Note 8 - Fair Value Disclosures

3 Months Ended

Mar. 31, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8. 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 that have the attributes in FASB ASC 946-10-15-2 (commonly referred to as investment companies) or that have fair values that are readily determinable; and

●  investments in residential mortgage 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  ($28,924) and ($2,603), 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 March 31, 2024 and 2023, respectively.

The Company recognized net gains (losses) of  $9,426 and $5 related to changes in fair value of investments that are included as a component of other investments, sold not yet purchased during the three months ended March 31, 2024 and 2023, 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 valuation hierarchy. The valuation 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 valuation hierarchy under FASB ASC 820 are described below.

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

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

1.	Quoted prices for similar assets or liabilities in active markets;
2.	Quoted prices for identical or similar assets or liabilities in non-active markets;
3.	Pricing models with inputs that are derived, other than quoted prices, and observable for substantially the full term of the asset or liability; or
4.	Pricing models with inputs that 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 3            Financial assets and liabilities with values that 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 valuation hierarchy. In such cases, the level in the valuation 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 that may be 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.

The following tables present information about the Company’s assets and liabilities measured at fair value as of March 31, 2024 and December 31, 2023, and indicate the valuation hierarchy of the valuation techniques utilized by the Company to determine such fair value.

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
March 31, 2024

(Dollars in Thousands)

					Significant		Significant
			Quoted Prices in		Observable		Unobservable
			Active Markets		Inputs		Inputs
Assets	Fair Value		(Level 1)		(Level 2)		(Level 3)
Investments-trading:
Corporate bonds and redeemable preferred stock	$	44,611	$	-	$	44,611	$	-
Derivatives		2,768		-		2,768		-
Equity securities		644		429		215		-
Municipal bonds		20,169		-		20,169		-
Residential mortgage loans		1,554		-		1,554		-
RMBS		8		-		8		-
U.S. government agency debt securities		8,615		-		8,615		-
U.S. government agency MBS and CMOs		86,264		-		86,264		-
U.S. Treasury securities		1,270		-		1,270		-
Total investments - trading	$	165,903	$	429	$	165,474	$	-
Other investments, at fair value:
Equity securities	$	27,773	$	27,773	$	-	$	-
Equity derivatives		956		-		956		-
Restricted equity securities		7,743		5,819		1,924		-
Corporate bonds and redeemable preferred stock		522		-		522		-
Fair value receivables		9,824		-		9,824		-
Interests in SPVs		4,111		-		4,111		-
Residential mortgage loans		131		-		131		-
		51,060	$	33,592	$	17,468	$	-
Investments measured at NAV (1)		8,473
Total other investments, at fair value	$	59,533
Liabilities
Trading securities sold, not yet purchased:
Corporate bonds and redeemable preferred stock	$	20,994	$	-	$	20,994	$	-
Derivatives		2,382		-		2,382		-
Equity securities		143		143		-		-
U.S. government agency debt securities		114		-		114		-
U.S. government agency MBS and CMOs		1		-		1		-
U.S. Treasury securities		33,481		33,481		-		-
Total trading securities sold, not yet purchased	$	57,115	$	33,624	$	23,491	$	-
Other investments, sold not yet purchased:
Equity securities	$	3,371	$	113	$	3,258	$	-
Share forward liabilities		16,846		-		16,846		-
Total other investments sold, not yet purchased	$	20,217	$	113	$	20,104	$	-

(1) As a practical expedient, the Company uses NAV (or its equivalent) to measure the fair value of its investments in the U.S. Insurance JV and the CREO JV. The U.S. Insurance JV invests in U.S. Dollar ("USD") denominated debt issued by small insurance and reinsurance companies.  The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans. According to ASC 820, these investments are not categorized within the valuation hierarchy.  

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

December 31, 2023

(Dollars in Thousands)

					Significant		Significant
			Quoted Prices in		Observable		Unobservable
			Active Markets		Inputs		Inputs
Assets	Fair Value		(Level 1)		(Level 2)		(Level 3)
Investments-trading:
Corporate bonds and redeemable preferred stock	$	53,657	$	-	$	53,657	$	-
Derivatives		7,470		-		7,470		-
Equity securities		928		639		289		-
Municipal bonds		20,572		-		20,572		-
Residential mortgage loans		3,113		-		3,113		-
RMBS		9		-		9		-
U.S. government agency debt securities		6,567		-		6,567		-
U.S. government agency MBS and CMOs		88,000		-		88,000		-
U.S. Treasury securities		1,012		1,012		-		-
Total investments - trading	$	181,328	$	1,651	$	179,677	$	-
Other investments, at fair value:
Equity Securities	$	38,038	$	38,038	$	-	$	-
Equity derivatives		1,447		-		1,447		-
Restricted Equity Securities		2,054		-		2,054		-
Corporate bonds and redeemable preferred stock		506		-		506		-
Fair value receivables		9,541		-		9,541		-
Interests in SPVs		12,609		-		12,609		-
Residential mortgage loans		132		-		132		-
		64,327	$	38,038	$	26,289	$	-
Investments measured at NAV (1)		7,890
Total other investments, at fair value	$	72,217
Liabilities
Trading securities sold, not yet purchased:
Corporate bonds and redeemable preferred stock	$	24,355	$	-	$	24,355	$	-
Derivatives		6,719		-		6,719		-
Equity securities		393		393		-		-
U.S. Government Agency debt		-		-		-		-
U.S. government agency MBS and CMOs		-		-		-		-
U.S. Treasury securities		34,284		34,284		-		-
Total trading securities sold, not yet purchased	$	65,751	$	34,677	$	31,074	$	-
Other investments, sold not yet purchased:
Equity securities	$	97	$	97	$	-	$	-
Share forward liabilities		24,645		-		24,645		-
Total other investments sold, not yet purchased	$	24,742	$	97	$	24,645	$	-

(1) As a practical expedient, the Company uses NAV (or its equivalent) to measure the fair value of its investments in the U.S. Insurance JV and the CREO JV. The U.S. Insurance JV invests in USD denominated debt issued by small insurance and reinsurance companies. The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans.  According to ASC 820, these investments are not categorized within the valuation hierarchy.  

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 valuation 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.

CLOs and CDOs: CLOs and CDOs are interests in securitizations. When 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 within 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 to the extent that it (i) receives two quotations in a similar range from broker-dealers knowledgeable about these interests in securitizations and (ii) considers 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 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 interests in securitizations, the Company requests and considers indications of fair value from third party pricing services to assist in the valuation process.

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

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.

Equity Securities: The fair value of equity securities that represent unrestricted 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 and the Company classifies their fair value within level 1 of the valuation hierarchy.  The fair value of equity securities that represent investments in privately held companies is generally determined either (i) based on a valuation model or (ii) based on recently observed transactions in the same instrument or similar instrument that we hold.  These valuations are generally classified within either level 2 or level 3 of the valuation hierarchy.  

Equity Securities Without Readily Determinable Fair Value: From time to time, the Company invests in equity securities that do not have a readily determinable fair value that also do not qualify for equity method accounting or the practical expedient for investments in investment companies, which are measured at NAV. In those cases, the Company utilizes the measurement alternative of ASC 321-10-35-2. This alternative allows the Company to carry the investment at cost minus impairment. If the Company observes a market transaction for an identical or similar instrument, it will adjust the carrying value of the equity security. These securities are included as a component of other investments, at fair value. When measured at fair value using an orderly observable market transaction, it will generally be classified as level 1 in the valuation hierarchy. Otherwise, it will be classified as level 2 in the valuation hierarchy.

Restricted Equity Securities:  Restricted equity securities are investments in publicly traded companies.  However, they are restricted from re-sale until either (a) the share price trades above a certain threshold for a certain period of time or (b) a certain period of time elapses, or both. The Company determines the fair value by utilizing a model that starts with the publicly traded share price but then applies a discount based on a Monte Carlo simulation.  The inputs to this model are observable so the Company generally classifies these securities within level 2 of the valuation hierarchy.  If the restriction is short and deemed immaterial, the Company will determine fair value to be equal to the publicly traded shares price without discount and will classify the securities within level 1 of the hierarchy.  The Company is not allowed to sell these shares during the restriction period and there is no certainty as to when these hurdles will be met or if they will be met at all.  

Fair value receivables:  Fair value receivables represent amounts receivables from third parties in connection with the Company's SFAs and CCM business.  See note 9.  The Company values these instruments using a model.  The main input to these models is the risk-based cash flow discount rates.  In the case where the receivable is convertible into counterparty equity, additional inputs include the counterparty’s share price, volatility, and the risk free rate of return. The inputs to this model are observable so the Company classifies these securities within level 2 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 classifies the fair value within level 2 of the valuation hierarchy.

Interests in SPVs: The Company values these instruments using a model.  The model first determines the value of the SPV's financial instruments and then determines what portion of that fair value is allocable to the Company’s interest in the SPV.  If appropriate, the Company determines the fair value of the financial instruments held by the SPV using a model which may include a Monte Carlo simulation.  The main inputs are the counterparty’s share price, volatility, risk free rate of return, and risk-based cash flow discount rates.  The inputs to this model are observable so the Company classifies these securities within level 2 of the 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 as level 3 within the valuation hierarchy until it is able to obtain third party pricing.

Residential Mortgage Loans: The Company generally values these loans using a model. The model’s main inputs are current market quotations for pooled mortgage loan securities with similar characteristics. The Company considers the inputs to be observable and therefore classifies the fair value of these loans 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 the fair value of these securities based on third party quotations 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.

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. The Company classifies the fair value of 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 classifies the fair value of these securities within level 1 of the valuation hierarchy.

Derivatives 

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 valuation 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.  U.S. government agency MBS and CMOs include TBAs and other forward agency MBS contracts.  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 9.

Other Extended Settlement Trades 

When the Company buys or sells a financial instrument that will not settle in the regular timeframe, the Company will account for that purchase or 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.

Equity Derivatives

The Company may enter into equity derivatives, which include listed options as well as other derivative transactions with an underlying equity instrument.  Listed options are traded on a recognized liquid exchange and the Company classifies the fair value of these securities within level 1 of the valuation hierarchy.  Other equity derivatives (where the underlying equity instrument is publicly traded but the derivative itself is not) are classified within level 2 of the valuation hierarchy.  

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 of the valuation hierarchy. See note 9.

Share forward liabilities

Share forward liabilities are included as a component of other investments sold, not yet purchased in the Company's balance sheets.  The Company considers these derivatives as level 2 within the fair value hierarchy.  See note 9.

Investments in Certain Entities that Calculate NAV Per Share (or its Equivalent)

The following table presents additional information about investments in certain entities that calculate NAV per share (regardless of whether the “practical expedient” provisions of FASB ASC 820 have been applied), which were measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023.

	Fair Value March 31, 2024		Unfunded Commitments		Redemption Frequency		Redemption Notice Period
Other investments, at fair value
CREO JV (a)	$	5,362	$	9,978		N/A		N/A
U.S. Insurance JV (b)		3,111		N/A		N/A		N/A
	$	8,473

	Fair Value December 31, 2023		Unfunded Commitments		Redemption Frequency		Redemption Notice Period
Other investments, at fair value
CREO JV (a)	$	4,783	$	10,398		N/A		N/A
U.S. Insurance JV (b)	3,107		N/A		N/A		N/A
	$	7,890

N/A	Not Applicable
(a)	The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans.
(b)	The U.S. Insurance JV invests in USD denominated debt issued by small and medium size insurance and reinsurance companies.