7. FAIR VALUE DISCLOSURES

Fair Value Option

The Company has elected to account for certain of its other financial assets at fair value under the fair value option provisions of FASB ASC 825. The primary reason for electing the fair value option was to reduce the burden of monitoring the differences between the cost and the fair value of the Company’s investments, previously classified as available for sale securities, including the assessment as to whether the declines are temporary in nature and to further remove an element of management judgment.

Such financial assets accounted for at fair value include:

securities that would otherwise qualify for available for sale treatment;

investments in equity method affiliates where the affiliate has all of the attributes in FASB ASC 946-10-15-2 (commonly referred to as investment companies); and

investments in residential loans.

The changes in fair value (realized and unrealized gains and losses) of these instruments for which the Company has elected the fair value option are recorded in principal transactions and other income in the consolidated statements of operations. All of the investments for which the Company has elected the fair value option are included as a component of other investments, at fair value in the consolidated balance sheets. The Company recognized net gains (losses) of $ (385) and $(287) related to changes in fair value of investments that are included as a component of other investments, at fair value during the nine months ended September 30, 2017 and 2016, respectively. The Company recognized net gains (losses) of $(107) and $281 related to changes in fair value of investments that are included as a component of other investments, at fair value during the three months ended September 30, 2017 and 2016, respectively.

Fair Value Measurements

In accordance with FASB ASC 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the hierarchy under FASB ASC 820 are described below.

Level 1Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2Financial assets and liabilities whose values are based on one or more of the following:

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in non-active markets;

Pricing models whose inputs, other than quoted prices, are observable for substantially the full term of the asset or liability; or

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain financial assets or liabilities. There were no transfers between level 1 and level 2 of the fair value hierarchy during the nine months ended September 30, 2017 and 2016. Reclassifications between levels of the fair value hierarchy are reported as transfers in or transfers out as of the beginning of the quarter in which reclassifications occur.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.



FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
September 30, 2017
(Dollars in Thousands)
					Significant		Significant
			Quoted Prices in		Other Observable		Unobservable
			Active Markets		Inputs		Inputs
Assets	Fair Value		(Level 1)		(Level 2)		(Level 3)
Investments-trading:
U.S. government agency MBS and CMOs	$	955	$	-	$	955	$	-
U.S. government agency debt securities		19,311		-		19,311		-
RMBS		21		-		21		-
U.S. Treasury securities		4,971		4,971		-		-
ABS		1		-		1		-
SBA loans		11,404		-		11,404		-
Corporate bonds and redeemable preferred stock		30,924		-		30,924		-
Foreign government bonds		1,112		-		1,112		-
Municipal bonds		28,299		-		28,299		-
Certificates of deposit		1,087		-		1,087		-
Derivatives		2,713		-		2,713		-
Equity securities		3,464		36		3,428		-
Total investments - trading	$	104,262	$	5,007	$	99,255	$	-

Other investments, at fair value:
CLOs	$	4,590	$	-	$	-	$	4,590
CDOs		25		-		-		25
Residential loans		354		-		354		-
Foreign currency forward contracts		17		17		-		-
		4,986	$	17	$	354	$	4,615
EuroDekania (1)		828
Total other investments, at fair value	$	5,814

Liabilities
Trading securities sold, not yet purchased:
U.S. Treasury securities	$	56,166	$	56,166	$	-	$	-
Corporate bonds		32,410		-		32,410		-
Municipal bonds		21		-		21		-
Derivatives		1,396		4		1,392		-
Total trading securities sold, not yet purchased	$	89,993	$	56,170	$	33,823	$	-

(1)Hybrid Securities Fund—European.



FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
December 31, 2016
(Dollars in Thousands)
					Significant		Significant
			Quoted Prices in		Other Observable		Unobservable
			Active Markets		Inputs		Inputs
Assets	Fair Value		(Level 1)		(Level 2)		(Level 3)
Investments-trading:
U.S. government agency MBS and CMOs	$	9,539	$	-	$	9,539	$	-
U.S. government agency debt securities		30,681		-		30,681		-
RMBS		70		-		70		-
ABS		1		-		1		-
SBA loans		18,416		-		18,416		-
Corporate bonds and redeemable preferred stock		45,271		-		45,271		-
Foreign government bonds		339		-		339		-
Municipal bonds		43,759		-		43,759		-
Certificates of deposit		240		-		240		-
Derivatives		8,763		-		8,763		-
Equity securities		99		99		-		-
Total investments - trading	$	157,178	$	99	$	157,079	$	-

Other investments, at fair value:
CLOs	$	6,733	$	-	$	-	$	6,733
CDOs		28		-		-		28
Residential loans		360		-		360		-
Foreign currency forward contracts		17		17		-		-
		7,138	$	17	$	360	$	6,761
EuroDekania (1)		1,165						-
Total other investments, at fair value	$	8,303
Liabilities
Trading securities sold, not yet purchased:
U.S. Treasury securities	$	56,329	$	56,329	$	-	$	-
Corporate bonds and redeemable preferred stock		18,552		-		18,552		-
Municipal bonds		20		-		20		-
Derivatives		10,282		-		10,282		-
Total trading securities sold, not yet purchased	$	85,183	$	56,329	$	28,854	$	-

(1)Hybrid Securities Fund—European.

The following provides a brief description of the types of financial instruments the Company holds; the methodology for estimating fair value; and the level within the hierarchy of the estimate. The discussion that follows applies regardless of whether the instrument is included in investments-trading; other investments, at fair value; or trading securities sold, not yet purchased.

U.S. Government Agency MBS and CMOs: These are securities that are generally traded over-the-counter. The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. These are classified within level 2 of the valuation hierarchy.

U.S. Government Agency Debt Securities: Callable and non-callable U.S. government agency debt securities are measured primarily based on quoted market prices obtained from third party pricing services. Non-callable U.S. government agency debt securities are generally classified within level 1 and callable U.S. government agency debt securities are classified within level 2 of the valuation hierarchy.

RMBS: The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. The Company generally classifies these securities within level 2 of the valuation hierarchy.

U.S. Treasury Securities: U.S. Treasury securities include U.S. Treasury bonds and notes and the fair values of the U.S. Treasury securities are based on quoted prices or market activity in active markets. Valuation adjustments are not applied. The Company generally classifies these securities within level 1 of the valuation hierarchy.

CLOs, CDOs, and ABS: CLOs, CDOs, and ABS are interests in securitizations. ABS may include, but are not limited to, securities backed by auto loans, credit card receivables, or student loans. Where the Company is able to obtain independent market quotations from at least two broker-dealers and where a price within the range of at least two broker-dealers is used or market price quotations from third party pricing services is used, these interests in securitizations will generally be classified as level 2 of the valuation hierarchy. These valuations are based on a market approach. The independent market quotations from broker-dealers are generally nonbinding. The Company seeks quotations from broker-dealers that historically have actively traded, monitored, issued, and been knowledgeable about the interests in securitizations. The Company generally believes that to the extent that it (1) receives two quotations in a similar range from broker-dealers knowledgeable about these interests in securitizations, and (2) believes the broker-dealers gather and utilize observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources, then classification within level 2 of the valuation hierarchy is appropriate. In the absence of two broker-dealer market quotations, a single broker-dealer market quotation may be used without corroboration of the quote in which case the Company generally classifies the fair value within level 3 of the valuation hierarchy.

If quotations are unavailable, prices observed by the Company for recently executed market transactions may be used or valuation models prepared by the Company’s management may be used, which are based on an income approach. These models prepared by the Company’s management include estimates, and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Each CLO and CDO position is evaluated independently taking into consideration available comparable market levels, underlying collateral performance and pricing, deal structures, and liquidity. Fair values based on internal valuation models prepared by the Company’s management are generally classified within level 3 of the valuation hierarchy.

Establishing fair value is inherently subjective (given the volatile and sometimes illiquid markets for certain interests in securitizations) and requires management to make a number of assumptions, including assumptions about the future of interest rates, discount rates, and the timing of cash flows. The assumptions the Company applies are specific to each security. Although the Company may rely on internal calculations to compute the fair value of certain interest in securitizations, the Company requests and considers indications of fair value from third party pricing services to assist in the valuation process.

SBA Loans: SBA loans include loans and SBA interest only strips. In the case of loans, the Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices, internal valuation models using observable inputs, or market price quotations from third party pricing services. The Company generally classifies these investments within level 2 of the valuation hierarchy. These valuations are based on a market approach. SBA interest only strips do not trade in an active market with readily available prices. Accordingly, the Company generally uses valuation models to determine fair value and classifies the fair value of the SBA interest only strips within level 2 or level 3 of the valuation hierarchy depending on if the model inputs are observable or not.

Corporate Bonds and Redeemable Preferred Stock: The Company uses recently executed transactions or third party quotations from independent pricing services to arrive at the fair value of its investments in corporate bonds and redeemable preferred stock. These valuations are based on a market approach. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. In instances where the fair values of securities are based on quoted prices in active markets (for example with redeemable preferred stock), the Company classifies the fair value of these securities within level 1 of the valuation hierarchy.

Foreign Government Bonds: The fair value of foreign government bonds is estimated using valuations provided by third party pricing services and are classified within level 2 of the valuation hierarchy.

Municipal Bonds: Municipal bonds, which include obligations of U.S. states, municipalities, and political subdivisions, primarily include bonds or notes issued by U.S. municipalities. The Company generally values these securities using third party quotations such as market price quotations from third party pricing services. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. The valuations are based on a market approach. In instances where the Company is unable to obtain reliable market price quotations from third party pricing services, the Company will use its own internal valuation models. In these cases, the Company will classify such securities within level 3 of the valuation hierarchy until it is able to obtain third party pricing.

Certificates of Deposit: The fair value of certificates of deposit is estimated using valuations provided by third party pricing services. Certificates of deposit are generally classified within level 2 of the valuation hierarchy.

Residential Loans: Management utilizes home price indices or market indications to value the residential loans. These are generally classified within level 2 of the valuation hierarchy.

Equity Securities: The fair value of equity securities that represent investments in publicly traded companies (common or preferred shares, options, warrants, and other equity investments) is determined using the closing price of the security as of the reporting date. These are securities that are traded on a recognized liquid exchange. This is classified within level 1 of the valuation hierarchy.

In some cases, the Company has owned options or warrants in newly publicly traded companies when the option or warrant itself is not publicly traded. In those cases, the Company used an internal valuation model and classified the investment within level 3 of the valuation hierarchy. The non-exchange traded equity options and warrants were measured using 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. Once the securities underlying the options or warrants (not the options or warrants themselves) have quoted prices available in an active market, the Company attributes a value to the warrants using the Black-Scholes model based on the respective price of the options or warrants and the quoted prices of the securities underlying the options or warrants and key observable inputs. In this case, the Company will generally classify the options or warrants as level 2 within the valuation hierarchy because the inputs to the valuation model are now observable. If the option or warrant itself begins to trade on a liquid exchange, the Company will discontinue using a valuation model and will begin to use the public exchange price at which point it will be classified within level 1 of the valuation hierarchy.

In other cases, the Company has owned investments in investment funds having the attributes of investment companies as described in FASB ASC 946-15-2. The Company estimates the fair value of these entities using the reported net asset value per share as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities. The Company does not classify these investments within the fair value hierarchy.

Finally, the Company has from time to time owned an equity interest in a non-public company or a company that is public but with limited trading. In those cases, the Company will generally determine fair value based on a model using the market approach. If the inputs to the model are observable, the Company will classify these investments within level 2 of the valuation hierarchy. If the inputs are unobservable, the Company will classify this as level 3 of the valuation hierarchy.

Derivatives

Foreign Currency Forward Contracts

Foreign currency forward contracts are exchange-traded derivatives, which transact on an exchange that is deemed to be active. The fair value of the foreign currency forward contracts is based on current quoted market prices. Valuation adjustments are not applied. These are classified within level 1 within the valuation hierarchy. See note 8.

TBAs and Other Forward Agency MBS Contracts

The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. TBAs and other forward agency MBS contracts are generally classified within level 2 of the fair value hierarchy. If there is limited transaction activity or less transparency to observe market based inputs to valuation models, TBAs and other forward agency MBS contracts are classified within level 3 of the valuation hierarchy. Unrealized gains on TBAs and other forward agency MBS contracts are included in investments-trading on the Company’s consolidated balance sheets and unrealized losses on TBAs and other forward agency MBS contracts are included in trading securities sold, not yet purchased on the Company’s consolidated balance sheets. See note 8.

Other Extended Settlement Trades

When the Company buys or sells a financial instrument that will not settle in the regular time frame, the Company will account for that purchase and sale on the settlement date rather than the trade date. In those cases, the Company accounts for the transaction between trade date and settlement date as a derivative (as either a purchase commitment or sale commitment). The Company will record an unrealized gain or unrealized loss on the derivative for the difference between the fair value of the underlying financial instrument as of the reporting date and the agreed upon transaction price. The Company will determine the fair value of the financial instrument using the methodologies described above.

Level 3 Financial Assets and Liabilities

Financial Instruments Measured at Fair Value on a Recurring Basis

The following tables present additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized level 3 inputs to determine fair value.



LEVEL 3 ROLLFORWARD
Nine Months Ended September 30, 2017
(Dollars in Thousands)

	December 31, 2016		Net trading		Gains and losses (1)		Transfers into Level 3		Transfers out of level 3		Accretion of income (1)		Purchases		Sales and returns of capital		September 30, 2017		Change in unrealized gains /(losses) (2)
Assets
Other investments, at fair value
CLOs	$	6,733	$	-	$	(88)	$	-	$	-	$	938	$	-	$	(2,993)	$	4,590	$	608
CDOs		28		-		-		-		-		-		-		(3)		25		-
Total other investments, fair value	$	6,761	$	-	$	(88)	$	-	$	-	$	938	$	-	$	(2,996)	$	4,615	$	608

(1)

Recorded as a component of principal transactions and other income in the consolidated statement of operations.

(2)

Represents the change in unrealized gains and losses for the period included in principal transactions and other income for assets held at the end of the reporting period.



LEVEL 3 ROLLFORWARD
Nine Months Ended September 30, 2016
(Dollars in Thousands)

	December 31, 2015		Net trading		Gains and losses (1)			Transfers into Level 3	Transfers out of level 3		Accretion of income (1)		Purchases		Sales and returns of capital		September 30, 2016		Change in unrealized gains /(losses) (2)
Assets
Other investments, at fair value
CLOs	$	11,569	$	-	$	746	$	-	$	-	$	1,005	$	-	$	(7,091)	$	6,229	$	872
CDOs		34		-		(4)		-		-		-		-		(2)		28		(4)
Total other investments, fair value	$	11,603	$	-	$	742	$	-	$	-	$	1,005	$	-	$	(7,093)	$	6,257	$	868

(1)

Recorded as a component of principal transactions and other income in the consolidated statement of operations.

(2)

Represents the change in unrealized gains and losses for the period included in principal transactions and other income for assets held at the end of the reporting period.



LEVEL 3 ROLLFORWARD
Three Months Ended September 30, 2017
(Dollars in Thousands)

	June 30, 2017		Net trading		Gains and losses (1)			Transfers into Level 3	Transfers out of level 3		Accretion of income (1)		Purchases		Sales and returns of capital		September 30, 2017		Change in unrealized gains /(losses) (2)
Assets
Other investments, at fair value
CLOs	$	4,828	$	-	$	(103)	$	-	$	-	$	169	$	-	$	(304)	$	4,590	$	187
CDOs		27		-		-		-		-		-		-		(2)		25		-
Total other investments, fair value	$	4,855	$	-	$	(103)	$	-	$	-	$	169	$	-	$	(306)	$	4,615	$	187

(1)

Recorded as a component of principal transactions and other income in the consolidated statement of operations.

(2)

Represents the change in unrealized gains and losses for the period included in principal transactions and other income for assets held at the end of the reporting period.



LEVEL 3 ROLLFORWARD
Three Months Ended September 30, 2016
(Dollars in Thousands)

	June 30, 2016		Net trading			Gains and losses (1)			Transfers into Level 3	Transfers out of level 3		Accretion of income (1)		Purchases		Sales and returns of capital		September 30, 2016		Change in unrealized gains /(losses) (2)
Assets
Other investments, at fair value
CLOs	$	8,028	$	-	$		392	$	-	$	-	$	250	$	-	$	(2,441)	$	6,229	$	580
CDOs		30		-			-		-		-		-		-		(2)		28		-
Total other investments, fair value	$	8,058	$	-		$	392	$	-	$	-	$	250	$	-	$	(2,443)	$	6,257	$	580

(1)

Recorded as a component of principal transactions and other income in the consolidated statement of operations.

(2)

Represents the change in unrealized gains and losses for the period included in principal transactions and other income for assets held at the end of the reporting period.

The circumstances that would result in transferring certain financial instruments from level 2 to level 3 of the valuation hierarchy would typically include what the Company believes to be a decrease in the availability, utility, and reliability of observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources.

During the nine and three months ended September 30, 2017 and 2016, there were no transfers into or out of level 3 of the valuation hierarchy.

The following tables provide the quantitative information about level 3 fair value measurements as of September 30, 2017 and December 31, 2016.

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

(Dollars in Thousands)

Significant

Range of

Fair Value

Valuation

Unobservable

Weighted

Significant

September 30, 2017

Technique

Inputs

Average

Inputs

Assets

Other investments, at fair value

CLOs

4,590

Discounted Cash Flow Model

Yield

15.6%

12.8% - 23.9%

Duration (years)

5.7

4.8 - 6.8

Default rate

2.0%

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

(Dollars in Thousands)

Significant

Range of

Fair Value

Valuation

Unobservable

Weighted

Significant

December 31, 2016

Technique

Inputs

Average

Inputs

Assets

Other investments, at fair value

CLOs

6,733

Discounted Cash Flow Model

Yield

16.1%

11.8 - 25.0%

Duration (years)

5.8

5.3 - 6.6

Default rate

2.0%

Sensitivity of Fair Value to Changes in Significant Unobservable Inputs

For recurring fair value measurements categorized within level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below.

CLOs: The Company uses a discounted cash flow model to determine the fair value of its investments in CLOs. Changes in the yield, duration, and default rate assumptions would impact the fair value determined. The longer the duration, the lower the fair value of the investment. The higher the yield, the lower the fair value of the investment. The higher the default rate, the lower the fair value of the investment.

Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent)

The following table presents additional information about investments in certain entities that calculate net asset value per share (regardless of whether the “practical expedient” provisions of FASB ASC 820 have been applied), which are measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016.

FAIR VALUE MEASUREMENTS OF INVESTMENTS IN CERTAIN ENTITIES

THAT CALCULATE NET ASSET VALUE PER SHARE (OR ITS EQUIVALENT)

(Dollars in Thousands)

Fair Value September 30, 2017

Unfunded Commitments

Redemption Frequency

Redemption Notice Period

Other investments, at fair value

EuroDekania (a)

828

N/A

828

Fair Value December 31, 2016

Unfunded Commitments

Redemption Frequency

Redemption Notice Period

Other investments, at fair value

EuroDekania (a)

1,165

N/A

1,165

N/ANot applicable.

(a)EuroDekania owns investments in hybrid capital securities that have attributes of debt and equity, primarily in the form of subordinated debt issued by insurance companies, banks, and bank holding companies based primarily in Western Europe; widely syndicated leveraged loans issued by European corporations; CMBS, including subordinated interests in first mortgage real estate loans; and RMBS and ABS backed by consumer and commercial receivables. The majority of the assets are denominated in Euros and U.K. Pounds Sterling. The fair value of the investment in this category has been estimated using the NAV per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820.