Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, short-term and long-term restricted cash and investments, short-term and long-term investments, customer accounts receivable, margin deposits and guaranty funds, cost and equity method investments, short-term and long-term debt and certain other short-term assets and liabilities. The fair value of our financial instruments are measured based on a three-level hierarchy:


•	Level 1 inputs — quoted prices for identical assets or liabilities in active markets.


•	Level 2 inputs — observable inputs other than Level 1 inputs such as quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are directly observable.


•	Level 3 inputs — unobservable inputs supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In general, we use Level 1 inputs to determine fair value. The Level 1 assets consist of U.S. Treasury securities, equity and other securities listed in active markets, and investments in publicly traded mutual funds held for the purpose of providing future payments of the SERP and SESP plans. Level 2 assets consist of foreign exchange derivative contracts whose fair value we determined using published currency rates. As of December 31, 2014, the fair values of our $1.39 billion Senior Notes and $1.99 billion NYSE Notes are $1.46 billion and $2.01 billion, respectively. The fair values of these fixed rate notes were estimated using quoted market prices for these instruments. The fair value of our other short-term and long-term debt approximates the carrying value since the rates of interest on the debt approximate market rates as of December 31, 2014. All other financial instruments are determined to approximate carrying value due to the short period of time to their maturities.

Financial assets and liabilities recorded in the accompanying consolidated balance sheets as of December 31, 2014 and 2013 are classified in their entirety based on the lowest level of input that is significant to the asset or liability’s fair value measurement. Financial instruments measured at fair value on a recurring basis as of December 31, 2014 are as follows (in millions):



	Level 1		Level 2		Level 3		Total
Assets at fair value:
Long-term investment in equity securities	$	379	$	—	$	—	$	379
U.S. Treasury securities	374		—		—		374
Mutual Funds	27		—		—		27
Total assets at fair value	$	780	$	—	$	—	$	780

Financial instruments measured at fair value on a recurring basis as of December 31, 2013 are as follows (in millions):



	Level 1		Level 2		Level 3		Total
Assets at fair value:
Long-term investment in equity securities	$	324	$	—	$	—	$	324
U.S. Treasury securities	100		—		—		100
Mutual Funds	33		—		—		33
Foreign exchange derivative contracts	—		4		—		4
Total assets at fair value	$	457	$	4	$	—	$	461

The long-term investment in equity securities as of December 31, 2014 and 2013 represents our 12% investment in Cetip, recorded at its fair value using its quoted market price (Note 5). The mutual funds represent equity and fixed income mutual funds held for the purpose of providing future payments to the SERP and SESP (Note 14). As of December 31, 2014 and 2013, we are holding $374 million and $100 million in U.S. Treasury securities, respectively, all of which had maturities of less than one year from the date of purchase (Note 5).

We did not use Level 3 inputs to determine the fair value of assets or liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013. We measure certain assets, such as intangible assets and cost and equity method investments, at fair value on a non-recurring basis. These assets are recognized at fair value if they are deemed to be impaired. As of December 31, 2014 and 2013, none of these assets were required to be recorded at fair value since no impairment indicators were present.

Cost and equity method investments were $53 million and $172 million as of December 31, 2014 and 2013, respectively, and are classified as other non-current assets in the accompanying consolidated balance sheets. The decrease in the cost and equity investments relate to investments in LCH.Clearnet and Euroclear owned by Euronext that were de-recognized as part of the de-consolidation of Euronext (Note 16), offset by an increase in our equity method investment in OCC.

In connection with our acquisition of NYSE, we obtained a 40% ownership in OCC. OCC serves as a clearing house for securities and commodities options and futures offered for trading on various independent exchanges. OCC clears securities options traded on NYSE Arca and NYSE MKT. OCC is regulated by the SEC as a registered clearing agency and by the CFTC as a derivatives clearing organization. We recorded our investment in OCC as an equity method investment with an initial fair value of $4 million on November 13, 2013. Under equity method accounting, we will subsequently adjust the carrying value of our OCC investment on our balance sheet by recognizing our pro-rata share of the earnings or losses of OCC, with a corresponding adjustment in our statement of income to other income, after eliminating any intra-entity income or expenses. The share of OCC's earnings that we will recognize is calculated based on our 40% ownership of OCC's net income. Also, if OCC issues cash dividends to us in the future, we will deduct the amount of these dividends from the carrying amount of our investment.

Historically, OCC declared a refund to its clearing members each year that resulted in minimal profit for OCC. However, based on a new capital plan designed to comply with proposed new regulatory capital standards, OCC declared in December 2014 a reduced refund for 2014. Based on the preliminary OCC net income for the year ended December 31, 2014, we increased the carrying value of our OCC investment by $26 million, and recorded other income of $25 million during the fourth quarter of 2014. In addition, we eliminated intra-entity transaction-based expenses paid to OCC of $1 million for the year ended December 31, 2014. We recorded the increase in our equity investment during the fourth quarter of 2014, versus throughout 2014, because we were not able to determine what the OCC refund for 2014 was going to be until the new capital plan was formalized during the fourth quarter of 2014 and the 2014 fee refund was declared.

OCC's new capital plan, which is scheduled to be finalized during the first quarter of 2015, subject to regulatory and OCC shareholders’ approvals, would potentially raise $150 million in equity capital from OCC's shareholders, including $60 million to be contributed by NYSE. If this were to occur, our $60 million equity contribution would increase the carrying value of our investment. In exchange for the equity capital from its shareholders, OCC would, subject to determination by its board of directors and compliance with legal requirements, commit to pay an annual dividend to its shareholders equal to the after-tax income of OCC, in excess of the amount required to maintain its target capital requirement and satisfy other capital requirements, and after refunds to its clearing members equal to 50% of distributable earnings before tax. After the capital plan is finalized and approved by the regulators and OCC's shareholders, we would be able to record our share of OCC's net income quarterly in the future since OCC will have a formula based program for determining the annual refund to clearing members that will be declared in December of each year. In addition, the OCC shareholders have committed to contribute up to $200 million in additional equity capital if certain capital thresholds are breached, including up to $80 million to be contributed by NYSE. Unless and until such $200 million capital contribution is repaid to the shareholders, OCC would not declare any dividends and would not pay refunds to its clearing members.