Edgar Filing: Jefferies Group LLC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 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 February 28, 2013

¨	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

Former name, former address and former fiscal year, if changed since last report: Jefferies Group, Inc.

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

JEFFERIES GROUP LLC

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2013


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Financial Condition (Unaudited) - February 28, 2013 and November 30, 2012	2
	Consolidated Statements of Earnings (Unaudited) - Three Months Ended February 28, 2013 and February 29, 2012	5
	Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended February 28, 2013 and February 29, 2012	6
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Three Months Ended February 28, 2013 and Twelve Months Ended November 30, 2012	7
	Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended February 28, 2013 and February 29, 2012	8
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	69
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	111
Item 4.	Controls and Procedures	111

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	111
Item 1A.	Risk Factors	111
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	112
Item 6.	Exhibits	112

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(In thousands)


	February 28, 2013		November 30, 2012
ASSETS
Cash and cash equivalents	$	3,017,958	$	2,692,595
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		3,728,742		4,082,595
Financial instruments owned, at fair value, including securities pledged of $13,721,094 and $12,334,745 at February 28, 2013 and November 30, 2012, respectively:
Corporate equity securities		1,688,607		1,762,775
Corporate debt securities		3,371,464		3,038,146
Government, federal agency and other sovereign obligations		5,010,455		5,153,750
Mortgage- and asset-backed securities		4,939,327		5,468,284
Loans and other receivables		968,360		678,311
Derivatives		206,920		298,086
Investments, at fair value		71,103		127,023
Physical commodities		157,299		144,016

Total financial instruments owned, at fair value		16,413,535		16,670,391
Investments in managed funds		59,976		57,763
Loans to and investments in related parties		783,382		586,420
Securities borrowed		5,315,488		5,094,679
Securities purchased under agreements to resell		3,578,366		3,357,602
Securities received as collateral		25,338		—
Receivables:
Brokers, dealers and clearing organizations		2,444,085		1,424,027
Customers		1,045,251		916,284
Fees, interest and other		225,555		196,811
Premises and equipment		183,289		185,991
Goodwill		366,777		365,670
Other assets		615,484		662,713

Total assets	$	37,803,226	$	36,293,541

Continued on next page.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION – CONTINUED (UNAUDITED)

(In thousands, except share amounts)


	February 28, 2013			November 30, 2012
LIABILITIES AND STOCKHOLDERS’ EQUITY
Short-term borrowing	$	100,000		$	150,000
Financial instruments sold, not yet purchased, at fair value:
Corporate equity securities		1,934,184			1,539,332
Corporate debt securities		1,845,617			1,389,312
Government, federal agency and other sovereign obligations		5,045,241			3,666,112
Mortgage- and asset-backed securities		101,580			241,211
Loans		452,007			207,227
Derivatives		220,697			229,127
Physical commodities		167,550			183,142

Total financial instruments sold, not yet purchased, at fair value		9,766,876			7,455,463
Securities loaned		1,902,687			1,934,355
Securities sold under agreements to repurchase		7,976,492			8,181,250
Obligation to return securities received as collateral		25,338			—
Payables:
Brokers, dealers and clearing organizations		1,787,055			2,819,677
Customers		5,450,781			5,568,017
Accrued expenses and other liabilities		915,534			1,124,368
Long-term debt		5,711,751			4,804,607
Mandatorily redeemable convertible preferred stock		125,000			125,000
Mandatorily redeemable preferred interests of consolidated subsidiaries		358,951			348,051

Total liabilities		34,120,465			32,510,788

STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 214,707,928 shares at February 28, 2013 and 204,147,007 shares at November 30, 2012		21			20
Additional paid-in capital		2,231,430			2,219,959
Retained earnings		1,339,430			1,281,855
Treasury stock, at cost, 9,339,897 shares at February 28, 2013 and 835,033 shares at November 30, 2012		(181,145	)		(12,682	)
Accumulated other comprehensive loss:
Currency translation adjustments		(48,027	)		(38,009	)
Additional minimum pension liability		(15,128	)		(15,128	)

Total accumulated other comprehensive loss		(63,155	)		(53,137	)

Total common stockholders’ equity		3,326,581			3,436,015
Noncontrolling interests		356,180			346,738

Total stockholders’ equity		3,682,761			3,782,753


Total liabilities and stockholders’ equity	$	37,803,226		$	36,293,541

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.


	February 28, 2013		November 30, 2012
Assets
Cash and cash equivalents	$	335,419	$	388,279
Financial instruments owned, at fair value
Corporate equity securities		161,305		105,271
Corporate debt securities		486,283		394,043
Mortgage- and asset-backed securities		16,885		15,589
Loans and other receivables		581,444		383,667
Derivatives		211		—
Investments, at fair value		2,186		5,836

Total financial instruments owned, at fair value		1,248,314		904,406
Receivables:
Brokers, dealers and clearing organizations		474,096		236,594
Fees, interest and other		9,619		10,931
Other assets		96		348

Total assets	$	2,067,544	$	1,540,558


Liabilities
Financial instruments sold, not yet purchased, at fair value:
Corporate equity securities		15,161		—
Corporate debt securities		450,936		325,979
Loans		452,007		199,610
Derivatives		—		505

Total financial instruments sold, not yet purchased, at fair value		918,104		526,094
Payables:
Brokers, dealers and clearing organizations		365,139		201,237
Accrued expenses and other liabilities		137,661		72,956
Mandatorily redeemable preferred interests of consolidated subsidiaries		358,951		348,051

Total liabilities	$	1,779,855	$	1,148,338

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended
	February 28, 2013		February 29, 2012

Revenues:
Commissions	$	131,083	$	117,499
Principal transactions		300,278		280,835
Investment banking		288,278		285,795
Asset management fees and investment income from managed funds		10,883		5,634
Interest		249,277		274,708
Other		27,004		42,340

Total revenues		1,006,803		1,006,811
Interest expense		203,416		226,845

Net revenues		803,387		779,966
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries		10,961		21,844

Net revenues, less mandatorily redeemable preferred interests		792,426		758,122

Non-interest expenses:
Compensation and benefits		474,217		446,462

Non-compensation expenses:
Floor brokerage and clearing fees		30,998		27,838
Technology and communications		59,878		61,450
Occupancy and equipment rental		24,309		22,565
Business development		24,927		22,247
Professional services		32,635		13,693
Other		14,475		14,998

Total non-compensation expenses		187,222		162,791


Total non-interest expenses		661,439		609,253


Earnings before income taxes		130,987		148,869
Income tax expense		45,491		52,152

Net earnings		85,496		96,717
Net earnings to noncontrolling interests		10,704		19,581

Net earnings to common shareholders	$	74,792	$	77,136


Earnings per common share:
Basic	$	0.32	$	0.33
Diluted	$	0.32	$	0.33

Dividends declared per common share	$	0.075	$	0.075

Weighted average common shares:
Basic		213,732		218,049
Diluted		217,844		222,162

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	Three Months Ended
	February 28, 2013			February 29, 2012

Net earnings	$	85,496		$	96,717

Other comprehensive income, net of tax:
Currency translation adjustments		(10,018	)		5,491

Total other comprehensive (loss) income, net of tax (1)		(10,018	)		5,491


Comprehensive income		75,478			102,208
Net earnings attributable to noncontrolling interests		10,704			19,581

Comprehensive income to common shareholders	$	64,774		$	82,627

(1)	Total other comprehensive (loss) income, net of tax, is attributable to common shareholders. No other comprehensive (loss) income is attributable to noncontrolling interests.

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended February 28, 2013			Twelve Months Ended November 30, 2012
Common stock, par value $0.0001 per share
Balance, beginning of period	$	20		$	20
Issued		1			1
Retired		—			(1	)

Balance, end of period		21			20


Additional paid-in capital
Balance, beginning of period		2,219,959			2,207,410
Benefit plan share activity (1)		3,138			12,076
Share-based expense, net of forfeitures and clawbacks		22,288			83,769
Proceeds from exercise of stock options		57			104
Acquisitions and contingent consideration		2,535			—
Tax (deficiency) benefit for issuance of share-based awards		(17,965	)		19,789
Equity component of convertible debt, net of tax		—			(427	)
Dividend equivalents on share-based plans		1,418			6,531
Retirement of treasury stock		—			(109,293	)

Balance, end of period		2,231,430			2,219,959


Retained earnings
Balance, beginning of period		1,281,855			1,067,858
Net earnings to common shareholders		74,792			282,409
Dividends		(17,217	)		(68,412	)

Balance, end of period		1,339,430			1,281,855


Treasury stock, at cost
Balance, beginning of period		(12,682	)		(486	)
Purchases		(166,541	)		(113,562	)
Returns / forfeitures		(1,922	)		(7,928	)
Retirement of treasury stock		—			109,294

Balance, end of period		(181,145	)		(12,682	)


Accumulated other comprehensive loss
Balance, beginning of period		(53,137	)		(50,490	)
Currency adjustment		(10,018	)		1,511
Pension adjustment, net of tax		—			(4,158	)

Balance, end of period		(63,155	)		(53,137	)


Total common stockholders’ equity		3,326,581			3,436,015


Noncontrolling interests
Balance, beginning of period		346,738			312,663
Net earnings attributable to noncontrolling interests		10,704			40,740
Distributions		(1,262	)		(13,570	)
Consolidation of asset management entity		—			6,905

Balance, end of period		356,180			346,738


Total stockholders’ equity	$	3,682,761		$	3,782,753

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

See accompanying notes to consolidated financial statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Three Months Ended
	February 28, 2013			February 29, 2012
Cash flows from operating activities:
Net earnings	$	85,496		$	96,717

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization		17,393			17,693
Bargain purchase gain		—			(3,368	)
Gain on repurchase of long-term debt		—			(9,898	)
Fees related to assigned management agreements		(1,154	)		(739	)
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries		10,961			21,844
Accruals related to various benefit plans and stock issuances, net of forfeitures		23,505			24,987
Decrease (increase) in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations		352,891			(290,223	)
(Increase) decrease in receivables:
Brokers, dealers and clearing organizations		(1,027,671	)		(482,230	)
Customers		(130,543	)		260,225
Fees, interest and other		(29,149	)		(43,498	)
(Increase) decrease in securities borrowed		(224,557	)		135,129
Decrease in financial instruments owned		229,394			2,591,767
(Increase) decrease in loans to and investments in related parties		(197,166	)		46,441
Increase in investments in managed funds		(2,213	)		(2,275	)
Increase in securities purchased under agreements to resell		(224,418	)		(1,537,111	)
Decrease (increase) in other assets		22,335			(76,800	)
(Decrease) increase in payables:
Brokers, dealers and clearing organizations		(1,031,335	)		(1,501,144	)
Customers		(111,139	)		538,234
(Decrease) increase in securities loaned		(28,138	)		120,968
Increase in financial instruments sold, not yet purchased		2,327,667			1,387,536
Decrease in securities sold under agreements to repurchase		(197,493	)		(1,047,485	)
Decrease in accrued expenses and other liabilities		(258,836	)		(199,438	)


Net cash (used in) provided by operating activities		(394,170	)		47,332


Cash flows from investing activities:
Net payments on premises and equipment		(10,706	)		(11,642	)
Cash received from contingent consideration		1,203			741


Net cash used in investing activities		(9,503	)		(10,901	)

Continued on next page.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (UNAUDITED)

(In thousands)


	Three Months Ended
	February 28, 2013			February 29, 2012
Cash flows from financing activities:
Excess tax benefits from the issuance of share-based awards	$	5,682		$	29,316
Proceeds from short-term borrowings		6,744,000			109,513
Payments on short-term borrowings		(6,794,000	)		(67,007	)
Proceeds from secured credit facility		900,000			160,000
Payments on secured credit facility		(990,007	)		(10,000	)
Proceeds from other secured financings		60,000			—
Payments on repurchase of long-term debt		—			(1,435	)
Payments on mandatorily redeemable preferred interest of consolidated subsidiaries		(61	)		—
Payments on repurchase of common stock		(166,541	)		(47,930	)
Payments on dividends		(15,799	)		(15,605	)
Proceeds from exercise of stock options, not including tax benefits		57			—
Net proceeds from (payments on):
Issuance of senior notes, net of issuance costs		991,469			—
Noncontrolling interest		(1,262	)		—


Net cash provided by financing activities		733,538			156,852


Effect of exchange rate changes on cash and cash equivalents		(4,502	)		2,113

Net increase in cash and cash equivalents		325,363			195,396
Cash and cash equivalents at beginning of period		2,692,595			2,393,797

Cash and cash equivalents at end of period	$	3,017,958		$	2,589,193


Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	178,836		$	214,800
Income taxes, net of refunds		(34,054	)		(1,785	)

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		12
Note 3. Accounting Developments		20
Note 4. Hoare Govett Acquisition		21
Note 5. Cash, Cash Equivalents and Short-Term Investments		22
Note 6. Fair Value Disclosures		23
Note 7. Derivative Financial Instruments		37
Note 8. Collateralized Transactions		41
Note 9. Securitization Activities		42
Note 10. Variable Interest Entities		43
Note 11. Investments		48
Note 12. Goodwill and Other Intangible Assets		51
Note 13. Short-Term Borrowings		53
Note 14. Long-Term Debt		54
Note 15. Mandatorily Redeemable Convertible Preferred Stock		55
Note 16. Noncontrolling Interests and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries		56
Note 17. Benefit Plans		57
Note 18. Compensation Plans		57
Note 19. Earnings per Share		61
Note 20. Income Taxes		61
Note 21. Commitments, Contingencies and Guarantees		62
Note 22. Net Capital Requirements		65
Note 23. Segment Reporting		66
Note 24. Related Party Transactions		67

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.

Organization and Basis of Presentation

Organization

On March 1, 2013, Jefferies Group, Inc. was converted into a limited liability company and renamed Jefferies Group LLC. In addition, subsidiaries of Jefferies Group, Inc. were 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, CoreCommodity Management, LLC (formerly Jefferies Asset Management, LLC), Jefferies Bache Financial Services, Inc. and all other entities in which we have a controlling financial interest or are the primary beneficiary, including Jefferies High Yield Holdings, LLC (“JHYH”), Jefferies Special Opportunities Partners, LLC (“JSOP”) and Jefferies Employees Special Opportunities Partners, LLC (“JESOP”).

We operate in two business segments, Capital Markets and Asset Management. Capital Markets includes our securities, commodities, futures and foreign exchange trading (including the results of our indirectly partially owned subsidiary, Jefferies High Yield Trading, LLC) and investment banking activities, which provides the research, sales, trading and origination effort for various equity, fixed income and advisory products and services. Asset Management provides investment management services to various private investment funds, separate accounts and mutual funds.

On February 1, 2012, we acquired the corporate broking business of Hoare Govett from The Royal Bank of Scotland Group plc (“RBS”). The acquired business represented the corporate broking business carried on under the name RBS Hoare Govett in the United Kingdom and comprised corporate broking advice and services. The acquisition of Hoare Govett provided us with the opportunity to continue our growth in corporate broking and significantly expand the capabilities and reach of our established European Investment Banking and Equities businesses. See Note 4, Hoare Govett Acquisition for further details.

On March 1, 2013, Jefferies Group LLC through a series of merger transactions, became a wholly owned subsidiary of Leucadia National Corporation (“Leucadia”). The outstanding shares of Jefferies Group LLC were converted into 0.81 shares 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 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 and were contributed as equity to Jefferies Group LLC as part of the purchase price. Jefferies Group LLC continues to operate as the holding company to its various regulated and unregulated operating subsidiaries. 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 also appointed Leucadia’s President and a Director of Leucadia. Following the merger, we continue to operate as a full-service global investment banking firm and retain a credit rating separate from Leucadia and remain an SEC reporting company, filing annual, quarterly and periodic financial reports.

The merger will be accounted for by Leucadia under the acquisition method of accounting. Accordingly, the assets, including identifiable intangible assets, and the liabilities of Jefferies Group LLC will be recorded at their fair values at the date of acquisition (March 1, 2013). The application of the acquisition method of accounting will be pushed down and

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

reflected in the financial statements of Jefferies Group LLC as a wholly-owned subsidiary of Leucadia. The excess of Leucadia’s purchase price over the fair value of the net assets acquired will be recorded as goodwill. The purchase price is preliminarily estimated at $4.7 billion resulting in a preliminary estimate of goodwill of $1.8 billion and a preliminary estimate of net assets of $5.1 billion, inclusive of goodwill. The acquisition accounting will be finalized upon completion of the analysis of the assets and liabilities of Jefferies Group LLC as of March 1, 2013 and reported in our quarterly report on Form 10-Q for the period ended May 31, 2013.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended November 30, 2012.

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, 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.

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 Stockholders’ 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. 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

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.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Soft dollar expenses amounted to $8.5 million and $8.2 million for the three months ended February 28, 2013 and February 29, 2012, respectively. 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-term borrowings, long-term borrowings and our mandatorily redeemable convertible preferred stock on an accrual basis with related interest recorded as Interest expense. 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.

Cash Equivalents

Cash equivalents include highly liquid investments, including 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

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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 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

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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

The Independent Price Verification (“IPV”) Group, which is part of Finance, in partnership with Market Risk Management, is responsible for establishing our valuation policies and procedures. The IPV Group and Market 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 the Chief Financial Officer, Global Controller, Global Head of Product Control, Chief Risk Officer and the 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 Market 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 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

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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 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 Market Risk Management, independent from the trading desks, and then approved to be used in the valuation process. Review and approval of a model for use includes 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.

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 11, Investments, and Note 24, 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

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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.

Goodwill and Intangible Assets

Goodwill. At least annually, and more frequently if warranted, we assess whether goodwill has been impaired by comparing the estimated fair value of each reporting unit with its 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 methodologies we utilize in estimating the fair value of reporting units include market capitalization, price-to-book multiples of comparable exchange traded companies and multiples of merger and acquisitions of similar businesses. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of estimates and assumptions that could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Our annual goodwill impairment testing date is June 1. Refer to Note 12, Goodwill and Other Intangible Assets for further details on our assessment of goodwill.

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

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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 annually, or more frequently, when certain events or circumstances exist indicating an assessment for impairment is necessary. Impairment exists when the carrying amount exceeds its fair value. 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. Subsequent reversal of impairment losses is not permitted. Our annual indefinite-lived intangible asset impairment testing date is June 1.

Income Taxes

We file a consolidated U.S. federal income tax return, which includes all of our qualifying subsidiaries. We also are subject to income tax in various states and municipalities and those foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. 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 carry-forwards. 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. Deferred income taxes are provided for temporary differences in reporting certain items, principally share-based compensation, long-term debt and tax amortization of intangible assets. 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.

The tax benefit related to dividends and dividend equivalents paid on nonvested share-based payment awards and outstanding equity options is 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 Stockholders’ Equity.

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.

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

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. Common shares outstanding and certain other shares committed to be, but not yet issued, include restricted stock and restricted stock units (“RSUs”) for which no future service is required. 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. We grant restricted stock and RSUs as part of our share-based compensation that contain nonforfeitable rights to dividends and dividend equivalents, respectively, and therefore, prior to the requisite service being rendered for the right to retain the award, restricted stock and RSUs meet the definition of a participating security. As such, we calculate Basic and Diluted earnings per share under the two-class method.

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 liabilities in the Consolidated Statements of Financial Condition.

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Note 3.

Accounting Developments

Accounting Standards to be Adopted in Future Periods

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 update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The ASU 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 other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 (three months ended May 31, 2013). We are currently evaluating the impact of the guidance on our consolidated financial statements.

Balance Sheet Offsetting Disclosures. In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The update requires new disclosures regarding balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (fiscal year ended November 30, 2014), and is to be applied retrospectively. This guidance does not amend the existing guidance on when it is appropriate to offset; as a result, this guidance will not affect our financial condition, results of operations or cash flows.

Adopted Accounting Standards

Indefinite-Lived Intangible Asset Impairment. In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The update does not revise the requirement to test indefinite-lived intangible assets annually for impairment, or more frequently if deemed appropriate. The new guidance is effective for annual and interim tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance on December 1, 2012 did not affect our financial condition, results of operations or cash flows as it did not affect how impairment is calculated.

Goodwill Testing. In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The update outlines amendments to the two step goodwill impairment test permitting an entity to first assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. The update is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011. We adopted this guidance on December 1, 2012, which did not change how goodwill is calculated nor assigned to reporting units and therefore had no effect on our financial condition, results of operations or cash flows.

Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The update requires entities to report comprehensive income either (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements. We adopted the guidance on March 1, 2012, and elected the two separate but consecutive statements approach. Accordingly, we now present our Consolidated Statements of Comprehensive Income immediately following our Consolidated Statements of Earnings within our consolidated financial statements.

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Fair Value Measurements and Disclosures. In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments prohibit the use of blockage factors at all levels of the fair value hierarchy and provide guidance on measuring financial instruments that are managed on a net portfolio basis. Additional disclosure requirements include transfers between Levels 1 and 2; and for Level 3 fair value measurements, a description of our valuation processes and additional information about unobservable inputs impacting Level 3 measurements. We adopted this guidance on March 1, 2012 and have reflected the new disclosures in our consolidated financial statements. The adoption of this guidance did not have an impact on our financial condition, results of operations or cash flows.

Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. In assessing whether to account for repurchase and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity as sales or as secured financing, this guidance removes from the assessment of effective control 1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and 2) the collateral maintenance implementation guidance related to that criterion. The adoption of this guidance for transactions beginning on or after January 1, 2012 did not have an impact on our financial condition, results of operations or cash flows.

Note 4.

Hoare Govett Acquisition

On February 1, 2012, we acquired the corporate broking business of Hoare Govett from RBS. Total cash consideration paid by us to RBS for the acquisition was £1. In addition, under the terms of the purchase agreement RBS agreed to pay us approximately £1.9 million towards retention payments made to certain employees, which constituted a reduction of the final purchase price. The business acquired represents the corporate broking business carried on under the name RBS Hoare Govett in the United Kingdom and comprised corporate broking advice and services, as well as certain equity sales and trading activities. The acquisition included the Hoare Govett trade name, domain name, client agreements and the exclusive right to carry on the business in succession to RBS.

We accounted for the acquisition under the acquisition method of accounting. Accordingly, the assets acquired, including identifiable intangible assets, and liabilities assumed were recorded at their respective fair values as of the date of acquisition. The fair values of the net assets acquired, including identifiable intangible assets, specifically the Hoare Govett trademark/trade name, was approximately $0.3 million, which exceeded the negative purchase price of $3.1 million (cash consideration paid of £1 less remittance from RBS of £1.9 million), resulting in a bargain purchase gain of approximately $3.4 million. The bargain purchase gain is included within Other revenues in the Consolidated Statement of Earnings for the year ended November 30, 2012 and is reported within the Capital Markets business segment.

Our results of operations for the three months ended February 29, 2012 include the results of operations of Hoare Govett for the period from February 1, 2012 to February 29, 2012. There were no material revenues contributed by Hoare Govett for this period and net earnings amounted to an immaterial loss, primarily as a result of compensation costs. The effect on our results for the quarter ended February 29, 2012, had the acquisition of Hoare Govett been completed on December 1, 2011 is not considered material. The acquisition closed on February 29, 2012.

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Note 5.

Cash, Cash Equivalents and Short-Term Investments

We generally invest our excess cash in money market funds and in other short-term instruments. Cash equivalents include highly liquid investments not held for resale and with original maturities of three months or less. The following are financial instruments, classified as cash and cash equivalents, that are deemed by us to be generally readily convertible into cash as of February 28, 2013 and November 30, 2012 (in thousands):


	February 28, 2013		November 30, 2012

Cash and cash equivalents:
Cash in banks	$	857,202	$	1,038,664
Money market investments		2,160,756		1,653,931


Total cash and cash equivalents	$	3,017,958	$	2,692,595


Cash and securities segregated (1)	$	3,728,742	$	4,082,595

(1)

Consists of deposits at exchanges and clearing organizations, as well as deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Jefferies as a broker-dealer carrying client accounts to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients, and Jefferies Bache, LLC which, as a futures commission merchant, is subject to the segregation requirements pursuant to the Commodity Exchange Act.

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Note 6.

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 February 28, 2013 and November 30, 2012 by level within the fair value hierarchy (in thousands):


	February 28, 2013
	Level 1 (1)		Level 2 (1)		Level 3			Counterparty and Cash Collateral Netting (2)			Total
Assets:
Financial instruments owned:
Corporate equity securities	$	1,443,328	$	232,045	$	13,234		$	—		$	1,688,607
Corporate debt securities		—		3,339,644		31,820			—			3,371,464
Collateralized debt obligations		—		115,145		29,776			—			144,921
U.S. government and federal agency securities		776,846		132,794		—			—			909,640
Municipal securities		—		603,957		—			—			603,957
Sovereign obligations		2,041,200		1,455,658		—			—			3,496,858
Residential mortgage-backed securities		—		3,620,210		169,426			—			3,789,636
Commercial mortgage-backed securities		—		915,820		17,794			—			933,614
Other asset-backed securities		—		69,904		1,252			—			71,156
Loans and other receivables		—		797,374		170,986			—			968,360
Derivatives		445,895		1,491,718		220			(1,730,913	)		206,920
Investments at fair value		—		1,036		70,067			—			71,103
Physical commodities		—		157,299		—			—			157,299

Total financial instruments owned	$	4,707,269	$	12,932,604	$	504,575		$	(1,730,913	)	$	16,413,535


Level 3 financial instruments for which the firm does not bear economic exposure (3)						(38,771	)

Level 3 financial instruments for which the firm bears economic exposure					$	465,804


Cash and cash equivalents	$	3,017,958	$	—	$	—		$	—		$	3,017,958
Investments in managed funds	$	—	$	—	$	59,976		$	—		$	59,976
Cash and securities segregated and on deposit for regulatory purposes (4)	$	3,728,742	$	—	$	—		$	—		$	3,728,742
Securities received as collateral	$	25,338	$	—	$	—		$	—		$	25,338

Total Level 3 assets for which the firm bears economic exposure					$	525,780


Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	1,697,826	$	236,320	$	38		$	—		$	1,934,184
Corporate debt securities		—		1,845,617		—			—			1,845,617
U.S. government and federal agency securities		2,567,397		—		—			—			2,567,397
Sovereign obligations		1,268,489		1,209,355		—			—			2,477,844
Residential mortgage-backed securities		—		94,532		1,542			—			96,074
Commercial mortgage-backed securities		—		1,811		—			—			1,811
Other asset-backed securities		—		3,695		—			—			3,695
Loans		—		444,609		7,398			—			452,007
Derivatives		435,602		1,640,905		11,405			(1,867,215	)		220,697
Physical commodities		—		167,550		—			—			167,550

Total financial instruments sold, not yet purchased	$	5,969,314	$	5,644,394	$	20,383		$	(1,867,215	)	$	9,766,876


Obligation to return securities received as collateral	$	25,338	$	—	$	—		$	—		$	25,338

(1)	There were no transfers between Level 1 and Level 2 for the three months ended February 28, 2013.

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

(3)	Consists of Level 3 assets attributable to third party or employee noncontrolling interests in certain consolidated entities.

(4)	Includes U.S. government securities segregated for regulatory purposes with a fair value of $357.2 million.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	November 30, 2012
	Level 1 (1)		Level 2 (1)		Level 3			Counterparty and Cash Collateral Netting (2)			Total
Assets:
Financial instruments owned:
Corporate equity securities	$	1,608,715	$	137,245	$	16,815		$	—		$	1,762,775
Corporate debt securities		—		3,034,515		3,631			—			3,038,146
Collateralized debt obligations		—		87,239		31,255			—			118,494
U.S. government and federal agency securities		1,720,617		115,310		—			—			1,835,927
Municipal securities		—		619,969		—			—			619,969
Sovereign obligations		1,722,044		975,810		—			—			2,697,854
Residential mortgage-backed securities		—		4,008,844		156,069			—			4,164,913
Commercial mortgage-backed securities		—		1,060,333		30,202			—			1,090,535
Other asset-backed securities		—		93,228		1,114			—			94,342
Loans and other receivables		—		497,918		180,393			—			678,311
Derivatives		615,024		1,547,984		328			(1,865,250	)		298,086
Investments at fair value		—		43,126		83,897			—			127,023
Physical commodities		—		144,016		—			—			144,016

Total financial instruments owned	$	5,666,400	$	12,365,537	$	503,704		$	(1,865,250	)	$	16,670,391


Level 3 financial instruments for which the firm does not bear economic exposure (3)						(53,289	)

Level 3 financial instruments for which the firm bears economic exposure					$	450,415


Cash and cash equivalents	$	2,692,595	$	—	$	—		$	—		$	2,692,595
Investments in managed funds	$	—	$	—	$	57,763		$	—		$	57,763
Cash and securities segregated and on deposit for regulatory purposes (4)	$	4,082,595	$	—	$	—		$	—		$	4,082,595

Total Level 3 assets for which the firm bears economic exposure					$	508,178


Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	1,442,347	$	96,947	$	38		$	—		$	1,539,332
Corporate debt securities		—		1,389,312		—			—			1,389,312
U.S. government and federal agency securities		1,428,746		250,387		—			—			1,679,133
Sovereign obligations		1,395,355		591,624		—			—			1,986,979
Residential mortgage-backed securities		—		239,063		—			—			239,063
Commercial mortgage-backed securities		—		2,148		—			—			2,148
Loans		—		205,516		1,711			—			207,227
Derivatives		547,605		1,684,884		9,516			(2,012,878	)		229,127
Physical commodities		—		183,142		—			—			183,142

Total financial instruments sold, not yet purchased	$	4,814,053	$	4,643,023	$	11,265		$	(2,012,878	)	$	7,455,463

(1)	There were no transfers between Level 1 and Level 2 for the year ended November 30, 2012.

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

(3)	Consists of Level 3 assets attributable to third party or employee noncontrolling interests in certain consolidated entities.

(4)	Includes U.S. government securities segregated for regulatory purposes with a fair value of $404.3 million.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

Corporate Equity Securities

•

Exchange Traded Equity Securities: Exchange-traded equity securities 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.

•

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 of comparable size, 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.

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.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, interest-only and principal-only securities and to-be-announced 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 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.

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.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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 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 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

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 defaults 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 3 of the fair value hierarchy. Additionally, investments at fair value include investments in insurance contracts relating to our defined benefit plan in Germany and shares in non-U.S. exchanges and clearing houses. Fair value for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy. Fair value for the shares in non-U.S. exchanges and clearing houses is determined based on recent transactions or third party model valuations and is categorized within Level 2 or Level 3 of the fair value hierarchy. The following tables present information about our investments in entities that have the characteristics of an investment company at February 28, 2013 and November 30, 2012 (in thousands):


	February 28, 2013
	Fair Value (7)		Unfunded Commitments		Redemption Frequency (if currently eligible)
Equity Long/Short Hedge Funds ⁽¹⁾	$	20,003	$	—	Monthly, Quarterly
High Yield Hedge Funds⁽²⁾		327		—	—
Fund of Funds⁽³⁾		394		106	—
Equity Funds⁽⁴⁾		71,883		47,460	—
Convertible Bond Funds⁽⁵⁾		2,916		—	At Will
Other Investments⁽⁶⁾		17		—	Bi-Monthly

Total⁽⁸⁾	$	95,540	$	47,566

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	November 30, 2012
	Fair Value (7)		Unfunded Commitments		Redemption Frequency (if currently eligible)
Equity Long/Short Hedge Funds ⁽¹⁾	$	19,554	$	—	Monthly, Quarterly
High Yield Hedge Funds⁽²⁾		612		—	—
Fund of Funds⁽³⁾		604		106	—
Equity Funds⁽⁴⁾		69,223		59,272	—
Convertible Bond Funds⁽⁵⁾		3,002		—	At Will
Other Investments⁽⁶⁾		19		—	Bi-Monthly

Total⁽⁸⁾	$	93,014	$	59,378

(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 February 28, 2013 and November 30, 2012, investments representing approximately 98% and 96%, respectively, of the fair value of investments in this category are redeemable with 30 – 65 days prior written notice, and includes investments in private asset management funds managed by us with an aggregate fair value of $0.5 million in both periods. 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 February 28, 2013 and November 30, 2012, approximately 94%, of the fair value of investments in this category is managed by us and has 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 one to two years. As of February 28, 2013 and November 30, 2012, we have requested redemption for investments representing approximately 6% of the fair value of investments in this category; however, we are unable to estimate when these funds will be received.

(4)

At February 28, 2013 and November 30, 2012, investments representing approximately 98% 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. At February 28, 2013 and November 30, 2012, investments representing approximately 2% of the fair value of investments in equity funds are in liquidation and we are unable to estimate when the underlying assets will be fully liquidated. At February 28, 2013 and November 30, 2012, this category includes investments in equity funds managed by us with a fair value of $58.1 million and $55.6 million and unfunded commitments of $45.8 million and $56.9 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)	Other investments at February 28, 2013 and November 30, 2012 included investments in funds that invest in commodity futures and options contracts.

(7)	Fair value has been estimated using the net asset value derived from each of the funds’ capital statements.

(8)

Investments at fair value in the Consolidated Statements of Financial Condition at February 28, 2013 and November 30, 2012 include $35.5 million and $91.8 million, respectively, of direct investments which do not have the characteristics of investment companies and therefore not included within this table.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Pricing Information

At February 28, 2013 and November 30, 2012, our Financial instruments owned and Financial instruments sold, not yet purchased are measured using different valuation bases as follows:


	February 28, 2013						November 30, 2012
	Financial Instruments Owned			Financial Instruments Sold, Not Yet Purchased			Financial Instruments Owned			Financial Instruments Sold, Not Yet Purchased

Exchange closing prices		9	%		17	%		11	%		19	%
Recently observed transaction prices		4	%		4	%		5	%		6	%
External pricing services		72	%		75	%		70	%		71	%
Broker quotes		1	%		0	%		1	%		0	%
Valuation techniques		14	%		4	%		13	%		4	%

		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 February 28, 2013 (in thousands):


	Three Months Ended February 28, 2013
	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		3,624			9,406			(17,374	)		—			2,865			29,776		(1,125	)
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		50			1,627			(1,342	)		(19	)		(178	)		1,252		(1	)
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			952			(4,923	)		(9,721	)		(1,099	)		70,067		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.

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 decreased valuations of certain derivative instruments.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended February 29, 2012⁽³⁾
	Balance, November 30, 2011		Total gains/ losses (realized and unrealized) (1)			Purchases			Sales			Settlements			Net transfers into/ (out of) Level 3			Balance, February 29, 2012		Change in unrealized gains/ (losses) relating to instruments still held at February 29, 2012 (1)
Assets:
Financial instruments owned:
Corporate equity securities	$	13,489	$	1,684		$	14,184		$	—		$	—		$	912		$	30,269	$	1,685
Corporate debt securities		48,140		671			271			(22,300	)		(1,276	)		8,100			33,606		(737	)
Collateralized debt obligations		47,988		(796	)		—			(14,063	)		(3,328	)		42,775			72,576		(1,488	)
Municipal securities		6,904		(71	)		—			(740	)		—			(4,917	)		1,176		12
Sovereign obligations		140		—			—			—			—			—			140		—
Residential mortgage-backed securities		149,965		(6,492	)		10,497			(44,282	)		(6,881	)		25,944			128,751		(5,995	)
Commercial mortgage-backed securities		52,407		(1,655	)		—			(3,593	)		(44	)		(11,323	)		35,792		(1,419	)
Other asset-backed securities		3,284		(104	)		—			(197	)		(40	)		2,446			5,389		(76	)
Loans and other receivables		97,291		1,899			48,309			(21,733	)		(25,729	)		4,412			104,449		643
Investments, at fair value		78,326		1,378			480			(1,797	)		(277	)		—			78,110		1,378
Investments in managed funds		70,740		(6,212	)		8,499			(12	)		—			—			73,015		(6,212	)

Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	—	$	—		$	—		$	11,511		$	—		$	—		$	11,511	$	—
Corporate debt securities		74		—			—			—			—			—			74		—
Net derivatives (2)		9,285		1,512			(295	)		—			—			(2,192	)		8,310		2,736
Loans		10,157		—			(10,157	)		—			—			—			—		—

(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 29, 2012.

Analysis of Level 3 Assets and Liabilities for the Three Months Ended February 29, 2012

During the three months ended February 29, 2012, transfers of assets of $109.9 million from Level 2 to Level 3 are attributed to:

•

Collateralized debt obligations of $42.8 million which have little to no transparency in trade activity;

•

Non-agency residential mortgage-backed securities of $32.5 million, Other asset-backed securities of $4.7 million, and Commercial mortgage-backed securities of $1.5 million for which no recent trade activity was observed;

•

Loans and other receivables of $18.4 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2 as less market interest likely existed for the specific loans during the period; and

•

Corporate debt securities of $8.6 million, Corporate equity securities of $0.9 million, and Municipal securities of $0.5 million due to lack of observable market transactions.

During the three months ended February 29, 2012, transfers of assets of $41.5 million from Level 3 to Level 2 are attributed to:

•

Loans and other receivables of $13.9 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Commercial mortgage-backed securities of $12.8 million, Non-agency residential mortgage-backed securities of $6.6 million, and $2.3 million of Other asset-backed securities for which market trades were observed in the period for either identical or similar securities; and

•

Municipal securities of $5.4 million and Corporate debt securities of $0.5 million due to increased observability of trades in certain bonds.

During the three months ended February 29, 2012 there were no transfers of liabilities from Level 2 to Level 3 and there were $2.2 million transfers of net derivative liabilities from Level 3 to Level 2 due to available broker quotes for the significant inputs used in valuing the derivative contracts.

Net losses on Level 3 assets were $9.7 million and net losses on Level 3 liabilities were $1.5 million for the three months ended February 29, 2012. Net losses on Level 3 assets were primarily due to decreased valuations of certain residential mortgage-backed securities and investments in managed funds. Net losses on Level 3 liabilities were primarily due to decreased 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.

Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair Value Measurements at February 28, 2013 and November 30, 2012

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)


February 28, 2013
Financial Instruments Owned	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Input /Range		Weighted Average

Corporate equity securities	$	13,234
Non-exchange traded securities			Market approach	EBITDA (a) multiple		6.0 to 13.0		9.9
			Scenario analysis	Estimated recovery percentage		30%		—
Warrants			Option model	Volatility		34%		—

Corporate debt securities	$	31,820
			Scenario analysis	Estimated recovery percentage		25%		—
			Comparable pricing	Comparable bond or loan price		$65.50 to $76.50	$	72.10
			Market approach	Yield		8% to 16%		9	%
Collateralized debt obligations	$	20,676
			Discounted cash flows	Constant prepayment rate		0% to 5%		0.5	%
				Constant default rate		0% to 10%		3	%
				Loss severity		13% to 100%		41	%
				Yield		10% to 73%		34	%
Residential mortgage-backed	$	169,426
			Discounted cash flows	Constant prepayment rate		0% to 27%		5	%
				Constant default rate		1% to 50%		7	%
				Loss severity		25% to 95%		52	%
				Yield		0% to 37%		10	%
				Cumulative loss rate		7% to 37%		13	%
Commercial mortgage-backed	$	17,794
			Discounted cash flows	Yield		20% to 88%		37	%
				Cumulative loss rate		2% to 21%		14	%
Other asset-backed securities	$	1,252
			Discounted cash flows	Yield		7%		—
Loans and other receivables	$	164,188
			Comparable pricing	Comparable bond or loan price		$96.25 to $101.25	$	100.35
			Discounted cash flows	Yield		19%		—
				Cumulative loss rate		0%		—
			Market approach	Yield		5% to 25%		11	%
				EBITDA (a) multiple		6.5		—
			Scenario analysis	Estimated recovery percentage		15% to 61%		53	%

Investments at fair value	$	17,817
Private equity securities			Market approach	EBITDA (a) multiple		8.1		—
			Comparable pricing	Comparable share price	$	400.00		—

Financial Instruments Sold, Not Yet
Purchased

Fair Value (in
thousands)

Valuation Technique

Significant Unobservable Input(s)

Input /Range

Weighted
Average

Derivatives

(11,405

)

Equity options

Option model

Volatility

34%

—

Loan commitments

Comparable pricing

Comparable bond or loan price

101.13

—

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

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


November 30, 2012
Financial Instruments Owned	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input(s)	Range

Corporate equity securities	$	16,815
Non-exchange traded securities			Market approach	EBITDA (a) multiple	4.0 to 16.3
			Scenario analysis	Estimated recovery percentage	35%
Warrants			Option model	Volatility	39%

Collateralized debt obligations	$	26,705
			Discounted cash flows	Constant prepayment rate	0% to 5%
				Constant default rate	0% to 10%
				Loss severity	13% to 75%
				Yield	10% to 35%

Residential mortgage-backed securities	$	156,069
			Discounted cash flows	Constant prepayment rate	0% to 25%
				Constant default rate	0% to 50%
				Loss severity	0% to 80%
				Yield	1% to 50%

Commercial mortgage-backed securities	$	30,202
			Discounted cash flows	Yield	22% to 57%
				Cumulative loss rate	2% to 20%

Loans and other receivables	$	153,365
			Comparable pricing	Comparable bond or loan price	$81.88 to $101.25
			Discounted cash flows	Yield	19%
				Cumulative loss rate	0%
			Market approach	Yield	5% to 54%
				EBITDA (a) multiple	8.3
			Scenario analysis	Estimated recovery percentage	15%

Investments at fair value	$	32,751
Private equity securities			Market approach	EBITDA (a) multiple	6.6
			Comparable pricing	Comparable share price	$400.00
			Scenario analysis	Estimated recovery percentage	50%

Financial Instruments Sold, Not Yet Purchased

Fair Value (in
thousands)

Valuation Technique

Significant Unobservable Input(s)

Range

Derivatives

(9,516

)

Equity options

Option model

Volatility

39%

Loan commitments

Comparable pricing

Comparable bond or loan price

101.13

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

The fair values of certain Level 3 assets 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 table. At February 28, 2013 and November 30, 2012, the exclusions consisted of $68.1 million and $82.7 million, respectively, primarily comprised of investments in private equity and hedge funds, investments in reinsurance contracts, certain collateralized debt obligations and corporate loans.

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, 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, corporate debt securities, private equity 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.

•

Non-exchange traded securities, 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.

•

Loans and other receivables, 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, loss severities or cumulative loss rate and discount 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.

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 11, 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 that are not registered broker-dealers as the investments are risk managed by us on a fair value basis. The fair value option has also been elected for secured financings that arise in connection with our securitization activities and other structural 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):


	Three Months Ended
	February 28, 2013			February 29, 2012
Financial Instruments Owned:
Loans and other receivables	$	3,924		$	7,811

Financial Instruments Sold:
Loans	$	—		$	226
Loan commitments		(2,746	)		(654	)

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):


	February 28, 2013			November 30, 2012
Financial Instruments Owned:
Loans and other receivables (2)	$	(258,406	)	$	(256,271	)
Loans greater than 90 days past due (1) (2)		—			10,433

(1)	The aggregate fair value of loans that were 90 or more days past due was $- 0 - million and $34.7 million at February 28, 2013 and November 30, 2012.

(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 loans or other receivables on nonaccrual status at February 28, 2013 and November 30, 2012.

Note 7.

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 legal 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 6, Fair Value Disclosures and Note 21, 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 master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default.

The following tables present the fair value and related number of derivative contracts at February 28, 2013 and November 30, 2012 categorized by predominant risk exposure. The fair value of assets/liabilities related to derivative contracts represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged (in thousands, except contract amounts):


	February 28, 2013
	Assets					Liabilities
	Fair Value			Number of Contracts		Fair Value			Number of Contracts

Interest rate contracts	$	805,821			32,262	$	915,449			32,790
Foreign exchange contracts		537,752			89,195		526,944			87,414
Equity contracts		428,877			1,892,132		421,858			2,754,124
Commodity contracts		158,064			1,534,542		204,924			1,528,982
Credit contracts		7,319			23		18,737			52

Total		1,937,833					2,087,912
Counterparty/cash-collateral netting		(1,730,913	)				(1,867,215	)

Total per Consolidated Statement of Financial Condition	$	206,920				$	220,697


	November 30, 2012
	Assets					Liabilities
	Fair Value			Number of Contracts		Fair Value			Number of Contracts

Interest rate contracts	$	927,896			67,410	$	1,065,788			90,831
Foreign exchange contracts		387,325			118,958		357,277			116,758
Equity contracts		577,964			1,526,127		528,979			1,396,213
Commodity contracts		265,703			754,987		278,660			728,696
Credit contracts		4,448			13		11,301			40

Total		2,163,336					2,242,005
Counterparty/cash-collateral netting		(1,865,250	)				(2,012,878	)

Total per Consolidated Statement of Financial Condition	$	298,086				$	229,127

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 months ended February 28, 2013 and February 29, 2012 (in thousands):


	Three Months Ended
Gains (Losses)	February 28, 2013			February 29, 2012

Interest rate contracts	$	25,713		$	(16,235	)
Foreign exchange contracts		11,895			1,161
Equity contracts		(5,436	)		(30,112	)
Commodity contracts		19,585			20,680
Credit contracts		(3,742	)		(15,227	)

Total	$	48,015		$	(39,733	)

OTC Derivatives. The following tables set forth the remaining contract maturity of the fair value of OTC derivative assets and liabilities as of February 28, 2013 (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	$	61,023	$	137	$	—	$	(318	)	$	60,842
Credit default swaps		—		3,844		—		—			3,844
Equity swaps and options		1,622		—		—		—			1,622
Total return swaps		1,277		—		—		—			1,277
Foreign currency forwards, swaps and options		82,784		32,781		—		(8,301	)		107,264
Fixed income forwards		—		—		447		—			447
Interest rate swaps and options		19,464		47,523		179,557		(77,633	)		168,911

Total	$	166,170	$	84,285	$	180,004	$	(86,252	)		344,207

Cross product counterparty netting											(1,511	)

Total OTC derivative assets included in Financial instruments owned										$	342,696

(1)	At February 28, 2013, we held exchange traded derivative assets and other credit enhancements with a fair value of $20.5 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 February 28, 2013, cash collateral received was $156.3 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	$	107,646	$	108	$	—	$	(318	)	$	107,436
Credit default swaps		238		7,014		—		—			7,252
Equity swaps and options		3,148		—		—		—			3,148
Total return swaps		6,248		—		—		—			6,248
Foreign currency forwards, swaps and options		73,554		31,197		—		(8,301	)		96,450
Interest rate swaps and options		16,612		130,979		210,771		(77,633	)		280,729

Total	$	207,446	$	169,298	$	210,771	$	(86,252	)		501,263

Cross product counterparty netting											(1,511	)

Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	499,752

(1)	At February 28, 2013, we held exchange traded derivative liabilities and other credit enhancements with a fair value of $13.5 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 February 28, 2013, cash collateral pledged was $292.6 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 February 28, 2013, 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	$	225,413
BBB- to BBB+		42,967
BB+ or lower		66,073
Unrated		8,243

Total	$	342,696

(1)	We utilize internal credit ratings determined by our Credit Risk Management. Credit ratings determined by Credit 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 February 28, 2013 and November 30, 2012 is $172.6 million and $164.8 million, respectively, for which we have posted collateral of $113.6 million and $129.2 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on February 28, 2013 and November 30, 2012, we would have been required to post an additional $63.9 million $38.1 million, respectively, of collateral to our counterparties.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8.

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 manage our exposure to credit risk associated with these transactions by entering into master netting agreements. We also 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 certain 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 or derivative transactions or cover short positions. At February 28, 2013 and November 30, 2012, the approximate fair value of securities received as collateral by us that may be sold or repledged was $21.8 billion and $21.1 billion, respectively. The fair value of securities received as collateral at February 28, 2013 and November 30, 2012 that pertains to our securities financing activities at February 28, 2013 and November 30, 2012 are as follows (in thousands):


	February 28, 2013		November 30, 2012
Carrying amount:
Securities purchased under agreements to resell	$	3,578,366	$	3,357,602
Securities borrowed		5,315,488		5,094,679
Securities received as collateral		25,338		—

Total assets on Consolidated Statement of Financial Condition		8,919,192		8,452,281
Netting of securities purchased under agreements to resell (1)		9,027,147		9,982,752

		17,946,339		18,435,033
Fair value of collateral received in excess of contract amount (2)		3,854,353		2,683,767


Fair value of securities received as collateral	$	21,800,692	$	21,118,800

(1)	Represents the netting of securities purchased under agreements to resell with securities sold under agreements to repurchase balances for the same counterparty under legally enforceable netting agreements.

(2)

Includes collateral received from customers for margin balances unrelated to arrangements for securities purchased under agreements to resell or securities borrowed with a fair value of $1,381.0 million and $1,252.6 million at February 28, 2013 and November 30, 2012, respectively, of which $812.6 million and $727.7 million had been rehypothecated and collateral received on securities for securities transactions of $2,302.7 million and $1,378.8 million at February 28, 2013 and November 30, 2012, respectively.

At February 28, 2013 and November 30, 2012, a substantial portion of the securities received by us had been sold or repledged.

In instances where we 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 February 28, 2013 and November 30, 2012, $25.3 million and $-0- million, respectively, were reported as Securities received as collateral and as Obligation to return securities received as collateral.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9.

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 10, 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 secured borrowing is recognized in Other liabilities.

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):


	Three Months Ended
	February 28, 2013		February 29, 2012

Transferred assets	$	2,735.2	$	2,036.8
Proceeds on new securitizations		2,751.3		2,046.9
Net revenues		12.9		8.0

Cash flows received on retained interests	$	32.3	$	15.8

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 6, 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 February 28, 2013 and November 30, 2012. 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 10, Variable Interest Entities.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	As of February 28, 2013
Securitization Type	Total Assets			Retained Interests

U.S. government agency residential mortgage-backed securities	$	5,368.8		$	300.6	(1)
U.S. government agency commercial mortgage-backed securities		2,324.0			91.3	(1)
Collateralized loan obligations		728.5	(2)		19.7	(2)

(1)

A portion of these securities have been subsequently sold in secondary-market transactions to third parties. As of March 22, 2013, we continue to hold approximately $240.7 million and $16.2 million of these Residential mortgage-backed securities and Commercial mortgage-backed securities, respectively, in inventory.

(2)	Total assets include assets transferred by unrelated transferors. Retained interests at March 22, 2013 was $19.7 million.


	As of November 30, 2012
Securitization Type	Total Assets		Retained Interests

U.S. government agency residential mortgage-backed securities	$	3,791.5	$	335.2	(1)
U.S. government agency commercial mortgage-backed securities		2,193.4		28.9	(1)

(1)

A significant portion of these securities have been subsequently sold in secondary-market transactions to third parties. As of March 22, 2013, we continue to hold approximately $107.2 million and $16.2 million of these Residential mortgage-backed securities and Commercial mortgage-backed securities, respectively, in inventory.

We do not have any 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 10.

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 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

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

•

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,

•

Ownership of debt, equity and partnership interests in Jefferies High Yield Holdings, LLC and related entities,

•

Management and performance fees in the Jefferies Umbrella Fund, and

•

Loans to and investments in investment fund vehicles.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 February 28, 2013 and November 30, 2012. 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.


(in millions)	February 28, 2013						November 30, 2012
	High Yield		Mortgage- and Asset-backed Vehicles		Other		High Yield		Mortgage- and Asset-backed Vehicles		Other

Cash	$	335.2	$	—	$	0.2	$	388.1	$	—	$	0.2
Financial instruments owned		1,238.0		9.9		0.5		894.2		10.0		0.5
Securities borrowed		488.9		—		—		372.1		—		—
Securities purchased under agreement to resell (3)		—		120.0		—		—		60.0		—
Receivable from brokers and dealers		474.1		—		—		264.5		—		—
Other		9.7		—		—		11.4		—		—

	$	2,545.9	$	129.9	$	0.7	$	1,930.3	$	70.0	$	0.7


Financial instruments sold, not yet purchased	$	918.1	$	—	$	—	$	526.1	$	—	$	—
Securities loaned		122.6		—		—		112.0		—		—
Payable to brokers and dealers		367.8		—		—		201.2		—		—
Mandatorily redeemable interests (1)		1,116.6		—		—		1,076.0		—		—
Secured financing (2)		—		129.9		—		—		70.0		—
Other		21.6		—		0.2		15.0		—		0.2

	$	2,546.7	$	129.9	$	0.2	$	1,930.3	$	70.0	$	0.2

(1)

After consolidation, which eliminates our interests and the interests of our consolidated subsidiaries, JSOP and JESOP, the carrying amount of the mandatorily redeemable financial interests pertaining to the above VIEs included within Mandatorily redeemable preferred interests of consolidated subsidiaries was approximately $359.0 million and $348.1 million at February 28, 2013 and November 30, 2012, respectively. These amounts represent the portion of the mandatorily redeemable preferred interests held by our joint venture partner.

(2)	Secured financing is included within Accrued expenses and other liabilities. Approximately $7.6 million and $7.7 million of the secured financing represents an amount held by us in inventory and are eliminated in consolidation at February 28, 2013 and November 30, 2012, respectively.

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

High Yield. We conduct our high yield secondary market trading activities through Jefferies High Yield Trading, LLC (“JHYT”), Jefferies High Yield Finance, LLC (“JHYF”), and Jefferies Leveraged Credit Products, LLC (“JLCP”). JHYT is a registered broker-dealer engaged in the secondary sales and trading of high yield and special situation securities, including bank debt, post-reorganization equity, public and private equity, equity derivatives and other financial instruments. JHYT makes markets in high yield and distressed securities and provides research coverage on these types of securities. JHYF is engaged in the trading of total return swaps. JLCP is engaged in the trading of bank debt, credit default swaps and trade claims. JHYT, JHYF and JLCP are wholly owned subsidiaries of JHYH.

We own voting and non-voting interests in JHYH and have entered into management, clearing, and other services agreements with JHYH. We and Leucadia each have the right to nominate two of a total of four directors to JHYH’s board of directors. Two funds managed by us, JSOP and JESOP, are also investors in JHYH. We have determined that JHYH, JSOP and JESOP meet the definition of a variable interest entity. We are the primary beneficiary of JHYH, JSOP and JESOP and accordingly consolidate JHYH (and the assets, liabilities and results of operations of its wholly owned subsidiaries JHYT, JHYF and JLCP), JSOP and JESOP.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At February 28, 2013 and November 30, 2012, the carrying amount of our variable interests was $409.2 million and $389.4 million, respectively, which consist of our debt, equity and partnership interests in JHYH, JSOP and JESOP, which are eliminated in consolidation. In addition, the secondary market trading activity conducted through JHYT, JHYF and JLCP is a significant component of our overall brokerage platform, and while not contractually obligated, could require us to provide additional financial support and/or expose us to further losses of JHYH, JSOP and JESOP. The assets of these VIEs are available for the benefit of the mandatorily redeemable interest holders and equity holders. The creditors of these VIEs do not have recourse to our general credit.

There have been no changes in our conclusion to consolidate JHYH, JSOP and JESOP since formation. See Note 16, Noncontrolling Interests and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries for further discussion of JSOP, JESOP and the mandatorily redeemable interests in JHYH.

Mortgage-and asset-backed vehicles. We are the primary beneficiary of a mortgage-backed securitization vehicle to which we transferred a project loan and retained servicing rights over the loan as well as retained a portion of the securities issued by the securitization vehicle. Our variable interests in this vehicle consist of the securities and a contractual servicing fee. The asset of this VIE consists of a project loan, which is available for the benefit of the vehicles’ beneficial interest holders. The creditors of this VIE do not have recourse to our general credit.

We are also 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 consists of our collateral margin maintenance obligations under the master repurchase agreement. The assets of these VIEs consists of reverse repurchase agreements, which is available for the benefit of the vehicle’s debt holders. The creditors of these VIEs do not have recourse to our general credit.

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 months ended February 28, 2013 and year ended November 30, 2012. We have no explicit or implicit arrangements to provide additional financial support to these VIEs and have no liabilities related to these VIEs at February 28, 2013 and November 30, 2012.

JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.


	February 28, 2013
	Variable Interests
(in millions)	Financial Statement Carrying Amount			Maximum exposure to loss			VIE Assets

Collateralized loan obligations	$	24.5	⁽²⁾	$	24.5	⁽⁴⁾	$	1,231.0
Agency mortgage- and asset-backed securitizations (1)		1,300.4	⁽²⁾		1,300.4	⁽⁴⁾		9,160.4
Non-agency mortgage- and asset-backed securitizations (1)		938.1	⁽²⁾		938.1	⁽⁴⁾		60,800.9
Asset management vehicle		2.9	⁽³⁾		2.9	⁽⁴⁾		477.7
Private equity vehicles		53.8	⁽³⁾		96.8			79.1

Total	$	2,319.7		$	2,362.7		$	71,749.1

(1)	VIE assets represent the unpaid principal balance of the assets in these vehicles at February 28, 2013 and represent the underlying assets that provide the cash flows supporting our variable interests.

(2)	Consists of debt securities accounted for at fair value, which are included within Financial instruments owned.

(3)	Consists of equity interests and loans, which are included within Investments in managed funds and Loans to and investments in related parties.

(4)	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, 2012
	Variable Interests
(in millions)	Financial Statement Carrying Amount			Maximum exposure to loss			VIE Assets

Collateralized loan obligations	$	5.3	⁽²⁾	$	5.3	⁽⁴⁾	$	499.7
Agency mortgage- and asset-backed securitizations (1)		1,579.1	⁽²⁾		1,579.1	⁽⁴⁾		6,396.6
Non-agency mortgage- and asset-backed securitizations (1)		814.1	⁽²⁾		814.1	⁽⁴⁾		54,436.2
Asset management vehicle		3.0	⁽³⁾		3.0	⁽⁴⁾		505.3
Private equity vehicles