XML 22 R10.htm IDEA: XBRL DOCUMENT v3.21.2
Assets and Liabilities, at Fair Value
 9 Months Ended
Jun. 30, 2021
Fair Value Disclosures [Abstract]  
Assets and Liabilities, at Fair Value 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. 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 an asset or liability at the measurement date. The Company uses prices and inputs that are current as of 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 prices.
In accordance with FASB Accounting Standards Codification (“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 based on prices or valuation techniques that require inputs that are 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. Level 3 includes contingent liabilities that have been valued using an income approach based upon management developed discounted cash flow projections, which are an unobservable input. The Company had $0.4 million and $1.5 million of contingent liabilities classified within Level 3 of the fair value hierarchy as of June 30, 2021 and September 30, 2020, respectively. The Company had no Level 3 assets as of June 30, 2021 and September 30, 2020.
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 participants. 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.
Relevant guidance requires the Company to consider counterparty credit risk of all parties to 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 principally relates to the portfolio of Over-the-counter (“OTC”) derivative contracts as all exchange-traded contracts held can be settled on an active market with a credit guarantee from 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 and money market mutual funds, 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 clients and broker-dealers, clearing organizations and counterparties includes the fair 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 OTC forwards, swaps and options.
Financial instruments owned and sold, not yet purchased include the fair value of equity securities, which includes common, preferred, and foreign ordinary shares, American Depository Receipts (“ADRs”), Global Depository Receipts (“GDRs”), and exchange-traded funds (“ETFs”), corporate and municipal bonds, 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 investments in managed funds. The fair value of exchange firm common stock is determined by quoted market prices.
Cash equivalents, debt and equity 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 instruments with such quotes within Level 1 of the fair value hierarchy. Examples include U.S. Treasury obligations, foreign government obligations, commodities warehouse receipts, certain equity securities traded in active markets, physical precious metals inventory held by a regulated broker-dealer subsidiary, exchange firm common stock, investments in managed funds, as well as options on futures contracts traded on national exchanges. The fair value of exchange firm common stock 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 based upon observable inputs for comparable financial instruments, or prices obtained from third-party pricing services or brokers or a combination thereof, and accordingly, classified these instruments as Level 2. Examples include corporate and municipal bonds, U.S. government agency obligations, agency-mortgage backed obligations, asset-backed obligations, certain equity securities traded in less active markets, and OTC derivative contracts, which include purchase and sale commitments related to the Company’s foreign exchange, agricultural, and energy commodities.
Certain 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.
Physical commodities inventory includes precious metals that are a part of the trading activities of a regulated broker-dealer subsidiary and is recorded at fair value using exchange-quoted prices. Physical commodities inventory also includes agricultural commodities that are a part of the trading activities of a non-broker dealer subsidiary and are recorded at net realizable value using exchange-quoted prices. The fair value of precious metals physical commodities inventory is based upon unadjusted exchange-quoted prices and is, therefore, classified within Level 1 of the fair value hierarchy. The fair value of agricultural physical commodities inventory and the related OTC firm sale and purchase commitments are generally based upon exchange-quoted prices, adjusted for basis or differences in local markets, broker or dealer quotations or market transactions in either listed or OTC markets. Exchange-quoted prices are adjusted for location and quality because the exchange-quoted prices for agricultural and energy related products represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. The basis or local market adjustments are observable inputs or have an insignificant impact on the measurement of fair value and, therefore, the agricultural physical commodities inventory, as well as the related OTC forward firm sale and purchase commitments have been included within Level 2 of the fair value hierarchy.
With the exception of certain derivative instruments where the valuation approach is disclosed above, financial instruments owned and sold are primarily valued using third-party pricing sources. Third-party pricing vendors compile prices from various sources and often apply matrix pricing for similar securities when market-observable transactions for the instruments are not observable for substantially the full term. The Company reviews the pricing methodologies used by third-party pricing vendors in order to evaluate the fair value hierarchy classification of vendor-priced financial instruments and the accuracy of vendor pricing, which typically involves comparing of primary vendor prices to internal trader prices or secondary vendor prices. When evaluating the propriety of vendor-priced financial instruments using secondary prices, considerations include the range and quality of vendor prices, level of observable transactions for identical and similar instruments, and judgments based upon knowledge of a particular market and asset class. If the primary vendor price does not represent fair value, justification for using a secondary price, including source data used to make the determination, is subject to review and approval by authorized personnel prior to using a secondary price. 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.
The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2021 and September 30, 2020. 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 condensed consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein, particularly in light of the uncertain impacts of COVID-19.
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 June 30, 2021 by level in the fair value hierarchy. Except as disclosed in Note 6, there were no assets or liabilities that were measured at fair value on a nonrecurring basis as of June 30, 2021.
 June 30, 2021
(in millions)Level 1Level 2Level 3Netting (1)Total
Assets:
Certificates of deposit $5.3 $— $— $— $5.3 
Money market mutual funds14.9 — — — 14.9 
Cash and cash equivalents20.2 — — — 20.2 
Commodities warehouse receipts18.8 — — — 18.8 
U.S. Treasury obligations77.3 — — — 77.3 
Securities and other assets segregated under federal and other regulations96.1 — — — 96.1 
U.S. Treasury obligations749.5 — — — 749.5 
To be announced ("TBA") and forward settling securities — 21.6 — — 21.6 
Foreign government obligations13.2 — — — 13.2 
Derivatives4,115.4 249.1 — (4,120.0)244.5 
Deposits with and receivables from broker-dealers, clearing organizations and counterparties, net4,878.1 270.7 — (4,120.0)1,028.8 
Receivables from clients - Derivatives— 340.5 (335.4)5.1 
Equity securities 484.1 18.2 — — 502.3 
Corporate and municipal bonds— 150.5 — — 150.5 
U.S. Treasury obligations442.7 — — — 442.7 
U.S. government agency obligations— 274.9 — — 274.9 
Foreign government obligations3.7 — — — 3.7 
Agency mortgage-backed obligations— 1,738.8 — — 1,738.8 
Asset-backed obligations0.2 105.7 — — 105.9 
Derivatives0.5 912.9 — (715.4)198.0 
Commodities leases— 22.1 — — 22.1 
Commodities warehouse receipts 5.7 — — — 5.7 
Exchange firm common stock 12.8 — — — 12.8 
Mutual funds and other9.8 — — — 9.8 
Financial instruments owned959.5 3,223.1 — (715.4)3,467.2 
Physical commodities inventory135.1 241.2 — — 376.3 
Total assets at fair value$6,089.0 $4,075.5 $— $(5,170.8)$4,993.7 
Liabilities:
Accounts payable and other accrued liabilities - contingent liabilities$— $— $0.4 $— $0.4 
Payables to clients - Derivatives3,858.6 305.0 (4,659.3)(495.7)
TBA and forward settling securities — 16.5 — (4.1)12.4 
Derivatives— 52.9 — (52.9)— 
Payable to broker-dealers, clearing organizations and counterparties— 69.4 — (57.0)12.4 
Equity securities 397.7 6.6 — — 404.3 
Corporate and municipal bonds— 44.4 — — 44.4 
U.S. Treasury obligations823.1 — — — 823.1 
U.S. government agency obligations— 2.5 — — 2.5 
Agency mortgage-backed obligations0.2 11.5 — — 11.7 
Derivatives11.0 1,058.5 — (592.4)477.1 
Commodities leases— 1.1 — — 1.1 
Financial instruments sold, not yet purchased1,232.0 1,124.6 — (592.4)1,764.2 
Total liabilities at fair value $5,090.6 $1,499.0 $0.4 $(5,308.7)$1,281.3 
(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, 2020 by level in the fair value hierarchy. Except as disclosed in Note 6, there were no assets or liabilities that were measured at fair value on a nonrecurring basis as of September 30, 2020.
 September 30, 2020
(in millions)Level 1Level 2Level 3Netting (1)Total
Assets:
Certificates of deposit $3.2 $— $— $— $3.2 
Money market mutual funds12.8 — — — 12.8 
Cash and cash equivalents16.0 — — — 16.0 
Commodities warehouse receipts2.4 — — — 2.4 
U.S. Treasury obligations0.2 — — — 0.2 
Securities and other assets segregated under federal and other regulations2.6 — — — 2.6 
U.S. Treasury obligations1,941.3 — — — 1,941.3 
TBA and forward settling securities — 31.0 — (11.8)19.2 
Foreign government obligations8.0 — — — 8.0 
Derivatives1,949.0 395.8 — (2,537.5)(192.7)
Deposits with and receivables from broker-dealers, clearing organizations and counterparties, net3,898.3 426.8 — (2,549.3)1,775.8 
Receivables from clients - Derivatives— 235.6 (234.1)1.5 
Equity securities 254.9 9.4 — — 264.3 
Corporate and municipal bonds— 66.9 — — 66.9 
U.S. Treasury obligations419.9 — — — 419.9 
U.S. government agency obligations— 293.4 — — 293.4 
Foreign government obligations2.5 — — — 2.5 
Agency mortgage-backed obligations— 1,384.6 — — 1,384.6 
Asset-backed obligations— 33.0 — — 33.0 
Derivatives0.7 652.3 — (535.6)117.4 
Commodities leases— 24.9 — — 24.9 
Commodities warehouse receipts 103.2 — — — 103.2 
Exchange firm common stock 10.1 — — — 10.1 
Mutual funds and other7.5 — — — 7.5 
Financial instruments owned798.8 2,464.5 — (535.6)2,727.7 
Physical commodities inventory26.8 188.9 — — 215.7 
Total assets at fair value$4,742.5 $3,315.8 $— $(3,319.0)$4,739.3 
Liabilities:
Accounts payable and other accrued liabilities - contingent liabilities$— $— $1.5 $— $1.5 
Payables to clients - Derivatives2,000.8 176.4 (2,399.9)(222.7)
TBA and forward settling securities — 22.0 — (11.8)10.2 
Derivatives— 306.7 — (302.2)4.5 
Payable to broker-dealers, clearing organizations and counterparties— 328.7 — (314.0)14.7 
Equity securities 218.0 14.9 — — 232.9 
Corporate and municipal bonds— 22.5 — — 22.5 
U.S. Treasury obligations247.5 — — — 247.5 
U.S. government agency obligations— 0.1 — — 0.1 
Agency mortgage-backed obligations— 5.1 — — 5.1 
Derivatives— 563.6 — (386.8)176.8 
Commodities leases— 1.1 — — 1.1 
Financial instruments sold, not yet purchased465.5 607.3 — (386.8)686.0 
Total liabilities at fair value $2,466.3 $1,112.4 $1.5 $(3,100.7)$479.5 
(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 Principal gains, net, Interest income, and Cost of sales of physical commodities in the Condensed Consolidated Income Statements.
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 June 30, 2021 and September 30, 2020 was not carried at fair value in accordance with U.S. GAAP on the 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 resell and securities sold under agreements to repurchase, 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 the Company 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 resell and securities sold under agreements to repurchase, and securities borrowed and loaned are classified as Level 2 under the fair value hierarchy as they are generally overnight or short-term in nature and are collateralized by equity securities, 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 clients, net, notes receivables, 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 clients and payables to broker-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.
Lenders 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.
Senior secured borrowings, net: Senior secured borrowings, net includes a senior secured term loan with a carrying value of $172.5 million as of June 30, 2021, which carries a variable rate of interest and thus approximates fair value and is classified as Level 2 under the fair value hierarchy. Senior secured borrowings, net also includes the Company's 8.625% Senior Secured Notes due 2025 (the “Senior Secured Notes”) as further described in Note 9 with a carrying value of $336.2 million as of June 30, 2021. The carrying value of the Senior Secured Notes represent their principal amount net of unamortized deferred financing costs and original issue discount. As of June 30, 2021, the Senior Secured Notes had a fair value of $374.8 million and are classified as Level 2 under the fair value hierarchy.