EDGAR 10-K Filing

Company CIK: 1084580
Filing Year: 2021
Filename: 1084580_10-K_2021_0001084580-21-000007.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:
•Earnings Releases and Other Public Announcements
•Annual and interim reports on Form 10-K
•Quarterly reports on Form 10-Q
•Current reports on Form 8-K
•Code of Ethics
•Reportable waivers, if any, from our Code of Ethics by our executive officers
•Board of Directors Corporate Governance Guidelines
•Charter of the Corporate Governance and Nominating Committee of the Board of Directors
•Charter of the Compensation Committee of the Board of Directors
•Charter of the Audit Committee of the Board of Directors
•Charters of other Committees of our Board of Directors
•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 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 associated third-party asset managers in which we have an interest.
Financial information regarding our reportable business segments for the years ended November 30, 2020, 2019 and 2018 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 950 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, Amsterdam, Stockholm, Mumbai, Hong Kong, Singapore, Sydney, Tokyo and Zurich.
Advisory Services
We provide mergers and acquisition and restructuring and recapitalization services to companies, financial sponsors and government entities. In the mergers and acquisition area, we advise business owners and corporations on corporate sales and divestitures, acquisitions, mergers, tender offers, spinoffs, joint ventures, strategic alliances and takeover and proxy fight defense. 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.
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 acquisition companies; follow-on offerings; block trades and equity-linked convertible securities transactions.
Debt Underwriting
We provide a wide range of debt and acquisition financing capabilities for 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
Jefferies Finance 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 in middle market and broadly syndicated loans. Jefferies Finance conducts its operations primarily through two business lines, Leveraged Finance Arrangement and Portfolio and Asset Management. Jefferies Finance typically syndicates to third-party investors substantially all of its arranged volume. Its Portfolio and Asset Management business line 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. The Portfolio and Asset Management business is comprised of three registered Investment Advisors: Jefferies Finance, Apex Credit Partners LLC and JFIN Asset Management LLC, which each separately focus on investments in cash flow and traditional asset-based revolving credit, collateralized loan obligations which invest in predominately broadly syndicated loans and proprietary and third-party investments in middle market loans held in private funds and separately managed accounts.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Equities
Equities Research, Capital Markets
We provide our clients full-service equities research, sales and trading capabilities across global securities 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 strategy, trading ideas, market information and analyses across a range of industries and receive and execute client orders. Our equity research covers over 2,500 companies around the world and a further more than 700 companies are covered by eight leading local firms in Asia Pacific with which we maintain alliances.
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 International Limited 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.
Berkadia
Berkadia Commercial Mortgage Holding LLC (“Berkadia”) is a 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 Fannie Mae, 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
JEFFERIES GROUP LLC AND SUBSIDIARIES
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, such as Schonfeld Fundamental Equities, Dymon Asia Capital and Weiss Multi-Strategy, to niche equity long/short strategies, such as Riposte Capital and Kathmandu, to credit strategies, such as Point Bonita Capital and 3|5|2 Capital. 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. During 2020, we established a strategic relationship with Dymon Asia Capital (Asian multi-strategy) and FourSixThree Capital (distressed credit and special situations) and added Riposte Capital (contrarian long/short equity) and 3|5|2 Capital (consumer-focused asset-backed securities) to our LAM platform.
Human Capital
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, 2020, we had 3,922 employees globally with approximately 64%, 24% and 12% 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 2020, our overall employee levels increased by 3%, as we have continued to expand our presence in Asia, particularly in our Equities business, and we have continued to grow certain of our businesses in Europe. During fiscal 2020, there was a slight decline in the overall percentage of our employees in our Asset Management business segment due to the wind down of a wholly-owned asset management platform during the year.
Our ability to develop and retain our clients depends on the reputation, marketing efforts, capabilities and knowledge of our employees and our firm. 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. In order to compete effectively and continue to provide best in class service to our clients, we must attract, retain and motivate qualified professionals. During 2020, our voluntary turnover rate was approximately 8%. Our overall retention rate is 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.
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 have implemented a number of policies and measures focused on non-discrimination, sexual harassment prevention, health and safety, training and education, and Employee Resource Groups. We embrace diversity and inclusion, which we believe fosters creativity, innovation and thought leadership through the infusion of new ideas and perspectives. Our Board of Directors has underscored our commitment to diversity by appointing diverse candidates to fill the seats of one-third of our independent directors. 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. Solid internal partnerships with Employee Resource Groups allow Jefferies to develop and retain our wealth of diverse talent and ensure continued growth and success. We encourage you to review the Environmental, Social and Governance 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.”
JEFFERIES GROUP LLC AND SUBSIDIARIES
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”) and swap 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 and swap 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. 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 and swap 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 to 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 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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 required to maintain minimum adjusted net capital of $1.0 million.
SEC registered broker-dealers that will 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 has also approved swap dealer capital rules. Both the SEC rules governing a standalone SBS dealer and the CFTC rules governing swap dealers are expected to come into effect in late 2021. 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 means the sum of (i) the total initial margin required to be maintained by the SEC SBS dealer or CFTC swap dealer at each clearing agency with respect to SBS or swap transactions cleared for SBS or swap customers and (ii) the total initial margin amount calculated by the SEC SBS dealer or CFTC swap dealer with respect to non-cleared SBS under new SEC rules and swaps under the CFTC rules.
Jefferies Group has two entities provisionally registered with the CFTC as swap dealers - Jefferies Financial Services Inc. (“JFSI”) and Jefferies Financial Products LLC (“JFP”). Both JFSI and JFP are expected to comply with the SEC and CFTC capital rules for SBS and swap dealers, respectively, in the fourth quarter of 2021.
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.
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.
Our principal trading and investments expose us to risk of loss.
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.
We are exposed to market risk.
We are, directly and indirectly, affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest spread, the difference between the yield we earn on our assets and the interest rate we pay for sources of funding, which, in turn, impacts our net interest revenue and earnings. Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. In our brokerage operations, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely, in those operations, a falling interest rate environment generally results in our earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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.
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.
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 it will not compel panel banks to contribute to LIBOR after 2021 and possibly prior to then. We currently hold IBOR positions with maturities past 2020. In addition, we rely on vendor applications and data providers that support downstream IBOR data. We are reviewing our positions for a strategic conversion to alternative rates for each currency we deal in. Each jurisdiction has proposed an alternative to LIBOR and other IBORs based on a risk free rate (the Secured Overnight Funding Rate for U.S. Dollars, Sterling Overnight Index Average for Sterling markets, Euro Short Term Rate for Euros and Tokyo Overnight Average Rate for Japanese Yens). It is possible that the discontinuance of the IBORs will result in disruption in the financial markets, suppressed capital markets activities and liquidity, pricing volatility, loss of market share in certain products, adverse tax or accounting impacts, increased compliance, legal and operational costs, increased capital requirements and business continuity issues.
We continue to monitor and facilitate the transition from IBOR-referencing products to products referencing alternative reference rates. We have also been monitoring the development of the IBOR Fallbacks Protocol of the International Swaps and Derivatives Association, which was published on October 23, 2020, and will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties as part of IBOR transition.
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 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. 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 United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. Several states, including New York, where we are headquartered, have declared states of emergency. Similar impacts have been experienced in every country in which we do business. 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
JEFFERIES GROUP LLC AND SUBSIDIARIES
• 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
We are taking necessary and recommended precautions to protect the safety and well-being of our employees and customers, 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 customer support and service.
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 would likely result in a decline 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, terrorist attacks, extreme weather events 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), terrorist attacks, extreme terrestrial or solar weather 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.
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 customers 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, renewed concern about China's economy, 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.
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:
JEFFERIES GROUP LLC AND SUBSIDIARIES
•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 resulting from the current populist political movement 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 customers or competitors fail, our business prospects and revenue could be negatively impacted due to negative market sentiment causing customers 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.
The potential impacts related to the delivery of Brexit or 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 could adversely affect our businesses, including our revenues from trading and investment banking activities, particularly in Europe, and our results of operations and financial condition.
We operated substantial parts of our EU businesses from entities based in the U.K. and have taken steps to ensure that we are able to continue to provide services to clients located in the European Economic Area (“EEA”) jurisdiction without interruption. As such, a wholly-owned subsidiary (“Jefferies GmbH”) has been established in Germany which is authorized as a MiFID investment firm by BaFin and 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 Amsterdam, Madrid, Milan, Paris and Stockholm. 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.
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
JEFFERIES GROUP LLC AND SUBSIDIARIES
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.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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. Third-parties may also attempt to place individuals within our firm or 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 have been the target of attempted cyber attacks and we understand that cybersecurity incidents among financial services firms are on the rise. We are not aware of any material losses relating to cyber attacks or other information security breaches. The techniques used in these cyber attacks and cybersecurity incidents are increasingly sophisticated, change frequently and are often not recognized until launched. Although we 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 would 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 human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code, and other events that could result in significant liability and damage to our reputation, and have an ongoing impact on the security and stability of our operations.
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 regularly conduct security assessments on these third-party vendors, we cannot be certain that their information security protocols are sufficient to withstand a cyber attack, cybersecurity incident, or other information security breach. In addition, in order to access our products and services, our customers may use 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 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. federal, state and international laws governing the protection of personally identifiable information. If any person, including any of our
JEFFERIES GROUP LLC AND SUBSIDIARIES
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 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 Berkadia may not prove to be successful and may adversely affect our results of operations or financial condition.
At November 30, 2020, we had an approximately $301.2 million investment in Berkadia. 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.
Legal, Legislation and Regulation Risks
New 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 (although some rules, including the SEC rules for SBS, have compliance dates that will occur in the future). Two of our subsidiaries are provisionally registered as swap dealers with the CFTC and are members of the NFA. We may also be required in the future to register one or more additional subsidiaries as SBS dealers with the SEC. Certain swaps have been made subject to mandatory clearing and exchange trading and additional swaps and SBS may become subject to such requirements in the future. Pursuant to regulations adopted by the CFTC and bank regulators, swap dealers are required to post and collect variation margin in connection with the trading of uncleared swaps. We have already incurred significant compliance and operational costs as a result of the Dodd-Frank Act swap business conduct and mandatory variation margin rules, and when the compliance dates for all the final rules contemplated by Title VII have been implemented, our swap dealer entities will also be subject to mandatory capital requirements that will likely have an effect on our business. Although there is uncertainty about the full impact of these changes, we expect we will continue to be subject to a complex regulatory framework that will require significant monitoring and compliance expenditures. 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.
The European Market Infrastructure Regulation (“EMIR”) relating to derivatives entered into force during August 2012 and introduced certain requirements in respect of derivative contracts including: (i) the mandatory clearing of OTC derivative contracts declared subject to the clearing obligation; (ii) risk mitigation techniques in respect of uncleared OTC derivative
JEFFERIES GROUP LLC AND SUBSIDIARIES
contracts, including the mandatory margining of uncleared OTC derivative contracts; and (iii) reporting and record keeping requirements in respect of all derivative contracts. EMIR’s requirements apply to “financial counterparties” such as EU authorized investment firms, credit institutions, insurance companies, undertakings for collective investment in transferable securities and alternative investment funds, and “non-financial counterparties” (being an EU entity which is not a financial counterparty). Members of our group who are EU entities or subsidiaries and, when transacting with in-scope EU counterparties, members of our group who are non-EU regulated entities or subsidiaries may be subject to additional obligations and/or costs that may not otherwise have applied. Amendments to EMIR entered into force during 2019 to make the rules more streamlined and proportionate. From January 1, 2021, following the end of the transition period agreed between the EU and the U.K., EMIR will no longer apply under U.K. law; it will be replaced by “U.K. EMIR,” being EMIR as it forms part of U.K. domestic law by virtue of Section 3 of the European Union (Withdrawal) Act 2018. U.K. EMIR is therefore expected, at least initially, to impose substantially similar requirements on in-scope U.K. counterparties as those imposed on in-scope EU counterparties under 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 European Commission (“EC”) has been reviewing MiFID II throughout 2020 and is expected to publish a legislative proposal for changes to MiFID II. The extent of the changes that will be proposed under the MiFID II review is not known; however, subject to certain conditions and exceptions we may be unable to trade shares or derivatives with in-scope counterparties other than as provided by MiFID II and we may also be unable to trade shares or derivatives with, or as, in-scope counterparties under the U.K.’s “onshored” version of MiFID II.
The EU capital and liquidity legislation for banks and investment firms 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. These changes will begin to take effect from June 2021.
Increasing regulatory focus on privacy and security issues and expanding laws could impact our businesses and investments and expose us to increased liability.
The General Data Protection Regulation (“GDPR”), which went into effect in the EU in May 2018, imposes obligations including, among other things:
•accountability and transparency requirements, which require companies to demonstrate and record compliance with the GDPR and to provide more detailed information to data subjects regarding the processing of their personal data obligations to consider data protection when any new products or services are developed and to limit the amount of personal data processed
•compliance with the data protection rights of data subjects including a right of access to or correction of personal data and a right of erasure of personal data
•the prompt reporting of personal data breaches to 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.
The GDPR also includes restrictions on the transfers of personal data from the European Union to jurisdictions that have not been deemed to provide essentially equivalent data protection safeguards through national laws outside of certain legal transfer mechanisms. The 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. Data subjects also have a right to compensation as a result of infringement of the GDPR for financial or non-financial losses.
Obligations under the GDPR and implementing member state legislation continue to evolve through legislation and regulatory guidance. In addition to other privacy legislation that is in effect in other regions, numerous proposals regarding privacy and data protection 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.
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.
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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, such as the Net Capital Rule, that could impact various capital allocation decisions or limit the operations of our broker-dealers. In particular, compliance with the Net Capital Rule 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.
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 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.
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.
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
Item 6. Selected Financial Data
Omitted pursuant to general instruction I(2)(a) to Form 10-K.

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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”.
During March 2020, the global novel coronavirus (“COVID-19”) pandemic and initial actions taken in response wreaked havoc on the global economy and all financial markets, and adversely affected our businesses. Subsequently, with various government actions and more clarity from the U.S. Federal Reserve Bank on future interest rate policy, the equity markets have experienced a strong rebound and a supportive trading environment for investors has emerged along with renewed activity in the equity and debt new issue capital markets. We have experienced strong market volumes and increased client activity across our capital markets business with considerably improved performance, and mergers and acquisition activity was significant in the latter part of the year.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our results of operations for the years ended November 30, 2020 (“2020”) and November 30, 2019 (“2019”) are discussed below. For a discussion of our results of operations for the year ended November 30, 2018 (“2018”) and our 2019 results of operations as compared with our 2018 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, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on January 29, 2020.
Consolidated Results of Operations
Overview
The following table provides an overview of our consolidated results of operations (dollars in thousands):
% Change from
Prior Year
2020 2019 2018 2020 2019
Net revenues
$ 5,197,477 $ 3,112,530 $ 3,183,376 67.0 % (2.2) %
Non-interest expenses
4,020,023 2,787,861 2,773,709 44.2 % 0.5 %
Earnings before income taxes 1,177,454 324,669 409,667 262.7 % (20.7) %
Income tax expense 302,748 80,284 250,650 277.1 % (68.0) %
Net earnings 874,706 244,385 159,017 257.9 % 53.7 %
Net earnings (loss) attributable to noncontrolling interests (4,597) (1,644) 256 179.6 % N/M
Net earnings attributable to Jefferies Group LLC 879,303 246,029 158,761 257.4 % 55.0 %
Effective tax rate
25.7 % 24.7 % 61.2 %
N/M - Not Meaningful
Executive Summary
2020 Compared with 2019
Consolidated Results
•Net revenues for 2020 were a record $5,197.5 million, compared with $3,112.5 million for 2019, an increase of $2,084.9 million, or 67.0%.
•Our record results for 2020 reflect record net revenues in all of our businesses for the year.
•Our investment banking results reflect record performance in investment banking advisory, record net revenues in equity underwriting and solid performance in debt underwriting.
•We believe our record equities and fixed income net revenues were primarily due to increased market share, higher market trading volumes and a strong trading backdrop, given increased levels of volatility that transpired following the onset of COVID-19, and the effect of governments’ policy response on the markets in the second and third quarter of the current year.
Business Results
•Our record investment banking results during 2020, reflect record advisory revenues of $1,053.5 million, an increase of 37.3%, or $286.1 million, compared to 2019, while our record underwriting revenues for 2020 were $1,448.0 million, up $678.7 million, or 88.2%.
•Our investment banking results during 2020 also include a net loss of $37.5 million from our share of the net earnings of our Jefferies Finance LLC (“Jefferies Finance”) joint venture, reflecting unrealized losses related to the write-down of commitments and loans held-for-sale, as well as reserves recorded on the loan portfolio. This compares with net revenues of $22.3 million from our share of the net earnings of our Jefferies Finance joint venture for 2019.
•Our record equities net revenues reflect an increase of 45.9% compared to 2019, driven by strong results across most businesses as a result of the continued expansion of our business both from a product and geographic perspective, increased market volumes and strong client activity and continued momentum across our client franchise.
JEFFERIES GROUP LLC AND SUBSIDIARIES
•Our record fixed income net revenues reflect an increase of 96.8% compared to 2019, primarily due to strong trading volumes, as clients continued to navigate through uncertainty, and the businesses successfully managed through the markets’ high level of volatility during the year.
•Our record asset management net revenues during 2020 reflect an increase of $131.8 million, or 172.2%, compared to 2019, primarily as a result of higher investment returns. Our results reflect improved performance across most of our historical platforms. Since 2019, we made capital investments in several new separately managed accounts and funds.
•Net revenues in our other business category for 2020 were $121.3 million, compared with $58.5 million in 2019. Results for 2020 include net revenues of $68.9 million due to our share of the net income from Berkadia Commercial Mortgage Holding LLC (“Berkadia”), compared with $88.2 million from Berkadia for 2019. Results in 2020 also include gains of $61.5 million from hedges that were bought and sold in the first quarter.
Expenses
•Non-interest expenses for 2020 increased $1,232.2 million, or 44.2%, to $4,020.0 million, compared with $2,787.9 million for 2019, a lower rate of increase than the 67.0% increase in our net revenues. As a result, our pre-tax operating margin increased to 22.7% in 2020 from 10.4% in 2019.
•Compensation and benefits expense for 2020 was $2,792.6 million, inclusive of $179.6 million related to the accelerated amortization of certain cash-based awards that had been granted during previous years, which were amended to remove any service requirements for vesting in the awards. Compensation and benefits expense for 2020 was an increase of $1,108.5 million, or 65.8%, from 2019, consistent with the 67.0% growth in net revenues. Compensation and benefits expense as a percentage of Net revenues was 53.7% for 2020, or 50.3% excluding the impact of the accelerated cash awards, compared with 54.1% for 2019.
•Non-compensation expenses for 2020 increased $123.6 million, or 11.2%, to $1,227.4 million, compared with $1,103.8 million for 2019. The increase in non-compensation expenses was primarily due to increased Floor brokerage and clearing fees due to record net revenues in equities and fixed income resulting from an increase in trading volumes, and higher Underwriting costs due to record investment banking net revenues resulting from an increase in the number of transactions. The increase was also due to higher Technology and communication expenses and higher Other expenses, which was partially offset by significantly lower Business development expenses as business travel and events were substantially curtailed due to COVID-19.
Headcount
•At November 30, 2020, we had 3,922 employees globally, an increase of 107 employees from our headcount of 3,815 at November 30, 2019. Our headcount increased primarily in Europe and Asia Pacific, as a result of continued investment to expand our businesses in equities and fixed income; as well as additions in corporate services to support this business growth. The increase was partially offset by reductions in our asset management business due to the wind down of an asset management platform.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Revenues by Source
For presentation purposes, the remainder of “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.
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
2020 2019 2018
Amount % of Net Revenues Amount % of Net Revenues Amount % of Net Revenues 2020 2019
Advisory
$ 1,053,500 20.3 % $ 767,421 24.6 % $ 820,042 25.8 % 37.3 % (6.4) %
Equity underwriting
902,016 17.4 361,972 11.6 454,555 14.3 149.2 % (20.4) %
Debt underwriting
545,978 10.5 407,336 13.1 635,606 19.9 34.0 % (35.9) %
Total underwriting 1,447,994 27.9 769,308 24.7 1,090,161 34.2 88.2 % (29.4) %
Other investment banking
(103,330) (2.0) (14,617) (0.5) 3,638 0.1 606.9 % N/M
Total investment banking
2,398,164 46.2 1,522,112 48.8 1,913,841 60.1 57.6 % (20.5) %
Equities
1,128,910 21.7 773,979 24.9 665,557 20.9 45.9 % 16.3 %
Fixed income
1,340,792 25.8 681,362 21.9 559,712 17.6 96.8 % 21.7 %
Total capital markets
2,469,702 47.5 1,455,341 46.8 1,225,269 38.5 69.7 % 18.8 %
Other
121,272 2.3 58,535 1.9 45,316 1.4 107.2 % 29.2 %
Total Investment Banking and Capital Markets (1)(2)
4,989,138 96.0 3,035,988 97.5 3,184,426 100.0 64.3 % (4.7) %
Asset management fees and revenues 28,694 0.6 20,285 0.7 21,214 0.7 41.5 % (4.4) %
Investment return (3)(4) 228,129 4.4 96,805 3.1 16,971 0.5 135.7 470.4 %
Allocated net interest (3)(5) (48,484) (0.9) (40,548) (1.3) (39,235) (1.2) 19.6 % 3.3 %
Total Asset Management
208,339 4.0 76,542 2.5 (1,050) - 172.2 % N/M
Net revenues
$ 5,197,477 100.0 % $ 3,112,530 100.0 % $ 3,183,376 100.0 % 67.0 % (2.2) %
N/M - Not Meaningful
(1) Includes net interest revenues of $12.3 million, $74.0 million and $8.5 million for 2020, 2019 and 2018, respectively.
(2) 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.
(3) Net revenues attributed to the Investment return in Asset Management have been disaggregated to separately present Investment return and Allocated net interest (see footnote 5 below). This disaggregation is intended 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.
(4) Includes net interest expenses of $24.5 million, $8.9 million and $8.4 million for 2020, 2019 and 2018, respectively.
(5) Allocated net interest represents the allocation of our long-term debt interest expense to Asset Management, net of interest income on our Cash and cash equivalents and other sources of liquidity.
Investment Banking Revenues
Investment banking is comprised of revenues from:
•advisory services with respect to mergers and acquisitions and restructurings and recapitalizations;
•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
JEFFERIES GROUP LLC AND SUBSIDIARIES
•securities and loans received or acquired in connection with our investment banking activities.
The following table sets forth our investment banking revenues (dollars in thousands):
% Change from
Prior Year
2020 2019 2018 2020 2019
Advisory
$ 1,053,500 $ 767,421 $ 820,042 37.3 % (6.4) %
Equity underwriting
902,016 361,972 454,555 149.2 % (20.4) %
Debt underwriting
545,978 407,336 635,606 34.0 % (35.9) %
Total underwriting
1,447,994 769,308 1,090,161 88.2 % (29.4) %
Other investment banking
(103,330) (14,617) 3,638 606.9 % N/M
Total investment banking
$ 2,398,164 $ 1,522,112 $ 1,913,841 57.6 % (20.5) %
N/M - Not Meaningful
The following table sets forth certain statistics in respect of our investment banking activities (dollars in billions):
Deals Completed Aggregate Value
2020 2019 2018 2020 2019 2018
Advisory transactions 228 195 195 $ 217.5 $ 241.6 $ 193.9
Public and private debt financings
639 779 969 255.8 190.7 270.1
Public and private equity and convertible offerings 286 166 193 103.5 45.3 43.3
2020 Compared with 2019
•Investment banking revenues were a record $2,398.2 million for 2020, 57.6% higher than 2019. This reflects record performance in mergers and acquisitions, record results in equity underwriting and solid performance in debt underwriting, while the results for 2019 were impacted by the significant industry-wide decline in equity and leverage finance activity across the U.S. and Europe during the year.
•Our 2020 advisory revenues were a record $1,053.5 million, up $286.1 million, or 37.3%, from 2019, reflecting a meaningful acceleration of activity in the second half of 2020. Our underwriting revenues for 2020 were $1,448.0 million, an increase of $678.7 million, or 88.2%, from 2019, due to record results in equity underwriting and solid performance in debt underwriting, as clients took advantage of both a strong rebound in equity valuations, and in loan and bond prices to raise capital after the initial market disruption from COVID-19 subsided. From equity and debt underwriting activities, we generated $902.0 million and $546.0 million in revenues, respectively, for 2020, compared with $362.0 million and $407.3 million in revenues, respectively, for 2019.
•Other investment banking revenues were a loss of $103.3 million for 2020, compared with a loss of $14.6 million for 2019. The results for 2020 include a net loss of $37.5 million from our share of the net earnings of the Jefferies Finance joint venture reflecting unrealized losses related to the write-down of commitments and loans held-for-sale, as well as reserves recorded on the loan portfolio during the current year, primarily due to the impact of COVID-19 on the markets and the economy, compared to net revenues of $22.3 million for 2019, inclusive of $12.5 million in costs from refinancing its debt. The results in both years also include the amortization of costs and allocated interest expense related to our investment in the Jefferies Finance business. In addition, Other investment banking results for 2020 include unrealized write-downs of private equity investments received or acquired in connection with our investment banking activities.
Equities Net Revenue
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; and
•wealth management services.
2020 Compared with 2019
•In May 2020, Greenwich Associates named us as the top firm in helping clients navigate the markets as COVID-19 significantly impacted equity markets in mid-March, causing volatility and increased trading volumes. These results were based on a survey they had recently conducted of more than 75 buy-side institutions evaluating brokers’ performances in providing clients with liquidity, hedging solutions, market color and insights.
•Total equities net revenues were a record $1,128.9 million for 2020, an increase of 45.9% over the $774.0 million for 2019. Our strong performance was a result of the continued expansion of our business both from a product and geographic perspective, increased market volumes and the continued momentum of our client franchise. We increased our market share globally, as we were well-positioned to respond to our clients’ dynamic needs during the year.
•Our overall results included record net revenues across each region, including the Americas, Europe and Asia Pacific. Each of our regional businesses is continuing to benefit from our overall global expansion and network. We believe we provided consistent and exceptional advisory and execution capabilities to our clients globally throughout this unprecedented period.
•On a product basis, our overall results included record net revenues in our global cash equities businesses and across most of our global electronic trading businesses, as well as our domestic and international convertibles businesses. Our electronic trading and convertibles franchises continued to maintain several market-leading positions, while our cash equities franchise continued to improve its market share and competitive positioning. In November 2020, Greenwich Associates ranked our international convertibles business as #1 in Europe and Asia, excluding Japan, with significant market share and continued momentum.
•The record results in our global cash equities businesses were driven by increased client activity, market volumes and improved trading. While global market trading volumes and higher volatility drove an increase in commissions, our results in Asia Pacific were also driven by our expansion and investment in the region in 2019 and 2020 across advisory and execution capabilities. The record results in our global convertibles business was driven by strong primary and secondary trading activity and higher volatility, and also the expansion of the business in London we undertook in late 2018. Our global electronic trading business achieved record results, which were driven by increased global market volumes, volatility, and the continued strength of the global platform. Our exchange traded funds business had higher results driven by increased trading revenues and the better market environment.
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, 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.
2020 Compared with 2019
•Fixed income net revenues totaled a record $1,340.8 million for 2020, an increase of 96.8%, compared with net revenues of $681.4 million for 2019, a result of strong client activity both in primary and secondary markets across products and regions, as well as periods of elevated market volatility. Our overall results included record net revenues regionally in each of the Americas, Europe and Asia, as the business successfully managed through the markets’ high volumes and levels of uncertainty during the year.
•Our global rates businesses generated record net revenues for 2020, driven by higher volatility and wider bid-offer spreads, particularly during the second quarter. Our results for 2020 also benefited from low interest rates and a favorable market environment, compared to 2019 when economic challenges and uncertainties, such as Brexit, limited client activity and trading opportunities.
•Record results in our leveraged credit, European and Asian credit and investment grade corporates businesses resulted from robust revenues across regions and products due to increased client activity and higher levels of volatility during 2020. Similarly, record revenues from our global emerging markets business benefited from more favorable market conditions driving strong investor demand, as well as an increase in new issuance.
JEFFERIES GROUP LLC AND SUBSIDIARIES
•Revenues in our U.S. securitized markets group were higher due to an increase in demand for new issuance in the securitization markets and as the relative higher yields on securitized products drove investor demand in the second half of 2020.
•The record results were partially offset by lower revenues in our municipal securities business, which was impacted by a significant sell-off in the second quarter of 2020 before stabilizing and recovering over the second half of 2020.
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 or related parties and that are not part of our Leucadia Asset Management platform; and
•investments held as part of employee benefit plans, including deferred compensation plans (for which we incur an equal and offsetting amount of compensation expenses).
2020 Compared with 2019
•Our other net revenues totaled $121.3 million for 2020, an increase of $62.8 million compared with $58.5 million for 2019.
•Results for 2020 include net revenues of $68.9 million due to our share of income from Berkadia, compared with net revenues of $88.2 million for 2019. The lower net revenues for 2020 are due to the impairment of mortgage servicing rights as a result of lower interest rates and a decline in loan originations due to the impact of COVID-19 in the second quarter of 2020, with increased volumes and improved valuations returning in the latter part of the year.
•Results for 2020 also include gains of $61.5 million from hedges that were bought and sold in the first quarter as we took a negative view of the market due to the onset of the COVID-19 pandemic.
Asset Management
Our asset management business is a diversified alternative asset management platform offering institutional clients an innovative range of investment strategies through us and our affiliated asset managers. We provide certain of our affiliated asset managers access to fully integrated global operational infrastructure and support. This may include strategy and product development, daily operations and finance-related activities, compliance, legal and human resources support, as well as all aspects of business development.
Collectively, we and our affiliated asset managers have net asset values or net asset value equivalent assets under management of approximately $21.0 billion and $16.0 billion at November 30, 2020 and 2019, 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, the net capital invested in a separately managed account or the par value of collateralized loan obligations. These include the following:
•$6.9 billion (2020) and $3.1 billion (2019) - This includes the assets under management raised by affiliated asset managers with whom we have an ongoing profit or revenue sharing arrangement. In some instances, due to the timing of payments and crystallization of profits or revenue, the majority of revenue related to these relationships will be realized at their calendar year-end (during our first fiscal quarter). Revenues from our share of fees received by affiliated asset managers are presented in Revenue from third-parties with strategic affiliates within the results of our Asset Management businesses.
•$10.8 billion (2020) and $9.5 billion (2019) - Asset management activities within Jefferies Finance, our 50/50 joint venture with Massachusetts Mutual Life Insurance Company, which represent the aggregate par value of collateralized loan obligations (“CLOs”) managed by Jefferies Finance, including those consolidated by Jefferies Finance. Because management evaluates segment performance based on the inclusion of our share of the net earnings of our Jefferies Finance joint venture in our Investment Banking and Capital Markets reportable business segment, those activities are excluded from our Asset Management reportable business segment results. Revenues from our investment in Jefferies Finance are accounted for under the equity method and presented in Other revenues on the Consolidated Statement of Earnings.
•$2.6 billion (2020) and $2.6 billion (2019) - Net asset values of investments made by us or by Jefferies in funds or separately managed accounts. At times, we will incubate strategies using our own capital during the institutional build-out phase before opening investments to outside capital. This net asset value includes our seed capital of $1.5 billion (2020) and $1.2 billion (2019) in addition to amounts financed of $1.1 billion (2020) and $1.4 billion (2019), invested in funds and separately managed accounts that are managed by us and third-party asset managers. Revenues related to the net asset values of investments made by us are presented in Investment return within the results of our Asset
JEFFERIES GROUP LLC AND SUBSIDIARIES
Management businesses. We earn asset management fees from the net asset values of investments made by Jefferies, which are presented in Asset management fees and revenues within the results of our Asset Management businesses.
•$0.7 billion (2020) and $0.8 billion (2019) - This includes third-party investments actively managed by our wholly-owned divisions. We earn asset management fees as a result of the third-party investments, which are presented in Asset management fees and revenues within within the results of our Asset Management businesses.
Asset management revenues include the following:
•management and performance fees from funds and accounts managed by us;
•revenues from affiliated asset managers in which we hold interests that entitle us to portions of their revenues and/or profits; and
•investment income from capital invested in and managed by us, 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. Performance fees are generally recognized once a year, typically in December, when they become fixed and determinable and are not probable of being significantly reversed. As a result, the benefit of performance fees attributable to performance during the latter eleven months of each of our fiscal years is actually realized and recorded only in the first quarter of our next fiscal year.
The following summarizes the results of our Asset Management businesses by asset class (dollars in thousands):
% Change from
Prior Year
2020 2019 2018 2020 2019
Asset management fees:
Equities
$ 6,095 $ 3,623 $ 1,900 68.2 % 90.7 %
Multi-asset
3,092 13,596 19,314 (77.3) % (29.6) %
Total asset management fees
9,187 17,219 21,214 (46.6) % (18.8) %
Revenue from third-parties with strategic affiliates (1) 19,507 3,066 - 536.2 % N/M
Total asset management fees and revenues
28,694 20,285 21,214 41.5 % (4.4) %
Investment return
228,129 96,805 16,971 135.7 % 470.4 %
Allocated net interest
(48,484) (40,548) (39,235) 19.6 % 3.3 %
Total Asset Management
$ 208,339 $ 76,542 $ (1,050) 172.2 % N/M
N/M - Not Meaningful
(1) The amounts include our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements.
2020 Compared with 2019
•Asset management net revenues for 2020 were a record $208.3 million, compared with $76.5 million for 2019, primarily as a result of higher investment returns. Since 2019, we made capital investments in several new separately managed accounts and funds. In addition, our results reflect improved performance across most of our historical platforms. Total asset management revenues for 2020 are also reflective of a 41.5% increase in total asset management fees and revenues, primarily attributed to higher revenues from our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements, partially offset by a decline in asset management fees.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Assets under Management
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,
2020 2019
Assets under management (1):
Equities
$ 481 $ 110
Multi-asset (2) 173 730
Total
$ 654 $ 840
(1) Assets under management include third-party net assets actively managed by us, including hedge funds and certain managed accounts. We may consolidate certain funds and for such consolidated funds, assets under management include the pro-rata portion of third-party net assets in consolidated funds based on the percentage ownership of third-party investors in the consolidated fund. The above amounts do not include assets under management at non-consolidated strategic affiliates or investments or Jefferies Financial Group Inc.
(2) During 2020, certain of the assets under management in this asset class were liquidated and the funds were returned to the third-party investors due to the wind down of our quantPORT asset management platform.
Changes in assets under management were as follows (in millions):
Year Ended November 30,
2020 2019
Assets under management:
Balance, beginning of period
$ 840 $ 1,463
Net cash flow out
(86) (738)
Net market appreciation (depreciation)
(100) 115
Balance, end of period
$ 654 $ 840
The change in assets under management in our wholly-owned managers during 2020 is primarily due to market depreciation during the year and the liquidation and redemptions from certain funds related to the wind down of our quantPORT asset management platform, partially offset by increased investments by third-parties in certain funds and managed accounts. The change in assets under management during 2019 is primarily due to redemptions from certain funds and separately managed accounts, partially offset by market appreciation.
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 earnings or profits of the affiliated manager. Our asset management investments generated an investment return of $228.1 million and $96.8 million for 2020 and 2019, respectively. The following table represents our investments by asset manager (in thousands):
November 30,
2020 2019
Jefferies Group LLC; as manager:
Fund investments (1)
$ 25,292 $ 22,695
Separately managed accounts (2)
342,443 344,549
Total $ 367,735 $ 367,244
Jefferies Financial Group Inc.; as manager:
Fund investments
$ 233,601 $ 218,109
Separately managed accounts (2)
- 43,153
Total $ 233,601 $ 261,262
Strategic affiliates; as asset manager:
Fund investments (3) $ 641,185 $ 289,930
Separately managed accounts (2)
261,273 266,484
Total $ 902,458 $ 556,414
Total asset management investments $ 1,503,794 $ 1,184,920
(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, 2020 and 2019, $0.1 million and $22.6 million, respectively, represents net investments in funds that have been consolidated in our financial statements.
(2) Where we have investments in a separately managed account, the assets and liabilities of such account are presented on our balance sheet within each respective line item.
(3) The increase for 2020 was primarily due to an investment in a new fund.
Non-interest Expenses
Non-interest expenses were as follows (dollars in thousands):
% Change from
Prior Year
2020 2019 2018 2020 2019
Compensation and benefits
$ 2,792,575 $ 1,684,054 $ 1,736,264 65.8 % (3.0) %
Non-compensation expenses:
Floor brokerage and clearing fees
270,132 227,471 189,068 18.8 % 20.3 %
Underwriting costs
95,636 50,662 64,317 88.8 % (21.2) %
Technology and communications
386,830 335,395 305,655 15.3 % 9.7 %
Occupancy and equipment rental
107,180 119,472 100,952 (10.3) % 18.3 %
Business development
67,603 138,158 163,756 (51.1) % (15.6) %
Professional services
179,888 162,668 139,885 10.6 % 16.3 %
Other
120,179 69,981 73,812 71.7 % (5.2) %
Total non-compensation expenses
1,227,448 1,103,807 1,037,445 11.2 % 6.4 %
Total non-interest expenses
$ 4,020,023 $ 2,787,861 $ 2,773,709 44.2 % 0.5 %
N/M - Not Meaningful
JEFFERIES GROUP LLC AND SUBSIDIARIES
Compensation and Benefits
•Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation awards and the amortization of certain 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 also includes amortization expense associated with these awards to the extent there are respective future service period requirements. In addition, the senior executive awards contain market and performance conditions.
•Compensation and benefits expense was $2,792.6 million for 2020 compared with $1,684.1 million for 2019, increasing in line with our significant increase in net revenues. A significant portion of our compensation expense remains variable.
•Compensation expense related to the amortization of share- and cash-based awards amounted to $499.5 million for 2020 compared with $341.4 million for 2019. During the fourth quarter of 2020, we amended the service requirement provisions of certain cash-based awards that had been granted during previous years. Compensation expense of $179.6 million was recorded as a result of these amendments.
•Compensation and benefits expense as a percentage of Net revenues was 53.7% for 2020, or 50.3% excluding the impact of the accelerated cash awards, and 54.1% for 2019.
•Employee headcount was 3,922 globally at November 30, 2020, an increase of 107 employees from our headcount of 3,815 at November 30, 2019. Our headcount increased primarily in Europe and Asia, as a result of continued investment to expand our businesses in equities and fixed income; as well as additions in corporate services to support this business growth. The increase was partially offset by reductions in our asset management business due to the wind down of an asset management platform.
•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
2020 Compared with 2019
•Non-compensation expenses were $1,227.4 million for 2020, an increase of $123.6 million, or 11.2%, compared with $1,103.8 million for 2019.
•The increase in non-compensation expenses was primarily due to higher Floor brokerage and clearing fees due to record net revenues in equities and fixed income resulting from an increase in trading volumes and growth in certain asset management funds and resultant trading activity. The increase was also due to higher Underwriting costs, primarily due to record investment banking net revenues resulting from an increase in the number of transactions and higher Technology and communication expenses, primarily related to costs associated with the development of various trading systems, increased market data and higher connectivity usage due to the expansion of certain businesses in Asia.
•Non-compensation expenses also increased due to higher Other expenses, which included our charitable donations of $8.6 million, in memory of Peg Broadbent, our longstanding, esteemed Chief Financial Officer (“CFO”) who tragically died from complications of COVID-19 in March. Additionally, the increase in Other expenses also included $34.0 million attributed to our donation made to various charities in support of the Australian wildfire relief effort, costs associated with the early retirement of our 6.875% senior notes in November 2020, costs related to provisions for receivable losses and a writeoff of goodwill and intangible assets related to the wind down of our quantPORT asset management platform.
•The increase in non-compensation expenses was partially offset by significantly lower Business development expenses as business travel and hosted events were substantially curtailed due to COVID-19.
•Non-compensation expenses as a percentage of Net revenues was 23.6% and 35.5% for 2020 and 2019, respectively, demonstrating the operating leverage inherent in our business.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Income Taxes
•For 2020, the provision for income taxes was $302.7 million, equating to an effective tax rate of 25.7%, compared with a provision for income taxes of $80.3 million, equating to an effective tax rate of 24.7% for 2019.
•The increase in the effective tax rate during 2020, as compared with 2019, is primarily due to our substantially higher earnings before income taxes minimizing the impact of net tax benefits in 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.
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.
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, 2020, Goodwill recorded in our Consolidated Statement of Financial Condition is $1,646.9 million (3.4% 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, 2020.
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, 2020 are as follows: $566.2 million in Investment Banking, $160.8 million in Equities and Wealth Management, $919.5 million in Fixed Income and $0.4 million in Asset Management.
The results of our assessment on August 1, 2020 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,
2020 2019 % Change
Total assets
$ 47,752.0 $ 43,516.1 9.7 %
Cash and cash equivalents
7,111.9 5,567.9 27.7 %
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
604.3 796.8 (24.2) %
Financial instruments owned
17,686.1 16,363.4 8.1 %
Financial instruments sold, not yet purchased
10,017.5 10,532.5 (4.9) %
Total Level 3 assets
379.1 332.2 14.1 %
Securities borrowed
$ 6,934.8 $ 7,624.6 (9.0) %
Securities purchased under agreements to resell
5,096.8 4,299.6 18.5 %
Total securities borrowed and securities purchased under
agreements to resell $ 12,031.6 $ 11,924.2 0.9 %
Securities loaned
$ 1,810.7 $ 1,525.1 18.7 %
Securities sold under agreements to repurchase
8,316.3 7,504.7 10.8 %
Total securities loaned and securities sold under agreements to
repurchase $ 10,127.0 $ 9,029.8 12.2 %
Total assets at November 30, 2020 and 2019 were $47.8 billion and $43.5 billion, respectively, an increase of 9.7%. During 2020, average total assets were approximately 16.7% higher than total assets at November 30, 2020.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our total Financial instruments owned inventory was $17.7 billion and $16.4 billion at November 30, 2020 and 2019, respectively. During the year ended November 30, 2020, our total Financial instruments owned increased primarily due to increases in government and federal agency obligations, corporate debt securities, investments at fair value and loans and other receivables, partially offset by decreases in municipal securities and sovereign obligations. Financial instruments sold, not yet purchased inventory was $10.0 billion at November 30, 2020, a decrease of 4.9% from $10.5 billion at November 30, 2019, with the decrease primarily driven by decreases in corporate equity and debt securities and sovereign obligations, partially offset by increases in government and federal agency obligations and loans. Our overall net inventory position was $7.7 billion and $5.8 billion at November 30, 2020 and 2019, respectively, with the increase primarily due to an increase in corporate debt and equity securities, sovereign obligations and investments at fair value, partially offset by a decrease in municipal securities. Our Level 3 financial instruments owned as a percentage of total Financial instruments owned increased to 2.1% at November 30, 2020 from 1.9% at November 30, 2019.
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 borrowed and securities purchased under agreements to resell increased by 0.9% from November 30, 2019 to November 30, 2020, due to a decrease in the netting benefit for our collateralized financing transactions and increases in firm financing of our inventory, partially offset by a decrease in our matched book transactions. The outstanding balance of our securities loaned and securities sold under agreements to repurchase increased by 12.2% from November 30, 2019 to November 30, 2020, primarily due to an increase in firm financing of our inventory and a decrease in the netting benefit for our collateralized financing transactions, partially offset by a decrease in our matched book transactions. Our average month end balance of total reverse repos and stock borrows during 2020 were 37.6% higher than the November 30, 2020 balance. Our average month end balance of total repos and stock loans during 2020 were 53.9% higher than the November 30, 2020 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
2020 2019
Securities Purchased Under Agreements to Resell:
Year end $ 5,097 $ 4,300
Month end average
8,040 7,762
Maximum month end
12,061 11,589
Securities Sold Under Agreements to Repurchase:
Year end $ 8,316 $ 7,505
Month end average
13,501 14,686
Maximum month end
18,979 19,654
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,
2020 2019
Total assets
$ 47,751,997 $ 43,516,115
Total equity
$ 6,366,132 $ 6,129,747
Total Jefferies Group LLC member’s equity
$ 6,348,743 $ 6,125,472
Deduct:
Goodwill and intangible assets
(1,805,376) (1,814,141)
Tangible Jefferies Group LLC member’s equity
$ 4,543,367 $ 4,311,331
Leverage ratio (1)
7.5 7.1
Tangible gross leverage ratio (2)
10.1 9.7
(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 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 crisis, we seek to maintain surplus cash capital, which is reflected in the leverage ratios we maintain. Our total long-term capital of $13.0 billion at November 30, 2020 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 crisis, 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 crisis, 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 crisis. 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 crisis.
•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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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, 2020, 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.
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, 2020 Average Balance Quarter ended November 30, 2020 (1) November 30, 2019
Cash and cash equivalents:
Cash in banks
$ 1,979,058 $ 2,777,480 $ 983,816
Money market investments (2)
5,132,871 4,044,718 4,584,087
Total cash and cash equivalents
7,111,929 6,822,198 5,567,903
Other sources of liquidity:
Debt securities owned and securities purchased under agreements to resell (3)
1,180,410 1,074,927 972,624
Other (4)
312,511 306,911 377,296
Total other sources
1,492,921 1,381,838 1,349,920
Total cash and cash equivalents and other liquidity sources
$ 8,604,850 $ 8,204,036 $ 6,917,823
Total cash and cash equivalents and other liquidity sources as % of Total assets
18.0 % 15.9 %
Total cash and cash equivalents and other liquidity sources as % of Total assets less goodwill and intangible assets
18.7 % 16.6 %
(1)Average balances are calculated based on weekly balances.
(2)At November 30, 2020 and 2019, $5,118.0 million and $4,496.7 million, 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 and $87.4 million at November 30, 2020 and 2019, respectively, are invested in AAA rated prime money funds. The average balance of U.S. government money funds for the quarter ended November 30, 2020 was $4,030.2 million.
(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, 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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, 2020, we had the ability to readily obtain repurchase financing for 71.0% 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, 2020 and 2019 (in thousands):
November 30,
2020 2019
Liquid Financial
Instruments Unencumbered Liquid Financial Instruments (2) Liquid Financial Instruments Unencumbered Liquid Financial Instruments (2)
Corporate equity securities
$ 2,191,536 $ 238,129 $ 2,403,589 $ 256,624
Corporate debt securities
2,298,591 50,217 1,893,605 29,412
U.S. government, agency and municipal securities
3,336,361 110,586 2,894,264 151,414
Other sovereign obligations
2,518,928 1,101,272 2,633,636 969,800
Agency mortgage-backed securities (1)
1,652,743 - 1,757,077 -
Loans and other receivables
564,112 - 655,120 -
Total
$ 12,562,271 $ 1,500,204 $ 12,237,291 $ 1,407,250
(1)Consists solely of agency mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. These securities include pass-through securities, securities backed by adjustable rate mortgages, collateralized mortgage obligations, commercial mortgage-backed securities and interest- and principal-only securities.
(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 $21.5 billion and $16.3 billion for 2020 and 2019, respectively. Average unencumbered liquid financial instruments were $1.4 billion and $1.6 billion for 2020 and 2019, respectively.
In addition to being able to be readily financed at modest 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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, 2020, approximately 60.1% of our cash and noncash repurchase financing activities used collateral that was considered eligible collateral by central clearing corporations. During the year ended November 30, 2020, an average of approximately 87.7% 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 five months at November 30, 2020.
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, 2020, short-term borrowings, which must be repaid within one year or less and include bank loans and overdrafts, borrowings under revolving credit facilities, floating rate puttable notes and equity-linked notes totaled $764.7 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 $656.3 million and $555.4 million for 2020 and 2019, respectively.
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, 2020, we were in compliance with all covenants under these facilities. Our facilities included within short-term borrowings at November 30, 2020 were as follows (in thousands):
Bank of New York Mellon Master Loan Agreement (1) $ 300,000
JPMorgan Chase Bank, N.A. Credit Facility (2) 246,000
Royal Bank of Canada Credit Facility (3) 200,000
Bank of New York Mellon Credit Facility (4) -
Total $ 746,000
(1)Interest is generally based at spreads over the Federal Funds Rate as defined in this master loan agreement.
(2)Interest is based on an annual alternative base rate or an adjusted London Interbank Offered Rate (“LIBOR”), as defined in this credit facility agreement.
(3)Interest is based on a rate per annum equal to LIBOR plus an applicable margin of 2.05%.
(4)During 2020, Jefferies LLC entered into a revolving credit facility with the Bank of New York Mellon for a committed amount of $100.0 million, maturing on September 13, 2021. Interest is based on a rate per annum equal to the Federal Funds Rate plus 2%. At November 30, 2020, there were no borrowings outstanding under this agreement.
Our short-term borrowings at November 30, 2020 also include floating rate puttable notes of $6.8 million, equity-linked notes of $5.1 million and other bank loans of $6.8 million.
In addition, the Bank of New York Mellon 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%. Interest is charged 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, 2020, we were in compliance with all debt covenants under the Intraday Credit Facility.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
In addition to the above financing arrangements, we issue notes backed by eligible collateral under a master repurchase agreement, 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, 2020, the outstanding notes were $2.7 billion, bear interest at a spread over LIBOR and mature from December 2020 to August 2022.
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, 2020 and 2019, we had total long-term capital of $13.0 billion and $12.3 billion resulting in a long-term debt to equity capital ratio of 1.05:1 and 1.01:1, respectively. See “Equity Capital” herein for further information on our change in total equity. Our total long-term capital base at November 30, 2020 and 2019 was as follows (in thousands):
November 30,
2020 2019
Long-Term Debt (1)
$ 6,655,948 $ 6,213,648
Total Equity
6,366,132 6,129,747
Total Long-Term Capital
$ 13,022,080 $ 12,343,395
(1)Long-term debt at November 30, 2020 excludes $189.7 million of our outstanding borrowings under our senior secured revolving credit facility (“Revolving Credit Facility”) and $50.0 million of our secured bank loan. Long-term debt at November 30, 2019 excludes $550.6 million of our 2.375% Euro Medium Term Notes, as these notes matured on May 20, 2020, $189.1 million of our outstanding borrowings under our Revolving Credit Facility and $50.0 million of our secured bank loan.
Long-Term Debt
During 2020, long-term debt decreased by $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. At November 30, 2020, 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, 2020 was $1,712.2 million. For further information, see Note 12, Long-Term Debt, in our consolidated financial statements included in this Annual Report on Form 10-K.
We have a Revolving Credit Facility with a group of commercial banks for an aggregate principal amount of $190.0 million. At November 30, 2020, borrowings under the Revolving Credit Facility amounted to $189.7 million. Interest is based on an annual alternative base rate or an adjusted LIBOR, as defined in the Revolving Credit Facility 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 year and at November 30, 2020, 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. For further information, see Note 12, Long-Term Debt, in our consolidated financial statements included in this Annual Report on Form 10-K.
One of our subsidiaries has a Loan and Security Agreement with a bank for a term loan with a principal amount of $50.0 million (“Secured Bank Loan”). This Secured Bank Loan matures on September 27, 2021 and is collateralized by certain trading securities. Interest on the Secured Bank Loan is 1.25% plus LIBOR. The agreement contains certain covenants that, among other things, restrict lien or encumbrance upon any of the pledged collateral. At November 30, 2020, we were in compliance with all covenants under the Loan and Security Agreement.
At November 30, 2020, our long-term debt, excluding the Revolving Credit Facility and the Secured Bank Loan, has a weighted average maturity of approximately 10.8 years.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our long-term debt ratings at November 30, 2020 are as follows:
Rating Outlook
Moody’s Investors Service (1) Baa3 Stable
Standard and Poor’s (2) BBB Stable
Fitch Ratings
BBB Stable
(1) On April 15, 2020, Moody’s affirmed our rating of Baa3 and rating outlook of stable.
(2) On October 29, 2020, Standard and Poor’s (“S&P”) affirmed our ratings of BBB and revised our rating outlook from negative to stable.
At November 30, 2020, the long-term ratings on our principal operating broker-dealers, Jefferies LLC and Jefferies International Limited (a U.K. broker-dealer) are as follows:
Jefferies LLC
Jefferies International Limited
Rating Outlook Rating Outlook
Moody’s Investors Service (1) Baa2 Stable Baa2 Stable
S&P (2) BBB+ Stable BBB+ Stable
(1) On April 15, 2020, Moody’s affirmed our rating of Baa2 and rating outlooks of stable on Jefferies LLC and Jefferies International Limited.
(2) On October 29, 2020, S&P affirmed our rating of BBB+ and revised our rating outlook from negative to stable on Jefferies LLC and Jefferies International Limited.
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, 2020, 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 $102.9 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 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, 2019, the increase to total Jefferies Group LLC member’s equity at November 30, 2020 is primarily attributed to net earnings, partially offset by distributions to Jefferies during 2020. In addition, during 2020, we recognized gains due to foreign currency translation adjustments, net of tax, of $34.5 million, the majority of which is due to our £957.8 million investment in our London subsidiaries at November 30, 2020. 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. For further information on foreign currency translations, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in this Annual Report on Form 10-K.
During 2020, we paid distributions of $298.7 million to Jefferies, based on our results for the three months ended November 30, 2019 and the nine months ended August 31, 2020. In addition, on November 24, 2020 our Board of Directors approved a distribution of $200.0 million, which was paid on November 30, 2020. At November 30, 2020, we have accrued a distribution payable of $153.6 million, based on our results for the three months ended November 30, 2020.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Net Capital
As a broker-dealer registered with the SEC and member firms of the Financial Industry Regulatory Authority (“FINRA”), Jefferies LLC is subject to the Securities and Exchange 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.
At November 30, 2020, Jefferies LLC’s net capital and excess net capital were as follows (in thousands):
Net Capital Excess Net Capital
Jefferies LLC
$ 2,161,289 $ 2,060,537
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 United Kingdom (“U.K.”). The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010. 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. The CFTC has finalized rules establishing capital requirements and financial reporting requirements for CFTC registered swap dealers not subject to regulation by a banking regulator. We expect that these provisions will result in modifications to the regulatory capital requirements of some of our entities, and will result in some of our other entities becoming subject to regulatory capital requirements for the first time, including Jefferies Financial Services, Inc., which registered as a swap dealer with the CFTC during January 2013 and Jefferies Financial Products LLC, which registered during August 2014. We may also be required in the future to register one or more additional subsidiaries as security-based swap dealers with the SEC. Compliance with these rules is required by October 6, 2021.
The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our regulated subsidiaries.
Other Developments
The U.K. left the European Union on January 31, 2020 and the current transition period ended on December 31, 2020. On January 1, 2021, our U.K. broker dealer, Jefferies International Limited, is no longer able to provide services to European clients under the passport regime. We have 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”). European clients have been migrated to Jefferies GmbH to conduct business across all of our European investment banking, fixed income and equity platforms. During 2020, our European branches in Amsterdam, Madrid, Milan, Paris and Stockholm were migrated and we increased our local employees, equity capital and established clearing relationships.
Central banks and regulators around the world have convened working groups to find, and implement the transition to, suitable replacements for IBORs. We have an active transition program that focuses on an orderly transition from IBORs to alternative reference rates, including internal operational readiness and risk management. We are identifying, assessing and monitoring risk associated with the expected discontinuation of IBORs, which includes taking steps to update operational processes and models and evaluation legacy contracts for any changes that may be required.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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, 2020, 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.
Contractual Obligations
The table below provides information about our contractual obligations at November 30, 2020. The table presents principal cash flows with expected maturity dates (in millions):
Expected Maturity Date
2021 2022 2023
and
2024 2025
and
2026 2027
and
Later Total
Contractual obligations:
Unsecured long-term debt (contractual principal payments net of unamortized discounts and premiums) (1)
$ - $ 4.6 $ 1,358.7 $ 61.9 $ 5,230.8 $ 6,656.0
Revolving credit facility (1)
189.7 - - - - 189.7
Secured bank loan (1)
50.0 - - - - 50.0
Interest payment obligations on long-term debt (2)
295.5 282.7 476.8 457.4 1,587.6 3,100.0
Operating leases (3) 65.4 70.2 123.7 120.1 281.9 661.3
Purchase obligations (4) 275.0 127.0 121.9 46.5 23.2 593.6
Total contractual obligations
$ 875.6 $ 484.5 $ 2,081.1 $ 685.9 $ 7,123.5 $ 11,250.6
(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, 2020.
(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 From 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, 2020 reflect the minimum contractual obligations under legally enforceable contracts.
Subsequent to November 30, 2020 and on or before January 31, 2021, we expect to make cash payments of $1,450.9 million related to compensation awards for fiscal 2020. 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 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, 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 at the top of our priority list and ensuring we are in compliance with applicable laws, rules and regulations, as well as adhering to the highest ethical standards. We undertake prudent and conservative 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 oversight 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 with risk oversight responsibilities assigned to those areas of the business that have the appropriate knowledge.
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 tolerance. 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. 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 our Board and senior management 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.
•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.
•Vendor Risk Committee - oversees our vendor assurance program, reviews the list of critical vendors annually, ensures that our vendor risk management policy is being applied consistently and operated effectively and that the overall level of vendor risk is in line with our approved risk levels.
•Model Governance Committee - approves the model risk policy and sets common standards for managing model risk, and reviews and approves all model validation reports. The committee also reviews model validation findings and monitors the completion of any remedial action.
Risk Policy Framework
We maintain risk management policies which detail our risk management approach and controls. The Risk Management Department is responsible for ensuring policies are reviewed and approved annually, or in response to any material change in business activity or risk profile. All policies are reviewed and approved by the RMC.
Our policies set forth the governance structures, business controls, and risk mitigation strategies in place to manage risk. The policies also set out the measures or limits to manage our risks in accordance with our risk tolerance, as well as outline the risk exposure reporting requirements. All policies articulate the governance process for the development of the policies and the risk measurement techniques that are used and the business controls that are in place to manage any principal risks. The policies also set forth the processes and systems that are used to monitor the risk and the processes and escalation channels used to report the risk.
Our risk management policies include the following:
•Market Risk Management Policy;
•Operational Risk Management Policy;
•Credit Risk Management Policy;
•Independent Price Verification Policy;
•Model Risk Management Policy;
•Vendor Risk Management Policy; and
•New Business Approval Policy.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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 tolerance 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, amount of 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, specialist and investing activities 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. Trader mandates are reviewed annually and as part of the new business proposal process.
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 $10.51 million for 2020 from $8.79 million for 2019. The increase in average VaR and the average interest rate VaR component was primarily due to the increase in market volatility observed throughout 2020.
JEFFERIES GROUP LLC AND SUBSIDIARIES
The following table illustrates each separate component of VaR for each component of market risk by interest rate, 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, 2020 VaR at November 30, 2019
Daily VaR for 2020 Daily VaR for 2019
Risk Categories:
Average High Low Average High Low
Interest Rates $ 7.66 $ 7.90 $ 12.50 $ 3.93 $ 4.81 $ 4.47 $ 6.22 $ 2.58
Equity Prices 12.54 8.01 14.91 3.68 5.07 7.94 13.17 4.75
Currency Rates 0.16 0.21 2.17 0.03 0.32 0.25 1.41 0.06
Commodity Prices 0.44 0.70 1.56 0.24 0.64 0.89 2.43 0.40
Diversification Effect (2) (2.04) (6.31) N/A N/A (6.14) (4.76) N/A N/A
Firmwide
$ 18.76 $ 10.51 $ 22.78 $ 5.02 $ 4.70 $ 8.79 $ 14.83 $ 4.70
(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 business 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 2020, results of the evaluation at the aggregate level demonstrated eleven days when the net trading loss exceeded the 95% one day VaR.
The chart below reflects our daily VaR over the last four quarters, with the increase in August 2020 and the three months ended November 30, 2020 due to market volatility observed throughout 2020 and as certain businesses took advantage of positive market momentum in August and November 2020.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Daily Net Trading Revenue
There were 26 days with trading losses out of a total of 252 trading days in 2020. The histogram below presents the distribution of our actual daily net trading revenue for substantially all of our trading activities for 2020 (in millions).
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, monitoring concentration risk and tracking price target/stop loss levels. 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, 2020 (in thousands):
10% Sensitivity
Investment in funds (1)
$ 95,598
Private investments
16,655
Corporate debt securities in default
7,979
Trade claims
3,808
(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 $1.2 million at November 30, 2020, 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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 direct lender and through extending loan commitments, as a holder of securities 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:
•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 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 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
Our Secured Revolving Credit Facility, which supports loan underwritings by Jefferies Finance, is governed under separate policies other than the Credit Risk Policy and is approved by our Board of Directors. 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, 2020 and 2019 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,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
AAA Range
$ - $ - $ 1.1 $ 1.5 $ 0.1 $ - $ 1.2 $ 1.5 $ 5,132.9 $ 4,584.1 $ 5,134.1 $ 4,585.6
AA Range
45.2 45.2 111.7 43.0 9.8 3.7 166.7 91.9 7.8 5.3 174.5 97.2
A Range
0.2 1.1 542.2 531.9 147.2 152.4 689.6 685.4 1,967.9 976.3 2,657.5 1,661.7
BBB Range
250.5 250.2 110.2 140.9 18.1 48.3 378.8 439.4 2.2 1.6 381.0 441.0
BB or Lower
50.0 15.0 8.3 6.6 201.6 154.1 259.9 175.7 0.1 - 260.0 175.7
Unrated
142.0 94.2 - - 0.2 6.8 142.2 101.0 1.0 0.6 143.2 101.6
Total
$ 487.9 $ 405.7 $ 773.5 $ 723.9 $ 377.0 $ 365.3 $ 1,638.4 $ 1,494.9 $ 7,111.9 $ 5,567.9 $ 8,750.3 $ 7,062.8
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,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
Asia/Latin America/Other $ 15.0 $ 15.0 $ 72.6 $ 50.5 $ 6.9 $ 0.3 $ 94.5 $ 65.8 $ 248.4 $ 100.4 $ 342.9 $ 166.2
Europe
0.1 - 313.0 324.1 42.5 101.1 355.6 425.2 96.4 74.1 452.0 499.3
North America
472.8 390.7 387.9 349.3 327.6 263.9 1,188.3 1,003.9 6,767.1 5,393.4 7,955.4 6,397.3
Total
$ 487.9 $ 405.7 $ 773.5 $ 723.9 $ 377.0 $ 365.3 $ 1,638.4 $ 1,494.9 $ 7,111.9 $ 5,567.9 $ 8,750.3 $ 7,062.8
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,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
2019 November 30,
2020 November
30,
Asset Managers
$ 0.2 $ - $ - $ 1.7 $ - $ - $ 0.2 $ 1.7 $ 5,132.9 $ 4,584.1 $ 5,133.1 $ 4,585.8
Banks, Broker-dealers
250.7 250.7 558.6 526.7 178.8 206.8 988.1 984.2 1,979.0 983.8 2,967.1 1,968.0
Corporates
132.7 81.3 - - 183.9 154.4 316.6 235.7 - - 316.6 235.7
Other
104.3 73.7 214.9 195.5 14.3 4.1 333.5 273.3 - - 333.5 273.3
Total
$ 487.9 $ 405.7 $ 773.5 $ 723.9 $ 377.0 $ 365.3 $ 1,638.4 $ 1,494.9 $ 7,111.9 $ 5,567.9 $ 8,750.3 $ 7,062.8
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, 2020 and 2019 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, 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
November 30, 2019
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
Netherlands $ 946.0 $ (329.7) $ (100.1) $ - $ 42.6 $ 0.5 $ - $ 559.3 $ 559.3
United
Kingdom 416.1 (199.9) (124.4) - 60.7 37.6 54.1 190.1 244.2
Italy 1,262.3 (1,192.4) 105.4 - - 0.4 - 175.7 175.7
France 423.4 (296.2) (93.1) - 94.2 40.9 - 169.2 169.2
Canada 380.4 (362.2) 7.4 - 0.3 81.2 1.9 107.1 109.0
Spain 249.2 (137.3) (25.7) - 3.3 - - 89.5 89.5
Japan 76.0 (171.6) 133.8 - 24.7 - 13.2 62.9 76.1
China 283.3 (236.9) 25.6 - - - - 72.0 72.0
Mexico 112.0 (68.3) 13.0 - - - - 56.7 56.7
Germany 238.2 (321.3) 19.3 - 88.3 14.4 13.6 38.9 52.5
Total
$ 4,386.9 $ (3,315.8) $ (38.8) $ - $ 314.1 $ 175.0 $ 82.8 $ 1,521.4 $ 1,604.2
We have no material exposure to countries where either sovereign or non-sovereign sectors pose potential default risk as the result of liquidity concerns.
Operational Risk
Operational risk refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. 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. In addition, the transactions we process have become increasingly complex. If 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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 of transactions could also constrain our ability to expand our businesses.
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability 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.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third-parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
Our Operational Risk framework includes governance, collection of operational risk incidents, proactive operational risk management, and periodic review and analysis of business metrics to identify and recommend controls and process-related enhancements. Each revenue producing and support department is responsible for the management and reporting of operational risks and the implementation of the Operational Risk policy and processes within the department. Operational Risk policy, framework, infrastructure, methodology, processes, guidance and oversight of the operational risk processes are centralized and consistent firm wide and also subject to regional operational risk governance.
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 have adopted enhanced cleaning practices across our offices, have restricted business travel, and have monitored the health and welfare of our employees and worked actively with many individuals diagnosed with COVID-19. We implemented our Business Continuity Planning plan and have largely moved to a remote working environment across all functions without any significant 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, 2020. 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, 2020, 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 58.
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, 2020 and 2019, 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, 2020, and the related notes and the schedules listed in the Index at Items 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2020, 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 30,2020 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, 2021, 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 matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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, and fair value is determined based on significant judgments regarding models, unobservable 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 unobservable inputs, complexity of models and/or methodologies used by management to estimate fair value. The valuations involve a high degree of auditor judgment 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 and:
◦We developed valuation estimates, using externally sourced inputs and models, and compared to management’s recorded value and investigated differences.
◦We compared management’s assumptions utilized within management’s models to external sources.
•We evaluated management’s ability to estimate fair value by comparing management’s valuation estimates to subsequent transactions, when available.
Goodwill - Refer to Note 2 and Note 10 to the financial statements
Critical Audit Matter Description
The carrying value of the Company’s goodwill balance was $1,647 million as of November 30, 2020. During fiscal year 2020, the Company performed its required goodwill impairment assessment as of August 1, which required comparing the fair value of each of its reporting units to its carrying value. The Company’s goodwill impairment assessment did not indicate any goodwill impairment for any of its reporting units.
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of each of its reporting units using a market valuation approach which incorporates estimates and assumptions, including the selection of multiples based on guideline public companies and their weighting, applied control premiums, and projections of profitability, growth and return on equity.
We identified the valuation of the Company’s reporting units for impairment testing as a critical audit matter because of the significant judgment required in determining certain of the inputs used in the valuation of the reporting units, which could have a significant effect on whether an impairment charge is recorded and the magnitude of such a charge. Such judgments include the reporting unit’s projected profitability, growth and return on equity. Auditing the fair value of the reporting units involved a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, to evaluate the appropriateness of management’s assumptions for each reporting unit.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s determination of the fair value for each reporting unit, included the following procedures, among others:
•We tested the operating effectiveness of the Company’s controls related to its goodwill impairment assessment, including the controls designed to address key assumptions.
•With the assistance of our fair value specialists, we evaluated the Company’s applied control premium and selection of multiples based on guideline public companies for each reporting unit by:
◦Comparing the market multiple utilized in the Company’s market approach calculation against independently obtained data for comparable entities.
◦Comparing the control premium utilized in the Company’s market approach against the control premiums for recent industry transactions.
•We tested the reasonableness of the Company’s projected profitability, growth and return on equity assumptions for each reporting unit by comparing management’s estimates to (1) historical results for each reporting unit, (2) internal communications to management and the Board of Directors, (3) forecasted information included in Company press releases, and (4) industry reports of the Company.
•We tested the mathematical accuracy of the valuation model.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2021
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, 2020, 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, 2020, 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, 2020, of the Company and our report dated January 28, 2021, 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, 2021
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
November 30,
2020 2019
ASSETS
Cash and cash equivalents (includes $468 and $1,154 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
$ 7,111,929 $ 5,567,903
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
604,321 796,797
Financial instruments owned, at fair value (includes securities pledged of $13,065,585 and $12,058,522 at November 30, 2020 and 2019, respectively; and $5,238 and $339 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
17,686,052 16,363,374
Loans to and investments in related parties
1,000,730 944,509
Securities borrowed
6,934,762 7,624,642
Securities purchased under agreements to resell (includes $0 and $25,000 at fair value at November 30, 2020 and 2019, respectively)
5,096,769 4,299,598
Securities received as collateral, at fair value 7,517 9,500
Receivables:
Brokers, dealers and clearing organizations ($12,919 and $0 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
4,158,823 3,007,949
Customers
1,286,925 1,490,876
Fees, interest and other
397,630 323,067
Premises and equipment
847,127 350,433
Goodwill
1,646,933 1,643,599
Other assets ($131 and $0 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
972,479 1,093,868
Total assets
$ 47,751,997 $ 43,516,115
LIABILITIES AND EQUITY
Short-term borrowings (includes $5,067 and $20,981 at fair value at November 30, 2020 and 2019, respectively)
$ 764,715 $ 548,490
Financial instruments sold, not yet purchased, at fair value ($2,466 and $0 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
10,017,522 10,532,460
Collateralized financings:
Securities loaned
1,810,748 1,525,140
Securities sold under agreements to repurchase
8,316,269 7,504,670
Other secured financings (includes $1,543 at fair value at November 30, 2020; and $2,769,674 and $2,465,800 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
2,771,217 2,467,819
Obligation to return securities received as collateral, at fair value 7,517 9,500
Payables:
Brokers, dealers and clearing organizations
3,325,753 2,555,178
Customers
4,251,556 3,808,609
Lease liabilities 561,249 -
Accrued expenses and other liabilities (includes $1,202 and $1,546 at November 30, 2020 and 2019, respectively, related to consolidated VIEs)
2,663,639 1,431,144
Long-term debt (includes $1,712,245 and $1,215,285 at fair value at November 30, 2020 and 2019, respectively)
6,895,680 7,003,358
Total liabilities
41,385,865 37,386,368
EQUITY
Member’s paid-in capital
6,569,328 6,329,677
Accumulated other comprehensive income (loss):
Currency translation and other adjustments (141,843) (179,378)
Changes in instrument specific credit risk
(71,151) (18,889)
Additional minimum pension liability
(8,104) (6,079)
Available-for-sale securities 513 141
Total accumulated other comprehensive loss (220,585) (204,205)
Total Jefferies Group LLC member’s equity
6,348,743 6,125,472
Noncontrolling interests
17,389 4,275
Total equity
6,366,132 6,129,747
Total liabilities and equity
$ 47,751,997 $ 43,516,115
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
Year Ended November 30,
2020 2019 2018
Revenues:
Commissions and other fees
$ 823,258 $ 676,309 $ 663,465
Principal transactions
1,867,013 769,258 524,296
Investment banking
2,501,494 1,528,729 1,910,203
Asset management fees and revenues
28,694 20,285 21,214
Interest
894,215 1,496,529 1,207,095
Other
37,632 93,422 103,359
Total revenues
6,152,306 4,584,532 4,429,632
Interest expense
954,829 1,472,002 1,246,256
Net revenues
5,197,477 3,112,530 3,183,376
Non-interest expenses:
Compensation and benefits
2,792,575 1,684,054 1,736,264
Non-compensation expenses:
Floor brokerage and clearing fees
270,132 227,471 189,068
Technology and communications
386,830 335,395 305,655
Occupancy and equipment rental
107,180 119,472 100,952
Business development
67,603 138,158 163,756
Professional services
179,888 162,668 139,885
Underwriting costs
95,636 50,662 64,317
Other
120,179 69,981 73,812
Total non-compensation expenses
1,227,448 1,103,807 1,037,445
Total non-interest expenses
4,020,023 2,787,861 2,773,709
Earnings before income taxes 1,177,454 324,669 409,667
Income tax expense 302,748 80,284 250,650
Net earnings 874,706 244,385 159,017
Net earnings (loss) attributable to noncontrolling interests (4,597) (1,644) 256
Net earnings attributable to Jefferies Group LLC $ 879,303 $ 246,029 $ 158,761
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended November 30,
2020 2019 2018
Net earnings $ 874,706 $ 244,385 $ 159,017
Other comprehensive loss, net of tax:
Currency translation and other adjustments (1) 37,535 6,426 (85,554)
Changes in instrument specific credit risk (2) (52,262) (13,161) 22,160
Cash flow hedges (3) - (470) 1,406
Minimum pension liability adjustments (4) (2,025) (1,318) 4,285
Unrealized gain on available-for-sale securities (5) 372 487 311
Total other comprehensive loss, net of tax (6) (16,380) (8,036) (57,392)
Comprehensive income 858,326 236,349 101,625
Net earnings (loss) attributable to noncontrolling interests (4,597) (1,644) 256
Comprehensive income attributable to Jefferies Group LLC $ 862,923 $ 237,993 $ 101,369
(1)The amounts include income tax benefits (expenses) of approximately $(11.9) million, $(3.2) million and $8.9 million during the years ended November 30, 2020, 2019 and 2018, respectively. The amount during the year ended November 30, 2018 also includes a gain of $20.5 million related to foreign currency gains, which was reclassified to Other revenues within the Consolidated Statements of Earnings.
(2)The amounts include income tax benefits (expenses) of approximately $16.4 million, $4.5 million, and $(15.5) million for the years ended November 30, 2020, 2019 and 2018, respectively. The amounts for the years ended November 30, 2020, 2019 and 2018 includes a net gain (loss) of $(0.4) million, $0.4 million and $0.9 million, respectively, net of tax benefits (expenses) of $0.1 million, $(0.2) million and $(0.3) million, respectively, related to changes in instrument specific risk, which were reclassified to Principal transactions revenues within the Consolidated Statements of Earnings. The amount during the year ended November 30, 2018 also includes $(6.5) million related to the Tax Cuts and Jobs Act (the “Tax Act”), which was reclassified to Member’s paid-in capital.
(3)The amounts include income tax benefits (expenses) of approximately $0.2 million, and $(0.8) million for the years ended November 30, 2019 and 2018, respectively. 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. The amount during the year ended November 30, 2018 also includes $(0.2) million related to the Tax Act, which was reclassified to Member’s paid-in capital.
(4)The amounts include income tax benefits (expenses) of $0.7 million, $0.5 million and $(0.7) million for the years ended November 30, 2020, 2019 and 2018, respectively. The amount during the year ended November 30, 2020 includes pension net gains of $0.5 million, net of tax of $0.2 million, which were reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings. The amounts during the years ended November 30, 2019 and 2018 includes pension net gains (losses) of $0.1 million and $(0.3) million, respectively, net of negligible tax benefits (expenses), which were reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings. The amount during the year ended November 30, 2018 also includes $5.3 million related to the transfer of the German Pension Plan, which was reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings and $(0.8) million related to the Tax Act, which was reclassified to Member’s paid-in capital.
(5)The amounts for the years ended November 30, 2020, 2019 and 2018 include income tax expenses of approximately $0.1 million and $0.2 million and $0.1 million, respectively.
(6)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,
2020 2019 2018
Member’s paid-in capital:
Balance, beginning of period $ 6,329,677 $ 6,376,662 $ 5,895,601
Cumulative effect of the adoption of the new revenue standard,
net of tax - - (6,121)
Net earnings attributable to Jefferies Group LLC 879,303 246,029 158,761
Contribution from Jefferies Financial Group Inc. - - 600,247
Distribution to Jefferies Financial Group Inc. (639,652) (293,014) (279,381)
Tax Act adjustment - - 7,555
Balance, end of period $ 6,569,328 $ 6,329,677 $ 6,376,662
Accumulated other comprehensive income (loss), net of tax:
Balance, beginning of period $ (204,205) $ (196,169) $ (136,779)
Contribution from Jefferies Financial Group Inc. - - (1,998)
Currency translation and other adjustments 37,535 6,426 (85,554)
Changes in instrument specific credit risk (52,262) (13,161) 22,160
Cash flow hedges - (470) 1,406
Pension adjustments (2,025) (1,318) 4,285
Unrealized gain on available-for-sale securities 372 487 311
Balance, end of period $ (220,585) $ (204,205) $ (196,169)
Total Jefferies Group LLC member’s equity
$ 6,348,743 $ 6,125,472 $ 6,180,493
Noncontrolling interests:
Balance, beginning of period $ 4,275 $ 1,911 $ 737
Net earnings (loss) attributable to noncontrolling interests (4,597) (1,644) 256
Contributions 19,405 6,600 10
Distributions (1,694) (2,592) (7,408)
Consolidation of asset management entity - - 8,316
Balance, end of period $ 17,389 $ 4,275 $ 1,911
Total equity
$ 6,366,132 $ 6,129,747 $ 6,182,404
See accompanying notes to consolidated financial statements.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended November 30,
2020 2019 2018
Cash flows from operating activities:
Net earnings $ 874,706 $ 244,385 $ 159,017
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization 51,346 40,942 15,250
Goodwill impairment 3,000 - -
Deferred income taxes (17,741) 22,032 126,265
Income on loans to and investments in related parties (14,329) (85,169) (73,662)
Distributions received on investments in related parties 35,949 144,320 62,949
Other adjustments 245,005 61,915 (127,698)
Net change in assets and liabilities:
Securities deposited with clearing and depository organizations 751 (169) 64,911
Receivables:
Brokers, dealers and clearing organizations (1,146,197) 211,065 (406,509)
Customers 203,952 526,238 (453,360)
Fees, interest and other (73,161) 3,340 51,122
Securities borrowed 714,664 (1,103,708) 1,137,134
Financial instruments owned (1,253,249) 35,908 (1,194,791)
Securities purchased under agreements to resell (752,171) (1,523,222) 807,619
Other assets 148,369 (41,844) 31,699
Payables:
Brokers, dealers and clearing organizations 764,213 111,757 252,698
Customers 442,913 631,854 512,760
Securities loaned 270,261 (301,727) (964,137)
Financial instruments sold, not yet purchased (604,669) 1,051,600 311,998
Securities sold under agreements to repurchase 799,794 (1,122,982) 36,956
Lease liabilities (46,482) - -
Accrued expenses and other liabilities 1,150,134 (126,684) (224,157)
Net cash provided by (used in) operating activities 1,797,058 (1,220,149) 126,064
Cash flows from investing activities:
Contributions to loans to and investments in related parties (1,569,671) (32,669) (1,929,603)
Capital distributions from investments and repayments of loans from related parties 1,491,081 24,629 1,876,164
Net payments on premises and equipment (101,311) (116,330) (71,445)
Purchase of Leucadia Investment Management Limited, net of cash paid - - 3,125
Consolidation of asset management entity - - 130
Net cash used in investing activities (179,901) (124,370) (121,629)
Continued on next page.
JEFFERIES GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Year Ended November 30,
2020 2019 2018
Cash flows from financing activities:
Proceeds from short-term borrowings $ 1,619,820 $ 1,732,232 $ 1,083,416
Payments on short-term borrowings (1,368,255) (1,597,773) (1,137,599)
Proceeds from issuance of long-term debt, net of issuance costs 1,169,722 1,239,891 1,367,243
Repayment of long-term debt (1,494,696) (823,875) (1,035,700)
Distributions to Jefferies Financial Group Inc. (498,674) (311,131) (248,684)
Net proceeds from other secured financings 305,873 1,586,347 159,364
Net change in bank overdrafts (34,663) 26,568 10,290
Proceeds from contributions of noncontrolling interests 19,405 6,600 10
Payments on distributions to noncontrolling interests (1,694) (2,592) (7,408)
Net cash provided by (used in) financing activities (283,162) 1,856,267 190,932
Effect of exchange rate changes on cash, cash equivalents and restricted cash
18,306 (1,063) (19,116)
Net increase in cash, cash equivalents and restricted cash 1,352,301 510,685 176,251
Cash, cash equivalents and restricted cash at beginning of period
6,329,712 5,819,027 5,642,776
Cash, cash equivalents and restricted cash at end of period
$ 7,682,013 $ 6,329,712 $ 5,819,027
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 999,576 $ 1,480,559 $ 1,287,162
Income taxes, net 115,053 84,119 196,553
Noncash financing activities:
On October 1, 2018, Jefferies transferred to us its 50% interest in Berkadia Commercial Mortgage Holding LLC (“Berkadia”) and its capital investments in certain separately managed accounts and funds. The transfer of its interest in Berkadia and a portion of the transfer of its capital investments in certain separately managed accounts and funds were recorded as a capital contribution and increased member’s equity by $598.2 million. Refer to Note 21, Related Party Transactions, for further details.
The following presents our cash, cash equivalents and restricted cash by category within the Consolidated Statements of Financial Condition (in thousands):
November 30,
2020 2019
Cash and cash equivalents $ 7,111,929 $ 5,567,903
Cash and securities segregated and on deposit for regulatory purposes with clearing and depository organizations
570,084 761,809
Total cash, cash equivalents and restricted cash $ 7,682,013 $ 6,329,712
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. Selected Quarterly Financial Data (Unaudited)
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 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.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 partners’ management company revenues and/or partners’ 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.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3: Instruments that have little to no pricing observability at the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, the financial instrument is valued at the point within the bid-ask range that meets 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.
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.
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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.
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.
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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.
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, 2020 and 2019, furniture, fixtures and equipment, including amounts under capital leases at November 30, 2019, amounted to $527.9 million and $500.3 million, respectively, and leasehold improvements amounted to $259.7 million and $262.1 million, respectively. Accumulated depreciation and amortization was $427.2 million and $411.9 million at November 30, 2020 and 2019, respectively.
Depreciation and amortization expense amounted to $74.7 million, $67.0 million and $56.2 million for the years ended November 30, 2020, 2019 and 2018, respectively.
Leases
We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (the “new lease standard”) 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.
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 3, Accounting Developments, and Note 13, Leases, for further information.
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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 two-step impairment test is not required. If we conclude otherwise, we are required to perform the two-step 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 estimated fair value is less than the carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.
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 amortizable intangible assets, impairment exists when the carrying amount of the intangible asset 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.
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.
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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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Note 3. Accounting Developments
Accounting Standards to be Adopted in Future Periods
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. The guidance is effective in the first quarter of fiscal 2022. We are currently evaluating the impact of the new guidance 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.
We have determined expected credit losses to be immaterial upon adoption for our other financial instruments within the scope of the guidance. A significant portion of our financial instruments within the scope of the guidance represent secured financing receivables (reverse repurchase, secured borrowing, and margin loan agreements) that are substantially collateralized. For our secured financing receivables, we have concluded that the impact upon adoption was immaterial because the contractual collateral maintenance provisions require that the counterparty continually adjust the amount of collateralization 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. 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.
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Adopted Accounting Standards
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional exceptions for applying U.S. GAAP to contracts, hedge accounting relationships or other transactions affected by reference rate reform. We adopted the guidance on September 1, 2020 and the adoption had no impact on our consolidated financial statements.
Leases. We adopted the new lease standard on December 1, 2019 using a modified retrospective transition approach. Accordingly, reported financial information for historical comparable periods is not revised and continues to be reported under the accounting standards in effect during those historical periods. We elected not to reassess whether existing contracts are or contain leases, or the lease classification and initial direct costs of existing leases upon transition. At transition on December 1, 2019, the adoption of this standard resulted in the recognition of operating ROU assets of $519.9 million and operating lease liabilities of $586.3 million reflected in Premises and equipment and Lease liabilities in our Consolidated Statement of Financial Condition, respectively. Finance lease ROU assets and finance lease liabilities were not material and are reflected in Premises and equipment and Lease liabilities in our Consolidated Statement of Financial Condition, respectively.
Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The objective of the guidance is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. We adopted the guidance in the first quarter of fiscal 2020 and the adoption did not have a material impact on our consolidated financial statements.
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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 $956.0 million and $570.3 million at November 30, 2020 and 2019, respectively, by level within the fair value hierarchy (in thousands):
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.
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November 30, 2019
Level 1 Level 2 Level 3 Counterparty and Cash Collateral Netting (1) Total
Assets:
Financial instruments owned:
Corporate equity securities
$ 2,325,116 $ 218,403 $ 58,301 $ - $ 2,601,820
Corporate debt securities
- 2,472,213 7,490 - 2,479,703
Collateralized debt obligations and collateralized loan obligations
- 124,225 20,081 - 144,306
U.S. government and federal agency securities
2,101,624 158,618 - - 2,260,242
Municipal securities
- 742,326 - - 742,326
Sovereign obligations
1,330,026 1,405,827 - - 2,735,853
Residential mortgage-backed securities
- 1,069,066 17,740 - 1,086,806
Commercial mortgage-backed securities
- 424,060 6,110 - 430,170
Other asset-backed securities
- 303,847 42,563 - 346,410
Loans and other receivables
- 2,395,211 64,240 - 2,459,451
Derivatives
2,809 1,812,659 14,889 (1,432,806) 397,551
Investments at fair value
- 32,688 75,738 - 108,426
Total financial instruments owned, excluding Investments at fair value based on NAV
$ 5,759,575 $ 11,159,143 $ 307,152 $ (1,432,806) $ 15,793,064
Securities purchased under agreements to resell $ - $ - $ 25,000 $ - $ 25,000
Securities received as collateral
$ 9,500 $ - $ - $ - $ 9,500
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities
$ 2,755,601 $ 7,438 $ 4,487 $ - $ 2,767,526
Corporate debt securities
- 1,471,142 340 - 1,471,482
U.S. government and federal agency securities
1,851,981 - - - 1,851,981
Sovereign obligations
1,363,475 941,065 - - 2,304,540
Commercial mortgage-backed securities
- - 35 - 35
Loans
- 1,600,228 9,463 - 1,609,691
Derivatives
871 2,066,064 92,057 (1,631,787) 527,205
Total financial instruments sold, not yet purchased
$ 5,971,928 $ 6,085,937 $ 106,382 $ (1,631,787) $ 10,532,460
Short-term borrowings
$ - $ 20,981 $ - $ - $ 20,981
Obligation to return securities received as collateral
$ 9,500 $ - $ - $ - $ 9,500
Long-term debt
$ - $ 735,216 $ 480,069 $ - $ 1,215,285
(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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•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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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 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 (“GNMA”) 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 (“FNMA”) 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. GNMA project loan bonds and FNMA 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 GNMA Project and Construction Loans: Valuations of participation certificates in GNMA 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 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. 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.
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 unadjusted 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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. Discounted cash flow models are also utilized to measure certain variable funding note swaps, which are backed by CLOs and incorporates constant prepayment rate, constant default rate and loss severity assumptions. 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, fund of 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, 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
November 30, 2019
Fair Value (1) Unfunded Commitments
Equity Long/Short Hedge Funds (2)
$ 291,593 $ -
Equity Funds (3)
27,952 12,108
Commodity Fund (4)
16,025 -
Multi-asset Funds (5)
234,583 -
Other Funds (6)
157 -
Total
$ 570,310 $ 12,108
(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 both November 30, 2020 and 2019, approximately 94% of the fair value of investments in this category cannot be redeemed because these investments include restrictions that do not allow for redemption in the first 36 months after acquisition. At both November 30, 2020 and 2019, approximately 6% of the fair value of investments in this category are redeemable quarterly with 60 days prior written notice.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3)At November 30, 2020 and 2019, 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 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 eight 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, 2020 and 2019, investments representing approximately 57% and 5%, respectively, of the fair value of investments in this category are redeemable monthly with 30 or 60 days prior written notice.
(6)At November 30, 2020 this category primarily includes an investment 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. These investments are redeemable quarterly with 90 days prior written notice. At both November 30, 2020 and 2019, this category also includes investments in a fund of funds that invests in various private equity funds that are managed by us and have no redemption provisions. Investments in the fund of funds are gradually being liquidated, however, the timing of when the proceeds will be received is uncertain.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell may include embedded call features. The valuation of these instruments is based on review of expected future cash flows, interest rates, funding spreads and the fair value of the underlying collateral. Securities purchased under agreements to resell are categorized within Level 3 of the fair value hierarchy due to limited observability of the embedded derivative and unobservable credit spreads.
Other Secured Financings
Other secured financings that are accounted for at fair value are classified within 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 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
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, 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.
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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
•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 pricing 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.
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.
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, 2018 (in thousands):
Balance at November 30, 2017 Total gains/
losses
(realized
and
unrealized)
(1) Purchases Sales Settlements Issuances Net
transfers
into/
(out of)
Level 3 Balance at November 30, 2018 For instruments still held at November 30, 2018, changes in unrealized gains/(losses) included in:
Earnings (1) Other
comprehensive
income (1)
Assets:
Financial instruments owned:
Corporate equity
securities $ 22,009 $ 24,023 $ 31,669 $ (22,759) $ (3,977) $ - $ 75 $ 51,040 $ 22,774 $ -
Corporate debt
securities 26,036 (439) 10,352 (23,364) (1,679) - (1,422) 9,484 (2,606) -
CDOs and CLOs 30,004 (14,368) 356,650 (353,330) (10,247) - 17,106 25,815 (7,605) -
RMBS 26,077 (6,970) 3,118 (12,816) (513) - 10,707 19,603 521 -
CMBS 12,419 (2,186) 1,436 (471) (16,624) - 16,312 10,886 (4,000) -
Other ABS 61,129 (9,934) 706,846 (677,220) (27,641) - (5) 53,175 (5,283)
Loans and other
receivables 47,304 (5,137) 149,228 (130,832) (15,311) - 1,733 46,985 (8,457) -
Investments, at fair
value 93,454 2,353 34,648 (17,570) - - 946 113,831 1,759 -
Liabilities:
Financial instruments sold,
not yet purchased:
Corporate equity
securities $ 48 $ - $ - $ - $ - $ - $ (48) $ - $ - $ -
Corporate debt
securities 522 - - - - - - 522 - -
CMBS 105 (105) - - - - - - - -
Loans 3,486 84 (4,626) 7,432 - - - 6,376 (28) -
Net derivatives (2) 6,746 (3,237) (17) 14,920 (1,335) - 4,537 21,614 (646) -
Long-term debt - (30,347) - - - 84,860 146,232 200,745 10,951 19,396
(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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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, 2018
During the year ended November 30, 2018, transfers of assets of $57.8 million from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
•CDOs and CLOs of $17.3 million, CMBS of $16.3 million and RMBS of $15.3 million due to reduced price transparency.
During the year ended November 30, 2018, transfers of assets of $12.3 million from Level 3 to Level 2 are primarily attributed to:
•RMBS of $4.6 million, corporate debt securities of $3.6 million and corporate equity securities of $2.9 million due to greater pricing transparency supporting classification into Level 2.
During the year ended November 30, 2018, there were transfers of structured notes within long-term debt of $146.2 million from Level 2 to Level 3 due to reduced market transparency.
Net losses on Level 3 assets were $12.7 million and net gains on Level 3 liabilities were $33.6 million for the year ended November 30, 2018. Net losses on Level 3 assets were primarily due to decreased market values in CDOs and CLOs, other ABS, RMBS and certain loans and other receivables, partially offset by increased market values in corporate equity securities. Net gains on Level 3 liabilities were primarily due to decreased 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, 2020 and 2019
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, 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 $ 76,049 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 $ 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
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2019
Financial Instruments Owned: Fair Value
(in thousands) Valuation Technique Significant Unobservable Input(s) Input / Range Weighted
Average
Corporate equity securities $ 29,017
Non-exchange-traded securities Market approach Price $1 - $140 $55
Underlying stock price $3 - $5 $4
Corporate debt securities $ 7,490 Scenario Analysis Estimated recovery percentage 23 % - 85% 46%
Volatility 44% -
Credit spread 750 -
Underlying stock price £0.4 -
CDOs and CLOs $ 20,081 Discounted cash flows Constant prepayment rate 20% -
Constant default rate 1 % - 2% 2%
Loss severity 25 % - 37% 29%
Discount rate/yield 12 % - 21% 15%
RMBS $ 17,740 Discounted cash flows Cumulative loss rate 2% -
Duration (years) 6.3 -
Discount rate/yield 3% -
CMBS $ 6,110 Discounted cash flows Cumulative loss rate 7.3% -
Duration (years) 0.2 -
Discount rate/yield 85% -
Scenario analysis Estimated recovery percentage 44% -
Other ABS $ 42,563 Discounted cash flows Cumulative loss rate 7 % - 31% 16%
Duration (years) 0.5 - 3.0 1.5
Discount rate/yield 7 % - 15% 11%
Loans and other receivables $ 62,734 Market approach Price $36 - $100 $90
Scenario analysis Estimated recovery percentage 87 % - 104% 99%
Derivatives $ 13,826
Interest rate swaps Market approach Basis points upfront 0 - 16 6
Unfunded commitments Market approach Price $88 -
Equity options Volatility benchmarking Volatility 45% -
Investments at fair value $ 75,736
Private equity securities Market approach Price $8 - $250 $125
Securities purchased under agreements to resell $ 25,000 Market approach Spread to 6 month LIBOR 500 -
Duration (years) 1.5 -
Financial Instruments Sold, Not Yet Purchased:
Corporate equity securities $ 4,487 Market approach Transaction level $1 -
Loans $ 9,463 Market approach Price $50 - $100 $88
Scenario analysis Estimated recovery percentage 1% -
Derivatives $ 92,057
Equity options Volatility benchmarking Volatility 21 % - 61% 43%
Interest rate swaps Market approach Basis points upfront 0 - 22 13
Cross currency swaps Basis points upfront 2 -
Unfunded commitments Price $88 -
Long-term debt
Structured notes $ 480,069 Market approach Price $84 - $108 $96
Price €74 - €103 €91
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, 2020 and 2019, asset exclusions consisted of $17.3 million and $31.9 million, respectively, primarily comprised of other ABS, CMBS, certain derivatives, loans and other receivables and corporate equity securities. At November 30, 2020 and 2019, liability exclusions consisted of $0.8 million and $0.4 million, respectively, primarily comprised of certain derivatives, CMBS and corporate debt.
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:
•Corporate equity securities, corporate debt securities, other ABS, loans and other receivables, certain derivatives, private equity securities, securities purchased under agreements to resell and structured notes using a market approach valuation technique. A significant increase (decrease) in the transaction level of corporate equity securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the price of the private equity securities, non-exchange-traded securities, unfunded commitments, corporate debt securities, other ABS, loans and other receivables or structured notes would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the EBITDA multiple related to corporate equity securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the underlying stock price of corporate equity securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the yield or duration, in isolation, of securities purchased under agreements to resell would result in a significantly lower (higher) 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 cross currency and interest rate swaps.
•Loans and other receivables, CMBS, corporate debt securities, 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. A significant increase (decrease) in the price of the underlying assets of the financial instrument would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the volatility of the underlying stock price would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the credit spread of the financial instrument would result in a significantly lower (higher) fair value measurement.
•CDOs and CLOs, RMBS, CMBS 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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,
2020 2019 2018
Financial instruments owned:
Loans and other receivables
$ (25,623) $ (2,072) $ (3,856)
Financial instruments sold, not yet purchased:
Loans
$ - $ 656 $ (46)
Loan commitments
464 (1,089) (739)
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)
2,475 - -
Long-term debt:
Changes in instrument specific credit risk (1)
$ (70,201) $ (20,332) $ 38,064
Other changes in fair value (2)
(84,116) (25,144) 48,748
(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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of the amount by which contractual principal exceeds 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,
2020 2019
Financial instruments owned:
Loans and other receivables (1)
$ 1,662,647 $ 1,546,516
Loans and other receivables on nonaccrual status and/or 90 days or
greater past due (1) (2)
287,889 197,215
Long-term debt and short-term borrowings
(42,819) 74,408
Other secured financings 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 $30.0 million and $22.2 million at November 30, 2020 and 2019, respectively.
The aggregate fair value of loans and other receivables on nonaccrual status and/or 90 days or greater past due was $69.7 million and $127.0 million at November 30, 2020 and 2019, respectively, which includes loans and other receivables 90 days or greater past due of $3.8 million and $24.8 million at November 30, 2020 and 2019, respectively.
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, 2020, 2019 and 2018 (in thousands):
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
Carrying Value at November 30, 2018 Level 2 Impairment Losses for the Year Ended November 30, 2018
Exchange ownership interests and registrations (1)
$ 2,663 $ 2,663 $ 9
(1)Impairment losses for exchange memberships, which represent ownership interests in market exchanges on which trading business is conducted, and registrations, were recognized in Other expenses. The fair value of these exchange memberships is based on observed quoted sales prices for each individual membership. (See Note 10, Goodwill and Intangible Assets.) The intangible assets are recognized for the years ended November 30, 2020, 2019 and 2018, primarily in the Investment Banking and Capital Markets reportable business segment.
(2)Impairment losses for Goodwill and Intangible assets were recognized in Other expenses. (See Note 10, Goodwill and Intangible Assets.) The goodwill and intangible assets impairments were recognized for the year ended November 30, 2020 in the Asset Management reportable business segment.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $34.2 million and $35.0 million at November 30, 2020 and 2019, respectively.
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, 2020 and 2019 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, 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.
(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, 2019 (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
$ 28,663 1 $ - -
Total derivatives designated as accounting hedges
28,663 -
Derivatives not designated as accounting hedges:
Interest rate contracts:
Exchange-traded
1,191 65,226 103 38,464
Cleared OTC
213,224 3,329 284,433 3,443
Bilateral OTC
421,700 1,325 258,857 738
Foreign exchange contracts:
Exchange-traded
- 256 - 199
Bilateral OTC
190,570 9,255 187,836 9,187
Equity contracts:
Exchange-traded
717,494 1,714,538 962,535 1,481,388
Bilateral OTC
248,720 4,731 445,241 4,271
Commodity contracts:
Exchange-traded
- 5,524 - 4,646
Credit contracts:
Cleared OTC
2,514 13 5,768 12
Bilateral OTC
6,281 25 14,219 28
Total derivatives not designated as accounting hedges
1,801,694 2,158,992
Total gross derivative assets/liabilities:
Exchange-traded 718,685 962,638
Cleared OTC
244,401 290,201
Bilateral OTC
867,271 906,153
Amounts offset in our Consolidated Statements of Financial Condition (3):
Exchange-traded
(688,871) (688,871)
Cleared OTC
(222,869) (266,900)
Bilateral OTC
(521,066) (676,016)
Net amounts per Consolidated Statements of Financial Condition (4)
$ 397,551 $ 527,205
(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
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) 2020 2019 2018
Interest rate swaps $ 41,524 $ 56,385 $ (25,539)
Long-term debt (36,668) (58,931) 27,363
Total $ 4,856 $ (2,546) $ 1,824
The following table provides information related to gains (losses) on our net investment hedges recognized in Currency translation adjustments and other, a component of Other comprehensive income (loss), in our Consolidated Statements of Comprehensive Income (in thousands):
Year Ended November 30,
Gains (Losses) 2020 2019 2018
Foreign exchange contracts $ (3,306) $ - $ -
Total $ (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)
2020 2019 2018
Interest rate contracts
$ (52,331) $ (188,605) $ 67,291
Foreign exchange contracts
3,851 (4,016) (304)
Equity contracts
47,631 (108,961) (232,873)
Commodity contracts
(189) (681) 1,112
Credit contracts
15,218 9,147 2,715
Total
$ 14,180 $ (293,116) $ (162,059)
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, 2020 (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 $ 32,766 $ 951 $ 16,650 $ (24,685) $ 25,682
Credit default swaps
- 750 11 - 761
Total return swaps
140,394 25,110 1,321 (2,975) 163,850
Foreign currency forwards, swaps and options
62,249 18,460 517 (5,746) 75,480
Interest rate swaps, options and forwards
80,949 168,430 204,467 (40,131) 413,715
Total
$ 316,358 $ 213,701 $ 222,966 $ (73,537) 679,488
Cross product counterparty netting
(24,723)
Total OTC derivative assets included in Financial instruments owned
$ 654,765
(1)At November 30, 2020, we held net exchange-traded derivative assets and other credit agreements with a fair value of $29.8 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, 2020, cash collateral received was $216.8 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.
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 $ 23,278 $ 491,595 $ 119,988 $ (24,685) $ 610,176
Credit default swaps
- 596 1,615 - 2,211
Total return swaps
88,130 190,616 22 (2,975) 275,793
Foreign currency forwards, swaps and options
50,949 13,376 - (5,746) 58,579
Fixed income forwards
213 - - - 213
Interest rate swaps, options and forwards
61,558 65,934 68,252 (40,131) 155,613
Total
$ 224,128 $ 762,117 $ 189,877 $ (73,537) 1,102,585
Cross product counterparty netting
(24,723)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased
$ 1,077,862
(1)At November 30, 2020, we held net exchange-traded derivative liabilities and other credit agreements with a fair value of $22.5 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, 2020, cash collateral pledged was $459.3 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.
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, 2020 (in thousands):
Counterparty credit quality (1):
A- or higher
$ 164,718
BBB- to BBB+
19,628
BB+ or lower
316,361
Unrated
154,058
Total
$ 654,765
(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, 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
November 30, 2019
External Credit Rating
Investment Grade Non-investment Grade Unrated Total Notional
Credit protection sold:
Index credit default swaps
$ 3.0 $ 32.0 $ - $ 35.0
Single name credit default swaps
3.4 29.0 1.5 33.9
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,
2020 2019
Derivative instrument liabilities with credit-risk-related contingent features
$ 284.6 $ 42.9
Collateral posted (129.8) (3.1)
Collateral received 141.4 114.1
Return of and additional collateral required in the event of a credit rating downgrade below investment grade (1)
296.2 154.0
(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 the 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, 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
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2019
Securities Lending Arrangements Repurchase Agreements Obligation To Return Securities Received As Collateral, at fair value Total
Collateral Pledged:
Corporate equity securities
$ 1,314,395 $ 129,558 $ - $ 1,443,953
Corporate debt securities
191,311 1,730,526 - 1,921,837
Mortgage-backed and asset-backed securities
- 1,745,145 - 1,745,145
U.S. government and federal agency securities
19,434 10,863,997 9,500 10,892,931
Municipal securities
- 498,202 - 498,202
Sovereign obligations
- 3,016,563 - 3,016,563
Loans and other receivables
- 772,926 - 772,926
Total
$ 1,525,140 $ 18,756,917 $ 9,500 $ 20,291,557
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, 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
November 30, 2019
Overnight and Continuous Up to 30 Days 31-90 Days Greater Than 90 Days Total
Securities lending arrangements
$ 694,821 $ - $ 672,969 $ 157,350 $ 1,525,140
Repurchase agreements
6,614,026 1,556,260 8,988,528 1,598,103 18,756,917
Obligation to return securities received as collateral, at fair value - - 9,500 - 9,500
Total
$ 7,308,847 $ 1,556,260 $ 9,670,997 $ 1,755,453 $ 20,291,557
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, 2020 and 2019, the approximate fair value of securities received as collateral by us that may be sold or repledged was $25.9 billion and $28.7 billion, respectively. At November 30, 2020 and 2019, 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, 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 (3)
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
November 30, 2019
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
$ 7,624,642 $ - $ 7,624,642 $ (361,394) $ (1,479,433) $ 5,783,815
Reverse repurchase agreements
15,551,845 (11,252,247) 4,299,598 (291,316) (3,929,977) 78,305
Securities received as collateral, at fair value 9,500 - 9,500 - - 9,500
Liabilities
Securities lending arrangements
$ 1,525,140 $ - $ 1,525,140 $ (361,394) $ (970,799) $ 192,947
Repurchase agreements
18,756,917 (11,252,247) 7,504,670 (291,316) (6,663,807) 549,547
Obligation to return securities received as collateral, at fair value 9,500 - 9,500 - - 9,500
(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 $4,757.8 million of securities borrowing arrangements, for which we have received securities collateral of $4,617.0 million, 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.
(4)Amounts include $5,683.4 million of securities borrowing arrangements, for which we have received securities collateral of $5,523.6 million, and $439.7 million of repurchase agreements, for which we have pledged securities collateral of $447.5 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 $604.3 million and $796.8 million at November 30, 2020 and 2019, 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,
2020 2019 2018
Transferred assets $ 6,556.2 $ 4,780.9 $ 7,159.3
Proceeds on new securitizations 6,556.2 4,852.2 7,165.3
Cash flows received on retained interests 26.8 48.3 48.5
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, 2020 and 2019.
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,
2020 2019
Securitization Type
Total Assets Retained Interests Total Assets Retained Interests
U.S. government agency RMBS
$ 562.5 $ 7.8 $ 10,671.7 $ 103.3
U.S. government agency CMBS
2,461.2 205.2 1,374.8 45.8
CLOs
3,345.5 39.5 3,006.7 58.4
Consumer and other loans
1,290.6 56.6 1,149.3 71.8
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 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, 2020 and 2019 (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,
2020 2019
Secured Funding Vehicles Other Secured Funding Vehicles Other
Cash (1) $ - $ 1.2 $ - $ 1.2
Financial instruments owned
- 5.2 - 0.3
Securities purchased under agreements to resell (2) 2,908.9 - 2,467.3 -
Receivable from brokers - 12.9 - -
Other assets - 0.1 - -
Total assets
$ 2,908.9 $ 19.4 $ 2,467.3 $ 1.5
Financial instruments sold, not yet purchased $ - $ 2.5 $ - $ -
Other secured financings (3) 2,907.8 - 2,465.8 -
Other liabilities (4) 1.1 0.4 1.5 0.2
Total liabilities
$ 2,908.9 $ 2.9 $ 2,467.3 $ 0.2
(1)Approximately $0.7 million of the cash amount at November 30, 2020 represents cash on deposit with related consolidated entities and is 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 $138.2 million of the other secured financings amount at November 30, 2020 is with related consolidated entities, which is eliminated in consolidation.
(4)Approximately $0.3 million and $0.2 million of the other liabilities amounts at November 30, 2020 and 2019, respectively, represent intercompany payables with related consolidated entities, which are eliminated in consolidation.
Secured Funding Vehicles. We are the primary beneficiary of 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.
Nonconsolidated VIEs
The following tables present information about our variable interests in nonconsolidated VIEs (in millions):
November 30, 2020
Carrying Amount Maximum Exposure to Loss VIE Assets
Assets Liabilities
CLOs
$ 60.7 $ 0.2 $ 642.7 $ 6,849.1
Consumer loan and other 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
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2019
Carrying Amount Maximum Exposure to Loss VIE Assets
Assets Liabilities
CLOs
$ 152.6 $ 0.6 $ 505.3 $ 7,845.0
Consumer loan and other asset-backed vehicles
358.3 - 490.6 2,354.8
Related party private equity vehicles
23.0 - 34.3 71.4
Other investment vehicles
404.1 - 411.9 6,102.7
Total
$ 938.0 $ 0.6 $ 1,442.1 $ 16,373.9
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 and sub-investment grade and senior secured U.S. loans. 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;
•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, mortgage loans, and trade claims. 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.
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, 2020 and 2019, our total equity commitment in the JCP Entities was $133.0 million, of which $122.0 million and $121.7 million had been funded, respectively. The carrying value of our equity investments in the JCP Entities was $19.0 million and $23.0 million at November 30, 2020 and 2019, 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, 2020 and 2019, we had equity commitments to invest $749.3 million and $398.6 million, respectively, in various other investment vehicles, of which $748.1 million and $390.8 million was funded, respectively. The carrying value of our equity investments was $739.7 million and $404.1 million at November 30, 2020 and 2019, 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 (FNMA (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) or GNMA (“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, 2020 and 2019, we held $1,571.6 million and $1,453.5 million of agency mortgage-backed securities, respectively, and $252.0 million and $134.8 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.
Note 9. Investments
At November 30, 2020, we had investments in Jefferies Finance LLC (“Jefferies Finance”) and Berkadia. 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, a joint venture entity pursuant to an agreement with Massachusetts Mutual Life Insurance Company (“MassMutual”), is a commercial finance company that structures, underwrites and arranges primarily senior secured loans to corporate borrowers. Loans are originated primarily through the investment banking efforts of Jefferies LLC. Jefferies Finance may also underwrite and arrange other debt products such as second lien term, bridge and mezzanine loans, as well as related equity co-investments. In addition, Jefferies Finance is a registered investment advisor under the Investment Advisers Act of 1940 and, through two of its wholly-owned subsidiaries, Apex Credit Partners LLC and JFIN Asset Management LLC, acts as an investment advisor for various loan funds and CLOs managing direct lending and broadly syndicated loan products.
At November 30, 2020, we and MassMutual each had equity commitments to Jefferies Finance of $750.0 million, for a combined total commitment of $1.5 billion. At November 30, 2020, we had funded $652.4 million of our $750.0 million commitment, leaving $97.6 million unfunded. The investment commitment is scheduled to expire on March 1, 2021 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, 2020. Advances are shared equally between us and MassMutual. The facility is scheduled to mature on March 1, 2021 with automatic one year extensions absent a 60 days termination notice by either party. At November 30, 2020, we had funded $50.0 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):
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended November 30,
2020 2019 2018
Interest income $ 2.4 $ - $ 1.2
Unfunded commitment fees 1.1 1.3 1.2
The following is a summary of selected financial information for Jefferies Finance (in millions):
November 30,
2020 2019
Total assets
$ 7,199.5 $ 7,112.4
Total liabilities
5,990.4 5,828.3
Total equity
1,209.1 1,284.1
Our total equity balance
604.6 642.0
Year Ended November 30,
2020 2019 2018
Net earnings (loss) $ (74.9) $ 44.5 $ 197.2
The following summarizes activity related to our other transactions with Jefferies Finance (in millions):
Year Ended November 30,
2020 2019 2018
Origination and syndication fee revenues (1) $ 198.1 $ 176.3 $ 377.7
Origination fee expenses (1) 27.3 27.6 56.6
CLO placement fee revenues (2) 1.7 6.0 3.7
Derivative losses (3) - - (1.6)
Underwriting fees (4) 1.7 3.9 -
Service fees (5) 65.1 60.8 61.7
(1) We engage in debt underwriting transactions with Jefferies Finance related to the originations and syndications of loans 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, 2020 and 2019, we held securities issued by CLOs managed by Jefferies Finance, which are included in Financial instruments owned, at fair value.
(3) We have entered into participation agreements and derivative contracts with Jefferies Finance based upon certain securities issued by CLOs and we have recognized gains (losses) relating to the derivative contracts.
(4) We acted as underwriter in connection with term loans issued by Jefferies Finance.
(5) 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 $24.2 million and $17.2 million at November 30, 2020 and 2019, respectively. 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 at both November 30, 2020 and 2019. At November 30, 2019, a payable to Jefferies Finance of $17.6 million related to its lending transactions is included in Payables to customers in our Consolidated Statements of Financial Condition.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On March 28, 2019, we entered into 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. We repaid Jefferies Finance the entire outstanding principal amount of this note on May 15, 2019. 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.
The following is a summary of selected financial information for Berkadia (in millions):
November 30,
2020 2019
Total assets $ 4,294.0 $ 2,809.8
Total liabilities 3,626.3 2,213.2
Total equity 667.7 596.6
Our total equity balance 301.2 268.9
November 30, Two Months Ended November 30, 2018
2020 2019
Net earnings $ 153.1 $ 195.9 $ 44.4
We received distributions from Berkadia on our equity interest as follows (in millions):
Year Ended November 30, Two Months Ended November 30, 2018
2020 2019
Distributions $ 37.1 $ 65.0 $ 23.1
At November 30, 2020 and 2019, in the normal course of our securities markets group business, we had commitments to purchase $401.0 million and $360.4 million, respectively, in 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 $17.4 million and $20.6 million at November 30, 2020 and 2019, 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,
2020 2019 2018
Net gains (losses) from our investments in JCP Fund V $ (3.0) $ (5.7) $ 12.1
At both November 30, 2020 and 2019, we were committed to invest equity of up to $85.0 million in JCP Fund V. At November 30, 2020 and 2019, our unfunded commitment relating to JCP Fund V was $9.1 million and $9.4 million, respectively.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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,
2020 (1) 2019 (1)
Total assets
$ 49,404 $ 63,248
Total liabilities
84 76
Total partners’ capital
49,319 63,172
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) Nine Months Ended September 30, 2018 (1) Three Months Ended December 31, 2017 (1)
Net increase (decrease) in net assets resulting from operations
$ (12,456) $ (1,397) $ (19,070) $ (8,412) $ 15,252 $ 19,712
(1)Financial information for JCP Fund V in financial position and results of operations at November 30, 2020 and 2019 and for the years ended November 30, 2020, 2019 and 2018 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 and net losses of $20.1 million in the period we held the investment during the year ended November 30, 2019 and for the year ended November 30, 2018, respectively.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 10. Goodwill and Intangible Assets
Goodwill
Goodwill attributed to our reportable business segments are as follows (in thousands):
November 30,
2020 2019
Investment Banking and Capital Markets (1)
$ 1,646,523 $ 1,640,201
Asset Management (1)
410 3,398
Total goodwill
$ 1,646,933 $ 1,643,599
(1)Accumulated goodwill impairments related to the Investment Banking and Capital Markets business segment were $51.9 million at both December 1, 2019 and 2018, and goodwill prior to these impairments was $1,692.1 million and $1,690.7 million at December 1, 2019 and 2018, respectively. Accumulated goodwill impairments related to the Asset Management business segment were $2.1 million at both December 1, 2019 and 2018 and goodwill prior to these impairments was $5.5 million at both December 1, 2019 and 2018.
The following table is a summary of the changes to goodwill (in thousands):
Year Ended November 30,
2020 2019
Balance, at beginning of period
$ 1,643,599 $ 1,642,170
Currency translation and other adjustments 6,334 1,325
Goodwill acquired during the period (1)
- 104
Impairment losses (2) $ (3,000) $ -
Balance, at end of period
$ 1,646,933 $ 1,643,599
(1)Goodwill acquired was in connection with our purchase of an entity in Australia and relates to our Investment Banking and Capital Markets business segment.
(2)Impairment losses are related to our wind down of our quantPORT asset management platform.
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 and consists of two steps. In the first step, 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 a second step is performed in order to measure the amount of the impairment loss, if any, which is based on comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.
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, 2020.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Our annual goodwill impairment testing at August 1, 2020 did not indicate any goodwill impairment in any of our reporting units. Substantially 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. At November 30, 2020, goodwill allocated to these reporting units is $1,646.5 million of total goodwill of $1,646.9 million.
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, 2020 and 2019 (dollars in thousands):
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 are related to our wind down of our quantPORT asset management platform.
November 30, 2019 Weighted average remaining lives (years)
Gross cost Impairment losses Accumulated amortization Net carrying amount
Customer relationships
$ 125,736 $ - $ (67,257) $ 58,479 9.9
Trade name
128,590 - (24,800) 103,790 28.3
Exchange and clearing organization membership interests and registrations
8,564 (291) - 8,273 N/A
Total
$ 262,890 $ (291) $ (92,057) $ 170,542
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, 2020. 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 $12.2 million, $11.9 million and $12.1 million for the years ended November 30, 2020, 2019 and 2018, 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, 2021 $ 12,181
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
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 11. Short-Term Borrowings
Short-term borrowings at November 30, 2020 and 2019 mature in one year or less and include the following (in thousands):
November 30,
2020 2019
Bank loans (1)
$ 752,848 $ 527,509
Floating rate puttable notes (1)
6,800 -
Equity-linked notes (2) 5,067 20,981
Total short-term borrowings
$ 764,715 $ 548,490
(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, 2020, the weighted average interest rate on short-term borrowings outstanding is 1.87% 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, 2020, we were in compliance with all covenants under these facilities. Our facilities included within bank loans at November 30, 2020 and 2019 were as follows (in thousands):
November 30,
2020 2019
Bank of New York Mellon Master Loan Agreement (1) $ 300,000 $ 351,000
JPMorgan Chase Bank, N.A. Credit Facility (2) 246,000 135,000
Royal Bank of Canada Credit Facility (3) 200,000 -
Bank of New York Mellon Credit Facility (4) - -
Total $ 746,000 $ 486,000
(1)Interest is generally based at spreads over the Federal Funds Rate as defined in this master loan agreement.
(2)Interest is based on an annual alternative base rate or an adjusted London Interbank Offered Rate (“LIBOR”), as defined in this credit facility agreement.
(3)Interest is based on a rate per annum equal to LIBOR plus an applicable margin of 2.05%.
(4)During 2020, Jefferies LLC entered into a revolving credit facility with the Bank of New York Mellon for a committed amount of $100.0 million, maturing on September 13, 2021. Interest is based on a rate per annum equal to the Federal Funds Rate plus 2%. At November 30, 2020, there were no borrowings outstanding under this agreement.
In addition, the Bank of New York Mellon 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%. Interest is charged 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, 2020, we were in compliance with all debt covenants under the Intraday Credit Facility.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 2020 2019
Unsecured long-term debt
2.375% Euro Medium Term Notes
May 20, 2020 -% $ - $ 550,622
6.875% Senior Notes
April 15, 2021 -% - 774,738
2.250% Euro Medium Term Notes
July 13, 2022 4.08% 4,638 4,204
5.125% Senior Notes
January 20, 2023 4.47% 759,901 610,023
1.000% Euro Medium Term Notes
July 19, 2024 1.00% 595,700 548,880
4.850% Senior Notes (1)
January 15, 2027 4.93% 809,039 768,931
6.450% Senior Debentures
June 8, 2027 5.46% 369,057 371,426
4.150% Senior Notes
January 23, 2030 4.26% 989,574 988,662
2.750% Senior Notes (1)
October 15, 2032 2.85% 485,134 -
6.250% Senior Debentures
January 15, 2036 6.03% 510,834 511,260
6.500% Senior Notes
January 20, 2043 6.09% 419,826 420,239
Structured notes (2)(3) Various Various 1,712,245 1,215,285
Total unsecured long-term debt
6,655,948 6,764,270
Secured long-term debt
Revolving Credit Facility
189,732 189,088
Secured Bank Loan
September 27, 2021 50,000 50,000
Total long-term debt (4)
$ 6,895,680 $ 7,003,358
(1)The carrying values of these senior notes include net losses of $36.7 million and $58.9 million during 2020 and 2019, 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 $1,712.2 million of structured notes at November 30, 2020, $3.1 million matures in 2024, $25.4 million matures in 2025, and the remaining $1,683.7 million matures in 2026 or thereafter.
(4)The Total Long-term debt has a fair value of $7,575.2 million and $7,280.4 million at November 30, 2020 and 2019, respectively, which would be classified as Level 2 and Level 3 in the fair value hierarchy.
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. At November 30, 2020, 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 2019, long-term debt increased $457.1 million. This increase is primarily due to structured notes issuances with a total principal amount of approximately $498.9 million, net of retirements. In addition, on July 19, 2019, under our $2.5 billion Euro Medium Term Note Program, we issued 1.000% senior unsecured notes with a principal amount of $553.6 million, due 2024. Proceeds amounted to $551.4 million. The decrease in long-term debt was partially offset by repayments of $680.8 million of our 8.500% senior notes.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We have a Revolving Credit Facility with a group of commercial banks for an aggregate principal amount of $190.0 million. At November 30, 2020, borrowings under the Revolving Credit Facility amounted to $189.7 million. Interest is based on an annual alternative base rate or an adjusted LIBOR, as defined in the Revolving Credit Facility 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 year and at November 30, 2020, 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.
One of our subsidiaries has a Loan and Security Agreement with a bank for a term loan with a principal amount of $50.0 million (“Secured Bank Loan”). This Secured Bank Loan matures on September 27, 2021 and is collateralized by certain trading securities. Interest on the Secured Bank Loan is 1.25% plus LIBOR. The agreement contains certain covenants that, among other things, restrict lien or encumbrance upon any of the pledged collateral. At November 30, 2020, we were in compliance with all covenants under the Loan and Security Agreement.
Note 13. Leases
We enter into lease and sublease agreements, primarily for office space, across our geographic locations. Finance lease ROU assets and finance lease liabilities are not material. Information related to operating leases in our Consolidated Statement of Financial Condition at November 30, 2020 was as follows (in thousands, except lease term and discount rate):
Premises and equipment - ROU assets $ 486,614
Weighted average:
Remaining lease term (in years) 10.9
Discount rate 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, 2020 (in thousands):
Fiscal Year Lease Liabilities
2021 $ 65,442
2022 70,200
2023 62,641
2024 61,106
2025 63,158
2026 and thereafter 338,742
Total undiscounted cash flows 661,289
Less: Difference between undiscounted and discounted cash flows (100,402)
Operating leases amount in our Consolidated Statement of Financial Condition 560,887
Finance leases amount in our Consolidated Statement of Financial Condition 362
Total amount in our Consolidated Statement of Financial Condition $ 561,249
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents our lease costs (in thousands):
Year Ended
November 30, 2020
Operating lease costs (1) $ 71,140
Variable lease costs (2) 13,332
Less: Sublease income (5,974)
Total lease cost, net $ 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, 2020
Cash outflows - lease liabilities $ 66,248
Non-cash - ROU assets recorded for new and modified leases 21,389
In addition, the amortization of the ROU assets is included within Other adjustments on the Consolidated Statements of Cash Flows.
Minimum Future Lease Commitments (under Previous GAAP). As lessee, we lease certain premises and equipment under non-cancelable agreements expiring at various dates through 2039 which are operating leases. At November 30, 2019, future minimum aggregate annual lease payments under such leases (net of subleases) for fiscal years ended November 30, 2020 through 2024 and the aggregate amount thereafter, were as follows (in thousands):
Fiscal Year Operating Leases
2020 $ 57,952
2021 60,395
2022 62,916
2023 57,574
2024 56,878
Thereafter 389,245
Total $ 684,960
The total minimum payments to be received in the future under non-cancelable subleases at November 30, 2019 was $16.2 million.
Rental expense, net of subleases, amounted to $61.2 million and $52.3 million for the years ended November 30, 2019 and 2018, respectively.
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,
2020 2019 2018
Revenues from contracts with customers:
Commissions and other fees $ 823,258 $ 676,309 $ 663,470
Investment banking 2,501,494 1,528,729 1,910,203
Asset management fees 9,187 17,219 21,214
Total revenue from contracts with customers 3,333,939 2,222,257 2,594,887
Other sources of revenue:
Principal transactions 1,867,013 769,258 524,296
Revenues from third-parties with strategic relationships pursuant to arrangements
19,507 3,066 -
Interest 894,215 1,496,529 1,207,095
Other 37,632 93,422 103,354
Total revenues $ 6,152,306 $ 4,584,532 $ 4,429,632
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 convertible 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,
2020 2019 2018
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 $ 1,053,500 $ - $ 1,053,500 $ 767,421 $ - $ 767,421 $ 820,042 $ - $ 820,042
Investment banking -
Underwriting 1,447,994 - 1,447,994 761,308 - 761,308 1,090,161 - 1,090,161
Equities (1) 807,350 - 807,350 662,804 - 662,804 649,631 - 649,631
Fixed income (1) 15,908 - 15,908 13,505 - 13,505 13,839 - 13,839
Asset management - 9,187 9,187 - 17,219 17,219 - 21,214 21,214
Total $ 3,324,752 $ 9,187 $ 3,333,939 $ 2,205,038 $ 17,219 $ 2,222,257 $ 2,573,673 $ 21,214 $ 2,594,887
Primary geographic region:
Americas $ 2,742,298 $ 4,239 $ 2,746,537 $ 1,751,568 $ 10,472 $ 1,762,040 $ 2,186,955 $ 20,871 $ 2,207,826
Europe 401,853 4,948 406,801 374,411 6,747 381,158 304,027 343 304,370
Asia Pacific 180,601 - 180,601 79,059 - 79,059 82,691 - 82,691
Total $ 3,324,752 $ 9,187 $ 3,333,939 $ 2,205,038 $ 17,219 $ 2,222,257 $ 2,573,673 $ 21,214 $ 2,594,887
(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, 2020. 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, 2020.
During the years ended November 30, 2020, 2019 and 2018, we recognized $11.1 million, $27.6 million and $26.6 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 $17.6 million, $21.7 million and $18.1 million of revenues primarily associated with distribution services during the years ended November 30, 2020, 2019 and 2018, 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
We had receivables related to revenues from contracts with customers of $278.5 million and $209.3 million at November 30, 2020 and 2019, respectively. We had no significant impairments related to these receivables during the years ended November 30, 2020 and 2019.
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, 2020 and 2019 was $10.0 million and $9.0 million, respectively, which are recorded in Accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. During the years ended November 30, 2020, 2019 and 2018, we recognized revenue of $7.9 million, $9.5 million and $5.4 million, respectively, that were recorded as deferred revenue at the beginning of the year.
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, 2020 and 2019, capitalized costs to fulfill a contract were $1.8 million and $4.8 million, respectively, which are recorded in Receivables - Fees, interest and other in the Consolidated Statement of Financial Condition. For the years ended November 30, 2020, 2019 and 2018, we recognized expenses of $5.1 million, $4.0 million and $2.3 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, 2020, 2019 and 2018.
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, 2020 and we do not anticipate making a contribution to the plan for the year ending November 30, 2021.
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,
2020 2019
Change in projected benefit obligation:
Projected benefit obligation, beginning of period
$ 63,222 $ 54,724
Interest cost
1,801 2,303
Actuarial losses 9,874 9,606
Administrative expenses paid
(346) (467)
Benefits paid
(1,003) (3,444)
Settlements
(2,477) -
Other costs 470 500
Projected benefit obligation, end of period
$ 71,541 $ 63,222
Change in plan assets:
Fair value of assets, beginning of period
$ 56,980 $ 48,176
Benefits paid
(1,003) (3,444)
Administrative expenses paid
(346) (467)
Actual return on plan assets
10,007 10,715
Contributions
- 2,000
Settlements
(2,477) -
Fair value of assets, end of period
$ 63,161 $ 56,980
Funded status at end of period
$ (8,380) $ (6,242)
The amounts recognized in our Consolidated Statements of Financial Condition are as follows (in thousands):
November 30,
2020 2019
Consolidated statements of financial condition:
Accrued expenses and other liabilities $ 8,380 $ 6,242
Accumulated other comprehensive income, before taxes:
Net losses
$ (10,875) $ (8,159)
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,
2020 2019 2018
Components of net periodic pension cost:
Interest cost on projected benefit obligation
$ 1,801 $ 2,303 $ 2,129
Expected return on plan assets
(3,477) (3,008) (3,247)
Net amortization
252 122 -
Settlement losses
376 - 365
Other costs 470 500 400
Net periodic pension cost
$ (578) $ (83) $ (353)
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended November 30,
2020 2019 2018
Amounts recognized in Other comprehensive income:
Net losses arising during the period
$ 3,344 $ 1,899 $ 655
Amortization of net loss
(252) (122) -
Settlements during the period
(376) - (365)
Total losses recognized in Other comprehensive income
$ 2,716 $ 1,777 $ 290
Net losses/(gains) recognized in net periodic benefit cost and Other comprehensive income
$ 2,138 $ 1,694 $ (63)
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,
2020 2019 2018
Discount rate used to determine benefit obligation
2.00 % 2.90 % 4.30 %
Weighted average assumptions used to determine net pension cost:
Discount rate
2.90 % 4.30 % 3.60 %
Expected long-term rate of return on plan assets
6.25 % 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):
2021 $ 2,207
2022 3,048
2023 4,176
2024 4,758
2025 4,422
2026 through 2030 24,755
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.
German Pension Plan
We maintained a defined benefits pension plan located in Germany (the “German Pension Plan”) in connection with our Futures business. On December 28, 2017, a Liquidation Insurance Contract was entered into with Generali Lebensversicherung AG (“Generali”) to transfer the defined benefit pension obligations and insurance contracts to Generali, for approximately €6.5 million, which was paid in January 2018, and released us from any and all obligations under the German Pension Plan. In addition, on December 28, 2017, we received $3.25 million as consideration relating to the German Pension Plan in connection with releasing the prior plan sponsor from any indemnities. Accumulated other comprehensive income for the year ended November 30, 2018 included $5.3 million related to the transfer of the German Pension Plan.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 16. Compensation Plans
Jefferies sponsors our following share-based compensation plans: Incentive Compensation Plan, Employee Stock Purchase Plan (“ESPP”) and the Deferred Compensation Plan. 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.
The components of total compensation cost associated with certain of our compensation plans are as follows (in millions):
Year Ended November 30,
2020 2019 2018
Components of compensation cost:
Restricted cash awards (1) $ 474.3 $ 314.7 $ 274.4
Restricted stock and RSUs (2) 25.2 26.7 27.6
Profit sharing plan
7.8 7.2 6.5
Total compensation cost
$ 507.3 $ 348.6 $ 308.5
(1)During the fourth quarter of 2020, we amended certain provisions of a set of cash awards that had been granted as part of compensation at previous year-ends to remove any service requirements for vesting in the awards. Compensation expense of $179.6 million was recorded during the year ended November 30, 2020 as a result of these amendments.
(2)Total compensation cost associated with restricted stock and restricted stock units (“RSUs”) includes the amortization of sign-on, retention and senior executive awards, less forfeitures and clawbacks. Additionally, we recognize compensation cost related to the discount provided to employees in electing to defer compensation under the Deferred Compensation Plan. This compensation cost was approximately $0.3 million, $0.4 million and $0.3 million for the years ended November 30, 2020, 2019 and 2018, respectively.
Remaining unamortized amounts related to certain compensation plans at November 30, 2020 are as follows (dollars in millions):
Remaining Unamortized Amounts Weighted Average Vesting Period
(in Years)
Non-vested share-based awards
$ 28.2 2
Restricted cash awards
363.5 3
Total
$ 391.7
The following are descriptions of the compensation plans:
Incentive Compensation Plan. The Incentive Compensation Plan (“Incentive Plan”) allows 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. RSUs give a participant the right to receive fully vested common shares at the end of a specified 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 Incentive Plan relate to shares of Jefferies.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 awards for multiple years. Sign-on and retention awards are generally subject to annual ratable vesting over a four-year service period and are amortized as compensation expense on a straight-line basis over the related four years. Restricted stock and RSUs are granted to certain senior executives with market, performance and 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 condition is not met. Awards with performance conditions are amortized over the service period if we determine that it is probable that the performance condition will be achieved.
Employee Stock Purchase Plan. There is also an ESPP which we consider noncompensatory effective January 1, 2007. The ESPP permits all regular full-time employees and employees who work part time over 20 hours per week to purchase, at a discount, Jefferies common shares. Annual employee contributions are limited to $21,250, are voluntary and made through payroll deduction. The stock purchase price is equal to 95% of the closing price of common stock on the last day of the applicable session (monthly).
Deferred Compensation Plan. There is also a Deferred Compensation Plan (“Deferred Compensation Plan”), 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 Deferred Compensation Plan. We often invest directly, as a principal, in investments corresponding to the other investment funds, relating to our obligations to perform under the Deferred Compensation Plan. 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,
2020 2019 2018
Income tax expense
$ 302,748 $ 80,284 $ 250,650
The provision for income tax expense consists of the following components (in thousands):
Year Ended November 30,
2020 2019 2018
Current:
U.S. Federal
$ 213,274 $ 50,970 $ 106,761
U.S. state and local
35,317 (3,641) 7,485
Foreign
71,898 10,923 10,139
Total current
320,489 58,252 124,385
Deferred:
U.S. Federal
(30,190) 19,973 131,233
U.S. state and local
(96) 5,768 975
Foreign
12,545 (3,709) (5,943)
Total deferred
(17,741) 22,032 126,265
Total income tax expense
$ 302,748 $ 80,284 $ 250,650
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents the U.S. and non-U.S. components of income before income tax expense (in thousands):
Year Ended November 30,
2020 2019 2018
U.S.
$ 888,639 $ 313,349 $ 370,600
Non-U.S. (1)
288,815 11,320 39,067
Income before income tax expense
$ 1,177,454 $ 324,669 $ 409,667
(1)For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rates of 21.0% for the years ended November 30, 2020 and 2019 and 22.2% for the year ended November 30, 2018 to earnings before income taxes as a result of the following (dollars in thousands):
Year Ended November 30,
2020 2019 2018
Amount Percent Amount Percent Amount Percent
Computed expected income taxes
$ 247,265 21.0 % $ 68,181 21.0 % $ 90,945 22.2 % (1)
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of Federal income tax benefit
50,923 4.3 11,638 3.6 20,419 5.0
International operations (including foreign rate differential)
13,168 1.1 4,518 1.4 2,258 0.6
Tax exempt income
(227) - (634) (0.2) (2,202) (0.5)
Foreign tax credits, net
(8,654) (0.7) (1,664) (0.5) (8,006) (2.0)
Meals and entertainment
1,822 0.2 3,641 1.1 4,528 1.1
Non-deductible executive compensation
8,407 0.7 3,720 1.1 3,011 0.7
Change in unrecognized tax benefits related to prior years
(9,314) (0.8) (7,690) (2.4) (18,497) (4.5)
Deferred tax asset remeasurement related to the Tax Act
- - - - 112,733 27.5
Transition tax on foreign earnings related to the Tax Act
- - 139 0.1 52,417 12.8
Other, net
(642) (0.1) (1,565) (0.5) (6,956) (1.7)
Total income tax expense
$ 302,748 25.7 % $ 80,284 24.7 % $ 250,650 61.2 %
(1)On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act, which reduced the U.S. federal corporate tax rate from 35.0% to 21.0%, as well as other changes. The statutory U.S. federal corporate tax rate for companies with a fiscal year end of November 30, 2018 is a blended rate of 22.2%, which was reduced to 21.0% in fiscal 2019 and thereafter.
The following table presents a reconciliation of gross unrecognized tax benefits (in thousands):
Year Ended November 30,
2020 2019 2018
Balance at beginning of period
$ 125,607 $ 125,626 $ 129,544
Increases based on tax positions related to the current period
40,209 8,142 19,840
Increases based on tax positions related to prior periods
5,275 1,399 5,002
Decreases based on tax positions related to prior periods
(2,444) (9,560) (28,760)
Balance at end of period
$ 168,647 $ 125,607 $ 125,626
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate was $133.9 million and $99.5 million (net of benefits of taxes) at November 30, 2020 and 2019, respectively.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $9.8 million, $6.3 million and $1.0 million for the years ended November 30, 2020, 2019 and 2018, respectively. At November 30, 2020 and 2019, we had interest accrued of approximately $65.4 million and $55.6 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, 2020 and 2019.
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,
2020 2019
Deferred tax assets:
Compensation and benefits $ 238,154 $ 223,357
Operating lease liabilities 140,742 -
Long-term debt 41,934 33,097
Accrued expenses and other 61,247 71,993
Net operating losses 2,534 5,634
Sub-total 484,611 334,081
Valuation allowance (3,201) (3,228)
Total deferred tax assets 481,410 330,853
Deferred tax liabilities:
Operating lease right-of-use assets 134,638 -
Amortization of intangibles 67,663 70,373
Partnerships 28,249 49,853
Other 15,167 12,580
Total deferred tax liabilities 245,717 132,806
Net deferred tax asset, included in Other assets $ 235,693 $ 198,047
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 $235.7 million at November 30, 2020 is more likely than not based on expectations of future taxable income in the jurisdictions in which we operate.
At November 30, 2020, we had gross net operating loss carryforwards of $2.5 million, primarily related to various European jurisdictions. A deferred tax asset of $1.8 million related to net operating losses in Europe has been partially offset by a valuation allowance of $1.4 million, while $0.6 million of a deferred tax asset related to net operating losses in Asia has been partially offset by a valuation allowance of allowance of $0.3 million. 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. We do not expect that resolution of these examinations will have a material effect on our consolidated financial position, but could have a material impact on the 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 $6.2 million.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 2017
New Jersey 2010
New York State 2001
New York City 2006
United Kingdom 2019
Italy 2012
Hong Kong 2014
India 2010
The new tax on global intangible low-taxed income (“GILTI”), became applicable in fiscal 2019. As a result, we made an accounting policy election in the first quarter of 2019 to treat GILTI as a period cost if and when incurred.
Note 18. Commitments, Contingencies and Guarantees
Commitments
The following table summarizes our commitments at November 30, 2020 (in millions):
Expected Maturity Date (fiscal years)
2021 2022 2023 and 2024 2025 and 2026 2027 and Later Maximum Payout
Equity commitments (1)
$ 306.7 $ 1.3 $ - $ - $ 6.8 $ 314.8
Loan commitments (1)
249.5 10.0 25.0 1.4 - 285.9
Underwriting commitments
243.3 - - - - 243.3
Forward starting reverse repos (2)
6,048.0 - - - - 6,048.0
Forward starting repos (2)
3,488.7 - - - - 3,488.7
Other unfunded commitments (1)
156.6 25.0 5.2 - - 186.8
Total commitments
$ 10,492.8 $ 36.3 $ 30.2 $ 1.4 $ 6.8 $ 10,567.5
(1)Equity, loan and other unfunded commitments are presented by contractual maturity date. The amounts, however, are available on demand.
(2)At November 30, 2020, $5,919.9 million within forward starting securities purchased under agreements to resell and $3,480.4 million within 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, 2020, our outstanding commitments relating to Jefferies Capital Partners, LLC and its private equity funds were $11.0 million.
See Note 9, Investments, for additional information regarding our investments in Jefferies Finance.
Additionally, at November 30, 2020, we had other outstanding equity commitments to invest up to $200.0 million to third-parties with strategic relationships and up to $6.2 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, acquisition finance and securities transactions, SPE sponsors in connection with the funding of CLO and other asset-backed transactions, and third-parties with strategic relationships. 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, 2020, we had $80.0 million of outstanding loan commitments to clients and $5.9 million to third-parties with strategic relationships.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Loan commitments outstanding at November 30, 2020 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.
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, 2020 (in millions):
Expected Maturity Date (Fiscal Years)
2021 2022 2023 and 2024 2025 and 2026 2027 and Later Notional/ Maximum Payout
Guarantee Type:
Derivative contracts-non-credit related
$ 12,607.6 $ 2,475.8 $ 5,760.8 $ 390.4 $ 11.9 $ 21,246.5
Written derivative contracts-credit related
- - 6.4 - - 6.4
Total derivative contracts
$ 12,607.6 $ 2,475.8 $ 5,767.2 $ 390.4 $ 11.9 $ 21,252.9
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, 2020, the fair value of derivative contracts meeting the definition of a guarantee is approximately $181.3 million.
Standby Letters of Credit. At November 30, 2020, we provided guarantees to certain counterparties in the form of standby letters of credit in the amount of $20.4 million, all of which expire within approximately 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
At November 30, 2020, Jefferies LLC’s net capital and excess net capital were as follows (in thousands):
Net Capital Excess Net Capital
Jefferies LLC
$ 2,161,289 $ 2,060,537
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 authorized and regulated by the Financial Conduct Authority in the United Kingdom (“U.K.”).
The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our regulated subsidiaries.
At November 30, 2020 and 2019, $5,666.6 million and $4,934.2 million, 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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,
2020 2019 2018
Investment Banking and Capital Markets:
Net revenues
$ 4,989.2 $ 3,036.0 $ 3,184.4
Non-interest expenses
3,869.3 2,688.9 2,719.5
Earnings before income taxes $ 1,119.9 $ 347.1 $ 464.9
Asset Management:
Net revenues
$ 208.3 $ 76.5 $ (1.0)
Non-interest expenses
150.7 98.9 54.2
Earnings (loss) before income taxes $ 57.6 $ (22.4) $ (55.2)
Total:
Net revenues
$ 5,197.5 $ 3,112.5 $ 3,183.4
Non-interest expenses
4,020.0 2,787.8 2,773.7
Earnings before income taxes $ 1,177.5 $ 324.7 $ 409.7
The following table summarizes our total assets by reportable business segment (in millions):
November 30,
2020 2019
Investment Banking and Capital Markets
$ 44,488.1 $ 40,565.8
Asset Management
3,263.9 2,950.3
Total assets
$ 47,752.0 $ 43,516.1
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,
2020 2019 2018
Americas (1)
$ 4,060.0 $ 2,407.6 $ 2,652.9
Europe (2)
852.0 592.8 434.9
Asia Pacific 285.5 112.1 95.6
Net revenues
$ 5,197.5 $ 3,112.5 $ 3,183.4
(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, 2020 and 2019, we had $28.9 million and $34.8 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. One of our directors also had an investment in a hedge fund managed by us of approximately $3.6 million at November 30, 2019, which was fully redeemed in May 2020 due to the wind down of an asset management platform.
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,
2020 2019 2018
Charges to Jefferies for services provided
$ 47.2 $ 52.7 $ 61.2
Charges from Jefferies for services received
32.2 9.5 9.1
•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,
2020 2019 2018
Investment banking
$ 10.5 $ 10.6 $ 15.7
Commissions and other fees
1.5 1.2 1.8
Principal transactions - - 0.1
•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,
2020 2019
Receivable from Jefferies $ 1.3 $ 0.9
Payable to Jefferies 7.1 4.3
•During the years ended November 30, 2020 and 2019, we paid distributions of $498.7 million and $311.1 million, respectively, to Jefferies. At November 30, 2020 and 2019, we accrued distributions payable in the amount of $153.6 million and $12.6 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, 2020 and 2019.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
•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, 2020, a net current tax payable from Jefferies of $111.1 million is included in Accrued expenses and other liabilities, in our Consolidated Statements of Financial Condition. At November 30, 2019, a net current tax receivable from Jefferies of $24.4 million is included in Other assets, in our Consolidated Statements of Financial Condition. During the years ended November 30, 2020 and 2019, we made payments to Jefferies of $83.0 million and $71.4 million, respectively.
•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,
2020 2019
Securities purchased from Jefferies $ 64.8 $ 917.2
Securities sold to Jefferies (1) 0.1 110.9
(1)During the year ended November 30, 2019, we also transferred to Jefferies a related deferred tax liability of $3.1 million.
•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, 2020, we have customer account payables to entities of Jefferies totaling $2.2 million, 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.
•On October 1, 2018, Jefferies transferred its 50% interest in Berkadia and capital investments in certain separately managed accounts and funds to us. On November 1, 2018, we purchased LIML, an investment advisory company, from Jefferies. These transfers were accomplished as a capital contribution from Jefferies of approximately $598.2 million and cash payments of $70.5 million to Jefferies during the fourth quarter of 2018. In addition, we paid cash of approximately $5.5 million, representing LIML’s net book value as at October 31, 2018, including goodwill of $0.4 million and intangible assets of $0.2 million. In connection with these transfers, related deferred tax liabilities of approximately $50.9 million were transferred to us, for which Jefferies has indemnified us. These transferred deferred tax liabilities were adjusted by an additional $19.1 million during the fourth quarter of 2019. See Note 9, Investments, for further details on our 50% interest in Berkadia.
•In connection with foreign exchange contracts entered into under a prime brokerage agreement with an affiliate of Jefferies, we have $2.7 million and $9.9 million at November 30, 2020 and 2019, 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, and $0.6 million recorded in Financial instruments sold, not yet purchased, at fair value, in our Consolidated Statements of Financial Condition at November 30, 2020 and 2019, respectively. 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,
2020 2019 2018
Net gains (losses) on foreign exchange contracts $ 1.6 $ (6.1) $ -
•Two of our directors have 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.
JEFFERIES GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
•We have investments in hedge funds managed by Jefferies of $239.0 million and $223.5 million at November 30, 2020 and 2019, respectively, included in Financial instruments owned, at fair value in our Consolidated Statements of Financial Condition. Net gains on our investments in these hedge funds, which are included in Principal transactions revenues in our Consolidated Statements of Earnings, are as follows (in millions):
Year Ended November 30,
2020 2019 2018
Net gains on our investments $ 15.8 $ 4.7 $ 5.0
•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, 2020 and 2019, approximately $2.6 million and $0.1 million, respectively, of debt issued by Jefferies is included in Financial instruments owned, at fair value in our Consolidated Statements of Financial Condition.
•We have entered into a sublease agreement with an affiliate of Jefferies for office space. For the year ended November 30, 2020, we received payments for rent and other expenses of $0.8 million from this affiliate.
•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.
HRG Group Inc. (“HRG”). We recognized investment banking revenues of $3.0 million for the year ended November 30, 2018 in connection with the merger of HRG into Spectrum Brands Holdings, Inc., which was partially owned by Jefferies.
For information on transactions with our equity method investees, see Note 9, Investments.
Note 22. Selected Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly statements of earnings for the years ended November 30, 2020 and 2019 (in thousands):
Three Months Ended
November 30, 2020 August 31,
2020 May 31,
2020 February 28, 2020
Total revenues
$ 1,810,394 $ 1,595,073 $ 1,267,283 $ 1,479,556
Net revenues
1,608,970 1,383,444 1,034,367 1,170,696
Earnings before income taxes 405,807 363,401 172,868 235,378
Net earnings attributable to Jefferies Group LLC 307,114 268,062 130,738 173,389
Three Months Ended
November 30, 2019 August 31,
2019 May 31,
2019 February 28, 2019
Total revenues
$ 1,073,536 $ 1,141,631 $ 1,314,493 $ 1,054,872
Net revenues
747,802 777,159 901,851 685,718
Earnings before income taxes 23,871 83,075 155,138 62,585
Net earnings attributable to Jefferies Group LLC 25,160 64,968 109,920 45,981
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, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of November 30, 2020 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, 2020 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, 2020 and 2019, 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,
2020 2019
Audit Fees $ 7,514,963 $ 6,344,700
Audit-Related Fees 1,254,925 1,221,753
Tax Fees 181,058 319,622
All Other Fees 6,990 8,803
Total All Fees $ 8,957,936 $ 7,894,878
Audit Fees - The Audit Fees reported above reflect fees for services provided during fiscal 2020 and 2019. 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 2020, 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 2020 and 2019. 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 2020 and 2019 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 Registrant’s Securities
23.1* Consent of Deloitte & Touche LLP.
31.1* Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.
31.2* Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.
32* Rule 13a-14(b)/15d-14(b) and Section 1350 of Title 18 U.S.C. Certification by the Chief Executive Officer and Chief Financial Officer.
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, 2020 and 2019; (ii) the Consolidated Statements of Earnings for the years ended November 30, 2020, 2019 and 2018; (iii) the Consolidated Statements of Comprehensive Income for the years ended November 30, 2020, 2019 and 2018; (iv) the Consolidated Statements of Changes in Equity for the years ended November 30, 2020, 2019 and 2018; (v) the Consolidated Statements of Cash Flows for the years ended November 30, 2020, 2019 and 2018; 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.