Edgar Filing: Jefferies Group LLC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-14947

JEFFERIES GROUP LLC

(Exact name of registrant as specified in its charter)


Delaware		95-4719745
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

520 Madison Avenue, New York, New York		10022
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 284-2550

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The Registrant is a wholly-owned subsidiary of Leucadia National Corporation and meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with a reduced disclosure format as permitted by Instruction H (2).

JEFFERIES GROUP LLC

INDEX TO QUARTERLY REPORT ON FORM 10-Q

MAY 31, 2014

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)- May 31, 2014 and November 30, 2013			2

Consolidated Statements of Earnings (Unaudited)- Three and Six Months Ended May 31, 2014 (Successor), Three Months Ended May 31, 2013 (Successor) and Three Months Ended February 28, 2013 (Predecessor)			4

Consolidated Statements of Comprehensive Income (Unaudited)- Three and Six Months Ended May 31, 2014 (Successor), Three Months Ended May 31, 2013 (Successor) and Three Months Ended February 28, 2013 (Predecessor)			6

Consolidated Statements of Changes in Equity (Unaudited)- Six Months Ended May 31, 2014 (Successor), Nine Months Ended November 30, 2013 (Successor) and Three Months Ended February 28, 2013 (Predecessor)			7

Consolidated Statements of Cash Flows (Unaudited)- Six Months Ended May 31, 2014 (Successor), Three Months Ended May 31, 2013 (Successor) and Three Months Ended February 28, 2013 (Predecessor)			8

Notes to Consolidated Financial Statements (Unaudited)			10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			76
Item 3. Quantitative and Qualitative Disclosures About Market Risk			115
Item 4. Controls and Procedures			115

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			115
Item 1A. Risk Factors			116
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			116
Item 6. Exhibits			116

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(In thousands)


	May 31, 2014		November 30, 2013
ASSETS
Cash and cash equivalents	$	3,958,288	$	3,561,119
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		3,288,517		3,616,602
Financial instruments owned, at fair value, including securities pledged of $13,994,936 and $13,253,537 at May 31, 2014 and November 30, 2013, respectively		17,143,518		16,650,043
Investments in managed funds		75,369		57,285
Loans to and investments in related parties		508,570		701,873
Securities borrowed		6,097,098		5,359,846
Securities purchased under agreements to resell		4,609,422		3,746,920
Securities received as collateral		126,106		11,063
Receivables:
Brokers, dealers and clearing organizations		2,588,654		2,119,279
Customers		1,805,451		1,046,945
Fees, interest and other		290,838		251,072
Premises and equipment		234,258		202,467
Goodwill		1,725,117		1,722,346
Other assets		1,158,780		1,130,136

Total assets	$	43,609,986	$	40,176,996

LIABILITIES AND EQUITY
Short-term borrowings	$	12,000	$	12,000
Financial instruments sold, not yet purchased, at fair value		8,172,300		7,271,613
Collateralized financings:
Securities loaned		2,901,159		2,506,122
Securities sold under agreements to repurchase		11,668,130		10,779,845
Other secured financings		240,288		234,711
Obligation to return securities received as collateral		126,106		11,063
Payables:
Brokers, dealers and clearing organizations		1,475,140		1,281,253
Customers		5,623,278		5,208,768
Accrued expenses and other liabilities		1,135,000		1,217,141
Long-term debt		6,729,484		6,232,806

Total liabilities		38,082,885		34,755,322

EQUITY
Member’s paid-in capital		5,455,461		5,280,420
Accumulated other comprehensive income:
Currency translation adjustments		37,984		21,341
Additional minimum pension liability		2,759		2,759

Total accumulated other comprehensive income		40,743		24,100

Total member’s equity		5,496,204		5,304,520
Noncontrolling interests		30,897		117,154

Total equity		5,527,101		5,421,674

Total liabilities and equity	$	43,609,986	$	40,176,996

Continued on next page.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION – CONTINUED (UNAUDITED)

(In thousands)

The table below presents the carrying amount and classification of assets of consolidated variable interest entities (“VIEs”) that can be used only to settle obligations of the consolidated VIEs and the liabilities of consolidated VIEs for which creditors (or beneficial interest holders) do not have recourse to our general credit. The assets and liabilities of these consolidated VIEs are included in the Consolidated Statements of Financial Condition and are presented net of intercompany eliminations.


	May 31, 2014		November 30, 2013
Assets
Cash and cash equivalents	$	175		$	176
Financial instruments owned, at fair value
Loans and other receivables		—			97,500
Investments, at fair value		374			412

Total financial instruments owned, at fair value		374			97,912
Other assets		—			2,275

Total assets	$	549		$	100,363

Liabilities
Other secured financings	$	222,000		$	226,000
Accrued expenses and other liabilities		—			706

Total liabilities	$	222,000		$	226,706

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(In thousands, except per share amounts)


	Successor
	Three Months Ended May 31, 2014			Three Months Ended May 31, 2013
Revenues:
Commissions	$	167,378		$	162,759
Principal transactions		183,416			134,571
Investment banking		331,149			277,134
Asset management fees and investment income from managed funds		(3,101	)		10,527
Interest		283,540			258,665
Other		8,404			26,245

Total revenues		970,786			869,901
Interest expense		247,794			211,463

Net revenues		722,992			658,438
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries		—			3,368

Net revenues, less interest on mandatorily redeemable preferred interests of consolidated subsidiaries		722,992			655,070

Non-interest expenses:
Compensation and benefits		404,876			373,880
Non-compensation expenses:
Floor brokerage and clearing fees		54,020			48,902
Technology and communications		70,257			63,839
Occupancy and equipment rental		26,673			32,225
Business development		24,917			22,732
Professional services		25,345			29,519
Other		17,767			18,720

Total non-compensation expenses		218,979			215,937

Total non-interest expenses		623,855			589,817

Earnings before income taxes		99,137			65,253
Income tax expense		37,323			25,007

Net earnings		61,814			40,246
Net earnings attributable to noncontrolling interests		488			738

Net earnings attributable to Jefferies Group LLC	$	61,326		$	39,508

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED (UNAUDITED)

(In thousands, except per share amounts)


	Successor				Predecessor
	Six Months Ended May 31, 2014		Three Months Ended May 31, 2013		Three Months Ended February 28, 2013
Revenues:
Commissions	$	329,441	$	162,759	$	146,240
Principal transactions		421,779		134,571		300,278
Investment banking		745,469		277,134		288,278
Asset management fees and investment income from managed funds		6,856		10,527		10,883
Interest		532,808		258,665		249,277
Other		31,473		26,245		27,004

Total revenues		2,067,826		869,901		1,021,960
Interest expense		445,806		211,463		203,416

Net revenues		1,622,020		658,438		818,544
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries		—		3,368		10,961

Net revenues, less interest on mandatorily redeemable preferred interests of consolidated subsidiaries		1,622,020		655,070		807,583

Non-interest expenses:
Compensation and benefits		912,775		373,880		474,217
Non-compensation expenses:
Floor brokerage and clearing fees		103,533		48,902		46,155
Technology and communications		134,563		63,839		59,878
Occupancy and equipment rental		53,175		32,225		24,309
Business development		51,393		22,732		24,927
Professional services		50,164		29,519		24,135
Other		35,011		18,720		14,475

Total non-compensation expenses		427,839		215,937		193,879

Total non-interest expenses		1,340,614		589,817		668,096

Earnings before income taxes		281,406		65,253		139,487
Income tax expense		104,200		25,007		48,645

Net earnings		177,206		40,246		90,842
Net earnings attributable to noncontrolling interests		3,448		738		10,704

Net earnings attributable to Jefferies Group LLC/common stockholders	$	173,758	$	39,508	$	80,138

Earnings per common share:
Basic		N/A		N/A	$	0.35
Diluted		N/A		N/A	$	0.35
Dividends declared per common share		N/A		N/A	$	0.075
Weighted average common shares:
Basic		N/A		N/A		213,732
Diluted		N/A		N/A		217,844

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	Successor
	Three Months Ended May 31, 2014		Three Months Ended May 31, 2013
Net earnings	$	61,814	$	40,246

Other comprehensive income (loss), net of tax:
Currency translation adjustments		2,859		(11,466	)

Total other comprehensive income (loss), net of tax (1)		2,859		(11,466	)

Comprehensive income:		64,673		28,780
Net earnings attributable to noncontrolling interests		488		738

Comprehensive income attributable to Jefferies Group LLC	$	64,185	$	28,042


	Successor					Predecessor
	Six Months Ended May 31, 2014		Three Months Ended May 31, 2013			Three Months Ended February 28, 2013
Net earnings	$	177,206	$	40,246		$	90,842

Other comprehensive income (loss), net of tax:
Currency translation adjustments		16,643		(11,466	)		(10,018	)

Total other comprehensive income (loss), net of tax (1)		16,643		(11,466	)		(10,018	)

Comprehensive income:		193,849		28,780			80,824
Net earnings attributable to noncontrolling interests		3,448		738			10,704

Comprehensive income attributable to Jefferies Group LLC/ common stockholders	$	190,401	$	28,042		$	70,120

(1)	No other comprehensive income (loss) is attributable to noncontrolling interests.

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(In thousands, except per share amounts)


	Successor						Predecessor
	Six Months Ended May 31, 2014			Nine Months Ended November 30, 2013			Three Months Ended February 28, 2013
Common stock, par value $0.0001 per share
Balance, beginning of period	$	—		$	—		$	20
Issued		—			—			1

Balance, end of period	$	—		$	—		$	21

Member’s paid-in capital
Balance, beginning of period	$	5,280,420		$	4,754,101		$	—
Contributions		—			362,255			—
Net earnings to Jefferies Group LLC		173,758			161,191			—
Tax benefit for issuance of share-based awards		1,283			2,873			—

Balance, end of period	$	5,455,461		$	5,280,420		$	—

Additional paid-in capital
Balance, beginning of period	$	—		$	—		$	2,219,959
Benefit plan share activity (1)		—			—			3,138
Share-based expense, net of forfeitures and clawbacks		—			—			22,288
Proceeds from exercise of stock options		—			—			57
Acquisitions and contingent consideration		—			—			2,535
Tax deficiency for issuance of share-based awards		—			—			(17,965	)
Dividend equivalents on share-based plans		—			—			1,418

Balance, end of period	$	—		$	—		$	2,231,430

Retained earnings
Balance, beginning of period	$	—		$	—		$	1,281,855
Net earnings to common shareholders		—			—			80,138
Dividends		—			—			(17,217	)

Balance, end of period	$	—		$	—		$	1,344,776

Accumulated other comprehensive income (loss) (2) (3)
Balance, beginning of period	$	24,100		$	—		$	(53,137	)
Currency adjustment		16,643			21,341			(10,018	)
Pension adjustment, net of tax		—			2,759			—

Balance, end of period	$	40,743		$	24,100		$	(63,155	)

Treasury stock, at cost
Balance, beginning of period	$	—		$	—		$	(12,682	)
Purchases		—			—			(166,541	)
Returns / forfeitures		—			—			(1,922	)

Balance, end of period	$	—		$	—		$	(181,145	)

Total member’s / common stockholders’ equity	$	5,496,204		$	5,304,520		$	3,331,927

Noncontrolling interests
Balance, beginning of period	$	117,154		$	356,180		$	346,738
Net earnings attributable to noncontrolling interests		3,448			8,418			10,704
Contributions		31,076			100,210			—
Distributions		—			(25	)		(1,262	)
Redemptions		—			(347,629	)		—
Deconsolidation of asset management entity		(120,781	)		—			—

Balance, end of period	$	30,897		$	117,154		$	356,180

Total equity	$	5,527,101		$	5,421,674		$	3,688,107

(1)	Includes grants related to the Incentive Plan, Deferred Compensation Plan and Directors’ Plan.

(2)	The components of other comprehensive income (loss) are attributable to Jefferies Group LLC (formerly Jefferies Group, Inc.). None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.

(3)	There were no reclassifications out of Accumulated other comprehensive loss during the six months ended May 31, 2014 and nine months ended November 30, 2013.

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Successor						Predecessor
	Six Months Ended May 31, 2014			Three Months Ended May 31, 2013			Three Months Ended February 28, 2013
Cash flows from operating activities:
Net earnings	$	177,206		$	40,246		$	90,842

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization		(10,052	)		(1,511	)		17,393
(Gain) loss on conversion option		(5,679	)		7,109			—
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries		—			3,368			10,961
Accruals related to various benefit plans and stock issuances, net of forfeitures		—			—			23,505
Income on loans to and investments in related parties		(37,893	)		(28,540	)		—
Distributions received on investments in related parties		41,260			19,353			—
Other adjustments		(3,909	)		(1,329	)		(1,154	)
Net change in assets and liabilities:
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		329,559			671,426			352,891
Receivables:
Brokers, dealers and clearing organizations		(466,846	)		(845,322	)		(1,027,671	)
Customers		(756,884	)		(144,938	)		(130,543	)
Fees, interest and other		(39,072	)		(39,832	)		(29,149	)
Securities borrowed		(732,449	)		(47,036	)		(224,557	)
Financial instruments owned		(661,495	)		1,116,683			229,394
Loans to and investments in related parties		—			—			(197,166	)
Investments in managed funds		12,469			4,835			(2,213	)
Securities purchased under agreements to resell		(852,859	)		106,129			(224,418	)
Other assets		(31,835	)		36,500			25,489
Payables:
Brokers, dealers and clearing organizations		192,375			205,037			(1,031,335	)
Customers		406,233			(18,807	)		(111,139	)
Securities loaned		390,165			780,579			(28,138	)
Financial instruments sold, not yet purchased		1,071,678			(2,979,532	)		2,327,667
Securities sold under agreements to repurchase		878,120			1,521,605			(197,493	)
Accrued expenses and other liabilities		(88,488	)		151,616			(267,336	)

Net cash (used in) provided by operating activities		(188,396	)		557,639			(394,170	)

Cash flows from investing activities:
Contributions to loans to and investments in related parties		(941,725	)		(345,955	)		—
Distributions from loans to and investments in related parties		1,131,661			644,666			—
Net payments on premises and equipment		(59,595	)		(10,071	)		(10,706	)
Deconsolidation of asset management entity		(137,856	)		—			—
Cash received from contingent consideration		3,979			1,284			1,203

Net cash (used in) provided by investing activities		(3,536	)		289,924			(9,503	)

Continued on next page.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (UNAUDITED)

(In thousands)


	Successor						Predecessor
	Six Months Ended May 31, 2014			Three Months Ended May 31, 2013			Three Months Ended February 28, 2013
Cash flows from financing activities:
Excess tax benefits from the issuance of share-based awards	$	1,364		$	1,857		$	5,682
Proceeds from short-term borrowings		6,081,157			3,838,000			6,744,000
Payments on short-term borrowings		(6,081,157	)		(3,938,000	)		(6,794,000	)
Proceeds from secured credit facility		655,000			265,000			900,000
Payments on secured credit facility		(790,000	)		(450,000	)		(990,007	)
Net proceeds from other secured financings		5,577			105,000			60,000
Payments on mandatorily redeemable preferred interest of consolidated subsidiaries		—			(64	)		(61	)
Payments on repurchase of common stock		—			—			(166,541	)
Payments on dividends		—			—			(15,799	)
Proceeds from exercise of stock options, not including tax benefits		—			—			57
Net proceeds from issuance of senior notes, net of issuance costs		681,222			—			991,469
Proceeds from contributions of noncontrolling interests		31,076			27,200			—
Payments on distributions to noncontrolling interests		—			(306,830	)		(1,262	)

Net cash provided by (used in) financing activities		584,239			(457,837	)		733,538

Effect of exchange rate changes on cash and cash equivalents		4,862			(4,205	)		(4,502	)

Net increase in cash and cash equivalents		397,169			385,521			325,363
Cash and cash equivalents at beginning of period		3,561,119			3,017,958			2,692,595

Cash and cash equivalents at end of period	$	3,958,288		$	3,403,479		$	3,017,958

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	460,219		$	195,409		$	178,836
Income taxes paid (refunds), net		60,220			(7,475	)		(34,054	)

Noncash financing activities:

In connection with the transaction with Leucadia National Corporation, Jefferies Group LLC recorded acquisition accounting adjustments which resulted in changes to equity. Refer to Note 4, Leucadia and Related Transactions, for further details.

On March 31, 2013, Leucadia contributed its mandatorily redeemable preferred interests in JHYH to Jefferies Group, LLC. The contribution was recorded as a capital contribution and increased member’s equity by $362.3 million. Refer to Note 4, Leucadia and Related Transactions, for further details.

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Index


Note	Page
Note 1. Organization and Basis of Presentation		11
Note 2. Summary of Significant Accounting Policies		13
Note 3. Accounting Developments		21
Note 4. Leucadia and Related Transactions		21
Note 5. Fair Value Disclosures		24
Note 6. Derivative Financial Instruments		42
Note 7. Collateralized Transactions		48
Note 8. Securitization Activities		50
Note 9. Variable Interest Entities		52
Note 10. Investments		56
Note 11. Goodwill and Other Intangible Assets		58
Note 12. Short-Term Borrowings		61
Note 13. Long-Term Debt		61
Note 14. Noncontrolling Interests and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries		63
Note 15. Benefit Plans		64
Note 16. Compensation Plans		65
Note 17. Earnings per Share		67
Note 18. Income Taxes		68
Note 19. Commitments, Contingencies and Guarantees		69
Note 20. Net Capital Requirements		72
Note 21. Segment Reporting		72
Note 22. Related Party Transactions		74

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Basis of Presentation

Organization

Jefferies Group LLC and its subsidiaries operate as a global full service, integrated securities and investment banking firm. Jefferies Group LLC was previously known as Jefferies Group, Inc., which on March 1, 2013 was converted into a limited liability company and renamed Jefferies Group LLC. In addition, certain subsidiaries of Jefferies Group, Inc. also converted into limited liability companies. The accompanying Consolidated Financial Statements therefore refer to Jefferies Group LLC and represent the accounts of Jefferies Group, Inc., as it was formerly known, and all our subsidiaries (together “we” or “us”). The subsidiaries of Jefferies Group LLC include Jefferies LLC (“Jefferies”), Jefferies Execution Services, Inc. (“Jefferies Execution”), Jefferies Bache, LLC, Jefferies International Limited, Jefferies Bache Limited, Jefferies Hong Kong Limited, Jefferies Bache Financial Services, Inc., Jefferies Mortgage Funding, LLC and Jefferies Leveraged Credit Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary.

On March 1, 2013, Jefferies Group LLC, through a series of transactions, became an indirect wholly owned subsidiary of Leucadia National Corporation (“Leucadia”) (referred to herein as the “Leucadia Transaction”). Each outstanding share of Jefferies Group LLC was converted into 0.81 of a share of Leucadia common stock (the “Exchange Ratio”). Leucadia did not assume nor guarantee any of our outstanding debt securities. Our 3.875% Convertible Senior Debentures due 2029 are now convertible into Leucadia common shares at a price that reflects the Exchange Ratio and the 3.25% Series A Convertible Cumulative Preferred Stock of Jefferies Group, Inc. was exchanged for a comparable series of convertible preferred shares of Leucadia. Jefferies Group LLC continues to operate as a full-service investment banking firm and as the holding company of its various regulated and unregulated operating subsidiaries, retain a credit rating separate from Leucadia and remain an SEC reporting company, filing annual, quarterly and periodic financial reports. Richard Handler, our Chief Executive Officer and Chairman, was also appointed the Chief Executive Officer of Leucadia, as well as a Director of Leucadia. Brian Friedman, our Chairman of the Executive Committee, was appointed Leucadia’s President and a Director of Leucadia.

We operate in two business segments, Capital Markets and Asset Management. Capital Markets, which represents substantially our entire business, includes our securities, commodities, futures and foreign exchange trading and investment banking activities, which provides the research, sales, trading, origination and advisory effort for various equity, fixed income and advisory products and services. Asset Management provides investment management services to various private investment funds and separate accounts.

In addition, on April 1, 2013, we merged Jefferies High Yield Trading, LLC (our high yield trading broker-dealer) with Jefferies (a U.S. broker-dealer) and our high yield activities are now conducted by Jefferies. In addition, during the three months ended May 31, 2013, we redeemed the third party interests in our high yield joint venture.

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and should be read in conjunction with our Annual Report on Form 10-K for the year ended November 30, 2013.

As more fully described in Note 4, Leucadia and Related Transactions, the Leucadia Transaction is accounted for using the acquisition method of accounting, which requires that the assets, including identifiable intangible assets, and liabilities of Jefferies Group LLC be recorded at their fair values. The application of the acquisition method of accounting has been pushed down and reflected in the financial statements of Jefferies Group LLC as a wholly-owned subsidiary of Leucadia. The application of push down accounting represents the termination of the prior reporting entity and the creation of a new reporting entity, which do not have the same bases of accounting. As a result, our consolidated financial statements are presented for periods subsequent to March 1, 2013 for the new reporting entity

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(the “Successor”), and before March 1, 2013 for the prior reporting entity (the “Predecessor.”) The Predecessor and Successor periods are separated by a vertical line to highlight the fact that the financial information for such periods has been prepared under two different cost bases of accounting. We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with U.S. GAAP. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, goodwill and intangible assets, the ability to realize deferred tax assets and the recognition and measurement of uncertain tax positions. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Cash Flow Statement Presentation

Amounts relating to loans and investments in related parties are classified as components of investing activities on the Consolidated Statements of Cash Flows to conform to the presentation of our Parent company in connection with the establishment of a new accounting entity through the application of push down accounting. These amounts are classified by the Predecessor entity as operating activities for reporting periods prior to the Leucadia Transaction.

Consolidation

Our policy is to consolidate all entities in which we control by ownership a majority of the outstanding voting stock. In addition, we consolidate entities which meet the definition of a variable interest entity for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party’s holding of equity interest is presented as Noncontrolling interests in the Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity. The portion of net earnings attributable to the noncontrolling interests are presented as Net earnings to noncontrolling interests in the Consolidated Statements of Earnings.

In situations where we have significant influence, but not control, of an entity that does not qualify as a variable interest entity, we apply either the equity method of accounting or fair value accounting pursuant to the fair value option election under U.S. GAAP, with our portion of net earnings or gains and losses recorded within Other revenues or Principal transaction revenues, respectively. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies and are carried at fair value. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights.

Intercompany accounts and transactions are eliminated in consolidation.

Immaterial 2013 Adjustments

As indicated in our Quarterly Report on Form 10-Q for the three months ended August 31, 2013 and our Annual Report on Form 10-K for the year ended November 30, 2013, we have made correcting adjustments (referred to as “adjustments”) to our historical financial statements for the first and second quarter of 2013. We do not believe these adjustments are material to our financial statements for the quarterly periods ended May 31, 2013 and February 28, 2013. For additional information on these adjustments, see Note 1, Organization and Basis of Presentation, and Note 26, Selected Quarterly Financial Data (Unaudited), of the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended November 30, 2013.

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Note 2. Summary of Significant Accounting Policies

Revenue Recognition Policies

Commissions. All customer securities transactions are reported on the Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. These arrangements are accounted for on an accrual basis and, as we are not the primary obligor for these arrangements, netted against commission revenues in the Consolidated Statements of Earnings. The commissions and related expenses on client transactions executed by Jefferies Bache, LLC, a futures commission merchant, are recorded on a half-turn basis.

Principal Transactions. Financial instruments owned and Financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in Principal transactions in the Consolidated Statements of Earnings on a trade date basis. Fees received on loans carried at fair value are also recorded within Principal transactions.

Investment Banking. Underwriting revenues and fees from mergers and acquisitions, restructuring and other investment banking advisory assignments or engagements are recorded when the services related to the underlying transactions are completed under the terms of the assignment or engagement. Expenses associated with such assignments are deferred until reimbursed by the client, the related revenue is recognized or the engagement is otherwise concluded. Expenses are recorded net of client reimbursements and netted against revenues. Unreimbursed expenses with no related revenues are included in Business development and Professional services expenses in the Consolidated Statements of Earnings.

Asset Management Fees and Investment Income From Managed Funds. Asset management fees and investment income from managed funds include revenues we earn from management, administrative and performance fees from funds and accounts managed by us, revenues from management and performance fees we earn from related-party managed funds and investment income from our investments in these funds. We earn fees in connection with management and investment advisory services performed for various funds and managed accounts. These fees are based on assets under management or an agreed upon notional amount and may include performance fees based upon the performance of the funds. Management and administrative fees are generally recognized over the period that the related service is provided. Generally, performance fees are earned when the return on assets under management exceeds certain benchmark returns, “high-water marks” or other performance targets. Performance fees are accrued (or reversed) on a monthly basis based on measuring performance to date versus any relevant benchmark return hurdles stated in the investment management agreement. Performance fees are not subject to adjustment once the measurement period ends (generally annual periods) and the performance fees have been realized.

Interest Revenue and Expense. We recognize contractual interest on Financial instruments owned and Financial instruments sold, but not yet purchased, on an accrual basis as a component of interest revenue and expense. Interest flows on derivative trading transactions and dividends are included as part of the fair valuation of these contracts and recognized in Principal transactions in the Consolidated Statements of Earnings rather than as a component of interest revenue or expense. We account for our short- and long-term borrowings on an accrual basis with related interest recorded as Interest expense. Discounts/premiums arising on our long-term debt are accreted / amortized to Interest expense using the effective yield method over the remaining lives of the underlying debt obligations. In addition, we recognize interest revenue related to our securities borrowed and securities purchased under agreements to resell activities and interest expense related to our securities loaned and securities sold under agreements to repurchase activities on an accrual basis.

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Cash Equivalents

Cash equivalents include highly liquid investments, including certificates of deposit and money market funds, not held for resale with original maturities of three months or less.

Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited With Clearing and Depository Organizations

In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. In addition, certain financial instruments used for initial and variation margin purposes with clearing and depository organizations are recorded in this caption. Jefferies Bache, LLC, as a futures commission merchant, is obligated by rules mandated by the Commodities Futures Trading Commission under the Commodities Exchange Act, to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets. Certain other entities are also obligated by rules mandated by their primary regulators to segregate or set aside cash or equivalent securities to satisfy regulations, promulgated to protect customer assets.

Financial Instruments

Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value, either as required by accounting pronouncements or through the fair value option election. These instruments primarily represent our trading activities and include both cash and derivative products. Gains and losses are recognized in Principal transactions in our Consolidated Statements of Earnings. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).

Fair Value Hierarchy

In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:


Level 1:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3:		Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Financial instruments are valued at quoted market prices, if available. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, the financial instrument is valued at the point within the bid-ask range that meets our best estimate of fair value. We use

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prices and inputs that are current as of the measurement date. For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments.

The valuation of financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models may be made when, in management’s judgment, features of the financial instrument such as its complexity, the market in which the financial instrument is traded and risk uncertainties about market conditions require that an adjustment be made to the value derived from the models. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions. As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels. Transfers among the levels are recognized at the beginning of each period. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

Valuation Process for Financial Instruments

Our Independent Price Verification (“IPV”) Group, which is part of our Finance department, in partnership with Risk Management, is responsible for establishing our valuation policies and procedures. The IPV Group and Risk Management, which are independent of our business functions, play an important role and serve as a control function in determining that our financial instruments are appropriately valued and that fair value measurements are reliable. This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. The IPV Group reports to the Global Controller and is subject to the oversight of the IPV Committee, which is comprised of our Chief Financial Officer, Global Controller, Global Head of Product Control, Chief Risk Officer and Principal Accounting Officer, among other personnel. Our independent price verification policies and procedures are reviewed, at a minimum, annually and changes to the policies require the approval of the IPV Committee.

Price Testing Process. The business units are responsible for determining the fair value of our financial instruments using approved valuation models and methodologies. In order to ensure that the business unit valuations represent a fair value exit price, the IPV Group tests and validates the fair value of our financial instruments inventory. In the testing process, the IPV Group obtains prices and valuation inputs from sources independent of Jefferies, consistently adheres to established procedures set forth in our valuation policies for sourcing prices and valuation inputs and utilizing valuation methodologies. Sources used to validate fair value prices and inputs include, but are not limited to, exchange data, recently executed transactions, pricing data obtained from third party vendors, pricing and valuation services, broker quotes and observed comparable transactions.

To the extent discrepancies between the business unit valuations and the pricing or valuations resulting from the price testing process are identified, such discrepancies are investigated by the IPV Group and fair values are adjusted, as appropriate. The IPV Group maintains documentation of its testing, results, rationale and recommendations and prepares a monthly summary of its valuation results. This process also forms the basis for our classification of fair values within the fair value hierarchy (i.e., Level 1, Level 2 or Level 3). The IPV Group utilizes the additional expertise of Risk Management personnel in valuing more complex financial instruments and financial instruments with less or limited pricing observability. The results of the valuation testing are reported to the IPV Committee on a monthly basis, which discusses the results and is charged with the final conclusions as to the financial instrument fair values in the consolidated financial statements. This process specifically assists the Chief Financial Officer in

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asserting as to the fair presentation of our financial condition and results of operations as included within our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. At each quarter end, the overall valuation results, as concluded upon by the IPV Committee, are presented to the Audit Committee.

Judgment exercised in determining Level 3 fair value measurements is supplemented by daily analysis of profit and loss performed by the Product Control functions. Gains and losses, which result from changes in fair value, are evaluated and corroborated daily based on an understanding of each of the trading desks’ overall risk positions and developments in a particular market on the given day. Valuation techniques generally rely on recent transactions of suitably comparable financial instruments and use the observable inputs from those comparable transactions as a validation basis for Level 3 inputs. Level 3 fair value measurements are further validated through subsequent sales testing and market comparable sales, if such information is available. Level 3 fair value measurements require documentation of the valuation rationale applied, which is reviewed for consistency in application from period to period; and the documentation includes benchmarking the assumptions underlying the valuation rationale against relevant analytic data.

Third Party Pricing Information. Pricing information obtained from external data providers (including independent pricing services and brokers) may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities. External pricing data is subject to evaluation for reasonableness by the IPV Group using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period. We have a process whereby we challenge the appropriateness of pricing information obtained from external data providers (including independent pricing services and brokers) in order to validate the data for consistency with the definition of a fair value exit price. Our process includes understanding and evaluating the external data providers’ valuation methodologies. For corporate, U.S. government and agency and municipal debt securities, and loans, to the extent independent pricing services or broker quotes are utilized in our valuation process, the vendor service providers are collecting and aggregating observable market information as to recent trade activity and active bid-ask submissions. The composite pricing information received from the independent pricing service is thus not based on unobservable inputs or proprietary models. For mortgage- and other asset-backed securities and collateralized debt obligations, our independent pricing service uses a matrix evaluation approach incorporating both observable yield curves and market yields on comparable securities as well as implied inputs from observed trades for comparable securities in order to determine prepayment speeds, cumulative default rates and loss severity. Further, we consider pricing data from multiple service providers as available as well as compare pricing data to prices we have observed for recent transactions, if any, in order to corroborate our valuation inputs.

Model Review Process. Where a pricing model is to be used to determine fair value, the pricing model is reviewed for theoretical soundness and appropriateness by Risk Management, independent from the trading desks, and then approved by Risk Management to be used in the valuation process. Review and approval of a model for use may include benchmarking the model against relevant third party valuations, testing sample trades in the model, backtesting the results of the model against actual trades and stress-testing the sensitivity of the pricing model using varying inputs and assumptions. In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model. Models are independently reviewed and validated by Risk Management annually or more frequently if market conditions or use of the valuation model changes.

Investments in Managed Funds

Investments in managed funds include our investments in funds managed by us and our investments in related-party managed funds in which we are entitled to a portion of the management and/or performance fees. Investments in nonconsolidated managed funds are accounted for at fair value with gains or losses included in Asset management fees and investment income from managed funds in the Consolidated Statements of Earnings.

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Loans to and Investments in Related Parties

Loans to and investments in related parties include investments in private equity and other operating entities made in connection with our capital markets activities in which we exercise significant influence over operating and capital decisions and loans issued in connection with such activities. Loans to and investments in related parties are accounted for using the equity method or at cost, as appropriate. Revenues on Loans to and investments in related parties are included in Other revenues in the Consolidated Statements of Earnings. See Note 10, Investments, and Note 22, Related Party Transactions, for additional information regarding certain of these investments.

Receivable from and Payable to Customers

Receivable from and payable to customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying consolidated financial statements. Receivable from officers and directors included within this financial statement line item represents balances arising from their individual security transactions. These transactions are subject to the same regulations as customer transactions and are provided on substantially the same terms.

Securities Borrowed and Securities Loaned

Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions and accounted for as collateralized financing transactions. In connection with both trading and brokerage activities, we borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers and dealers for similar purposes. We have an active securities borrowed and lending matched book business in which we borrow securities from one party and lend them to another party. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities to another party, that party provides cash to us as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities loaned. We pay interest expense on the cash collateral received from the party borrowing the securities. The initial collateral advanced or received approximates or is greater than the fair value of the securities borrowed or loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell and Securities sold under agreements to repurchase (collectively “repos”) are accounted for as collateralized financing transactions and are recorded at their contracted resale or repurchase amount plus accrued interest. We earn and incur interest over the term of the repo, which is reflected in Interest income and Interest expense on our Consolidated Statements of Earnings on an accrual basis. Repos are presented in the Consolidated Statements of Financial Condition on a net-basis-by counterparty, where permitted by generally accepted accounting principles. We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate.

Premises and Equipment

Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of the related leases or the estimated useful lives of the assets, whichever is shorter. Premises and equipment includes internally developed software, which was increased to its fair market value in the allocation of the purchase price on March 1, 2013. The revised carrying values of internally developed software ready for its intended use are depreciated over the remaining useful life. See Note 4, Leucadia and Related Transactions for more information regarding the allocation of the purchase price.

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Goodwill and Intangible Assets

Goodwill. Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing on August 1 or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If we conclude otherwise, we are required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than carrying value, further analysis is necessary to determine the amount of impairment, if any.

The fair value of reporting units are based on widely accepted valuation techniques that we believe market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions. The methodologies we utilize in estimating the fair value of reporting units include market valuation methods that incorporate price-to-earnings and price-to-book multiples of comparable exchange traded companies and multiples of merger and acquisitions of similar businesses. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment charges in future periods.

Intangible Assets. Intangible assets deemed to have finite lives are amortized on a straight line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated.

An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, we have the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If we conclude otherwise, we are required to perform a quantitative impairment test. Our annual indefinite-lived intangible asset impairment testing date is August 1.

To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not permitted.

Income Taxes

Prior to the Leucadia Transaction, we filed a consolidated U.S. federal income tax return, which included all of our qualifying subsidiaries. Subsequently, our results of operations are included in the consolidated federal and applicable state income tax returns filed by Leucadia. In states that neither accept nor require combined or unitary tax returns, certain subsidiaries file separate state income tax returns. We also are subject to income tax in various foreign jurisdictions in which we operate. We account for our provision for income taxes using a “separate return” method. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable.

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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Under acquisition accounting, the recognition of certain assets and liabilities at fair value created a change in the financial reporting basis for our assets and liabilities, while the tax basis of our assets and liabilities remained the same. As a result, deferred tax assets and liabilities were recognized for the change in the basis differences. Jefferies provides deferred taxes on its temporary differences and on any carryforwards that it could claim on its hypothetical tax return. The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized on the basis of its projected separate return results. The tax benefit related to Leucadia dividends and dividend equivalents paid on nonvested share-based payment awards are recognized as an increase to Additional paid-in capital. These amounts are included in tax benefits for issuance of share-based awards on the Consolidated Statements of Changes in Equity.

We record uncertain tax positions using a two-step process: (i) we determine whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Legal Reserves

In the normal course of business, we have been named, from time to time, as a defendant in legal and regulatory proceedings. We are also involved, from time to time, in other exams, investigations and similar reviews (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions.

We recognize a liability for a contingency in Accrued expenses and other liabilities when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the reasonable estimate of a probable loss is a range, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum in the range as the loss accrual. The determination of the outcome and loss estimates requires significant judgment on the part of management. As of May 31, 2014, we have reserved approximately $5.1 million for remaining payments under a non-prosecution agreement with the United States Attorney for the District of Connecticut and a settlement agreement with the Securities and Exchange Commission, both with respect to an investigation of certain purchases and sales of mortgage-backed securities. We believe that any other matters for which we have determined a loss to be probable and reasonably estimable are not material to the consolidated financial statements.

In many instances, it is not possible to determine whether any loss is probable or even possible or to estimate the amount of any loss or the size of any range of loss. We believe that, in the aggregate, the pending legal actions or regulatory proceedings and any other exams, investigations or similar reviews (both formal and informal) should not have a material adverse effect on our consolidated results of operations, cash flows or financial condition. In addition, we believe that any amount that could be reasonably estimated of potential loss or range of potential loss in excess of what has been provided in the consolidated financial statements is not material.

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Share-based Compensation

Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. Expected forfeitures are included in determining share-based compensation expense.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, if any, are included in Other comprehensive income. Gains or losses resulting from foreign currency transactions are included in Principal transactions in the Consolidated Statements of Earnings.

Earnings per Common Share

As a single member limited liability company, earnings per share is not calculated for Jefferies Group LLC (the Successor company).

Prior to the Leucadia Transaction, Jefferies Group, Inc. (the Predecessor company) had common shares and other common share equivalents outstanding. For the Predecessor periods, basic earnings per share (“EPS”) is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding and certain other shares committed to be, but not yet issued. Net earnings available to common shareholders represent net earnings to common shareholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. For Predecessor periods, diluted EPS is computed by dividing net earnings available to common shareholders plus dividends on dilutive mandatorily redeemable convertible preferred stock by the weighted average number of common shares outstanding and certain other shares committed to be, but not yet issued, plus all dilutive common stock equivalents outstanding during the period. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and, therefore, are included in the earnings allocation in computing earnings per share under the two-class method of earning per share.

Securitization Activities

We engage in securitization activities related to corporate loans, commercial mortgage loans and mortgage-backed and other asset-backed securities. Such transfers of financial assets are accounted for as sales when we have relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests, if any, based upon their respective fair values at the date of sale. We may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included within Financial instruments owned in the Consolidated Statements of Financial Condition at fair value. Any changes in the fair value of such retained interests are recognized within Principal transactions revenues in the Consolidated Statements of Earnings.

When a transfer of assets does not meet the criteria of a sale, we account for the transfer as a secured borrowing and continue to recognize the assets of a secured borrowing in Financial instruments owned and recognize the associated financing in Other secured financings in the Consolidated Statements of Financial Condition.

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(Unaudited)

Note 3. Accounting Developments

Adopted Accounting Standards

Accumulated Other Comprehensive Income. In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted the guidance effective March 1, 2013, presenting the additional disclosures within our Consolidated Statements of Changes in Equity. Adoption did not affect our results of operations, financial condition or cash flows.

Accounting Standards to be Adopted in Future Periods

Repurchase Agreements. In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The accounting guidance changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The guidance also requires new disclosures about transfers that are accounted for as sales in transactions that are economically similar to repurchase agreements and increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The guidance is effective prospectively in the second quarter of fiscal 2015. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The accounting guidance defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The guidance is effective beginning in the first quarter of fiscal 2017. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Discontinued Operations. In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The guidance changes the criteria for disposals to qualify as discontinued operations and requires new disclosures about disposals of both discontinued operations and certain other disposals that do not meet the new definition. The guidance is effective beginning in the first quarter of 2015. We do not expect the guidance to have a significant impact on our consolidated financial position or results of operations upon adoption.

Income Taxes. In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The guidance requires an entity to net their unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements against a deferred tax asset for a net operating loss carryforward, a similar tax loss or tax credit carryforward, unless such tax loss or credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes resulting from the disallowance of a tax position. In the event that the tax position is disallowed or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2013, and is to be applied prospectively to all unrecognized tax benefits that exist at the effective date. We do not expect that the adoption of this update will have a material effect on our consolidated financial statements.

Note 4. Leucadia and Related Transactions

Leucadia Transaction

On March 1, 2013, Jefferies Group LLC completed a business combination with Leucadia and became a wholly-owned subsidiary of Leucadia as described in Note 1, Organization and Basis of Presentation. Each share of Jefferies Group Inc.‘s common stock outstanding was converted into common shares of Leucadia at an Exchange Ratio of 0.81 of a Leucadia common share for each share of Jefferies Group, Inc. (the “Exchange Ratio”). Leucadia exchanged Jefferies Group, Inc.‘s $125.0 million 3.25% Series A-1 Convertible Cumulative Preferred Stock for a new series of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Leucadia $125.0 million 3.25% Cumulative Convertible Preferred Shares. In addition, each restricted share and restricted stock unit of Jefferies Group, Inc. common stock was converted at the Exchange Ratio, into an equivalent award of shares of Leucadia, with all such awards for Leucadia shares subject to the same terms and conditions, including, without limitation, vesting and, in the case of performance-based restricted stock units, performance being measured at existing targets.

Leucadia did not assume or guarantee any of our outstanding debt securities, but our 3.875% Convertible senior Debentures due 2029 with an aggregate principal amount of $345.0 million became convertible into common shares of Leucadia. Other than the conversion into Leucadia common shares, the terms of the debenture remain the same.

The Leucadia Transaction resulted in a change in our ownership and was recorded under the acquisition method of accounting by Leucadia and pushed-down to us by allocating the total purchase consideration of $4.8 billion to the cost of the assets acquired, including intangible assets, and liabilities assumed based on their estimated fair values. The excess of the total purchase price over the fair value of assets acquired and the liabilities assumed is recorded as goodwill. The goodwill arising from the Leucadia Transaction consists largely of our commercial potential and the value of our assembled workforce.

In connection with the Leucadia Transaction, we recognized $9.0 million and $2.1 million in transaction costs during the three months ended May 31 and February 28, 2013, respectively.

The summary computation of the purchase price and the fair values assigned to the assets and liabilities are presented as follows (in thousands except share amounts):


Purchase Price
Jefferies common stock outstanding		205,368,031
Less: Jefferies common stock owned by Leucadia		(58,006,024	)

Jefferies common stock acquired by Leucadia		147,362,007
Exchange ratio		0.81

Leucadia’s shares issued (excluding for Jefferies shares held by Leucadia)		119,363,226
Less: restricted shares issued for share-based payment awards (1)		(6,894,856	)

Leucadia’s shares issued, excluding share-based payment awards		112,468,370
Closing price of Leucadia’s common stock (2)	$	26.90

Fair value of common shares acquired by Leucadia		3,025,399
Fair value of 3.25% cumulative convertible preferred shares (3)		125,000
Fair value of shares-based payment awards (4)		343,811
Fair value of Jefferies shares owned by Leucadia (5)		1,259,891

Total purchase price	$	4,754,101

(1)	Represents shares of restricted stock included in Jefferies common stock outstanding that contained a future service requirement as of March 1, 2013.

(2)	The value of the shares of common stock exchanged with Jefferies shareholders was based upon the closing price of Leucadia’s common stock at February 28, 2013, the last trading day prior to the date of acquisition.

(3)	Represents Leucadia’s 3.25% Cumulative Convertible Preferred Shares issued in exchange for Jefferies Group, Inc.‘s 3.25% Series A-1 Convertible Cumulative Preferred Stock.

(4)

The fair value of share-based payment awards is calculated in accordance with ASC 718, Compensation – Stock Compensation. Share-based payment awards attributable to pre-combination service are included as part of the total purchase price. Share-based payment awards attributable to pre-combination service is estimated based on the ratio of the pre-combination service performed to the original service period of the award.

(5)	The fair value of Jefferies shares owned by Leucadia was based upon a price of $21.72, the closing price of Jefferies common stock at February 28, 2013.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Assets acquired:
Cash and cash equivalents	$	3,017,958
Cash and securities segregated		3,728,742
Financial instruments owned, at fair value		16,413,535
Investments in managed funds		59,976
Loans to and investments in related parties		766,893
Securities borrowed		5,315,488
Securities purchased under agreements to resell		3,578,366
Securities received as collateral		25,338
Receivables:
Brokers, dealers and clearing organizations		2,444,085
Customers		1,045,251
Fees, interest and other		225,555
Premises and equipment		192,603
Indefinite-lived intangible exchange memberships and licenses (1)		15,551
Finite-lived intangible customer relationships (1)		136,002
Finite-lived trade name (1)		131,299
Other assets		939,600

Total assets	$	38,036,242

Liabilities assumed:
Short-term borrowings	$	100,000
Financial instruments sold, not yet purchased, at fair value		9,766,876
Securities loaned		1,902,687
Securities sold under agreements to repurchase		7,976,492
Other secured financings		122,294
Obligation to return securities received as collateral		25,338
Payables:
Brokers, dealers and clearing organizations		1,787,055
Customers		5,450,781
Accrued expenses and other liabilities		793,843
Long-term debt		6,362,024
Mandatorily redeemable preferred interests		358,951

Total liabilities	$	34,646,341

Noncontrolling interests		356,180

Fair value of net assets acquired, excluding goodwill	$	3,033,721

Goodwill	$	1,720,380

(1)	Intangible assets are recorded within Other assets on the Consolidated Statements of Financial Condition.

The goodwill of $1.7 billion is not deductible for tax purposes.

Reorganization of Jefferies High Yield Holdings, LLC

On March 1, 2013, we commenced a reorganization of our high yield joint venture with Leucadia, conducted through Jefferies High Yield Holdings, LLC (“JHYH”) (the parent of Jefferies High Yield Trading, LLC (our high yield trading broker-dealer)). On March 1, 2013, we redeemed the outstanding third party noncontrolling interests in JHYH of $347.6 million. On March 31, 2013, Leucadia contributed its mandatorily redeemable preferred interests in JHYH of $362.3 million to Jefferies Group LLC as member’s equity. On April 1, 2013, we redeemed the mandatorily redeemable preferred interests in JHYH received from Leucadia. In addition, on April 1, 2013, our high yield trading broker-dealer was merged into Jefferies LLC (our U.S. securities broker-dealer).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5. Fair Value Disclosures

The following is a summary of our financial assets and liabilities that are accounted for at fair value on a recurring basis as of May 31, 2014 and November 30, 2013 by level within the fair value hierarchy (in thousands):


	M ay 31, 2014
	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
Assets:
Financial instruments owned:
Corporate equity securities	$	1,997,684	$	345,139	$	16,402	$	—		$	2,359,225
Corporate debt securities		—		3,171,520		31,648		—			3,203,168
Collateralized debt obligations		—		290,292		42,313		—			332,605
U.S. government and federal agency securities		2,176,254		74,996		—		—			2,251,250
Municipal securities		—		690,649		—		—			690,649
Sovereign obligations		1,540,017		1,018,348		—		—			2,558,365
Residential mortgage-backed securities		—		3,024,940		71,962		—			3,096,902
Commercial mortgage-backed securities		—		579,591		24,246		—			603,837
Other asset-backed securities		—		13,603		45,444		—			59,047
Loans and other receivables		—		1,426,045		138,643		—			1,564,688
Derivatives		87,612		2,813,166		913		(2,648,507	)		253,184
Investments at fair value		—		5,361		118,071		—			123,432
Physical commodities		—		47,166		—		—			47,166

Total financial instruments owned	$	5,801,567	$	13,500,816	$	489,642	$	(2,648,507	)	$	17,143,518

Cash and cash equivalents	$	3,958,288	$	—	$	—	$	—		$	3,958,288
Investments in managed funds	$	—	$	19,250	$	56,119	$	—		$	75,369
Cash and securities segregated and on deposit for regulatory purposes (2)	$	3,288,517	$	—	$	—	$	—		$	3,288,517
Securities received as collateral	$	126,106	$	—	$	—	$	—		$	126,106

Total Level 3 assets					$	545,761

Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	1,632,106	$	52,160	$	38	$	—		$	1,684,304
Corporate debt securities		—		1,510,841		2,780		—			1,513,621
U.S. government and federal agency securities		1,554,835		—		—		—			1,554,835
Municipal securities				—		—		—			—
Sovereign obligations		1,517,111		716,275		—		—			2,233,386
Residential mortgage-backed securities		—		16,837		—		—			16,837
Loans		—		872,322		31,534		—			903,856
Derivatives		75,585		2,881,585		16,195		(2,747,077	)		226,288
Physical commodities		—		39,173		—		—			39,173

Total financial instruments sold, not yet purchased	$	4,779,637	$	6,089,193	$	50,547	$	(2,747,077	)	$	8,172,300

Obligation to return securities received as collateral	$	126,106	$	—	$	—	$	—		$	126,106
Other secured financings	$	—	$	—	$	20,288	$	—		$	20,288
Embedded conversion option	$	—	$	3,895	$	—	$	—		$	3,895

(1)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

(2)	Cash and securities segregated and on deposit for regulatory purposes include U.S. government securities with a fair value of $564.7 million.

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(Unaudited)


	November 30, 2013
	Level 1 (1)		Level 2 (1)		Level 3		Counterparty and Cash Collateral Netting (2)			Total
Assets:
Financial instruments owned:
Corporate equity securities	$	1,913,220	$	175,493	$	9,884	$	—		$	2,098,597
Corporate debt securities		—		2,957,102		25,666		—			2,982,768
Collateralized debt obligations		—		182,095		37,216		—			219,311
U.S. government and federal agency		2,293,221		40,389		—		—			2,333,610
Municipal securities		—		664,054		—		—			664,054
Sovereign obligations		1,458,803		889,685		—		—			2,348,488
Residential mortgage-backed securities		—		2,932,268		105,492		—			3,037,760
Commercial mortgage-backed securities		—		1,130,410		17,568		—			1,147,978
Other asset-backed securities		—		55,475		12,611		—			68,086
Loans and other receivables		—		1,203,238		145,890		—			1,349,128
Derivatives		40,952		2,472,237		1,493		(2,253,589	)		261,093
Investments at fair value		—		40		101,242		—			101,282
Physical commodities		—		37,888		—		—			37,888

Total financial instruments owned	$	5,706,196	$	12,740,374	$	457,062	$	(2,253,589	)	$	16,650,043

Cash and cash equivalents	$	3,561,119	$	—	$	—	$	—		$	3,561,119
Investments in managed funds	$	—	$	—	$	57,285	$	—		$	57,285
Cash and securities segregated and on deposit for regulatory purposes (3)	$	3,616,602	$	—	$	—	$	—		$	3,616,602
Securities received as collateral	$	11,063	$	—	$	—	$	—		$	11,063

Total Level 3 assets					$	514,347

Liabilities:
Financial instruments sold,
Corporate equity securities	$	1,782,903	$	40,358	$	38	$	—		$	1,823,299
Corporate debt securities		—		1,346,078		—		—			1,346,078
U.S. government and federal agency securities		1,324,326		—		—		—			1,324,326
Sovereign obligations		1,360,269		471,088		—		—			1,831,357
Residential mortgage-backed securities		—		34,691		—		—			34,691
Loans		—		672,838		22,462		—			695,300
Derivatives		43,829		2,480,463		8,398		(2,352,611	)		180,079
Physical commodities		—		36,483		—		—			36,483

Total financial instruments sold, not yet purchased	$	4,511,327	$	5,081,999	$	30,898	$	(2,352,611	)	$	7,271,613

Obligation to return securities received as collateral	$	11,063	$	—	$	—	$	—		$	11,063
Other secured financings	$	—	$	31,000	$	8,711	$	—		$	39,711
Embedded conversion option	$	—	$	9,574	$	—	$	—		$	9,574

(1)

During the nine months ended November 30, 2013, we transferred listed equity options with a fair value of $403.0 million within Financial instruments owned and $423.0 million within Financial instruments sold, not yet purchased from Level 1 to Level 2 as adjustments to the exchange closing price are necessary to best reflect the fair value of the population at its exit price.

(2)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

(3)	Cash and securities segregated and on deposit for regulatory purposes include U.S. government securities with a fair value of $304.2 million.

The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:

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(Unaudited)

Corporate Equity Securities

•

Exchange Traded Equity Securities: Exchange-traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 or Level 3 of the fair value hierarchy.

•

Non-exchange Traded Equity Securities: Non-exchange traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).

•

Equity warrants: Non-exchange traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are 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.

Corporate Debt Securities

•

Corporate Bonds: Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed for recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and comprise a limited portion of our corporate bonds.

•

High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Collateralized Debt Obligations

Collateralized debt obligations are measured based on prices observed for recently executed market transactions or based on valuations received from third party brokers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs.

U.S. Government and Federal Agency Securities

•

U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized within Level 1 of the fair value hierarchy.

•

U.S. Agency Issued Debt Securities: Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services. Non-callable U.S. agency securities are generally categorized within Level 1 and callable U.S. agency securities are categorized within Level 2 of the fair value hierarchy.

Municipal Securities

Municipal securities are measured based on quoted prices obtained from external pricing services and are generally categorized within Level 2 of the fair value hierarchy.

Sovereign Obligations

Foreign sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size. To the extent external price quotations are not available or recent transactions have not been observed, valuation techniques incorporating interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value of sovereign bonds or obligations. Foreign sovereign government obligations are classified in Level 1, 2 or Level 3 of the fair value hierarchy, primarily based on the country of issuance.

Residential Mortgage-Backed Securities

•

Agency Residential Mortgage-Backed Securities: Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and interest-only and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy.

•

Agency Residential Inverse Interest-Only Securities (“Agency Inverse IOs”): The fair value of agency inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age. Agency inverse IOs are categorized within Level 2 or Level 3 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.

•

Non-Agency Residential Mortgage-Backed Securities: Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.

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(Unaudited)

Commercial Mortgage-Backed Securities

•

Agency Commercial Mortgage-Backed Securities: GNMA project loan bonds and FNMA Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.

•

Non-Agency Commercial Mortgage-Backed Securities: Non-agency commercial mortgage-backed securities are measured using pricing data obtained from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.

Other Asset-Backed Securities

Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables and student loans and are categorized within Level 2 and Level 3 of the fair value hierarchy. Valuations are determined using pricing data obtained from external pricing services and prices observed for recently executed market transactions.

Loans and Other Receivables

•

Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by market transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on market price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.

•

Participation Certificates in GNMA Project and Construction Loans: Valuations of participation certificates in GNMA project and construction loans are based on observed market prices of recently executed purchases of similar loans which are then used to derive a market implied spread, which in turn is used as the primary input in estimating the fair value of loans at the measurement date. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.

•

Project Loans: Valuation of project loans are based on benchmarks of prices for recently executed transactions of related realized collateralized securities and are categorized within Level 2 of the fair value hierarchy.

•

Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent trade activity in the same security.

Derivatives

•

Listed Derivative Contracts: Listed derivative contracts that are actively traded are measured based on quoted exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy. Listed derivatives for which there is limited trading activity are measured based on incorporating the closing auction price of the underlying equity security, use similar valuation approaches as those applied to over-the-counter derivative contracts and are categorized within Level 2 of the fair value hierarchy.

•

OTC Derivative Contracts: Over-the-counter (“OTC”) derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.

OTC options include OTC equity, foreign exchange and commodity options measured using various valuation models, such as the Black-Scholes, with key inputs impacting the valuation including the underlying security, foreign exchange spot rate or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps, which incorporate observable inputs related to commodity spot prices and forward curves. Credit default swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from external pricing services.

Physical Commodities

Physical commodities include base and precious metals and are measured using observable inputs including spot prices and published indices. Physical commodities are categorized within Level 2 of the fair value hierarchy. To facilitate the trading in precious metals we undertake leasing of such precious metals. The fees earned or paid for such leases are recorded as Principal transaction revenues on the Consolidated Statements of Earnings.

Investments at Fair Value and Investments in Managed Funds

Investments at fair value and Investments in managed funds include investments in hedge funds, fund of funds, private equity funds, convertible bond funds and commodity funds, which are measured at fair value based on the net asset value of the funds provided by the fund managers and are categorized within Level 2 or Level 3 of the fair value hierarchy. Investments at fair value also include direct equity investments in private companies, which are measured at fair value using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy. Additionally, investments at fair value include investments in insurance contracts relating to our defined benefit plan in Germany. Fair value for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present information about our investments in entities that have the characteristics of an investment company at May 31, 2014 and November 30, 2013 (in thousands):


	May 31, 2014
	Fair Value (6)		Unfunded Commitments		Redemption Frequency (if currently eligible)
Equity Long/Short Hedge Funds (1)	$	38,315	$	—	Monthly, Quarterly
High Yield Hedge Funds(2)		232		—	—
Fund of Funds(3)		388		94	—
Equity Funds(4)		69,047		27,409	—
Convertible Bond Funds(5)		3,647		—	At Will

Total(7)	$	111,629	$	27,503


	November 30, 2013
	Fair Value (6)		Unfunded Commitments		Redemption Frequency (if currently eligible)
Equity Long/Short Hedge Funds (1)	$	20,927	$	—	Monthly, Quarterly
High Yield Hedge Funds(2)		244		—	—
Fund of Funds(3)		494		94	—
Equity Funds(4)		66,495		40,816	—
Convertible Bond Funds(5)		3,473		—	At Will

Total(7)	$	91,633	$	40,910

(1)

This category includes investments in hedge funds that invest, long and short, in equity securities in domestic and international markets in both the public and private sectors. At May 31, 2014 and November 30, 2013, investments representing approximately 99% and 98%, respectively, of the fair value of investments in this category are redeemable with 30 - 65 days prior written notice, and includes an investment in a private asset management fund managed by us with a fair value of $15.6 million at May 31, 2014. The remaining investments in this category cannot be redeemed as they are in liquidation and distributions will be received through the liquidation of the underlying assets of the funds. We are unable to estimate when the underlying assets will be liquidated.

(2)

Includes investments in funds that invest in domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt, and private equity investments. There are no redemption provisions. The underlying assets of the funds are being liquidated and we are unable to estimate when the underlying assets will be fully liquidated.

(3)

Includes investments in fund of funds that invest in various private equity funds. At May 31, 2014 and November 30, 2013, approximately 96% and 98%, respectively, of the fair value of investments in this category are managed by us and have no redemption provisions, instead distributions are received through the liquidation of the underlying assets of the fund of funds, which are estimated to be liquidated in approximately two years. For the remaining investments we have requested redemption; however, we are unable to estimate when these funds will be received.

(4)

At May 31, 2014 and November 30, 2013, investments representing approximately 99% and 99%, respectively of the fair value of investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries. These investments cannot be redeemed, instead distributions are received through the liquidation of the underlying assets of the funds which are expected to liquidate in one to eight years. The remaining investments are in liquidation and we are unable to estimate when the underlying assets will be fully liquidated. At May 31, 2014 and November 30, 2013, this category includes investments in equity funds managed by us with a fair value of $56.6 million and $54.4 million and unfunded commitments of $25.8 million and $39.2 million, respectively.

(5)	Investment in the Jefferies Umbrella Fund, an open-ended investment company managed by us that invests primarily in convertible bonds. The investment is redeemable with 5 days prior written notice.

(6)	Where fair value is calculated based on net asset value, fair value has been derived from each of the funds’ capital statements.

(7)

Investments at fair value in the Consolidated Statements of Financial Condition at May 31, 2014 and November 30, 2013 include $87.2 million and $66.9 million, respectively, of direct investments which do not have the characteristics of investment companies and therefore not included within this table. We have unfunded commitments to such investments of $-0- and $3.3 million in aggregate at May 31, 2014 and November 30, 2013, respectively.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Secured Financings

Other secured financings include the notes issued by consolidated VIEs, which are classified as Level 2 within the fair value hierarchy. Fair value is based on recent transaction prices. In addition, at May 31, 2014, Other secured financings includes $20.3 million related to transfers of loans accounted for as secured financings rather than as sales and classified as Level 3 within the fair value hierarchy.

Embedded Conversion Option

The embedded conversion option presented within long-term debt represents the fair value of the conversion option on Leucadia shares within our 3.875% Convertible Senior Debentures, due November 1, 2029 and categorized as Level 2 within the fair value hierarchy. The conversion option was valued using a convertible bond model using as inputs the price of Leucadia’s common stock, the conversion strike price, 252-day historical volatility, a maturity date of November 1, 2017 (the first put date), dividend yield and the risk-free interest rate curve.

Pricing Information

At May 31, 2014 and November 30, 2013, our Financial instruments owned and Financial instruments sold, not yet purchased are measured using different valuation bases as follows:


	May 31, 2014						November 30, 2013
	Financial Instruments Owned			Financial Instruments Sold, Not Yet Purchased			Financial Instruments Owned			Financial Instruments Sold, Not Yet Purchased
Exchange closing prices		12	%		20	%		12	%		25	%
Recently observed transaction prices		4	%		5	%		5	%		4	%
External pricing services		72	%		70	%		68	%		66	%
Broker quotes		3	%		2	%		3	%		3	%
Valuation techniques		9	%		3	%		12	%		2	%

		100	%		100	%		100	%		100	%

The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the three months ended May 31, 2014 (in thousands):

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Successor
	Three Months Ended May 31, 2014 (3)
	Balance, February 28, 2014		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Net transfers into/ (out of) Level 3			Balance, May 31, 2014		Change in unrealized gains/ (losses) relating to instruments still held at May 31, 2014 (1)
Assets:
Financial instruments owned:
Corporate equity securities	$	12,341	$	(178	)	$	90		$	(84	)	$	—		$	4,233		$	16,402	$	(178	)
Corporate debt securities		29,315		5,659			1,937			(5,831	)		—			568			31,648		7,999
Collateralized debt obligations		66,028		4,706			19,146			(49,636	)		(331	)		2,400			42,313		238
Residential mortgage-backed securities		116,992		(791	)		10,955			(24,618	)		(459	)		(30,117	)		71,962		(422	)
Commercial mortgage-backed securities		17,486		(903	)		18,026			(21,038	)		(1,189	)		11,864			24,246		(1,933	)
Other asset-backed securities		2,375		(314	)		15,686			—			(438	)		28,135			45,444		(314	)
Loans and other receivables		128,832		11,933			42,278			(48,064	)		(21,482	)		25,146			138,643		11,922
Investments, at fair value		118,268		2,872			7,660			(4,101	)		—			(6,628	)		118,071		224
Investments in managed funds		59,528		(8,151	)		11,305			—			—			(6,563	)		56,119		(8,151	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	1,015	$	(977	)	$	—		$	—		$	—		$	—		$	38	$	558
Corporate debt securities		—		(84	)		(4,082	)		3,012			—			3,934			2,780	$	84
Net derivatives (2)		5,773		9,485			(2,150	)		2,149			25			—			15,282		(9,485	)
Loans		10,260		62			(9,629	)		18,995			139			11,707			31,534		(57	)
Other secured financings		30,394		—			(992	)		—			(9,114	)		—			20,288		—

(1)	Realized and unrealized gains/losses are reported in Principal transactions in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned – Derivatives and Financial instruments sold, not yet purchased – Derivatives.

(3)	There were no issuances during the three months ended May 31, 2014.

Analysis of Level 3 Assets and Liabilities for the Three Months Ended May 31, 2014

During the three months ended May 31, 2014, transfers of assets of $95.4 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:

•

Non-agency residential mortgage-backed securities of $5.5 million, commercial mortgage-backed securities of $14.2 million and other asset-backed securities of $29.9 million for which no recent trade activity was observed for purposes of determining observable inputs;

•

Loans and other receivables of $26.3 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2;

•

Corporate equity securities of $11.6 million, and corporate debt securities of $0.6 million due to lack of observable market transactions;

•

Collateralized debt obligations of $7.1 million which have little to no transparency in trade activity;

During the three months ended May 31, 2014, transfers of assets of $66.4 million from Level 3 to Level 2 are attributed to:

•

Non-agency residential mortgage-backed securities of $35.6 million, commercial mortgage-backed securities of $2.3 million and other asset-backed securities of $1.8 million for which market trades were observed in the period for either identical or similar securities;

•

Collateralized debt obligations of $4.7 million, loans and other receivables of $1.1 million and investments at fair value of $6.6 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

•

Corporate equity securities of $7.4 million and investments in managed funds of $6.7 million due to an increase in observable market transactions.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the three months ended May 31, 2014, there were transfers of loan liabilities of $11.7 million from Level 2 to Level 3 due to a decrease in observable inputs in the valuation. There were $3.9 million transfers of corporate debt liabilities from Level 2 to Level 3 due to a lower number of observable market transactions.

Net gains on Level 3 assets were $14.8 million and net losses on Level 3 liabilities were $8.5 million for the three months ended May 31, 2014. Net gains on Level 3 assets were primarily due to increased valuations of certain loans and other receivables, collateralized debt obligations, corporate debt securities and investments at fair value, partially offset by a decrease in valuation of certain corporate equity securities, residential and commercial mortgage-backed securities and investments in managed funds. Net losses on Level 3 liabilities were primarily due to increased valuations of certain derivative instruments, partially offset by decrease in valuation of certain corporate equity and debt securities.

The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the six months ended May 31, 2014 (in thousands):


	Successor
	Six Months Ended May 31, 2014
	Balance, November 30, 2013		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Issuances		Net transfers into/ (out of) Level 3			Balance, May 31, 2014		Change in unrealized gains/ (losses) relating to instruments still held at May 31, 2014 (1)
Assets:
Financial instruments owned:
Corporate equity securities	$	9,884	$	(1,583	)	$	608		$	(370	)	$	—		$	—	$	7,863		$	16,402	$	(494	)
Corporate debt securities		25,666		5,116			3,835			(3,224	)		—			—		255			31,648		7,420
Collateralized debt obligations		37,216		14,169			36,200			(55,963	)		—			—		10,691			42,313		5,656
Residential mortgage-backed securities		105,492		(4,114	)		21,893			(37,356	)		(529	)		—		(13,424	)		71,962		(1,324	)
Commercial mortgage-backed securities		17,568		(2,191	)		32,449			(29,864	)		(1,710	)		—		7,994			24,246		(3,236	)
Other asset-backed securities		12,611		(537	)		17,361			(5,496	)		(438	)		—		21,943			45,444		(569	)
Loans and other receivables		145,890		3,946			92,579			(88,674	)		(26,685	)		—		11,587			138,643		3,382
Investments, at fair value		101,242		27,757			30,160			(33,684	)		—			—		(7,404	)		118,071		25,110
Investments in managed funds		57,285		(11,284	)		13,407			—			—			—		(3,289	)		56,119		(11,284	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	38	$	—		$	—		$	—		$	—		$	—	$	—		$	38	$	—
Corporate debt securities		—		(203	)		(28,319	)		31,431			—			—		(129	)		2,780		203
Net derivatives (2)		6,905		11,591			(179	)		(21	)		318			—		(3,332	)		15,282		(11,591	)
Loans		22,462		754			(22,491	)		27,908			139			—		2,762			31,534		(57	)
Other secured financings		8,711		—			—			—			(9,114	)		20,691		—			20,288		—

(1)	Realized and unrealized gains/losses are reported in Principal transactions in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned – Derivatives and Financial instruments sold, not yet purchased – Derivatives.

Analysis of Level 3 Assets and Liabilities for the Six Months Ended May 31, 2014

During the six months ended May 31, 2014, transfers of assets of $95.1 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Non-agency residential mortgage-backed securities of $20.9 million, commercial mortgage-backed securities of $8.4 million and other asset-backed securities of $25.5 million for which no recent trade activity was observed for purposes of determining observable inputs;

•

Loans and other receivables of $14.2 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2;

•

Corporate equity securities of $11.5 million, and corporate debt securities of $0.3 million due to lack of observable market transactions;

•

Collateralized debt obligations of $14.3 million which have little to no transparency in trade activity.

During the six months ended May 31, 2014, transfers of assets of $58.9 million from Level 3 to Level 2 are attributed to:

•

Non-agency residential mortgage-backed securities of $34.3 million, commercial mortgage-backed securities of $0.4 million and other asset-backed securities of $3.5 million for which market trades were observed in the period for either identical or similar securities;

•

Collateralized debt obligations of $3.6 million, loans and other receivables of $2.6 million and investments at fair value of $7.4 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

•

Corporate equity securities of $3.6 million and investments in managed funds $3.5 million due to an increase in observable market transactions.

During the six months ended May 31, 2014, there were transfers of loan liabilities of $2.8 million from Level 2 to Level 3 due to a decrease in observable inputs in the valuation. There were $3.3 million transfers of net derivative liabilities from Level 3 to Level 2 and $0.1 million transfers of corporate debt securities from Level 2 to Level 3 due to an increase in observable inputs used in the valuing of derivative contracts and an increase in observable market transactions, respectively.

Net gains on Level 3 assets were $31.3 million and net losses on Level 3 liabilities were $12.1 million for the six months ended May 31, 2014. Net gains on Level 3 assets were primarily due to increased valuations of certain corporate debt securities, collateralized debt obligations, loans and other receivables and investments at fair value, partially offset by a decrease in valuation of certain corporate equity securities, residential and commercial mortgage-backed securities, other asset backed securities and investments in managed funds. Net losses on Level 3 liabilities were primarily due to increased valuations of certain derivative instruments and loan positions, partially offset by decrease in valuation of certain corporate debt securities.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Successor
	Three Months Ended May 31, 2013 (3)
	Balance, February 28, 2013		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Net transfers into/ (out of) Level 3			Balance, May 31, 2013		Change in unrealized gains/ (losses) relating to instruments still held at May 31, 2013 (1)
Assets:
Financial instruments owned:
Corporate equity securities	$	13,234	$	2,906		$	5,023		$	(2,984	)	$	—		$	1,398		$	19,577	$	2,058
Corporate debt securities		31,820		(2,867	)		918			(11,989	)		—			733			18,615		(2,242	)
Collateralized debt obligations		29,776		6,698			17,864			(6,270	)		—			(2,944	)		45,124		6,148
Residential mortgage-backed securities		169,426		(86	)		57,750			(71,534	)		(5,436	)		(6,354	)		143,766		(367	)
Commercial mortgage-backed securities		17,794		(2,905	)		1,403			(2,744	)		(1,578	)		4,098			16,068		(3,835	)
Other asset-backed securities		1,252		(4	)		—			—			—			196			1,444		(4	)
Loans and other receivables		170,986		(5,049	)		160,409			(24,741	)		(188,268	)		4,159			117,496		(6,925	)
Investments, at fair value		70,067		(1,197	)		5,000			—			(2,493	)		4,987			76,364		(1,349	)
Investments in managed funds		59,976		(927	)		2,532			—			(6,562	)		122			55,141		(926	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	38	$	—		$	—		$	—		$	—		$	—		$	38	$	—
Residential mortgage-backed securities	$	1,542	$	—		$	(1,542	)											—	$	—
Net derivatives (2)		11,185		(386	)		—			—			—			—			10,799		386
Loans		7,398		—			(7,398	)		15,212			—			—			15,212		—
Other secured financings		—		—			—			—			—			2,294			2,294		—

(1)	Realized and unrealized gains/losses are reported in Principal transactions in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned – Derivatives and Financial instruments sold, not yet purchased – Derivatives.

(3)	There were no issuances during the three months ended May 31, 2013.

Analysis of Level 3 Assets and Liabilities for the Three Months Ended May 31, 2013

During the three months ended May 31, 2013, transfers of assets of $54.9 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:

•

Non-agency residential mortgage-backed securities of $29.7 million and commercial mortgage-backed securities of $5.6 million for which no recent trade activity was observed for purposes of determining observable inputs;

•

Loans and other receivables of $6.9 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2.

•

Corporate equity securities of $2.7 million and corporate debt securities of $2.0 million due to lack of observable market transactions;

•

Collateralized debt obligations of $2.8 million which have little to no transparency in trade activity;

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the three months ended May 31, 2013, transfers of assets of $48.5 million from Level 3 to Level 2 are attributed to:

•

Non-agency residential mortgage-backed securities of $36.0 million and commercial mortgage-backed securities of $1.5 million for which market trades were observed in the period for either identical or similar securities;

•

Collateralized debt obligations of $5.7 million and loans and other receivables of $2.7 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

•

Corporate equity securities of $1.3 million and corporate debt securities of $1.2 million due to an increase in observable market transactions.

During the three months ended May 31, 2013, there were $2.3 million of transfers of liabilities from Level 2 to Level 3 and no transfers of liabilities from Level 3 to Level 2.

Net losses on Level 3 assets were $3.4 million and net gains on Level 3 liabilities were $0.4 million for the three months ended May 31, 2013. Net losses on Level 3 assets were primarily due to decreased valuations of certain loans and other receivables, commercial mortgage-backed securities, corporate debt securities, investments at fair value, investments in managed funds and residential mortgage-backed securities, partially offset by an increase in valuation of certain collateralized debt obligations and corporate equity securities. Net gains on Level 3 liabilities were primarily due to increased valuations of certain derivative instruments.


	Predecessor
	Three Months Ended February 28, 2013 ⁽³⁾
	Balance, November 30, 2012		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Net transfers into/ (out of) Level 3			Balance, February 28, 2013		Change in unrealized gains/ (losses) relating to instruments still held at February 28, 2013 (1)
Assets:
Financial instruments owned:
Corporate equity securities	$	16,815	$	200		$	707		$	109		$	—		$	(4,597	)	$	13,234	$	172
Corporate debt securities		3,631		7,836			11,510			(1,918	)		—			10,761			31,820		7,833
Collateralized debt obligations		31,255		3,584			4,406			(17,374	)		—			2,865			24,736		(1,165	)
Residential mortgage-backed securities		156,069		11,906			132,773			(130,143	)		(6,057	)		4,878			169,426		4,511
Commercial mortgage-backed securities		30,202		(995	)		2,280			(2,866	)		(1,188	)		(9,639	)		17,794		(2,059	)
Other asset-backed securities		1,114		90			1,627			(1,342	)		(19	)		(178	)		1,292		39
Loans and other receivables		180,393		(8,682	)		105,650			(29,828	)		(61,407	)		(15,140	)		170,986		(12,374	)
Investments, at fair value		83,897		961			5,952			(4,923	)		(9,721	)		(1,099	)		75,067		1,171
Investments in managed funds		57,763		(363	)		11,068			—			(8,492	)		—			59,976		(363	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	38	$	—		$	—		$	—		$	—		$	—		$	38	$	—
Residential mortgage-backed securities		—		25			(73,846	)		75,363			—			—			1,542		(19	)
Net derivatives (2)		9,188		2,648			—			—			—			(651	)		11,185		2,648
Loans		1,711		—			(1,711	)		7,398			—			—			7,398		—

(1)	Realized and unrealized gains/losses are reported in Principal transactions in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned – Derivatives and Financial instruments sold, not yet purchased – Derivatives.

(3)	There were no issuances during the three months ended February 28, 2013.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Analysis of Level 3 Assets and Liabilities for the Three Months Ended February 28, 2013

During the three months ended February 28, 2013, transfers of assets of $100.5 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:

•

Non-agency residential mortgage-backed securities of $78.4 million and commercial mortgage-backed securities of $1.3 million for which no recent trade activity was observed for purposes of determining observable inputs;

•

Corporate debt securities of $10.8 million and corporate equity securities of $0.1 million due to lack of observable market transactions;

•

Collateralized debt obligations of $5.3 million which have little to no transparency in trade activity;

•

Loans and other receivables of $4.8 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2.

During the three months ended February 28, 2013, transfers of assets of $112.7 million from Level 3 to Level 2 are attributed to:

•

Non-agency residential mortgage-backed securities of $73.5 million, commercial mortgage-backed securities of $10.9 million and $0.2 million of other asset-backed securities for which market trades were observed in the period for either identical or similar securities;

•

Loans and other receivables of $19.9 million and collateralized debt obligations of $2.4 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

•

Corporate equity securities of $4.7 million due to an increase in observable market transactions.

During the three months ended February 28, 2013, there were no transfers of liabilities from Level 2 to Level 3 and there were $0.7 million transfers of net derivative liabilities from Level 3 to Level 2 due to an increase in observable significant inputs used in valuing the derivative contracts.

Net gains on Level 3 assets were $14.5 million and net losses on Level 3 liabilities were $2.7 million for the three months ended February 28, 2013. Net gains on Level 3 assets were primarily due to increased valuations of certain residential mortgage-backed securities, corporate debt securities, collateralized debt obligations and investments at fair value partially offset by a decrease in valuation of certain loans and other receivables, commercial mortgage backed securities and investments in managed funds. Net losses on Level 3 liabilities were primarily due to increased valuations of certain derivative instruments.

Components or portions of interest rate and credit risk related to mortgage-backed securities categorized within Level 3 of the fair value hierarchy are frequently economically hedged with U.S. Treasury and Eurodollar futures and short U.S. Treasury securities, which are categorized within Level 1 liabilities, and with interest rate swaps and, to a lesser extent, index credit default swaps categorized within Level 2 assets or liabilities. Accordingly, a portion of the gains and losses on mortgage-backed securities reported in Level 3 are offset by gains and losses from the economic hedges attributed to instruments categorized within Level 1 and Level 2. Economic hedging is often executed on a macro-basis for a given asset class rather than an instrument-specific basis. Valuation inputs and prices for hedging instruments categorized within Level 1 and Level 2 provide a level of observability used in valuing Level 3 mortgage-backed securities; however, other inputs, such as prepayment, default rates and other credit specific factors are significant to the valuation and are not derived from the prices of the hedging instruments. Basis risk differences may also arise between the Level 3 mortgage-backed securities and the Level 1 and Level 2 hedging instruments due to the underlying interest rates and the underlying credits comprising the referenced credit index. Hedge effectiveness is limited by factors that include idiosyncratic collateral performance and basis risk as well as the sizing of the macro-hedge.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair Value Measurements at May 31, 2014 and November 30, 2013

The tables below present information on the valuation techniques, significant unobservable inputs and their ranges for our financial assets and liabilities, subject to threshold levels related to the market value of the positions held, measured at fair value on a recurring basis with a significant Level 3 balance. The range of unobservable inputs could differ significantly across different firms given the range of products across different firms in the financial services sector. The inputs are not representative of the inputs that could have been used in the valuation of any one financial instrument; i.e., the input used for valuing one financial instrument within a particular class of financial instruments may not be appropriate for valuing other financial instruments within that given class. Additionally, the ranges of inputs presented below should not be construed to represent uncertainty regarding the fair values of our financial instruments; rather the range of inputs is reflective of the differences in the underlying characteristics of the financial instruments in each category.

For certain categories, we have provided a weighted average of the inputs allocated based on the fair values of the financial instruments comprising the category. We do not believe that the range or weighted average of the inputs is indicative of the reasonableness of uncertainty of our Level 3 fair values. The range and weighted average are driven by the individual financial instruments within each category and their relative distribution in the population. The disclosed inputs when compared with the inputs as disclosed in other quarters should not be expected to necessarily be indicative of changes in our estimates of unobservable inputs for a particular financial instrument as the population of financial instruments comprising the category will vary from period to period based on purchases and sales of financial instruments during the period as well as transfers into and out of Level 3 each period.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


May 31, 2014
Financial Instruments Owned	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input / Range	Weighted Average
Corporate equity securities	$	16,402
Non-exchange traded securities			Market approach	EBITDA (a) multiple	3.3 to 3.5		3.5

Corporate debt securities	$	29,739
			Scenario analysis	Estimated recovery percentage	25% to 50%		42	%

Collateralized debt obligations	$	40,213
			Discounted cash flows	Constant prepayment rate	10% to 20%		13	%
				Constant default rate	0% to 3%		2	%
				Loss severity	30% to 85%		57	%
				Yield	5% to 43%		20	%

Residential mortgage-backed securities	$	71,962
			Discounted cash flows	Constant prepayment rate	1% to 50%		13	%
				Constant default rate	1% to 100%		20	%
				Loss severity	0% to 90%		50	%
				Yield	3% to 14%		9	%

Commercial mortgage-backed securities	$	24,246
			Discounted cash flows	Yield	9% to 18%		12	%
				Cumulative loss rate	0% to 9%		4	%

Other asset-backed securities	$	45,444
			Comparable pricing	Comparable bond price	$100		—
			Discounted cash flows	Constant prepayment rate	0%		—
				Constant default rate	0%		—
				Loss severity	0%		—
				Yield	4%		—

Loans and other receivables	$	130,068
			Comparable pricing	Comparable bond or loan price	$93.50 to $100.375	$	98
			Market approach	Yield	3% to 4%		4	%
				EBITDA (a) multiple	3 to 8		6
			Scenario analysis	Estimated recovery percentage	10% to 100%		88	%

Derivatives	$	913
Forward contract			Comparable pricing	Comparable loan price	$100.38		—

Investments at fair value
Private equity securities	$	26,463
			Comparable pricing	Comparable share price	$27		—


Financial Instruments Sold, Not Yet Purchased	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input / Range	Weighted Average
Corporate debt securities	$	2,780
			Comparable pricing	Comparable bond price	$30		—

Derivatives	$	15,033
Unfunded Commitment			Comparable pricing	Comparable loan price	$92.25 to $102.20	$	94

Loans	$	31,534
			Comparable pricing	Comparable loan price	$100.38		—

(a)	Earnings before interest, taxes, depreciation and amortization (“EBITDA”).

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

November 30, 2013

Financial Instruments Owned

Fair Value (in
thousands)

Valuation Technique

Significant Unobservable Input(s)

Input / Range

Weighted
Average

Corporate equity securities

8,034

Non-exchange traded securities Warrants

Market approach

EBITDA (a) multiple

4.0 to 5.5

4.53

Option model

Volatility

36%

Corporate debt securities

17,699

Scenario analysis

Estimated recovery percentage

24%

Comparable pricing

Comparable bond or loan price

$69.10 to $70.50

$69.91

Market approach

Yield

13%

Collateralized debt obligations

34,316

Discounted cash flows

Constant prepayment rate

0% to 20%

13%

Constant default rate

2% to 3%

Loss severity

30% to 85%

38%

Yield

3% to 91%

28%

Residential mortgage-backed securities

105,492

Discounted cash flows

Constant prepayment rate

2% to 50%

11%

Constant default rate

1% to 100%

17%

Loss severity

30% to 90%

48%

Yield

0% to 20%

Commercial mortgage-backed securities

17,568

Discounted cash flows

Yield

12% to 20%

14%

Cumulative loss rate

5% to 28.2%

11%

Other asset-backed securities

12,611

Discounted cash flows

Constant prepayment rate

4% to 30%

17%

Constant default rate

2% to 11%

Loss severity

40% to 92%

64%

Yield

3% to 29%

18%

Loans and other receivables

101,931

Comparable pricing

Comparable bond or loan price

$91 to $101

$98.90

Market approach

Yield

8.75% to 13.5%

10%

EBITDA (a) multiple

6.9

Scenario analysis

Estimated recovery percentage

16.9% to 92%

74%

Derivatives

1,493

Loan commitments

Comparable pricing

Comparable bond or loan price

$100.875

Investments at fair value

30,203

Private equity securities

Comparable pricing

Comparable share price

$414

Market approach

Discount rate

15% to 30%

23%

Financial Instruments Sold, Not Yet

Purchased

Fair Value (in
thousands)

Valuation Technique

Significant Unobservable Input(s)

Input / Range

Weighted
Average

Derivatives

8,398

Equity options

Option model

Volatility

36.25% to 41%

39%

Loans

8,106

Comparable pricing

Comparable bond or loan price

$101.88

—

(a)	Earnings before interest, taxes, depreciation and amortization (“EBITDA”).

The fair values of certain Level 3 assets and liabilities that were determined based on third-party pricing information, unadjusted past transaction prices, reported net asset value or a percentage of the reported enterprise fair value are excluded from the above tables. At May 31, 2014 and November 30, 2013, asset exclusions consisted of $104.2 million and $127.7 million, respectively, primarily comprised of investments in private equity securities, investments in reinsurance contracts and certain corporate loans. At May 31, 2014 and November 30, 2013, liability exclusions consisted of $1.2 million and $14.4 million, respectively of corporate loan commitments.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sensitivity of Fair Values 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:

•

Private equity securities, corporate debt securities, other asset-backed securities, loans and other receivables and loan commitments using comparable pricing valuation techniques. A significant increase (decrease) in the comparable share, bond or loan price in isolation would result in a significant higher (lower) fair value measurement.

•

Non-exchange traded securities and loans and other receivables using a market approach valuation technique. A significant increase (decrease) in the EBITDA or other multiples in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the yield of a corporate debt security, loan and other receivable would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the discount rate of a private equity security would result in a significantly lower (higher) fair value measurement.

•

Corporate debt securities and loans and other receivables using scenario analysis. A significant increase (decrease) in the possible recovery rates of the cash flow outcomes underlying the investment would result in a significantly higher (lower) fair value measurement for the financial instrument.

•

Collateralized debt obligations, residential and commercial mortgage-backed securities and other asset-backed securities using a discounted cash flow valuation technique. A significant increase (decrease) in isolation in the constant default rate and loss severities or cumulative loss rate would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant prepayment rate would have differing impacts depending on the capital structure of the security. A significant increase (decrease) in the loan or bond yield would result in a significant lower (higher) fair value measurement.

•

Derivative equity options and equity warrants using an option model. A significant increase (decrease) in volatility would result in a significant higher (lower) fair value measurement.

•

Private equity securities using a net asset value technique. A significant increase (decrease) in the discount applied to net asset value would result in a significant (lower) higher fair value measurement.

Fair Value Option Election

We have elected the fair value option for all loans and loan commitments made by our capital markets businesses. These loans and loan commitments include loans entered into by our investment banking division in connection with client bridge financing and loan syndications, loans purchased by our leveraged credit trading desk as part of its bank loan trading activities and mortgage loan commitments and fundings in connection with mortgage-backed securitization activities. Loans and loan commitments originated or purchased by our leveraged credit and mortgage-backed businesses are managed on a fair value basis. Loans are included in Financial instruments owned and loan commitments are included in Financial instruments owned-derivatives and Financial instruments sold, not yet purchased – derivatives on the Consolidated Statements of Financial Condition. The fair value option election is not applied to loans made to affiliate entities as such loans are entered into as part of ongoing, strategic business ventures. Loans to affiliate entities are included within Loans to and investments in related parties on the Consolidated Statements of Financial Condition and are accounted for on an amortized cost basis. We have elected the fair value option for our investment in Knight Capital Group, Inc., which is included in Financial Instruments owned – Corporate equity securities on the Consolidated Statement of Financial Condition. See Note 10, Investments for further details regarding our investment in Knight Capital Group, Inc. We have also elected the fair value option for certain financial instruments held by subsidiaries as the investments are risk managed by us on a fair value basis. The fair value option has also been elected for certain secured financings that arise in connection with our securitization activities and other structural financings. Other secured financings, Receivables – Brokers, dealers and clearing organizations, Receivables – Customers, Receivables – Fees, interest and other, Payables – Brokers, dealers and clearing organizations and Payables – Customers, are not accounted for at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of gains (losses) due to changes in instrument specific credit risk on loans and other receivables and loan commitments measured at fair value under the fair value option (in thousands):


	Successor									Predecessor
	Three Months Ended May 31, 2014			Six Months Ended May 31, 2014			Three Months Ended May 31, 2013			Three Months Ended February 28, 2013
Financial Instruments Owned:
Loans and other receivables	$	2,038		$	1,430		$	13,474		$	3,924
Financial Instruments Sold:
Loans	$	(1,555	)	$	(2,591	)	$	—		$	—
Loan commitments		(9,024	)		(11,090	)		(5,421	)		(2,746)

The following is a summary of the amount by which contractual principal exceeds fair value for loans and other receivables measured at fair value under the fair value option (in thousands):


	May 31, 2014		November 30, 2013
Financial Instruments Owned:
Loans and other receivables (2)	$	276,420	$	264,896
Loans greater than 90 days past due (1) (2)		—		—

(1)	The aggregate fair value of loans that were 90 or more days past due was $-0- million and $-0- at May 31, 2014 and November 30, 2013.

(2)	Interest income is recognized separately from other changes in fair value and is included within Interest revenues on the Consolidated Statements of Earnings.

There were no loan receivables on nonaccrual status at May 31, 2014 and November 30, 2013.

Note 6. Derivative Financial Instruments

Off-Balance Sheet Risk

We have contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon our consolidated financial statements.

Derivative Financial Instruments

Our derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Financial instruments owned – derivatives and Financial instruments sold, not yet purchased – derivatives net of cash paid or received under credit support agreements and on a net counterparty basis when a legally enforceable right to offset exists under a master netting agreement. Net realized and unrealized gains and losses are recognized in Principal transactions in the Consolidated Statements of Earnings on a trade date basis and as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Acting in a trading capacity, we may enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities. (See Note 5, Fair Value Disclosures and Note 19, Commitments, Contingencies and Guarantees for additional disclosures about derivative instruments.)

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firm wide risk management policies.

In connection with our derivative activities, we may enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements or similar agreements with counterparties. A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. In addition, we enter into customized bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

Under our ISDA master netting agreements, we typically also execute credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted by or paid to a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. In cases where we have not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of our risk management processes as part of reducing counterparty credit risk and managing liquidity risk.

We are also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open derivative contracts.

The following tables present the fair value and related number of derivative contracts at May 31, 2014 and November 30, 2013 categorized by type of derivative contract and the platform on which these derivatives are transacted. The fair value of assets/liabilities represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged. The following tables also provide information regarding 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and 2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our financial position (in thousands, except contract amounts). See Note 7, Collateralized Transactions, for information related to offsetting of certain secured financing transactions.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	M ay 31, 2014 (1)
	Assets					Liabilities
	Fair Value			Number of Contracts		Fair Value			Number of Contracts
Interest rate contracts
Exchange-traded	$	1,828			44,290	$	704			64,517
Cleared OTC		876,853			2,650		930,315			2,386
Bilateral OTC		793,513			1,913		747,723			830
Foreign exchange contracts
Exchange-traded		166			53,799		339			50,513
Bilateral OTC		474,467			11,146		488,424			12,430
Equity contracts
Exchange-traded		543,402			1,818,081		541,357			1,750,939
Bilateral OTC		10,220			2,531		13,856			850
Commodity contracts
Exchange-traded		68,481			844,560		69,765			837,632
Bilateral OTC		128,079			4,330		151,310			4,082
Credit contracts
Cleared OTC		3,386			4		6,550			9
Bilateral OTC		1,295			15		23,022			31

Total gross derivative assets/ liabilities:
Exchange-traded		613,877					612,165
Cleared OTC		880,239					936,865
Bilateral OTC		1,407,574					1,424,335
Amounts offset in the Consolidated Statements of Financial Condition (2):
Exchange-traded		(606,007	)				(606,007	)
Cleared OTC		(875,817	)				(889,732	)
Bilateral OTC		(1,166,683	)				(1,251,338	)

Net amounts per Consolidated Statements of Financial Condition (3)	$	253,183				$	226,288

(1)

Exchange traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty.

(2)	Amounts netted include both netting by counterparty and for cash collateral paid or received.

(3)	We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	November 30, 2013 (1)
	Assets					Liabilities
				Number of					Number of
	Fair Value			Contracts		Fair Value			Contracts
Interest rate contracts
Exchange-traded	$	8,696			57,344	$	3,846			68,268
Cleared OTC		432,667			5,402		396,422			7,730
Bilateral OTC		724,613			1,221		730,897			1,340
Foreign exchange contracts
Exchange-traded		33			111,229		40			104,205
Bilateral OTC		653,739			7,478		693,618			8,212
Equity contracts
Exchange-traded		495,069			1,742,195		465,110			1,800,467
Bilateral OTC		6,715			148		9,875			136
Commodity contracts
Exchange-traded		27,185			785,718		33,661			780,358
Bilateral OTC		114,095			11,811		139,458			8,359
Credit contracts
Cleared OTC		49,531			49		51,632			46
Bilateral OTC		2,339			16		8,131			19

Total gross derivative assets/ liabilities:
Exchange-traded		530,983					502,657
Cleared OTC		482,198					448,054
Bilateral OTC		1,501,501					1,581,979
Amounts offset in the Consolidated Statements of Financial Condition (2):
Exchange-traded		(489,375	)				(489,375	)
Cleared OTC		(446,520	)				(445,106	)
Bilateral OTC		(1,317,694	)				(1,418,130	)

Net amounts per Consolidated Statements of Financial Condition (3)	$	261,093				$	180,079

(1)

(2)	Amounts netted include both netting by counterparty and for cash collateral paid or received.

(3)	We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents unrealized and realized gains (losses) on derivative contracts for the three and six months ended May 31, 2014, and for the three months ended May 31, 2013 and February 28, 2013 (in thousands):


	Successor									Predecessor
	Three Months Ended			Six Months Ended			Three Months Ended			Three Months Ended
Gains (Losses)	May 31, 2014			May 31, 2014			May 31, 2013			February 28, 2013
Interest rate contracts	$	(49,738	)	$	(49,946	)	$	29,381		$	38,936
Foreign exchange contracts		(4,281	)		1,156			4,135			11,895
Equity contracts		(73,529	)		(164,630	)		33,892			(22,021	)
Commodity contracts		21,794			37,980			21,513			19,585
Credit contracts		(11,441	)		(15,330	)		(11,010	)		(3,742	)

Total	$	(117,195	)	$	(190,770	)	$	77,911		$	44,653

OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities as of May 31, 2014 (in thousands):


	OTC Derivative Assets (1) (2) (4)
	0 – 12 Months		1 – 5 Years		Greater Than 5 Years		Cross-Maturity Netting (3)			Total
Commodity swaps, options and forwards	$	52,226	$	1,435	$	—	$	—		$	53,661
Equity swaps and options		1,297		—		—		—			1,297
Total return swaps		6,559		—		—		—			6,559
Foreign currency forwards, swaps and options		85,715		15,283		51		(14,167	)		86,882
Interest rate swaps, options and forwards		80,802		114,082		129,218		(70,493	)		253,609

Total	$	226,599	$	130,800	$	129,269	$	(84,660	)		402,008

Cross product counterparty netting											(17,810	)

Total OTC derivative assets included in Financial instruments owned										$	384,198

(1)	At May 31, 2014, we held exchange traded derivative assets and other credit agreements with a fair value of $11.6 million, which are not included in this table.

(2)	OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received on the Consolidated Statements of Financial Condition. At May 31, 2014, cash collateral received was $143.0 million.

(3)	Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

(4)	Derivative fair values include counterparty netting within product category.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	OTC Derivative Liabilities (1) (2) (4)
	0 – 12 Months		1 – 5 Years		Greater Than 5 Years		Cross-Maturity Netting (3)			Total
Commodity swaps, options and forwards	$	78,158	$	9,117	$	—	$	—		$	87,275
Credit default swaps		51		8,744		898		—			9,693
Equity swaps and options		—		—		9,300		—			9,300
Total return swaps		2,200		—		—		—			2,200
Foreign currency forwards, swaps and options		88,516		16,380		—		(14,167	)		90,729
Interest rate swaps, options and forwards		56,392		111,734		166,652		(70,493	)		264,285

Total	$	225,317	$	145,975	$	176,850	$	(84,660	)		463,482

Cross product counterparty netting											(17,810	)

Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	445,672

(1)	At May 31, 2014, we held exchange traded derivative liabilities and other credit agreements with a fair value of $22.2 million, which are not included in this table.

(2)	OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged on the Consolidated Statements of Financial Condition. At May 31, 2014, cash collateral pledged was $241.6 million.

(3)	Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

(4)	Derivative fair values include counterparty netting within product category.

At May 31, 2014, the counterparty credit quality with respect to the fair value of our OTC derivatives assets was as follows (in thousands):


Counterparty credit quality (1):
A- or higher	$	179,090
BBB- to BBB+		52,347
BB+ or lower		82,789
Unrated		69,972

Total	$	384,198

(1)	We utilize internal credit ratings determined by our Risk Management. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.

Contingent Features

Certain of our derivative instruments contain provisions that require our debt to maintain an investment grade credit rating from each of the major credit rating agencies. If our debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on our derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position at May 31, 2014 and November 30, 2013 is $47.3 million and $170.2 million, respectively, for which we have posted collateral of $42.4 million and $127.7 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on May 31, 2014 and November 30, 2013, we would have been required to post an additional $5.6 million and $49.4 million, respectively, of collateral to our counterparties.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7. Collateralized Transactions

We enter into secured borrowing and lending arrangements to obtain collateral necessary to effect settlement, finance inventory positions, meet customer needs or re-lend as part of our dealer operations. We monitor the fair value of the securities loaned and borrowed on a daily basis as compared with the related payable or receivable, and request additional collateral or return excess collateral, as appropriate. We pledge financial instruments as collateral under repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. Our agreements with counterparties generally contain contractual provisions allowing the counterparty the right to sell or repledge the collateral. Pledged securities owned that can be sold or repledged by the counterparty are included within Financial instruments owned and noted parenthetically as Securities pledged on our Consolidated Statements of Financial Condition.

We receive securities as collateral under resale agreements, securities borrowing transactions and customer margin loans. We also receive securities as collateral in connection with securities-for-securities transactions in which we are the lender of securities. In many instances, we are permitted by contract or custom to rehypothecate the securities received as collateral. These securities may be used to secure repurchase agreements, enter into securities lending transactions, satisfy margin requirements on derivative transactions or cover short positions. At May 31, 2014 and November 30, 2013, the approximate fair value of securities received as collateral by us that may be sold or repledged was $22.5 billion and $21.9 billion, respectively.

At May 31, 2014 and November 30, 2013, a substantial portion of the securities received by us had been sold or repledged.

In instances where we receive securities as collateral in connection with securities-for-securities transactions in which we are the lender of securities and are permitted to sell or repledge the securities received as collateral, we report the fair value of the collateral received and the related obligation to return the collateral in the Consolidated Statements of Financial Condition. At May 31, 2014 and November 30, 2013, $126.1 million and $11.1 million, respectively, were reported as Securities received as collateral and as Obligation to return securities received as collateral.

Offsetting of Securities Financing Agreements

To manage our exposure to credit risk associated with securities financing transactions, we may enter into master netting agreements and collateral arrangements with counterparties. Generally, transactions are executed under standard industry agreements, including, but not limited to, master securities lending agreements (securities lending transactions) and master repurchase agreements (repurchase transactions). A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. In addition, we enter into customized bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. Master netting agreements are a critical component of our risk management processes as part of reducing counterparty credit risk and managing liquidity risk.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables provide information regarding repurchase agreements and securities borrowing and lending arrangements that are recognized in the Consolidated Statements of Financial Condition and 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and 2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our financial position. See Note 6, Derivative Financial Instruments, for information related to offsetting of derivatives.


	May 31, 2014
			Netting in			Net Amounts in
			Consolidated			Consolidated		Additional
			Statement of			Statement of		Amounts
	Gross		Financial			Financial		Available for			Available
(in thousands)	Amounts		Condition			Condition		Setoff (1)			Collateral (2)			Net Amount (3)
Assets
Securities borrowing arrangements	$	6,097,098	$	—		$	6,097,098	$	(807,137	)	$	(877,639	)	$	4,412,322
Reverse repurchase agreements	$	11,402,865	$	(6,793,443	)	$	4,609,422	$	(230,295	)	$	(4,355,647	)	$	23,480
Liabilities
Securities lending arrangements	$	2,901,159	$	—		$	2,901,159	$	(807,137	)	$	(2,063,606	)	$	30,416
Repurchase agreements	$	18,461,573	$	(6,793,443	)	$	11,668,130	$	(230,295	)	$	(10,996,643	)	$	441,192

(1)

Under master netting agreements with our counterparties, we have the legal right of offset with a counterparty, which incorporates all of the counterparty’s outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty’s default, but which are not netted in the balance sheet because other netting provisions of U.S. GAAP are not met.

(2)

Includes securities received or paid under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty’s rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.

(3)

Amounts include $4,358.7 million of securities borrowing arrangements, for which we have received securities collateral of $4,242.4 million, and $431.0 million of repurchase agreements, for which we have pledged securities collateral of $448.4 million, which are subject to master netting agreements but we have not yet determined the agreements to be legally enforceable.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	November 30, 2013
			Netting in			Net Amounts in
			Consolidated			Consolidated		Additional
			Statement of			Statement of		Amounts
	Gross		Financial			Financial		Available for			Available
(in thousands)	Amounts		Condition			Condition		Setoff (1)			Collateral (2)			Net Amount (3)
Assets
Securities borrowing arrangements	$	5,359,846	$	—		$	5,359,846	$	(530,293	)	$	(957,140	)	$	3,872,413
Reverse repurchase agreements	$	12,715,449	$	(8,968,529	)	$	3,746,920	$	(590,754	)	$	(3,074,540	)	$	81,626
Liabilities
Securities lending arrangements	$	2,506,122	$	—		$	2,506,122	$	(530,293	)	$	(1,942,271	)	$	33,558
Repurchase agreements	$	19,748,374	$	(8,968,529	)	$	10,779,845	$	(590,754	)	$	(8,748,641	)	$	1,440,450

(1)

(2)

(3)

Amounts include $3,818.4 million of securities borrowing arrangements, for which we have received securities collateral of $3,721.8 million, and $1,410.0 million of repurchase agreements, for which we have pledged securities collateral of $1,438.9 million, which are subject to master netting agreements but we have not yet determined the agreements to be legally enforceable.

Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited with Clearing and Depository Organizations

Cash and securities deposited with clearing and depository organizations and segregated in accordance with regulatory regulations totaled $3,288.5 million and $3,616.6 million at May 31, 2014 and November 30, 2013, respectively. Segregated cash and securities consist of deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Jefferies as a broker-dealer carrying customer accounts to requirements related to maintaining cash or qualified securities in segregated special reserve bank accounts for the exclusive benefit of its customers, and with the Commodity Exchange Act, which subjects Jefferies Bache, LLC as a futures commission merchant to segregation requirements.

Note 8. Securitization Activities

We engage in securitization activities related to corporate loans, commercial mortgage loans and mortgage-backed and other asset-backed securities. In our securitization transactions, we transfer these assets to special purpose entities (“SPEs”) and act as the placement or structuring agent for the beneficial interests sold to investors by the SPE. A significant portion of our securitization transactions are securitization of assets issued or guaranteed by U.S. government agencies. These SPEs generally meet the criteria of variable interest entities; however we generally do not consolidate the SPEs as we are not considered the primary beneficiary for these SPEs. See Note 9, Variable Interest Entities for further discussion on variable interest entities and our determination of the primary beneficiary.

We account for our securitization transactions as sales provided we have relinquished control over the transferred assets. Transferred assets are carried at fair value with unrealized gains and losses reflected in Principal transactions revenues in the Consolidated Statement of Earnings prior to the identification and isolation for securitization. Revenues subsequent to such identification and isolation, including revenues recognized from the sales of the beneficial interests to investors, are reflected as net underwriting revenues. If we have not relinquished control over the transferred assets, the assets continue to be recognized in Financial instruments owned and a corresponding

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

secured borrowing is recognized in Other secured financings. The carrying value of assets and liabilities resulting from transfers made as part of our securitization activities for which we have not relinquished control over the related assets was $20.3 million and $20.3 million, respectively, at May 31, 2014 and $8.7 million and $8.7 million, respectively, at November 30, 2013. The related liabilities do not have recourse to our general credit.

We generally receive cash proceeds in connection with the transfer of assets to an SPE. We may, however, have continuing involvement with the transferred assets, which is limited to retaining one or more tranches of the securitization (primarily senior and subordinated debt securities), which are included within Financial instruments owned. We apply fair value accounting to the securities.

The following table presents activity related to our securitizations that were accounted for as sales in which we had continuing involvement (in millions):


	Successor						Predecessor
	Three Months Ended May 31, 2014		Six Months Ended May 31, 2014		Three Months Ended May 31, 2013		Three Months Ended February 28, 2013
Transferred assets	$	1,599.7	$	3,226.6	$	2,184.0	$	2,735.2
Proceeds on new securitizations		1,600.1		3,228.2		2,190.9		2,751.3
Net revenues		0.9		1.6		4.8		12.9
Cash flows received on retained interests	$	20.4	$	28.9	$	11.1	$	32.3

Assets received as proceeds in the form of mortgage-backed-securities or collateralized loan obligations issued by the SPEs have been initially categorized as Level 2 within the fair value hierarchy. For further information on fair value measurements and the fair value hierarchy, refer to Note 2, Summary of Significant Accounting Policies and Note 5, Fair Value Disclosures. We have no explicit or implicit arrangements to provide additional financial support to these SPEs and have no liabilities related to these SPEs at May 31, 2014 and November 30, 2013. Although not obligated, in connection with secondary market-making activities we may make a market in the securities issued by these SPEs. In these market-making transactions, we buy these securities from and sell these securities to investors. Securities purchased through these market-making activities are not considered to be continuing involvement in these SPEs, although the securities are included in Financial instruments owned – Mortgage- and asset-backed securities. To the extent the securities purchased through these market-marking activities meet specific thresholds and we are not deemed to be the primary beneficiary of the variable interest entity, these securities are included in agency and non-agency mortgage- and asset-backed securitizations in the nonconsolidated variable interest entities table presented in Note 9, Variable Interest Entities.

The following tables summarize our retained interests in SPEs where we transferred assets and have continuing involvement and received sale accounting treatment (in millions):


	May 31, 2014
Securitization Type	Total Assets		Retained Interests
U.S. government agency residential mortgage-backed securities	$	11,466.7	$	254.3
U.S. government agency commercial mortgage-backed securities		3,655.2		100.2
Collateralized loan obligations		728.5		8.6

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	November 30, 2013
Securitization Type	Total Assets		Retained Interests
U.S. government agency residential mortgage-backed securities	$	11,518.4	$	281.3
U.S. government agency commercial mortgage-backed securities		5,385.6		96.8
Collateralized loan obligations		728.5		9.0

We do not have any outstanding derivative contracts executed in connection with these securitization activities. Total assets represent the unpaid principal amount of assets in the SPEs in which we have continuing involvement and are presented solely to provide information regarding the size of the transaction and the size of the underlying assets supporting our retained interests, and are not considered representative of the risk of potential loss. Assets retained in connection with a securitization transaction represent the fair value of the securities of one or more tranches issued by an SPE, including senior and subordinated tranches. Our risk of loss is limited to this fair value amount which is included within total Financial instruments owned—Mortgage- and asset-backed securities on our Consolidated Statements of Financial Condition.

Note 9. Variable Interest Entities

Variable interest entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.

We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires significant judgment. In determining whether we are the party with the power to direct the VIE’s most significant activities, we first identify the activities of the VIE that most significantly impact its economic performance. Our considerations in determining the VIE’s most significant activities primarily include, but are not limited to, the VIE’s purpose and design and the risks passed through to investors. We then assess whether we have the power to direct those significant activities. Our considerations in determining whether we have the power to direct the VIE’s most significant activities include, but are not limited to, voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees. In situations where we have determined that the power over the VIE’s most significant activities is shared, we assess whether we are the party with the power over the majority of the significant activities. If we are the party with the power over the majority of the significant activities, we meet the “power” criteria of the primary beneficiary. If we do not have the power over a majority of the significant activities or we determine that decisions require consent of each sharing party, we do not meet the “power” criteria of the primary beneficiary.

We assess our variable interests in a VIE both individually and in aggregate to determine whether we have an obligation to absorb losses of or a right to receive benefits from the VIE that could potentially be significant to the VIE. The determination of whether our variable interest is significant to the VIE requires significant judgment. In determining the significance of our variable interest, we consider the terms, characteristics and size of the variable interests, the design and characteristics of the VIE, our involvement in the VIE and our market-making activities related to the variable interests. Our variable interests in VIEs include debt and equity interests, commitments and certain fees. Our involvement with VIEs arises primarily from:

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Purchases of mortgage-backed securities and collateralized debt and loan obligations in connection with our trading and secondary market making activities,

•

Retained interests held as a result of securitization activities as part of primary market making activities, including the resecuritizations of mortgage-backed securities and the securitization of corporate loans,

•

Financing of agency and non-agency mortgage- and other asset-backed securities through financing vehicles utilizing master repurchase agreements, participation certificates and revolving loan commitments,

•

Management and performance fees in the Jefferies Umbrella Fund, and

•

Loans to and investments in investment fund vehicles.

Consolidated VIEs

The following table presents information about the assets and liabilities of our consolidated VIEs, which are presented within our Consolidated Statements of Financial Condition in the respective asset and liability categories, as of May 31, 2014 and November 30, 2013. The assets and liabilities in the tables below are presented prior to consolidation and thus a portion of these assets and liabilities are eliminated in consolidation. We have aggregated our consolidated VIEs based upon principal business activity.


	May 31, 2014				November 30, 2013
(in millions)	Securitization Vehicles		Other		Securitization Vehicles		Other
Cash	$	—	$	0.2	$	—	$	0.2
Financial instruments owned		—		0.4		97.5		0.4
Securities purchased under agreement to resell (1)		220.0		—		195.1		—
Other assets		—		—		2.3		—

	$	220.0	$	0.6	$	294.9	$	0.6

Other secured financings (2)	$	220.0	$	—	$	292.5	$	—
Other liabilities		—		0.2		2.1		0.2

	$	220.0	$	0.2	$	294.6	$	0.2

(1)	Securities purchased under agreement to resell represent an amount due under a collateralized transaction on a related consolidated entity, which is eliminated in consolidation.

(2)	Approximately $66.5 million of the secured financing represents an amount held by us in inventory and is eliminated in consolidation at November 30, 2013.

Securitization Vehicles. We are the primary beneficiary of mortgage-backed financing vehicles to which we sell agency and non-agency residential and commercial mortgage-backed securities pursuant to the terms of a master repurchase agreement. We manage the assets within these vehicles. Our variable interests in these vehicles consist of our collateral margin maintenance obligations under the master repurchase agreement. The assets of these VIEs consist of reverse repurchase agreements, which are available for the benefit of the vehicle’s debt holders. The creditors of these VIEs do not have recourse to our general credit.

At November 30, 2013, we were the primary beneficiary of a securitization vehicle to which we transferred a corporate loan and retained a portion of the securities issued by the securitization vehicle. Our variable interests in this vehicle consists of the securities retained. The assets of the VIE consist of a corporate loan, which is available for the benefit of the vehicle’s beneficial interest holders. During the second quarter of 2014, the loan was repaid, the securities issued by the securitization vehicle were redeemed and the securitization vehicle was terminated. As a result, the securitization vehicle is no longer consolidated by us at May 31, 2014 and no gain or loss was recognized upon deconsolidation.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other. We are the primary beneficiary of certain investment vehicles set up for the benefit of our employees. We manage and invest alongside our employees in these vehicles. The assets of these VIEs consist of private equity securities, and are available for the benefit of the entities’ equity holders. Our variable interests in these vehicles consist of equity securities. The creditors of these VIEs do not have recourse to our general credit.

Nonconsolidated VIEs

We also hold variable interests in VIEs in which we are not the primary beneficiary and do not have the power to direct the activities that most significantly impact their economic performance and, accordingly, do not consolidate. We have not provided financial or other support to these VIEs during the three and six months ended May 31, 2014 and three months ended May 31, 2013, and the three months ended February 28, 2013. We have no explicit or implicit arrangements to provide additional financial support to these VIEs at May 31, 2014 and November 30, 2013.

The following tables present information about nonconsolidated VIEs in which we had variable interests aggregated by principal business activity. The tables include VIEs where we have determined that the maximum exposure to loss is greater than specific thresholds or meets certain other criteria.


	May 31, 2014
	Carrying Amount				Maximum
(in millions)	Assets		Liabilities		Exposure to loss			VIE Assets
Collateralized loan obligations (1)	$	174.1	$	0.3	$	678.2		$	3,564.6
Agency mortgage- and asset-backed securitizations (2) (3)		859.4		—		859.4	(5)		13,570.6
Non-agency mortgage- and asset-backed securitizations (2) (3)		956.3		—		956.3	(5)		217,889.8
Asset management vehicle (4)		3.6		—		3.6	(5)		394.6
Private equity vehicles (4)		45.2		—		61.4			94.8

Total	$	2,038.6	$	0.3	$	2,558.9		$	235,514.4

(1)

Assets consist of debt securities and participation interests in corporate loans accounted for at fair value, which are included within Financial instruments owned. Liabilities consist of forward sale agreements and a guarantee provided to a CLO managed by Jefferies Finance, which are accounted for at fair value and included within Financial instruments sold, not yet purchased.

(2)	VIE assets represent the unpaid principal balance of the assets in these vehicles at May 31, 2014, and represent the underlying assets that provide the cash flows supporting our variable interests.

(3)	Assets consist of debt securities accounted for at fair value, which are included within Financial instruments owned.

(4)	Assets consist of equity interests, which are included within Investments in managed funds.

(5)	Our maximum exposure to loss in these non-consolidated VIEs is limited to our investment, which is represented by the financial statement carrying amount of our purchased or retained interests.


	November 30, 2013
	Carrying Amount				Maximum
(in millions)	Assets		Liabilities		Exposure to loss			VIE Assets
Collateralized loan obligations (1)	$	11.9	$	0.2	$	88.8		$	1,122.3
Agency mortgage- and asset-backed securitizations (2) (3)		1,226.0		—		1,226.0	(5)		5,857.3
Non-agency mortgage- and asset-backed securitizations (2) (3)		840.1		—		840.1	(5)		78,070.8
Asset management vehicle (4)		3.5		—		3.5	(5)		454.2
Private equity vehicles (4)		40.8		—		68.8			89.4

Total	$	2,122.3	$	0.2	$	2,227.2		$	85,594.0

(1)	Assets consist of debt securities accounted for at fair value, which are included within Financial instruments owned. Liabilities consist of forward sale agreements accounted for at fair value, which are included within Financial instruments sold, not yet purchased.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2)	VIE assets represent the unpaid principal balance of the assets in these vehicles at November 30, 2013 and represent the underlying assets that provide the cash flows supporting our variable interests.

(3)	Assets consist of debt securities accounted for at fair value, which are included within Financial instruments owned.

(4)	Assets consist of equity interests, which are included within Investments in managed funds.

(5)	Our maximum exposure to loss in these non-consolidated VIEs is limited to our investment, which is represented by the financial statement carrying amount of our purchased or retained interests.

Collateralized Loan Obligations. We act as transferor and underwriter in collateralized loan obligation (“CLOs”) transactions and retain securities representing variable interests in the CLOs. Assets collateralizing the CLOs include bank loans, participation interests and sub-investment grade and senior secured U.S. loans. We also enter into forward sale agreements and master participation agreements with CLOs. Under forward sale agreements, we commit to sell, at a fixed price, corporate loans and ownership interests in an entity holding such corporate loans to a CLO. Under master participation agreements, we purchase participation interests in corporate loans held by a CLO.

In addition, we own variable interests in CLOs previously managed by us. Our variable interests consist of debt securities and a right to a portion of the CLOs’ management and incentive fees. Our exposure to loss from these CLOs is limited to our investments in the debt securities held. Management and incentives fees are accrued as the amounts become realizable. These CLOs represent interests in assets consisting primarily of senior secured loans, unsecured loans and high yield bonds. We also have provided a guarantee to a CLO managed by Jefferies Finance, whereby we guarantee certain of the obligations of Jefferies Finance to the CLO.

Mortgage- and Asset-Backed Vehicles. In connection with our trading and market making activities, we buy and sell mortgage- and asset-backed securities. Mortgage- and asset-backed securities issued by securitization entities are generally considered variable interests in VIEs. A substantial portion of our variable interests in mortgage- and asset-backed VIEs are sponsored by unrelated third parties. The variable interests consist entirely of mortgage- and asset-backed securities and are accounted for at fair value and included in Financial instruments owned on our Consolidated Statements of Financial Condition. In addition to the agency mortgage- and asset-backed securities, non-agency mortgage- and asset-backed securities and collateralized loan obligations presented in the above table, we owned additional securities issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional securities were acquired in connection with our secondary market making activities and our securitization activities.

Asset Management Vehicle. We manage the Jefferies Umbrella Fund, an “umbrella structure” company that invests primarily in convertible bonds and enables investors to choose between one or more investment objectives by investing in one or more sub-funds within the same structure. Accounting changes to consolidation standards under generally accepted accounting principles have been deferred for entities that are considered to be investment companies; accordingly, consolidation continues to be determined under a risk and reward model. The Jefferies Umbrella Fund is subject to the deferral guidance and we are not the primary beneficiary as of May 31, 2014 and November 30, 2013 under the risk and reward model. Our variable interests in the Jefferies Umbrella Fund consist of equity interests, management fees and performance fees.

Private Equity Vehicles. On July 26, 2010, we committed to invest equity of up to $75.0 million in Jefferies SBI USA Fund L.P. (the “SBI USA Fund”). As of May 31, 2014 and November 30, 2013, we funded approximately $58.8 million and $47.0 million, respectively, of our commitment. The carrying amount of our equity investment was $43.9 million and $39.2 million at May 31, 2014 and November 30, 2013, respectively. Our exposure to loss is limited to our equity commitment. The SBI USA Fund has assets consisting primarily of private equity and equity related investments.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We have a variable interest in Jefferies Employees Partners IV, LLC (“JEP IV”) consisting of an equity investment. The carrying amount of our equity investment was $1.3 million and $1.6 million at May 31, 2014 and November 30, 2013, respectively. Our exposure to loss is limited to our equity investment. JEP IV has assets consisting primarily of private equity and equity related investments.

Note 10. Investments

We have investments in Jefferies Finance, LLC (“Jefferies Finance”), Jefferies LoanCore LLC (“Jefferies LoanCore”) and KCG Holdings, Inc. (“Knight”). Our investment in Knight is accounted for at fair value by electing the fair value option available under U.S. GAAP and is included in Financial instruments owned, at fair value – Corporate equity securities on the Consolidated Statements of Financial Condition with changes in fair value recognized in Principal transaction revenues on the Consolidated Statements of Earnings. Our investments in Jefferies Finance and Jefferies LoanCore are accounted for under the equity method and are included in Loans to and investments in related parties on the Consolidated Statements of Financial Condition with our share of the investees’ earnings recognized in Other revenues in the Consolidated Statements of Earnings.

Jefferies Finance

On October 7, 2004, we entered into an agreement with Babson Capital Management LLC (“Babson Capital”) and Massachusetts Mutual Life Insurance Company (“MassMutual”) to form Jefferies Finance, a joint venture entity. Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt to middle market and growth companies in the form of term and revolving loans. Loans are originated primarily through the investment banking efforts of Jefferies, with Babson Capital providing primary credit analytics and portfolio management services. Jefferies Finance can also originate other debt products such as second lien term, bridge and mezzanine loans, as well as related equity co-investments. Jefferies Finance also purchases syndicated loans in the secondary market, including loans that are performing, stressed and distressed loan obligations.

As of May 31, 2014, we and MassMutual each have equity commitments to Jefferies Finance of $600.0 million for a combined total commitment of $1.2 billion. As of May 31, 2014, we have funded $331.1 million of our $600.0 million commitment, leaving $268.9 million unfunded. The investment commitment is scheduled to expire on March 1, 2016 with automatic one year extensions absent a 60 day termination notice by either party.

Jefferies Finance has executed a Secured Revolving Credit Facility with us and MassMutual, to be funded equally, to support loan underwritings by Jefferies Finance. The Secured Revolving Credit Facility bears interest based on the interest rates of the related Jefferies Finance underwritten loans and is secured by the underlying loans funded by the proceeds of the facility. The total committed Secured Revolving Credit Facility is $700.0 million at May 31, 2014. The facility is scheduled to mature on March 1, 2016 with automatic one year extensions absent a 60 day termination notice by either party. At May 31, 2014 and November 30, 2013, we have funded $0.0 million and $123.8 million, respectively, of our $350.0 million commitment. During the three and six months ended May 31, 2014, $0.6 million and $1.1 million of interest income and $0.4 million and $1.1 million of unfunded commitment fees, respectively, are included in the Consolidated Statements of Earnings related to the Secured Revolving Credit Facility. During the three months ended May 31 and February 28, 2013, we earned interest income of $0.4 million and $4.1 million and unfunded commitment fees of $0.4 million and $0.3 million, respectively.

The following is a summary of selected financial information for Jefferies Finance (in millions):


	May 31,		November 30,
	2014		2013
Total assets	$	4,226.6	$	3,271.9
Total liabilities		3,564.4		2,597.0
Total equity		662.2		674.9
Our total equity balance		331.1		337.3

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The net earnings of Jefferies Finance were $29.3 million and $58.5 million for the three and six months ended May 31, 2014, respectively, and $20.3 million and $36.7 million for the three months ended May 31 and February 28, 2013, respectively.

We engage in debt capital markets transactions with Jefferies Finance related to the originations of loans by Jefferies Finance. In connection with such transactions, we earned net underwriting fees of $38.8 million and $86.4 million during the three and six months ended May 31, 2014, respectively, and $35.2 million and $39.9 million during the three months ended May 31 and February 28, 2013, respectively, recognized in Investment banking revenues on the Consolidated Statements of Earnings. In addition, we paid fees to Jefferies Finance regarding certain loans originated by Jefferies Finance of $3.4 million and $7.7 million during the three and six months ended May 31, 2014, respectively, and $6.2 million and $0.8 million during the three months ended May 31 and February 28, 2013, respectively, which are recognized as Business development expenses on the Consolidated Statements of Earnings. Under a service agreement, we charged Jefferies Finance $7.0 million and $28.7 million for services provided during the three and six months ended May 31, 2014, respectively, and $5.4 million and $15.7 million for the three months ended May 31 and February 28, 2013, respectively. Receivables from Jefferies Finance, included within Other assets on the Consolidated Statements of Financial Condition, were $14.2 million and $31.1 million at May 31, 2014 and November 30, 2013, respectively.

Jefferies LoanCore

On February 23, 2011, we entered into a joint venture agreement with the Government of Singapore Investment Corporation and LoanCore, LLC and formed Jefferies LoanCore, a commercial real estate finance company. Jefferies LoanCore originates and purchases commercial real estate loans throughout the United States with the support of the investment banking and securitization capabilities of Jefferies and the real estate and mortgage investment expertise of the Government of Singapore Investment Corporation and LoanCore, LLC. Jefferies LoanCore has aggregate equity commitments of $600.0 million. As of May 31, 2014 and November 30, 2013, we have funded $108.1 million and $175.5 million, respectively, of our $291.0 million equity commitment and have a 48.5% voting interest in Jefferies LoanCore.

The following is a summary of selected financial information for Jefferies LoanCore (in millions):


	May 31,		November 30,
	2014		2013
Total assets	$	899.0	$	974.9
Total liabilities		568.4		507.9
Total equity		330.6		467.0
Our total equity balance		160.3		226.5

The net earnings of Jefferies LoanCore were $6.8 million and $11.8 million for the three and six months ended May 31, 2014, respectively, and $41.7 million and $7.3 million for the three months ended May 31 and February 28, 2013, respectively.

Under a service agreement, we charged Jefferies LoanCore $16,000 and $0.1 million for the three and six months ended May 31, 2014, respectively, and $0.1 million and $0.6 million for the three months ended May 31 and February 28, 2013, respectively. Receivables from Jefferies LoanCore, included within Other assets on the Consolidated Statements of Financial Condition, were $4,900 and $230,000 at May 31, 2014 and November 30, 2013, respectively.

In connection with the securitization of commercial real estate loans originated by Jefferies LoanCore, we earned placement fees of $0.3 million and $0.6 million, respectively, during the three and six months ended May 31, 2014.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Knight Capital

On August 6, 2012, we entered into a Securities Purchase Agreement with Knight Capital Group, Inc., a publicly-traded global financial services firm, (“the Agreement”). Under the Agreement, we purchased preferred stock, which contained certain conversion options, in exchange for cash consideration of $125.0 million. On August 29, 2012, we exercised our conversion options and converted our holding of Series A Securities to common stock. On July 1, 2013, Knight Capital Group, Inc. merged with GETCO Holding Company, LLC (the merged company referred to as “KCG Holdings, Inc.”). In connection with the consummation of the merger, we received cash consideration of $3.75 per share, or approximately $192.0 million, with respect to approximately 63% of our holdings in Knight Capital Group, Inc. and stock consideration of one third of a share of KCG Holdings, Inc. common stock for each share of Knight Capital Group Inc. common stock for the remainder of our holdings. As of May 31, 2014, we owned approximately 18.0% of the outstanding common stock of Knight.

We elected to record our investment in Knight at fair value under the fair value option as the investment was acquired as part of our capital markets activities. The valuation of our investment at May 31, 2014 is based on the closing exchange price of Knight’s common stock and included within Level 1 of the fair value hierarchy. Changes in the fair value of our investment of $7.6 million and $6.6 million for three and six months ended May 31, 2014, respectively, and $(5.7) million and $26.5 million for the three months ended May 31 and February 28, 2013, respectively, are recognized in Revenues—Principal transactions on the Consolidated Statement of Earnings.

The following is a summary of selected financial information for Knight as of March 31, 2014, the most recently available public financial information for the company (in millions):


		March 31, 2014