Assets and Liabilities, at Fair Value

Fair value is defined by U.S. GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company is required to develop a set of assumptions that reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

The Company has designed independent price verification controls and periodically performs such controls to ensure the reasonableness of such values.

In accordance with FASB ASC 820, Fair Value Measurement, the Company groups its assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 1 consists of financial assets and liabilities whose fair values are estimated using quoted market prices.

Level 2 - Valuation is based upon quoted prices for identical or similar assets or liabilities in markets that are less active, that is, markets in which there are few transactions for the asset or liability that are observable for substantially the full term. Included in Level 2 are those financial assets and liabilities for which fair values are estimated using models or other valuation methodologies. These models are primarily industry-standard models that consider various observable inputs, including time value, yield curve, volatility factors, observable current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.

Level 3 - Valuation is generated from prices or valuation techniques that require an input that is both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). Level 3 comprises financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are not readily observable from objective sources.

Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A market is active if there are sufficient transactions on an ongoing basis to provide current pricing information for the asset or liability, pricing information is released publicly, and price quotations do not vary substantially either over time or among market makers. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

The guidance requires the Company to consider counterparty credit risk of all parties of outstanding derivative instruments that would be considered by a market participant in the transfer or settlement of such contracts (exit price). The Company’s exposure to credit risk on derivative financial instruments relates to the portfolio of OTC derivative contracts as all exchange-traded contracts held can be settled on an active market with a credit guarantee by the respective exchange. The Company requires each counterparty to deposit margin collateral for all OTC instruments and is also required to deposit margin collateral with counterparties. The Company has assessed the nature of these deposits and used its discretion to adjust each based on the underlying credit considerations for the counterparty and determined that the collateral deposits minimize the exposure to counterparty credit risk in the evaluation of the fair value of OTC instruments as determined by a market participant.

Fair value of financial and nonfinancial assets and liabilities that are carried on the Condensed Consolidated Balance Sheets at fair value on a recurring basis

Cash and cash equivalents reported at fair value on a recurring basis includes certificates of deposit, which are stated at cost plus accrued interest, which approximates fair value.

Cash, securities and other assets segregated under federal and other regulations reported at fair value on a recurring basis include the value of pledged investments, primarily U.S. Treasury obligations and commodities warehouse receipts.

Deposits with and receivables from broker-dealers, clearing organizations and counterparties and payable to customers and broker-dealers, clearing organizations and counterparties include the value of pledged investments, primarily U.S. Treasury obligations and foreign government obligations. These balances also include the fair value of exchange-traded options on futures and exchange-cleared OTC swaps and options determined by quoted prices on the applicable exchange.

Financial instruments owned and sold, not yet purchased include the value of common and preferred stock, American Depository Receipts (“ADRs”), and Global Depository Receipts (“GDRs”), exchangeable foreign ordinary equities, ADRs, and GDRs, corporate and municipal debt obligations, U.S. Treasury obligations, U.S. government agency obligations, foreign government obligations, agency mortgage-backed obligations, asset-backed obligations, derivative financial instruments, commodities warehouse receipts, exchange firm common stock, and mutual funds and investments in managed funds. The fair value of exchange firm common stock is determined by quoted market prices, and the fair value of exchange memberships is determined by recent sale transactions.

Physical commodities inventory recorded at fair value on a recurring basis includes precious metals that are a part of the trading activities of a regulated broker-dealer subsidiary and is recorded at fair value using spot prices. Physical commodities inventory also includes agricultural commodities that are a part of the trading activities of a non-broker dealer subsidiary and are also recorded at net realizable value using spot prices. Precious metals inventory held by subsidiaries that are not broker-dealers are valued at fair value on a non-recurring basis. Except as disclosed in Note 6, the Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2017 and September 30, 2017.

Cash equivalents, securities, commodities warehouse receipts, physical commodities inventory, derivative financial instruments and contingent liabilities are carried at fair value, on a recurring basis, and are classified and disclosed into three levels in the fair value hierarchy.

The following section describes the valuation methodologies used by the Company to measure classes of financial instruments at fair value and specifies the level within the fair value hierarchy where various financial instruments are classified.

The Company uses quoted prices in active markets, where available, and classifies such instruments within Level 1 of the fair value hierarchy. Examples include U.S. Treasury obligations, commodities warehouse receipts, some common and preferred stock, ADRs, and GDRs, some exchangeable foreign ordinary equities, ADRs, and GDRs, some corporate and municipal obligations, physical precious metals, agricultural, and energy commodities, equity investments in exchange firms, mutual funds, as well as futures and options on futures contracts traded on national exchanges. The fair value of exchange memberships is determined by recent sale transactions and is included within Level 1.

When instruments are traded in secondary markets and observable prices are not available for substantially the full term, the Company generally relies on internal valuation techniques or prices obtained from third-party pricing services or brokers or a combination thereof, and accordingly, classified these instruments as Level 2. Examples include U.S. government agency obligations, agency-mortgage backed obligations, asset-backed obligations, foreign government obligations, some common and preferred stock, ADRs, and GDRs, certain exchangeable foreign ordinary equities, ADRs, and GDRs, OTC commodity and foreign exchange forwards, swaps, and options, OTC firm purchase and sale commitments related to precious metals commodities, and OTC firm purchase and sale commitments related to the Company’s agricultural and energy commodities.

Derivatives without a quoted price in an active market and derivatives executed OTC are valued using internal valuation techniques, including pricing models which utilize significant inputs observable to market participants. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instrument. The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest yield curves, foreign exchange rates, commodity prices, volatilities and correlation. These derivative instruments are included within Level 2 of the fair value hierarchy.

With the exception of certain derivative instruments, financial instruments owned and sold are primarily valued using third party pricing sources. Third party vendors compile prices from various sources and often apply matrix pricing for similar securities when no prices are observable. The Company reviews the pricing methodologies provided by the various vendors in order to determine if observable market information is being used, versus unobservable inputs. When evaluating the propriety of an internal trader price compared with vendor prices, considerations include the range and quality of vendor prices. Trader or broker prices are used to ensure the reasonableness of a vendor price; however valuing financial instruments involves judgments acquired from knowledge of a particular market. If a trader asserts that a vendor or market price is not reflective of market value, justification for using the trader price, including recent sales activity where possible, must be provided to and approved by the appropriate levels of management. Financial instruments owned and sold that are valued using third party pricing sources are included within either Level 1 or Level 2 of the fair value hierarchy based upon the observability of the inputs used and the level of activity in the market.

Level 3 comprises financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are not readily observable from objective sources. Included in Level 3 are some common stock and ADRs, some corporate and municipal obligations, and contingent liabilities. Level 3 assets and liabilities are valued using an income approach based upon management developed discounted cash flow projections, which are an unobservable input.

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2017 and September 30, 2017. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of December 31, 2017 by level in the fair value hierarchy.



	December 31, 2017
(in millions)	Level 1		Level 2		Level 3		Netting and Collateral (1)			Total
Assets:
Unrestricted cash equivalents - certificate of deposits	$	4.7	$	—	$	—	$	—		$	4.7
Commodities warehouse receipts	14.9		—		—		—			14.9
U.S. Treasury obligations	1.6		—		—		—			1.6
Securities and other assets segregated under federal and other regulations	16.5		—		—		—			16.5
U.S. Treasury obligations	219.1		—		—		—			219.1
"To be announced" (TBA) and forward settling securities	—		1.7		—		(0.6		)	1.1
Foreign government obligations	—		6.2		—		—			6.2
Derivatives	3,068.1		188.7		—		(3,429.5		)	(172.7		)
Deposits with and receivables from broker-dealers, clearing organization and counterparties	3,287.2		196.6		—		(3,430.1		)	53.7
Common and preferred stock, ADRs, and GDRs	30.5		3.4		0.1		—			34.0
Exchangeable foreign ordinary equities, ADRs, and GDRs	9.0		1.1		—		—			10.1
Corporate and municipal bonds	45.1		0.6		—		—			45.7
U.S. Treasury obligations	76.8		—		—		—			76.8
U.S. government agency obligations	—		587.7		—		—			587.7
Foreign government obligations	—		11.3		—		—			11.3
Agency mortgage-backed obligations	—		1,053.4		—		—			1,053.4
Asset-backed obligations	—		21.6		—		—			21.6
Derivatives	1.4		1,577.8		—		(1,444.3		)	134.9
Commodities leases	—		178.9		—		(168.5		)	10.4
Commodities warehouse receipts	56.1		—		—		—			56.1
Exchange firm common stock	8.9		—		—		—			8.9
Mutual funds and other	5.0		—		—		—			5.0
Financial instruments owned	232.8		3,435.8		0.1		(1,612.8		)	2,055.9
Physical commodities inventory, net	142.7		—		—		—			142.7
Total assets at fair value	$	3,683.9	$	3,632.4	$	0.1	$	(5,042.9	)	$	2,273.5
Liabilities:
TBA and forward settling securities	—		1.7		—		(0.6		)	1.1
Derivatives	3,169.6		212.5		—		(3,382.1		)	—
Payable to broker-dealers, clearing organizations and counterparties	3,169.6		214.2		—		(3,382.7		)	1.1
Common and preferred stock, ADRs, and GDRs	48.6		1.2		—		—			49.8
Exchangeable foreign ordinary equities, ADRs, and GDRs	10.2		—		—		—			10.2
Corporate and municipal bonds	0.3		—		—		—			0.3
U.S. Treasury obligations	404.6		—		—		—			404.6
U.S. government agency obligations	—		35.5		—		—			35.5
Agency mortgage-backed obligations	—		3.9		—		—			3.9
Derivatives	—		1,634.6		—		(1,385.3		)	249.3
Commodities leases	—		186.4		—		(136.7		)	49.7
Financial instruments sold, not yet purchased	463.7		1,861.6		—		(1,522.0		)	803.3
Total liabilities at fair value	$	3,633.3	$	2,075.8	$	—	$	(4,904.7	)	$	804.4


(1)	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

The following table sets forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of September 30, 2017 by level in the fair value hierarchy.



	September 30, 2017
(in millions)	Level 1		Level 2		Level 3		Netting and Collateral (1)			Total
Assets:
Unrestricted cash equivalents - certificates of deposits	$	3.8	$	—	$	—	$	—		$	3.8
Commodities warehouse receipts	21.0		—		—		—			21.0
U.S. Treasury obligations	33.5		—		—		—			33.5
Securities and other assets segregated under federal and other regulations	54.5		—		—		—			54.5
U.S. Treasury obligations	244.7		—		—		—			244.7
"To be announced" (TBA) and forward settling securities	—		8.8		—		—			8.8
Foreign government obligations	—		6.4		—		—			6.4
Derivatives	2,608.6		289.1		—		(2,952.9		)	(55.2		)
Deposits with and receivables from broker-dealers, clearing organizations, and counterparties	2,853.3		304.3		—		(2,952.9		)	204.7
Common and preferred stock, ADRs, and GDRs	31.2		3.4		0.1		—			34.7
Exchangeable foreign ordinary equities, ADRs, and GDRs	9.2		1.2		—		—			10.4
Corporate and municipal bonds	28.2		0.9		—		—			29.1
U.S. Treasury obligations	60.0		—		—		—			60.0
U.S. government agency obligations	—		368.9		—		—			368.9
Foreign government obligations	—		10.2		—		—			10.2
Agency mortgage-backed obligations	—		920.9		—		—			920.9
Asset-backed obligations	—		47.3		—		—			47.3
Derivatives	1.3		1,413.4		—		(1,252.6		)	162.1
Commodities leases	—		174.1		—		(138.7		)	35.4
Commodities warehouse receipts	38.5		—		—		—			38.5
Exchange firm common stock	8.3		—		—		—			8.3
Mutual funds and other	6.0		—		—		—			6.0
Financial instruments owned	182.7		2,940.3		0.1		(1,391.3		)	1,731.8
Physical commodities inventory, net	73.2		—		—		—			73.2
Total assets at fair value	$	3,167.5	$	3,244.6	$	0.1	$	(4,344.2	)	$	2,068.0
Liabilities:
Accounts payable and other accrued liabilities - contingent liabilities	$	—	$	—	$	1.0	$	—		$	1.0
TBA and forward settling securities	—		4.9		—		(0.1		)	4.8
Derivatives	2,476.2		292.8		—		(2,769.0		)	—
Payable to broker-dealers, clearing organizations and counterparties	2,476.2		297.7		—		(2,769.1		)	4.8
Common and preferred stock, ADRs, and GDRs	33.7		0.7		—		—			34.4
Exchangeable foreign ordinary equities, ADRs, and GDRs	10.3		0.2		—		—			10.5
Corporate and municipal bonds	0.3		—		—		—			0.3
U.S. Treasury obligations	285.9		—		—		—			285.9
U.S. government agency obligations	—		27.9		—		—			27.9
Agency mortgage-backed obligations	—		0.1		—		—			0.1
Derivatives	—		1,427.2		—		(1,110.2		)	317.0
Commodities leases	—		191.1		—		(149.6		)	41.5
Financial instruments sold, not yet purchased	330.2		1,647.2		—		(1,259.8		)	717.6
Total liabilities at fair value	$	2,806.4	$	1,944.9	$	1.0	$	(4,028.9	)	$	723.4


(1)	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

Realized and unrealized gains and losses are included in ‘trading gains, net’ and ‘interest income’ in the condensed consolidated income statements.

Information on Level 3 Financial Assets and Liabilities

The Company’s financial assets at fair value classified in Level 3 of the fair value hierarchy as of December 31, 2017 and September 30, 2017 are summarized below:



(in millions)	December 31, 2017			September 30, 2017
Total Level 3 assets	$	0.1		$	0.1
Level 3 assets for which the Company bears economic exposure	$	0.1		$	0.1
Total assets	$	6,808.9		$	6,243.4
Total assets at fair value	$	2,273.5		$	2,068.0
Total Level 3 assets as a percentage of total assets	—		%	—		%
Level 3 assets for which the Company bears economic exposure as a percentage of total assets	—		%	—		%
Total Level 3 assets as a percentage of total financial assets at fair value	—		%	—		%

The following tables set forth a summary of changes in the fair value of the Company’s Level 3 financial assets and liabilities during the three months ended December 31, 2017 and 2016, including a summary of unrealized gains (losses) during the respective periods on the Company’s Level 3 financial assets and liabilities still held as of December 31, 2017.



	Level 3 Financial Assets and Financial Liabilities For the Three Months Ended December 31, 2017
(in millions)	Balances at beginning of period		Realized gains (losses) during period		Unrealized gains (losses) during period		Purchases/issuances		Settlements		Transfers in or (out) of Level 3		Balances at end of period
Assets:
Common stock and ADRs	$	0.1	$	—	$	—	$	—	$	—	$	—	$	0.1
	$	0.1	$	—	$	—	$	—	$	—	$	—	$	0.1



	Level 3 Financial Assets and Financial Liabilities For the Three Months Ended December 31, 2016
(in millions)	Balances at beginning of period		Realized gains (losses) during period		Unrealized gains (losses) during period		Purchases/issuances		Settlements			Transfers in or (out) of Level 3		Balances at end of period
Assets:
Common stock and ADRs	$	0.2	$	—	$	—	$	—	$	—		$	—	$	0.2
Corporate and municipal bonds	3.0		—		—		—		(3.0		)	—		—
	$	3.2	$	—	$	—	$	—	$	(3.0	)	$	—	$	0.2

(in millions)	Balances at beginning of period		Realized (gains) losses during period		Unrealized (gains) losses during period		Purchases/issuances		Settlements			Transfers in or (out) of Level 3		Balances at end of period
Liabilities:
Contingent liabilities	$	0.8	$	—	$	—	$	—	$	—		$	—	$	0.8

The Company is required to make additional future cash payments based on certain financial performance measures of an acquired business. The Company was required to remeasure the fair value of contingent consideration arrangements on a recurring basis. As of September 30, 2017, the Company had classified its liability for the contingent consideration within Level 3 of the fair value hierarchy because the fair value was determined using significant unobservable inputs, which included projected cash flows. The estimated fair value of the earn-outs was based upon management-developed earnings forecasts for the remaining contingency period, which was a Level 3 input in the fair value hierarchy. The fair value of the contingent consideration increased by less than $0.1 million during the three months ended December 31, 2017 and 2016 with the corresponding amount classified as ‘other’ in the condensed consolidated income statements. The contingency period for the contingent consideration arrangements ended as of December 31, 2017. The accrued balance of $1.0 million is included within ‘accounts payable and other accrued liabilities’ on the condensed consolidated balance sheet at an amount approximating fair value with the final payment due in February 2018.

The Company reports transfers in and out of Levels 1, 2 and 3, as applicable, using the fair value of the securities as of the beginning of the reporting period in which the transfer occurred. The Company did not have any transfers in and out of Levels 1, 2, and 3 during the three months ended December 31, 2017 and 2016.

Additional disclosures about the fair value of financial instruments that are not carried on the Condensed Consolidated Balance Sheets at fair value

Many, but not all, of the financial instruments that the Company holds are recorded at fair value in the Condensed Consolidated Balance Sheets. The following represents financial instruments in which the ending balance at December 31, 2017 and September 30, 2017 was not carried at fair value in accordance with U.S. GAAP on our Condensed Consolidated Balance Sheets:

Short-term financial instruments: The carrying value of short-term financial instruments, including cash and cash equivalents, cash segregated under federal and other regulations, securities purchased under agreements to re-sell and securities sold under agreements to re-purchase, and securities borrowed and loaned are recorded at amounts that approximate the fair value of these instruments due to their short-term nature and level of collateralization. These financial instruments generally expose us to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market rates. Under the fair value hierarchy, cash and cash equivalents and cash segregated under federal and other regulations are classified as Level 1. Securities purchased under agreements to re-sell and securities sold under agreements to re-purchase, and securities borrowed and loaned are classified as Level 2 under the fair value hierarchy as they are generally overnight and are collateralized by common stock, U.S. Treasury obligations, U.S. government agency obligations, agency mortgage-backed obligations, and asset-backed obligations.

Receivables and other assets: Receivables from broker-dealers, clearing organizations, and counterparties, receivables from customers, net, notes receivables, net and certain other assets are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair value hierarchy.

Payables: Payables to customers and payables to brokers-dealers, clearing organizations, and counterparties are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair value hierarchy.

Lender under loans: Payables to lenders under loans carry variable rates of interest and thus approximate fair value and are classified as Level 2 under the fair value hierarchy.