not only increase the market and credit risks associated with such positions, but also increase capital requirements, which could have an adverse effect on our business, results of operations, financial condition, and liquidity.
A considerable portion of our revenues is derived from trading in which we act as principal. We may incur trading losses relating to the purchase, sale or short sale of fixed income, high yield, international, convertible, and equity securities, loans, derivative contracts and commodities for our own account. In any period, we may experience losses on our inventory positions as a result of the level and volatility of equity, fixed income and commodity prices (including oil prices), lack of trading volume and illiquidity. From time to time, we may engage in a large block trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, securities of issuers engaged in a specific industry, or securities from issuers located in a particular country or region. In general, because our inventory is marked to market on a daily basis, any adverse price movement in these securities could result in a reduction of our revenues and profits. In addition, we may engage in hedging transactions that if not successful, could result in losses.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management within Part II, Item 7. of this Annual Report on Form 10-K for additional discussion.
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A credit-rating agency downgrade could significantly impact our business.
Maintaining an investment grade credit rating is important to our business and financial condition. If our credit ratings were downgraded, or if rating agencies indicate that a downgrade may occur, our business, financial position and results of operations could be adversely affected and perceptions of our financial strength could be damaged, which could adversely affect our client relationships. Additionally, we intend to access the capital markets and issue debt securities from time to time, and a decrease in our credit ratings or outlook could adversely affect our liquidity and competitive position, increase our borrowing costs, decrease demand for our debt securities and increase the expense and difficulty of financing our operations. In addition, in connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, we may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of a credit rating downgrade. Such a downgrade could also negatively impact the prices of our debt securities. There can be no assurance that our credit ratings will not be downgraded.
We may be adversely affected by changes in or the discontinuance of Interbank Offered Rates (“IBORs”), in particular, London Interbank Offered Rate (“LIBOR”).
Central banks and regulators in a number of major jurisdictions (for example, the U.S., U.K., European Union (“EU”), Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for IBORs. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that, after specified dates, LIBOR settings will cease to be provided by any administrator or will no longer be representative of the underlying market and economic reality that such settings are intended to measure. Those dates are: (i) June 30, 2023, in the case of the principal U.S. dollar LIBOR tenors (overnight and one, three, six and 12 months); and (ii) December 31, 2021, in all other cases (i.e., one week and two month U.S. dollar LIBOR and all tenors of non-U.S. dollar LIBOR). Accordingly, many existing LIBOR obligations will transition to another benchmark after June 30, 2023 or, in some cases, after December 31, 2021. However, those transition dates may occur earlier. The U.K. Financial Conduct Authority and certain U.S. regulators have encouraged market participants to cease entering into new contracts using U.S. dollar LIBOR by December 31, 2021, despite expected publication of U.S. dollar LIBOR through June 30, 2023. Regulators have also stated that, for certain purposes, market participants should transition away from U.S. dollar LIBOR sooner. It is not possible to know what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments. Similar developments have occurred with respect to other IBORs.
We continue to work towards reducing our exposure to IBOR-referencing contracts, including derivatives, securities, and other financial products, to meet the industry milestones and recommendations published by National Working Groups (“NWG”), including the Alternative Reference Rates Committee (the “ARRC”) in the U.S.
On October 23, 2020, the International Swaps and Derivatives Association, Inc. (“ISDA”) published a new supplement to the ISDA 2006 definitions and the related 2020 IBOR Fallbacks Protocol (the “Protocol”). These publications are intended to facilitate the incorporation of robust rate fallback provisions into both legacy and new derivative contracts with effect from January 25, 2021. A significant portion of our derivative exposures have incorporated the Protocol.
Our centralized LIBOR transition program continues to make progress with a focus on:
•continuing to reduce our overall exposure to LIBOR,
•implementing rate fallback provisions in new LIBOR contracts, where appropriate,
•continuing to educate and inform clients on LIBOR transition and the necessity to prepare for the cessation of LIBOR,
•assisting clients with discontinuing their issuance or use of LIBOR-linked products within the timelines specified by NWGs,
•supporting clients in their efforts to remediate contracts linked to LIBOR, including contracts to which we are a party, and
•planning for the implementation of rate fallback mechanisms across products based on the conventions recommended by NWGs upon the cessation of various IBORs.
Uncertainty regarding IBORs and the taking of discretionary actions or negotiation of rate fallback provisions could result in pricing volatility, loss of market share in certain products, adverse tax or accounting impacts, compliance, legal and operational costs and risks associated with client disclosures, as well as systems disruption, model disruption and other business continuity issues. In addition, uncertainty relating to IBORs could result in increased capital requirements for us given potential low transaction volumes, a lack of liquidity or limited observability for exposures linked to IBORs or any emerging successor rates and operational incidents associated with changes in and the discontinuance of IBORs.
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The language in our contracts and financial instruments that define IBORs, in particular LIBOR, have developed over time and have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments often give the calculation agent (which may be us) discretion over the successor rate or benchmark to be selected. As a result, there is considerable uncertainty as to how the financial services industry will address the discontinuance of designated rates in contracts and financial instruments or such designated rates ceasing to be acceptable reference rates. This uncertainty could ultimately result in client disputes and litigation surrounding the proper interpretation of our IBOR-based contracts and financial instruments. Although we have adhered to the Protocol, it is applicable only to derivatives when both parties adhere to the Protocol or otherwise agree for it to apply to their derivatives.
Further, the discontinuation of an IBOR, changes in an IBOR or changes in market acceptance of any IBOR as a reference rate may also adversely affect the yield on loans or securities held by us, amounts paid on securities we have issued, amounts received and paid on derivative instruments we have entered into, the value of such loans, securities or derivative instruments, the trading market for securities, the terms of new loans being made using different or modified reference rates, our ability to effectively use derivative instruments to manage risk, or the availability or cost of our floating-rate funding and our exposure to fluctuations in interest rates.
As a holding company, we are dependent for liquidity from payments from our subsidiaries, many of which are subject to restrictions.
As a holding company, we depend on dividends, distributions and other payments from our subsidiaries to fund payments on our obligations, including debt obligations. Many of our subsidiaries, including our broker-dealer subsidiaries, are subject to regulation that restrict dividend payments or reduce the availability of the flow of funds from those subsidiaries to us. In addition, our broker-dealer subsidiaries are subject to restrictions on their ability to lend or transact with affiliates and to minimum regulatory capital requirements.
Economic Environment Risks
The effects of the outbreak of the novel coronavirus (“COVID-19”) have negatively affected the global economy, the United States economy and the global financial markets, and may disrupt our operations and our clients’ operations, which could have an adverse effect on our business, financial condition and results of operations.
The ongoing COVID-19 pandemic has caused significant disruption in the international and United States economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The ongoing effects of COVID-19 remain challenging to predict due to multiple uncertainties, including the transmissibility, severity, duration and resurgences of the outbreak; new virus variants and the potential extent of their spread; the application and effectiveness of health and safety measures that are voluntarily adopted by the public or required by governments or public health authorities, including vaccines and treatments; the speed and strength of an economic recovery; and the impact to our employees and our operations, our clients’ operations, suppliers and business partners. Impacts to our business could be widespread and global, and material impacts may be possible, including the following:
•Employees contracting COVID-19
•Reductions in our operating effectiveness as our employees work from home or disaster-recovery locations
•Unavailability of key personnel necessary to conduct our business activities
•Unprecedented volatility in global financial markets
•Reductions in revenue across our operating businesses
•Closure of our offices or the offices of our clients
•De-globalization
•Potential regulatory scrutiny of our ability to adequately supervise our activities in accordance with applicable regulatory requirements
•Risk of cyber attacks or security vulnerabilities due to remote work environments and other changes in our operations
We are taking necessary and recommended precautions to protect the safety and well-being of our employees and clients, including by means of conducting certain business activities and operations remotely. However, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to provide client support and service. We will continue to evaluate the nature and extent of the impact to our business.
Although the onset of the COVID-19 pandemic resulted in meaningfully lower stock prices for many companies, as well as the trading prices for our own securities, the markets have not only stabilized but returned to near pre-COVID-19 levels. However, the further spread of the COVID-19 outbreak may materially negatively impact stock and other securities prices and materially disrupt banking and other financial activity generally and in the areas in which we operate. This could likely result in a decline
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in demand for our products and services, which would negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our and our consolidated subsidiaries’ business, operations, consolidated financial condition, and consolidated results of operations.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, cybersecurity incidents and events, terrorist attacks, climate-related incidents, or other natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as COVID-19, or other widespread health emergency (or concerns over the possibility of such an emergency), cybersecurity incidents and events, terrorist attacks, extreme climate-related incidents or events or other natural disasters, could create economic and financial disruptions, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses.
Climate change concerns and incidents could disrupt our businesses, adversely affect the profitability of certain of our investments, adversely affect client activity levels, adversely affect the creditworthiness of our counterparties, and damage our reputation.
Climate change may cause extreme weather events that disrupt operations at one or more of our locations, which may negatively affect our ability to service and interact with our clients, and also may adversely affect the value of certain of our investments, including our real estate investments. Climate change may also have a negative impact on the financial condition of our clients, which may decrease revenues from those clients and increase the credit risk associated with loans and other credit exposures to those clients. Additionally, our reputation and client relationships may be damaged as a result of our involvement, or our clients’ involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change. New regulations or guidance relating to climate change, as well as the perspectives of shareholders, employees and other stakeholders regarding climate change, may affect whether and on what terms and conditions we engage in certain activities or offer certain products.
Abrupt changes in market and general economic conditions have in the past adversely affected, and may in the future adversely affect, our business and profitability and cause volatility in our results of operations.
Economic and market conditions have had, and will continue to have, a direct and material impact on our results of operations and financial condition because performance in the financial services industry is heavily influenced by the overall strength of general economic conditions and financial market activity.
Our investment banking revenue, in the form of advisory services and underwriting, is directly related to general economic conditions and corresponding financial market activity. When the outlook for such economic conditions is uncertain or negative, financial market activity generally tends to decrease, which reduces our investment banking revenues. Reduced expectations of U.S. economic growth or a decline in the global economic outlook could cause financial market activity to decrease and negatively affect our investment banking revenues.
A sustained and continuing market downturn could lead to or exacerbate declines in the number of securities transactions executed for clients and, therefore, to a decline in the revenues we receive from commissions and spreads. Correspondingly, a reduction of prices of the securities we hold in inventory or as investments would lead to reduced revenues.
Revenues from our asset management businesses have been and may continue to be negatively impacted by declining securities prices, as well as widely fluctuating securities prices. Because our asset management businesses hold long and short positions in equity and debt securities, changes in the prices of these securities, as well as any decrease in the liquidity of these securities, may materially and adversely affect our revenues from asset management.
In addition, global economic conditions and global financial markets remain vulnerable to the potential risks posed by certain events, which could include, among other things, political and financial uncertainty in the United States and the European Union, ongoing concern about Asia’s economies, global supply disruptions, complications involving terrorism and armed conflicts around the world, or other challenges to global trade or travel, such as those that have occurred due to the COVID-19 pandemic. More generally, because our business is closely correlated to the general economic outlook, a significant deterioration in that outlook or realization of certain events would likely have an immediate and significant negative impact on our business and overall results of operations.
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Changing financial, economic and political conditions could result in decreased revenues, losses or other adverse consequences.
Because we are a global securities and investment banking firm, global or regional changes in the financial markets or economic and political conditions could adversely affect our business in many ways, including the following:
•A market downturn could lead to a decline in the volume of transactions executed for customers and, therefore, to a decline in the revenues we receive from commissions and spreads
•Unfavorable conditions or changes in general political, economic or market conditions could reduce the number and size of transactions in which we provide underwriting, financial advisory and other services. Our investment banking revenues, in the form of financial advisory and sales and trading or placement fees, are directly related to the number and size of the transactions in which we participate and could therefore be adversely affected by unfavorable financial, economic or political conditions. In particular, the increasing trend toward sovereign protectionism and de-globalization has resulted or could result in decreases in free trade, erosion of traditional international coalitions, the imposition of sanctions and tariffs, governmental closures and no-confidence votes, domestic and international strife, and general market upheaval in response to such results, all of which could negatively impact our business
•Adverse changes in the securities markets could lead to a reduction in revenues from asset management fees and losses on our own capital invested in managed funds. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors
•Adverse changes in the financial markets could lead to regulatory restrictions that may limit or halt certain of our business activities
•Limitations on the availability of credit can affect our ability to borrow on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. Global market and economic conditions have been particularly disrupted and volatile in the last several years and may be in the future. Our cost and availability of funding could be affected by illiquid credit markets and wider credit spreads
•New or increased taxes on compensation payments such as bonuses may adversely affect our profits
•Should one of our clients or competitors fail, our business prospects and revenue could be negatively impacted due to negative market sentiment causing clients to cease doing business with us and our lenders to cease loaning us money, which could adversely affect our business, funding and liquidity
The United Kingdom’s exit from the EU could adversely affect our business.
The U.K. left the EU on January 31, 2020, with a transition period until December 31, 2020 during which time the U.K. followed EU rules and a U.K.-EU trade agreement was negotiated governing EU and U.K. relations from January 1, 2021 resulting in a Trade and Cooperation Agreement together with a Political Declaration covering a number of areas including financial services. The Trade and Cooperation Agreement does not include substantive provisions for financial services, in particular it does not allow U.K. investment firms to provide services into the EU under the Passporting regime.
We historically operated substantial parts of our EU businesses from entities based in the U.K. As a result, services to clients located in the European Economic Area (“EEA”) jurisdiction are now provided by a wholly-owned subsidiary (“Jefferies GmbH”) established in Germany which is authorized as a MiFID investment firm by BaFin. Client relationships have been migrated so that Jefferies GmbH can service EEA institutional clients across Investment Banking, Equities and Fixed Income sectors from its office in Frankfurt and branch offices in other EEA countries. Due to considerations such as operating expenses, liquidity, leverage and capital, the modified European operating framework will be more complex, less efficient and more costly than would otherwise have been the case, which could have an adverse impact on our businesses, results of operations and our ability to service clients. In addition, the potential impacts related to, among other things, the U.K.’s exit from the EU, the terms of the new economic and security relationship between the U.K. and the EU on the movement of goods, services, people and capital between the U.K. and the EU, customer behavior, economic conditions, interest rates, currency exchange rates, availability of capital or other matters are unclear and likely to change over time. The overall impact of the U.K.’s exit from the EU on any one or more factors, or more generally, could adversely affect our businesses, our results of operations and financial condition, including our revenues from trading and investment banking activities, particularly in Europe. We are continuing to monitor the impact of the U.K.’s exit from the EU on our businesses, our results of operations and financial condition.
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Operational Risks
Damage to our reputation could damage our business.
Maintaining our reputation is critical to our attracting and maintaining customers, investors and employees. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our business prospects. These issues include, but are not limited to, any of the risks discussed in this Item 1A, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, cybersecurity and privacy, record keeping, sales and trading practices, failure to sell securities we have underwritten at the anticipated price levels, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. A failure to deliver appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Further, negative publicity regarding us, whether or not true, may also result in harm to our prospects. Our operations in the past have been impacted as some clients either ceased doing business or temporarily slowed down the level of business they do, thereby decreasing our revenue. There is no assurance that we will be able to successfully reverse the negative impact of allegations and rumors in the future and our potential failure to do so could have a material adverse effect on our business, financial condition and liquidity.
We may incur losses if our risk management is not effective.
We seek to monitor and control our risk exposure. Our risk management processes and procedures are designed to limit our exposure to acceptable levels as we conduct our business. We apply a comprehensive framework of limits on a variety of key metrics to constrain the risk profile of our business activities. These limits reflect our risk tolerances for business activity. Our framework includes inventory position and exposure limits on a gross and net basis, scenario analysis and stress tests, Value-at-Risk, sensitivities, exposure concentrations, aged inventory, amount of Level 3 assets, counterparty exposure, leverage, cash capital and performance analysis. See Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management within Part II. Item 7. of this Annual Report on Form 10-K for additional discussion. While we employ various risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application, including risk tolerance determinations, cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. As a result, we may incur losses notwithstanding our risk management processes and procedures.
The ability to attract, develop and retain highly skilled and productive employees is critical to the success of our business.
Our ability to develop and retain our clients depends on the reputation, judgment, business generation capabilities and skills of our professionals. To compete effectively, we must attract, retain and motivate qualified professionals, including successful financial advisors, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel, in addition to qualified, successful personnel in functional, non-revenue producing roles. Competitive pressures we experience with respect to employees could have an adverse effect on our business, results of operations, financial condition and liquidity.
Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Financial industry employers are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee’s decision to leave us as well as in a prospective employee’s decision to join us. As competition for skilled professionals in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel.
If we were to lose the services of certain of our professionals, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our professionals or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Further, new business initiatives and efforts to expand existing businesses frequently require that we incur compensation and benefits expense before generating additional revenues.
Moreover, companies in our industry whose employees accept positions with competitors often claim that those competitors have engaged in unfair hiring practices. We may be subject to such claims in the future as we seek to hire qualified personnel who have worked for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending against these claims, regardless of their merits. Such claims could also discourage potential employees who work for our competitors from joining us.
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Operational risks may disrupt our business, result in regulatory action against us or limit our growth.
Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume and complexity of transactions could also constrain our ability to expand our businesses.
Certain of our financial and other data processing systems rely on access to and the functionality of operating systems maintained by third-parties. If the accounting, trading or other data processing systems on which we are dependent are unable to meet increasingly demanding standards for processing and security or, if they fail or have other significant shortcomings, we could be adversely affected. Such consequences may include our inability to effect transactions and manage our exposure to risk.
In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third-parties with which we conduct business.
Any cyber attack, cybersecurity incident, or other information security breach of, or vulnerability in, our technology systems, or those of our clients, partners, counterparties, or other third-party service providers we rely on, could have operational impacts, subject us to significant liability and harm our reputation.
Our operations rely heavily on the secure processing, storage and transmission of financial, personal and other information in our computer systems and networks. In recent years, there have been several highly publicized incidents involving financial services companies reporting the unauthorized disclosure of client or other confidential information, as well as cyber attacks involving theft, dissemination and destruction of corporate information or other assets, which in some cases occurred as a result of failure to follow procedures by employees or contractors or as a result of actions by third-parties. Cyber attacks can originate from a variety of sources, including third-parties affiliated with foreign governments, organized crime or terrorist organizations, and malicious individuals both outside and inside a targeted company. Malicious actors may also attempt to compromise or induce our induce employees, clients or other users of our systems to disclose sensitive information or provide access to our data, and these types of risks may be difficult to detect or prevent.
Like other financial services firms, we and our third-party service providers have been the target of cyber attacks. Although we and our service providers regularly defend against, respond to and mitigate the risks of cyberattacks, cybersecurity incidents among financial services firms and industry generally are on the rise. We are not aware of any material losses we have incurred relating to cyber attacks or other information security breaches. The techniques and malware used in these cyber attacks and cybersecurity incidents are increasingly sophisticated, change frequently and are often not recognized until launched because they are novel. Although we monitor the changing cybersecurity risk environment and seek to maintain reasonable security measures, including a suite of authentication and layered information security controls, no security measures are infallible, and we cannot guarantee that our safeguards will always work or that they will detect, mitigate or remediate these risks in a timely manner. Despite our implementation of reasonable security measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to spam attacks, unauthorized access, distributed denial of service attacks, ransomware, computer viruses and other malicious code, as well as human error, natural disaster, power loss, and other events that could damage to our reputation, impact the security and stability of our operations, and expose us to class action lawsuits and regulatory investigation, action, and penalties, and significant liability.
We also rely on numerous third-party service providers to conduct other aspects of our business operations, and we face similar risks relating to them. While we evaluate the information security programs and defenses of third-party vendors, we cannot be certain that our reviews and oversight will identify all potential information security weaknesses, or that our vendors’ information security protocols are or will be sufficient to withstand or adequately respond to a cyber attack, cybersecurity incident, or other information security breach. In addition, in order to access our products and services, or trade with us, our customers and counterparties may use networks, computers and other devices that are beyond our security control systems and processes.
Notwithstanding the precautions we take, if a cyber attack, cybersecurity incident, or other information security breach were to occur, this could jeopardize the information we confidentially maintain, or otherwise cause interruptions in our operations or those of our clients and counterparties, exposing us to liability. As attempted attacks continue to evolve in scope and sophistication, we may be required to expend substantial additional resources to modify or enhance our reasonable security
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measures, to investigate and remediate vulnerabilities or other exposures or to communicate about cyber attacks, cybersecurity incidents, or other information security breaches to our customers, partners, third-party service providers, and counterparties. Though we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our insurance policy limits or are not covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Successful cyber attacks, cybersecurity incidents, or other information security breaches at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our reasonable security measures or the financial system in general, which could result in a loss of business.
Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, and the increasing sophistication of malicious actors, a cyber attack, cybersecurity incident, or other information security breach could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack, cybersecurity incident, or other information security breach would take substantial amounts of time and resources, and that there may be extensive delays before we obtain full and reliable information. During such time we would not necessarily know the extent of the harm caused by the cyber attack, cybersecurity incident, or other information security breach or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated. All of these factors could further increase the costs and consequences of such a cyber attack or cybersecurity incident. In providing services to clients, we manage, utilize and store sensitive or confidential client or employee data, including personal data. As a result, we are subject to numerous laws and regulations designed to protect this information, such as U.S. and non-U.S. federal and state laws governing privacy and cybersecurity. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through system compromise or failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Depending on the circumstances giving rise to the information security breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
Employee misconduct could harm us by impairing our ability to attract and retain clients and subject us to significant legal liability and reputational harm.
There is a risk that our employees could engage in misconduct that adversely affects our business. For example, our business often requires that we deal with confidential matters of great significance to our clients. If our employees were to improperly use or disclose confidential information provided by our clients, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, current client relationships and ability to attract future clients. We are also subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. In addition, our financial advisors may act in a fiduciary capacity, providing financial planning, investment advice, and discretionary asset management. The violation of these obligations and standards by any of our employees would adversely affect our clients and us. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective against certain misconduct, including conduct which is difficult to detect. The occurrence of significant employee misconduct could have a material adverse financial effect or cause us significant reputational harm and/or legal and regulatory liability, which in turn could seriously harm our business and our prospects.
Our investment in Jefferies Finance may not prove to be successful and may adversely affect our results of operations or financial condition.
Many factors, most of which are outside of our control, can affect Jefferies Finance’s business, including adverse investment banking and capital market conditions leading to a decline of syndicate loans, inability of borrowers to repay commitments, adverse changes to a borrower’s credit worthiness, and other factors that directly and indirectly effect the results of operations, and consequently may adversely affect our results of operations or financial condition.
Our investment in Berkadia may not prove to be successful and may adversely affect our results of operations or financial condition.
Many factors, most of which are outside of our control, can affect Berkadia’s business, including loan losses in excess of reserves, a change in the relationships with U.S. Government-Sponsored Enterprises or federal agencies, a significant loss of customers, and other factors that directly and indirectly effect the results of operations, including the sales and profitability of Berkadia, and consequently may adversely affect our results of operations or financial condition.
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Legal, Legislation and Regulation Risks
Newly introduced legislation and regulation may significantly affect our business.
Significant new legislation and regulation affecting the financial services industry is regularly proposed and sometimes adopted. These legislative and regulatory initiatives affect not only us, but also our competitors and certain of our clients. These changes could have an effect on our revenue and profitability, limit our ability to pursue certain business opportunities, impact the value of assets that we hold, require us to change certain business practices, impose additional costs on us and otherwise adversely affect our business. Accordingly, we cannot provide assurance that legislation and regulation will not eventually have an adverse effect on our business, results of operations, cash flows and financial condition. In the U.S., such initiatives frequently arise in the aftermath of elections that change the party of the president or the majority party in the House and/or Senate.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the rules and regulations adopted by the CFTC and the SEC have introduced a comprehensive regulatory regime for swaps and SBS and parties that deal in such derivatives. One of our subsidiaries is registered as a swap dealer with the CFTC and is a member of the NFA, is registered as a security-based swap dealer with the SEC and has applied to the SEC to register as an OTC Derivatives Dealer. We have incurred significant compliance and operational costs as a result of the swaps and SBS rules adopted by the CFTC and SEC pursuant to the Dodd-Frank Act, and we expect that the complex regulatory framework will continue to require significant monitoring and compliance expenditures. We also will become subject to the SEC’s rules with respect to OTC Derivative Dealers if our subsidiary’s application to register as an OTC Derivatives Dealer is approved. Negative effects could result from an expansive extraterritorial application of the Dodd-Frank Act and/or insufficient international coordination with respect to adoption of rules for derivatives and other financial reforms in other jurisdictions.
Similar types of swap regulation have been proposed or adopted in jurisdictions outside the U.S., including in the EU, the U.K. and Japan. For example, the EU and the U.K. have established regulatory requirements relating to portfolio reconciliation and reporting, clearing certain OTC derivatives and margining for uncleared derivatives activities under the European Market Infrastructure Regulation (“EMIR”).
The Markets in Financial Instruments Regulation and a revision of the Market in Financial Instruments Directive (collectively referred to as “MiFID II”) imposes certain restrictions as to the trading of shares and derivatives including market structure-related, reporting, investor protection-related and organizational requirements, requirements on pre- and post-trade transparency, requirements to use certain venues when trading financial instruments (which includes shares and certain derivative instruments), requirements affecting the way investment managers can obtain research, powers of regulators to impose position limits and provisions on regulatory sanctions. The EU published amended rules in August 2021, which include investor protection rules and rules relating to research on small and medium sized enterprises, effective in 2022.
The EU capital and liquidity legislation for banks implemented many of the finalized Basel III capital and liquidity standards, including in relation to the leverage ratio, market risk capital, and a net stable funding ratio. Certain of these changes began to be phased in from June 2021, and further changes will be required to be implemented from 2023. In addition, new prudential regimes for investment firms are in the process of being implemented in both the EU and the UK for MiFID authorized investment firms. The Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD), being applicable to the UK and Europe, whilst simplifying the capital treatment for investments firms such as the UK entity, Jefferies International Limited, and, its European subsidiary, Jefferies GmbH, will include a requirement that a certain amount of variable remuneration for material risk takers be paid in non-cash instruments and have a deferral element. Implementation of this requirement is effective from the financial year commencing December 1, 2022 for Jefferies International Limited and December 1, 2021 for Jefferies GmbH (although the European implementation timeline for Jefferies GmbH could be delayed by the German regulator, resulting in a commencement date of December 1, 2022, being in line with the UK). Consequently, we will need to adapt our remuneration structures for those employees identified as material risk takers.
Increasing regulatory focus on evolving privacy and security issues and expanding laws could impact our businesses and investments and expose us to increased liability.
The EU General Data Protection Regulation (the “EU GDPR” or “GDPR”) applies in all EU Member States and also applies to entities established outside of the EU where such entity processes personal data in relation to: (i) the offering of goods or services to data subjects in the EEA; or (ii) monitoring the behavior of data subjects as far as that behavior takes place in the EEA. The UK has implemented the GDPR as part of its national law (referred to as the “UK GDPR”). The GDPR imposes a number of obligations on companies, including, without limitation: accountability and transparency requirements; compliance with the data protection rights of data subjects; and the prompt reporting of certain personal data breaches to both (1) the relevant data supervisory authority without undue delay unless the personal data breach is unlikely to result in a risk to the data subject’s rights and freedoms; and (2) impacted individuals where the personal data breach is likely to result in a high risk with regard to their rights and freedoms.
JEFFERIES GROUP LLC AND SUBSIDIARIES
The EU GDPR also includes restrictions on the transfers of personal data from the EEA to jurisdictions that are not recognized as having ‘adequate data protection laws’. Obligations under the EU GDPR and implementing Member State legislation continue to evolve through legislation and regulatory guidance, for example imposing further restrictions on use of the standard contractual clauses (“SCCs”) to transfer data to third countries by requiring companies to carry out a transfer privacy impact assessment.
The EU GDPR imposes significant fines for serious non-compliance of up to the higher of 4% of an organization’s annual worldwide turnover or €20 million (or approximately £17.5 million under the UK GDPR). The EU GDPR identifies a list of points to consider when determining the level of fines to impose (including the nature, gravity and duration of the infringement). Data subjects also have a right to compensation as a result of infringement of the EU GDPR for financial or non-financial losses.
Following the United Kingdom’s departure from the EU, known as Brexit, the EU GDPR’s data protection obligations continue to apply in the United Kingdom in substantially unvaried form under “UK GDPR”. The UK GDPR exists alongside the UK Data Protection Act 2018 and its requirements are largely aligned with those under the EU GDPR and as such, may lead to similar compliance and operational costs with potential fines of up to £17.5 million or 4% of global turnover.
Other privacy laws at both federal and state levels are in effect in the U.S. and other regions, many of which involve heightened compliance obligations similar to those under GDPR. The privacy and cybersecurity legislative and regulatory landscape is evolving rapidly, and numerous proposals regarding privacy and cybersecurity are pending before U.S. and non-U.S. legislative and regulatory bodies. The adopted form of such developing legislation and regulation will determine the level of any resources which we will need to invest to ensure compliance. In the event of non-compliance with privacy laws and regulations, we could face significant administrative and monetary sanctions as well as reputational damage which may have a material adverse effect on our operations, financial condition and prospects.
Extensive regulation of our business limits our activities, and, if we violate these regulations, we may be subject to significant penalties.
We are subject to extensive laws, rules and regulations in the countries in which we operate. Firms that engage in providing financial services must comply with the laws, rules and regulations imposed by national and state governments and regulatory and self-regulatory bodies with jurisdiction over such activities. Such laws, rules and regulations cover many aspects of providing financial services.
Our regulators supervise our business activities to monitor compliance with applicable laws, rules and regulations. In addition, if there are instances in which our regulators question our compliance with laws, rules, or regulations, they may investigate the facts and circumstances to determine whether we have complied. At any moment in time, we may be subject to one or more such investigations or similar reviews. At this time, all such investigations and similar reviews are insignificant in scope and immaterial to us. However, there can be no assurance that, in the future, the operations of our businesses will not violate such laws, rules, or regulations, or that such investigations and similar reviews will not result in significant or material adverse regulatory requirements, regulatory enforcement actions, fines or other adverse impact to the operation of our business.
Additionally, violations of laws, rules and regulations could subject us to one or more of the following events: civil and criminal liability; sanctions, which could include the revocation of our subsidiaries’ registrations as investment advisors or broker-dealers; the revocation of the licenses of our financial advisors; censures; fines; or a temporary suspension or permanent bar from conducting business. The occurrence of any of these events could have a material adverse effect on our business, financial condition and prospects.
Certain of our subsidiaries are subject to regulatory financial capital holding requirements, that could impact various capital allocation decisions or limit the operations of our broker-dealers. In particular, compliance with the financial capital holding requirement may restrict our broker-dealers’ ability to engage in capital-intensive activities such as underwriting and trading, and may also limit their ability to make loans, advances, dividends and other payments and may restrict our swap dealers’ ability to execute certain derivative transactions.
Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, conflicts and inconsistencies among rules and regulations, or the entering into businesses that subject us to new rules and regulations may directly affect our business, results of operations and financial condition. We continue to monitor the impact of new U.S. and international regulation on our businesses.
Legal liability may harm our business.
Many aspects of our business involve substantial risks of liability, and in the normal course of business, we have been named as a defendant or codefendant in lawsuits involving primarily claims for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. The expansion of our business, including increases in the number and size of investment banking transactions
JEFFERIES GROUP LLC AND SUBSIDIARIES
and our expansion into new areas impose greater risks of liability. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our business and our prospects.
A change in tax laws in key jurisdictions could materially increase our tax expense.
We are subject to tax in the U.S. and numerous international jurisdictions. Changes to income tax laws and regulations in any of the jurisdictions in which we operate, or in the interpretation of such laws, or the introduction of new taxes, could significantly increase our effective tax rate and ultimately reduce our cash flow from operating activities and otherwise have an adverse effect on our financial condition or results of operations.
If our tax filing positions were to be challenged by federal, state and local, or foreign tax jurisdictions, we may not be wholly successful in defending our tax filing positions.
We record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and, if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which result could be significant to our financial condition or results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
We maintain offices in over 30 cities throughout the world. Our principal offices include our global headquarters in New York City, our European headquarters in London and our Asia Pacific headquarters in Hong Kong. In addition, we maintain backup data center facilities with redundant technologies for each of our three main data center hubs in Jersey City, London and Hong Kong. We lease all of our office space, or contract via service arrangement, which management believes is adequate for our business.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Many aspects of our business involve substantial risks of legal and regulatory liability. In the normal course of business, we have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. We are also involved in a number of regulatory matters, including exams, investigations and similar reviews, arising out of the conduct of our business. Based on currently available information, we do not believe that any pending matter will have a material adverse effect on our consolidated financial statements.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
JEFFERIES GROUP LLC AND SUBSIDIARIES
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains or incorporates by reference “forward looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements about our future and statements that are not historical facts. These forward looking statements are usually preceded by the words “believe,” “intend,” “may,” “will,” or similar expressions. Forward looking statements may contain expectations regarding revenues, earnings, operations and other results, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future development of our business and products. Forward looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward looking statements is contained in this report and other documents we file. You should read and interpret any forward looking statement together with these documents, including the following:
•the description of our business contained in this report under the caption “Business”;
•the risk factors contained in this report under the caption “Risk Factors”;
•the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein;
•the discussion of our risk management policies, procedures and methodologies contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management” herein;
•the notes to the consolidated financial statements contained in this report; and
•cautionary statements we make in our public documents, reports and announcements.
Any forward looking statement speaks only as of the date on which that statement is made. We will not update any forward looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law.
Our business, by its nature, does not produce predictable or necessarily recurring earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally and our own activities and positions. For a further discussion of the factors that may affect our future operating results, see the risk factors contained in this report under the caption “Risk Factors”.
Our results of operations for the years ended November 30, 2021 (“2021”) and November 30, 2020 (“2020”) are discussed below. For a discussion of our results of operations for the year ended November 30, 2019 (“2019”) and our 2020 results of operations as compared with our 2019 results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report Form 10-K for the year ended November 30, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on January 28, 2021.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Consolidated Results of Operations
Overview
The following table provides an overview of our consolidated results of operations (dollars in thousands):
% Change from
Prior Year
2021 2020 2019 2021 2020
Net revenues
$ 7,043,823 $ 5,197,477 $ 3,112,530 35.5 % 67.0 %
Non-interest expenses
4,859,870 4,020,023 2,787,861 20.9 % 44.2 %
Earnings before income taxes 2,183,953 1,177,454 324,669 85.5 % 262.7 %
Income tax expense 559,229 302,748 80,284 84.7 % 277.1 %
Net earnings 1,624,724 874,706 244,385 85.7 % 257.9 %
Net earnings (loss) attributable to noncontrolling interests 5,993 (4,597) (1,644) N/M 179.6 %
Net earnings attributable to Jefferies Group LLC 1,618,731 879,303 246,029 84.1 % 257.4 %
Effective tax rate
25.6 % 25.7 % 24.7 %
N/M - Not Meaningful
Executive Summary
2021 Compared with 2020 - Record Full Year Investment Banking Net Revenues, Total Net Revenues and Net Earnings
Consolidated Results
•Net revenues for 2021 were a record $7.04 billion, compared with a prior year record of $5.20 billion for 2020, an increase of $1.85 billion, or 35.5%, reflecting record net revenues in investment banking, equities and asset management and solid results in fixed income.
•Earnings before income taxes of $2.18 billion for 2021 were a record, up 85.5% over the prior year’s then record earnings before income taxes.
•Net earnings attributable to Jefferies Group LLC of $1.62 billion for 2021 were a record, up 84.1% over the prior year’s then record net earnings attributable to Jefferies Group LLC.
Business Results
•Our investment banking net revenues of $4.42 billion for 2021 were an increase of 84.4% from the prior year, reflecting record advisory revenues of $1.87 billion, an increase of 77.8%, or $820.1 million, compared to 2020, while our record underwriting revenues for 2021 were $2.49 billion, up $1.04 billion, or 72.1%. The increase in net revenues is reflective of an increase in both the number and aggregate value of transactions completed by our investment banking franchise.
•Our investment banking revenues include our share of the net earnings (loss) of the Jefferies Finance joint venture. In 2021, Jefferies Finance achieved record underwriting volumes on the back of the strength of the leveraged loan market and an active private-equity backed mergers and acquisitions environment. The results in 2021 were partially offset by a $56.0 million one-time charge incurred by Jefferies Finance related to refinancing outstanding debt. Results of Jefferies Finance in 2020 were impacted by unrealized losses related to the write-down of commitments and loans held-for-sale, primarily due to the impact of the novel coronavirus (“COVID-19”) pandemic on the markets and the economy. The prior year results were also impacted by unrealized write-downs of private equity investments received or acquired in connection with our investment banking activities.
•Our equities net revenues increased 15.2% compared to the prior year, reflecting record results that were driven by strong client activity and trading performance as a result of meaningful growth across all of our products and regions.
•Our fixed income net revenues were down 28.5% compared to the prior year, which was an all-time record. Net revenues for 2021 are reflective of strong trading results under more normalized trading conditions and reflect continued strength in certain of our credit-focused businesses and strong client demand though this is in comparison to outsize trading volumes and extremely active markets and high levels of volatility driving results in the prior year.
JEFFERIES GROUP LLC AND SUBSIDIARIES
•Our asset management net revenues of $247.2 million for 2021, were higher than the $208.3 million recorded in the prior year, driven by a substantial increase in asset management fees and revenues, partially offset by lower investment returns across certain platforms. Results in the current year include $71.6 million in management, performance and similar fees and revenues earned directly or through our strategic affiliates in the current year, as compared with $28.7 million in 2020.
•Net revenues in our other business category for 2021 were $113.4 million, compared with $121.3 million in 2020. Results for 2021 include higher net revenues from our share of the net income from Berkadia Commercial Mortgage Holding LLC (“Berkadia”). Results in 2020 also include gains of $61.5 million from hedges that were bought and sold in the first quarter of 2020 at the onset of COVID-19.
Expenses
•Non-interest expenses for 2021 increased $839.8 million, or 20.9%, to $4.86 billion, compared with $4.02 billion for 2020. This 20.9% increase, is largely due to higher compensation and benefits expense, as well as higher transaction-related costs. Our pre-tax operating margin increased to 31.0% in 2021 from 22.7% in 2020.
•Compensation and benefits expense for 2021 was $3.37 billion, an increase of $581.1 million, or 20.8%, from 2020. The increase is primarily a result of the significant increase in our net revenues. Compensation and benefits expense as a percentage of Net revenues was 47.9% for 2021, compared with 53.7% for 2020. Refer to Note 16, Compensation Plans, included in this Annual Report on Form 10-K, for further details
•Non-compensation expenses for 2021 increased $258.8 million, or 21.1%, to $1.49 billion, compared with $1.23 billion for 2020. The increase in non-compensation expenses was largely due to higher Floor brokerage and clearing fees related to increased trading volumes and a significant increase in volume of investment banking transactions driving higher Underwriting costs. Technology and communication expenses, Professional services expenses and Business development expenses were also higher for 2021 reflecting our growth and costs associated with our increased recruiting efforts.
•Other expenses within Non-compensation also increased for 2021 primarily due to an increase in bad debt expense mostly related to a specific default in our prime brokerage business and $38.2 million in costs related to the early redemption of senior notes.
Headcount
•At November 30, 2021, we had 4,508 employees globally, an increase of 586 employees from our headcount of 3,922 at November 30, 2020. Our headcount increased across all regions primarily as a result the growth of our investment banking business, as well as due to additions in technology and other corporate services staff to support our increased regulatory requirements and overall growth.
Revenues by Source
For presentation purposes, the remainder of “Consolidated Results of Operations” is presented on a detailed product and expense basis, rather than on a business segment basis. Net revenues presented for our Investment Banking and Capital Markets businesses include allocations of interest income and interest expense as we assess the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective activities, including the net interest cost of allocated long-term debt, which is a function of the mix of each business’s associated assets and liabilities and the related funding costs.
JEFFERIES GROUP LLC AND SUBSIDIARIES
The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary from period to period due to fluctuations in economic and market conditions, and our own performance. The following provides a summary of “Net Revenues by Source” (dollars in thousands):
% Change from
Prior Year
2021 2020 2019
Amount % of Net Revenues Amount % of Net Revenues Amount % of Net Revenues 2021 2020
Advisory
$ 1,873,560 26.6 % $ 1,053,500 20.3 % $ 767,421 24.6 % 77.8 % 37.3 %
Equity underwriting
1,557,364 22.1 902,016 17.4 361,972 11.6 72.7 % 149.2 %
Debt underwriting
935,131 13.3 545,978 10.5 407,336 13.1 71.3 % 34.0 %
Total underwriting 2,492,495 35.4 1,447,994 27.9 769,308 24.7 72.1 % 88.2 %
Other investment banking
57,196 0.8 (103,330) (2.0) (14,617) (0.5) N/M 606.9 %
Total investment banking
4,423,251 62.8 2,398,164 46.2 1,522,112 48.8 84.4 % 57.6 %
Equities
1,300,877 18.5 1,128,910 21.7 773,979 24.9 15.2 % 45.9 %
Fixed income
959,122 13.6 1,340,792 25.8 681,362 21.9 (28.5) % 96.8 %
Total capital markets
2,259,999 32.1 2,469,702 47.5 1,455,341 46.8 (8.5) % 69.7 %
Other
113,381 1.6 121,272 2.3 58,535 1.9 (6.5) % 107.2 %
Total Investment Banking and Capital Markets (1) 6,796,631 96.5 4,989,138 96.0 3,035,988 97.5 36.2 % 64.3 %
Asset management fees and revenues 71,571 1.0 28,694 0.6 20,285 0.7 149.4 % 41.5 %
Investment return (2) 220,528 3.1 228,129 4.4 96,805 3.1 (3.3) 135.7 %
Allocated net interest (2) (44,907) (0.6) (48,484) (0.9) (40,548) (1.3) (7.4) % 19.6 %
Total Asset Management
247,192 3.5 208,339 4.0 76,542 2.5 18.6 % 172.2 %
Net revenues
$ 7,043,823 100.0 % $ 5,197,477 100.0 % $ 3,112,530 100.0 % 35.5 % 67.0 %
N/M - Not Meaningful
(1) Allocated net interest is not separately disaggregated for Investment Banking and Capital Markets. This presentation is aligned to our Investment Banking and Capital Markets internal performance measurement.
(2) Allocated net interest represents an allocation to Asset Management of our long-term debt interest expense, net of interest income on our Cash and cash equivalents and other sources of liquidity. Allocated net interest has been disaggregated to increase transparency and to make clearer actual Investment return. We believe that aggregating Investment return and Allocated net interest would obscure the Investment return by including an amount that is unique to our credit spreads, debt maturity profile, capital structure, liquidity risks and allocation methods.
Investment Banking Revenues
Investment banking is comprised of revenues from:
•advisory services with respect to mergers/acquisitions, restructurings/recapitalizations and private capital advisory transactions;
•underwriting services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage-backed and asset-backed securities and equity and equity-linked securities and loan syndication;
•our 50% share of net earnings from our corporate lending joint venture, Jefferies Finance; and
•securities and loans received or acquired in connection with our investment banking activities.
JEFFERIES GROUP LLC AND SUBSIDIARIES
The following table sets forth our investment banking revenues (dollars in thousands):
% Change from
Prior Year
2021 2020 2019 2021 2020
Advisory
$ 1,873,560 $ 1,053,500 $ 767,421 77.8 % 37.3 %
Equity underwriting
1,557,364 902,016 361,972 72.7 % 149.2 %
Debt underwriting
935,131 545,978 407,336 71.3 % 34.0 %
Total underwriting
2,492,495 1,447,994 769,308 72.1 % 88.2 %
Other investment banking
57,196 (103,330) (14,617) N/M 606.9 %
Total investment banking
$ 4,423,251 $ 2,398,164 $ 1,522,112 84.4 % 57.6 %
N/M - Not Meaningful
The following table sets forth our investment banking activities (dollars in billions):
Deals Completed Aggregate Value
2021 2020 2019 2021 2020 2019
Advisory transactions 315 228 195 $ 380.4 $ 217.5 $ 241.6
Public and private equity and convertible offerings 426 286 166 145.6 103.5 45.3
Public and private debt financings
812 639 779 390.9 255.8 190.7
2021 Compared with 2020
•Investment banking revenues for 2021 were a record of $4.42 billion, compared with $2.40 billion for 2020, reflecting record advisory and underwriting revenues.
•Our 2021 advisory revenues were a record $1.87 billion, up $820.1 million, or 77.8%, from 2020, primarily due to a significant increase in the number and values of transactions, and including a significant contribution from Special Purpose Acquisition Companies (“SPACs”) advisory transactions in 2021.
•Our underwriting revenues for 2021 were a record $2.49 billion, an increase of $1.04 billion, or 72.1%, from 2020, with record net revenues in equity underwriting of $1.56 billion and record net revenues of $0.94 billion in debt underwriting, as clients took advantage of the strong equity environment and the low interest rate environment. Our equity underwriting results also include increased revenues from SPAC offerings, as well as strong revenues from at-the-money offerings.
•Other investment banking revenues were $57.2 million for 2021, compared with a loss of $103.3 million for 2020. Other investment banking revenues include our share of the net earnings (loss) of the Jefferies Finance joint venture. In 2021, Jefferies Finance achieved record underwriting volumes on the back of the strength of the leveraged loan market and an active private-equity backed mergers and acquisitions environment. The results in 2021 were partially offset by a $56.0 million one-time charge incurred by Jefferies Finance related to refinancing outstanding debt. Results of Jefferies Finance in 2020 were impacted by unrealized losses related to the write-down of commitments and loans held-for-sale, primarily due to the impact of the COVID-19 pandemic on the markets and the economy. The prior year results were also impacted by unrealized write-downs of private equity investments received or acquired in connection with our investment banking activities.
•At November 30, 2021, our investment banking backlog is robust and consistent with levels from a year ago. As an indicator of net revenues in a given future period, backlog is subject to limitations. The time frame for the realization of revenues from these expected transactions varies and is influenced by factors we do not control. Transactions not included in the estimate may occur, and expected transactions may also be modified or cancelled.
Equities Net Revenues
Equities is comprised of net revenues from:
•services provided to our clients from which we earn commissions or spread revenue by executing, settling and clearing transactions for clients;
•advisory services offered to clients;
JEFFERIES GROUP LLC AND SUBSIDIARIES
•financing, securities lending and other prime brokerage services offered to clients, including capital introductions and outsourced trading; and
•wealth management services.
2021 Compared with 2020
•Total equities net revenues were a record $1.30 billion for 2021, an increase of 15.2% over the previous year record of $1.13 billion in 2020. Overall, our record results were driven by strong client activity and trading performance across all regions.
•Our global cash equities business had record results driven by significant client activity and strong trading revenue, including trading gains from SPAC-related activity, and our electronic trading platform continues to expand and achieve record results. Our derivatives business achieved record results, driven by strong client activity and trading revenues. Our prime services franchise had record results driven by higher balances and increased client activity, as well as higher financing revenues in our securities finance business. Our results were slightly offset by lower revenues in our global convertibles businesses primarily driven by lower trading volumes and volatility.
•Our execution franchise continues to be top-ranked by Greenwich Associates in electronic trading and our global convertibles business was ranked #1 in global overall quality. Each of our research franchises in the U.S., Europe, and across Asia Pacific are now ranked within the top 8 by Institutional Investor. Our global distribution platform has received several top 5 rankings by Institutional Investor in sales and sector strategy.
Fixed Income Net Revenues
Fixed income is comprised of net revenues from:
•executing transactions for clients and making markets in securitized products, investment grade, high-yield, distressed, emerging markets, municipal and sovereign securities and bank loans, as well as foreign exchange execution on behalf of clients;
•interest rate derivatives and credit derivatives; and
•financing services offered to clients.
2021 Compared with 2020
•Fixed income net revenues totaled $959.1 million for 2021, a decrease of 28.5% compared with record net revenues of $1.34 billion for 2020, driven by reduced global trading volumes across several products. While 2021 revenues decreased from 2020, our fixed income franchise produced solid overall trading results across most of our businesses, reflecting continued strength in certain of our credit-focused businesses and strong client demand in structuring and financing credit products and for trading securitized products. The results in 2020 significantly benefited from strong trading volumes due to extremely active markets and high levels of volatility.
•Net revenues for 2021 were higher in our securitized markets groups and distressed trading business, as compared with the prior year. In addition, 2021 results benefited from trading gains in our municipal securities business compared to 2020 when markets experienced a significant sell-off due to the impact of COVID-19. Our revenues also benefited from ongoing investments across our European credit franchise.
•Our 2021 results also include lower revenues in our U.S. and International rates businesses due to a decline in trading opportunities, as a result of lower volatility, as the prior year benefited from significant client activity and wider bid-offer spreads. Lower results across our investment grade corporates and emerging markets businesses, as well as our high yield and loan trading businesses, were driven by reduced client activity and lower levels of volatility in 2021.
Other
Other is comprised of revenues from:
•Berkadia and other investments (other than Jefferies Finance, which is included in Other investment banking);
•principal investments in private equity and hedge funds managed by third-parties and are not part of our Leucadia Asset Management platform and other strategic investment positions; and
•investments held as part of employee benefit plans, including deferred compensation plans (for which we incur an equal and offsetting amount of compensation expense).
JEFFERIES GROUP LLC AND SUBSIDIARIES
2021 Compared with 2020
•Our other net revenues totaled $113.4 million for 2021, a decrease of $7.9 million compared with $121.3 million for 2020.
•Results for 2021 include net revenues of $130.6 million from our share of income from Berkadia, compared with $68.9 million in 2020. The higher net revenues for 2021 are due to significant increases in debt and investment sales volumes. The net revenues for 2020 were impacted by the impairment of mortgage servicing rights as a result of lower interest rates, higher loan loss provisions and a decline in loan originations due to the impact of COVID-19. Other revenues also include allocated interest expense related to our investment in Berkadia.
•Results for 2020 also include gains of $61.5 million from macro hedges that were bought and sold in 2020 at the onset of the COVID-19 pandemic.
Asset Management
We operate a diversified alternative asset management platform under the Leucadia Asset Management (“LAM”) umbrella offering institutional clients an innovative range of investment strategies and asset classes directly and through our affiliated asset managers. We provide access to capital and provide certain of our affiliated asset managers with operational infrastructure and global marketing and distribution.
Asset management revenues include the following:
•management and performance fees from funds and accounts managed by us;
•revenue from affiliated asset managers where we are entitled to portions of their revenues and/or profits; and
•investment income from capital invested in and managed by us, Jefferies Financial Group Inc. (“Jefferies”) and our affiliated asset managers.
The key components of asset management revenues are the level of assets under management and the performance return, for the most part on an absolute basis, and, in certain cases, relative to a benchmark or hurdle. These components can be affected by financial markets, profits and losses in the applicable investment portfolios and client capital activity. Further, asset management fees vary with the nature of investment management services. The terms under which clients may terminate our investment management authority, and the requisite notice period for such termination, varies depending on the nature of the investment vehicle and the liquidity of the portfolio assets. In some instances, performance fees and similar revenues are recognized once a year, when they become fixed and determinable and are not probable of being significantly reversed, typically in December. As a result, a significant portion of our performance fees and similar revenues generated from investment returns in a calendar year are recognized in our following fiscal year.
The following summarizes the results of our Asset Management businesses by asset class (dollars in thousands):
% Change from
Prior Year
2021 2020 2019 2021 2020
Asset management fees:
Equities
$ 6,927 $ 6,095 $ 3,623 13.7 % 68.2 %
Multi-asset
7,397 3,092 13,596 139.2 % (77.3) %
Total asset management fees
14,324 9,187 17,219 55.9 % (46.6) %
Revenue from strategic affiliates (1) 57,247 19,507 3,066 193.5 % 536.2 %
Total asset management fees and revenues
71,571 28,694 20,285 149.4 % 41.5 %
Investment return
220,528 228,129 96,805 (3.3) % 135.7 %
Allocated net interest
(44,907) (48,484) (40,548) (7.4) % 19.6 %
Total Asset Management
$ 247,192 $ 208,339 $ 76,542 18.6 % 172.2 %
(1) The amounts include our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements.
2021 Compared with 2020
•Asset management net revenues for 2021 were a record $247.2 million, higher than the $208.3 million for 2020, driven by a substantial increase in asset management fees and revenues, partially offset by lower investment returns across certain platforms. Asset management fees and revenues in 2021 of $71.6 million, as compared with $28.7 million in the prior year, were driven by significant increases in management, performance and similar fees and revenues from
JEFFERIES GROUP LLC AND SUBSIDIARIES
our strategic affiliates.
Assets under Management
We and our affiliated asset managers have aggregate net asset values or net asset value equivalent assets under management of approximately $14.3 billion and $10.2 billion at November 30, 2021 and 2020, respectively. Net asset values or net asset value equivalent assets under management are comprised of the fair value of the net assets of a fund or the net capital invested in a separately managed account. (In the third quarter of 2021, we made changes to our disclosure of aggregate assets under management to exclude the aggregate par value of collateralized loan obligations that are managed by Jefferies Finance, in order to better align the manner in which we evaluate our asset management businesses, and have presented the amount at November 30, 2020 on a comparable basis.) These include the following:
•Net asset values of investments made by us or by Jefferies in funds or separately managed accounts were $2.6 billion at both November 30, 2021 and 2020. We invest in certain strategies using our own capital, often before opening a strategy to outside capital. The net asset values include our capital of $1.6 billion and $1.5 billion at November 30, 2021 and 2020, respectively, plus amounts financed of $1.0 billion and $1.1 billion at November 30, 2021 and 2020, respectively. Revenues related to the investments made by us are presented in Investment return within the results of our asset management businesses.
•The assets under management by affiliated asset managers with whom we have an ongoing profit or revenue sharing arrangement were $10.9 billion and $6.9 billion at November 30, 2021 and 2020, respectively. In some instances, due to the timing of payments and crystallization of underlying profits or revenue, the revenue related to these relationships will generally be realized and recognized once per year at the calendar year-end (during our first fiscal quarter). Revenues from our share of fees received by affiliated asset managers are presented in Revenue from strategic affiliates within the results of our asset management businesses.
•Third-party investments actively managed by our wholly-owned managers were $0.8 billion and $0.7 billion at November 30, 2021 and 2020, respectively. We earn asset management fees as a result of the third-party investments, which are presented in Asset management fees and revenues within the results of our asset management businesses.
The tables below include only third-party assets under management by us, excluding those of our affiliated asset managers.
Period end assets under management by predominant asset class were as follows (in millions):
November 30,
2021 2020
Assets under management:
Equities
$ 349 $ 481
Multi-asset 482 173
Total
$ 831 $ 654
Change in assets under management were as follows (in millions):
Year Ended November 30,
2021 2020
Assets under management:
Balance, beginning of period
$ 654 $ 840
Net cash flow in (out) 152 (86)
Net market appreciation (depreciation)
25 (100)
Balance, end of period
$ 831 $ 654
The net cash flow in during 2021 is primarily due to new subscriptions and investments from third-parties and the transfer of third-party net assets from Jefferies to us, partially offset by redemptions from and liquidations of certain funds.
Our definition of assets under management is not based on any definition contained in any of our investment management agreements and differs from the manner in which “Regulatory Assets Under Management” is reported to the SEC on Form ADV.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Asset Management Investments
Our asset management business makes seed and additional strategic investments directly in alternative asset management separately managed accounts and co-mingled funds where we or our Parent act as the asset manager or in affiliated asset managers where we have strategic relationships and participate in the revenues or profits of the affiliated manager. The following table represents our investments by type of asset manager (in thousands):
November 30,
2021 2020
Jefferies Group LLC; as manager:
Fund investments (1)(2) $ 221,359 $ 25,292
Separately managed accounts (3) 251,665 342,443
Total $ 473,024 $ 367,735
Jefferies Financial Group Inc.; as manager:
Fund investments (2) $ - $ 233,601
Total $ - $ 233,601
Strategic affiliates; as asset manager:
Fund investments $ 825,503 $ 641,185
Separately managed accounts (3) 307,723 261,273
Total $ 1,133,226 $ 902,458
Total asset management investments $ 1,606,250 $ 1,503,794
(1) Due to the level or nature of an investment in a fund, we may consolidate that fund; and accordingly, the assets and liabilities of the fund are included in the representative line items in our consolidated financial statements. At November 30, 2021 and 2020, $76.5 million and $0.1 million, respectively, represents net investments in funds that have been consolidated in our financial statements.
(2) In 2021, certain fund investments, for which Jefferies Financial Group Inc. had acted as the manager, were transferred to us as the manager.
(3) Where we have investments in a separately managed account, the assets and liabilities of such account are presented in our consolidated financial statements within each respective line item.
Non-interest Expenses
Non-interest expenses were as follows (dollars in thousands):
% Change from
Prior Year
2021 2020 2019 2021 2020
Compensation and benefits
$ 3,373,629 $ 2,792,575 $ 1,684,054 20.8 % 65.8 %
Non-compensation expenses:
Floor brokerage and clearing fees
301,978 270,132 227,471 11.8 % 18.8 %
Underwriting costs
117,572 95,636 50,662 22.9 % 88.8 %
Technology and communications
434,359 386,830 335,395 12.3 % 15.3 %
Occupancy and equipment rental
118,961 107,180 119,472 11.0 % (10.3) %
Business development
111,540 67,603 138,158 65.0 % (51.1) %
Professional services
223,797 179,888 162,668 24.4 % 10.6 %
Other
178,034 120,179 69,981 48.1 % 71.7 %
Total non-compensation expenses
1,486,241 1,227,448 1,103,807 21.1 % 11.2 %
Total non-interest expenses
$ 4,859,870 $ 4,020,023 $ 2,787,861 20.9 % 44.2 %
JEFFERIES GROUP LLC AND SUBSIDIARIES
Compensation and Benefits
•Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation and share-based awards and the amortization of share-based and cash compensation awards to employees.
•Cash and share-based awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded during the year of the award. Compensation and benefits expense includes amortization expense associated with these awards to the extent vesting is contingent on future service. In addition, the awards to our Chief Executive Officer and Chairman and our Chairman of the Executive Committee and contain market and performance conditions and the awards are amortized over their service periods.
•Compensation and benefits expense was $3.37 billion for 2021 compared with $2.79 billion for 2020, increasing at a lower rate than the increase in our net revenues. A significant portion of our compensation expense is highly variable with net revenues.
•Compensation expense related to the amortization of share- and cash-based awards amounted to $393.1 million for 2021 compared with $499.5 million for 2020. Compensation expense related to the accelerated amortization of certain cash-based awards, which were amended to remove any service requirements for vesting in the awards, amounted to $188.3 million and $179.6 million for 2021 and 2020, respectively.
•Compensation and benefits expense as a percentage of Net revenues was 47.9% for 2021 and 53.7% for 2020.
•Employee headcount was 4,508 globally at November 30, 2021, an increase of 586 employees from our headcount of 3,922 at November 30, 2020. Our headcount increased across all regions primarily as a result the growth of our investment banking business, as well as due to additions in technology and other corporate services staff to support our increased regulatory requirements and overall growth.
•Refer to Note 16, Compensation Plans, included in this Annual Report on Form 10-K, for further details on compensation and benefits.
Non-Compensation Expenses
2021 Compared with 2020
•Non-compensation expenses were $1.49 billion for 2021, an increase of $258.8 million, or 21.1%, compared with $1.23 billion for 2020.
•The increase in non-compensation expenses was largely due to higher Floor brokerage and clearing fees on increased trading volumes in equities and higher Underwriting costs and Business Development expenses as investment banking activity increased and higher costs associated with our increased recruiting efforts. The increase also included higher Technology and communication expenses primarily related to the development of various trading and management systems and increased market data costs. Professional services expenses were also higher primarily due to legal and agency fees to support growing activity across our businesses.
•Results for 2021 also included higher Other expenses primarily due to an increase in bad debt expense mostly related to a specific default in our prime brokerage business and $38.2 million in costs related to the early redemption of senior notes, partially offset by a reduction in the loss provision for investment banking receivables.
•Non-compensation expenses as a percentage of Net revenues was 21.1% and 23.6% for 2021 and 2020, respectively, demonstrating the operating leverage inherent in our business.
Income Taxes
•For 2021, the provision for income taxes was $559.2 million, equating to an effective tax rate of 25.6%, compared with a provision for income taxes of $302.7 million, equating to an effective tax rate of 25.7% for 2020.
•Refer to Note 17, Income Taxes, in our consolidated financial statements included in this Annual Report on Form 10-K, for further details on income taxes.
Accounting Developments
For a discussion of recently issued accounting developments and their impact on our consolidated financial statements, see Note 3, Accounting Developments, in our consolidated financial statements included in this Annual Report on Form 10-K.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. Actual results can and may differ from estimates. These differences could be material to our consolidated financial statements.
We believe our application of U.S. GAAP and the associated estimates are reasonable. Our accounting estimates are reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
We believe our critical accounting policies (policies that are both material to the financial condition and results of operations and require our most subjective or complex judgments) are our valuation of certain financial instruments and assessment of goodwill.
For further discussions of the following significant accounting policies and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in this Annual Report on Form 10-K.
Valuation of Financial Instruments
Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value. 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). Unrealized gains or losses are generally recognized in Principal transactions revenues in our Consolidated Statements of Earnings.
For information on the composition of our Financial instruments owned and Financial instruments sold, not yet purchased recorded at fair value, see Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K.
Fair Value Hierarchy - In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs, where Level 1 uses observable prices in active markets and Level 3 uses valuation techniques that incorporate significant unobservable inputs. Greater use of management judgment is required in determining fair value when inputs are less observable or unobservable in the marketplace, such as when the volume or level of trading activity for a financial instrument has decreased and when certain factors suggest that observed transactions may not be reflective of orderly market transactions. Judgment must be applied in determining the appropriateness of available prices, particularly in assessing whether available data reflects current prices and/or reflects the results of recent market transactions. Prices or quotes are weighed when estimating fair value with greater reliability placed on information from transactions that are considered to be representative of orderly market transactions.
Fair value is a market-based measure; therefore, when market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability. The availability of observable inputs can vary for different products. We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity. The valuation of financial instruments categorized within Level 3 of the fair value hierarchy involves the greatest extent of management judgment. (See Note 2, Summary of Significant Accounting Policies, and Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K for further information on the definitions of fair value, Level 1, Level 2 and Level 3 and related valuation techniques.)
Level 3 Assets and Liabilities - For information on the composition and activity of our Level 3 assets and Level 3 liabilities, see Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Controls Over the Valuation Process for Financial Instruments - Our Independent Price Verification Group, independent of the trading function, plays an important role in determining that our financial instruments are appropriately valued and that fair value measurements are reliable. This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. Where a pricing model is used to determine fair value, these control processes include reviews of the pricing model’s theoretical soundness and appropriateness by risk management personnel with relevant expertise who are independent from the trading desks. In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.
Goodwill
At November 30, 2021, Goodwill recorded in our Consolidated Statement of Financial Condition is $1.65 billion (3.0% of total assets). The nature and accounting for goodwill is discussed in Note 2, Summary of Significant Accounting Policies, and Note 10, Goodwill and Intangible Assets, in our consolidated financial statements included in this Annual Report on Form 10-K. Goodwill must be allocated to reporting units and tested for impairment at least annually, or when circumstances or events make it more likely than not that an impairment occurred. Goodwill is tested by comparing the estimated fair value of each reporting unit with its carrying value. Our annual goodwill impairment testing date is August 1, which did not indicate any goodwill impairment in any of our reporting units at August 1, 2021.
We use allocated tangible equity plus allocated goodwill and intangible assets for the carrying amount of each reporting unit. The amount of tangible equity allocated to a reporting unit is based on our cash capital model deployed in managing our businesses, which seeks to approximate the capital a business would require if it were operating independently. For further information on our Cash Capital Policy, refer to the Liquidity, Financial Condition and Capital Resources section herein. Intangible assets are allocated to a reporting unit based on either specifically identifying a particular intangible asset as pertaining to a reporting unit or, if shared among reporting units, based on an assessment of the reporting unit’s benefit from the intangible asset in order to generate results.
Estimating the fair value of a reporting unit requires management judgment and often involves the use of estimates and assumptions that could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Estimated fair values for our reporting units utilize market valuation methods that incorporate price-to-earnings and price-to-book multiples of comparable public companies. Under the market valuation approach, the key assumptions are the selected multiples and our internally developed projections of future profitability, growth and return on equity for each reporting unit. The weight assigned to the multiples requires judgment in qualitatively and quantitatively evaluating the size, profitability and the nature of the business activities of the reporting units as compared to the comparable publicly-traded companies. In addition, as the fair values determined under the market valuation approach represent a noncontrolling interest, we apply a control premium to arrive at the estimate fair value of each reporting unit on a controlling basis.
The carrying values of goodwill by reporting unit at November 30, 2021 are as follows: $565.8 million in Investment Banking, $160.7 million in Equities and Wealth Management, and $918.8 million in Fixed Income.
The results of our assessment on August 1, 2021 indicated that all our reporting units had a fair value in excess of their carrying amounts based on current projections. The valuation methodology for our reporting units are sensitive to management’s forecasts of future profitability, which are a significant component of the valuation and come with a level of uncertainty regarding trading volumes and capital market transaction levels. Refer to Note 10, Goodwill and Intangible Assets, in our consolidated financial statements included in this Annual Report on Form 10-K, for details on the write-off of certain goodwill and intangible assets related to the wind down of an asset management platform.
Refer to Note 10, Goodwill and Intangible Assets, in our consolidated financial statements included in this Annual Report on Form 10-K, for further details on goodwill.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Liquidity, Financial Condition and Capital Resources
Our CFO and Global Treasurer are responsible for developing and implementing our liquidity, funding and capital management strategies. These policies are determined by the nature and needs of our day to day business operations, business opportunities, regulatory obligations, and liquidity requirements.
Our actual levels of capital, total assets and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long term and short term funding. We have historically maintained a balance sheet consisting of a large portion of our total assets in cash and liquid marketable securities, arising principally from traditional securities brokerage and trading activity. The liquid nature of these assets provides us with flexibility in financing and managing our business.
We maintain modest leverage to support our investment grade ratings. The growth of our balance sheet is supported by our equity and we have quantitative metrics in place to monitor leverage and double leverage. Our capital plan is robust, in order to sustain our operating model through stressed conditions. We maintain adequate financial resources to support business activities in both normal and stressed market conditions, including a buffer in excess of our regulatory, or other internal or external, requirements. Our access to funding and liquidity is stable and efficient to ensure that there is sufficient liquidity to meet our financial obligations in normal and stressed market conditions.
Our Balance Sheet
A business unit level balance sheet and cash capital analysis are prepared and reviewed with senior management on a weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross balance sheet limits are adjusted, as necessary. This process ensures that the allocation of capital and costs of capital are incorporated into business decisions. The goals of this process are to protect the firm’s platform, enable our businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage.
We actively monitor and evaluate our financial condition and the composition of our assets and liabilities. We continually monitor our overall securities inventory, including the inventory turnover rate, which confirms the liquidity of our overall assets. Substantially all of our financial instruments are valued on a daily basis and we monitor and employ balance sheet limits for our various businesses.
The following table provides detail on selected balance sheet items (dollars in millions):
November 30,
2021 2020 % Change
Total assets
$ 54,768.9 $ 47,752.0 14.7 %
Cash and cash equivalents
8,813.6 7,111.9 23.9 %
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
1,015.1 604.3 68.0 %
Financial instruments owned
19,336.2 17,686.1 9.3 %
Financial instruments sold, not yet purchased
11,690.8 10,017.5 16.7 %
Total Level 3 assets
336.6 379.1 (11.2) %
Securities borrowed
$ 6,409.4 $ 6,934.8 (7.6) %
Securities purchased under agreements to resell
7,642.5 5,096.8 49.9 %
Total securities borrowed and securities purchased under
agreements to resell $ 14,051.9 $ 12,031.6 16.8 %
Securities loaned
$ 1,525.7 $ 1,810.7 (15.7) %
Securities sold under agreements to repurchase
8,446.1 8,316.3 1.6 %
Total securities loaned and securities sold under agreements to
repurchase $ 9,971.8 $ 10,127.0 (1.5) %
Total assets at November 30, 2021 and 2020 were $54.77 billion and $47.75 billion, respectively, an increase of 14.7%. During 2021, average total assets were approximately 9.7% higher than total assets at November 30, 2021.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our total Financial instruments owned inventory was $19.34 billion and $17.69 billion at November 30, 2021 and 2020, respectively. During the year ended November 30, 2021, our total Financial instruments owned increased primarily due to increases in corporate debt securities, loans and other receivables, corporate equity securities and mortgage-and asset-backed securities, partially offset by a decrease in sovereign obligations. Financial instruments sold, not yet purchased inventory was $11.69 billion at November 30, 2021, an increase of 16.7% from $10.02 billion at November 30, 2020, with the increase primarily driven by corporate debt securities, derivative contracts and loans, partially offset by decreases in corporate equity securities, government and federal agency securities and sovereign obligations. Our overall net inventory position was $7.65 billion and $7.67 billion at November 30, 2021 and 2020, respectively, with the decrease primarily due to decreases in sovereign obligations and derivative contracts, partially offset by increases in corporate equity securities, government and federal agency securities and mortgage-and asset-backed securities. Our Level 3 financial instruments owned as a percentage of total Financial instruments owned declined to 1.7% at November 30, 2021 from 2.1% at November 30, 2020.
Securities financing assets and liabilities include financing for our financial instruments trading activity, matched book transactions and mortgage finance transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. The aggregate outstanding balance of our securities financing assets and liabilities increase or decrease from period to period depending on fluctuations in the level of our client activity and the level of our own trading activity. Our average month end balance of total reverse repos and stock borrows during 2021 were 29.9% higher than the November 30, 2021 balance. Our average month end balance of total repos and stock loans during 2021 were 40.3% higher than the November 30, 2021 balance.
The following table presents our period end balance, average balance and maximum balance at any month end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (dollars in millions):
Year Ended
2021 2020
Securities Purchased Under Agreements to Resell:
Year end $ 7,642 $ 5,097
Month end average
9,425 8,040
Maximum month end
12,321 12,061
Securities Sold Under Agreements to Repurchase:
Year end $ 8,446 $ 8,316
Month end average
11,515 13,501
Maximum month end
19,207 18,979
Fluctuations in the balance of our repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. Additionally, the fluctuations in the balances of our securities purchased under agreements to resell are influenced in any given period by our clients’ balances and our clients’ desires to execute collateralized financing arrangements via the repurchase market or via other financing products. Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider the fluctuations intraperiod to be typical for the repurchase market.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Leverage Ratios
The following table presents total assets, total equity, total Jefferies Group LLC member’s equity and tangible Jefferies Group LLC member’s equity with the resulting leverage ratios (dollars in thousands):
November 30,
2021 2020
Total assets
$ 54,768,900 $ 47,751,997
Total equity
$ 7,078,608 $ 6,366,132
Total Jefferies Group LLC member’s equity
$ 7,067,484 $ 6,348,743
Deduct:
Goodwill and intangible assets
(1,791,500) (1,805,376)
Tangible Jefferies Group LLC member’s equity
$ 5,275,984 $ 4,543,367
Leverage ratio (1)
7.7 7.5
Tangible gross leverage ratio (2)
10.0 10.1
(1)Leverage ratio equals total assets divided by total equity.
(2)Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets less goodwill and identifiable intangible assets divided by tangible Jefferies Group LLC member’s equity. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio.
Liquidity Management
The key objectives of the liquidity management framework are to support the successful execution of our business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. Our liquidity management policies are designed to mitigate the potential risk that we may be unable to access adequate financing to service our financial obligations without material franchise or business impact.
The principal elements of our liquidity management framework are our Contingency Funding Plan, our Cash Capital Policy and our assessment of Modeled Liquidity Outflow (“MLO”).
Contingency Funding Plan. Our Contingency Funding Plan is based on a model of a potential liquidity contraction over a one year time period. This incorporates potential cash outflows during a market or our idiosyncratic liquidity stress event, including, but not limited to, the following:
•Repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;
•Maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;
•Higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements;
•Liquidity outflows related to possible credit downgrade;
•Lower availability of secured funding;
•Client cash withdrawals;
•The anticipated funding of outstanding investment and loan commitments; and
•Certain accrued expenses and other liabilities and fixed costs.
Cash Capital Policy. We maintain a cash capital model that measures long-term funding sources against requirements. Sources of cash capital include our equity and the noncurrent portion of long-term borrowings. Uses of cash capital include the following:
•Illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments;
•A portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and
•Drawdowns of unfunded commitments.
JEFFERIES GROUP LLC AND SUBSIDIARIES
To ensure that we do not need to liquidate inventory in the event of a funding stress, we seek to maintain surplus cash capital. Our total long-term capital of $14.38 billion at November 30, 2021 exceeded our cash capital requirements.
MLO. Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity stress, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. As a result of our policy to ensure we have sufficient funds to cover what we estimate may be needed in a liquidity stress, we hold more cash and unencumbered securities and have greater long-term debt balances than our businesses would otherwise require. As part of this estimation process, we calculate an MLO that could be experienced in a liquidity stress. MLO is based on a scenario that includes both a market-wide stress and firm-specific stress, characterized by some or all of the following elements:
•Global recession, default by a medium-sized sovereign, low consumer and corporate confidence, and general financial instability.
•Severely challenged market environment with material declines in equity markets and widening of credit spreads.
•Damaging follow-on impacts to financial institutions leading to the failure of a large bank.
•A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade.
The following are the critical modeling parameters of the MLO:
•Liquidity needs over a 30-day scenario.
•A two-notch downgrade of our long-term senior unsecured credit ratings.
•No support from government funding facilities.
•A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a stress.
•No diversification benefit across liquidity risks. We assume that liquidity risks are additive.
The calculation of our MLO under the above stresses and modeling parameters considers the following potential contractual and contingent cash and collateral outflows:
•All upcoming maturities of unsecured long-term debt, commercial paper, promissory notes and other unsecured funding products assuming we will be unable to issue new unsecured debt or rollover any maturing debt.
•Repurchases of our outstanding long-term debt in the ordinary course of business as a market maker.
•A portion of upcoming contractual maturities of secured funding trades due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral and counterparty concentration.
•Collateral postings to counterparties due to adverse changes in the value of our over-the-counter (“OTC”) derivatives and other outflows due to trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments required by a two-notch downgrade in our credit ratings.
•Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded derivatives and any increase in initial margin and guarantee fund requirements by derivative clearing houses.
•Liquidity outflows associated with our prime services business, including withdrawals of customer credit balances, and a reduction in customer short positions.
•Liquidity outflows to clearing banks to ensure timely settlements of cash and securities transactions.
•Draws on our unfunded commitments considering, among other things, the type of commitment and counterparty.
•Other upcoming large cash outflows, such as tax payments.
Based on the sources and uses of liquidity calculated under the MLO scenarios, we determine, based on a calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and consider any adjustments that may be necessary to our inventory balances and cash holdings. At November 30, 2021, we had sufficient excess liquidity to meet all contingent cash outflows detailed in the MLO. We regularly refine our model to reflect changes in market or economic conditions and our business mix.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Sources of Liquidity
The following are financial instruments that are cash and cash equivalents or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time (dollars in thousands):
November 30, 2021 Average Balance Quarter ended November 30, 2021 (1) November 30, 2020
Cash and cash equivalents:
Cash in banks
$ 1,888,693 $ 3,238,339 $ 1,979,058
Money market investments (2)
6,924,871 4,149,368 5,132,871
Total cash and cash equivalents
8,813,564 7,387,707 7,111,929
Other sources of liquidity:
Debt securities owned and securities purchased under agreements to resell (3)
1,621,118 1,516,547 1,180,410
Other (4)
311,641 484,528 312,511
Total other sources
1,932,759 2,001,075 1,492,921
Total cash and cash equivalents and other liquidity sources
$ 10,746,323 $ 9,388,782 $ 8,604,850
Total cash and cash equivalents and other liquidity sources as % of Total assets
19.6 % 18.0 %
Total cash and cash equivalents and other liquidity sources as % of Total assets less goodwill and intangible assets
20.3 % 18.7 %
(1)Average balances are calculated based on weekly balances.
(2)At November 30, 2021 and 2020, $6.91 billion and $5.12 billion, respectively, was invested in U.S. government money funds that invest at least 99.5% of its total assets in cash, securities issued by the U.S. government and U.S. government-sponsored entities, and repurchase agreements that are fully collateralized by cash or government securities. The remaining $14.9 million at both November 30, 2021 and 2020 are invested in AAA-rated prime money funds. The average balance of U.S. government money funds for the quarter ended November 30, 2021 was $4.13 billion.
(3)Consists of high quality sovereign government securities and reverse repurchase agreements collateralized by U.S. government securities and other high quality sovereign government securities; deposits with a central bank within the European Economic Area, United Kingdom, Canada, Australia, Japan, Switzerland or the U.S.; and securities issued by a designated multilateral development bank and reverse repurchase agreements with underlying collateral comprised of these securities.
(4)Other includes unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably expected to be obtained from our Financial instruments owned that are currently not pledged after considering reasonable financing haircuts.
In addition to the cash balances and liquidity pool presented above, the majority of financial instruments (both long and short) in our trading accounts are actively traded and readily marketable. At November 30, 2021, we had the ability to readily obtain repurchase financing for 63.8% of our inventory at haircuts of 10% or less, which reflects the liquidity of our inventory. In addition, as a matter of our policy, all of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. Additionally, certain of our Financial instruments owned primarily consisting of bank loans, consumer loans and investments are predominantly funded by long term capital. Under our cash capital policy, we model capital allocation levels that are more stringent than the haircuts used in the market for secured funding; and we maintain surplus capital at these more stringent levels. We continually assess the liquidity of our inventory based on the level at which we could obtain financing in the marketplace for a given asset. Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less. The following summarizes our financial instruments by asset class that we consider to be of a liquid nature and the amount of such assets that have not been pledged as collateral at November 30, 2021 and 2020 (in thousands):
JEFFERIES GROUP LLC AND SUBSIDIARIES
November 30,
2021 2020
Liquid Financial
Instruments Unencumbered Liquid Financial Instruments (2) Liquid Financial Instruments Unencumbered Liquid Financial Instruments (2)
Corporate equity securities
$ 2,635,956 $ 347,157 $ 2,191,536 $ 238,129
Corporate debt securities
2,943,135 31,935 2,298,591 50,217
U.S. government, agency and municipal securities
3,610,885 109,325 3,336,361 110,586
Other sovereign obligations
1,528,100 1,463,968 2,518,928 1,101,272
Agency mortgage-backed securities (1)
1,487,165 - 1,652,743 -
Loans and other receivables
132,989 - 564,112 -
Total
$ 12,338,230 $ 1,952,385 $ 12,562,271 $ 1,500,204
(1)Consists solely of agency mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal National Mortgage Association (“Fannie Mae”) and the Government National Mortgage Association (“Ginnie Mae”).
(2)Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been.
Average liquid financial instruments were $16.23 billion and $21.51 billion for 2021 and 2020, respectively. Average unencumbered liquid financial instruments were $1.79 billion and $1.39 billion for 2021 and 2020, respectively.
In addition to being able to be readily financed at reasonable haircut levels, we estimate that each of the individual securities within each asset class above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral.
Sources of Funding and Capital Resources
Our assets are funded by equity capital, senior debt, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables.
Secured Financing
We rely principally on readily available secured funding to finance our inventory of financial instruments. Our ability to support increases in total assets is largely a function of our ability to obtain short and intermediate-term secured funding, primarily through securities financing transactions. We finance a portion of our long inventory and cover some of our short inventory by pledging and borrowing securities in the form of repurchase or reverse repurchase agreements (collectively “repos”), respectively. At November 30, 2021, approximately 60.9% of our cash and noncash repurchase financing activities use collateral that is considered eligible collateral by central clearing corporations. During 2021, an average of approximately 70.2% of our cash and noncash repurchase financing activities used collateral that was considered eligible collateral by central clearing corporations. Central clearing corporations are situated between participating members who borrow cash and lend securities (or vice versa); accordingly, repo participants contract with the central clearing corporation and not one another individually. Therefore, counterparty credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and variation margin calls from repo participants. The comparatively large proportion of our total repo activity that is eligible for central clearing reflects the high quality and liquid composition of the inventory we carry in our trading books. For those asset classes not eligible for central clearing house financing, we seek to execute our bi-lateral financings on an extended term basis and the tenor of our repurchase and reverse repurchase agreements generally exceeds the expected holding period of the assets we are financing. The weighted average maturity of cash and noncash repurchase agreements for non-clearing corporation eligible funded inventory is approximately eight months at November 30, 2021.
Our ability to finance our inventory via central clearinghouses and bi-lateral arrangements is augmented by our ability to draw bank loans on an uncommitted basis under our various banking arrangements. At November 30, 2021, short-term borrowings, which must be repaid within one year or less and include bank loans and overdrafts, borrowings under revolving credit facilities and floating rate puttable notes totaled $221.9 million. Interest under the bank lines is generally at a spread over the federal funds rate. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Average daily short-term borrowings outstanding were $346.8 million for 2021.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our short-term borrowings include facilities that contain certain covenants that, among other things, require us to maintain a specified level of tangible net worth and impose certain restrictions on the future indebtedness of certain of our subsidiaries that are borrowers. At November 30, 2021, we were in compliance with all covenants under these facilities. The outstanding balance of our facilities, which are with a bank and are included within short-term borrowings, were $200.0 million at November 30, 2021. Interest is based on a rate per annum at spreads over the federal funds rate, as defined in the credit agreements.
Our short-term borrowings at November 30, 2021 also include floating rate puttable notes of $6.8 million and other bank loans of $15.1 million.
A bank has agreed to make revolving intraday credit advances (“Intraday Credit Facility”) for an aggregate committed amount of $150.0 million. The Intraday Credit Facility is structured so that advances are generally repaid before the end of each business day. However, if an advance is not repaid by the end of any business day, the advance is converted to an overnight loan. Intraday loans accrue interest at a rate of 0.12% based on the number of minutes in a day the advance is outstanding. Overnight loans are charged interest at the base rate plus 3% on a daily basis. The base rate is the higher of the federal funds rate plus 0.50% or the prime rate in effect at that time. The Intraday Credit Facility contains financial covenants, which include a minimum regulatory net capital requirement for our U.S. broker-dealer, Jefferies LLC. At November 30, 2021, we were in compliance with all debt covenants under the Intraday Credit Facility.
In addition, this bank also provides a $200.0 million revolving credit facility with a termination date of September 12, 2022, which is used for margin calls at a domestic clearing corporation. Overnight loans are charged interest at a spread over the federal funds rate.
Another bank provides committed revolving credit facilities for a total of $200.0 million, including a $150.0 million intraday component and a $50.0 million overnight component, that are used to fund our Asia Pacific business activity. The intraday component is structured so that advances are generally repaid before the end of each business day. However, if an advance is not repaid by the end of any business day, the advance is converted to an overnight loan. Intraday loans accrue interest at a rate of 1.00%. Overnight loans are charged as agreed between the bank and us in reference to the bank’s cost of funding.
For additional details on our short-term borrowings, refer to Note 11, Short-Term Borrowings, in our consolidated financial statements included in this Annual Report on Form 10-K.
In addition to the above financing arrangements, we issue notes backed by eligible collateral under master repurchase agreements, which provides an additional financing source for our inventory (our “repurchase agreement financing program”). The notes issued under the program are presented within Other secured financings in our Consolidated Statements of Financial Condition. At November 30, 2021, the outstanding notes were $3.69 billion, bear interest at a spread over the London Interbank Offered Rate (“LIBOR”) and mature from December 2021 to August 2023.
For additional details on our repurchase agreement financing program, refer to Note 8, Variable Interest Entities, in our consolidated financial statements included in this Annual Report on Form 10-K.
Total Long-Term Capital
At November 30, 2021 and 2020, we had total long-term capital of $14.38 billion and $13.02 billion resulting in a long-term debt to equity capital ratio of 1.03:1 and 1.05:1, respectively. See “Equity Capital” herein for further information on our change in total equity. Our total long-term capital base at November 30, 2021 and 2020 was as follows (in thousands):
November 30,
2021 2020
Unsecured Long-Term Debt (1) $ 7,303,866 $ 6,655,948
Total Equity
7,078,608 6,366,132
Total Long-Term Capital
$ 14,382,474 $ 13,022,080
(1)The amounts at November 30, 2021 and 2020, exclude our secured long-term debt. The amount at November 30, 2021 also excludes $12.0 million of structured notes as these notes mature on June 10, 2022.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Long-Term Debt
During 2021, long-term debt increased by $1.14 billion to $8.04 billion at November 30, 2021, as presented in our Consolidated Statements of Financial Condition. This increase is primarily due to our issuances of 2.625% senior notes with a principal amount of $1.0 billion, due 2031, and floating rate senior notes with a principal amount of $62.3 million, due 2071, partially offset by the early redemption of our 5.125% senior notes with a principal amount of $750.0 million, due January 20, 2023. The change was also due to an increase of $349.0 million from borrowings under our senior unsecured revolving credit facility (“Unsecured Revolving Credit Facility”), an increase of $484.3 million from secured long-term borrowings and approximately $175.6 million of structured notes issuances, net of retirements. At November 30, 2021, all of our structured notes contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument-specific credit risk presented in other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transactions revenues. The fair value of all of our structured notes at November 30, 2021 was $1.84 billion.
During April 2021, we entered into a Revolving Credit Facility with a group of commercial banks following the maturity of our previous revolving credit facility. At November 30, 2021, borrowings under the Revolving Credit Facility amounted to $249.0 million. Interest is based on an adjusted LIBOR Rate, as defined in the credit agreement. The Revolving Credit Facility contains certain covenants that, among other things, requires Jefferies Group LLC to maintain specified level of tangible net worth and liquidity amounts, and imposes certain restrictions on future indebtedness of and requires specified levels of regulated capital for certain of our subsidiaries. Throughout the period and at November 30, 2021, no instances of noncompliance with the Revolving Credit Facility covenants occurred and we expect to remain in compliance given our current liquidity and anticipated funding requirements given our business plan and profitability expectations.
During May 2021, we entered into a Secured Credit Facility agreement with a bank under which we have borrowed $375.0 million at November 30, 2021. Interest is based on a rate per annum at spreads over an Adjusted LIBOR Rate, as defined in the credit agreement. The Secured Credit Facility contains certain covenants that, among other things, require Jefferies Group LLC to maintain a specified level of tangible net worth. The covenants also require a certain subsidiary to maintain specified leverage amounts and impose certain restrictions on its future indebtedness. At November 30, 2021, we were in compliance with all covenants under the Secured Credit Facility.
During August 2021, we entered into an Unsecured Revolving Credit Facility agreement with a bank under which we have borrowed $349.0 million at November 30, 2021. Interest is based on a rate per annum at spreads over an Adjusted LIBOR Rate or a Base Rate, as defined in the credit agreement. The Unsecured Revolving Credit Facility contains certain covenants that, among other things, require Jefferies Group LLC to maintain a specified level of tangible net worth, net cash capital and a minimum regulatory net capital requirement for Jefferies LLC. At November 30, 2021, we were in compliance with all covenants under the Unsecured Revolving Credit Facility.
During September 2021, one of our subsidiaries amended a Loan and Security Agreement with a bank for a term loan (“Secured Bank Loan”) due to the maturity of our previous secured bank loan. At November 30, 2021, borrowings under the Secured Bank Loan amounted to $100.0 million. The Secured Bank Loan matures on September 13, 2024 and is collateralized by certain trading securities with an interest rate of 1.25% plus LIBOR. The agreement contains certain covenants that, among other things, restricts lien or encumbrance upon any of the pledged collateral. At November 30, 2021, we were in compliance with all covenants under the Secured Bank Loan.
At November 30, 2021, our unsecured long-term debt, which excludes the Revolving Credit Facility, Secured Credit Facility and the Secured Bank Loan, has a weighted average maturity of approximately 10.9 years.
JEFFERIES GROUP LLC AND SUBSIDIARIES
For further information, see Note 12, Long-Term Debt, in our consolidated financial statements included in this Annual Report on Form 10-K.
Our long-term debt ratings at November 30, 2021 are as follows:
Rating Outlook
Moody’s Investors Service (1) Baa2 Stable
Standard and Poor’s BBB Stable
Fitch Ratings (2) BBB Stable
(1)On November 10, 2021, Moody’s Investors Service (“Moody’s) revised our rating of Baa3 to Baa2 and revised our rating outlook from positive to stable.
(2)Subsequent to year-end, on January 24, 2022, Fitch Ratings affirmed our rating of BBB and revised our rating outlook from stable to positive.
At November 30, 2021, the long-term ratings on our principal subsidiaries, Jefferies LLC, Jefferies International Limited (a U.K. broker-dealer) and Jefferies GmbH are as follows:
Jefferies LLC
Jefferies International Limited
Jefferies GmbH
Rating Outlook Rating Outlook Rating Outlook
Moody’s (1) Baa1 Stable Baa1 Stable Baa1 Stable
Standard and Poor’s BBB+ Stable BBB+ Stable BBB+ Stable
(1) On November 10, 2021, Moody’s revised our ratings of Baa2 to Baa1 and revised our rating outlooks from positive to stable on these principal subsidiaries.
Access to external financing to finance our day to day operations, as well as the cost of that financing, is dependent upon various factors, including our debt ratings. Our current debt ratings are dependent upon many factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share and competitive position in the markets in which we operate. Deterioration in any of these factors could impact our credit ratings. While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact on our business and trading results in future periods is inherently uncertain and depends on a number of factors, including the magnitude of the downgrade, the behavior of individual clients and future mitigating action taken by us.
In connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, we may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of a credit rating downgrade. At November 30, 2021, the amount of additional collateral that could be called by counterparties, exchanges and clearing organizations under the terms of such agreements in the event of a downgrade of our long-term credit rating below investment grade was $72.2 million. For certain foreign clearing organizations, credit rating is only one of several factors employed in determining collateral that could be called. The above represents management’s best estimate for additional collateral to be called in the event of a credit rating downgrade. The impact of additional collateral requirements is considered in our Contingency Funding Plan and calculation of MLO, as described above.
Equity Capital
As compared to November 30, 2020, the increase to total Jefferies Group LLC member’s equity at November 30, 2021 is primarily attributed to net earnings, partially offset by net distributions to Jefferies and changes in instrument specific credit risk on structured notes.
During 2021, we paid distributions of $769.9 million to Jefferies, based on our results for the three months ended November 30, 2020 and the nine months ended August 31, 2021. In addition, during 2021, we received a contribution of $153.6 million from Jefferies and paid an additional distribution of $153.6 million to Jefferies. At November 30, 2021, we have accrued a distribution payable of $193.0 million, based on our results for the three months ended November 30, 2021.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Subsequent to year-end, on December 1, 2021, Jefferies transferred certain investments in securities and limited partnerships to us. In addition, also on December 1, 2021, Jefferies transferred its investment in Foursight Capital, a subsidiary of Jefferies, to us. These transfers were accomplished as capital contributions from Jefferies, and since we are under common control, these capital contributions were recorded at their book values. As a result of these transfers, our total assets increased by $1.27 billion, total liabilities increased by $800.4 million and total equity increased by $476.5 million in our Consolidated Statement of Financial Condition at December 1, 2021.
Net Capital
As a broker-dealer registered with the SEC and a member firm of the Financial Industry Regulatory Authority (“FINRA”), Jefferies LLC is subject to the SEC Commission Uniform Net Capital Rule (“Rule 15c3-1”), which requires the maintenance of minimum net capital, and has elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Jefferies LLC, as a dually-registered U.S. broker-dealer and futures commission merchant (“FCM”), is also subject to Rule 1.17 of the Commodity Futures Trading Commission (“CFTC”), which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. On October 6, 2021, Jefferies Financial Services, Inc. (“JFSI”), a registered swap dealer, became subject to the CFTC’s regulatory capital requirements and holds regulatory capital in excess of the minimum regulatory requirement. Additionally, JFSI registered as a security-based swap dealer with the SEC on November 1, 2021, and became subject to the SEC’s security-based swap dealer regulatory rules. Further, subsequent to year-end, on December 16, 2021, JFSI was approved by the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC’s net capital requirements. At November 30, 2021, JFSI is in compliance with these SEC and CFTC requirements. As a security-based swap dealer and swap dealer, JFSI is subject to the net capital requirements of the SEC, CFTC and the National Futures Association (“NFA”), as a member of the NFA. JFSI 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, Jefferies LLC and JFSI’s net capital and excess net capital were as follows (in thousands):
Net Capital Excess Net Capital
Jefferies LLC
$ 2,225,733 $ 2,108,211
JFSI 452,297 432,297
FINRA is the designated examining authority for Jefferies LLC and the National Futures Association is the designated self-regulatory organization for Jefferies LLC as an FCM.
Certain other U.S. and non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject to the regulatory supervision and requirements of the Financial Conduct Authority in the U.K.
The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our regulated subsidiaries.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Other Developments
On December 31, 2020, the U.K. left the European Union single market and customs union and our U.K. broker dealer, Jefferies International Limited, was no longer able to provide services to European clients under the passport regime. We had already taken steps to ensure our ability to provide services to our European clients without interruption by establishing a wholly-owned subsidiary in Germany (“Jefferies GmbH”), which is authorized and regulated in Germany by the Federal Financial Services Authority (“BaFin”). Our European clients were migrated to Jefferies GmbH to conduct business across all of our European investment banking, fixed income and equity platforms with no client disruptions or settlement issues.
Central banks and regulators around the world have convened working groups to find, and implement the transition to, suitable replacements for Interbank Offered Rates (“IBORs”). During 2021, the U.K. Financial Conduct Authority announced that the publication of the one-week and two-month U.S. Dollar LIBOR maturities and all non-U.S. Dollar LIBOR maturities will cease immediately after December 31, 2021, with the remaining U.S. Dollar LIBOR maturities ceasing immediately after June 30, 2023. We are a counterparty to a number of LIBOR-based contracts, with maturity dates subsequent to 2021, composed primarily of cleared derivative contracts and floating rate notes. Our IBOR transition plan is overseen by a global steering committee and we have an active transition program focused on an orderly transition from IBORs to alternative reference rates in accordance with industry transition timelines. We continue to make progress on our transition plan, which is designed to enable operational readiness and robust risk management and are taking steps to update operational processes, models and contracts for any changes that may be required as well as reduce our overall exposure to LIBOR. We are actively engaged with our counterparties to ensure that our contracts adhere to the International Swaps and Derivative Association, Inc. (“ISDA”) fallback protocol or are actively converted to alternative risk-free reference rates and are both educating and assisting our clients with the transition from and cessation of LIBOR.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We have contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. 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 upon our consolidated financial statements.
In the normal course of business we engage in other off balance-sheet arrangements, including derivative contracts. Neither derivatives’ notional amounts nor underlying instrument values are reflected as assets or liabilities in our Consolidated Statements of Financial Condition. Rather, the fair values of derivative contracts are reported in our Consolidated Statements of Financial Condition as Financial instruments owned or Financial instruments sold, not yet purchased as applicable. Derivative contracts are reflected net of cash paid or received pursuant to credit support agreements and are reported on a net by counterparty basis when a legal right of offset exists under an enforceable master netting agreement. For additional information about our accounting policies and our derivative activities, see Note 2, Summary of Significant Accounting Policies, Note 4, Fair Value Disclosures, and Note 5, Derivative Financial Instruments, in our consolidated financial statements included in this Annual Report on Form 10-K.
We are routinely involved with variable interest entities (“VIEs”) in the normal course of business. At November 30, 2021, we did not have any commitments to purchase assets from these VIEs. For additional information regarding our involvement with VIEs, see Note 7, Securitization Activities, and Note 8, Variable Interest Entities, in our consolidated financial statements included in this Annual Report on Form 10-K.
Due to the uncertainty regarding the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded from the below contractual obligations table. See Note 17, Income Taxes, in our consolidated financial statements included in this Annual Report on Form 10-K for further information.
For information on our commitments and guarantees, see Note 18, Commitments, Contingencies and Guarantees, in our consolidated financial statements included in this Annual Report on Form 10-K.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Contractual Obligations
The table below provides information about our contractual obligations at November 30, 2021. The table presents principal cash flows with expected maturity dates (in millions):
Expected Maturity Date
2022 2023 2024
and
2025 2026
and
2027 2028
and
Later Total
Contractual obligations:
Unsecured long-term debt (contractual principal payments net of unamortized discounts and premiums) (1)
$ 12.0 $ 351.8 $ 599.6 $ 56.0 $ 6,296.4 $ 7,315.8
Secured long-term debt (1) - 375.0 349.0 - - 724.0
Interest payment obligations on long-term debt (2)
327.7 271.2 510.3 461.6 1,518.4 3,089.2
Operating leases (3) 68.3 66.0 128.2 122.0 221.7 606.2
Purchase obligations (4) 201.1 140.2 78.8 38.0 9.3 467.4
Total $ 609.1 $ 1,204.2 $ 1,665.9 $ 677.6 $ 8,045.8 $ 12,202.6
(1)For additional information on long-term debt, see Note 12, Long-Term Debt, in our consolidated financial statements included in this Annual Report on Form 10-K.
(2)Amounts based on applicable interest rates at November 30, 2021.
(3)For additional information on operating leases related to certain premises and equipment agreements, see Note 13, Leases, in our consolidated financial statements included in this Annual Report on Form 10-K.
(4)Purchase obligations for goods and services primarily include payments for outsourcing and computer and telecommunications maintenance agreements. Purchase obligations at November 30, 2021 reflect the minimum contractual obligations under legally enforceable contracts.
Subsequent to November 30, 2021 and on or before January 31, 2021, we expect to make cash payments of $1.94 billion related to compensation awards for fiscal 2021. See Note 16, Compensation Plans, in our consolidated financial statements included in this Annual Report on Form 10-K for further information.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Risk Management
Overview
Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our activities is critical to our financial soundness, viability and profitability. Accordingly, we have a comprehensive risk management approach, with a formal governance structure and policies and procedures outlining frameworks and processes to identify, assess, monitor and manage risk. Principal risks involved in our business activities include market, credit, liquidity and capital, operational, legal and compliance, new business and reputational risk.
Risk management is a multifaceted process that requires communication, judgment and knowledge of financial products and markets. Our risk management process encompasses the active involvement of executive and senior management, and also many departments independent of the revenue-producing business units, including the Risk Management, Operations, Information Technology, Compliance, Legal and Finance Departments. Our risk management policies, procedures and methodologies are flexible in nature and are subject to ongoing review and modification.
In achieving our strategic business objectives, our risk appetite incorporates keeping our clients’ interests as top priority and ensuring we are in compliance with applicable laws, rules and regulations, as well as adhering to the highest ethical standards. We undertake prudent risk-taking that protects the capital base and franchise, utilizing risk limits and tolerances that avoid outsized risk-taking. We maintain a diversified business mix and avoid significant concentrations to any sector, product, geography, or activity and set quantitative concentration limits to manage this risk. We consider contagion, second order effects and correlation in our risk assessment process and actively seek out value opportunities of all sizes. We manage the risk of opportunities larger than our approved risk levels through risk sharing and risk distribution, sell-down and hedging as appropriate. We have a limited appetite for illiquid assets and complex derivative financial instruments. We maintain the asset quality of our balance sheet through conducting trading activity in liquid markets and generally ensure high turnover of our inventory. We subject less liquid positions and derivative financial instruments to particular scrutiny and use a wide variety of specific metrics, limits, and constraints to manage these risks. We protect our reputation and franchise, as well as our standing within the market. We operate a federated approach to risk management and assign risk oversight responsibilities to a number of functions with specific areas of focus.
For discussion of liquidity and capital risk management, refer to the “Liquidity, Financial Condition and Capital Resources” section herein.
Governance and Risk Management Structure
Our Board of Directors (“Board”) and Risk and Liquidity Oversight Committee (“Committee”). Our Board and Committee play an important role in reviewing our risk management process and risk appetite. The Committee assists the Board in its oversight of: (i) the Company’s enterprise risk management, (ii) the Company’s capital, liquidity and funding guidelines and policies and (iii) the performance of the Company’s Chief Risk Officer. Our Global Chief Risk Officer (“CRO”) and Global Treasurer meet with the Committee on no less than a quarterly basis to present our risk profile and liquidity profile and to respond to questions. Our Chief Information Officer also meets with the Committee at least semi-annually to receive and review reports related to any exposure to cybersecurity risk and our plans and programs to mitigate and respond to cybersecurity risks. Additionally, our risk management team continuously monitors our various businesses, the level of risk the businesses are taking and the efficacy of potential risk mitigation strategies and presents this information to our senior management and the Committee.
Our Board also fulfills its risk oversight role through the operations of its various committees, including its Audit Committee. The Audit Committee has responsibility for risk oversight in connection with its review of our financial statements, internal audit function and internal control over financial reporting, as well as assisting the Board with our legal and regulatory compliance and overseeing our Code of Business Practice. The Audit Committee is also updated on risk controls at each of its regularly scheduled meetings.
Internal Audit, which reports to the Audit Committee of the Board and includes professionals with a broad range of audit and industry experience, including risk management expertise, is responsible for independently assessing and validating key controls within our risk management framework.
We make extensive use of internal committees to govern risk taking and ensure that business activities are properly identified, assessed, monitored and managed. The Risk Management Committee (“RMC”) and membership is comprised of our Chief Executive Officer and Chairman, Chairman of the Executive Committee, CFO, CRO and Global Treasurer. Our other risk related committees govern risk taking and ensure that business activities are properly managed for their area of oversight.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Risk Committees.
•RMC - the principal committee that governs our risk taking activities. The RMC meets weekly to discuss our risk profile and discuss business or market trends and their potential impact on the business. The Committee approves our limits as a whole, and across risk categories and business lines, reviews limit breaches, and approves risk policies and stress testing methodologies and is supported by the subcommittees, e.g., Credit Committee, Model Governance Committee and Stress Testing Committee, and management forums in risk management functions.
•Executive Committee - provides insight, perspective and guidance for the day-to-day operations and strategic direction of their respective businesses and us as a whole.
•Operating Committee - brings together the managers of all control areas and the business line chief operating officers, whereby each department presents issues regarding current and proposed business. This committee provides the key forum for coordination and communication between the control managers entirely focused on our activities as a whole.
•Asset / Liability Committee - seeks to ensure effective management and control of the balance sheet in terms of risk profile, adequacy of capital and liquidity resources, and funding profile and strategy. The committee is responsible for developing, implementing and enforcing our liquidity, funding and capital policies. This includes recommendations for capital and balance sheet size, as well as the allocation of capital to our businesses.
•Independent Price Verification Committee - establishes our valuation policies and procedures and is responsible for independently validating the fair value of our financial instruments. The committee, which is comprised of stakeholders represented by the CFO, Internal Audit, Risk Management and Controllers, meets monthly to assess and approve the results of our inventory price testing.
•New Business Committee - reviews new business, products and activities and extensions of existing businesses, products and activities that may introduce materially different or greater risks than those of a business’ existing activities. The new business approval process is a key control over new business activity. The objectives are to notify all relevant functions of the intention to introduce a new product, business or activity, to share information between functions and to ensure there is a thorough understanding of the proposal.
Risk Considerations
We apply a comprehensive framework of limits on a variety of key metrics to constrain the risk profile of our business activities. The size of the limits reflects our risk appetite for a certain activity under normal business conditions. Key metrics included in our risk management framework include inventory position and exposure limits on a gross and net basis, scenario analysis and stress tests, Value-at-Risk (“VaR”), sensitivities, exposure concentrations, aged inventory, Level 3 assets, counterparty exposure, leverage and cash capital.
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.
Our market risk principally arises from interest rate risk, from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads, and from equity price risks from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. In addition, commodity price risk results from exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices, and foreign exchange risk results from changes in foreign currency rates.
Market risk is present in our market making, proprietary trading, underwriting and investing activities, including our investments in Asset Management separately managed accounts, and is principally managed by diversifying exposures, controlling position sizes, and establishing economic hedges in related securities or derivatives. Due to imperfections in correlations, gains and losses can occur even for positions that are economically hedged. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and the results of our trading businesses.
Trader Mandates
Trading is principally managed through front office trader mandates, where each trader is provided a specific mandate in line with our product registry. Mandates set out the activities, currencies, countries and products that the desk is permitted to trade in and set the limits applicable to the desk. Traders are responsible for knowing their trading limits and trading in a manner consistent with their mandate.
JEFFERIES GROUP LLC AND SUBSIDIARIES
VaR
VaR is a statistical estimate of the potential loss from adverse market movements over a specified time horizon within a specified probability (confidence level). It provides a common risk measure across financial instruments, markets and asset classes. We estimate VaR using a model that simulates revenue and loss distributions on our trading portfolios by applying historical market changes to the current portfolio. We calculate a one-day VaR using a one year look-back period measured at a 95% confidence level.
As with all measures of VaR, our estimate has inherent limitations due to the assumption that historical changes in market conditions are representative of the future. Furthermore, the VaR model measures the risk of a current static position over a one-day horizon and might not capture the market risk over a longer time horizon where moves may be more extreme. Previous changes in market risk factors may not generate accurate predictions of future market movements. While we believe the assumptions and inputs in our risk model are reasonable, we could incur losses greater than the reported VaR. Consequently, this VaR estimate is only one of a number of tools we use in our daily risk management activities.
Our average daily VaR increased to $13.63 million for 2021 from $10.51 million for 2020. The increase was primarily due to higher equity VaR as a result of increased equity exposure and market volatility, as the historical volatility from 2020 remained in our rolling one year look-back period for most of 2021. Interest rate and credit spreads VaR was lower driven by a decrease in fixed income interest rate exposure over the period. This decrease was offset by a lower diversification benefit across asset classes and business divisions.
The following table illustrates each separate component of VaR for each component of market risk by interest rate and credit spreads, equity, currency and commodity products, as well as for our overall trading positions using the past 365 days of historical data (in millions):
Daily VaR (1)
Value-at-Risk in Trading Portfolios
VaR at November 30, 2021 VaR at November 30, 2020
Daily VaR for 2021 Daily VaR for 2020
Risk Categories: Average High Low Average High Low
Interest Rates and Credit
Spreads
$ 4.60 $ 5.46 $ 11.15 $ 3.21 $ 7.66 $ 7.90 $ 12.50 $ 3.93
Equity Prices 9.85 11.66 18.98 6.17 12.54 8.01 14.91 3.68
Currency Rates 0.12 0.12 0.31 0.03 0.16 0.21 2.17 0.03
Commodity Prices 0.15 0.39 0.77 0.13 0.44 0.70 1.56 0.24
Diversification Effect (2) (2.06) (4.00) N/A N/A (2.04) (6.31) N/A N/A
Firmwide
$ 12.66 $ 13.63 $ 22.91 $ 6.94 $ 18.76 $ 10.51 $ 22.78 $ 5.02
(1)For the VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used.
(2)The diversification effect is not applicable for the maximum and minimum VaR values as the firmwide VaR and the VaR values for the four risk categories might have occurred on different days during the year.
The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories and arises because the market risk categories are not perfectly correlated.
We perform daily back-testing of our VaR model comparing realized revenue and loss with the previous day’s VaR. Back-testing results are included in the quarterly risk review pack for our Board. The primary method used to test the efficacy of the VaR model is to compare our actual daily net revenue for those positions included in our VaR calculation with the daily VaR estimate. This evaluation is performed at various levels of the trading portfolio, from the overall level down to specific business lines. For the VaR model, trading related revenue is defined as principal transactions revenues, trading related commissions, revenue from securitization activities and net interest income.
For a 95% confidence one day VaR model (i.e., no intra-day trading), assuming current changes in market value are consistent with the historical changes used in the calculation, net trading losses would not be expected to exceed the VaR estimates more than twelve times on an annual basis (i.e., once in every 20 days). During 2021, results of the evaluation at the aggregate level demonstrated eight days when the net trading loss exceeded the 95% one day VaR.
JEFFERIES GROUP LLC AND SUBSIDIARIES
The chart below reflects our daily VaR over the last four quarters. The increases from mid-December 2020 through mid-January 2021 were driven by the high historical volatility observed throughout the initial period in 2020 driven by the impact of COVID-19. The lower trend from January 2021 to the end of February 2021 was driven by exposure reductions, while equity exposure increased at various points from March 2021 through early June 2021. VaR trended lower from June 2021 and throughout most of the remainder of 2021 due to position reductions and as the remaining volatile days from 2020 dropped out of the time series. The uptick in VaR towards the end of 2021 was driven by increased equity exposure.
Daily Net Trading Revenue
There were 60 days with trading losses out of a total of 252 trading days in 2021. The loss days in 2021 were primarily driven by certain equity funds in our Asset Management business, SPAC-related activity and idiosyncratic positions in our equity trading business and certain block positions that were liquidated during the year. The histogram below presents the distribution of our actual daily net trading revenue for substantially all of our trading activities for 2021 (in millions).
JEFFERIES GROUP LLC AND SUBSIDIARIES
Other Risk Measures
Certain positions within financial instruments are not included in the VaR model because VaR is not the most appropriate measure of risk. Accordingly, Risk Management has additional procedures in place to assure that the level of potential loss that would arise from market movements are within acceptable levels. Such procedures include performing stress tests and profit and loss analysis. The table below presents the potential reduction in net income associated with a 10% stress of the fair value of the positions that are not included in the VaR model at November 30, 2021 (in thousands):
10% Sensitivity
Investment in funds (1)
$ 101,233
Private investments
14,918
Corporate debt securities in default
9,297
Trade claims
3,190
(1)Includes investments in hedge funds, fund of funds and private equity funds. For additional details on these investments refer to “Investments at Fair Value” within Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K.
The impact of changes in our own credit spreads on our structured notes for which the fair value option was elected is not included in VaR. The estimated credit spread risk sensitivity for each one basis point widening in our own credit spreads on financial liabilities for which the fair value option was elected was an increase in value of approximately $1.5 million at November 30, 2021, which is included in other comprehensive income.
Stress Tests and Scenario Analysis
Stress tests are used to analyze the potential impact of specific events or extreme market moves on the current portfolio both firm-wide and within business segments. Stress testing is an important part of our risk management approach because it allows us to quantify our exposure to tail risks, highlight potential loss concentrations, undertake risk/reward analysis, set risk controls and overall assess and mitigate our risk.
We employ a range of stress scenarios, which comprise both historical market price and rate changes and hypothetical market environments, and generally involve simultaneous changes of many risk factors. Indicative market changes in the scenarios include, but are not limited to, a large widening of credit spreads, a substantial decline in equities markets, significant moves in selected emerging markets, large moves in interest rates and changes in the shape of the yield curve.
Unlike our VaR, which measures potential losses within a given confidence interval, stress scenarios do not have an associated implied probability. Rather, stress testing is used to estimate the potential loss from market moves that tend to be larger than those embedded in the VaR calculation. Stress testing complements VaR to cover for potential limitations of VaR such as the breakdown in correlations, non-linear risks, tail risk and extreme events and capturing market moves beyond the confidence levels assumed in the VaR calculations.
Stress testing is performed and reported at least weekly as part of our risk management process and on an ad hoc basis in response to market events or concerns. Current stress tests provide estimated revenue and loss of the current portfolio through a range of both historical and hypothetical events. The stress scenarios are reviewed and assessed at least annually so that they remain relevant and up to date with market developments. Additional hypothetical scenarios are also conducted on a sub-portfolio basis to assess the impact of any relevant idiosyncratic stress events as needed.
Counterparty Credit Risk
Credit risk is the risk of loss 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.
We are exposed to credit risk as a trading counterparty to other broker-dealers and customers, as a counterparty to derivative contracts, as a direct lender and through extending loan commitments and providing securities-based lending and as a member of exchanges and clearing organizations. Credit exposure exists across a wide-range of products, including cash and cash equivalents, loans, securities finance transactions and over-the-counter derivative contracts. The main sources of credit risk are:
JEFFERIES GROUP LLC AND SUBSIDIARIES
•Loans and lending arising in connection with our investment banking and capital markets activities, which reflects our exposure at risk on a default event with no recovery of loans. Current exposure represents loans that have been drawn by the borrower and lending commitments that are outstanding. In addition, credit exposures on forward settling traded loans are included within our loans and lending exposures for consistency with the balance sheet categorization of these items. Loans and lending also arise in connection with our portion of a Secured Revolving Credit Facility that is with us and Massachusetts Mutual Life Insurance Company, to be funded equally, to support loan underwritings by Jefferies Finance. For further information on this facility, refer to Note 9, Investments, in our consolidated financial statements included in this Annual Report on Form 10-K. In addition, we have loans outstanding to certain of our officers and employees (none of whom are executive officers or directors). For further information on these employee loans, refer to Note 21, Related Party Transactions, in our consolidated financial statements included in this Annual Report on Form 10-K.
•Securities and margin financing transactions, which reflect our credit exposure arising from reverse repurchase agreements, repurchase agreements and securities lending agreements to the extent the fair value of the underlying collateral differs from the contractual agreement amount and from margin provided to customers.
•OTC derivatives, which are reported net by counterparty when a legal right of setoff exists under an enforceable master netting agreement. OTC derivative exposure is based on a contract at fair value, net of cash collateral received or posted under credit support agreements. In addition, credit exposures on forward settling trades are included within our derivative credit exposures.
•Cash and cash equivalents, which includes both interest-bearing and non-interest-bearing deposits at banks.
Credit is extended to counterparties in a controlled manner and in order to generate acceptable returns, whether such credit is granted directly or is incidental to a transaction. All extensions of credit are monitored and managed as a whole to limit exposure to loss related to credit risk. Credit risk is managed according to the Credit Risk Management Policy, which sets out the process for identifying counterparty credit risk, establishing counterparty limits, and managing and monitoring credit limits. The policy includes our approach for:
•Client on-boarding and approving counterparty credit limits;
•Negotiating, approving and monitoring credit terms in legal and master documentation;
•Determining the analytical standards and risk parameters for ongoing management and monitoring credit risk books;
•Actively managing daily exposure, exceptions and breaches; and
•Monitoring daily margin call activity and counterparty performance.
Counterparty credit exposure limits are granted within our credit ratings framework, as detailed in the Credit Risk Management Policy. The Credit Risk Department assesses counterparty credit risk and sets credit limits at the counterparty master agreement level. Limits must be approved by appropriate credit officers and initiated in our credit and trading systems before trading commences. All credit exposures are reviewed against approved limits on a daily basis.
Our Secured Revolving Credit Facility, which supports loan underwritings by Jefferies Finance, is governed under separate policies other than the Credit Risk Management Policy and is approved by our Board. The loans outstanding to certain of our officers and employees are extended pursuant to a review by our most senior management.
Current counterparty credit exposures at November 30, 2021 and 2020 are summarized in the tables below and provided by credit quality, region and industry (in millions). Credit exposures presented take netting and collateral into consideration by counterparty and master agreement. Collateral taken into consideration includes both collateral received as cash as well as collateral received in the form of securities or other arrangements. Current exposure is the loss that would be incurred on a particular set of positions in the event of default by the counterparty, assuming no recovery. Current exposure equals the fair value of the positions less collateral. Issuer risk is the credit risk arising from inventory positions (for example, corporate debt securities and secondary bank loans). Issuer risk is included in our country risk exposure tables below.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Counterparty Credit Exposure by Credit Rating
Loans and Lending Securities and Margin
Finance OTC Derivatives Total Cash and
Cash Equivalents Total with Cash and
Cash Equivalents
At At At At At At
November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
AAA Range
$ - $ - $ 0.8 $ 1.1 $ - $ 0.1 $ 0.8 $ 1.2 $ 6,924.9 $ 5,132.9 $ 6,925.7 $ 5,134.1
AA Range
60.0 45.2 111.7 111.7 13.0 9.8 184.7 166.7 5.1 7.8 189.8 174.5
A Range
0.4 0.2 530.4 542.2 338.0 147.2 868.8 689.6 1,869.4 1,967.9 2,738.2 2,657.5
BBB Range
250.3 250.5 170.9 110.2 37.2 18.1 458.4 378.8 0.8 2.2 459.2 381.0
BB or Lower
40.0 50.0 11.4 8.3 71.0 201.6 122.4 259.9 0.1 0.1 122.5 260.0
Unrated
164.2 142.0 - - - 0.2 164.2 142.2 13.3 1.0 177.5 143.2
Total
$ 514.9 $ 487.9 $ 825.2 $ 773.5 $ 459.2 $ 377.0 $ 1,799.3 $ 1,638.4 $ 8,813.6 $ 7,111.9 $ 10,612.9 $ 8,750.3
Counterparty Credit Exposure by Region
Loans and Lending Securities and Margin
Finance OTC Derivatives Total Cash and
Cash Equivalents Total with Cash and
Cash Equivalents
At At At At At At
November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
Asia/Latin America/Other $ 14.9 $ 15.0 $ 63.7 $ 72.6 $ 0.9 $ 6.9 $ 79.5 $ 94.5 $ 268.1 $ 248.4 $ 347.6 $ 342.9
Europe
0.3 0.1 300.8 313.0 66.4 42.5 367.5 355.6 57.0 96.4 424.5 452.0
North America
499.7 472.8 460.7 387.9 391.9 327.6 1,352.3 1,188.3 8,488.5 6,767.1 9,840.8 7,955.4
Total
$ 514.9 $ 487.9 $ 825.2 $ 773.5 $ 459.2 $ 377.0 $ 1,799.3 $ 1,638.4 $ 8,813.6 $ 7,111.9 $ 10,612.9 $ 8,750.3
Counterparty Credit Exposure by Industry
Loans and Lending Securities and Margin
Finance OTC Derivatives Total Cash and
Cash Equivalents Total with Cash and
Cash Equivalents
At At At At At At
November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
2020 November 30,
2021 November
30,
Asset Managers
$ - $ 0.2 $ - $ - $ - $ - $ - $ 0.2 $ 6,924.9 $ 5,132.9 $ 6,924.9 $ 5,133.1
Banks, Broker-dealers
250.7 250.7 602.9 558.6 388.9 178.8 1,242.5 988.1 1,888.7 1,979.0 3,131.2 2,967.1
Corporates
158.2 132.7 - - 68.0 183.9 226.2 316.6 - - 226.2 316.6
As Agent Banks - - 185.2 190.0 - - 185.2 190.0 - - 185.2 190.0
Other
106.0 104.3 37.1 24.9 2.3 14.3 145.4 143.5 - - 145.4 143.5
Total
$ 514.9 $ 487.9 $ 825.2 $ 773.5 $ 459.2 $ 377.0 $ 1,799.3 $ 1,638.4 $ 8,813.6 $ 7,111.9 $ 10,612.9 $ 8,750.3
For additional information regarding credit exposure to OTC derivative contracts, refer to Note 5, Derivative Financial Instruments, in our consolidated financial statements included in this Annual Report on Form 10-K.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Country Risk Exposure
Country risk is the risk that events or developments that occur in the general environment of a country or countries due to economic, political, social, regulatory, legal or other factors, will affect the ability of obligors of the country to honor their obligations. We define the country of risk as the country of jurisdiction or domicile of the obligor, and monitor country risk resulting from both trading positions and counterparty exposure, which may not include the offsetting benefit of any financial instruments utilized to manage market risk. The following tables reflect our top exposure at November 30, 2021 and 2020 to the sovereign governments, corporations and financial institutions in those non- U.S. countries in which we have a net long issuer and counterparty exposure (in millions):
November 30, 2021
Issuer Risk Counterparty Risk Issuer and Counterparty Risk
Fair Value of Long Debt Securities Fair Value of Short Debt Securities Net Derivative Notional Exposure Loans and Lending Securities and Margin Finance OTC Derivatives Cash and Cash Equivalents Excluding Cash and Cash Equivalents Including Cash and Cash Equivalents
Canada $ 196.4 $ (94.2) $ 1.3 $ - $ 63.1 $ 259.5 $ 1.7 $ 426.1 $ 427.8
United Kingdom 570.6 (350.1) (1.4) 0.3 68.9 24.9 26.7 313.2 339.9
Hong Kong 27.9 (18.3) (1.8) - 2.5 - 160.6 10.3 170.9
Japan 247.3 (205.4) (3.1) - 18.3 0.1 51.4 57.2 108.6
Spain 191.4 (111.8) (0.1) - 25.3 0.3 - 105.1 105.1
Australia 134.1 (78.5) 0.6 - 25.5 - 7.5 81.7 89.2
Netherlands 220.2 (142.0) 0.7 - 3.9 0.1 1.3 82.9 84.2
Switzerland 97.3 (67.6) 3.5 - 40.3 2.5 2.7 76.0 78.7
France 210.7 (201.7) (59.5) - 99.6 26.9 - 76.0 76.0
China 458.4 (356.9) (34.1) - - - - 67.4 67.4
Total
$ 2,354.3 $ (1,626.5) $ (93.9) $ 0.3 $ 347.4 $ 314.3 $ 251.9 $ 1,295.9 $ 1,547.8
November 30, 2020
Issuer Risk Counterparty Risk Issuer and Counterparty Risk
Fair Value of Long Debt Securities Fair Value of Short Debt Securities Net Derivative Notional Exposure Loans and Lending Securities and Margin Finance OTC Derivatives Cash and Cash Equivalents Excluding Cash and Cash Equivalents Including Cash and Cash Equivalents
Italy $ 1,929.5 $ (921.6) $ (618.9) $ - $ - $ 0.1 $ - $ 389.1 $ 389.1
United Kingdom
464.0 (235.8) (46.7) 0.1 67.4 5.2 64.8 254.2 319.0
France 357.3 (290.9) 48.3 - 140.8 24.3 - 279.8 279.8
Germany 470.7 (352.7) 40.2 - 63.1 11.3 26.7 232.6 259.3
Australia 32.7 (17.8) 173.9 - 24.9 - 12.8 213.7 226.5
Hong Kong 35.2 (11.8) 0.7 - 0.1 - 157.4 24.2 181.6
Canada 417.3 (326.8) 1.3 - 20.4 64.3 2.1 176.5 178.6
Austria 151.2 (73.6) - - - - - 77.6 77.6
India 50.9 (6.7) - - - - 24.3 44.2 68.5
Switzerland 104.0 (72.2) 2.9 - 31.6 1.3 0.4 67.6 68.0
Total
$ 4,012.8 $ (2,309.9) $ (398.3) $ 0.1 $ 348.3 $ 106.5 $ 288.5 $ 1,759.5 $ 2,048.0
Operational Risk
Operational risk is the risk of financial or non-financial impact, resulting from inadequate or failed internal processes, people and systems or from external events. We interpret this definition as including not only financial loss or gain but also other negative impacts to our objectives such as reputational impact, legal/regulatory impact and impact on our clients. Third-party risk is also included as a subset of Operational Risk and is defined as the potential threat presented to us, or our employees or clients, from our supply chain and other third-parties used to perform a process, service or activity on our behalf.
Our Operational Risk framework includes governance as well as operational risk processes, which is comprised of operational risk event capture and analysis, risk and control self-assessments, operational risk key indicators, action tracking, risk monitoring and reporting, deep dive risk assessments, new business approvals and vendor risk management. Each revenue producing and support department is responsible for the management and reporting of operational risks and the implementation of the Operational Risk Management Policy and processes within the department with regular operational risk training provided to our employees.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Operational Risk events are mapped to Risk Categories used for the consistent classification of risk data to support root cause and trend analysis, these include:
•Fraud and Theft
•Clients and Business Practices
•Market Conduct / Regulatory Compliance
•Business Disruption
•Technology
•Data Protection and Privacy
•Trading
•Transaction and Process Management
•People
•Cyber
•Vendor Risk
Operational Risk Management Policy, framework, infrastructure, methodology, processes, guidance and oversight of the operational risk processes are centralized and consistent firm wide and additionally subject to regional and legal entity operational risk governance as required. We also maintain a firm wide Third-Party (“Vendor”) Risk Management Policy & Framework to ensure adequate control and monitoring over our critical third parties which includes processes for conducting periodic reviews covering areas of risk including financial health, information security, privacy, business continuity management, disaster recovery and operational risk.
Our leadership is continuously monitoring circumstances around COVID-19, as well as economic and capital market conditions, and providing frequent communications to both our clients and our employees. We continue to adopt enhanced cleaning practices across our offices, have established protocols for office access, travel, meetings and entertainment to ensure the safety of our people and clients, and continue to work actively with our employees to navigate the constantly changing environment. Our Business Continuity Plan is operating effectively across a hybrid remote working environment across all functions without any meaningful disruptions to our business or control processes. Additionally, we are working continuously with all of our critical vendors regarding their own pandemic responses to ensure there is minimal impact on our business operations.
Model 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. We use quantitative models primarily to value certain financial assets and liabilities and to monitor and manage our 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 our risk management approach and is overseen through our risk governance structure and risk management controls.
Legal and Compliance Risk
Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti-money laundering and record keeping. These risks also reflect the potential impact that changes in local and international laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups. We also maintain an anonymous hotline for employees or others to report suspected inappropriate actions by us or by our employees or agents.
New Business Risk
New business risk refers to the risks of entering into a new line of business or offering a new product. By entering a new line of business or offering a new product, we may face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we currently face. The New Business Committee reviews proposals for new businesses and new products to determine if we are prepared to handle the additional or increased risks associated with entering into such activities.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Reputational Risk
We recognize that maintaining our reputation among clients, investors, regulators and the general public is an important aspect of minimizing legal and operational risks. Maintaining our reputation depends on a large number of factors, including the selection of our clients and the conduct of our business activities. We seek to maintain our reputation by screening potential clients and by conducting our business activities in accordance with high ethical standards. Our reputation and business activity can be affected by statements and actions of third-parties, even false or misleading statements by them. We actively monitor public comment concerning us and are vigilant in seeking to assure accurate information and perception prevails.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Risk Management” in Part II, Item 7 of this Form 10-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated our internal control over financial reporting as of November 30, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). As a result of this assessment and based on the criteria in this framework, management has concluded that, as of November 30, 2021, our internal control over financial reporting was effective.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited and issued a report on our internal control over financial reporting, which appears on page 59.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member of Jefferies Group LLC
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Jefferies Group LLC and subsidiaries (the "Company") as of November 30, 2021 and 2020, the related consolidated statements of earnings, comprehensive income, changes in equity and cash flows, for each of the three years in the period ended November 30, 2021, and the related notes and the schedules listed in the Index at Item 15(a)(1) and 15(a)(2) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of November 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of November 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 28, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of certain Level 2 and Level 3 Financial Assets and Liabilities - Refer to Note 2 and Note 4 to the financial statements
Critical Audit Matter Description
The Company estimates fair value for certain financial assets and liabilities utilizing models and unobservable inputs. Unlike the fair value of other assets and liabilities which are readily observable and therefore more easily independently corroborated, these financial assets and liabilities are not actively traded or quoted prices are available but traded less frequently, and fair value is determined based on significant judgments such as models, inputs and valuation methodologies. Such assets and liabilities can be classified as Level 2 or Level 3.
We identified the valuation of certain Level 2 and Level 3 financial assets and liabilities as a critical audit matter because of the pricing inputs, complexity of models and/or methodologies used by management to estimate fair value. The valuations involve a high degree of auditor judgement and an increased extent of effort, including the need to involve our fair value specialists who possess significant quantitative and modeling experience, to audit and evaluate the appropriateness of the models and inputs.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures for certain Level 2 and Level 3 financial assets and liabilities included the following procedures, among others:
•We tested the operating effectiveness of the Company’s valuation controls, including the:
◦Independent price verification controls.
◦Pricing model controls which are designed to review a model’s theoretical soundness and its appropriateness.
•With the assistance of our fair value specialists, we evaluated the reasonableness of management’s valuation methodology and estimates by:
◦Developing independent valuation estimates and compared such estimates to management’s recorded values.
◦Comparing management’s assumptions to relevant audit evidence, including external sources, where available.
•We evaluated management’s ability to estimate fair value by comparing management’s valuation estimates to subsequent transactions, when available.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2022
We have served as the Company's auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member of Jefferies Group LLC
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Jefferies Group LLC and subsidiaries (the “Company”) as of November 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended November 30, 2021, of the Company and our report dated January 28, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, NY
January 28, 2022
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
November 30,
2021 2020
ASSETS
Cash and cash equivalents (includes $3,765 and $468 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
$ 8,813,564 $ 7,111,929
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations 1,015,107 604,321
Financial instruments owned, at fair value (includes securities pledged of $12,723,502 and $13,065,585 at November 30, 2021 and 2020, respectively; and $319,497 and $5,238 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
19,336,237 17,686,052
Loans to and investments in related parties 1,159,048 1,000,730
Securities borrowed 6,409,420 6,934,762
Securities purchased under agreements to resell 7,642,484 5,096,769
Securities received as collateral, at fair value 7,289 7,517
Receivables:
Brokers, dealers and clearing organizations ($39,435 and $12,919 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
4,896,704 4,158,823
Customers 1,615,822 1,286,925
Fees, interest and other ($679 and $0 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
474,304 397,630
Premises and equipment 860,742 847,127
Goodwill 1,645,317 1,646,933
Other assets ($0 and $131 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
892,862 972,479
Total assets $ 54,768,900 $ 47,751,997
LIABILITIES AND EQUITY
Short-term borrowings (includes $0 and $5,067 at fair value at November 30, 2021 and 2020, respectively)
$ 221,863 $ 764,715
Financial instruments sold, not yet purchased, at fair value ($109,088 and $2,466 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
11,690,795 10,017,522
Collateralized financings:
Securities loaned 1,525,721 1,810,748
Securities sold under agreements to repurchase 8,446,099 8,316,269
Other secured financings (includes $102,788 and $1,543 at fair value at November 30, 2021 and 2020, respectively; and $3,791,886 and $2,769,674 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
3,794,248 2,771,217
Obligation to return securities received as collateral, at fair value 7,289 7,517
Payables:
Brokers, dealers and clearing organizations (includes $44,246 and $0 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
5,814,066 3,325,753
Customers 4,461,950 4,251,556
Lease liabilities 521,448 561,249
Accrued expenses and other liabilities (includes $1,787 and $1,202 at November 30, 2021 and 2020, respectively, related to consolidated VIEs)
3,166,987 2,663,639
Long-term debt (includes $1,843,598 and $1,712,245 at fair value at November 30, 2021 and 2020, respectively)
8,039,826 6,895,680
Total liabilities 47,690,292 41,385,865
EQUITY
Member’s paid-in capital 7,381,391 6,569,328
Accumulated other comprehensive income (loss):
Currency translation and other adjustments (151,661) (141,843)
Changes in instrument specific credit risk (153,672) (71,151)
Additional minimum pension liability (8,843) (8,104)
Available-for-sale securities 269 513
Total accumulated other comprehensive loss (313,907) (220,585)
Total Jefferies Group LLC member’s equity 7,067,484 6,348,743
Noncontrolling interests 11,124 17,389
Total equity 7,078,608 6,366,132
Total liabilities and equity $ 54,768,900 $ 47,751,997
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
Year Ended November 30,
2021 2020 2019
Revenues:
Commissions and other fees
$ 896,312 $ 823,258 $ 676,309
Principal transactions
1,505,618 1,867,013 769,258
Investment banking
4,366,055 2,501,494 1,528,729
Asset management fees and revenues
71,571 28,694 20,285
Interest
847,969 894,215 1,496,529
Other
219,762 37,632 93,422
Total revenues
7,907,287 6,152,306 4,584,532
Interest expense
863,464 954,829 1,472,002
Net revenues
7,043,823 5,197,477 3,112,530
Non-interest expenses:
Compensation and benefits
3,373,629 2,792,575 1,684,054
Non-compensation expenses:
Floor brokerage and clearing fees
301,978 270,132 227,471
Underwriting costs
117,572 95,636 50,662
Technology and communications
434,359 386,830 335,395
Occupancy and equipment rental
118,961 107,180 119,472
Business development
111,540 67,603 138,158
Professional services
223,797 179,888 162,668
Other
178,034 120,179 69,981
Total non-compensation expenses
1,486,241 1,227,448 1,103,807
Total non-interest expenses
4,859,870 4,020,023 2,787,861
Earnings before income taxes 2,183,953 1,177,454 324,669
Income tax expense 559,229 302,748 80,284
Net earnings 1,624,724 874,706 244,385
Net earnings (losses) attributable to noncontrolling interests 5,993 (4,597) (1,644)
Net earnings attributable to Jefferies Group LLC $ 1,618,731 $ 879,303 $ 246,029
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended November 30,
2021 2020 2019
Net earnings $ 1,624,724 $ 874,706 $ 244,385
Other comprehensive loss, net of tax:
Currency translation adjustments and other (1) (9,818) 37,535 6,426
Changes in instrument specific credit risk (2) (82,521) (52,262) (13,161)
Cash flow hedges (3) - - (470)
Minimum pension liability adjustments (4) (739) (2,025) (1,318)
Unrealized gain on available-for-sale securities (244) 372 487
Total other comprehensive loss, net of tax (5) (93,322) (16,380) (8,036)
Comprehensive income 1,531,402 858,326 236,349
Net earnings (loss) attributable to noncontrolling interests 5,993 (4,597) (1,644)
Comprehensive income attributable to Jefferies Group LLC $ 1,525,409 $ 862,923 $ 237,993
(1)The amounts include income tax benefits (expenses) of approximately $0.6 million, $(11.9) million and $(3.2) million during the years ended November 30, 2021, 2020 and 2019, respectively.
(2)The amounts include income tax benefits of approximately $26.7 million, $16.4 million and $4.5 million for the years ended November 30, 2021, 2020 and 2019, respectively. The amounts for the years ended November 30, 2021, 2020 and 2019 include net gains (losses) of $(1.9) million, $(0.4) million and $0.4 million, respectively, net of tax benefits (expenses) of $0.6 million, $0.1 million and $(0.2) million, respectively, related to changes in instrument specific risk, which were reclassified to Principal transactions revenues within the Consolidated Statements of Earnings.
(3)The includes income tax benefits of approximately $0.2 million for the year ended 2019. The cash flow hedge loss of $0.5 million during the year ended November 30, 2019 was reclassified to Other revenues within the Consolidated Statement of Earnings.
(4)The amounts include income tax benefits of $0.2 million, $0.7 million and $0.5 million for the years ended November 30, 2021, 2020 and 2019, respectively. The amounts during the years ended November 30, 2021 and 2020, include pension net gains of $0.4 million and $0.5 million, respectively, net of tax of $0.1 million and $0.2 million, respectively, which were reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings. The amount during the year ended November 30, 2019 includes pension net gains of $0.1 million, net of negligible tax expenses, which were reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings.
(5) None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
Year Ended November 30,
2021 2020 2019
Member’s paid-in capital:
Balance, beginning of period $ 6,569,328 $ 6,329,677 $ 6,376,662
Cumulative effect of change in accounting principle for current expected credit losses, net of tax 2,698 - -
Net earnings attributable to Jefferies Group LLC 1,618,731 879,303 246,029
Contribution from Jefferies Financial Group Inc. 153,557 - -
Distributions to Jefferies Financial Group Inc. (962,923) (639,652) (293,014)
Balance, end of period $ 7,381,391 $ 6,569,328 $ 6,329,677
Accumulated other comprehensive income (loss), net of tax:
Balance, beginning of period $ (220,585) $ (204,205) $ (196,169)
Currency translation and other adjustments (9,818) 37,535 6,426
Changes in instrument specific credit risk (82,521) (52,262) (13,161)
Cash flow hedges - - (470)
Pension adjustments (739) (2,025) (1,318)
Unrealized gain on available-for-sale securities (244) 372 487
Balance, end of period $ (313,907) $ (220,585) $ (204,205)
Total Jefferies Group LLC member’s equity
$ 7,067,484 $ 6,348,743 $ 6,125,472
Noncontrolling interests:
Balance, beginning of period $ 17,389 $ 4,275 $ 1,911
Net earnings (loss) attributable to noncontrolling interests 5,993 (4,597) (1,644)
Contributions 2,892 19,405 6,600
Distributions (15,150) (1,694) (2,592)
Balance, end of period $ 11,124 $ 17,389 $ 4,275
Total equity
$ 7,078,608 $ 6,366,132 $ 6,129,747
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended November 30,
2021 2020 2019
Cash flows from operating activities:
Net earnings $ 1,624,724 $ 874,706 $ 244,385
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization 60,911 51,346 40,942
Goodwill impairment 400 3,000 -
Deferred income taxes 90,356 (17,741) 22,032
Bad debt expense 36,569 19,010 1,582
Income on loans to and investments in related parties (205,091) (14,329) (85,169)
Distributions received on investments in related parties 57,346 35,949 144,320
Other adjustments (138,264) 245,005 61,915
Net change in assets and liabilities:
Securities deposited with clearing and depository organizations 34,237 751 (169)
Receivables:
Brokers, dealers and clearing organizations (778,371) (1,147,961) 210,994
Customers (328,978) 203,952 526,238
Fees, interest and other (67,861) (87,215) 2,111
Securities borrowed 520,455 714,664 (1,103,708)
Financial instruments owned (1,659,697) (1,253,249) 35,908
Securities purchased under agreements to resell (2,552,607) (752,171) (1,523,222)
Other assets 2,835 145,177 (42,126)
Payables:
Brokers, dealers and clearing organizations 2,490,443 764,213 111,757
Customers 210,524 442,913 631,854
Securities loaned (282,403) 270,261 (301,727)
Financial instruments sold, not yet purchased 1,682,645 (604,669) 1,051,600
Securities sold under agreements to repurchase 133,423 799,794 (1,122,982)
Lease liabilities (58,007) (46,482) -
Accrued expenses and other liabilities 466,110 1,150,134 (126,684)
Net cash provided by (used in) operating activities 1,339,699 1,797,058 (1,220,149)
Cash flows from investing activities:
Contributions to loans to and investments in related parties (2,270,446) (1,569,671) (32,669)
Capital distributions from investments and repayments of loans from related parties 2,258,844 1,491,081 24,629
Net payments on premises and equipment (117,606) (101,311) (116,330)
Transfer of net assets from Jefferies Financial Group Inc. (2,173) - -
Net cash used in investing activities (131,381) (179,901) (124,370)
Continued on next page.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Year Ended November 30,
2021 2020 2019
Cash flows from financing activities:
Proceeds from short-term borrowings $ 1,005,000 $ 1,619,820 $ 1,732,232
Payments on short-term borrowings (1,556,090) (1,368,255) (1,597,773)
Proceeds from issuance of long-term debt, net of issuance costs 2,166,865 1,169,722 1,239,891
Repayment of long-term debt (923,809) (1,494,696) (823,875)
Contributions from Jefferies Financial Group Inc. 153,557 - -
Distributions to Jefferies Financial Group Inc. (923,432) (498,674) (311,131)
Net proceeds from other secured financings 1,023,678 305,873 1,586,347
Net change in bank overdrafts 8,216 (34,663) 26,568
Proceeds from contributions of noncontrolling interests 2,892 19,405 6,600
Payments on distributions to noncontrolling interests (15,150) (1,694) (2,592)
Net cash provided by (used in) financing activities 941,727 (283,162) 1,856,267
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(3,387) 18,306 (1,063)
Net increase in cash, cash equivalents and restricted cash 2,146,658 1,352,301 510,685
Cash, cash equivalents and restricted cash at beginning of period
7,682,013 6,329,712 5,819,027
Cash, cash equivalents and restricted cash at end of period
$ 9,828,671 $ 7,682,013 $ 6,329,712
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 861,168 $ 999,576 $ 1,480,559
Income taxes, net 695,952 115,053 84,119
The following presents our cash, cash equivalents and restricted cash by category within the Consolidated Statements of Financial Condition (in thousands):
November 30,
2021 2020
Cash and cash equivalents $ 8,813,564 $ 7,111,929
Cash and securities segregated and on deposit for regulatory purposes with clearing and depository organizations
1,015,107 570,084
Total cash, cash equivalents and restricted cash $ 9,828,671 $ 7,682,013
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Index
Note Page
Note 1. Organization and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Accounting Developments
Note 4. Fair Value Disclosures
Note 5. Derivative Financial Instruments
Note 6. Collateralized Transactions
Note 7. Securitization Activities
Note 8. Variable Interest Entities
Note 9. Investments
Note 10. Goodwill and Intangible Assets
Note 11. Short-Term Borrowings
Note 12. Long-Term Debt
Note 13. Leases
Note 14. Revenues from Contracts with Customers
Note 15. Benefit Plans
Note 16. Compensation Plans
Note 17. Income Taxes
Note 18. Commitments, Contingencies and Guarantees
Note 19. Net Capital Requirements
Note 20. Segment Reporting
Note 21. Related Party Transactions
Note 22. Subsequent Events
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Organization and Basis of Presentation
Organization
Jefferies Group LLC is the largest independent U.S.-headquartered global full service, integrated investment banking and securities firm. The accompanying Consolidated Financial Statements represent the accounts of Jefferies Group LLC and all our subsidiaries (together “we” or “us”). The subsidiaries of Jefferies Group LLC include Jefferies LLC, Jefferies International Limited, Jefferies GmbH, Jefferies Hong Kong Limited, Jefferies Financial Services, Inc., Jefferies Funding LLC, Jefferies Leveraged Credit Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary.
Jefferies Group LLC is a direct wholly-owned subsidiary of publicly traded Jefferies Financial Group Inc. (“Jefferies”). Jefferies does not guarantee any of our outstanding debt securities. Jefferies Group LLC is a Securities and Exchange Commission (“SEC”) reporting company, filing annual, quarterly and periodic financial reports. Richard Handler, our Chief Executive Officer and Chairman, is the Chief Executive Officer of Jefferies, as well as a Director of Jefferies. Brian P. Friedman, our Chairman of the Executive Committee, is Jefferies’ President and a Director of Jefferies.
We operate in two reportable business segments: (1) Investment Banking and Capital Markets and (2) Asset Management. For further information on our reportable business segments, refer to Note 20, Segment Reporting.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for financial information.
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, goodwill and intangible assets, the ability to realize certain 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.
Consolidation
Our policy is to consolidate all entities that we control by ownership of a majority of the outstanding voting stock. In addition, we consolidate entities that meet the definition of a variable interest entity (“VIE”) for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly-owned, the third-party’s holding of equity interest is presented as Noncontrolling interests in our Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity. The portion of net earnings attributable to the noncontrolling interests is presented as Net earnings (loss) attributable to noncontrolling interests in our Consolidated Statements of Earnings.
In situations in which we have significant influence, but not control, of an entity that does not qualify as a VIE, we apply either the equity method of accounting or fair value accounting pursuant to the fair value option election under U.S. GAAP, with our portion of net earnings or gains and losses recorded in Other revenues or Principal transactions revenues, respectively. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies and are carried at fair value. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights.
Intercompany accounts and transactions are eliminated in consolidation.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 2. Summary of Significant Accounting Policies
Revenue Recognition Policies
Commissions and Other Fees. All customer securities transactions are reported in our Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third-parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. These arrangements are accounted for on an accrual basis and, as we are acting as an agent in these arrangements, netted against commission revenues in our Consolidated Statements of Earnings. In addition, we earn asset-based fees associated with the management and supervision of assets, account services and administration related to customer accounts.
Principal Transactions. Financial instruments owned and Financial instruments sold, not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in Principal transactions revenues in our Consolidated Statements of Earnings, except for derivatives accounted for as hedges (see “Hedge Accounting” section herein and Note 5, Derivative Financial Instruments). Fees received on loans carried at fair value are also recorded in Principal transactions revenues.
Investment Banking. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed. Advisory fees from restructuring engagements are recognized over time using a time elapsed measure of progress. Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring advisory engagements, are expensed as incurred. All investment banking advisory expenses are recognized within their respective expense category on the Consolidated Statements of Earnings and any expenses reimbursed by clients are recognized as Investment banking revenues.
Underwriting and placement agent revenues are recognized at a point in time on trade-date. Costs associated with underwriting activities are deferred until the related revenue is recognized or the engagement is otherwise concluded and are recorded on a gross basis within Underwriting costs in the Consolidated Statements of Earnings.
Asset Management Fees and Revenues. Asset management fees and revenues consist of asset management fees, as well as revenues from third-parties with strategic relationships pursuant to arrangements, which entitle us to portions of our revenues and/or affiliated managers’ profits and perpetual rights to certain defined revenues for a given revenue share period. Revenue from third-parties with strategic relationships pursuant to arrangements is recognized at the end of the defined revenue or profit share period when the revenues have been realized and all contingencies have been resolved.
Management and administrative fees are generally recognized over the period that the related service is provided. Performance fee revenue is generally recognized only at the end of the performance period to the extent that the benchmark return has been met.
Interest Revenue and Expense. We recognize contractual interest on Financial instruments owned and Financial instruments sold, not yet purchased, on an accrual basis as a component of interest revenue and expense. Interest flows on derivative trading transactions and dividends are included as part of the fair valuation of these contracts and recognized in Principal transactions revenues in our Consolidated Statements of Earnings rather than as a component of interest revenue or expense. We account for our short- and long-term borrowings on an accrual basis, except for those for which we have elected the fair value option, with related interest recorded as Interest expense. Discounts/premiums arising on our long-term debt are accreted/amortized to Interest expense using the effective yield method over the remaining lives of the underlying debt obligations. We recognize interest revenue related to our securities borrowed and securities purchased under agreements to resell activities and interest expense related to our securities loaned and securities sold under agreements to repurchase activities on an accrual basis. In addition, we recognize interest income as earned on brokerage customer margin balances and interest expense as incurred on credit balances.
Cash Equivalents
Cash equivalents include highly liquid investments, including money market funds and certificates of deposit, not held for resale with original maturities of three months or less.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited with Clearing and Depository Organizations
In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies LLC as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. Certain other entities are also obligated by rules mandated by their primary regulators to segregate or set aside cash or equivalent securities to satisfy regulations, promulgated to protect customer assets. In addition, certain exchange and/or clearing organizations require cash and/or securities to be deposited by us to conduct day-to-day activities.
Financial Instruments and Fair Value
Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value, either as required by accounting pronouncements or through the fair value option election. These instruments primarily represent our trading activities and include both cash and derivative products. Gains and losses are recognized in Principal transactions revenues in our Consolidated Statements of Earnings. 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).
Fair Value Hierarchy
In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities at the reported date. Valuation adjustments and block discounts are not applied to Level 1 instruments.
Level 2: Pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable at the reported date. The nature 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 financial instruments that are fair valued by reference to other similar 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 our best estimate of fair value. We use 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 less observable or unobservable in the market, the determination of fair value requires 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Loans to and Investments in Related Parties
Loans to and investments in related parties include investments in private equity and other operating entities made in connection with our investment banking and capital markets activities in which we exercise significant influence over operating and capital decisions and loans issued in connection with such activities. Loans to and investments in related parties are accounted for using the equity method or at cost, as appropriate. Revenues on Loans to and investments in related parties are included in Other revenues in our Consolidated Statements of Earnings. See Note 9, Investments, and Note 21, Related Party Transactions, for additional information regarding certain of these investments.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions and accounted for as collateralized financing transactions. In connection with both trading and brokerage activities, we borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers and dealers for similar purposes. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities to another party, that party provides cash to us as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities loaned. We pay interest expense on the cash collateral received from the party borrowing the securities. The initial collateral advanced or received approximates or is greater than the fair value of the securities borrowed or loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.
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. We earn and incur interest over the term of the repo, which is reflected in Interest revenue and Interest expense in our Consolidated Statements of Earnings on an accrual basis. Repos are presented in our Consolidated Statements of Financial Condition on a net-basis by counterparty, where permitted by U.S. GAAP. We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should the fair value of the underlying 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 our exposure to credit risk associated with our derivative activities and securities financing transactions, we may enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements, master securities lending 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 our ISDA master netting agreements, we typically also execute credit support annexes, which provide for collateral, either in the form 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 party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims 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 laws 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 we have not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of our risk management processes as part of reducing counterparty credit risk and managing liquidity risk.
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We are also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open contracts or transactions.
Refer to Note 5, Derivative Financial Instruments, and Note 6, Collateralized Transactions, for further information.
Hedge Accounting
Hedge accounting is applied using interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior long-term debt. The interest rate swaps are included as derivative contracts in Financial instruments owned and Financial instruments sold, not yet purchased in our Consolidated Statements of Financial Position. We use regression analysis to perform ongoing prospective and retrospective assessments of the effectiveness of these hedging relationships. A hedging relationship is deemed effective if the change in fair value of the interest rate swap and the change in the fair value of the long-term debt due to changes in the benchmark interest rate offset within a range of 80% - 125%. The impact of valuation adjustments related to our own credit spreads and counterparty credit spreads are included in the assessment of effectiveness.
For qualifying fair value hedges of benchmark interest rates, the change in the fair value of the derivative and the change in fair value of the long-term debt provide offset of one another and, together with any resulting ineffectiveness, are recorded in Interest expense.
We seek to reduce the impact of fluctuations in foreign exchange rates on our net investments in certain non-U.S. operations through the use of foreign exchange contracts. The foreign exchange contracts are included as derivative contracts in Financial instruments owned and Financial instruments sold, not yet purchased in our Consolidated Statements of Financial Position. For foreign exchange contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (i.e., based on changes in forward rates). For qualifying net investment hedges, all gains or losses on the hedging instruments are included in Currency translation adjustments and other in our Consolidated Statements of Comprehensive Income.
Refer to Note 5, Derivative Financial Instruments, for further information.
Premises and Equipment
Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of the related leases or the estimated useful lives of the assets, whichever is shorter. Premises and equipment includes internally developed software. The carrying values of internally developed software ready for its intended use are depreciated over the remaining useful life.
At November 30, 2021 and 2020, furniture, fixtures and equipment amounted to $553.5 million and $527.9 million, respectively, and leasehold improvements amounted to $223.3 million and $259.7 million, respectively. Accumulated depreciation and amortization was $473.2 million and $427.2 million at November 30, 2021 and 2020, respectively.
Depreciation and amortization expense amounted to $73.8 million, $74.7 million and $67.0 million for the years ended November 30, 2021, 2020 and 2019, respectively.
Leases
We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases on December 1, 2019. These lease policy updates are applied using a modified retrospective approach. Reported financial information for the historical comparable period was not revised and continues to be reported under the accounting standards in effect during the historical periods.
For leases with an original term longer than one year, lease liabilities are initially recognized on the lease commencement date based on the present value of the future minimum lease payments over the lease term, including non-lease components such as fixed common area maintenance costs and other fixed costs for generally all leases. A corresponding right-of-use (“ROU”) asset is initially recognized equal to the lease liability adjusted for any lease prepayments, initial direct costs and lease incentives. The ROU assets are included in Premises and equipment and the lease liabilities are included in Lease liabilities in our Consolidated Statement of Financial Condition.
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The discount rates used in determining the present value of leases represent our collateralized borrowing rate considering each lease’s term and currency of payment. The lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain leases have renewal options that can be exercised at the discretion of the Company. Lease expense is generally recognized on a straight-line basis over the lease term and included in Occupancy and equipment rental expense in our Consolidated Statement of Earnings.
Refer to Note 13, Leases, for further information.
Goodwill and Intangible Assets
Goodwill. Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing on August 1st or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the goodwill impairment test is not required. If we conclude otherwise, we are required to perform the goodwill impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the fair value is less than the carrying value, then an impairment loss is recognized for the amount by which the carrying value of the reporting unit exceeds the reporting unit’s fair value.
The fair value of reporting units are based on widely accepted valuation techniques that we believe market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions. The methodologies we utilize in estimating the fair value of reporting units include market valuation methods that incorporate price-to-earnings and price-to-book multiples of comparable exchange-traded companies and multiples of merger and acquisitions of similar businesses. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment charges in future periods.
Intangible Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For intangible assets deemed to be impaired, an impairment loss is recognized for the amount by which the intangible asset's carrying value exceeds its fair value. At least annually, the remaining useful life is evaluated.
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, we have the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If we conclude otherwise, we are required to perform a quantitative impairment test.
Intangible assets are included in Other assets in our Consolidated Statements of Financial Condition. Our annual indefinite-lived intangible asset impairment testing date is August 1st. 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 losses is not permitted.
Refer to Note 10, Goodwill and Intangible Assets, for further information.
Income Taxes
Our results of operations are included in the consolidated federal and applicable state income tax returns filed by Jefferies. In states that neither accept nor require combined or unitary tax returns, certain subsidiaries file separate state income tax returns. We also are subject to income tax in various foreign jurisdictions in which we operate. We account for our provision for income taxes using a “separate return” method. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Pursuant to a tax sharing agreement entered into between us and Jefferies, payments are made between us and Jefferies to settle current tax assets and liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. 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 effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We provide deferred taxes on our temporary differences and on any carryforwards that we could claim on our hypothetical tax return. 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 on the basis of its projected separate return results.
We record uncertain tax positions using a two-step process: (i) we determine whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize 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, we have been named, from time to time, as a defendant in legal and regulatory proceedings. We are also involved, from time to time, in other exams, investigations and similar reviews (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions.
We recognize 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, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue 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. We believe that any other matters for which we have determined a loss to be probable and reasonably estimable are not material to our consolidated financial statements.
In many instances, it is not possible to determine whether any loss is probable or even possible or to estimate the amount of any loss or the size of any range of loss. We believe that, in the aggregate, the pending 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 our consolidated results of operations, cash flows or financial condition. In addition, we believe that any amount of potential loss or range of potential loss in excess of what has been provided in our consolidated financial statements that could be reasonably estimated is not material.
Share-based Compensation
Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. We account for forfeitures as they occur.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, if any, are included in Other comprehensive income. Gains or losses resulting from foreign currency transactions are included in Principal transactions revenues in our Consolidated Statements of Earnings.
Securitization Activities
We engage in securitization activities related to corporate loans, consumer loans, commercial mortgage loans and mortgage-backed and other asset-backed securities. Transfers of financial assets to secured funding vehicles are accounted for as sales when we have relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests, if any, based upon their respective fair values at the date of sale. We may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in Financial instruments owned within our Consolidated Statements of Financial Condition at fair value. Any changes in the fair value of such retained interests are recognized in Principal transactions revenues in our Consolidated Statements of Earnings.
When a transfer of assets does not meet the criteria of a sale, we account for the transfer as a secured borrowing and continue to recognize the assets of a secured borrowing in Financial instruments owned and recognize the associated financing in Other secured financings in our Consolidated Statements of Financial Condition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 3. Accounting Developments
Adopted Accounting Standards
Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The objective of the guidance is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. We adopted the guidance in the first quarter of fiscal 2021 and the adoption did not have a material impact on our consolidated financial statements.
Consolidation. In October 2018, the FASB issued ASU No. 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance requires indirect interests held through related parties under common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. We adopted the guidance in the first quarter of fiscal 2021 and the adoption did not have a material impact on our consolidated financial statements.
Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The guidance amends the definition of a hosting arrangement and requires that the customer in a hosting arrangement that is a service contract capitalize certain implementation costs as if the arrangement was an internal-use software project. We adopted the guidance in the first quarter of fiscal 2021 and elected to apply the guidance prospectively to implementation costs incurred after the adoption date. The adoption did not have an impact on our consolidated financial statements on the adoption date.
Defined Benefit Plans. In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. We adopted the guidance in the first quarter of fiscal 2021 and the adoption did not have a material impact on our consolidated financial statements.
Goodwill. In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies goodwill impairment testing. We adopted the guidance in the first quarter of fiscal 2021 and the adoption did not have a material impact on our consolidated financial statements.
Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on 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. We adopted the new credit loss guidance on December 1, 2020 and applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings upon adoption. At transition on December 1, 2020, the new accounting guidance's adoption resulted in a decrease in the provision for credit losses of $3.6 million with a corresponding increase in retained earnings of $2.7 million, net of tax. The decrease was attributable to applying a revised provisioning methodology based on historical loss experience for our investment banking fee receivables. The impact upon adoption for our secured financing receivables (reverse repurchases agreements, securities borrowing arrangements, and margin loans) 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. The updated accounting policy for estimating credit losses on financial assets measured at amortized cost as a result of this adoption is outlined below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Credit Losses on Financial Assets Measured at Amortized Cost
Financial assets measured at amortized cost are presented at the net amount expected to be collected and the measurement of credit losses and any expected increases or decreases in expected credit losses are recognized in earnings. The estimate of expected credit losses involves judgment and based on an assessment over the life of the financial instrument taking into consideration forecasts of expected future economic conditions. In evaluating secured financing receivables (reverse repurchases agreements, securities borrowing arrangements, and margin loans), the underlying collateral maintenance provisions are taken into consideration. The underlying contractual collateral maintenance for significantly all of our secured financing receivables requires that the counterparty continually adjust the collateralization amount, securing the credit exposure on these contracts. Collateralization levels for our secured financing receivables are initially established based upon the counterparty, the type of acceptable collateral that is monitored daily and adjusted to mitigate the potential of any credit losses. Credit losses are not recognized for secured financing receivables 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 of the collateral at the reporting date and the amortized cost basis of the financial assets. During the year ended November 30, 2021, we incurred bad debt expense of $39.0 million related to a specific default in our prime brokerage business.
Our receivables from brokers, dealers, and clearing organizations include deposits of cash with exchange clearing organizations to meet margin requirements, amounts due from clearing organizations for daily variation settlements, securities failed-to-deliver or receive, receivables and payables for fees and commissions, and receivables arising from unsettled securities or loans transactions. 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 such, generally, no allowance for credit losses is held against these receivables.
For all other financial assets measured at amortized cost, we estimate 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 4. Fair Value Disclosures
The following is a summary of our financial assets and liabilities that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value (“NAV”) of $1.01 billion and $956.0 million at November 30, 2021 and 2020, respectively, by level within the fair value hierarchy (in thousands):
November 30, 2021
Level 1 Level 2 Level 3 Counterparty and Cash Collateral Netting (1) Total
Assets:
Financial instruments owned:
Corporate equity securities
$ 2,567,690 $ 199,244 $ 76,082 $ - $ 2,843,016
Corporate debt securities
- 3,836,303 11,803 - 3,848,106
Collateralized debt obligations and collateralized loan obligations
- 579,518 31,944 - 611,462
U.S. government and federal agency securities
3,045,295 68,784 - - 3,114,079
Municipal securities
- 509,559 - - 509,559
Sovereign obligations
899,086 654,199 - - 1,553,285
Residential mortgage-backed securities
- 1,168,246 1,477 - 1,169,723
Commercial mortgage-backed securities
- 196,419 2,333 - 198,752
Other asset-backed securities
- 337,022 93,524 - 430,546
Loans and other receivables
- 3,363,050 74,585 - 3,437,635
Derivatives
4,429 3,858,848 10,248 (3,304,566) 568,959
Investments at fair value
- 4,236 34,557 - 38,793
Total financial instruments owned, excluding Investments at fair value based on NAV
$ 6,516,500 $ 14,775,428 $ 336,553 $ (3,304,566) $ 18,323,915
Securities received as collateral
$ 7,289 $ - $ - $ - $ 7,289
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities
$ 1,671,696 $ 19,654 $ 4,635 $ - $ 1,695,985
Corporate debt securities
- 2,111,777 482 - 2,112,259
U.S. government and federal agency securities
2,457,420 - - - 2,457,420
Sovereign obligations
935,801 593,040 - - 1,528,841
Residential mortgage-backed securities
- 719 - - 719
Commercial mortgage-backed securities
- - 210 - 210
Loans
- 2,476,087 15,770 - 2,491,857
Derivatives
1,815 5,024,682 78,017 (3,701,010) 1,403,504
Total financial instruments sold, not yet purchased
$ 5,066,732 $ 10,225,959 $ 99,114 $ (3,701,010) $ 11,690,795
Other secured financings $ - $ 76,883 $ 25,905 $ - $ 102,788
Obligation to return securities received as collateral
$ 7,289 $ - $ - $ - $ 7,289
Long-term debt
$ - $ 961,866 $ 881,732 $ - $ 1,843,598
(1)Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2020
Level 1 Level 2 Level 3 Counterparty and Cash Collateral Netting (1) Total
Assets:
Financial instruments owned:
Corporate equity securities
$ 2,331,440 $ 58,159 $ 75,797 $ - $ 2,465,396
Corporate debt securities
- 2,954,201 23,146 - 2,977,347
Collateralized debt obligations and collateralized loan obligations
- 64,155 10,513 - 74,668
U.S. government and federal agency securities
2,840,025 91,653 - - 2,931,678
Municipal securities
- 453,881 - - 453,881
Sovereign obligations
1,962,346 591,342 - - 2,553,688
Residential mortgage-backed securities
- 1,100,849 21,826 - 1,122,675
Commercial mortgage-backed securities
- 736,291 2,003 - 738,294
Other asset-backed securities
- 103,611 79,995 - 183,606
Loans and other receivables
- 2,610,746 77,042 - 2,687,788
Derivatives
1,523 2,000,752 21,678 (1,556,136) 467,817
Investments at fair value
- 6,122 67,108 - 73,230
Total financial instruments owned, excluding Investments at fair value based on NAV
$ 7,135,334 $ 10,771,762 $ 379,108 $ (1,556,136) $ 16,730,068
Securities received as collateral
$ 7,517 $ - $ - $ - $ 7,517
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities
$ 2,046,441 $ 9,046 $ 4,434 $ - $ 2,059,921
Corporate debt securities
- 1,237,631 141 - 1,237,772
U.S. government and federal agency securities
2,609,660 - - - 2,609,660
Sovereign obligations
1,050,771 624,740 - - 1,675,511
Residential mortgage-backed securities
- 477 - - 477
Commercial mortgage-backed securities
- - 35 - 35
Loans
- 1,776,446 16,635 - 1,793,081
Derivatives
551 2,391,478 47,695 (1,798,659) 641,065
Total financial instruments sold, not yet purchased
$ 5,707,423 $ 6,039,818 $ 68,940 $ (1,798,659) $ 10,017,522
Short-term borrowings
$ - $ 5,067 $ - $ - $ 5,067
Other secured financings $ - $ - $ 1,543 $ - $ 1,543
Obligation to return securities received as collateral
$ 7,517 $ - $ - $ - $ 7,517
Long-term debt
$ - $ 1,036,217 $ 676,028 $ - $ 1,712,245
(1)Represents counterparty and cash collateral netting across the levels of 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 our 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
•Non-Exchange-Traded Equity Securities: Non-exchange-traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed from recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange-traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization (“EBITDA”), price/book value), discounted cash flow analyses and transaction prices observed from subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).
•Equity Warrants: Non-exchange-traded equity warrants are measured primarily from observed prices on recently executed market transactions and broker quotations and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange-traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and can be measured using third-party valuation services or the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.
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 value 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 or Level 3 of the fair value hierarchy and are a limited portion of our investment grade corporate bonds.
•High Yield Corporate and Convertible Bonds: A significant portion of our 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. Where pricing data is less observable, valuations are categorized within Level 3 of the fair value hierarchy and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financing or recapitalization, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.
Collateralized Debt Obligations and Collateralized Loan Obligations
Collateralized debt obligations (“CDOs”) and collateralized loan obligations (“CLOs”) are measured based on prices observed from recently executed market transactions of the same or similar security or based on valuations received from third-party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs. Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria, including, but not limited to, collateral type, tranche type, rating, origination year, prepayment rates, default rates and loss severity.
U.S. Government and Federal Agency 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.
•U.S. Agency Debt Securities: Callable and non-callable U.S. agency debt securities are measured primarily based on quoted market prices obtained from external pricing services and are generally categorized within Level 1 or Level 2 of the fair value hierarchy.
Municipal Securities
Municipal securities are measured based on quoted prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size and are generally categorized within Level 2 of the fair value hierarchy.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Sovereign Obligations
Sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size. Sovereign government obligations, with consideration given to the country of issuance, are generally categorized within Level 1 or Level 2 of the fair value hierarchy.
Residential Mortgage-Backed Securities
•Agency Residential Mortgage-Backed Securities (“RMBS”): Agency RMBS include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and principal-only and interest-only (including inverse interest-only) securities. Agency RMBS are generally measured using recent transactions, pricing data from external pricing services or expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral and are categorized within Level 2 or Level 3 of the fair value hierarchy. We use prices observed from recently executed transactions to develop market-clearing spread and yield assumptions. Valuation inputs with regard to the underlying collateral incorporate factors such as weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer and weighted average loan age.
•Non-Agency RMBS: The fair value of non-agency RMBS is determined primarily using pricing data from external pricing services, where available, and discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields. In addition, broker quotes, where available, are also referenced to compare prices primarily on interest-only securities.
Commercial Mortgage-Backed Securities
•Agency Commercial Mortgage-Backed Securities (“CMBS”): Government National Mortgage Association (“Ginnie Mae”) project loan bonds are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation of various factors, including prepayment speeds, default rates and cash flow structures. Federal National Mortgage Association (“Fannie Mae”) Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed from recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. Ginnie Mae project loan bonds and Fannie Mae DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.
•Non-Agency CMBS: Non-agency CMBS are measured using pricing data obtained from external pricing services, prices observed from recently executed market transactions or based on expected cash flow models that incorporate underlying loan collateral characteristics and performance. Non-Agency CMBS are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability of the underlying inputs.
Other Asset-Backed Securities
Other asset-backed securities (“ABS”) include, but are not limited to, securities backed by auto loans, credit card receivables, student loans and other consumer loans and are categorized within Level 2 or Level 3 of the fair value hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services, broker quotes and prices observed from recently executed market transactions. In addition, recent transaction data from comparable deals is deployed to develop market clearing yields and cumulative loss assumptions. The cumulative loss assumptions are based on the analysis of the underlying collateral and comparisons to earlier deals from the same issuer to gauge the relative performance of the deal.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Loans and Other Receivables
•Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market consensus pricing service quotations. Where available, market price quotations from external pricing services are reviewed to ensure they are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, for example, derived using market prices for debt securities of the same creditor and estimates of future cash flows incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.
•Participation Certificates in Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans and data provider pricing. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.
•Project Loans and Participation Certificates in Ginnie Mae Project and Construction Loans: Valuations of participation certificates in Ginnie Mae project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans to account for the arbitrage that is realized at the time of securitization. The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.
•Consumer Loans and Funding Facilities: Consumer and small business whole loans and related funding facilities are valued based on observed market transactions and incorporating valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy.
•Escrow and Claim Receivables: Escrow and claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent observations in the same receivable. Escrow and claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers.
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 external vendors and pricing services. Broker quotes are validated directly through observable and tradeable quotes. Listed derivative contracts that use exchange close prices are generally categorized within Level 1 of the fair value hierarchy. All other 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 we believe 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 valuation 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 significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as Black-Scholes, with key inputs including the underlying security price, foreign exchange spot rate, commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves. Credit default swaps include both index and single-name credit default swaps. Where available, external data is used in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are generally observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from external pricing services.
Investments at Fair Value
Investments at fair value includes investments in hedge funds and private equity funds, which are measured at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy. Investments at fair value also include direct equity investments in private companies, which are measured at fair value using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy.
The following tables present information about our investments in entities that have the characteristics of an investment company (in thousands):
November 30, 2021
Fair Value (1) Unfunded Commitments
Equity Long/Short Hedge Funds (2)
$ 466,231 $ -
Equity Funds (3)
32,412 10,593
Commodity Fund (4)
24,401 -
Multi-asset Funds (5)
390,224 -
Other Funds (6)
99,054 36,090
Total
$ 1,012,322 $ 46,683
November 30, 2020
Fair Value (1) Unfunded Commitments
Equity Long/Short Hedge Funds (2)
$ 328,096 $ -
Equity Funds (3)
23,821 11,242
Commodity Fund (4)
17,747 -
Multi-asset Funds (5)
561,236 -
Other Funds (6)
25,084 5,000
Total
$ 955,984 $ 16,242
(1)Where fair value is calculated based on NAV, fair value has been derived from each of the funds’ capital statements.
(2)This category includes investments in hedge funds that invest, long and short, primarily in both public and private equity securities in domestic and international markets. At November 30, 2021 and 2020, approximately 74% and 94%, respectively, of the fair value of investments cannot be redeemed because these investments include restrictions that do not allow for redemption before December 31, 2021. At November 30, 2021, approximately 21% of the fair value of investments cannot be redeemed because these investments include restrictions that do not allow for redemption before November 30, 2023. The remaining investments are redeemable quarterly with 60 days prior written notice.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3)The investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries. These investments cannot be redeemed; instead, distributions are received through the liquidation of the underlying assets of the funds which are primarily expected to be liquidated in approximately one to seven years.
(4)This category includes investments in a hedge fund that invests, long and short, primarily in commodities. Investments in this category are redeemable quarterly with 60 days prior written notice.
(5)This category includes investments in hedge funds that invest, long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At November 30, 2021 and 2020, investments representing approximately 78% and 57%, respectively, of the fair value of investments in this category are redeemable monthly with 60 days prior written notice. At November 30, 2021, approximately 22% of the fair value of investments in this category are redeemable quarterly with 90 days prior written notice.
(6)This category includes investments in a fund that invests in short-term trade receivables and payables that are expected to generally be outstanding between 90 to 120 days and short-term credit instruments. This category also includes investments in a fund that invests in distressed and special situations long and short credit strategies across sectors and asset types. Investments in this category are redeemable quarterly with 90 days prior written notice.
Other Secured Financings
Other secured financings that are accounted for at fair value are classified within Level 2 or Level 3 of the fair value hierarchy. Fair value is based on estimates of future cash flows incorporating assumptions regarding recovery rates.
Securities Received as Collateral / Obligations to Return Securities Received as Collateral
In connection with securities-for-securities transactions in which we are the lender of securities and are permitted to sell or repledge the securities received as collateral, we report the fair value of the collateral received and the related obligation to return the collateral. Valuation is based on the price of the underlying security and is categorized within the corresponding leveling guidance above. These financial instruments are typically categorized withing Level 1 of the fair value hierarchy.
Short-term Borrowings / Long-term Debt
Short-term borrowings that are accounted for at fair value include equity-linked notes, which are generally categorized within Level 2 of the fair value hierarchy, as the fair value is based on the price of the underlying equity security. Long-term debt includes variable rate, fixed-to-floating rate, equity-linked notes, constant maturity swap, digital and Bermudan structured notes. These are valued using various valuation models that incorporate our own credit spread, market price quotations from external pricing sources referencing the appropriate interest rate curves, volatilities and other inputs as well as prices for transactions in a given note during the period. Long-term debt notes are generally categorized within Level 2 of the fair value hierarchy where market trades have been observed during the period or model pricing is available, otherwise the notes are categorized within Level 3.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Level 3 Rollforwards
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the year ended November 30, 2021 (in thousands):
Balance at November 30, 2020 Total gains/ losses (realized and unrealized) (1) Purchases Sales Settlements Issuances Net transfers into/
(out of)
Level 3 Balance at November 30, 2021 For instruments still held at November 30, 2021, changes in unrealized gains/(losses) included in:
Earnings (1) Other comprehensive income (1)
Assets:
Financial instruments owned:
Corporate equity securities
$ 75,797 $ 31,273 $ 8,778 $ (34,307) $ (49) $ - $ (5,410) $ 76,082 $ 27,124 $ -
Corporate debt securities
23,146 1,565 11,161 (7,978) (1,417) - (14,674) 11,803 1,724 -
CDOs and CLOs
10,513 7,264 32,618 (19,332) (4,757) - 5,638 31,944 (4,297) -
RMBS
21,826 (243) 708 (1,183) (354) - (19,277) 1,477 (131) -
CMBS
2,003 (1,694) 2,445 (393) (13) - (15) 2,333 (733) -
Other ABS
79,995 5,335 65,277 (21,727) (45,397) - 10,041 93,524 (14,471) -
Loans and other receivables
77,042 (1,065) 58,993 (61,560) (15,442) - 16,617 74,585 (4,924) -
Investments at fair value
67,108 (7,260) 155 (23,575) (1,871) - - 34,557 (9,151) -
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities
$ 4,434 $ (83) $ (21) $ 318 $ - $ - $ (13) $ 4,635 $ 83 $ -
Corporate debt securities
141 1,205 (815) - (49) - - 482 (139) -
CMBS
35 - (35) 210 - - - 210 - -
Loans
16,635 1,826 (8,549) 5,673 - - 185 15,770 (1,825) -
Net derivatives (2)
26,017 7,246 - - (1,491) 44,453 (8,456) 67,769 (7,371) -
Other secured financings
1,543 (649) - - - 25,011 - 25,905 649
Long-term debt
676,028 (22,132) - - - 169,975 57,861 881,732 85,260 (63,126)
(1)Realized and unrealized gains/losses are primarily reported in Principal transactions revenues in our Consolidated Statements of Earnings. Changes in instrument-specific credit risk related to structured notes within long-term debt are included in our Consolidated Statement of Comprehensive Income, net of tax.
(2)Net derivatives represent Financial instruments owned-Derivatives and Financial instruments sold, not yet purchased -Derivatives.
Analysis of Level 3 Assets and Liabilities for the Year Ended November 30, 2021
During the year ended November 30, 2021, transfers of assets of $38.3 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Loans and other receivables of $17.2 million, other ABS of $10.2 million, CDOs and CLOs of $7.6 million and corporate debt securities of $3.3 million due to reduced pricing transparency.
During the year ended November 30, 2021, transfers of assets of $45.4 million from Level 3 to Level 2 are primarily attributed to:
•RMBS of $19.3 million, corporate debt securities of $17.9 million and corporate equity securities of $5.4 million due to greater pricing transparency.
During the year ended November 30, 2021, transfers of liabilities of $74.3 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Structured notes within long-term debt of $57.9 million and net derivatives of $16.2 million due to reduced market and pricing transparency.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During the year ended November 30, 2021, transfers of liabilities of $24.7 million from Level 3 to Level 2 of the fair value hierarchy are primarily attributed to:
•Net derivatives of $24.7 million due to greater pricing transparency.
Net gains on Level 3 assets were $35.2 million and net gains on Level 3 liabilities were $12.6 million for the year ended November 30, 2021. Net gains on Level 3 assets were primarily due to increased market values in corporate equity securities and CDOs and CLOs, partially offset by decreases in investments at fair value. Net gains on Level 3 liabilities were primarily due to decreased market valuations of certain structured notes within long-term debt, partially offset by increased values of certain derivatives and loans.
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the year ended November 30, 2020 (in thousands):
Balance at November 30, 2019 Total gains/
losses
(realized
and
unrealized)
(1) Purchases Sales Settlements Issuances Net
transfers
into/
(out of)
Level 3 Balance at November 30, 2020 For instruments still held at November 30, 2020, changes in unrealized gains/(losses) included in:
Earnings (1) Other
comprehensive
income (1)
Assets:
Financial instruments owned:
Corporate equity securities
$ 58,301 $ (3,961) $ 31,778 $ (37,706) $ - $ - $ 27,385 $ 75,797 $ (652) $ -
Corporate debt securities
7,490 83 1,607 (391) (602) - 14,959 23,146 (270) -
CDOs and CLOs
20,081 (5,703) 10,913 (14,389) (2,071) - 1,682 10,513 (15,964) -
RMBS
17,740 (934) 7,887 (969) (1,053) - (845) 21,826 (599) -
CMBS
6,110 (827) 393 (1,856) (1,787) - (30) 2,003 (295) -
Other ABS
42,563 (3,848) 69,701 (1,638) (43,072) - 16,289 79,995 (5,945) -
Loans and other receivables
64,240 (20,487) 73,485 (36,929) (7,063) - 3,796 77,042 (18,747) -
Investments at fair value
75,738 (19,396) 28,132 (167) (17,199) - - 67,108 (21,244) -
Securities purchased under
agreements to resell 25,000 - - - (25,000) - - - - -
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities
$ 4,487 $ 456 $ (513) $ - $ - $ - $ 4 $ 4,434 $ (81) $ -
Corporate debt securities
340 (268) (325) 394 - - - 141 27 -
CMBS
35 - - 35 - - (35) 35 - -
Loans
9,463 (520) (6,061) 13,851 - - (98) 16,635 360 -
Net derivatives (2)
77,168 (40) (7,446) 19,376 (2,216) - (60,825) 26,017 (1,805) -
Other secured financings
- (2,475) - - - 4,018 - 1,543 2,475 -
Long-term debt
480,069 84,930 - - (57,088) 248,718 (80,601) 676,028 (51,567) (33,363)
(1)Realized and unrealized gains/losses are primarily reported in Principal transactions revenues in our Consolidated Statements of Earnings. Changes in instrument-specific credit risk related to structured notes within long-term debt are included in our Consolidated Statement of Comprehensive Income, net of tax.
(2)Net derivatives represent Financial instruments owned-Derivatives and Financial instruments sold, not yet purchased -Derivatives.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Analysis of Level 3 Assets and Liabilities for the Year Ended November 30, 2020
During the year ended November 30, 2020, transfers of assets of $88.0 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Corporate equity securities of $32.5 million, other ABS of $23.0 million, corporate debt securities of $18.0 million and loans and other receivables of $10.9 million due to reduced pricing transparency.
During the year ended November 30, 2020, transfers of assets of $24.7 million from Level 3 to Level 2 are primarily attributed to:
•Loans and other receivables of $7.1 million, other ABS of $6.8 million, corporate equity securities of $5.1 million and corporate debt securities of $3.0 million due to greater pricing transparency supporting classification into Level 2.
During the year ended November 30, 2020, transfers of liabilities of $1.9 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Loans of $1.8 million due to reduced pricing transparency.
During the year ended November 30, 2020, transfers of liabilities of $143.4 million from Level 3 to Level 2 of the fair value hierarchy are primarily attributed to:
•Structured notes within long-term debt of $80.6 million and net derivatives of $60.8 million due to greater market and pricing transparency.
Net losses on Level 3 assets were $55.1 million and net losses on Level 3 liabilities were $82.1 million for the year ended November 30, 2020. Net losses on Level 3 assets were primarily due to decreased market values in loans and other receivables, investments at fair value and CDOs and CLOs. Net losses on Level 3 liabilities were primarily due to increased market valuations of certain structured notes within long-term debt, partially offset by decreased values of other secured financings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the year ended November 30, 2019 (in thousands):
Balance at November 30, 2018 Total gains/
losses
(realized
and
unrealized)
(1) Purchases Sales Settlements Issuances Net
transfers
into/
(out of)
Level 3 Balance at November 30, 2019 For instruments still held at November 30, 2019, changes in unrealized gains/(losses) included in:
Earnings (1) Other
comprehensive
income (1)
Assets:
Financial instruments owned:
Corporate equity
securities $ 51,040 $ (10,380) $ 69,065 $ (28,159) $ (18,208) $ - $ (5,057) $ 58,301 $ (12,821) $ -
Corporate debt
securities 9,484 (4,860) 8,900 (13,854) (379) - 8,199 7,490 (6,176) -
CDOs and CLOs 25,815 (2,342) 49,658 (38,147) (9,083) - (5,820) 20,081 (974) -
RMBS 19,603 (1,669) 1,954 (2,472) (152) - 476 17,740 (530) -
CMBS 10,886 (2,888) 206 (2,346) (5,317) - 5,569 6,110 (2,366) -
Other ABS 53,175 433 104,097 (73,335) (51,374) - 9,567 42,563 (98)
Loans and other
receivables 46,985 (5,505) 57,403 (48,350) (5,068) - 18,775 64,240 (3,319) -
Investments, at fair
value 113,831 113 240 (38,446) - - - 75,738 2,964 -
Securities purchased under
agreements to resell - - - - - 25,000 - 25,000 - -
Liabilities:
Financial instruments sold,
not yet purchased:
Corporate equity
securities $ - $ (2,649) $ (4,322) $ 11,458 $ - $ - $ - $ 4,487 $ 1,928 $ -
Corporate debt
securities 522 (381) (457) - (524) - 1,180 340 383 -
CMBS - 35 - - - - - 35 (35) -
Loans 6,376 (1,382) (2,573) 6,494 - - 548 9,463 1,382 -
Net derivatives (2) 21,614 (21,452) (4,323) 36,144 2,227 - 42,958 77,168 12,098 -
Long-term debt 200,745 (18,662) - - (11,250) 348,275 (39,039) 480,069 29,656 (10,993)
(1)Realized and unrealized gains/losses are primarily reported in Principal transactions revenues in our Consolidated Statements of Earnings. Changes in instrument-specific credit risk related to structured notes within long-term debt are included in our Consolidated Statement of Comprehensive Income, net of tax.
(2)Net derivatives represent Financial instruments owned-Derivatives and Financial instruments sold, not yet purchased -Derivatives.
Analysis of Level 3 Assets and Liabilities for the Year Ended November 30, 2019
During the year ended November 30, 2019, transfers of assets of $58.4 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•Loans and other receivables of $27.4 million, other ABS of $12.1 million, corporate debt securities of $8.9 million, CMBS of $5.6 million and CDOs and CLOs of $3.0 million due to reduced price transparency.
During the year ended November 30, 2019, transfers of assets of $26.7 million from Level 3 to Level 2 are primarily attributed to:
•CDOs and CLOs of $8.8 million, loans and other receivables of $8.6 million, corporate equity securities of $6.0 million and other ABS of $2.6 million due to greater pricing transparency supporting classification into Level 2.
During the year ended November 30, 2019, there were transfers of net derivatives of $57.2 million from Level 2 to Level 3 due to reduced observability of inputs and market data. Transfers of net derivatives from Level 3 to Level 2 were $14.3 million for the year ended November 30, 2019 due to greater observability of inputs and market data.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During the year ended November 30, 2019, there were transfers of structured notes within long-term debt of $22.6 million from Level 2 to Level 3 due to reduced market transparency. Transfers of structured notes within long-term debt from Level 3 to Level 2 were $61.7 million for the year ended November 30, 2019 due to greater market transparency.
Net losses on Level 3 assets were $27.1 million and net gains on Level 3 liabilities were $44.5 million for the year ended November 30, 2019. Net losses on Level 3 assets were primarily due to decreased market values in corporate equity securities, loans and other receivables, corporate debt securities, CMBS and CDOs and CLOs. Net gains on Level 3 liabilities were primarily due to decreased market values across certain derivatives and valuations of certain structured notes within long-term debt.
Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair Value Measurements at November 30, 2021 and 2020
The tables below present information on the valuation techniques, significant unobservable inputs and their ranges for our financial assets and liabilities, subject to threshold levels related to the market value of the positions held, measured at fair value on a recurring basis with a significant Level 3 balance. The range of unobservable inputs could differ significantly across different firms given the range of products across different firms in the financial services sector. The inputs are not representative of the inputs that could have been used in the valuation of any one financial instrument (i.e., the input used for valuing one financial instrument within a particular class of financial instruments may not be appropriate for valuing other financial instruments within that given class). Additionally, the ranges of inputs presented below should not be construed to represent uncertainty regarding the fair values of our financial instruments; rather, the range of inputs is reflective of the differences in the underlying characteristics of the financial instruments in each category.
For certain categories, we have provided a weighted average of the inputs allocated based on the fair values of the financial instruments comprising the category. We do not believe that the range or weighted average of the inputs is indicative of the reasonableness of uncertainty of our 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 our estimates of unobservable inputs for a particular financial instrument as the population of financial instruments comprising the category will vary from period to period based on purchases and sales of financial instruments during the period as well as transfers into and out of Level 3 each period.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2021
Financial Instruments Owned Fair Value
(in thousands) Valuation Technique Significant Unobservable Input(s) Input / Range Weighted
Average
Corporate equity securities $ 75,694
Non-exchange-traded securities Market approach Price $1 - $366 $208
Corporate debt securities $ 11,803 Market approach Price $13 - $100 $86
CDOs and CLOs $ 31,944 Discounted cash flows Constant prepayment rate 20% -
Constant default rate 2% -
Loss severity 25 % - 30% 26%
Discount rate/yield 8 % - 19% 16%
Market approach Price $86 - $103 $93
CMBS $ 2,333 Scenario analysis Estimated recovery percentage 81% -
Other ABS $ 86,099 Discounted cash flows Constant prepayment rate 0 % - 35% 31%
Constant default rate 2 % - 4% 4%
Loss severity 60 % - 85% 55%
Discount rate/yield 3 % - 16% 10%
Cumulative loss rate 7 % - 20% 14%
Duration (years) 0.7 - 1.4 1.1
Market approach Price $37 - $100 $94
Loans and other receivables $ 73,361 Market approach Price $31 - $101 $54
Scenario analysis Estimated recovery percentage 9 % - 100% 42%
Derivatives $ 6,501
Equity options Volatility benchmarking Volatility 46% -
Interest rate swaps Market approach Basis points upfront 0.1 - 8.7 3.3
Total return swaps Price $100 -
Investments at fair value $ 34,557
Private equity securities Market approach Price $1 - $152 $48
Scenario analysis Estimated recovery percentage 7% -
Financial Instruments Sold, Not Yet Purchased:
Corporate equity securities $ 4,635
Non-exchange-traded securities Market approach Price $1 -
Loans $ 15,770 Market approach Price $31 - $100 $43
Scenario analysis Estimated recovery percentage 50% -
Derivatives $ 76,533
Equity options Volatility benchmarking Volatility 26 % - 77% 40%
Interest rate swaps Market approach Basis points upfront 0.1 - 8.7 3.1
Total return swaps Price $100 -
Other secured financings $ 25,905 Scenario analysis Estimated recovery percentage 13 % - 98% 92%
Long-term debt
Structured notes $ 881,732 Market approach Price $76 - $115 $94
Price €81 - €113 €103
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2020
Financial Instruments Owned: Fair Value
(in thousands) Valuation Technique Significant Unobservable Input(s) Input / Range Weighted
Average
Corporate equity securities $ 75,409
Non-exchange-traded securities Market approach Price $1 - $213 $86
EBITDA multiple 4.0 - 8.0 5.7
Corporate debt securities $ 23,146 Market approach Price $69 -
Scenario analysis Estimated recovery percentage 20 % - 44% 30%
CDOs and CLOs $ 10,513 Discounted cash flows Constant prepayment rate 20% -
Constant default rate 2% -
Loss severity 25 % - 30% 26%
Discount rate/yield 14 % - 28% 20%
RMBS $ 21,826 Discounted cash flows Cumulative loss rate 2% - 3% 3%
Loss severity 35% - 50% 36%
Duration (years) 2.0 - 12.9 5.1
Discount rate/yield 3% - 12% 4%
Other ABS $ 67,816 Discounted cash flows Cumulative loss rate 1 % - 28% 11%
Loss severity 50 % - 85% 54%
Duration (years) 0.2 - 2.1 1.3
Discount rate/yield 1 % - 16% 9%
Market approach Price $100 -
Loans and other receivables $ 76,046 Market approach Price $31 - $100 $84
Scenario analysis Estimated recovery percentage 19 % - 100% 52%
Derivatives $ 19,951
Equity options Volatility benchmarking Volatility 47% -
Interest rate swaps Market approach Basis points upfront 1.2 - 8.0 4.8
Investments at fair value $ 67,108
Private equity securities Market approach Price $1 - $169 $34
Scenario analysis Estimated recovery percentage 17% -
Financial Instruments Sold, Not Yet Purchased:
Corporate equity securities
Non-exchange-traded securities $ 4,434 Market approach Price $1 -
Corporate debt securities $ 141 Scenario analysis Estimated recovery percentage 20% -
Loans $ 16,635 Market approach Price $31 - $99 $55
Derivatives $ 46,971
Equity options Volatility benchmarking Volatility 33 % - 50% 42%
Interest rate swaps Market approach Basis points upfront 1.2 - 8.0 5.4
Other secured financings $ 1,543 Scenario analysis Estimated recovery percentage 19 % - 55% 45%
Long-term debt
Structured notes $ 676,028 Market approach Price $100 -
Price €76 - €113 €99
The fair values of certain Level 3 assets and liabilities that were determined based on third-party pricing information, unadjusted past transaction prices or a percentage of the reported enterprise fair value are excluded from the above tables. At November 30, 2021 and 2020, asset exclusions consisted of $14.3 million and $17.3 million, respectively, primarily comprised of other ABS, RMBS, CMBS, certain derivatives, loans and other receivables and corporate equity securities. At November 30, 2021 and 2020, liability exclusions consisted of $2.2 million and $0.8 million, respectively, primarily comprised of certain derivatives, corporate debt securities and CMBS.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Uncertainty of Fair Value Measurement from Use of Significant Unobservable Inputs
For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the uncertainty of the fair value measurement due to the use of significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below:
•Non-exchange-traded securities, corporate debt securities, CDOs and CLOs, loans and other receivables, other ABS, private equity securities, certain derivatives and structured notes using a market approach valuation technique. A significant increase (decrease) in the price of the private equity securities, non-exchange-traded securities, corporate debt securities, CDOs and CLOs, other ABS, loans and other receivables, total return swaps or structured notes would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the EBITDA multiple related to non-exchange-traded securities would result in a significantly higher (lower) fair value measurement. Depending on whether we are 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.
•Loans and other receivables, corporate debt securities, CMBS, private equity securities and other secured financings using scenario analysis. A significant increase (decrease) in the possible recovery rates of the cash flow outcomes underlying the financial instrument would result in a significantly higher (lower) fair value measurement for the financial instrument.
•CDOs and CLOs, RMBS and other ABS using a discounted cash flow valuation technique. A significant increase (decrease) in isolation in the constant default rate, loss severity or cumulative loss rate would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant prepayment rate and duration would have differing impacts depending on the capital structure and type of security. A significant increase (decrease) in the discount rate/security yield would result in a significantly lower (higher) fair value measurement.
•Derivative equity options using volatility benchmarking. A significant increase (decrease) in volatility would result in a significantly higher (lower) fair value measurement.
Fair Value Option Election
We have elected the fair value option for all loans and loan commitments made by our investment banking and capital markets businesses. These loans and loan commitments include loans entered into by our investment banking division in connection with client bridge financing and loan syndications, loans purchased by our leveraged credit trading desk as part of its bank loan trading activities and mortgage and consumer loan commitments, purchases and fundings in connection with mortgage-backed and other asset-backed securitization activities. Loans and loan commitments originated or purchased by our leveraged credit and mortgage-backed businesses are managed on a fair value basis. Loans are included in Financial instruments owned and loan commitments are included in Financial instruments owned and Financial instruments sold, not yet purchased in our Consolidated Statements of Financial Condition. The fair value option election is not applied to loans made to affiliate entities as such loans are entered into as part of ongoing, strategic business ventures. Loans to affiliate entities are included in Loans to and investments in related parties in our Consolidated Statements of Financial Condition and are accounted for on an amortized cost basis. We have also elected the fair value option for certain of our structured notes which are managed by our investment banking and capital markets businesses and are included in Long-term debt and Short-term borrowings in our Consolidated Statements of Financial Condition. We have elected the fair value option for certain financial instruments held by subsidiaries as the investments are risk managed by us on a fair value basis. The fair value option has been elected for certain other secured financings that arise in connection with our securitization activities and other structured financings. Other secured financings, Receivables - Brokers, dealers and clearing organizations, Receivables - Customers, Receivables - Fees, interest and other, Payables - Brokers, dealers and clearing organizations and Payables - Customers, are accounted for at cost plus accrued interest rather than at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of gains (losses) due to changes in instrument specific credit risk on loans, other receivables and debt instruments and gains (losses) due to other changes in fair value on Short-term borrowings, Other secured financings and Long-term debt measured at fair value under the fair value option (in thousands):
Year Ended November 30,
2021 2020 2019
Financial instruments owned:
Loans and other receivables
$ 11,682 $ (25,623) $ (2,072)
Financial instruments sold, not yet purchased:
Loans
$ 1,077 $ - $ 656
Loan commitments
- 464 (1,089)
Short-term borrowings:
Changes in instrument specific credit risk (1)
$ - $ - $ 114
Other changes in fair value (2)
- (48) (863)
Other secured financings:
Other changes in fair value (2)
$ 650 $ 2,475 $ -
Long-term debt:
Changes in instrument specific credit risk (1)
$ (113,027) $ (70,201) $ (20,332)
Other changes in fair value (2)
108,739 (84,116) (25,144)
(1)Changes in instrument specific credit risk related to structured notes are included in our Consolidated Statements of Comprehensive Income, net of tax.
(2)Other changes in fair value are included in Principal transactions revenues in our Consolidated Statements of Earnings.
The following is a summary of the amounts by which contractual principal is greater than (less than) fair value for loans and other receivables, short-term borrowings, Other secured financings and Long-term debt measured at fair value under the fair value option (in thousands):
November 30,
2021 2020
Financial instruments owned:
Loans and other receivables (1)
$ 5,600,648 $ 1,662,647
Loans and other receivables on nonaccrual status and/or 90 days or
greater past due (1) (2)
64,203 287,889
Long-term debt and short-term borrowings
(38,391) (42,819)
Other secured financings 3,432 2,782
(1)Interest income is recognized separately from other changes in fair value and is included in Interest revenues in our Consolidated Statements of Earnings.
(2)Amounts include loans and other receivables 90 days or greater past due by which contractual principal exceeds fair value of $19.7 million and $30.0 million at November 30, 2021 and 2020, respectively.
The aggregate fair value of loans and other receivables on nonaccrual status and/or 90 days or greater past due was $56.9 million and $69.7 million at November 30, 2021 and 2020, respectively, which includes loans and other receivables 90 days or greater past due of $23.5 million and $3.8 million at November 30, 2021 and 2020, respectively.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain intangible assets were measured at fair value on a non-recurring basis and are not included in the tables above. The following table presents those assets measured at fair value on a non-recurring basis for which we recognized a non-recurring fair value adjustment during the years ended November 30, 2021, 2020 and 2019 (in thousands):
Carrying Value at November 30, 2021 Level 2 Impairment Losses for the Year Ended November 30, 2021
Exchange ownership interests and
registrations (1) $ 1,935 $ 1,935 $ 66
Goodwill (2) - - 400
Carrying Value at November 30, 2020 Level 2 Impairment Losses for the Year Ended November 30, 2020
Exchange ownership interests and
registrations (1) $ 1,974 $ 1,974 $ 468
Goodwill (2) - - 3,000
Intangible assets (2) - - 300
Carrying Value at November 30, 2019 Level 2 Impairment Losses for the Year Ended November 30, 2019
Exchange ownership interests and registrations (1)
$ 2,443 $ 2,443 $ 291
(1)These impairment losses, which represent ownership interests in market exchanges on which trading business is conducted, and registrations, were recognized in Other expenses in our Consolidated Statements of Earnings and the assets were in the Investment Banking and Capital Markets reportable business segment. The fair value is based on observed quoted sales prices for each individual membership. (See Note 10, Goodwill and Intangible Assets.)
(2)These impairment losses for Goodwill and Intangible assets were recognized in Other expenses in our Consolidated Statements of Earnings and the assets were in the Asset Management reportable business segment. (See Note 10, Goodwill and Intangible Assets.)
Financial Instruments Not Measured at Fair Value
Certain of our 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 equivalents and Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations and would generally be presented within Level 1 of the fair value hierarchy. Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations includes U.S. Treasury securities with a fair value of $0.0 million and $34.2 million at November 30, 2021 and 2020, respectively.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 5. Derivative Financial Instruments
Derivative Financial Instruments
Our derivative activities are recorded at fair value in our Consolidated Statements 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. We enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities. In addition, we apply hedge accounting to: (1) interest rate swaps that have been designated as fair value hedges of the changes in fair value due to the benchmark interest rate for certain fixed rate senior long-term debt, and (2) forward foreign exchange contracts designated as hedges to offset the change in the value of certain net investments in foreign operations.
See Note 4, Fair Value Disclosures, and Note 18, Commitments, Contingencies and Guarantees, for additional disclosures about derivative financial instruments.
Derivatives are subject to various risks similar 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 our other trading-related activities. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firm wide risk management policies.
In connection with our derivative activities, we may enter into ISDA master netting agreements or similar agreements with counterparties. See Note 2, Summary of Significant Accounting Policies, for additional information regarding the offsetting of derivative contracts.
The following tables present the fair value and related number of derivative contracts at November 30, 2021 and 2020 categorized by type of derivative contract and the platform on which these derivatives are transacted. The fair value of assets/liabilities represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged. The following tables also provide information regarding 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in our Consolidated Statements 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 our financial position (in thousands, except contract amounts).
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2021 (1)
Assets Liabilities
Fair Value Number of Contracts (2) Fair Value Number of Contracts (2)
Derivatives designated as accounting hedges:
Interest rate contracts:
Cleared OTC
$ 35,726 2 $ 32,200 1
Foreign exchange contracts:
Bilateral OTC
30,462 4 - -
Total derivatives designated as accounting hedges 66,188 32,200
Derivatives not designated as accounting hedges:
Interest rate contracts:
Exchange-traded
1,262 23,888 756 39,195
Cleared OTC
373,355 4,505 367,134 4,467
Bilateral OTC
322,353 1,037 283,481 967
Foreign exchange contracts:
Bilateral OTC
1,428,712 17,792 1,437,116 17,576
Equity contracts:
Exchange-traded
1,206,606 1,582,713 1,036,019 1,450,624
Bilateral OTC
377,132 2,888 1,824,418 2,682
Commodity contracts:
Exchange-traded
448 1,394 223 1,457
Bilateral OTC - 1 - -
Credit contracts:
Cleared OTC
84,180 132 108,999 128
Bilateral OTC
13,289 14 14,168 17
Total derivatives not designated as accounting hedges 3,807,337 5,072,314
Total gross derivative assets/ liabilities:
Exchange-traded
1,208,316 1,036,998
Cleared OTC
493,261 508,333
Bilateral OTC
2,171,948 3,559,183
Amounts offset in our Consolidated Statements of Financial Condition (3):
Exchange-traded
(1,008,091) (1,008,091)
Cleared OTC
(483,339) (508,333)
Bilateral OTC
(1,813,136) (2,184,586)
Net amounts per Consolidated Statements of Financial Condition (4)
$ 568,959 $ 1,403,504
(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 our Consolidated Statements of Financial Condition.
(3)Amounts netted include both netting by counterparty and for cash collateral paid or received.
(4)We have 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 our Consolidated Statements of Financial Condition.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2020 (1)
Assets Liabilities
Fair Value Number of Contracts (2) Fair Value Number of Contracts (2)
Derivatives designated as accounting hedges:
Interest rate contracts:
Cleared OTC
$ 67,381 1 $ 6,891 1
Foreign exchange contracts:
Bilateral OTC
- - 3,306 11
Total derivatives designated as accounting hedges
67,381 10,197
Derivatives not designated as accounting hedges:
Interest rate contracts:
Exchange-traded
2,442 52,620 439 42,611
Cleared OTC
17,379 3,785 114,524 4,307
Bilateral OTC
626,210 1,493 317,534 466
Foreign exchange contracts:
Exchange-traded
- - - 180
Bilateral OTC
297,165 15,005 277,628 15,049
Equity contracts:
Exchange-traded
558,304 1,147,486 564,951 971,938
Bilateral OTC
429,304 2,374 1,125,944 2,421
Commodity contracts:
Exchange-traded
64 3,207 - 2,654
Credit contracts:
Cleared OTC
24,696 39 26,298 31
Bilateral OTC
1,008 11 2,209 11
Total derivatives not designated as accounting hedges
1,956,572 2,429,527
Total gross derivative assets/liabilities:
Exchange-traded 560,810 565,390
Cleared OTC
109,456 147,713
Bilateral OTC
1,353,687 1,726,621
Amounts offset in our Consolidated Statements of Financial Condition (3):
Exchange-traded
(546,989) (546,989)
Cleared OTC
(109,228) (111,654)
Bilateral OTC
(899,919) (1,140,016)
Net amounts per Consolidated Statements of Financial Condition (4)
$ 467,817 $ 641,065
(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 our Consolidated Statements of Financial Condition.
(3)Amounts netted include both netting by counterparty and for cash collateral paid or received.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4)We have 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 our Consolidated Statements of Financial Condition.
The following table provides information related to gains (losses) recognized in Interest expense in our Consolidated Statements of Earnings related to fair value hedges (in thousands):
Year Ended November 30,
Gains (Losses) 2021 2020 2019
Interest rate swaps $ (41,845) $ 41,524 $ 56,385
Long-term debt 58,507 (36,668) (58,931)
Total $ 16,662 $ 4,856 $ (2,546)
The following table provides information related to gains (losses) on our net investment hedges recognized in Currency translation and other adjustments, a component of Other comprehensive income (loss), in our Consolidated Statements of Comprehensive Income (in thousands):
Year Ended November 30,
Gains (Losses) 2021 2020 2019
Foreign exchange contracts $ 19,008 $ (3,306) $ -
Total $ 19,008 $ (3,306) $ -
The following table presents unrealized and realized gains (losses) on derivative contracts recognized in Principal transactions revenues in our Consolidated Statements of Earnings, which are utilized in connection with our client activities and our economic risk management activities (in thousands):
Year Ended November 30,
Gains (Losses)
2021 2020 2019
Interest rate contracts
$ (48,510) $ (52,331) $ (188,605)
Foreign exchange contracts
(9,951) 3,851 (4,016)
Equity contracts
(427,593) 47,631 (108,961)
Commodity contracts
4,741 (189) (681)
Credit contracts
653 15,218 9,147
Total
$ (480,660) $ 14,180 $ (293,116)
The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising our business activities and are before consideration of economic hedging transactions, which generally offset the net gains (losses) included above. We substantially mitigate our exposure to market risk on our cash instruments through derivative contracts, which generally provide offsetting revenues, and we manage the risk associated with these contracts in the context of our overall risk management framework.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities at November 30, 2021 (in thousands):
OTC Derivative Assets (1) (2) (3)
0 - 12 Months 1 - 5 Years Greater Than
5 Years Cross-Maturity
Netting (4) Total
Equity options and forwards $ 26,603 $ 3,524 $ - $ (8,181) $ 21,946
Credit default swaps
1 1,226 497 - 1,724
Total return swaps
124,348 24,144 - (1,211) 147,281
Foreign currency forwards, swaps and options
186,348 4,933 - (1,959) 189,322
Fixed income forwards
31,527 - - - 31,527
Interest rate swaps, options and forwards
25,630 86,577 114,519 (23,162) 203,564
Total
$ 394,457 $ 120,404 $ 115,016 $ (34,513) 595,364
Cross-product counterparty netting (60,489)
Total OTC derivative assets included in Financial instruments owned
$ 534,875
(1)At November 30, 2021, we held net exchange-traded derivative assets and other credit agreements with a fair value of $210.4 million, 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 our Consolidated Statements of Financial Condition. At November 30, 2021, cash collateral received was $176.3 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.
OTC Derivative Liabilities (1) (2) (3)
0 - 12 Months 1 - 5 Years Greater Than 5 Years Cross-Maturity Netting (4) Total
Equity options and forwards $ 15,539 $ 642,337 $ 41,996 $ (8,181) $ 691,691
Credit default swaps
6 13,690 11,632 - 25,328
Total return swaps
149,353 777,266 2,042 (1,211) 927,450
Foreign currency forwards, swaps and options
159,206 10,028 - (1,959) 167,275
Fixed income forwards
30,368 - - - 30,368
Interest rate swaps, options and forwards
11,364 42,713 132,289 (23,162) 163,204
Total
$ 365,836 $ 1,486,034 $ 187,959 $ (34,513) 2,005,316
Cross-product counterparty netting (60,489)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased
$ 1,944,827
(1)At November 30, 2021, we held net exchange-traded derivative liabilities and other credit agreements with a fair value of $31.5 million, which are not included in this table.
(2)OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged in our Consolidated Statements of Financial Condition. At November 30, 2021, cash collateral pledged was $572.8 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents the counterparty credit quality with respect to the fair value of our OTC derivative assets at November 30, 2021 (in thousands):
Counterparty credit quality (1):
A- or higher
$ 173,691
BBB- to BBB+
71,870
BB+ or lower
140,008
Unrated
149,306
Total
$ 534,875
(1)We utilize internal credit ratings determined by our Risk Management department. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.
Credit Related Derivative Contracts
The external credit ratings of the underlyings or referenced assets for our written credit related derivative contracts (in millions):
November 30, 2021
External Credit Rating
Investment Grade Non-investment Grade Unrated Total Notional
Credit protection sold:
Index credit default swaps
$ 2,612.0 $ 1,298.8 $ - $ 3,910.8
Single name credit default swaps
- 17.6 0.2 17.8
November 30, 2020
External Credit Rating
Investment Grade Non-investment Grade Unrated Total Notional
Credit protection sold:
Index credit default swaps
$ 62.0 $ 262.8 $ - $ 324.8
Single name credit default swaps
- 6.2 0.2 6.4
Contingent Features
Certain of our derivative instruments contain provisions that require our debt to maintain an investment grade credit rating from each of the major credit rating agencies. If our debt were to fall 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 our derivative instruments in liability positions. The following table presents the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position, the collateral amounts we have posted or received in the normal course of business and the potential collateral we would have been required to return and/or post additionally to our counterparties if the credit-risk-related contingent features underlying these agreements were triggered (in millions):
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30,
2021 2020
Derivative instrument liabilities with credit-risk-related contingent features
$ 821.5 $ 284.6
Collateral posted (160.5) (129.8)
Collateral received 369.3 141.4
Return of and additional collateral required in the event of a credit rating downgrade below investment grade (1)
1,030.4 296.2
(1)These potential outflows include initial margin received from counterparties at the execution of the derivative contract. The initial margin will be returned if counterparties elect to terminate the contract after a downgrade.
Note 6. Collateralized Transactions
Our repurchase agreements and securities borrowing and lending arrangements are generally recorded at cost in our Consolidated Statements of Financial Condition, which is a reasonable approximation of their fair values due to their short-term nature. We enter into secured borrowing and lending arrangements to obtain collateral necessary to effect settlement, finance inventory positions, meet customer needs or re-lend as part of our dealer operations. We monitor the fair value of the securities loaned and borrowed on a daily basis as compared with the related payable or receivable, and request additional collateral or return excess collateral, as appropriate. We pledge financial instruments as collateral under repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. Our agreements with counterparties generally contain contractual provisions allowing the counterparty the right to sell or repledge the collateral. Pledged securities owned that can be sold or repledged by the counterparty are included in Financial instruments owned, at fair value and noted parenthetically as Securities pledged in our Consolidated Statements of Financial Condition.
In instances where we receive securities as collateral in connection with securities-for-securities transactions in which we are the lender of securities and are permitted to sell or repledge the securities received as collateral, we report the fair value of the collateral received and the related obligation to return the collateral in our Consolidated Statements of Financial Condition.
The following tables set forth the carrying value of securities lending arrangements, repurchase agreements and obligation to return securities received as collateral, at fair value, by class of collateral pledged (in thousands):
November 30, 2021
Securities Lending Arrangements Repurchase Agreements Obligation to Return Securities Received As Collateral, at Fair Value Total
Collateral Pledged:
Corporate equity securities
$ 1,160,916 $ 150,602 $ 7,289 $ 1,318,807
Corporate debt securities
321,356 2,684,458 - 3,005,814
Mortgage-backed and asset-backed securities
- 1,209,442 - 1,209,442
U.S. government and federal agency securities
6,348 8,426,536 - 8,432,884
Municipal securities
- 413,073 - 413,073
Sovereign obligations
37,101 2,422,901 - 2,460,002
Loans and other receivables
- 712,388 - 712,388
Total
$ 1,525,721 $ 16,019,400 $ 7,289 $ 17,552,410
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2020
Securities Lending Arrangements Repurchase Agreements Obligation to Return Securities Received As Collateral, at Fair Value Total
Collateral Pledged:
Corporate equity securities
$ 1,371,978 $ 157,912 $ 7,517 $ 1,537,407
Corporate debt securities
369,218 1,869,844 - 2,239,062
Mortgage-backed and asset-backed securities
- 1,547,140 - 1,547,140
U.S. government and federal agency securities
14,789 7,149,992 - 7,164,781
Municipal securities
- 278,470 - 278,470
Sovereign obligations
54,763 2,763,032 - 2,817,795
Loans and other receivables
- 1,392,883 - 1,392,883
Total
$ 1,810,748 $ 15,159,273 $ 7,517 $ 16,977,538
The following tables set forth the carrying value of securities lending arrangements, repurchase agreements and obligation to return securities received as collateral, at fair value, by remaining contractual maturity (in thousands):
November 30, 2021
Overnight and Continuous Up to 30 Days 31-90 Days Greater than 90 Days Total
Securities lending arrangements
$ 595,628 $ 1,318 $ 539,623 $ 389,152 $ 1,525,721
Repurchase agreements
6,551,934 1,798,716 4,361,993 3,306,757 16,019,400
Obligation to return securities received as collateral, at fair value 7,289 - - - 7,289
Total
$ 7,154,851 $ 1,800,034 $ 4,901,616 $ 3,695,909 $ 17,552,410
November 30, 2020
Overnight and Continuous Up to 30 Days 31-90 Days Greater than 90 Days Total
Securities lending arrangements
$ 636,256 $ 59,735 $ 459,455 $ 655,302 $ 1,810,748
Repurchase agreements
5,510,476 1,747,526 5,019,885 2,881,386 15,159,273
Obligation to return securities received as collateral, at fair value 7,517 - - - 7,517
Total
$ 6,154,249 $ 1,807,261 $ 5,479,340 $ 3,536,688 $ 16,977,538
We receive securities as collateral under resale agreements, securities borrowing transactions and customer margin loans. We also receive securities as collateral in connection with securities-for-securities transactions in which we are the lender of securities. In many instances, we are permitted by contract to rehypothecate the securities received as collateral. These securities may be used to secure repurchase agreements, enter into securities lending transactions, satisfy margin requirements on derivative transactions or cover short positions. At November 30, 2021 and 2020, the approximate fair value of securities received as collateral by us that may be sold or repledged was $31.97 billion and $25.85 billion, respectively. At November 30, 2021 and 2020, a substantial portion of the securities received by us had been sold or repledged.
Offsetting of Securities Financing Agreements
To manage our exposure to credit risk associated with securities financing transactions, we may enter into master netting agreements and collateral arrangements with counterparties. Generally, transactions are executed under standard industry agreements, including, but not limited to, master securities lending agreements (securities lending transactions) and master repurchase agreements (repurchase transactions). See Note 2, Summary of Significant Accounting Policies, for additional information regarding the offsetting of securities financing agreements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables provide information regarding repurchase agreements, securities borrowing and lending arrangements and securities received as collateral, at fair value, and obligation to return securities received as collateral, at fair value, that are recognized in our Consolidated Statements of Financial Condition and 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in our Consolidated Statements 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 our financial position (in thousands).
November 30, 2021
Gross Amounts Netting in Consolidated Statement of Financial Condition Net Amounts in Consolidated Statement of Financial Condition Additional Amounts Available for Setoff (1) Available Collateral (2) Net Amount (3)
Assets
Securities borrowing arrangements
$ 6,409,420 $ - $ 6,409,420 $ (271,475) $ (1,528,206) $ 4,609,739
Reverse repurchase agreements
15,215,785 (7,573,301) 7,642,484 (540,312) (7,048,823) 53,349
Securities received as collateral, at fair value 7,289 - 7,289 - (7,289) -
Liabilities
Securities lending arrangements
$ 1,525,721 $ - $ 1,525,721 $ (271,475) $ (1,213,563) $ 40,683
Repurchase agreements
16,019,400 (7,573,301) 8,446,099 (540,312) (7,136,585) 769,202
Obligation to return securities received as collateral, at fair value 7,289 - 7,289 - (7,289) -
November 30, 2020
Gross Amounts Netting in Consolidated Statement of Financial Condition Net Amounts in Consolidated Statement of Financial Condition Additional Amounts Available for Setoff (1) Available Collateral (2) Net Amount (4)
Assets
Securities borrowing arrangements
$ 6,934,762 $ - $ 6,934,762 $ (395,342) $ (1,706,046) $ 4,833,374
Reverse repurchase agreements
11,939,773 (6,843,004) 5,096,769 (412,327) (4,578,560) 105,882
Securities received as collateral, at fair value 7,517 - 7,517 - - 7,517
Liabilities
Securities lending arrangements
$ 1,810,748 $ - $ 1,810,748 $ (395,342) $ (1,397,550) $ 17,856
Repurchase agreements
15,159,273 (6,843,004) 8,316,269 (412,327) (7,122,422) 781,520
Obligation to return securities received as collateral, at fair value 7,517 - 7,517 - - 7,517
(1)Under master netting agreements with our counterparties, we have 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 default, but which are not netted in the balance sheet because other netting provisions of U.S. GAAP are not met.
(2)Includes 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 or securities borrowing or lending arrangements.
(3)Amounts include $4.51 billion of securities borrowing arrangements, for which we have received securities collateral of $4.35 billion, and $765.0 million of repurchase agreements, for which we have pledged securities collateral of $781.8 million, which are subject to master netting agreements but we have not determined the agreements to be legally enforceable.
(4)Amounts include $4.76 billion of securities borrowing arrangements, for which we have received securities collateral of $4.62 billion, and $720.0 million of repurchase agreements, for which we have pledged securities collateral of $733.9 million, which are subject to master netting agreements but we have not determined the agreements to be legally enforceable.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited with Clearing and Depository Organizations
Cash and securities segregated in accordance with regulatory regulations and deposited with clearing and depository organizations totaled $1.02 billion and $604.3 million at November 30, 2021 and 2020, respectively. Segregated cash and securities consist of deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Jefferies LLC as a broker-dealer carrying customer accounts to requirements related to maintaining cash or qualified securities in segregated special reserve bank accounts for the exclusive benefit of its customers.
Note 7. Securitization Activities
We engage in securitization activities related to corporate loans, mortgage loans, consumer loans and mortgage-backed and other asset-backed securities. In our securitization transactions, we transfer these assets to special purpose entities (“SPEs”) and act as the placement or structuring agent for the beneficial interests sold to investors by the SPE. A significant portion of our securitization transactions are the securitization of assets issued or guaranteed by U.S. government agencies. These SPEs generally meet the criteria of VIEs; however, we generally do not consolidate the SPEs as we are not considered the primary beneficiary for these SPEs. See Note 8, Variable Interest Entities, for further discussion on VIEs and our determination of the primary beneficiary.
We account for our securitization transactions as sales, provided we have relinquished control over the transferred assets. Transferred assets are carried at fair value with unrealized gains and losses reflected in Principal transactions revenues in our Consolidated Statements of Earnings prior to the identification and isolation for securitization. Subsequently, revenues recognized upon securitization are reflected as net underwriting revenues. We generally receive cash proceeds in connection with the transfer of assets to an SPE. We may, however, have continuing involvement with the transferred assets, which is limited to retaining one or more tranches of the securitization (primarily senior and subordinated debt securities in the form of mortgage-backed and other-asset backed securities or CLOs). These securities are included in Financial instruments owned, at fair value in our Consolidated Statements of Financial Condition and are generally initially categorized as Level 2 within the fair value hierarchy. For further information on fair value measurements and the fair value hierarchy, refer to Note 4, Fair Value Disclosures, and Note 2, Summary of Significant Accounting Policies, herein.
The following table presents activity related to our securitizations that were accounted for as sales in which we had continuing involvement (in millions):
Year Ended November 30,
2021 2020 2019
Transferred assets $ 10,487.3 $ 6,556.2 $ 4,780.9
Proceeds on new securitizations 10,488.6 6,556.2 4,852.2
Cash flows received on retained interests 21.8 26.8 48.3
We have no explicit or implicit arrangements to provide additional financial support to these SPEs, have no liabilities related to these SPEs and do not have any outstanding derivative contracts executed in connection with these securitization activities at November 30, 2021 and 2020.
The following tables summarize our retained interests in SPEs where we transferred assets and have continuing involvement and received sale accounting treatment (in millions):
November 30,
2021 2020
Securitization Type
Total Assets Retained Interests Total Assets Retained Interests
U.S. government agency RMBS
$ 330.2 $ 4.9 $ 562.5 $ 7.8
U.S. government agency CMBS
2,201.8 69.2 2,461.2 205.2
CLOs
3,382.3 31.0 3,345.5 39.5
Consumer and other loans
2,271.4 136.4 1,290.6 56.6
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Total assets represent the unpaid principal amount of assets in the SPEs in which we have continuing involvement and are presented solely to provide information regarding the size of the transactions and the size of the underlying assets supporting our retained interests, and are not considered representative of the risk of potential loss. Assets retained in connection with a securitization transaction represent the fair value of the securities of one or more tranches issued by an SPE, including senior and subordinated tranches. Our risk of loss is limited to this fair value amount which is included in total Financial instruments owned in our Consolidated Statements of Financial Condition.
Although not obligated, in connection with secondary market-making activities we may make a market in the securities issued by these SPEs. In these market-making transactions, we buy these securities from and sell these securities to investors. Securities purchased through these market-making activities are not considered to be continuing involvement in these SPEs. To the extent we purchased securities through these market-making activities and we are not deemed to be the primary beneficiary of the VIE, these securities are included in agency and non-agency mortgage-backed and asset-backed securitizations in the nonconsolidated VIEs section presented in Note 8, Variable Interest Entities.
Note 8. Variable Interest Entities
VIEs are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.
Our variable interests in VIEs include debt and equity interests, commitments, guarantees and certain fees. Our involvement with VIEs arises primarily from:
•Purchases of securities in connection with our trading and secondary market making activities;
•Retained interests held as a result of securitization activities;
•Acting as placement agent and/or underwriter in connection with client-sponsored securitizations;
•Financing of agency and non-agency mortgage-backed and other asset-backed securities;
•Warehouse funding arrangements for client-sponsored consumer and mortgage loan vehicles and CLOs through participation agreements, forward sale agreements, reverse repurchase agreements, and revolving loan and note commitments; and
•Loans to, investments in and fees from various investment vehicles.
We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires judgment. Our considerations in determining the VIE’s most significant activities and whether we have power to direct those activities include, but are not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees. In situations where we have determined that the power over the VIE’s significant activities is shared, we assess whether we are the party with the power over the most significant activities. If we are the party with the power over the most significant activities, we meet the “power” criteria of the primary beneficiary. If we do not have the power over the most significant activities or we determine that decisions require consent of each sharing party, we do not meet the “power” criteria of the primary beneficiary.
We assess our variable interests in a VIE both individually and in aggregate to determine whether we have an obligation to absorb losses of or a right to receive benefits from the VIE that could potentially be significant to the VIE. The determination of whether our variable interest is significant to the VIE requires judgment. In determining the significance of our variable interest, we consider the terms, characteristics and size of the variable interests, the design and characteristics of the VIE, our involvement in the VIE and our market-making activities related to the variable interests.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Consolidated VIEs
The following table presents information about our consolidated VIEs at November 30, 2021 and 2020 (in millions). The assets and liabilities in the tables below are presented prior to consolidation and thus a portion of these assets and liabilities are eliminated in consolidation.
November 30,
2021 2020
Secured Funding Vehicles Other Secured Funding Vehicles Other
Cash (1) $ 3.8 $ - $ - $ 1.2
Financial instruments owned
173.1 146.4 - 5.2
Securities purchased under agreements to resell (2) 3,697.1 - 2,908.9 -
Receivables from brokers (3) - 40.6 - 12.9
Other receivables 0.6 - - -
Other assets - - - 0.1
Total assets
$ 3,874.6 $ 187.0 $ 2,908.9 $ 19.4
Financial instruments sold, not yet purchased $ - $ 109.1 $ - $ 2.5
Other secured financings (4) 3,828.6 - 2,907.8 -
Payables to broker dealers 44.2 - - -
Other liabilities (5) 1.8 75.3 1.1 0.4
Total liabilities
$ 3,874.6 $ 184.4 $ 2,908.9 $ 2.9
(1)Approximately $0.7 million of the cash amounts at November 30, 2020, represent cash on deposit with related consolidated entities and are eliminated in consolidation.
(2)Securities purchased under agreements to resell primarily represent amounts due under collateralized transactions on related consolidated entities, which are eliminated in consolidation.
(3)Approximately $1.2 million of receivables from brokers at November 30, 2021 are with related consolidated entities, which are eliminated in consolidation.
(4)Approximately $36.7 million and $138.2 million of the other secured financings at November 30, 2021 and 2020, respectively, are with related consolidated entities and are eliminated in consolidation.
(5)Approximately $75.3 million and $0.3 million of the other liabilities amounts at November 30, 2021 and 2020, respectively, are with related consolidated entities, which are eliminated in consolidation.
Secured Funding Vehicles. Substantially all of the VIEs for which we are the primary beneficiary are asset-backed financing vehicles to which we sell agency and non-agency residential and commercial mortgage loans, and asset-backed securities pursuant to the terms of a master repurchase agreement. Our variable interests in these vehicles consist of our collateral margin maintenance obligations under the master repurchase agreement, which we manage, and retained interests in securities issued. The assets of these VIEs consist of reverse repurchase agreements, which are available for the benefit of the vehicle’s debt holders.
Other. We are the primary beneficiary of certain investment vehicles set up for the benefit of our employees. We manage and invest alongside our employees in these vehicles. The assets of these VIEs consist of private equity securities, and are available for the benefit of the entities’ equity holders. Our variable interests in these vehicles consist of equity securities. The creditors of these VIEs do not have recourse to our general credit and each such VIE’s assets are not available to satisfy any other debt.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Nonconsolidated VIEs
The following tables present information about our variable interests in nonconsolidated VIEs (in millions):
November 30, 2021
Carrying Amount Maximum Exposure to Loss VIE Assets
Assets Liabilities
CLOs
$ 582.2 $ 2.0 $ 2,557.1 $ 10,277.5
Asset-backed vehicles 281.9 - 359.3 3,474.6
Related party private equity vehicles
27.1 - 37.8 78.9
Other investment vehicles
907.6 - 908.5 12,536.8
Total
$ 1,798.8 $ 2.0 $ 3,862.7 $ 26,367.8
November 30, 2020
Carrying Amount Maximum Exposure to Loss VIE Assets
Assets Liabilities
CLOs
$ 60.7 $ 0.2 $ 642.7 $ 6,849.1
Asset-backed vehicles 251.6 - 377.2 2,462.7
Related party private equity vehicles
19.0 - 30.0 53.0
Other investment vehicles
739.7 - 740.9 12,570.2
Total
$ 1,071.0 $ 0.2 $ 1,790.8 $ 21,935.0
Our maximum exposure to loss often differs from the carrying value of the variable interests. The maximum exposure to loss is dependent on the nature of our variable interests in the VIEs and is limited to the notional amounts of certain loan and equity commitments and guarantees. Our maximum exposure to loss does not include the offsetting benefit of any financial instruments that may be utilized to hedge the risks associated with our variable interests and is not reduced by the amount of collateral held as part of a transaction with a VIE.
Collateralized Loan Obligations. Assets collateralizing the CLOs include bank loans, participation interests, sub-investment grade and senior secured U.S. loans, and senior secured Euro denominated corporate leveraged loans and bonds. We underwrite securities issued in CLO transactions on behalf of sponsors and provide advisory services to the sponsors. We may also sell corporate loans to the CLOs. Our variable interests in connection with CLOs where we have been involved in providing underwriting and/or advisory services consist of the following:
•Forward sale agreements whereby we commit to sell, at a fixed price, corporate loans and ownership interests in an entity holding such corporate loans to CLOs;
•Warehouse funding arrangements in the form of:
◦Participation interests in corporate loans held by CLOs and commitments to fund such participation interests,
◦Reverse repurchase agreements with collateral margin maintenance obligations and commitments to fund such reverse repurchase agreements; and
◦Senior and subordinated notes issued in connection with CLO warehousing activities.
•Trading positions in securities issued in CLO transactions; and
•Investments in variable funding notes issued by CLOs.
Asset-Backed Vehicles. We provide financing and lending related services to certain client-sponsored VIEs in the form of revolving funding note agreements, revolving credit facilities, forward purchase agreements and reverse repurchase agreements. The underlying assets, which are collateralizing the vehicles, are primarily composed of unsecured consumer loans and mortgage loans. In addition, we may provide structuring and advisory services and act as an underwriter or placement agent for securities issued by the vehicles. We do not control the activities of these entities.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Related Party Private Equity Vehicles. We committed to invest in private equity funds, (the “JCP Funds”, including JCP Fund V (see Note 9, Investments)) managed by Jefferies Capital Partners, LLC (the “JCP Manager”). Additionally, we committed to invest in the general partners of the JCP Funds (the “JCP General Partners”) and the JCP Manager. Our variable interests in the JCP Funds, JCP General Partners and JCP Manager (collectively, the “JCP Entities”) consist of equity interests that, in total, provide us with limited and general partner investment returns of the JCP Funds, a portion of the carried interest earned by the JCP General Partners and a portion of the management fees earned by the JCP Manager. At November 30, 2021 and 2020, our total equity commitment in the JCP Entities was $133.0 million, of which $122.3 million and $122.0 million had been funded, respectively. The carrying value of our equity investments in the JCP Entities was $27.1 million and $19.0 million at November 30, 2021 and 2020, respectively. Our exposure to loss is limited to the total of our carrying value and unfunded equity commitment. The assets of the JCP Entities primarily consist of private equity and equity related investments.
Other Investment Vehicles. At November 30, 2021 and 2020, we had equity commitments to invest $760.0 million and $749.3 million, respectively, in various other investment vehicles, of which $759.1 million and $748.1 million was funded, respectively. The carrying value of our equity investments was $907.6 million and $739.7 million at November 30, 2021 and 2020, respectively. Our exposure to loss is limited to the total of our carrying value and unfunded equity commitment. These investment vehicles have assets primarily consisting of private and public equity investments, debt instruments, trade and insurance claims and various oil and gas assets.
Mortgage-Backed and Other Asset-Backed Secured Funding Vehicles. In connection with our secondary trading and market making activities, we buy and sell agency and non-agency mortgage-backed securities and other asset-backed securities, which are issued by third-party securitization SPEs and are generally considered variable interests in VIEs. Securities issued by securitization SPEs are backed by residential mortgage loans, U.S. agency collateralized mortgage obligations, commercial mortgage loans, CDOs and CLOs and other consumer loans, such as installment receivables, auto loans and student loans. These securities are accounted for at fair value and included in Financial instruments owned in our Consolidated Statements of Financial Condition. We have no other involvement with the related SPEs and therefore do not consolidate these entities.
We also engage in underwriting, placement and structuring activities for third-party-sponsored securitization trusts generally through agency (Fannie Mae, Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Ginnie Mae) or non-agency-sponsored SPEs and may purchase loans or mortgage-backed securities from third-parties that are subsequently transferred into the securitization trusts. The securitizations are backed by residential and commercial mortgage, home equity and auto loans. We do not consolidate agency-sponsored securitizations as we do not have the power to direct the activities of the SPEs that most significantly impact their economic performance. Further, we are not the servicer of non-agency-sponsored securitizations and therefore do not have power to direct the most significant activities of the SPEs and accordingly, do not consolidate these entities. We may retain unsold senior and/or subordinated interests at the time of securitization in the form of securities issued by the SPEs.
At November 30, 2021 and 2020, we held $1.31 billion and $1.57 billion of agency mortgage-backed securities, respectively, and $253.9 million and $252.0 million of non-agency mortgage-backed and other asset-backed securities, respectively, as a result of our secondary trading and market-making activities, and underwriting, placement and structuring activities. Our maximum exposure to loss on these securities is limited to the carrying value of our investments in these securities. These mortgage-backed and other asset-backed secured funding vehicles discussed are not included in the above table containing information about our variable interests in nonconsolidated VIEs.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 9. Investments
At November 30, 2021, we had investments in JFIN Parent LLC (“Jefferies Finance”) and Berkadia. In August 2021, Jefferies Finance LLC’s corporate structure was reorganized and its outstanding debt was refinanced. As a result, we now hold an equity interest in JFIN Parent LLC and Jefferies Finance LLC is a direct subsidiary of JFIN Parent LLC. In addition, we had an investment in Epic Gas Ltd. (“Epic Gas”), which was sold on March 19, 2019. Our investments in Jefferies Finance, Berkadia and Epic Gas have been accounted for under the equity method and have been included in Loans to and investments in related parties in our Consolidated Statements of Financial Condition with our share of the investees’ earnings recognized in Other revenues in our Consolidated Statements of Earnings. We have limited partnership interests of 11% and 50% in Jefferies Capital Partners V L.P. and the Jefferies SBI USA Fund L.P. (together, “JCP Fund V”), respectively, which are private equity funds managed by a team led by one of our directors and our Chairman of the Executive Committee.
Jefferies Finance
Jefferies Finance, our 50/50 joint venture entity pursuant to an agreement with Massachusetts Mutual Life Insurance Company (“MassMutual”), is a commercial finance company that structures, underwrites and syndicates primarily senior secured loans to corporate borrowers; and manages proprietary and third-party investments for both broadly syndicated and direct lending loans. Jefferies Finance conducts its operations primarily through two business lines, Leveraged Finance Arrangement and Portfolio and Asset Management. Loans are originated primarily through our investment banking efforts and Jefferies Finance typically syndicates to third-party investors substantially all of its arranged volume through us. The Portfolio and Asset Management business lines, collectively referred to as Jefferies Credit Partners, manages a broad portfolio of assets under management comprised of portions of loans it has arranged, as well as loan positions that it has purchased in the primary and secondary markets. Jefferies Credit Partners is comprised of three registered Investment Advisors: Jefferies Finance, Apex Credit Partners LLC and JFIN Asset Management LLC, which serve as a private credit platform managing proprietary and third-party capital across commingled funds, separately managed accounts and CLOs.
At November 30, 2021, we and MassMutual each had equity commitments to Jefferies Finance of $750.0 million, for a combined total commitment of $1.5 billion. The equity commitment is reduced quarterly based on our share of any undistributed earnings from Jefferies Finance and the commitment is increased only to the extent the share of such earnings are distributed. At November 30, 2021, our remaining commitment to Jefferies Finance was $42.6 million. The investment commitment is scheduled to expire on March 1, 2022 with automatic one year extensions absent a 60 days termination notice by either party.
Jefferies Finance has executed a Secured Revolving Credit Facility with us and MassMutual, to be funded equally, to support loan underwritings by Jefferies Finance, which bears interest based on the interest rates of the related Jefferies Finance underwritten loans and is secured by the underlying loans funded by the proceeds of the facility. The total Secured Revolving Credit Facility is a committed amount of $500.0 million at November 30, 2021. Advances are shared equally between us and MassMutual. The facility is scheduled to mature on March 1, 2022 with automatic one year extensions absent a 60 days termination notice by either party. At November 30, 2021, we had funded $0.0 million of our $250.0 million commitment. The following summarizes the activity included in our Consolidated Statements of Earnings related to the facility (in millions):
Year Ended November 30,
2021 2020 2019
Interest income $ 1.5 $ 2.4 $ -
Unfunded commitment fees 1.2 1.1 1.3
The following is a summary of selected financial information for Jefferies Finance (in millions):
November 30,
2021 2020
Total assets
$ 8,258.7 $ 7,199.5
Total liabilities
6,843.9 5,990.4
Total equity
1,414.8 1,209.1
Our total equity balance
707.4 604.6
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended November 30,
2021 2020 2019
Net earnings (loss) $ 205.7 $ (74.9) $ 44.5
The following summarizes activity related to our other transactions with Jefferies Finance (in millions):
Year Ended November 30,
2021 2020 2019
Origination and syndication fee revenues (1) $ 410.5 $ 198.1 $ 176.3
Origination fee expenses (1) 66.8 27.3 27.6
CLO placement fee revenues (2) 5.7 1.7 6.0
Underwriting fees (3) 2.5 1.7 3.9
Service fees (4) 85.1 65.1 60.8
(1)We engage in the origination and syndication of loans underwritten by Jefferies Finance. In connection with such services, we earned fees, which are recognized in Investment banking revenues in our Consolidated Statements of Earnings. In addition, we paid fees to Jefferies Finance in respect of certain loans originated by Jefferies Finance, which are recognized as Business development expenses in our Consolidated Statements of Earnings.
(2)We act as a placement agent for CLOs managed by Jefferies Finance, for which we recognized fees, which are included in Investment banking revenues in our Consolidated Statements of Earnings. At November 30, 2021 and 2020, we held securities issued by CLOs managed by Jefferies Finance, which are included in Financial instruments owned, at fair value.
(3)We acted as underwriter in connection with term loans issued by Jefferies Finance.
(4)Under a service agreement, we charge Jefferies Finance for services provided.
In connection with non-U.S. dollar loans originated by Jefferies Finance to borrowers who are investment banking clients of ours, we have entered into an agreement to indemnify Jefferies Finance with respect to any foreign currency exposure.
Receivables from Jefferies Finance, included in Other assets in our Consolidated Statements of Financial Condition, were $26.2 million and $24.2 million at November 30, 2021 and 2020, respectively. At November 30, 2021, payables to Jefferies Finance, related to cash deposited with us and included in Payables to customers in our Consolidated Statements of Financial Condition, was $8.5 million. At November 30, 2020, payables to Jefferies Finance, related to cash deposited with us and included in Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition, were $13.7 million.
In 2019, we had a promissory note with Jefferies Finance with a principal amount of $1.0 billion, the proceeds of which were used in connection with our investment banking loan syndication activities. Interest paid on the note of $3.8 million is included in Interest expense within our Consolidated Statements of Earnings for the year ended November 20, 2019.
Berkadia
Berkadia is a commercial mortgage banking and servicing joint venture that was formed in 2009 by Jefferies and Berkshire Hathaway Inc. On October 1, 2018, Jefferies transferred its 50% voting equity interest in Berkadia and related arrangements to us. As a result, we are entitled to receive 45% of the profits of Berkadia. Berkadia originates commercial/multifamily real estate loans that are sold to U.S. government agencies or other investors. Berkadia also is an investment sales advisor focused on the multifamily industry. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of selected financial information for Berkadia (in millions):
November 30,
2021 2020
Total assets $ 4,630.7 $ 4,294.0
Total liabilities 3,377.0 3,626.3
Total equity 1,253.7 667.7
Our total equity balance 373.4 301.2
Year Ended November 30,
2021 2020 2019
Net earnings $ 290.3 $ 153.1 $ 195.9
We received distributions from Berkadia on our equity interest as follows (in millions):
Year Ended November 30,
2021 2020 2019
Distributions $ 58.0 $ 37.1 $ 65.0
At November 30, 2021 and 2020, we had commitments to purchase $425.6 million and $401.0 million, respectively, of agency CMBS from Berkadia.
JCP Fund V
The amount of our investments in JCP Fund V included in Financial instruments owned, at fair value in our Consolidated Statements of Financial Condition was $25.4 million and $17.4 million at November 30, 2021 and 2020, respectively. We account for these investments at fair value based on the NAV of the funds provided by the fund managers (see Note 2, Summary of Significant Accounting Policies, herein). The following summarizes the results from these investments which are included in Principal transactions revenues in our Consolidated Statements of Earnings (in millions):
Year Ended November 30,
2021 2020 2019
Net gains (losses) from our investments in JCP Fund V $ 7.7 $ (3.0) $ (5.7)
At both November 30, 2021 and 2020, we were committed to invest equity of up to $85.0 million in JCP Fund V. At November 30, 2021 and 2020, our unfunded commitment relating to JCP Fund V was $8.7 million and $9.1 million, respectively.
The following is a summary of selected financial information for 100.0% of JCP Fund V, in which we owned effectively 35.2% of the combined equity interests (in thousands):
September 30,
2021 (1) 2020 (1)
Total assets
$ 72,184 $ 49,404
Total liabilities
80 84
Total partners’ capital
72,104 49,319
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Nine Months Ended September 30, 2021 (1) Three Months Ended December 31, 2020 (1) Nine Months Ended September 30, 2020 (1) Three Months Ended December 31, 2019 (1) Nine Months Ended September 30, 2019 (1) Three Months Ended December 31, 2018 (1)
Net increase (decrease) in net assets resulting from operations
$ 23,809 $ (1,024) $ (12,456) $ (1,397) $ (19,070) $ (8,412)
(1)Financial information for JCP Fund V in financial position and results of operations at November 30, 2021 and 2020 and for the years ended November 30, 2021, 2020 and 2019 is included based on the presented periods.
Epic Gas
We had an investment in Epic Gas and during the year ended November 30, 2019, we sold all of our common shares of Epic Gas, at fair value, for a total of $24.6 million. There was a gain of $2.8 million on this transaction, which is included in Other revenue in our Consolidated Statements of Earnings for the year ended November 30, 2019. Epic Gas reported net gains of $0.9 million in the period we held the investment during the year ended November 30, 2019.
Note 10. Goodwill and Intangible Assets
Goodwill
Goodwill attributed to our reportable business segments are as follows (in thousands):
November 30,
2021 2020
Investment Banking and Capital Markets (1)
$ 1,645,317 $ 1,646,523
Asset Management (1)
- 410
Total goodwill
$ 1,645,317 $ 1,646,933
(1)Accumulated goodwill impairments related to the Investment Banking and Capital Markets business segment were $51.9 million at both December 1, 2020 and 2019, and goodwill prior to these impairments was $1.70 billion and $1.69 billion at December 1, 2020 and 2019, respectively. Accumulated goodwill impairments related to the Asset Management business segment were $5.1 million and $2.1 million at December 1, 2020 and 2019, respectively, and goodwill prior to these impairments was $5.5 million at both December 1, 2020 and 2019.
The following table is a summary of the changes to goodwill (in thousands):
Year Ended November 30,
2021 2020
Balance, at beginning of period
$ 1,646,933 $ 1,643,599
Currency translation and other adjustments (1,216) 6,334
Impairment losses (1) (400) (3,000)
Balance, at end of period
$ 1,645,317 $ 1,646,933
(1)Impairment losses in 2020 are related to our wind down of our quantPORT asset management platform.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Goodwill Impairment Testing
A reporting unit is an operating segment or one level below an operating segment. The quantitative goodwill impairment test is performed at the level of the reporting unit. The fair value of each reporting unit is compared with its carrying value, including goodwill and allocated intangible assets. If the fair value is in excess of the carrying value, the goodwill for the reporting unit is considered not to be impaired. If the fair value is less than the carrying value, then an impairment loss is recognized for the amount by which the carrying value of the reporting unit exceeds the reporting unit's fair value. Allocated tangible equity plus allocated goodwill and intangible assets are used for the carrying amount of each reporting unit. The amount of tangible equity allocated to a reporting unit is based on our cash capital model deployed in managing our businesses, which seeks to approximate the capital a business would require if it were operating independently. Intangible assets are allocated to a reporting unit based on either specifically identifying a particular intangible asset as pertaining to a reporting unit or, if shared among reporting units, based on an assessment of the reporting unit’s benefit from the intangible asset in order to generate results.
Estimating the fair value of a reporting unit requires management judgment. Estimated fair values for our reporting units were determined using a market valuation method that incorporates price-to-earnings and price-to-book multiples of comparable public companies. Under the market valuation approach, the key assumptions are the selected multiples and our internally developed projections of future profitability, growth and return on equity for each reporting unit. In addition, as the fair values determined under the market valuation approach represent a noncontrolling interest, we applied a control premium to arrive at the estimated fair value of each reporting unit on a controlling basis. We engaged an independent valuation specialist to assist us in our valuation process at August 1, 2021.
Our annual goodwill impairment testing at August 1, 2021 did not indicate any goodwill impairment in any of our reporting units. All of our goodwill is allocated to our Investment Banking, Equities and Fixed Income reporting units, which are part of our Investment Banking and Capital Markets reportable business segment, for which the results of our assessment indicated that these reporting units had a fair value in excess of their carrying amounts based on current projections.
Intangible Assets
Intangible assets are included in Other assets in our Consolidated Statements of Financial Condition. The following tables present the gross carrying amount, changes in carrying amount, net carrying amount and weighted average amortization period of identifiable intangible assets at November 30, 2021 and 2020 (dollars in thousands):
November 30, 2021 Weighted average remaining lives (years)
Gross cost Impairment losses Accumulated amortization Net carrying amount
Customer relationships $ 125,921 $ - $ (83,979) $ 41,942 9.0
Trade name 128,753 - (32,244) 96,509 26.3
Exchange and clearing organization membership interests and registrations
7,798 (66) - 7,732 N/A
Total
$ 262,472 $ (66) $ (116,223) $ 146,183
November 30, 2020 Weighted average remaining lives (years)
Gross cost Impairment losses Accumulated amortization Net carrying amount
Customer relationships (1) $ 126,106 $ (26) $ (75,776) $ 50,304 9.4
Trade name (1) 129,114 (274) (28,585) 100,255 27.3
Exchange and clearing organization membership interests and registrations
8,352 (468) - 7,884 N/A
Total
$ 263,572 $ (768) $ (104,361) $ 158,443
(1) Impairment losses in 2020 are related to our wind down of our quantPORT asset management platform.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We performed our annual impairment testing of intangible assets with an indefinite useful life, which consists of exchange and clearing organization membership interests and registrations, at August 1, 2021. We utilized quantitative assessments of membership interests and registrations that have available quoted sales prices as well as certain other membership interests and registrations that have declined in utilization and qualitative assessments were performed on the remainder of our indefinite-life intangible assets. In applying our quantitative assessments, we recognized impairment losses on certain exchange membership interests and registrations. With regard to our qualitative assessments of the remaining indefinite life intangible assets, based on our assessments of market conditions, the utilization of the assets and the replacement costs associated with the assets, we have concluded that it is not more likely than not that the intangible assets are impaired.
Amortization Expense
For finite life intangible assets, aggregate amortization expense amounted to $12.0 million, $12.2 million and $11.9 million for the years ended November 30, 2021, 2020 and 2019, respectively. These expenses are included in Other expenses in our Consolidated Statements of Earnings.
The estimated future amortization expense for the five succeeding fiscal years is as follows (in thousands):
Year ending November 30, 2022 $ 9,239
Year ending November 30, 2023 8,258
Year ending November 30, 2024 8,258
Year ending November 30, 2025 8,258
Year ending November 30, 2026 8,258
Note 11. Short-Term Borrowings
Short-term borrowings at November 30, 2021 and 2020 mature in one year or less and include the following (in thousands):
November 30,
2021 2020
Bank loans (1)
$ 215,063 $ 752,848
Floating rate puttable notes (1)
6,800 6,800
Equity-linked notes (2) - 5,067
Total short-term borrowings
$ 221,863 $ 764,715
(1) These Short-term borrowings are recorded at cost in our Consolidated Statements of Financial Condition, which is a reasonable approximation of their fair values due to their liquid and short-term nature.
(2) See Note 4, Fair Value Disclosures, for further information on these notes.
At November 30, 2021, the weighted average interest rate on short-term borrowings outstanding is 1.41% per annum.
Our bank loans include facilities that contain certain covenants that, among other things, require us to maintain a specified level of tangible net worth and impose certain restrictions on the future indebtedness of certain of our subsidiaries that are borrowers. At November 30, 2021, we were in compliance with all covenants under these facilities. The outstanding balance of our facilities, which are with a bank and are included within bank loans were $200.0 million and $746.0 million at November 30, 2021 and 2020, respectively. Interest is based on a rate per annum at spreads over the federal funds Rate, as defined in the credit agreements.
A bank has agreed to make revolving intraday credit advances (“Intraday Credit Facility”) for an aggregate committed amount of $150.0 million. The Intraday Credit Facility is structured so that advances are generally repaid before the end of each business day. However, if an advance is not repaid by the end of any business day, the advance is converted to an overnight loan. Intraday loans accrue interest at a rate of 0.12% based on the number of minutes in a day the advance is outstanding. Overnight loans are charged interest at the base rate plus 3.00% on a daily basis. The base rate is the higher of the federal funds rate plus 0.50% or the prime rate in effect at that time. The Intraday Credit Facility contains financial covenants, which include a minimum regulatory net capital requirement for our U.S. broker-dealer, Jefferies LLC. At November 30, 2021, we were in compliance with all debt covenants under the Intraday Credit Facility.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In addition, this bank also provides a $200.0 million revolving credit facility with a termination date of September 12, 2022, which is used for margin calls at a domestic clearing corporation. Overnight loans are charged interest at a spread over the federal funds rate.
Another bank provides committed revolving credit facilities for a total of $200.0 million, including a $150.0 million intraday component and a $50.0 million overnight component, that are used to fund our Asia Pacific business activity. The intraday component is structured so that advances are generally repaid before the end of each business day. However, if an advance is not repaid by the end of any business day, the advance is converted to an overnight loan. Intraday loans accrue interest at a rate of 1.00%. Overnight loans are charged as agreed between the bank and us in reference to the bank’s cost of funding.
Note 12. Long-Term Debt
The following summarizes our long-term debt carrying values (including unamortized discounts and premiums, valuation adjustments and debt issuance costs, where applicable) (in thousands):
Effective Interest Rate November 30,
Maturity 2021 2020
Unsecured long-term debt
2.250% Euro Medium Term Notes
July 13, 2022 -% $ - $ 4,638
5.125% Senior Notes
January 20, 2023 -% - 759,901
1.000% Euro Medium Term Notes
July 19, 2024 1.00% 564,985 595,700
4.850% Senior Notes (1)
January 15, 2027 4.93% 775,550 809,039
6.450% Senior Debentures
June 8, 2027 5.46% 366,556 369,057
4.150% Senior Notes
January 23, 2030 4.26% 990,525 989,574
2.750% Senior Notes (1)
October 15, 2032 2.85% 460,724 485,134
6.250% Senior Debentures
January 15, 2036 6.03% 505,267 510,834
6.500% Senior Notes
January 20, 2043 6.09% 409,926 419,826
2.625% Senior Notes
October 15, 2031 2.73% 988,059 -
Floating Rate Senior Notes October 29, 2071 -% 61,703 -
Unsecured Revolving Credit Facility August 3, 2023 1.63% 348,951 -
Structured notes (2)(3) Various Various 1,843,598 1,712,245
Total unsecured long-term debt
7,315,844 6,655,948
Secured long-term debt
Revolving Credit Facility
248,982 189,732
Secured Credit Facility 375,000 -
Secured Bank Loan
100,000 50,000
Total long-term debt (4) $ 8,039,826 $ 6,895,680
(1)The carrying values of these senior notes include a net gain of $58.5 million and a net loss $36.7 million during 2021 and 2020, respectively, associated with interest rate swaps based on designation as fair value hedges. See Note 2, Summary of Significant Accounting Policies, and Note 5, Derivative Financial Instruments, for further information.
(2)These structured notes contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument-specific credit risk presented in other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transactions revenues. A weighted average coupon rate is not meaningful, as all of the structured notes are carried at fair value.
(3)Of the $1.84 billion of structured notes at November 30, 2021, $12.0 million matures in 2022, $2.8 million matures in 2023, $3.9 million matures in 2024, $30.7 million matures in 2025, $35.5 million matures in 2026, and the remaining $1.76 billion matures in 2027 or thereafter.
(4)The Total Long-term debt has a fair value of $8.64 billion and $7.58 billion at November 30, 2021 and 2020, respectively, which would be classified as Level 2 and Level 3 in the fair value hierarchy.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During 2021, long-term debt increased by $1.14 billion to $8.04 billion at November 30, 2021, as presented in our Consolidated Statements of Financial Condition. This increase is primarily due to our issuances of 2.625% senior notes with a principal amount of $1.0 billion, due 2031, and floating rate senior notes with a principal amount of $62.3 million, due 2071, partially offset by the early redemption of our 5.125% senior notes with a principal amount of $750.0 million, due January 20, 2023. The change was also due to an increase of $349.0 million from borrowings under our senior unsecured revolving credit facility (“Unsecured Revolving Credit Facility”), an increase of $484.3 million from secured long-term borrowings and approximately $175.6 million of structured notes issuances, net of retirements. At November 30, 2021, all of our structured notes contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument-specific credit risk presented in other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transactions revenues. Gains and losses in the fair value of structured notes resulting from non-credit components are recognized within Other adjustments on the Consolidated Statements of Cash Flow.
During 2020, long-term debt decreased $107.7 million. This decrease is primarily due to the maturity and repayment of our 2.375% Euro Medium Term Notes and the early retirement of our 6.875% Senior Notes, partially offset by a $500.0 million principal amount issuance of 2.75% Senior Notes due 2032, a $150.0 million principal amount issuance of additional 5.125% Senior Notes due 2023 and approximately $325.5 million of structured notes issuances, net of retirements.
During April 2021, we entered into a Revolving Credit Facility with a group of commercial banks following the maturity of our previous revolving credit facility. At November 30, 2021, borrowings under the Revolving Credit Facility amounted to $249.0 million. Interest is based on an adjusted LIBOR Rate, as defined in the credit agreement. The Revolving Credit Facility contains certain covenants that, among other things, requires Jefferies Group LLC to maintain specified level of tangible net worth and liquidity amounts, and imposes certain restrictions on future indebtedness of and requires specified levels of regulated capital for certain of our subsidiaries. Throughout the period and at November 30, 2021, no instances of noncompliance with the Revolving Credit Facility covenants occurred and we expect to remain in compliance given our current liquidity and anticipated funding requirements given our business plan and profitability expectations.
During May 2021, we entered into a Secured Credit Facility agreement with a bank under which we have borrowed $375.0 million at November 30, 2021. Interest is based on a rate per annum at spreads over an Adjusted LIBOR Rate, as defined in the credit agreement. The Secured Credit Facility contains certain covenants that, among other things, require Jefferies Group LLC to maintain a specified level of tangible net worth. The covenants also require a certain subsidiary to maintain specified leverage amounts and impose certain restrictions on its future indebtedness. At November 30, 2021, we were in compliance with all covenants under the Secured Credit Facility.
During August 2021, we entered into an Unsecured Revolving Credit Facility agreement with a bank under which we have borrowed $349.0 million at November 30, 2021. Interest is based on a rate per annum at spreads over an Adjusted LIBOR Rate or a Base Rate, as defined in the credit agreement. The Unsecured Revolving Credit Facility contains certain covenants that, among other things, require Jefferies Group LLC to maintain a specified level of tangible net worth, net cash capital and a minimum regulatory net capital requirement for Jefferies LLC. At November 30, 2021, we were in compliance with all covenants under the Unsecured Revolving Credit Facility.
During September 2021, one of our subsidiaries amended a Loan and Security Agreement with a bank for a term loan (“Secured Bank Loan”) due to the maturity of our previous secured bank loan. At November 30, 2021, borrowings under the Secured Bank Loan amounted to $100.0 million. The Secured Bank Loan matures on September 13, 2024 and is collateralized by certain trading securities with an interest rate of 1.25% plus LIBOR. The agreement contains certain covenants that, among other things, restricts lien or encumbrance upon any of the pledged collateral. At November 30, 2021, we were in compliance with all covenants under the Secured Bank Loan.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 13. Leases
We enter into lease and sublease agreements, primarily for office space, across our geographic locations. Information related to operating leases in our Consolidated Statement of Financial Condition at November 30, 2021 and 2020 were as follows (in thousands, except lease term and discount rate):
November 30,
2021 2020
Premises and equipment - ROU assets $ 447,950 $ 486,614
Weighted average:
Remaining lease term (in years) 10.2 10.9
Discount rate 2.9 % 2.9 %
The following table presents the maturities of our operating lease liabilities and a reconciliation to the Lease liabilities included in our Consolidated Statement of Financial Condition at November 30, 2021 and 2020 (in thousands):
November 30,
Fiscal Year 2021 2020
2021 $ - $ 65,442
2022 68,315 70,200
2023 65,971 62,641
2024 63,640 61,106
2025 64,528 63,158
2026 62,120 56,936
2027 and thereafter 281,642 281,806
Total undiscounted cash flows 606,216 661,289
Less: Difference between undiscounted and discounted cash flows (84,997) (100,402)
Operating leases amount in our Consolidated Statement of Financial Condition 521,219 560,887
Finance leases amount in our Consolidated Statement of Financial Condition 229 362
Total amount in our Consolidated Statement of Financial Condition $ 521,448 $ 561,249
The following table presents our lease costs (in thousands):
Year Ended November 30,
2021 2020
Operating lease costs (1) $ 73,264 $ 71,140
Variable lease costs (2) 10,899 13,332
Less: Sublease income (4,835) (5,974)
Total lease cost, net $ 79,328 $ 78,498
(1) Includes short-term leases, which are not material.
(2) Includes property taxes, insurance costs, common area maintenance, utilities, and other costs that are not fixed. The amount also includes rent increases resulting from inflation indices and periodic market rent reviews.
Consolidated Statement of Cash Flows supplemental information was as follows (in thousands):
Year Ended November 30,
2021 2020
Cash outflows - lease liabilities $ 72,214 $ 66,248
Non-cash - ROU assets recorded for new and modified leases 18,902 21,389
The amortization of the ROU assets is included within Other adjustments on the Consolidated Statements of Cash Flows.
Rental expense, net of subleases, amounted to $61.2 million for the year ended November 30, 2019.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 14. Revenues from Contracts with Customers
The following table presents our total revenues separated for our revenues from contracts with customers and our other sources of revenues (in thousands):
Year Ended November 30,
2021 2020 2019
Revenues from contracts with customers:
Commissions and other fees $ 896,312 $ 823,258 $ 676,309
Investment banking 4,366,055 2,501,494 1,528,729
Asset management fees 14,324 9,187 17,219
Total revenue from contracts with customers 5,276,691 3,333,939 2,222,257
Other sources of revenue:
Principal transactions 1,505,618 1,867,013 769,258
Revenues from strategic affiliates
57,247 19,507 3,066
Interest 847,969 894,215 1,496,529
Other 219,762 37,632 93,422
Total revenues $ 7,907,287 $ 6,152,306 $ 4,584,532
Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third-parties.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following provides detailed information on the recognition of our revenues from contracts with customers:
Commissions and Other Fees. We earn commission and other fee revenue by executing, settling and clearing transactions for clients primarily in equity, equity-related and futures products. Trade execution and clearing services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, are recognized at a point in time on trade-date. Commissions revenues are generally paid on settlement date and we record a receivable between trade-date and payment on settlement date. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third-parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. We act as an agent in the soft dollar arrangements as the customer controls the use of the soft dollars and directs our payments to third-party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues in our Consolidated Statements of Earnings. We also earn investment research fees for the sales of our proprietary investment research when a contract with a client has been identified. The delivery of investment research services represents a distinct performance obligation that is satisfied over time when the performance obligation is to provide ongoing access to a research platform or research analysts, with fees recognized on a straight-line basis over the period in which the performance obligation is satisfied. The performance obligation is satisfied at a point in time when the performance obligation is to provide individual interactions with research analysts or research events, with fees recognized on the interaction date.
We earn account advisory and distribution fees in connection with wealth management services. Account advisory fees are recognized over time using the time-elapsed method as we determined that the customer simultaneously receives and consumes the benefits of investment advisory services as they are provided. Account advisory fees may be paid in advance of a specified service period or in arrears at the end of the specified service period (e.g., quarterly). Account advisory fees paid in advance are initially deferred within Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. Distribution fees are variable and recognized when the uncertainties with respect to the amounts are resolved.
Investment Banking. We provide our clients with a full range of financial advisory and underwriting services. Revenues from financial advisory services primarily consist of fees generated in connection with merger, acquisition and restructuring transactions. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction. Fees received prior to the completion of the transaction are deferred within Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. Advisory fees from restructuring engagements are recognized over time using a time elapsed measure of progress as our clients simultaneously receive and consume the benefits of those services as they are provided. A significant portion of the fees we receive for our advisory services are considered variable as they are contingent upon a future event (e.g., completion of a transaction or third-party emergence from bankruptcy) and are excluded from the transaction price until the uncertainty associated with the variable consideration is subsequently resolved, which is expected to occur upon achievement of the specified milestone. Payment for advisory services are generally due promptly upon completion of a specified milestone or, for retainer fees, periodically over the course of the engagement. We recognize a receivable between the date of completion of the milestone and payment by the customer. Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred. All investment banking advisory expenses are recognized within their respective expense category in our Consolidated Statements of Earnings and any expenses reimbursed by our clients are recognized as Investment banking revenues.
Underwriting services include underwriting and placement agent services in both the equity and debt capital markets, including private equity placements, initial public offerings, follow-on offerings and equity-linked securities transactions and structuring, underwriting and distributing public and private debt, including investment grade debt, high yield bonds, leveraged loans, municipal bonds and mortgage-backed and asset-backed securities. Underwriting and placement agent revenues are recognized at a point in time on trade-date, as the client obtains the control and benefit of the underwriting offering at that point. Costs associated with underwriting transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded, and are recorded on a gross basis within Underwriting costs in our Consolidated Statements of Earnings as we are acting as a principal in the arrangement. Any expenses reimbursed by our clients are recognized as Investment banking revenues.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Asset Management Fees. We earn management and performance fees in connection with investment advisory services provided to various funds and accounts, which are satisfied over time and measured using a time elapsed measure of progress as the customer receives the benefits of the services evenly throughout the term of the contract. Management and performance fees are considered variable as they are subject to fluctuation (e.g., changes in assets under management, market performance) and/ or are contingent on a future event during the measurement period (e.g., meeting a specified benchmark) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Management fees are generally based on month-end assets under management or an agreed upon notional amount and are included in the transaction price at the end of each month when the assets under management or notional amount is known. Performance fees are received when the return on assets under management for a specified performance period exceed certain benchmark returns, “high-water marks” or other performance targets. The performance period related to our performance fees is annual or semi-annual. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met.
Disaggregation of Revenue
The following presents our revenues from contracts with customers disaggregated by major business activity and primary geographic regions (in thousands):
Year Ended November 30,
2021 2020 2019
Reportable Segment Reportable Segment Reportable Segment
Investment Banking and Capital Markets Asset Management Total Investment Banking and Capital Markets Asset Management Total Investment Banking and Capital Markets Asset Management Total
Major business activity:
Investment banking -
Advisory $ 1,873,560 $ - $ 1,873,560 $ 1,053,500 $ - $ 1,053,500 $ 767,421 $ - $ 767,421
Investment banking -
Underwriting 2,492,495 - 2,492,495 1,447,994 - 1,447,994 761,308 - 761,308
Equities (1) 881,957 - 881,957 807,350 - 807,350 662,804 - 662,804
Fixed income (1) 14,355 - 14,355 15,908 - 15,908 13,505 - 13,505
Asset management - 14,324 14,324 - 9,187 9,187 - 17,219 17,219
Total $ 5,262,367 $ 14,324 $ 5,276,691 $ 3,324,752 $ 9,187 $ 3,333,939 $ 2,205,038 $ 17,219 $ 2,222,257
Primary geographic region:
Americas $ 4,250,294 $ 13,705 $ 4,263,999 $ 2,742,298 $ 4,239 $ 2,746,537 $ 1,751,568 $ 10,472 $ 1,762,040
Europe 766,746 619 767,365 401,853 4,948 406,801 374,411 6,747 381,158
Asia Pacific 245,327 - 245,327 180,601 - 180,601 79,059 - 79,059
Total $ 5,262,367 $ 14,324 $ 5,276,691 $ 3,324,752 $ 9,187 $ 3,333,939 $ 2,205,038 $ 17,219 $ 2,222,257
(1)Revenues from contracts with customers associated with the equities and fixed income businesses primarily represent commissions and other fee revenue.
Refer to Note 20, Segment Reporting, for a further discussion on the allocation of revenues to geographic regions.
Information on Remaining Performance Obligations and Revenue Recognized from Past Performance
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at November 30, 2021. Investment banking advisory fees that are contingent upon completion of a specific milestone and fees associated with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price at November 30, 2021.
During the years ended November 30, 2021, 2020 and 2019, we recognized $50.0 million, $11.1 million and $27.6 million, respectively, of revenue related to performance obligations satisfied (or partially satisfied) in previous periods, mainly due to resolving uncertainties in variable consideration that was constrained in prior periods. In addition, we recognized $12.1 million, $17.6 million and $21.7 million of revenues primarily associated with distribution services during the years ended November 30, 2021, 2020 and 2019, respectively, a portion of which relates to prior periods.
Contract Balances
The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Our deferred revenue primarily relates to retainer and milestone fees received in investment banking advisory engagements where the performance obligation has not yet been satisfied. Deferred revenue at November 30, 2021 and 2020 was $14.9 million and $10.0 million, respectively, which are recorded in Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. During the years ended November 30, 2021, 2020 and 2019, we recognized revenue of $6.4 million, $7.9 million and $9.5 million, respectively, that were recorded as deferred revenue at the beginning of the year.
We had receivables related to revenues from contracts with customers of $232.6 million and $278.5 million at November 30, 2021 and 2020, respectively. We estimate an allowance for credit losses on our investment banking fee receivables using a provisioning matrix based on the shared risk characteristics and historical loss experience for such receivables. In some instances, we may adjust the allowance calculated based on the provision matrix to incorporate a specific allowance based on the unique credit risk profile of a receivable. The provisioning matrix is periodically updated to reflect changes in the underlying portfolio's credit characteristics and most recent historical loss data.
The allowance for credit losses for the years ended November 30, 2021, 2020 and 2019 is as follows (in thousands):
Year Ended November 30,
2021 2020 2019
Beginning balance $ 19,788 $ 6,817 $ 6,568
Adjustment for change in accounting principle for current expected credit losses
(3,594) - -
Bad debt expense, net of reversals 2,287 19,582 3,525
Charge-offs (6,409) (2,083) (1,571)
Recoveries collected (7,248) (4,528) (1,705)
Ending balance (1) $ 4,824 $ 19,788 $ 6,817
(1)The allowance for doubtful accounts balances are substantially all related to mergers and acquisitions and restructuring fee receivables, which include recoverable expense receivables.
Contract Costs
We capitalize costs to fulfill contracts associated with investment banking advisory engagements where the revenue is recognized at a point in time and the costs are determined to be recoverable. Capitalized costs to fulfill a contract are recognized at the point in time that the related revenue is recognized.
At November 30, 2021 and 2020, capitalized costs to fulfill a contract were $1.6 million and $1.8 million, respectively, which are recorded in Receivables - Fees, interest and other in the Consolidated Statement of Financial Condition. For the years ended November 30, 2021, 2020 and 2019, we recognized expenses of $1.7 million, $5.1 million and $4.0 million, respectively, related to costs to fulfill a contract that were capitalized as of the beginning of the year. There were no significant impairment charges recognized in relation to these capitalized costs during the years ended November 30, 2021, 2020 and 2019.
Note 15. Benefit Plans
U.S. Pension Plan
We maintain a defined benefit pension plan, Jefferies Group LLC Employees’ Pension Plan (the “U.S. Pension Plan”), which is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and covers certain of our employees. Under the U.S. Pension Plan, benefits to participants are based on years of service and the employee’s career average pay. Effective December 31, 2005, benefits under the U.S. Pension Plan were frozen with no further benefit accruing to participants for future service after December 31, 2005.
Employer Contributions - Our funding policy is to contribute to the U.S. Pension Plan at least the minimum amount required for funding purposes under applicable employee benefit and tax laws. We did not contribute to the U.S. Pension Plan during the year ended November 30, 2021 and we do not anticipate making a contribution to the plan for the year ending November 30, 2022.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables summarize the changes in the projected benefit obligation, the fair value of the assets and the funded status of the plan (in thousands):
Year Ended November 30,
2021 2020
Change in projected benefit obligation:
Projected benefit obligation, beginning of period
$ 71,541 $ 63,222
Interest cost
1,409 1,801
Actuarial losses 487 9,874
Administrative expenses paid
(186) (346)
Benefits paid
(2,504) (1,003)
Settlements
- (2,477)
Other costs 400 470
Projected benefit obligation, end of period
$ 71,147 $ 71,541
Change in plan assets:
Fair value of assets, beginning of period
$ 63,161 $ 56,980
Benefits paid
(2,504) (1,003)
Administrative expenses paid
(186) (346)
Actual return on plan assets
2,064 10,007
Settlements
- (2,477)
Fair value of assets, end of period
$ 62,535 $ 63,161
Funded status at end of period
$ (8,612) $ (8,380)
The amounts recognized in our Consolidated Statements of Financial Condition are as follows (in thousands):
November 30,
2021 2020
Consolidated statements of financial condition:
Accrued expenses and other liabilities $ 8,612 $ 8,380
Accumulated other comprehensive income, before taxes:
Net losses
$ (11,842) $ (10,875)
The following tables summarize the components of net periodic pension cost and other amounts recognized in Other comprehensive income, before taxes (in thousands):
Year Ended November 30,
2021 2020 2019
Components of net periodic pension cost:
Interest cost on projected benefit obligation
$ 1,409 $ 1,801 $ 2,303
Expected return on plan assets
(3,094) (3,477) (3,008)
Net amortization
549 252 122
Settlement losses
- 376 -
Other costs 400 470 500
Net periodic pension cost
$ (736) $ (578) $ (83)
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended November 30,
2021 2020 2019
Amounts recognized in Other comprehensive income:
Net losses arising during the period
$ 1,516 $ 3,344 $ 1,899
Amortization of net loss
(549) (252) (122)
Settlements during the period
- (376) -
Total losses recognized in Other comprehensive income
$ 967 $ 2,716 $ 1,777
Net losses recognized in net periodic benefit cost and Other comprehensive income $ 231 $ 2,138 $ 1,694
The assumptions used to determine the actuarial present value of the projected obligation and net periodic pension benefit cost are as follows:
Year Ended November 30,
2021 2020 2019
Discount rate used to determine benefit obligation
2.40 % 2.00 % 2.90 %
Weighted average assumptions used to determine net pension cost:
Discount rate
2.00 % 2.90 % 4.30 %
Expected long-term rate of return on plan assets
5.00 % 6.25 % 6.25 %
Expected Benefit Payments - Expected benefit payments for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter are as follows (in thousands):
2022 $ 5,994
2023 4,431
2024 5,033
2025 4,663
2026 5,294
2027 through 2031 24,938
Plan Assets - We have an agreement with an external investment manager to invest and manage the plan’s assets under a strategy using a combination of two portfolios. The investment manager allocates the plan’s assets between a growth portfolio and a liability-driven portfolio according to certain target allocations and tolerance bands that are agreed to by the Administrative Committee of the U.S. Pension Plan. Such target allocations will take into consideration the plan’s funded ratio. The manager will also monitor the strategy and, as the plan’s funded ratio changes over time, will rebalance the strategy, if necessary, to be within the agreed tolerance bands and target allocations. The portfolios are comprised of certain common collective investment trusts that are established and maintained by the investment manager. The common collective trusts are valued at their NAV as a practical expedient for fair value.
Note 16. Compensation Plans
Jefferies sponsors our following share-based compensation plans: Equity Compensation Plan, Employee Stock Purchase Plan (“ESPP”) and the Deferred Compensation Plan (“DCP”). The outstanding and future share-based awards relating to these plans relate to Jefferies common shares. The fair value of share-based awards is estimated on the date of grant based on the market price of the underlying common stock less the impact of market conditions and selling restrictions subsequent to vesting, if any, and is amortized as compensation expense over the related requisite service periods. We are allocated costs associated with awards granted to our employees under such plans.
In addition, we sponsor non-share-based compensation plans. Non-share-based compensation plans sponsored by us include a profit sharing plan and other forms of restricted cash awards.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of total compensation costs associated with certain of our compensation plans are as follows (in millions):
Year Ended November 30,
2021 2020 2019
Components of compensation costs:
Restricted cash awards (1) $ 375.5 $ 474.3 $ 314.7
Stock options and Stock appreciation rights 41.3 - -
Restricted stock and RSUs (2) 17.6 25.2 26.7
Profit sharing plan 7.8 7.8 7.2
Total compensation costs $ 442.2 $ 507.3 $ 348.6
(1)Amounts include costs related to the accelerated amortization of certain cash-based awards, which were amended to remove any service requirements for vesting in the awards, which amounted to $188.3 million and $179.6 million for the years ended November 30, 2021 and 2020, respectively.
(2)Total compensation costs associated with restricted stock and restricted stock units (“RSUs”) include the amortization of sign-on, retention and senior executive awards, less forfeitures and clawbacks. Additionally, we recognize compensation costs related to the discount provided to employees in electing to defer compensation under the DCP. These compensation costs were approximately $0.4 million, $0.3 million and $0.4 million for the years ended November 30, 2021, 2020 and 2019, respectively.
Remaining unamortized amounts related to certain compensation plans at November 30, 2021 are as follows (dollars in millions):
Remaining Unamortized Amounts Weighted Average Vesting Period
(in Years)
Non-vested share-based awards
$ 18.8 2
Restricted cash awards
197.7 3
Total
$ 216.5
The following are descriptions of the compensation plans:
Equity Compensation Plan. On March 25, 2021, a new Equity Compensation Plan (the “ECP”) was approved by Jefferies’ shareholders. The ECP replaced the Incentive Compensation Plan (“Incentive Plan”) and no further awards will be granted under the replaced plan. The Incentive Plan allowed for awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), nonqualified stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards, RSUs, dividend equivalents or other share-based awards. The ECP is an omnibus plan authorizing a variety of equity award types, as well as cash incentive awards, to be used for employees, non-employee directors and other service providers. Restricted stock awards are grants of common shares that require service as a condition of vesting. RSUs give a participant the right to receive shares if service or performance conditions are met, and which may specify an additional deferral period allowing a participant to hold an interest tied to common stock on a tax deferred basis. Prior to settlement, RSUs carry no voting or dividend rights associated with the stock ownership, but dividend equivalents are accrued to the extent there are dividends declared on the underlying common shares as cash amounts or as deemed reinvestments in additional RSUs. Awards issued and outstanding related to the ECP and Incentive Plan relate to shares of Jefferies.
Restricted stock and RSUs may be granted to new employees as “sign-on” awards, to existing employees as “retention” awards and to certain executive officers as incentive awards. Sign-on and retention awards are generally subject to annual ratable vesting over a multi-year service period and are amortized as compensation expense on a straight-line basis over the service period. Restricted stock and RSUs are granted to certain senior executives and may contain market, performance and/or service conditions. Market conditions are incorporated into the grant-date fair value of senior executive awards using a Monte Carlo valuation model. Compensation expense for awards with market conditions is recognized over the service period and is not reversed if the market conditions are not met. Awards with performance conditions are amortized over the service period if and to the extent it is determined to be probable that the performance condition will be achieved. If awards are forfeited due to failure to achieve performance conditions or failure to satisfy service conditions, any previously recognized expense for such awards is reversed.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Employee Stock Purchase Plan. There is also an ESPP which we consider noncompensatory effective January 1, 2007. The ESPP allows eligible employees to make payroll contributions that are used to acquire shares of Jefferies’ stock, generally at a discounted price.
Deferred Compensation Plan. There is also a DCP, which was established in 2001. Eligible employees are able to defer compensation on a pre-tax basis, with deferred amounts deemed invested at a discount in Jefferies common shares, or by allocating among any combination of other investment funds available under the DCP. We often invest directly, as a principal, in investments corresponding to the other investment funds, relating to our obligations to perform under the DCP. The compensation deferred by our employees is expensed in the period earned. The change in fair value of our investments in assets corresponding to the specified other investment funds are recognized in Principal transactions revenues and changes in the corresponding deferred compensation liability are reflected as Compensation and benefits expense in our Consolidated Statements of Earnings.
Profit Sharing Plan. We have a profit sharing plan, covering substantially all employees, which includes a salary reduction feature designed to qualify under Section 401(k) of the Internal Revenue Code.
Restricted Cash Awards. We provide compensation to new and existing employees in the form of loans and/or other cash awards which are subject to ratable vesting terms with service requirements. We amortize these awards to compensation expense over the relevant service period, which is generally considered to start at the beginning of the annual compensation year.
Note 17. Income Taxes
Total income taxes were allocated as follows (in thousands):
Year Ended November 30,
2021 2020 2019
Income tax expense
$ 559,229 $ 302,748 $ 80,284
The provision for income tax expense consists of the following components (in thousands):
Year Ended November 30,
2021 2020 2019
Current:
U.S. Federal
$ 306,108 $ 213,274 $ 50,970
U.S. state and local
74,601 35,317 (3,641)
Foreign
88,164 71,898 10,923
Total current
468,873 320,489 58,252
Deferred:
U.S. Federal
67,636 (30,190) 19,973
U.S. state and local
18,056 (96) 5,768
Foreign
4,664 12,545 (3,709)
Total deferred
90,356 (17,741) 22,032
Total income tax expense
$ 559,229 $ 302,748 $ 80,284
The following table presents the U.S. and non-U.S. components of income before income tax expense (in thousands):
Year Ended November 30,
2021 2020 2019
U.S.
$ 1,843,953 $ 888,639 $ 313,349
Non-U.S. (1)
340,000 288,815 11,320
Income before income tax expense
$ 2,183,953 $ 1,177,454 $ 324,669
(1)For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate of 21.0% to earnings before income taxes as a result of the following (dollars in thousands):
Year Ended November 30,
2021 2020 2019
Amount Percent Amount Percent Amount Percent
Computed expected income taxes
$ 458,630 21.0 % $ 247,265 21.0 % $ 68,181 21.0 %
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of Federal income tax benefit
82,070 3.8 50,923 4.3 11,638 3.6
International operations (including foreign rate differential)
20,080 0.9 13,168 1.1 4,518 1.4
Tax exempt income
(1,046) - (227) - (634) (0.2)
Foreign tax credits, net
(13,963) (0.6) (8,654) (0.7) (1,664) (0.5)
Meals and entertainment
915 - 1,822 0.2 3,641 1.1
Non-deductible executive compensation
16,313 0.7 8,407 0.7 3,720 1.1
Change in unrecognized tax benefits related to prior years
(7,902) (0.4) (9,314) (0.8) (7,690) (2.4)
Other, net
4,132 0.2 (642) (0.1) (1,426) (0.4)
Total income tax expense
$ 559,229 25.6 % $ 302,748 25.7 % $ 80,284 24.7 %
The following table presents a reconciliation of gross unrecognized tax benefits (in thousands):
Year Ended November 30,
2021 2020 2019
Balance at beginning of period
$ 168,647 $ 125,607 $ 125,626
Increases based on tax positions related to the current period
46,962 40,209 8,142
Increases based on tax positions related to prior periods
1,938 5,275 1,399
Decreases based on tax positions related to prior periods
(18,612) (2,444) (9,560)
Balance at end of period
$ 198,935 $ 168,647 $ 125,607
The total amount of unrecognized benefits that, if recognized, would favorably affect the effective tax rate was $157.8 million and $133.9 million (net of Federal benefit) at November 30, 2021 and 2020, respectively.
We recognize interest accrued related to unrecognized tax benefits in Interest expense. Penalties, if any, are recognized in Other expenses in our Consolidated Statements of Earnings. Net interest expense related to unrecognized tax benefits was $8.9 million, $9.8 million and $6.3 million for the years ended November 30, 2021, 2020 and 2019, respectively. At November 30, 2021 and 2020, we had interest accrued of approximately $74.3 million and $65.4 million, respectively, included in Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. No material penalties were accrued for the years ended November 30, 2021 and 2020.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below (in thousands):
November 30,
2021 2020
Deferred tax assets:
Compensation and benefits $ 150,449 $ 238,154
Operating lease liabilities 129,996 140,742
Long-term debt 65,037 41,934
Accrued expenses and other 91,081 61,247
Net operating losses 1,756 2,534
Sub-total 438,319 484,611
Valuation allowance (2,817) (3,201)
Total deferred tax assets 435,502 481,410
Deferred tax liabilities:
Operating lease right-of-use assets 121,062 134,638
Amortization of intangibles 64,697 67,663
Partnerships 34,223 28,249
Other 29,485 15,167
Total deferred tax liabilities 249,467 245,717
Net deferred tax asset, included in Other assets $ 186,035 $ 235,693
The valuation allowance represents the portion of our deferred tax assets for which it is more likely than not that the benefit of such items will not be realized. We believe that the realization of the net deferred tax asset of $186.0 million at November 30, 2021 is more likely than not based on expectations of future taxable income in the jurisdictions in which we operate.
At November 30, 2021, we had gross net operating loss carryforwards of $1.8 million, primarily related to various European jurisdictions. Deferred tax assets of $1.4 million related to net operating losses in Europe and $0.4 million related to net operating losses in Asia Pacific have been fully offset by the valuation allowance. The remaining valuation allowance is attributable to deferred tax assets related to compensation and benefits in the U.K.
We have a tax sharing agreement between us and Jefferies. Refer to Note 21, Related Party Transactions, herein, for further information.
We are currently under examination by a number of taxing jurisdictions. Though we do not expect that resolution of these examinations will have a material effect on our consolidated financial position, they may have a material impact on our consolidated results of operations for the period in which resolution occurs. It is reasonably possible that, within the next twelve months, statutes of limitation will expire which would have the effect of reducing the balance of unrecognized tax benefits by $8.3 million.
The table below summarizes the earliest tax years that remain subject to examination in the major tax jurisdictions in which we operate:
Jurisdiction
Tax Year
United States 2018
New York State 2001
New York City 2006
United Kingdom 2020
Hong Kong 2015
India 2010
We will recognize any U.S. income tax expense we may incur on global intangible low-taxed income as income tax expense in the period in which the tax is incurred.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 18. Commitments, Contingencies and Guarantees
Commitments
The following table summarizes our commitments at November 30, 2021 (in millions):
Expected Maturity Date (fiscal years)
2022 2023 2024 and 2025 2026 and 2027 2028 and Later Maximum Payout
Equity commitments (1)
$ 255.6 $ 2.0 $ - $ - $ 0.8 $ 258.4
Loan commitments (1)
250.0 25.0 - 60.0 - 335.0
Underwriting commitments
167.0 - - - - 167.0
Forward starting reverse repos (2)
7,682.3 - - - - 7,682.3
Forward starting repos (2)
4,572.0 - - - - 4,572.0
Other unfunded commitments (1)
25.0 571.3 5.4 - - 601.7
Total commitments
$ 12,951.9 $ 598.3 $ 5.4 $ 60.0 $ 0.8 $ 13,616.4
(1)Equity, loan and other unfunded commitments are presented by contractual maturity date. The amounts, however, are available on demand.
(2)At November 30, 2021, $7.67 billion within forward starting securities purchased under agreements to resell and all of the forward starting securities sold under agreements to repurchase settled within three business days.
Equity Commitments. Includes a commitment to invest in our joint venture, Jefferies Finance, and commitments to invest in private equity funds and in Jefferies Capital Partners, LLC, the manager of the private equity funds, which consists of a team led by one of our directors and Chairman of the Executive Committee. At November 30, 2021, our outstanding commitments relating to Jefferies Capital Partners, LLC and its private equity funds were $10.7 million.
See Note 9, Investments, for additional information regarding our investments in Jefferies Finance.
Additionally, at November 30, 2021, we had other outstanding equity commitments to invest up to $100.0 million to strategic affiliates and $105.1 million to various other investments.
Loan Commitments. From time to time we make commitments to extend credit to investment banking and other clients in loan syndication and acquisition finance, and to strategic affiliates. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual conditions applicable to the borrower. At November 30, 2021, we had $85.0 million of outstanding loan commitments to clients.
Loan commitments outstanding at November 30, 2021 also include our portion of the outstanding secured revolving credit facility provided to Jefferies Finance, to support loan underwritings by Jefferies Finance. See Note 9, Investments, for additional information.
Underwriting Commitments. In connection with investment banking activities, we may from time to time provide underwriting commitments to our clients in connection with capital raising transactions.
Forward Starting Reverse Repos and Repos. We enter into commitments to take possession of securities with agreements to resell on a forward starting basis and to sell securities with agreements to repurchase on a forward starting basis that are primarily secured by U.S. government and agency securities.
Other Unfunded Commitments. Other unfunded commitments include obligations in the form of revolving notes, warehouse financings and debt securities to provide financing to asset-backed and CLO vehicles. Upon advancing funds, drawn amounts are collateralized by the assets of an entity.
Guarantees
Derivative Contracts. As a dealer, we make markets and trade in a variety of derivative instruments. Certain derivative contracts that we have entered into meet the accounting definition of a guarantee under U.S. GAAP, including credit default swaps, written foreign currency options and written equity put options. On certain of these contracts, such as written interest rate caps and foreign currency options, the maximum payout cannot be quantified since the increase in interest or foreign exchange rates are not contractually limited by the terms of the contract. As such, we have disclosed notional values as a measure of our maximum potential payout under these contracts.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the notional amounts associated with our derivative contracts meeting the definition of a guarantee under U.S. GAAP at November 30, 2021 (in millions):
Expected Maturity Date (Fiscal Years)
2022 2023 2024 and 2025 2026 and 2027 2028 and Later Notional/ Maximum Payout
Guarantee Type:
Derivative contracts-non-credit related
$ 16,978.6 $ 7,849.4 $ 3,081.8 $ 87.7 $ - $ 27,997.5
Written derivative contracts-credit related
- - 17.8 - - 17.8
Total derivative contracts
$ 16,978.6 $ 7,849.4 $ 3,099.6 $ 87.7 $ - $ 28,015.3
The derivative contracts deemed to meet the definition of a guarantee under U.S. GAAP are before consideration of hedging transactions and only reflect a partial or “one-sided” component of any risk exposure. Written equity options and written credit default swaps are often executed in a strategy that is in tandem with long cash instruments (e.g., equity and debt securities). We substantially mitigate our exposure to market risk on these contracts through hedges, such as other derivative contracts and/or cash instruments, and we manage the risk associated with these contracts in the context of our overall risk management framework. We believe notional amounts overstate our expected payout and that fair value of these contracts is a more relevant measure of our obligations. At November 30, 2021, the fair value of derivative contracts meeting the definition of a guarantee is approximately $351.3 million.
Standby Letters of Credit. At November 30, 2021, we provided guarantees to certain counterparties in the form of standby letters of credit in the amount of $5.1 million, all of which expire within one year. Standby letters of credit commit us to make payment to the beneficiary if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary. Since commitments associated with these collateral instruments may expire unused, the amount shown does not necessarily reflect the actual future cash funding requirement.
Other Guarantees. We are members of various exchanges and clearing houses. In the normal course of business, we provide guarantees to securities clearing houses and exchanges. These guarantees generally are required under the standard membership agreements, such that members are required to guarantee the performance of other members. Additionally, if a member becomes unable to satisfy its obligations to the clearing house, other members would be required to meet these shortfalls. To mitigate these performance risks, the exchanges and clearing houses often require members to post collateral. Our obligations under such guarantees could exceed the collateral amounts posted. Our maximum potential liability under these arrangements cannot be quantified; however, the potential for us to be required to make payments under such guarantees is deemed remote. Accordingly, no liability has been recognized for these arrangements. Additionally, we provide certain indemnifications in connection with third-party clearing and execution arrangements whereby a third-party may clear and settle transactions on behalf of our clients. These indemnifications generally have standard contractual terms and are entered into in the ordinary course of business. Our obligations in respect of such transactions are secured by the assets in our client’s account, as well as any proceeds received from the transactions cleared and settled on behalf of our client. However, we believe that it is unlikely we would have to make any material payments under these arrangements and no material liabilities related to these indemnifications have been recognized.
Note 19. Net Capital Requirements
As a broker-dealer registered with the SEC and a member firm of the Financial Industry Regulatory Authority (“FINRA”), Jefferies LLC is subject to the SEC Uniform Net Capital Rule (“Rule 15c3-1”), which requires the maintenance of minimum net capital, and has elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Jefferies LLC, as a dually-registered U.S. broker-dealer and futures commission merchant (“FCM”), is also subject to Rule 1.17 of the Commodity Futures Trading Commission (“CFTC”), which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. On October 6, 2021, Jefferies Financial Services, Inc. (“JFSI”), a registered swap dealer, became subject to the CFTC’s regulatory capital requirements and holds regulatory capital in excess of the minimum regulatory requirement. Additionally, JFSI registered as a security-based swap dealer with the SEC on November 1, 2021, and became subject to the SEC’s security-based swap dealer regulatory rules. Further, subsequent to year-end, on December 16, 2021, JFSI was approved by the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC’s net capital requirements. At November 30, 2021, JFSI is in compliance with these SEC and CFTC requirements. As a security-based swap dealer and swap dealer, JFSI is subject to the net capital requirements of the SEC, CFTC and the National Futures Association (“NFA”), as a member of the NFA. JFSI 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, Jefferies LLC and JFSI’s net capital and excess net capital were as follows (in thousands):
Net Capital Excess Net Capital
Jefferies LLC
$ 2,225,733 $ 2,108,211
JFSI 452,297 432,297
FINRA is the designated examining authority for Jefferies LLC and the National Futures Association is the designated self-regulatory organization for Jefferies LLC as an FCM.
Certain other U.S. and non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject to the regulatory supervision and requirements of the Financial Conduct Authority in the U.K.
The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our regulated subsidiaries.
At November 30, 2021 and 2020, $5.25 billion and $5.67 billion, respectively, of net assets of our consolidated subsidiaries are restricted, as they reflect regulatory capital requirements or require regulatory approval prior to the payment of cash dividends and advances to the parent company.
Note 20. Segment Reporting
We operate in two reportable business segments: (1) Investment Banking and Capital Markets and (2) Asset Management. The Investment Banking and Capital Markets reportable business segment includes our securities, commodities, futures and foreign exchange capital markets activities and investment banking business, which is composed of financial advisory and underwriting activities. The Investment Banking and Capital Markets reportable business segment provides the sales, trading, origination and advisory effort for various fixed income, equity and advisory products and services. The Asset Management reportable business segment provides investment management services to investors in the U.S. and overseas and invests capital in hedge funds, separately managed accounts and third-party asset managers.
Our reportable business segment information is prepared using the following methodologies:
•Net revenues and non-interest expenses directly associated with each reportable business segment are included in determining earnings (loss) before income taxes.
•Net revenues and non-interest expenses not directly associated with specific reportable business segments are allocated based on the most relevant measures applicable, including each reportable business segment’s net revenues, headcount and other factors.
•Reportable business segment assets include an allocation of indirect corporate assets that have been fully allocated to our reportable business segments, generally based on each reportable business segment’s capital utilization.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Our net revenues, non-interest expenses and earnings (loss) before income taxes by reportable business segment are summarized below (in millions):
Year Ended November 30,
2021 2020 2019
Investment Banking and Capital Markets:
Net revenues
$ 6,796.6 $ 4,989.2 $ 3,036.0
Non-interest expenses
4,699.4 3,869.3 2,688.9
Earnings before income taxes $ 2,097.2 $ 1,119.9 $ 347.1
Asset Management:
Net revenues
$ 247.2 $ 208.3 $ 76.5
Non-interest expenses
160.4 150.7 98.9
Earnings (loss) before income taxes $ 86.8 $ 57.6 $ (22.4)
Total:
Net revenues
$ 7,043.8 $ 5,197.5 $ 3,112.5
Non-interest expenses
4,859.8 4,020.0 2,787.8
Earnings before income taxes $ 2,184.0 $ 1,177.5 $ 324.7
The following table summarizes our total assets by reportable business segment (in millions):
November 30,
2021 2020
Investment Banking and Capital Markets
$ 51,697.4 $ 44,488.1
Asset Management
3,071.5 3,263.9
Total assets
$ 54,768.9 $ 47,752.0
Net Revenues by Geographic Region
Net revenues for the Investment Banking and Capital Markets reportable business segment are recorded in the geographic region in which the position was risk-managed or, in the case of investment banking, in which the senior coverage banker is located. For the Asset Management reportable business segment, net revenues are allocated according to the location of the investment advisor. Net revenues by geographic region were as follows (in millions):
Year Ended November 30,
2021 2020 2019
Americas (1)
$ 5,656.4 $ 4,060.0 $ 2,407.6
Europe (2)
1,109.6 852.0 592.8
Asia Pacific 277.8 285.5 112.1
Net revenues
$ 7,043.8 $ 5,197.5 $ 3,112.5
(1)Substantially all relates to U.S. results.
(2)Substantially all relates to U.K. results.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 21. Related Party Transactions
Officers, Directors and Employees. The following sets forth information regarding related party transactions with our officers, directors and employees:
•At November 30, 2021 and 2020, we had $23.1 million and $28.9 million, respectively, of loans outstanding to certain of our officers and employees (none of whom are executive officers or directors) that are included in Other assets in our Consolidated Statements of Financial Condition.
•In June 2020, we sold an investment in a limited partnership to one of our employees for $0.5 million.
•Receivables from and payables to customers include balances arising from officers’, directors’ and employees’ individual security transactions. These transactions are subject to the same regulations as all customer transactions and are provided on substantially the same terms.
•One of our directors had an investment in a hedge fund managed by us of approximately $0.8 million at November 30, 2020. This investment was fully redeemed in February 2021.
See Note 8, Variable Interest Entities, and Note 18, Commitments, Contingencies and Guarantees, for further information regarding related party transactions with our officers, directors and employees.
Jefferies. The following is a description of our related party transactions with Jefferies and its affiliates:
•We provide services to and receive services from Jefferies under service agreements (in millions):
Year Ended November 30,
2021 2020 2019
Charges to Jefferies for services provided
$ 42.9 $ 47.2 $ 52.7
Charges from Jefferies for services received
38.4 32.2 9.5
•We provide investment banking and capital markets and asset management services to Jefferies and its affiliates. The following table presents the revenues earned by type of services provided (in millions):
Year Ended November 30,
2021 2020 2019
Investment banking
$ 45.8 $ 10.5 $ 10.6
Commissions and other fees
0.9 1.5 1.2
•Receivables from and payables to Jefferies, included in Other assets and Accrued expenses and other liabilities, respectively, in our Consolidated Statements of Financial Condition:
Year Ended November 30,
2021 2020
Receivable from Jefferies $ 0.3 $ 1.3
Payable to Jefferies 10.9 7.1
•During the years ended November 30, 2021 and 2020, we paid distributions of $923.5 million and $498.7 million, respectively, to Jefferies. In addition, during the year ended November 30, 2021, we received a contribution of $153.6 million from Jefferies. At November 30, 2021 and 2020, we accrued distributions payable in the amount of $193.0 million and $153.6 million, respectively, which are included in Accrued expenses and other liabilities, in our Consolidated Statements of Financial Condition, based on our results for the three months ended November 30, 2021 and 2020.
•Pursuant to a tax sharing agreement entered into between us and Jefferies, payments are made between us and Jefferies to settle current tax receivables and payables. At November 30, 2021, we had a net current tax receivable from Jefferies of $130.6 million included in Other assets, in our Consolidated Statements of Financial Condition. At November 30, 2020, we had a net current tax payable to Jefferies of $111.1 million included in Accrued expenses and other liabilities, in our Consolidated Statements of Financial Condition. During the years ended November 30, 2021 and 2020, we made payments to Jefferies of $595.0 million and $83.0 million, respectively.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
•We purchase securities from and sell securities to Jefferies, at fair value (in millions). There were no gains or losses on these transactions.
Year Ended November 30,
2021 2020
Securities purchased from Jefferies $ 17.1 $ 64.8
Securities sold to Jefferies 5.7 0.1
•On November 3, 2020, Jefferies sold a wholly-owned subsidiary primarily invested in short-dated receivables that related to an asset management strategy to an investment fund managed by us for approximately $180.7 million.
•At November 30, 2021 and 2020, we have customer account payables to entities of Jefferies totaling $0.5 million and $2.2 million, respectively, included in Payables-customers, in our Consolidated Statements of Financial Condition.
•On November 27, 2019, we transferred our investment in CoreCommodity Capital, LLC, an asset manager, along with a related accrued receivable and deferred tax asset, to Jefferies, in return for a total cash payment of $31.0 million.
•In connection with foreign exchange contracts entered into under a prime brokerage agreement with an affiliate of Jefferies, we have $0.7 million and $2.7 million at November 30, 2021 and 2020, respectively, included in Payables-brokers, dealers and clearing organizations, in our Consolidated Statements of Financial Condition.
•We enter into OTC foreign exchange contracts with a subsidiary of Jefferies. In connection with these contracts, we had $0.1 million recorded in Financial instruments owned, at fair value, in our Consolidated Statements of Financial Condition at November 30, 2020. Net gains (losses) relating to these contracts, which are included in Principal transactions revenues in our Consolidated Statements of Earnings, are as follows (in millions):
Year Ended November 30,
2021 2020 2019
Net gains (losses) on foreign exchange contracts $ 0.1 $ 1.6 $ (6.1)
•Two of our directors had investments totaling $0.4 million at November 30, 2019 in a hedge fund managed by Jefferies. In December 2019, both directors fully redeemed their interests in this fund.
•We had investments in hedge funds managed by Jefferies of $239.0 million at November 30, 2020, included in Financial instruments owned, at fair value, in our Consolidated Statements of Financial Condition. In January 2021, Jefferies transferred one of its asset management divisions, the investment manager of this fund, to us, in return for a payment of $2.2 million. Net gains on our investments in these hedge funds for the years ended November 30, 2020 and 2019, were $15.8 million and $4.7 million, respectively, which are included in Principal transactions revenues in our Consolidated Statements of Earnings.
•In connection with our capital markets activities, from time to time we make a market in long-term debt securities of Jefferies (i.e., we buy and sell debt securities issued by Jefferies). At November 30, 2021 and 2020, approximately $2.3 million and $2.6 million, respectively, of debt issued by Jefferies are included in Financial instruments owned, at fair value, in our Consolidated Statements of Financial Condition.
•For the year ended November 30, 2021, we recorded fees related to our asset management business of $1.0 million, which are included in Floor brokerage and clearing fees in our Consolidated Statement of Earnings, relating to an investment in a separately managed account, which is managed by a strategic affiliate.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
•We have a sublease agreement with an affiliate of Jefferies for office space. Payments received from this affiliate for rent and other expenses are as follows (in millions).
Year Ended November 30,
2021 2020 2019
Payments received $ 0.8 $ 0.8 $ -
•In June 2020, Jefferies paid us $2.9 million for the transfer of one of its asset management divisions, which included a net related liability to us.
For information on transactions with our equity method investees, see Note 9, Investments.
Note 22. Subsequent Events
Subsequent to year-end, on December 1, 2021, Jefferies transferred certain investments in securities and limited partnerships to us. In addition, also on December 1, 2021, Jefferies transferred its investment in Foursight Capital, a subsidiary of Jefferies, to us. These transfers were accomplished as capital contributions from Jefferies, and since we are under common control, these capital contributions were recorded at their book values. As a result of these transfers, our total assets increased by $1.27 billion, total liabilities increased by $800.4 million and total equity increased by $476.5 million in our Consolidated Statement of Financial Condition at December 1, 2021.
JEFFERIES GROUP LLC AND SUBSIDIARIES

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our Management, under the direction of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of November 30, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of November 30, 2021 are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Internal Control over Financial Reporting
Management’s annual report on internal control over financial reporting is contained in Part II, Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended November 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
JEFFERIES GROUP LLC AND SUBSIDIARIES

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
For the fiscal years ended November 30, 2021 and 2020, the fees for services provided by Deloitte & Touche LLP and the member firms of Deloitte Touche Tohmatsu Limited were as follows:
Year Ended November 30,
2021 2020
Audit Fees $ 9,097,602 $ 7,514,963
Audit-Related Fees 1,376,380 1,254,925
Tax Fees 170,940 181,058
All Other Fees 6,990 6,990
Total All Fees $ 10,651,912 $ 8,957,936
Audit Fees - The Audit Fees reported above reflect fees for services provided during fiscal 2021 and 2020. These amounts include fees for professional services rendered as our principal accountant for the audit of our consolidated financial statements included in this Annual Report on Form 10-K, the audits of various affiliates and investment funds managed by Jefferies or its affiliates, the audit of internal controls over financial reporting required by Section 404 of Sarbanes-Oxley, reviews of the interim consolidated financial statements included in our quarterly reports on Form 10-Q, the issuance of comfort letters, consents and other services related to SEC and other regulatory filings, audit fees related to other services that are normally provided in connection with statutory and regulatory filings or engagements. The Audit Committee preapproves all auditing services and permitted non-audit services to be performed for us by our independent registered public accounting firm, which are approved by the Audit Committee prior to the completion of the audit. In 2021, the Audit Committee preapproved all auditing services performed for us by the independent registered public accounting firm.
Audit-Related Fees - The Audit-Related Fees reported above reflect fees for services provided during fiscal 2021 and 2020. These amounts include fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees” above. Specifically, the Audit-Related services included the preparation of our SOC1 report, performing agreed upon procedures related to specific matters at our request, accounting consultations, and other services that are normally provided in connection with statutory and regulatory filings or engagements.
Tax Fees - Tax Fees includes fees for services provided during fiscal 2021 and 2020 related to tax compliance, tax advice and tax planning.
All Other Fees - Fees for services not included in the first three categories.
JEFFERIES GROUP LLC AND SUBSIDIARIES
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)1. Financial Statements
The financial statements required to be filed hereunder are listed on page S-1.
(a)2. Financial Statement Schedules
The financial statement schedules required to be filed hereunder are listed on page S-1.
(a)3. Exhibits
Exhibit No. Description
3.1 Certificate of Formation of Jefferies Group LLC effective as of March 1, 2013 is incorporated herein by reference to Exhibit 3.2 of Registrant’s Form 8-K filed on March 1, 2013.
3.2 Certificate of Conversion of Jefferies Group LLC effective as of March 1, 2013 is incorporated herein by reference to Exhibit 3.1 of Registrant’s Form 8-K filed on March 1, 2013.
3.3 Limited Liability Company Agreement of Jefferies Group LLC dated as of March 1, 2013 (with Schedule A supplemented effective May 23, 2018) is incorporated herein by reference to Exhibit 3.3 of Registrant’s Form 10-K filed on January 29, 2019.
4.1 Senior Debt Indenture, by and among Jefferies Group LLC and Jefferies Group Capital Finance Inc. and The Bank of New York Mellon, as Trustee, dated May 26, 2016 is incorporated herein by reference to Exhibit 4.1 of the Registrant’s Form 8-A filed on January 17, 2017.
4.2 Indenture, dated as of March 12, 2002, by and between Jefferies Group LLC (formerly Jefferies Group, Inc.) and The Bank of New York Mellon, as Trustee, is incorporated herein by reference to Exhibit 4.3 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2002 filed on March 28, 2003.
4.3 First Supplemental Indenture, dated as of July 15, 2003, to Indenture dated as of March 12, 2002 by and between Jefferies Group LLC (formerly Jefferies Group, Inc.) and The Bank of New York Mellon, as Trustee, is incorporated herein by reference to Exhibit 4.2 of the Registrant’s Form S-3 Registration Statement filed on July 15, 2003 (No. 333-107032).
4.4 Second Supplemental Indenture, dated as of December 19, 2012, to the Indenture dated as of March 12, 2002, by and between Jefferies Group LLC (formerly Jefferies Group, Inc.) and The Bank of New York Mellon, as trustee, is incorporated herein by reference to Exhibit 4.1 of the Registrant’s Form 8-K filed on December 20, 2012.
4.5 Third Supplemental Indenture, dated as of March 1, 2013, to the Indenture dated as of March 12, 2002 by and between Jefferies Group LLC (formerly Jefferies Group, Inc.) and The Bank of New York Mellon, as Trustee, is incorporated herein by reference to Exhibit 4.3 of the Registrant’s Form 8-K filed on March 1, 2013.
4.6 Other instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. Registrant hereby agrees to furnish copies of these instruments to the Commission upon request.
4.7 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, is incorporated herein by reference to Exhibit 4.7 of the Registrant’s Form 10-K filed on January 29, 2021.
23.1* Consent of Deloitte & Touche LLP.
31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Exhibit No. Description
101* Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline Extensible Business Reporting language (iXBRL): (i) the Consolidated Statements of Financial Condition as of November 30, 2021 and 2020; (ii) the Consolidated Statements of Earnings for the years ended November 30, 2021, 2020 and 2019; (iii) the Consolidated Statements of Comprehensive Income for the years ended November 30, 2021, 2020 and 2019; (iv) the Consolidated Statements of Changes in Equity for the years ended November 30, 2021, 2020 and 2019; (v) the Consolidated Statements of Cash Flows for the years ended November 30, 2021, 2020 and 2019; and (vi) the Notes to Consolidated Financial Statements.
104 Cover page interactive data file pursuant to Rule 406 of Regulation S-T, formatted in iXBRL (included in exhibit 101)
* Filed herewith.
** Furnished herewith pursuant to item 601(b) (32) of Regulation S-K.