Edgar Filing: Jefferies Group LLC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended February 28, 2019



☐	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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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



Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒

The Registrant is a wholly-owned subsidiary of Jefferies Financial Group Inc. 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).

Table of Contents

JEFFERIES GROUP LLC

INDEX TO QUARTERLY REPORT ON FORM 10-Q

February 28, 2019



PART I. FINANCIAL INFORMATION
	Page
Item 1. Financial Statements	2
Consolidated Statements of Financial Condition (Unaudited)	2
Consolidated Statements of Earnings (Unaudited)	3
Consolidated Statements of Comprehensive Income (Unaudited)	4
Consolidated Statements of Changes in Equity (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
Item 3. Quantitative and Qualitative Disclosures About Market Risk	86
Item 4. Controls and Procedures	86

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	87
Item 1A. Risk Factors	87
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 6. Exhibits	87

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(In thousands)



	February 28, 2019			November 30, 2018
ASSETS
Cash and cash equivalents ($1,101 and $1,096 at February 28, 2019 and November 30, 2018, respectively, related to consolidated VIEs)	$	4,131,932		$	5,145,886
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	763,213			707,960
Financial instruments owned, at fair value (including securities pledged of $14,322,307 and $13,059,802 at February 28, 2019 and November 30, 2018, respectively; and $323,854 and $380 at February 28, 2019 and November 30, 2018, respectively, related to consolidated VIEs)	16,899,559			16,399,526
Loans to and investments in related parties	924,975			997,524
Securities borrowed	7,231,073			6,538,212
Securities purchased under agreements to resell	3,496,570			2,785,758
Receivables:
Brokers, dealers and clearing organizations	4,529,641			3,218,984
Customers	1,597,046			2,017,090
Fees, interest and other	347,185			327,083
Premises and equipment	307,604			304,026
Goodwill	1,645,435			1,642,170
Other assets ($2 at both February 28, 2019 and November 30, 2018, related to consolidated VIEs)	1,259,515			1,084,554
Total assets	$	43,133,748		$	41,168,773
LIABILITIES AND EQUITY
Short-term borrowings	$	530,484		$	387,492
Financial instruments sold, not yet purchased, at fair value	10,277,724			9,478,944
Collateralized financings:
Securities loaned	2,234,700			1,838,688
Securities sold under agreements to repurchase	9,307,283			8,643,069
Other secured financings (includes $932,544 and $881,472 at February 28, 2019 and November 30, 2018, respectively, related to consolidated VIEs)	933,169			881,472
Payables:
Brokers, dealers and clearing organizations	2,767,623			2,448,059
Customers	3,389,623			3,176,727
Accrued expenses and other liabilities ($583 and $642 at February 28, 2019 and November 30, 2018, respectively, related to consolidated VIEs)	954,941			1,585,635
Long-term debt (includes $750,978 and $686,170 at fair value at February 28, 2019 and November 30, 2018, respectively)	6,581,019			6,546,283
Total liabilities	36,976,566			34,986,369
EQUITY
Member’s paid-in capital	6,299,653			6,376,662
Accumulated other comprehensive loss:
Currency translation adjustments	(155,766		)	(185,804		)
Changes in instrument specific credit risk	12,101			(5,728		)
Cash flow hedges	219			470
Additional minimum pension liability	(4,739		)	(4,761		)
Available-for-sale securities	(200		)	(346		)
Total accumulated other comprehensive loss	(148,385		)	(196,169		)
Total Jefferies Group LLC member’s equity	6,151,268			6,180,493
Noncontrolling interests	5,914			1,911
Total equity	6,157,182			6,182,404
Total liabilities and equity	$	43,133,748		$	41,168,773

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(In thousands)



	Three Months Ended February 28,
	2019		2018
Revenues:
Commissions and other fees	$	147,326	$	147,902
Principal transactions	234,298		217,473
Investment banking	285,596		439,991
Asset management fees	6,669		4,930
Interest	360,975		257,816
Other	20,008		18,483
Total revenues	1,054,872		1,086,595
Interest expense	369,154		265,349
Net revenues	685,718		821,246
Non-interest expenses:
Compensation and benefits	371,685		455,633
Non-compensation expenses:
Floor brokerage and clearing fees	51,977		43,819
Technology and communications	79,170		69,077
Occupancy and equipment rental	28,539		24,591
Business development	30,555		42,107
Professional services	36,927		30,408
Underwriting costs	8,575		14,275
Other	15,705		18,598
Total non-compensation expenses	251,448		242,875
Total non-interest expenses	623,133		698,508
Earnings before income taxes	62,585		122,738
Income tax expense	16,220		183,557
Net earnings (loss)	46,365		(60,819		)
Net earnings (loss) attributable to noncontrolling interests	384		(1		)
Net earnings (loss) attributable to Jefferies Group LLC	$	45,981	$	(60,818	)

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)



	Three Months Ended February 28,
	2019			2018
Net earnings (loss)	$	46,365		$	(60,819	)
Other comprehensive income (loss), net of tax:
Currency translation and other adjustments (1)	30,060			16,019
Changes in instrument specific credit risk (2)	17,829			(18,113		)
Cash flow hedges (3)	(251		)	1,046
Unrealized gain on available-for-sale securities (4)	146			—
Total other comprehensive income (loss), net of tax (5)	47,784			(1,048		)
Comprehensive income (loss)	94,149			(61,867		)
Net earnings (loss) attributable to noncontrolling interests	384			(1		)
Comprehensive income (loss) attributable to Jefferies Group LLC	$	93,765		$	(61,866	)

(1)

The amount during the three months ended February 28, 2019 includes $7.4 million related to the impact of certain discrete items related to tax planning for our non-U.S. subsidiaries in connection with the Tax Cuts and Jobs Act (the “Tax Act”). The amount during the three months ended February 28, 2018 include $5.3 million related to the transfer of the German Pension Plan, which was reclassified to Compensation and benefits expenses within the Consolidated Statements of Earnings and ($0.8) million related to the Tax Act, which was reclassified to Member’s paid-in capital.

(2)

The amounts include income tax expense of approximately $6.0 million and $1.9 million for the three months ended February 28, 2019 and 2018, respectively. The amount during the three months ended February 28, 2019 includes a gain of $0.3 million, net of taxes of $0.1 million, related to changes in instrument specific risk, which was reclassified to Principal transactions revenues within the Consolidated Statements of Earnings. The amount during the three months ended February 28, 2018 includes ($6.5) million related to the Tax Act, which was reclassified to Member’s paid-in capital. Refer to Note 3, Accounting Developments for further information.


(3)	The amount during the three months ended February 28, 2019 includes income tax benefit of approximately $0.1 million. The amount during the three months ended February 28, 2018 includes income tax expense of $1.0 million and ($0.2) million related to the Tax Act, which was reclassified to Member’s paid-in capital.


(4)	The amount includes income tax expense of approximately $0.1 million.


(5)	None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(In thousands)



	Three Months Ended February 28,
	2019			2018
Member’s paid-in capital:
Balance, beginning of period	$	6,376,662		$	5,895,601
Cumulative effect of the adoption of the new revenue standard, net of tax	—			(6,121		)
Net earnings (loss) attributable to Jefferies Group LLC	45,981			(60,818		)
Distribution to Jefferies Financial Group Inc.	(122,990		)	(200,000		)
Tax Cuts and Jobs Act adjustment	—			7,150
Balance, end of period	$	6,299,653		$	5,635,812
Accumulated other comprehensive income (loss), net of tax:
Balance, beginning of period	$	(196,169	)	$	(136,779	)
Currency adjustments and other	30,060			16,019
Changes in instrument specific credit risk	17,829			(18,113		)
Cash flow hedges	(251		)	1,046
Unrealized gain on available-for-sale securities	146			—
Balance, end of period	$	(148,385	)	$	(137,827	)
Total Jefferies Group LLC member’s equity	$	6,151,268		$	5,497,985
Noncontrolling interests:
Balance, beginning of period	$	1,911		$	737
Net earnings (loss) attributable to noncontrolling interests	384			(1		)
Contributions	4,600			—
Distributions	(981		)	—
Balance, end of period	$	5,914		$	736
Total equity	$	6,157,182		$	5,498,721

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



	Three Months Ended February 28,
	2019			2018
Cash flows from operating activities:
Net earnings (loss)	$	46,365		$	(60,819	)
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation and amortization	5,367			1,843
Income on loans to and investments in related parties	(11,337		)	(5,605		)
Distributions received on investments in related parties	94,041			—
Other adjustments	28,745			(38,250		)
Net change in assets and liabilities:
Securities deposited with clearing and depository organizations	12			64,861
Receivables:
Brokers, dealers and clearing organizations	(1,285,635		)	(1,314,557		)
Customers	420,048			(33,216		)
Fees, interest and other	(18,352		)	71,275
Securities borrowed	(674,484		)	427,310
Financial instruments owned	(395,921		)	(1,102,846		)
Securities purchased under agreements to resell	(660,842		)	716,157
Other assets	(178,830		)	50,756
Payables:
Brokers, dealers and clearing organizations	301,741			814,852
Customers	212,895			222,603
Securities loaned	378,261			(476,725		)
Financial instruments sold, not yet purchased	704,478			1,442,571
Securities sold under agreements to repurchase	632,686			(418,052		)
Accrued expenses and other liabilities	(650,084		)	(679,748		)
Net cash used in operating activities	(1,050,846		)	(317,590		)
Cash flows from investing activities:
Contributions to loans to and investments in related parties	(10,370		)	(1,778,386		)
Distributions from loans to and investments in related parties	—			1,639,300
Net payments on premises and equipment	(19,606		)	(16,953		)
Net cash used in investing activities	(29,976		)	(156,039		)

Continued on next page.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (UNAUDITED)

(In thousands)



	Three Months Ended February 28,
	2019			2018
Cash flows from financing activities:
Proceeds from short-term borrowings	405,000			275,000
Payments on short-term borrowings	(254,000		)	(248,323		)
Proceeds from issuance of long-term debt, net of issuance costs	92,375			1,138,705
Repayment of long-term debt	(50,695		)	(334,978		)
Dividend distribution	(130,697		)	(200,000		)
Net proceeds from (payments on) other secured financings	51,697			(19,752		)
Net change in bank overdrafts	(8,360		)	2,360
Proceeds from contributions of noncontrolling interests	4,600			—
Payments on distributions to noncontrolling interests	(981		)	—
Net cash provided by financing activities	108,939			613,012
Effect of exchange rate changes on cash, cash equivalents and restricted cash	13,194			2,528
Net increase (decrease) in cash, cash equivalents and restricted cash	(958,689		)	141,911
Cash, cash equivalents and restricted cash at beginning of period	5,819,027			5,642,776
Cash, cash equivalents and restricted cash at end of period	$	4,860,338		$	5,784,687

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	391,674		$	314,921
Income taxes, net	37,168			(2,184		)

The following presents our cash, cash equivalents and restricted cash by category within the Consolidated Statements of Financial Condition (in thousands):



	February 28, 2019		November 30, 2018
Cash and cash equivalents	$	4,131,932	$	5,145,886
Cash and securities segregated and on deposit for regulatory purposes with clearing and depository organizations	728,406		673,141
Total cash, cash equivalents and restricted cash	$	4,860,338	$	5,819,027

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Index



Note	Page
Note 1. Organization and Basis of Presentation	9
Note 2. Summary of Significant Accounting Policies	10
Note 3. Accounting Developments	10
Note 4. Fair Value Disclosures	12
Note 5. Derivative Financial Instruments	26
Note 6. Collateralized Transactions	31
Note 7. Securitization Activities	34
Note 8. Variable Interest Entities	35
Note 9. Investments	39
Note 10. Goodwill and Intangible Assets	42
Note 11. Short-Term Borrowings	43
Note 12. Long-Term Debt	44
Note 13. Revenues from Contracts with Customers	45
Note 14. Compensation Plans	48
Note 15. Income Taxes	49
Note 16. Commitments, Contingencies and Guarantees	50
Note 17. Net Capital Requirements	51
Note 18. Segment Reporting	52
Note 19. Related Party Transactions	53

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Note 1. Organization and Basis of Presentation

Organization

Jefferies Group LLC is the largest independent U.S.-headquartered global full service, integrated securities and investment banking firm. The accompanying Consolidated Financial Statements represent the accounts of Jefferies Group LLC and all our subsidiaries (together “we” or “us”). The subsidiaries of Jefferies Group LLC include Jefferies LLC, Jefferies International Limited, Jefferies Hong Kong Limited, Jefferies Financial Services, Inc., Jefferies Funding LLC, Jefferies Leveraged Credit Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary.

Jefferies Group LLC is a direct wholly owned subsidiary of publicly traded Jefferies Financial Group Inc. (“Jefferies”). Jefferies does not guarantee any of our outstanding debt securities. Jefferies Group LLC is a Securities and Exchange Commission (“SEC”) reporting company, filing annual, quarterly and periodic financial reports. Richard Handler, our Chief Executive Officer and Chairman, is the Chief Executive Officer of Jefferies, as well as a Director of Jefferies. Brian P. Friedman, our Chairman of the Executive Committee, is Jefferies’ President and a Director of Jefferies.

In connection with the acquisition of Jefferies Bache from Prudential on July 1, 2011, we acquired a defined benefits pension plan located in Germany (the “German Pension Plan”) for the benefit of eligible employees of Jefferies Bache in that territory. On December 28, 2017, a Liquidation Insurance Contract was entered into between Jefferies Bache Limited and Generali Lebensversicherung AG (“Generali“) to transfer the defined benefit pension obligations and insurance contracts to Generali, for

approximately €6.5 million, which was paid in January 2018 and released us from any and all obligations under the German Pension Plan. This transaction was completed in the first quarter of 2018. In addition, on December 28, 2017, we entered into an agreement with Prudential under which we received $3.25 million as consideration for the release of Prudential by us from their indemnity relating to the German Pension Plan defined benefit pension obligations.

On October 1, 2018, Jefferies transferred its 50% interest in Berkadia Commercial Mortgage Holding LLC (“Berkadia”) and investments in certain separately managed accounts and funds to us. On November 1, 2018, we purchased Leucadia Investment Management Limited, an investment advisory company, from Leucadia Asset Management Holding LLC, a subsidiary of Jefferies. These transfers were accomplished as capital contributions from Jefferies of approximately $598.2 million and total cash payments of $76.0 million to Jefferies during the fourth quarter of 2018. In connection with these transfers, related deferred tax liabilities of approximately $50.9 million were transferred to us, for which Jefferies has indemnified us.

We operate in two reportable business segments, Capital Markets and Asset Management. For further information on our reportable business segments, refer to Note 18, Segment Reporting.

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 consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2018. Certain footnote disclosures included in our Annual Report on Form 10-K for the year ended November 30, 2018 have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results presented in the Consolidated Financial Statements for interim periods are not necessarily indicative of the results for the entire year.

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated 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 certain 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.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Consolidation

Our policy is to consolidate all entities that we control by ownership of a majority of the outstanding voting stock. In addition, we consolidate entities that meet the definition of a variable interest entity (“VIE”) for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE 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 our Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity. The portion of net earnings attributable to the noncontrolling interests is presented as Net earnings (loss) attributable to noncontrolling interests in our Consolidated Statements of Earnings.

In situations in which we have significant influence, but not control, of an entity that does not qualify as a VIE, 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 in Other revenues or Principal transactions 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.

Note 2. Summary of Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2018.

Note 3. Accounting Developments

Accounting Standards to be Adopted in Future Periods

Consolidation. In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance requires indirect interests held through related parties under common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective in the first quarter of fiscal 2021. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The guidance amends the definition of a hosting arrangement and requires that the customer in a hosting arrangement that is a service contract capitalize certain implementation costs as if the arrangement was an internal-use software project. The guidance is effective in the first quarter of fiscal 2021. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Defined Benefit Plans. In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. The guidance is effective in the first quarter of fiscal 2021. We do not believe the new guidance will have a material impact on our consolidated financial statements.

Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The objective of the guidance is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The guidance is effective in the first quarter of fiscal 2020. We do not believe the new guidance will have a material impact on our consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Goodwill. In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies goodwill impairment testing. The guidance is effective in the first quarter of fiscal 2021. We do not believe the new guidance will have a material impact on our consolidated financial statements.

Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance provides for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective in the first quarter of fiscal 2021. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The guidance affects the accounting for leases and provides for a lessee model that brings substantially all leases that are longer than one year onto the balance sheet, which will result in the recognition of a right of use asset and a corresponding lease liability. The right of use asset and lease liability will be measured initially using the present value of the remaining rental payments. A significant portion of the population of contracts that will be subject to recognition on our Consolidated Statements of Financial Condition have been identified; however, their initial measurement still remains under evaluation. We are currently modifying our lease accounting systems to enable us to comply with the accounting requirements of this guidance. In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements. The guidance allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings upon adoption of ASU 2016-02. We plan on adopting both lease ASUs in the first quarter of fiscal 2020 with a cumulative-effect adjustment to opening member’s equity in the period of adoption. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Note 4. 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, excluding Investments at fair value based on net asset value (“NAV”) of $557.8 million and $322.9 million at February 28, 2019 and November 30, 2018, respectively, by level within the fair value hierarchy (in thousands):



	February 28, 2019
	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)		Total
Assets:
Financial instruments owned:
Corporate equity securities	$	2,250,523	$	132,546	$	54,766	$	—	$	2,437,835
Corporate debt securities	—		2,574,258		10,930		—		2,585,188
Collateralized debt obligations and collateralized loan obligations	—		87,414		32,566		—		119,980
U.S. government and federal agency securities	1,726,076		92,128		—		—		1,818,204