Note 10.

Variable Interest Entities

Variable interest entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity 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.

We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and 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 significant judgment. In determining whether we are the party with the power to direct the VIE’s most significant activities, we first identify the activities of the VIE that most significantly impact its economic performance. Our considerations in determining the VIE’s most significant activities primarily include, but are not limited to, the VIE’s purpose and design and the risks passed through to investors. We then assess whether we have the power to direct those significant activities. Our considerations in determining whether we have the power to direct the VIE’s most significant activities include, but are not limited to, 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 most significant activities is shared, we assess whether we are the party with the power over the majority of the significant activities. If we are the party with the power over the majority of the significant activities, we meet the “power” criteria of the primary beneficiary. If we do not have the power over a majority of the 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 significant 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. Our variable interests in VIEs include debt and equity interests, commitments and certain fees. Our involvement with VIEs arises primarily from:

•

Purchases of mortgage-backed securities and collateralized debt and loan obligations in connection with our trading and secondary market making activities,

•

Retained interests held as a result of securitization activities as part of primary market making activities, including the resecuritizations of mortgage-backed securities,

•

Ownership of debt, equity and partnership interests in Jefferies High Yield Holdings, LLC and related entities,

•

Management and performance fees in the Jefferies Umbrella Fund, and

•

Loans to and investments in investment fund vehicles.

Consolidated VIEs

The following table presents information about the assets and liabilities of our consolidated VIEs, which are presented within our Consolidated Statements of Financial Condition in the respective asset and liability categories, as of February 28, 2013 and November 30, 2012. 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. We have aggregated our consolidated VIEs based upon principal business activity.


(in millions)	February 28, 2013						November 30, 2012
	High Yield		Mortgage- and Asset-backed Vehicles		Other		High Yield		Mortgage- and Asset-backed Vehicles		Other

Cash	$	335.2	$	—	$	0.2	$	388.1	$	—	$	0.2
Financial instruments owned		1,238.0		9.9		0.5		894.2		10.0		0.5
Securities borrowed		488.9		—		—		372.1		—		—
Securities purchased under agreement to resell (3)		—		120.0		—		—		60.0		—
Receivable from brokers and dealers		474.1		—		—		264.5		—		—
Other		9.7		—		—		11.4		—		—

	$	2,545.9	$	129.9	$	0.7	$	1,930.3	$	70.0	$	0.7


Financial instruments sold, not yet purchased	$	918.1	$	—	$	—	$	526.1	$	—	$	—
Securities loaned		122.6		—		—		112.0		—		—
Payable to brokers and dealers		367.8		—		—		201.2		—		—
Mandatorily redeemable interests (1)		1,116.6		—		—		1,076.0		—		—
Secured financing (2)		—		129.9		—		—		70.0		—
Other		21.6		—		0.2		15.0		—		0.2

	$	2,546.7	$	129.9	$	0.2	$	1,930.3	$	70.0	$	0.2

(1)

After consolidation, which eliminates our interests and the interests of our consolidated subsidiaries, JSOP and JESOP, the carrying amount of the mandatorily redeemable financial interests pertaining to the above VIEs included within Mandatorily redeemable preferred interests of consolidated subsidiaries was approximately $359.0 million and $348.1 million at February 28, 2013 and November 30, 2012, respectively. These amounts represent the portion of the mandatorily redeemable preferred interests held by our joint venture partner.

(2)	Secured financing is included within Accrued expenses and other liabilities. Approximately $7.6 million and $7.7 million of the secured financing represents an amount held by us in inventory and are eliminated in consolidation at February 28, 2013 and November 30, 2012, respectively.

(3)	Securities purchased under agreement to resell represent an amount due from a related consolidated entity in a collateralized transaction, which is eliminated in consolidation.

High Yield. We conduct our high yield secondary market trading activities through Jefferies High Yield Trading, LLC (“JHYT”), Jefferies High Yield Finance, LLC (“JHYF”), and Jefferies Leveraged Credit Products, LLC (“JLCP”). JHYT is a registered broker-dealer engaged in the secondary sales and trading of high yield and special situation securities, including bank debt, post-reorganization equity, public and private equity, equity derivatives and other financial instruments. JHYT makes markets in high yield and distressed securities and provides research coverage on these types of securities. JHYF is engaged in the trading of total return swaps. JLCP is engaged in the trading of bank debt, credit default swaps and trade claims. JHYT, JHYF and JLCP are wholly owned subsidiaries of JHYH.

We own voting and non-voting interests in JHYH and have entered into management, clearing, and other services agreements with JHYH. We and Leucadia each have the right to nominate two of a total of four directors to JHYH’s board of directors. Two funds managed by us, JSOP and JESOP, are also investors in JHYH. We have determined that JHYH, JSOP and JESOP meet the definition of a variable interest entity. We are the primary beneficiary of JHYH, JSOP and JESOP and accordingly consolidate JHYH (and the assets, liabilities and results of operations of its wholly owned subsidiaries JHYT, JHYF and JLCP), JSOP and JESOP.

At February 28, 2013 and November 30, 2012, the carrying amount of our variable interests was $409.2 million and $389.4 million, respectively, which consist of our debt, equity and partnership interests in JHYH, JSOP and JESOP, which are eliminated in consolidation. In addition, the secondary market trading activity conducted through JHYT, JHYF and JLCP is a significant component of our overall brokerage platform, and while not contractually obligated, could require us to provide additional financial support and/or expose us to further losses of JHYH, JSOP and JESOP. The assets of these VIEs are available for the benefit of the mandatorily redeemable interest holders and equity holders. The creditors of these VIEs do not have recourse to our general credit.

There have been no changes in our conclusion to consolidate JHYH, JSOP and JESOP since formation. See Note 16, Noncontrolling Interests and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries for further discussion of JSOP, JESOP and the mandatorily redeemable interests in JHYH.

Mortgage-and asset-backed vehicles. We are the primary beneficiary of a mortgage-backed securitization vehicle to which we transferred a project loan and retained servicing rights over the loan as well as retained a portion of the securities issued by the securitization vehicle. Our variable interests in this vehicle consist of the securities and a contractual servicing fee. The asset of this VIE consists of a project loan, which is available for the benefit of the vehicles’ beneficial interest holders. The creditors of this VIE do not have recourse to our general credit.

We are also the primary beneficiary of mortgage-backed financing vehicles to which we sell agency and non-agency residential and commercial mortgage-backed securities pursuant to the terms of a master repurchase agreement. We manage the assets within these vehicles. Our variable interests in these vehicles consists of our collateral margin maintenance obligations under the master repurchase agreement. The assets of these VIEs consists of reverse repurchase agreements, which is available for the benefit of the vehicle’s debt holders. The creditors of these VIEs do not have recourse to our general credit.

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.

Nonconsolidated VIEs

We also hold variable interests in VIEs in which we are not the primary beneficiary and do not have the power to direct the activities that most significantly impact their economic performance and, accordingly, do not consolidate. We have not provided financial or other support to these VIEs during the three months ended February 28, 2013 and year ended November 30, 2012. We have no explicit or implicit arrangements to provide additional financial support to these VIEs and have no liabilities related to these VIEs at February 28, 2013 and November 30, 2012.

The following tables present information about nonconsolidated VIEs in which we had variable interests aggregated by principal business activity. The tables include VIEs where we have determined that the maximum exposure to loss is greater than specific thresholds or meets certain other criteria.


	February 28, 2013
	Variable Interests
(in millions)	Financial Statement Carrying Amount			Maximum exposure to loss			VIE Assets

Collateralized loan obligations	$	24.5	⁽²⁾	$	24.5	⁽⁴⁾	$	1,231.0
Agency mortgage- and asset-backed securitizations (1)		1,300.4	⁽²⁾		1,300.4	⁽⁴⁾		9,160.4
Non-agency mortgage- and asset-backed securitizations (1)		938.1	⁽²⁾		938.1	⁽⁴⁾		60,800.9
Asset management vehicle		2.9	⁽³⁾		2.9	⁽⁴⁾		477.7
Private equity vehicles		53.8	⁽³⁾		96.8			79.1

Total	$	2,319.7		$	2,362.7		$	71,749.1

(1)	VIE assets represent the unpaid principal balance of the assets in these vehicles at February 28, 2013 and represent the underlying assets that provide the cash flows supporting our variable interests.

(2)	Consists of debt securities accounted for at fair value, which are included within Financial instruments owned.

(3)	Consists of equity interests and loans, which are included within Investments in managed funds and Loans to and investments in related parties.

(4)	Our maximum exposure to loss in these non-consolidated VIEs is limited to our investment, which is represented by the financial statement carrying amount of our purchased or retained interests.


	November 30, 2012
	Variable Interests
(in millions)	Financial Statement Carrying Amount			Maximum exposure to loss			VIE Assets

Collateralized loan obligations	$	5.3	⁽²⁾	$	5.3	⁽⁴⁾	$	499.7
Agency mortgage- and asset-backed securitizations (1)		1,579.1	⁽²⁾		1,579.1	⁽⁴⁾		6,396.6
Non-agency mortgage- and asset-backed securitizations (1)		814.1	⁽²⁾		814.1	⁽⁴⁾		54,436.2
Asset management vehicle		3.0	⁽³⁾		3.0	⁽⁴⁾		505.3
Private equity vehicles		55.0	⁽³⁾		107.7			82.1

Total	$	2,456.5		$	2,509.2		$	61,919.9

(1)	VIE assets represent the unpaid principal balance of the assets in these vehicles at November 30, 2012 and represent the underlying assets that provide the cash flows supporting our variable interests.

(2)	Consists of debt securities accounted for at fair value, which are included within Financial instruments owned.

(3)	Consists of equity interests and loans, which are included within Investments in managed funds and Loans to and investments in related parties.

(4)	Our maximum exposure to loss in these non-consolidated VIEs is limited to our investment, which is represented by the financial statement carrying amount of our purchased or retained interests.

Collateralized Loan Obligations. We acted as transferor and underwriter in several collateralized loan obligation (“CLO”) transactions during the period and retained securities representing variable interests in the CLOs. Assets collateralizing the CLOs included bank loans, participation interests and sub-investment grade and senior secured U.S. loans. In addition, we own variable interests in CLOs previously managed by us. These CLOs represent interests in assets consisting primarily of senior secured loans, unsecured loans and high yield bonds. Our exposure to loss from these entities is limited to our investments in the debt securities held. Regarding the CLOs previously managed by us, our variable interests consist of debt securities (with a fair value of $4.8 million and $5.3 million at February 28, 2013 and November 30, 2012, respectively) and a right to a portion of the CLOs’ management and incentive fees. Management and incentives fees are accrued as the amounts become realizable.

Mortgage- and Asset-Backed Vehicles. In connection with our trading and market making activities, we buy and sell mortgage- and asset-backed securities. Mortgage- and asset-backed securities issued by securitization entities are generally considered variable interests in VIEs. A substantial portion of our variable interests in mortgage- and asset-backed VIEs are sponsored by unrelated third parties. The variable interests consist entirely of mortgage- and asset-backed securities and are accounted for at fair value and included in Financial instruments owned on our Consolidated Statements of Financial Condition. In addition to the agency mortgage- and asset-backed securities of $1,300.4 million, non-agency mortgage- and asset-backed securities of $938.1 million and collateralized loan obligations of $24.5 million at February 28, 2013 presented in the above table, we owned additional securities issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional securities were acquired in connection with our secondary market making activities and our securitization activities. Total securities issued by securitization SPEs at February 28, 2013 consist of the following (in millions):


	Nonagency		Agency		Total
Variable interests in collateralized loan obligations	$	24.5	$	—	$	24.5
Variable interests in agency mortgage- and asset-backed securitizations		—		1,300.4		1,300.4
Variable interests in nonagency mortgage- and asset-backed securitizations		938.1		—		938.1
Additional securities in connection with trading and market making activities:
Residential mortgage-backed securities		64.5		1,981.1		2,045.6
Commercial mortgage-backed securities		73.6		525.6		599.2
Collateralized debt obligations		20.3		—		20.3
Other asset-backed securities		11.2		—		11.2

Total mortgage- and asset-backed securities on the Consolidated Statement of Financial Condition	$	1,132.2	$	3,807.1	$	4,939.3

Asset Management Vehicle. We manage the Jefferies Umbrella Fund, an “umbrella structure” company that enables investors to choose between one or more investment objectives by investing in one or more sub-funds within the same structure. The assets of the Jefferies Umbrella Fund primarily consist of convertible bonds. Accounting changes to consolidation standards under generally accepted accounting principles have been deferred for entities that are considered to be investment companies; accordingly, consolidation continues to be determined under a risk and reward model. The Jefferies Umbrella Fund is subject to the deferral guidance and we are not the primary beneficiary as of February 28, 2013 and November 30, 2012 under the risk and reward model. Our variable interests in the Jefferies Umbrella Fund consist of equity interests, management fees and performance fees.

Private Equity Vehicles. On July 26, 2010, we committed to invest equity of up to $75.0 million in Jefferies SBI USA Fund L.P. (the “SBI USA Fund”). As of February 28, 2013 and November 30, 2012, we funded approximately $36.8 million and $27.1 million, respectively, of our commitment. The carrying amount of our equity investment was $24.0 million and $20.8 million at February 28, 2013 and November 30, 2012, respectively. Our exposure to loss is limited to our equity commitment. The SBI USA Fund has assets consisting primarily of private equity and equity related investments.

We have variable interests in Jefferies Employees Partners IV, LLC (“JEP IV”) consisting of an equity investment and a loan commitment up to an aggregate principal amount of $33.0 million. The carrying amount of our equity investment was $1.6 million and $1.5 million at February 28, 2013 and November 30, 2012, respectively. As of February 28, 2013 and November 30, 2012, we funded approximately $28.2 million and $32.7 million, respectively, of the aggregate principal balance, which is included in Loans to and investments in related parties. Our exposure to loss is limited to our equity investment and the aggregate amount of our loan commitment. JEP IV has assets consisting primarily of private equity and equity related investments.