Jefferies Financial Group Inc.: Form 10-Q for the period ended Aug 31, 2023

This report contains or incorporates by reference “forward looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements about our future and statements that are not historical facts. These forward looking statements are usually preceded by the words “believe,” “intend,” “may,” “will,” or similar expressions. Forward looking statements may contain expectations regarding revenues, earnings, operations and other results, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future development of our business and products. Forward looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward looking statements is contained in this report and other documents we file. You should read and interpret any forward looking statement together with these documents, including the following:

• the description of our business and risk factors contained in our Annual Report on Form 10-K for the year ended November 30, 2022 and filed with the Securities and Exchange Commission (“SEC”) on January 27, 2023 and contained in our Quarterly Report on Form 10-Q for the quarterly period ended May 31, 2023 and filed with the SEC on July 7, 2023;
• the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein;
• the discussion of our risk management policies, procedures and methodologies contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” herein;
• the consolidated financial statements and notes to the consolidated financial statements contained in this report; and
• cautionary statements we make in our public documents, reports and announcements.

Any forward looking statement speaks only as of the date on which that statement is made. We undertake no obligation to update any forward looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law.

Our business, by its nature, does not produce predictable or necessarily recurring earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally and our own activities and positions.

Consolidated Results of Operations

Jefferies Group LLC Merger into Jefferies Financial Group Inc.

On November 1, 2022, we merged Jefferies Group LLC with and into Jefferies Financial Group Inc. In connection with the merger, we have reclassified the presentation of certain line items within our Consolidated Statements of Earnings to streamline our financial statements and better align the presentation of our firm with our strategy of building our investment banking and capital markets and asset management businesses. Prior year amounts have been revised to conform to these reclassification and presentation changes to current year reporting. Refer to Note 1, Organization and Basis of Presentation, for additional information related to these reclassification and presentation changes.

Overview

The following table provides an overview of our consolidated results of operations (dollars in thousands):

N/M — Not Meaningful

Executive Summary

Three Months Ended August 31, 2023

Consolidated Results

• Net revenues for the three months ended August 31, 2023 were $1.18 billion, down 21.7% compared with $1.51 billion for the three months ended August 31, 2022, as a result of a $455.2 million reduction in merchant banking net revenues within our asset management segment primarily attributable to divestitures made in the intervening period, partially offset by a $119. 4 million increase in Investment Banking and Capital Markets net revenues, as well as improved Asset Management investment return.
• Earnings before income taxes were $91.1 million, compared with $301.9 million for the prior year comparable quarter, with the difference primarily attributable to the substantial reduction in merchant banking net revenues.
• Net earnings attributable to Jefferies Financial Group Inc. common shareholders were $51.4 million, compared with $195.5 million for the prior year comparable quarter, with the difference primarily attributable to the substantial reduction in merchant banking net revenues.

Business Results

• Investment banking net revenues were $644.6 million for the three months ended August 31, 2023, compared with $656.8 million in the prior year comparable quarter. Advisory revenues were $335.3 million, down 30.4%, as overall mergers and acquisitions activity has been lower consistent with an industry-wide decline in activity over the periods. Total underwriting revenues of $264.9 million were 16.2% higher than the prior year comparable quarter of $227.9 million, with increases in equity and debt underwriting net revenues driven by improved market conditions.
• Equities net revenues of $268.0 million for the three months ended August 31, 2023 were 2.8% lower than those of the prior year comparable quarter, primarily due strong results and momentum across many equities business lines, offset by reduced net revenues from our securities finance business.
• Fixed income net revenues of $255.6 million were up 39.3% compared to the prior year comparable quarter, primarily driven by stronger results in our distressed trading, loans and investment grade corporates businesses, partially offset by lower revenues from our emerging markets business. In addition, losses in our CMBS business were meaningfully lower than in the prior year comparable quarter as interest rates were more stable relative to the rapid rise in rates in the same period last year.
• Asset management recognized net revenues of $10.1 million for the three months ended August 31, 2023, compared with $398.3 million in the prior year comparable quarter. Investment return was significantly higher on solid performance from certain of our strategies, but this was more than offset by a substantial decline in merchant banking net revenues as a result of the sale of Idaho Timber in August 2022 and the spin-off of Vitesse Energy in January 2023, as well as losses from the fair value write-downs of the carrying value of one of our merchant banking investments.

Non-interest Expenses

• Non-interest expenses were $1.09 billion for the three months ended August 31, 2023, a decrease of 9.7%, compared with $1.21 billion for the prior year comparable quarter, primarily due to lower cost of sales as a result of the sale of Idaho Timber in August 2022 and the spin-off Vitesse Energy in January 2023.
• Compensation and benefits expense for the three months ended August 31, 2023 was $644.1 million, an increase of $84.5 million, or 15.1%, from the prior year comparable quarter. Compensation and benefits expense as a percentage of Net revenues was 54.5% for the three months ended August 31, 2023, compared with 37.1% in the prior year comparable quarter and 43.3% for the year ended November 30, 2022. These lower ratios reflect higher merchant banking revenues during those earlier periods within our asset management segment, which have much lower compensation rates.
• Non-compensation expenses for the three months ended August 31, 2023 decreased compared with the prior year comparable quarter as a result of decreases in costs of sales primarily attributable to divestitures made within the last year. In addition, non-compensation expenses for the three months ended August 31, 2022 included an $80.0 million combined regulatory settlement with the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

Nine Months Ended August 31, 2023

Consolidated Results

• Net revenues for the nine months ended August 31, 2023 were $3.50 billion, down 22.8% compared with $4.54 billion for the nine months ended August 31, 2022, substantially as a result of a $905.0 million reduction in merchant banking net revenues within our asset management segment primarily driven by the divestitures made within the last year, and losses of $73.4 million and $59.2 million attributed to our equity method investments in OpNet and Golden Queen, respectively, both legacy merchant banking investments. In addition, Investment banking net revenues were lower compared to the prior year comparable period, reflecting reduced industry-wide mergers and acquisitions, new issues and leveraged finance activity. These decreases were partially offset by higher equities and fixed income net revenues.
• Earnings before income taxes of $267.0 million were 69.0% lower than that of the prior year comparable period, with a large portion of the decline primarily attributable to the reduction in merchant banking net revenues.
• Net earnings attributable to Jefferies Financial Group Inc. common shareholders of $197.4 million were 69.0% lower than that of the prior year comparable period, with a large portion of the decline primarily attributable to the reduction in merchant banking net revenues.

Business Results

• Investment banking net revenues were $1.71 billion for the nine months ended August 31, 2023, compared with $2.32 billion in the prior year comparable period. Advisory revenues were $886.6 million, down 36.5%, as overall mergers and acquisitions activity significantly declined. Underwriting revenues of $708.9 million were down 17.4% from the prior year comparable period of $858.6 million, also consistent with the reduction in industry-wide leveraged finance activity, while equity underwriting revenues are flat to the prior year comparable period, as market conditions have been improving.
• Equities net revenues of $852.0 million for the nine months ended August 31, 2023 were 5.9% higher than those of the prior year comparable period, with stronger results in our convertibles and U.S. cash equity businesses, partially offset by lower securities finance revenues.
• Fixed income net revenues of $883.0 million were up 57.8% compared to the prior year comparable period, reflecting strong results across a number of our businesses, including corporates, distressed trading, loans, and U.S. rates, partially offset by lower emerging markets revenues. In addition, losses in our CMBS business were meaningfully reduced from the prior year as interest rates were more stable relative to the rapid rise in rates in the prior year.
• Asset management net revenues were $47.7 million, compared with $854.4 million in the prior year comparable period. Investment return was significantly higher on strong performance from certain of our strategies, offset by a $905.1 million decrease in our merchant banking activities within our asset management segment largely due to the sale of Idaho Timber in August 2022 and the spin-off of Vitesse Energy in January 2023, as well as losses of $73.4 million and $59.2 million attributed to our equity method investments in OpNet and Golden Queen, respectively, both legacy merchant banking investments.

Non-interest Expenses

• Non-interest expenses were $3.24 billion for the nine months ended August 31, 2023, a decrease of 12.1%, compared with non-interest expenses of $3.68 billion for the prior year comparable period. The decrease is primarily due to lower cost of sales as a result of divestitures made within the last year including the sale of Idaho Timber in August 2022 and spin-off Vitesse Energy in January 2023.
• Compensation and benefits expense for the nine months ended August 31, 2023 was $1.92 billion, a decrease of $6.9 million, or 0.4%, from the prior year comparable period. Compensation and benefits expense as a percentage of Net revenues was 54.9% for the nine months ended August 31, 2023, compared with 42.5% in the prior year comparable period and 43.3% for the year ended November 30, 2022. These lower ratios reflect a much higher proportion of merchant banking revenues during those earlier periods within our asset management segment, which have much lower compensation rates.
• Non-compensation expenses for the nine months ended August 31, 2023 decreased compared with prior year comparable period as a result of decreases in costs of sales attributable to divestitures made within the last year. In addition, non-compensation expenses for the nine months ended August 31, 2022 included an $80.0 million combined regulatory settlement with the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. These decreases were partially offset by higher business development expenses, professional fees largely related to an increase in legal costs associated with capital markets transactions and litigation, technology and communications expenses, and bad debt and loss reserves.

Headcount

• At August 31, 2023, we had 5,505 employees globally, an increase of 158 employees from our headcount of 5,347 at August 31, 2022. Our headcount increased as a result of growth in our investment banking headcount, as well as additions in technology and other corporate services staff to support our growth and strategic priorities. The increase was partially offset by a decrease from the spin-off of our interests in Vitesse Energy in January 2023.

Revenues by Source

Historically, our results of operations have been presented by summarized income statement line items by business segments comprised as follows: Investment Banking and Capital Markets, Asset Management, Merchant Banking, Corporate and Parent Company Interest, including consolidation adjustments. During the year ended November 30, 2022 and in connection with the merger of Jefferies Group LLC with and into Jefferies Financial Group Inc., we transferred significantly all of our legacy merchant banking investments to our Asset Management reportable segment. Certain publicly traded equity investments that are related to investment banking relationships were transferred from our Merchant Banking reportable segment to our Investment Banking and Capital Markets reportable segment. In addition, there were certain investments that were held within the Investment Banking and Capital Markets reportable segment, which have been transferred to the Asset Management reportable segment. These investments are now managed by the respective segment managers and we have revised our reportable business segment presentation accordingly. Prior period amounts have been revised to conform to the current segment reporting.

We now present our results as two reportable business segments as follows: Investment Banking and Capital Markets and Asset Management. Additionally, corporate activities are now fully allocated to each of these reportable business segments. We believe that this reorganization of our segments better aligns the manner in which we manage our business activities and is in keeping with our fundamental long-term strategy of continuing to build out our investment banking effort, enhancing our capital markets businesses and further developing our Leucadia Asset Management alternative asset management platform as we continue to divest of significant portions of our legacy merchant banking portfolio.

Net revenues presented for our Investment Banking and Capital Markets reportable segment include allocations of interest income and interest expense as we assess the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective activities, including the net interest cost of allocated long-term debt, which is a function of the mix of each business's associated assets and liabilities and the related funding costs. During the quarter ended August 31, 2023, we refined our allocated net interest methodology to better reflect net interest expense across our business units based on use of capital. Historical periods have been recast to conform with the revised methodology.

The remainder of our “Consolidated Results of Operations” is presented on a detailed product and expense basis. Our “Revenues by Source” is reported along the following business lines: investment banking, equities, fixed income and asset management. Additionally, the results of the asset management business include a new subcategory “merchant banking.”

Foreign currency transaction gains or losses, fair value debt valuation adjustments on derivative contracts, gains and losses on investments held in deferred compensation or certain other immaterial corporate income items are not considered by management in assessing the financial performance of our operating businesses and are, therefore, not reported as part of our business segment results.

The changes to the manner in which we describe and disclose the performance of our business activities has no effect on our historical consolidated results of operation. Previously reported results are presented on a comparable basis in the tables below.

The following provides a summary of “Net Revenues by Source” (dollars in thousands):

N/M — Not Meaningful

(1) Allocated net interest is not separately disaggregated for Investment Banking and Capital Markets. This presentation is aligned to our Investment Banking and Capital Markets internal performance measurement.

(2) Allocated net interest represents an allocation to Asset Management of our long-term debt interest expense, net of interest income on our Cash and cash equivalents and other sources of liquidity. Allocated net interest has been disaggregated to increase transparency and to make clearer actual Investment return. We believe that aggregating

Investment return and Allocated net interest would obscure the Investment return by including an amount that is unique to our credit spreads, debt maturity profile, capital structure, liquidity risks and allocation methods.

Investment Banking Revenues

Investment banking is composed of revenues from:

• advisory services with respect to mergers/acquisitions, restructurings/recapitalizations and private capital advisory transactions;
• underwriting services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage-backed and asset-backed securities and equity and equity-linked securities and loan syndication;
• our 50% share of net earnings from our corporate lending joint venture, Jefferies Finance;
• our 43.6% share of net earnings from our commercial real estate joint venture, Berkadia (which includes commercial mortgage origination and servicing);
• Foursight, our wholly-owned subsidiary engaged in the lending and servicing of automobile loans; and
• securities and loans received or acquired in connection with our investment banking activities.

The following table sets forth our investment banking revenues (dollars in thousands):

The following table sets forth our investment banking activities (dollars in billions):

Three Months Ended August 31, 2023

• Investment banking revenues for the three months ended August 31, 2023 were $644.6 million, compared with $656.8 million for the three months ended August 31, 2022 primarily reflecting the reduction in industry-wide mergers and acquisitions activity, partially offset by improved performance from our Jefferies Finance joint ventures and unrealized gains on certain equity positions associated with our investment banking activities.
• Advisory revenues were $335.3 million, down 30.4% compared to the prior year comparable quarter, as deal volumes and values across most sectors in the global mergers and acquisitions markets declined. We continue to believe we are well positioned to gain market share.
• Total underwriting revenues for the three months ended August 31, 2023 were $264.9 million, an increase of 16.2% from $227.9 million in the prior year comparable quarter, reflecting slightly higher net revenues of $154.2 million in equity underwriting and higher net revenues of $110.7 million in debt underwriting. Debt underwriting revenues have increased on improved market conditions.
• Other investment banking net revenues were $44.5 million for the three months ended August 31, 2023, compared with negative net revenues of $52.5 million for the three months ended August 31, 2022. Results from our share of the net earnings of our Jefferies Finance joint venture improved from the prior year comparable quarter primarily driven by higher net fee and net interest income, as well as favorable mark-to-market adjustments on the loan portfolio, and a reduction in reserves. Revenues from our share of the net earnings of our Berkadia joint venture were impacted by a decline in mortgage origination volumes, partially offset by higher interest income on the loan servicing portfolio. Revenues from our automobile lending and servicing business were relatively consistent as compared to the prior year comparable quarter. In addition, during the three months ended August 31, 2023, we recognized gains on various equity positions related to our investment banking activities.
• Our investment banking backlog continues to strengthen from the levels at the end of the prior quarter. We have seen recent signs of a further pickup in underwriting and mergers and acquisitions activity, although execution is always uncertain and dependent on market conditions. As an indicator of net revenues in a given future period, backlog snapshots are subject to limitations. The time frame for the realization of revenues from these expected transactions varies and is influenced by factors we do not control. Transactions not included in the estimate may occur, and expected transactions may also be modified or cancelled.

Nine Months Ended August 31, 2023

• Investment banking revenues for the nine months ended August 31, 2023 were $1.71 billion, compared with $2.32 billion for the nine months ended August 31, 2022 reflecting the reduction in industry-wide deal activity, partially offset by improved performance from our Jefferies Finance joint ventures and unrealized gains on certain equity positions associated with our investment banking vehicles.
• Advisory revenues were $886.6 million, down 36.5% compared to the prior year comparable period, as deal volume and deal value across most sectors in the global mergers and acquisitions markets declined while we have continued to maintain our market share momentum.
• Total underwriting revenues for the nine months ended August 31, 2023 were $708.9 million, a decrease of 17.4% from $858.6 million in the prior year comparable period, reflecting slightly lower net revenues of $428.1 million in equity underwriting and lower net revenues of $280.8 million in debt underwriting. The decline in debt underwriting net revenues is consistent with a general slowdown in new issuance amid uncertainty in economic and market conditions due to inflation, elevated interest rates and market volatility while equity underwriting revenues are consistent with the prior year comparable period.
• Other investment banking net revenues were $116.0 million for the nine months ended August 31, 2023, compared with net revenues of $68.9 million for the nine months ended August 31, 2022. Results from our share of the net earnings of our Jefferies Finance joint venture increased driven by favorable mark-to-market adjustments on the loan portfolio, as well as higher net interest income, partially offset by lower net fee income. Revenues from our share of the net earnings of our Berkadia joint venture were impacted by a decline in mortgage origination volumes, partially offset by higher interest income on the loan servicing portfolio. Revenues from our automobile lending and servicing business were relatively consistent as compared to the prior year. In addition, during the nine months ended August 31, 2023, we recognized gains on various equity positions related to our investment banking activities.

Equities Net Revenues

Equities is composed of net revenues from:

• services provided to our clients from which we earn commissions or spread revenue by executing, settling and clearing transactions for clients;
• advisory services offered to clients;
• financing, securities lending and other prime brokerage services offered to clients, including capital introductions and outsourced trading; and
• wealth management services.

Three Months Ended August 31, 2023

• Equities net revenues were $268.0 million for the three months ended August 31, 2023, almost flat to net revenues of $275.6 million for the prior year comparable quarter, with strong results and momentum across many equities business lines, offset by a decline in performance within our securities finance business.

Nine Months Ended August 31, 2023

• Equities net revenues were $852.0 million for the nine months ended August 31, 2023, an increase of 5.9% from net revenues of $804.9 million for the prior year comparable period, as results in our global convertible business improved year over year as more favorable market conditions for this asset class led to increased primary issuance and secondary trading. Additionally, we achieved strong results in our U.S. cash equities business, which was partially offset by lower securities finance revenues.

Fixed Income Net Revenues

Fixed income is composed of net revenues from:

• executing transactions for clients and making markets in securitized products, investment grade, high-yield, distressed, emerging markets, municipal and sovereign securities and bank loans, as well as foreign exchange execution on behalf of clients;
• interest rate derivatives and credit derivatives; and
• financing services offered to clients.

Three Months Ended August 31, 2023

• Fixed income net revenues totaled $255.6 million for the three months ended August 31, 2023, an increase of 39.3% from net revenues of $183.5 million for the three months ended August 31, 2022, primarily reflecting stronger results across our distressed trading, loans and investment grade corporates businesses, partially offset by lower revenues from our emerging markets business. In addition, losses in our CMBS business were meaningfully lower than in the prior year comparable quarter as interest rates were stable relative to the rapid rise in rates in the same period last year. Our Fixed Income businesses broadly performed better during the third quarter of 2023 as compared to the more challenging market environment in the third quarter of 2022.

Nine Months Ended August 31, 2023

• Fixed income net revenues totaled $883.0 million for the nine months ended August 31, 2023, an increase of 57.8% from net revenues of $559.7 million for the nine months ended August 31, 2022, primarily reflecting exceptionally strong results across our distressed trading, loans, investment grade corporates and U.S. rates businesses, partially offset lower revenues from our emerging markets business. In addition, losses in our CMBS business were meaningfully reduced from the prior year as interest rates were more stable relative to the rapid rise in rates in the prior year. Our Fixed Income businesses broadly performed better during the nine months ended August 31, 2023, as compared to the more challenging market environment in the prior year comparable period.

Asset Management

We operate a diversified alternative asset management platform offering institutional clients a range of investment strategies directly and through our affiliated asset managers. We provide certain of our affiliated asset managers access to our fully integrated global operational infrastructure and support. This may include strategy and product development, daily operations and finance-related activities, compliance, legal and human resources support, as well as marketing and business development.

Asset management revenues include the following:

• management and performance fees from funds and accounts managed by us;
• revenue from affiliated asset managers where we are entitled to portions of their revenues and/or profits, as well as earnings on our ownership interests in our affiliated asset managers;
• investment income from our capital invested in and managed by us and our affiliated asset managers; and
• revenues from investments held in our merchant banking portfolio, including consolidated operations from real estate development activities, oil and gas activities and timber manufacturing (until the sale of Idaho Timber in August 2022 and our spin-off of our interest in Vitesse Energy in January 2023).

Asset management fees and revenues are impacted by the level of assets under management and the performance return of those assets, for the most part on an absolute basis, and, in certain cases, relative to a benchmark or hurdle. These components can be affected by financial markets, profits and losses in the applicable investment portfolios and client capital activity. Further, asset management fees vary with the nature of investment management services. The terms under which clients may terminate our investment management authority, and the requisite notice period for such termination, varies depending on the nature of the investment vehicle and the liquidity of the portfolio assets. In some instances, performance fees and similar revenues are recognized once a year, when they become fixed and determinable and are not probable of being significantly reversed, typically in December. As a result, a significant portion of our performance fees and similar revenues generated from investment returns in a calendar year are recognized in our following fiscal year.

The following summarizes the results of our Asset Management businesses by asset class (dollars in thousands):

(1) These amounts include our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements, as well as earnings on our ownership interest in affiliated asset managers.

Three Months Ended August 31, 2023

• Asset management fees and revenues in the three months ended August 31, 2023 were $16.4 million, consistent with fees and revenues of $17.1 million in the prior year comparable quarter.
• Investment return in the three months ended August 31, 2023 was $31.7 million, compared with $(35.5) million in the prior year comparable quarter, with the net increase led by favorable returns generated from new fund strategies launched during fiscal 2023 and improved performance by certain multi-strategy funds. These increases in performance returns were partially reduced by weaker performance from certain long-short funds.
• Net losses from merchant banking assets managed within our Asset Management business were $25.1 million, compared with net revenues of $430.0 million in the prior year comparable quarter, which include manufacturing revenues of $253.5 million from Idaho Timber (sold in August 2022) and oil and gas revenues of $103.8 million from Vitesse Energy (spun-off in January 2023). Additionally, we recognized unrealized losses on certain merchant banking position due to fair value write-downs.

Nine Months Ended August 31, 2023

• Asset management fees and revenues in the nine months ended August 31, 2023 were $75.0 million, compared with $75.7 million in the prior year comparable period, reflecting higher management and performance fees on funds managed by us offset by a decline in performance and similar fees and revenues earned through our strategic affiliates.
• Investment return in the nine months ended August 31, 2023 was $91.6 million, compared with near zero in the prior year comparable period, with the net increase led by favorable returns generated from new fund strategies launched during fiscal 2023 and improved performance by certain long-short and multi-strategy funds. These increases in performance returns were partially reduced by weaker performance from other funds.
• Net losses from merchant banking assets managed within our Asset Management business were $83.9 million, compared with net revenues of $821.2 million in the prior year comparable period, which include manufacturing revenues of $570.4 million from Idaho Timber (sold in August 2022) and oil and gas revenues of $173.9 million from Vitesse Energy (spun-off in January 2023). Results from our merchant banking activities for the nine months ended August 31, 2023 were impacted by net losses of $73.4 million and $59.2 million attributed to our equity method investments in OpNet and Golden Queen, respectively, both legacy merchant banking investments.

Assets under Management

We and our affiliated asset managers have aggregate net asset values or net asset value equivalent assets under management of $29.3 billion and $29.1 billion at August 31, 2023 and November 30, 2022, respectively. Net asset value or net asset value equivalent assets under management are composed of the fair value of the net assets of a fund or the net capital invested in a separately managed account. These include the following:

• Net asset values of investments made by us in funds or separately managed accounts were approximately $3.3 billion at August 31, 2023 and approximately $2.6 billion at November 30, 2022. We invest in certain strategies using our own capital, often before opening a strategy to outside capital. The net asset values include our capital of $1.7 billion at August 31, 2023 and $1.5 billion at November 30, 2022 plus amounts financed of $1.6 billion at August 31, 2023 and $0.9 billion at November 30, 2022. Revenues related to the investments made by us are presented in Investment return within the results of our asset management business.
• Assets under management by affiliated asset managers with whom we have an ongoing profit or revenue sharing arrangement were $24.3 billion at August 31, 2023 and $25.2 billion at November 30, 2022. Revenues from our share of fees received by affiliated asset managers are presented in Revenue from strategic affiliates within the results of our asset management businesses.
• Third-party investments actively managed by our wholly-owned managers were $1.7 billion at August 31, 2023 and $1.3 billion at November 30, 2022. We earn asset management fees as a result of the third-party investments, which are presented in Asset management fees and revenues within the results of our asset management businesses.

The tables below include only third-party assets under management by us, excluding those of our affiliated asset managers.

Period-end assets under management by predominant asset class were as follows (in millions):

Change in assets under management were as follows (in millions):

Our definition of assets under management is not based on any definition contained in any of our investment management agreements and differs from the manner in which “Regulatory Assets Under Management” is reported to the SEC on Form ADV.

Asset Management Investments

Our asset management business makes seed and additional strategic investments directly in alternative asset management separately managed accounts and co-mingled funds where we act as the asset manager or in affiliated asset managers where we have strategic relationships and participate in the revenues or profits of the affiliated manager. The following table represents our investments by type of asset manager (in thousands):

(1) Due to the level or nature of an investment in a fund, we may consolidate that fund; and accordingly, the assets and liabilities of the fund are included in the representative line items in our consolidated financial statements. At August 31, 2023 and November 30, 2022, $47.2 million and $9.7 million, respectively, represent net investments in funds that have been consolidated in our financial statements.

(2) Where we have investments in a separately managed account, the assets and liabilities of such account are presented in our consolidated financial statements within each respective line item.

Other

Other revenues include foreign currency transaction gains or losses, fair value debt valuation adjustments on derivative contracts, gains and losses on investments held in deferred compensation or certain other corporate income items that are not attributed to business segments as management does not consider such amounts in assessing the financial performance of our operating businesses.

Non-interest Expenses

Non-interest expenses were as follows (dollars in thousands):

Total Non-interest Expenses

Three Months Ended August 31, 2023

• Non-interest expenses were $1.09 billion for the three months ended August 31, 2023, a decrease of 9.7%, compared with $1.21 billion for the prior year comparable quarter. The decrease is primarily due to lower cost of sales related to the sale of Idaho Timber in August 2022 and the spin-off of Vitesse Energy in January 2023.

Nine Months Ended August 31, 2023

• Non-interest expenses were $3.24 billion for the nine months ended August 31, 2023, a decrease of 12.1%, compared with $3.68 billion for the prior year comparable period. The decrease is primarily due to lower cost of sales attributable to divestitures made within the last year of certain holdings within our merchant banking business and reflects the sale of Idaho Timber in August 2022 and the spin-off of Vitesse Energy in January 2023.

Compensation and Benefits

• Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation and share-based awards and the amortization of share-based and cash compensation awards to employees.
• Cash and share-based awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded during the year of the award. Compensation and benefits expense includes amortization expense associated with these awards to the extent vesting is contingent on future service. In addition, certain awards to our Chief Executive Officer and our President contain market and performance conditions and the awards are amortized over their service periods.
• Compensation and benefits expense was $644.1 million and $1.92 billion for the three and nine months ended August 31, 2023, respectively, compared with $559.6 million and $1.93 billion for the three and nine months ended August 31, 2022, respectively, which is consistent with net revenues in our Investment Banking and Capital Markets segment. A significant portion of our compensation expense is highly variable with net revenues.
• Compensation and benefits expense as a percentage of Net revenues was 54.5% and 54.9% for the three and nine months ended August 31, 2023, respectively, compared with 37.1% and 42.5% for the three and nine months ended August 31, 2022, respectively. The lower ratios for the three and nine months ended August 31, 2022 reflect a much higher proportion of merchant banking revenues within our asset management segment.
• Compensation expense related to the amortization of share- and cash-based awards amounted to $73.2 million and $219.9 million for the three and nine months ended August 31, 2023, respectively, compared with $42.3 million and $127.3 million for the three and nine months ended August 31, 2022, respectively.
• Employee headcount was 5,505 at August 31, 2023, an increase of 158 employees from our headcount of 5,347 at August 31, 2022. Our headcount increased as a result of growth in our investment banking headcount, as well as additions in technology and other corporate services staff to support our growth and strategic priorities. The increase was partially offset by a decrease from the spin-off of our interests in Vitesse Energy in January 2023.
• Refer to Note 13, Compensation Plans, in our consolidated financial statements included in this Quarterly Report on Form 10-Q, for further details on compensation and benefits.

Non-interest Expenses (Excluding Compensation and Benefits)

Three Months Ended August 31, 2023

• Non-interest expenses, excluding Compensation and benefits, as a percentage of Net revenues was 37.8% and 42.9% for the three months ended August 31, 2023 and 2022, respectively, and was impacted by the following:
• Cost of sales and depreciation and amortization expenses were significantly lower reflecting the sale of Idaho Timber in August 2022 and the spin-off of Vitesse Energy in January 2023.
• Technology and communication expenses were higher related to the development of various trading and management systems and increased market data costs.
• Other expenses were lower as non-compensation expenses for the three months ended August 31, 2022 included an $80.0 million combined regulatory settlement with the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

Nine Months Ended August 31, 2023

• Non-interest expenses, excluding Compensation and benefits, as a percentage of Net revenues was 37.5% and 38.5% for the nine months ended August 31, 2023 and 2022, respectively, and was impacted by the following:
• Cost of sales and depreciation and amortization expenses were significantly lower reflecting the sale of Idaho Timber in August 2022 and the spin-off of Vitesse Energy in January 2023.
• Business development expenses were higher as business travel, conferences and other events continued to return to more normal levels.
• Professional services expenses were higher primarily on increased transaction related legal fees associated with capital markets transaction and litigation as well as consulting fees related to strategic technology investment initiatives.
• Technology and communication expenses were higher related to the development of various trading and management systems and increased market data costs.
• Other expenses were lower as non-compensation expenses for the nine months ended August 31, 2022 included an $80.0 million combined regulatory settlement with the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. This decrease was partially offset by higher bad debt expense and loss reserves.

Income Taxes

• For the three months ended August 31, 2023 and 2022, the provision for income taxes was $37.1 million and $105.9 million, respectively, representing an effective tax rate of 40.8% and 35.1%, respectively. For the nine months ended August 31, 2023 and 2022, the provision for income taxes was $75.1 million and $219.9 million, respectively, representing an effective tax rate of 28.1% and 25.6%, respectively.
• The increase in the effective tax rate for the three months ended August 31, 2023, as compared to the prior year comparable quarter, is primarily due to the lower amount of earnings before income taxes in the current year quarter than the prior year comparable quarter and the increase in interest accrued on unrecognized tax benefits as a result of higher interest rates.
• The increase in the effective tax rate for the nine months ended August 31, 2023, as compared to the prior year comparable period, is primarily due to the recognition of a smaller excess tax benefit on restricted stock units distributed in the first quarter of 2023 than the prior year comparable quarter.
• Refer to Note 19, Income Taxes, in our consolidated financial statements included in this Quarterly Report on Form 10-Q, for further details on income taxes.

Accounting Developments

There are no accounting standard updates, except as discussed in Note 3, Accounting Developments, in our consolidated financial statement included in this quarterly report on Form 10-Q, which we have either determined are applicable or expected to have a material impact on our consolidated financial statements.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. Actual results can and may differ from estimates. These differences could be material to our consolidated financial statements.

We believe our application of U.S. GAAP and the associated estimates are reasonable. Our accounting estimates are reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

For further discussions of the following significant accounting policies and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2022.

Valuation of Financial Instruments

Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value. 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). Unrealized gains or losses are generally recognized in Principal transactions revenues in our Consolidated Statements of Earnings.

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, where Level 1 uses observable prices in active markets and Level 3 uses valuation techniques that incorporate significant unobservable inputs. Greater use of management judgment is required in determining fair value when inputs are less observable or unobservable in the marketplace, such as when the volume or level of trading activity for a financial instrument has decreased and when certain factors suggest that observed transactions may not be reflective of orderly market transactions. Judgment must be applied in determining the appropriateness of available prices, particularly in assessing whether available data reflects current prices and/or reflects the results of recent market transactions. Prices or quotes are weighed when estimating fair value with greater reliability placed on information from transactions that are considered to be representative of orderly market transactions.

Fair value is a market-based measure; therefore, when market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability. The availability of observable inputs can vary for different products. We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity. The valuation of financial instruments categorized within Level 3 of the fair value hierarchy involves the greatest extent of management judgment. (See Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2022 and Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Quarterly Report on Form 10-Q for further information on the definitions of fair value, Level 1, Level 2 and Level 3 and related valuation techniques.)

For information on the composition of our Financial instruments owned and Financial instruments sold, not yet purchased recorded at fair value and the composition of activity of our Level 3 assets and Level 3 liabilities, see Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Controls Over the Valuation Process for Financial Instruments – Our Independent Price Verification Group, independent of the trading function, plays an important role 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. Where a pricing model is used to determine fair value, these control processes include reviews of the pricing model’s theoretical soundness and appropriateness by risk management personnel with relevant expertise who are independent from the trading desks. In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.

Income Taxes

Significant judgment is required in estimating our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In determining the provision for income taxes, we must make judgments and interpretations about how to apply inherently complex tax laws to numerous transactions and business events. In addition, we must make estimates about the amount, timing and geographic mix of future taxable income, which includes various tax planning strategies to utilize tax attributes and deferred tax assets before they expire.

We record a valuation allowance to reduce our net deferred tax asset to the amount that is more likely than not to be realized. We are required to consider all available evidence, both positive and negative, and to weigh the evidence when determining whether a valuation allowance is required and the amount of such valuation allowance. Generally, greater weight is required to be placed on objectively verifiable evidence when making this assessment, in particular on recent historical operating results.

We also record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which could be significant to our financial condition or results of operations.

Impairment of Long-Lived Assets

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of whether an asset group is recoverable is based on management's estimate of undiscounted future cash flows directly attributable to the asset group as compared to its carrying value. If the carrying amount of the asset group is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value.

Impairment of Equity Method Investments

We evaluate equity method investments for impairment when operating losses or other factors may indicate a decrease in value which is other than temporary. We consider a variety of factors including economic conditions nationally and in their geographic areas of operation, adverse changes in the industry in which they operate, declines in business prospects, deterioration in earnings, increasing costs of operations and other relevant factors specific to the investee. Whenever we believe conditions or events indicate that one of these investments might be significantly impaired, we generally obtain from such investee updated cash flow projections and obtain other relevant information related to assessing the overall valuation of the investee. Utilizing this information, we assess whether the investment is considered to be other-than-temporarily impaired. To the extent an investment is deemed to be other-than-temporarily impaired, an impairment charge is recognized for the amount, if any, by which the investment’s book value exceeds our estimate of the investment’s fair value.

In the first quarter of 2023, we performed a valuation of our equity method investment in Golden Queen as forecasts of the expected future production of gold and silver from its mine had declined from previous periods. Our estimate of fair value was based on a discounted cash flow analysis, which included management’s projections of future Golden Queen cash flows and a discount rate of 11.0%. The estimated fair value of our investment in Golden Queen was $24.2 million, which was $22.1 million lower than our prior carrying value at November 30, 2022. As a result, an impairment loss of $22.1 million was recorded in Other income in the Consolidated Statement of Earnings for the three months ended February 28, 2023. During the three months ended May 31, 2023, we recognized an additional impairment loss of $7.3 million primarily due to further declines in cash flows at Golden Queen resulting in a carrying value our investment of $16.8 million at May 31, 2023. During the three months ended August 31, 2023, we recognized an additional impairment loss of $27.8 million primarily based on our estimate of what could be recognized in a sale transaction for the investment resulting in a carrying value our investment of $8.8 million at August 31, 2023.

Goodwill

At August 31, 2023, Goodwill recorded in our Consolidated Statement of Financial Condition is $1.74 billion (3.1% of total assets). The nature and accounting for goodwill is discussed in Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2022 and Note 11, Goodwill and Intangible Assets, in our consolidated financial statements included in this Quarterly Report on Form 10-Q. Goodwill must be allocated to reporting units and tested for impairment at least annually, or when circumstances or events make it more likely than not that an impairment occurred. Goodwill is tested by comparing the estimated fair value of each reporting unit with its carrying value. Our annual goodwill impairment testing date for a substantial portion of our reporting units is August 1 and November 30 for other identified reporting units.

We use allocated tangible equity plus allocated goodwill and intangible assets for the carrying amount of each reporting unit. The amount of tangible equity allocated to a reporting unit is based on our cash capital model deployed in managing our businesses, which seeks to approximate the capital a business would require if it were operating independently. For further information on our Cash Capital Policy, refer to the Liquidity, Financial Condition and Capital Resources section herein. Intangible assets are allocated to a reporting unit based on either specifically identifying a particular intangible asset as pertaining to a reporting unit or, if shared among reporting units, based on an assessment of the reporting unit’s benefit from the intangible asset in order to generate results.

Estimating the fair value of a reporting unit requires management 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. Estimated fair values for our reporting units utilize market valuation methods that incorporate price-to-earnings and price-to-book multiples of comparable public companies and/or projected cash flows. Under the market valuation approach, the key assumptions are the selected multiples and our internally developed projections of future profitability, growth and return on equity for each reporting unit. The weight assigned to the multiples requires judgment in qualitatively and quantitatively evaluating the size, profitability and the nature of the business activities of the reporting units as compared to the comparable publicly-traded companies. The valuation methodology for our reporting units are sensitive to management’s forecasts of future profitability, which are a significant component of the valuation and come with a level of uncertainty regarding trading volumes and capital market transaction levels. In addition, as the fair values determined under the market valuation approach represent a noncontrolling interest, we apply a control premium to arrive at the estimate fair value of each reporting unit on a controlling basis.

The results of our assessment on August 1, 2023 indicated that all of our reporting units had a fair value in excess of their carrying amounts based on current projections and, accordingly, goodwill is not considered to be impaired. The carrying values of goodwill by reporting unit at August 31, 2023 are as follows: $724.0 million in Investment Banking, $255.4 million in Equities and Wealth Management, $576.9 million in Fixed Income, $143.0 million in Asset Management and $40.2 million attributed to various individual legacy merchant banking investments.

Liquidity, Financial Condition and Capital Resources

Our CFO and Global Treasurer are responsible for developing and implementing our liquidity, funding and capital management strategies. These policies are determined by the nature and needs of our day to day business operations, business opportunities, regulatory obligations, and liquidity requirements.

Our actual levels of capital, total assets and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long term and short term funding. We have historically maintained a balance sheet consisting of a large portion of our total assets in cash and liquid marketable securities. The liquid nature of these assets provides us with flexibility in financing and managing our business.

We also own a legacy portfolio of businesses and investments that are reflected as consolidated subsidiaries, equity investments or securities. We are in the process of liquidating a substantial portion of this portfolio with the intention of selling to third parties or distributing to shareholders this portfolio over the next few years.

In keeping with our strategy of returning excess liquidity to shareholders, during the nine months ended August 31, 2023, we returned an aggregate of $911.7 million to shareholders primarily in the form of $208.6 million in cash dividends, the repurchase of 4.8 million common shares for a total of $165.3 million at a weighted average price of $34.74 per share, and on January 13, 2023, we distributed our ownership interests in Vitesse Energy on a tax-free pro rata basis to all shareholders, resulting in a distribution of capital of $527.0 million.

We maintain modest leverage to support our investment grade ratings. The growth of our balance sheet is supported by our equity and we have quantitative metrics in place to monitor leverage and double leverage. Our capital plan is robust, in order to sustain our operating model through stressed conditions. We maintain adequate financial resources to support business activities in both normal and stressed market conditions, including a buffer in excess of our regulatory, or other internal or external, requirements. Our access to funding and liquidity is stable and efficient to ensure that there is sufficient liquidity to meet our financial obligations in normal and stressed market conditions.

Our Balance Sheet

A business unit level balance sheet and cash capital analysis are prepared and reviewed with senior management on a weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross balance sheet limits are adjusted, as necessary. This process ensures that the allocation of capital and costs of capital are incorporated into business decisions. The goals of this process are to protect the firm’s platform, enable our businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage.

We actively monitor and evaluate our financial condition and the composition of our assets and liabilities. We continually monitor our overall securities inventory, including the inventory turnover rate, which confirms the liquidity of our overall assets. A significant portion of our financial instruments are valued on a daily basis and we monitor and employ balance sheet limits for our various businesses.

The following table provides detail on selected balance sheet items (dollars in millions):

Total assets at August 31, 2023 and November 30, 2022 were $56.04 billion and $51.06 billion, respectively, an increase of 9.8%. During the three and nine months ended August 31, 2023, average total assets were approximately 7.1% and 7.3% higher, respectively, than total assets at August 31, 2023.

Our total Financial instruments owned inventory was $22.81 billion at August 31, 2023, an increase of 22.2%, from $18.67 billion at November 30, 2022. During the nine months ended August 31, 2023, our total Financial instruments owned inventory increased primarily due to increases in corporate debt and equity securities, mortgage- and asset-backed securities and U.S. government and agency securities. Financial instruments sold, not yet purchased inventory was $11.83 billion at August 31, 2023, an increase of 7.0% from $11.06 billion at November 30, 2022, with the increase primarily driven by an increase in corporate debt securities. Our overall net inventory position was $10.98 billion and $7.61 billion at August 31, 2023 and November 30, 2022, respectively, with the increase primarily due to increases in mortgage- and asset-backed securities, corporate equity securities, U.S. government and agency securities and derivative contracts.

Our Level 3 Financial instruments owned as a percentage of total Financial instruments owned decreased to 4.0% at August 31, 2023 from 4.2% at November 30, 2022.

The following table summarizes Level 3 assets by operating segment (in millions, except percentages):

(1) At August 31, 2023 and November 30, 2022, $288.2 million and $218.7 million, respectively, are attributed to merchant banking investments within in our Asset Management operating segment.

Securities financing assets and liabilities include financing for our financial instruments trading activity, matched book transactions and mortgage finance transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. The aggregate outstanding balance of our securities financing assets and liabilities increase or decrease from period to period depending on fluctuations in the level of our client activity and the level of our own trading activity. Our average month end balance of total reverse repos and stock borrows during the three and nine months ended August 31, 2023 were 36.1% and 32.9% higher, respectively, than the August 31, 2023 balance. Our average month end balances of total repos and stock loans during the three and nine months ended August 31, 2023 were 32.6% and 22.5% higher, respectively, than the August 31, 2023 balance.

The following table presents our period end balance, average balance and maximum balance at any month end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (in millions):

Fluctuations in the balance of our repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. Additionally, the fluctuations in the balances of our securities purchased under agreements to resell are influenced in any given period by our clients’ balances and our clients’ desires to execute collateralized financing arrangements via the repurchase market or via other financing products. Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider the fluctuations intraperiod to be typical for the repurchase market.

Leverage Ratios

The following table presents total assets, total equity, total Jefferies Financial Group Inc. shareholders’ equity and tangible Jefferies Financial Group Inc. shareholders’ equity with the resulting leverage ratios (dollars in millions):

(1) Leverage ratio equals total assets divided by total equity.

(2) Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets less goodwill and identifiable intangible assets divided by tangible Jefferies Financial Group Inc. shareholders’ equity. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio.

Liquidity Management

The key objectives of the liquidity management framework are to support the successful execution of our business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. Our liquidity management policies are designed to mitigate the potential risk that we may be unable to access adequate financing to service our financial obligations without material franchise or business impact.

The principal elements of our liquidity management framework are our Contingency Funding Plan, our Cash Capital Policy and our assessment of Modeled Liquidity Outflow (“MLO”).

Contingency Funding Plan. Our Contingency Funding Plan is based on a model of a potential liquidity contraction over a one year time period. This incorporates potential cash outflows during a market or our idiosyncratic liquidity stress event, including, but not limited to, the following:

• Repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;
• Maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;
• Higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements and other secured funding;
• Liquidity outflows related to possible credit downgrade;
• Lower availability of secured funding;
• Client cash withdrawals;
• The anticipated funding of outstanding investment and loan commitments; and
• Certain accrued expenses and other liabilities and fixed costs.

Cash Capital Policy. We maintain a cash capital model that measures long-term funding sources against requirements. Sources of cash capital include our equity, mezzanine equity and the noncurrent portion of long-term borrowings. Uses of cash capital include the following:

• Illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments;
• A portion of securities inventory and other assets not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and
• Drawdowns of unfunded commitments.

To ensure that we do not need to liquidate inventory in the event of a funding stress, we seek to maintain surplus cash capital. Our total long-term capital of $17.09 billion at August 31, 2023 exceeded our cash capital requirements.

MLO. Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity stress, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. As a result of our policy to ensure we have sufficient funds to cover what we estimate may be needed in a liquidity stress, we hold more cash and unencumbered securities and have greater long-term debt balances than our businesses would otherwise require. As part of this estimation process, we calculate an MLO that could be experienced in a liquidity stress. MLO is based on a scenario that includes both a market-wide stress and firm-specific stress, characterized by some or all of the following elements:

• Global recession, default by a medium-sized sovereign, low consumer and corporate confidence, and general financial instability.
• Severely challenged market environment with material declines in equity markets and widening of credit spreads.
• Damaging follow-on impacts to financial institutions leading to the failure of a large bank.
• A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade.

The following are the critical modeling parameters of the MLO:

• Liquidity needs over a 30-day scenario.
• A two-notch downgrade of our long-term senior unsecured credit ratings.
• No support from government funding facilities.
• A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a stress.
• No diversification benefit across liquidity risks. We assume that liquidity risks are additive.

The calculation of our MLO under the above stresses and modeling parameters considers the following potential contractual and contingent cash and collateral outflows:

• All upcoming maturities of unsecured long-term debt, commercial paper, promissory notes and other unsecured funding products assuming we will be unable to issue new unsecured debt or rollover any maturing debt.
• Repurchases of our outstanding long-term debt in the ordinary course of business as a market maker.
• A portion of upcoming contractual maturities of secured funding activity due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral and counterparty concentration.
• Collateral postings to counterparties due to adverse changes in the value of our over-the-counter (“OTC”) derivatives and other outflows due to trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments required by a two-notch downgrade in our credit ratings.
• Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded derivatives and any increase in initial margin and guarantee fund requirements by derivative clearing houses.
• Liquidity outflows associated with our prime services business, including withdrawals of customer credit balances, and a reduction in customer short positions.
• Liquidity outflows to clearing banks to ensure timely settlements of cash and securities transactions.
• Draws on our unfunded commitments considering, among other things, the type of commitment and counterparty.
• Other upcoming large cash outflows, such as employee compensation, tax and dividend payments, with no expectation of future dividends from any subsidiaries.

Based on the sources and uses of liquidity calculated under the MLO scenarios, we determine, based on a calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and consider any adjustments that may be necessary to our inventory balances and cash holdings. At August 31, 2023, we had sufficient excess liquidity to meet all contingent cash outflows detailed in the MLO. We regularly refine our model to reflect changes in market or economic conditions and our business mix.

Sources of Liquidity

The following are financial instruments that are cash and cash equivalents or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time (dollars in thousands):

(1) Average balances are calculated based on weekly balances.

(2) At August 31, 2023 and November 30, 2022, $6.67 billion and $7.14 billion, respectively, was invested in U.S. government money funds that invest at least 99.5% of its total assets in cash, securities issued by the U.S. government and U.S. government-sponsored entities and repurchase agreements that are fully collateralized by cash or government securities. The remaining $15.1 million and $23.1 million at August 31, 2023 and November 30, 2022, respectively, are invested in AAA rated prime money funds. The average balance of U.S. government money funds for the quarter ended August 31, 2023 was $4.53 billion.

(3) Consists of high quality sovereign government securities and reverse repurchase agreements collateralized by U.S. government securities and other high quality sovereign government securities; deposits with a central bank within the European Economic Area, United Kingdom, Canada, Australia, Japan, Switzerland or the U.S.; and securities issued by a designated multilateral development bank and reverse repurchase agreements with underlying collateral composed of these securities.

(4) Other includes unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably expected to be obtained from our Financial instruments owned that are currently not pledged after considering reasonable financing haircuts.

In addition to the cash balances and liquidity pool presented above, the majority of financial instruments (both long and short) in our trading accounts are actively traded and readily marketable. At August 31, 2023, we had the ability to readily obtain repurchase financing for 83.2% of our inventory at haircuts of 10% or less, which reflects the liquidity of our inventory. In addition, as a matter of our policy, all of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. Additionally, certain of our Financial instruments owned, primarily consisting of bank loans, consumer loans and investments are predominantly funded by long term capital. Under our cash capital policy, we model capital allocation levels that are more stringent than the haircuts used in the market for secured funding; and we maintain surplus capital at these more stringent levels. We continually assess the liquidity of our inventory based on the level at which we could obtain financing in the marketplace for a given asset. Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less.

The following summarizes our financial instruments by asset class that we consider to be of a liquid nature and the amount of such assets that have not been pledged as collateral at August 31, 2023 and November 30, 2022 (in thousands):

(1) Consists solely of agency mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal National Mortgage Association (“Fannie Mae”) and the Government National Mortgage Association (“Ginnie Mae”).

(2) Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been.

In addition to being able to be readily financed at reasonable haircut levels, we estimate that each of the individual securities within each asset class above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral.

Sources of Funding and Capital Resources

Our assets are funded by equity capital, senior debt, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables.

Secured Financing

We rely principally on readily available secured funding to finance our inventory of financial instruments owned and financial instruments sold. Our ability to support increases in total assets is largely a function of our ability to obtain short and intermediate-term secured funding, primarily through securities financing transactions. We finance a portion of our long inventory and cover some of our short inventory by pledging and borrowing securities in the form of repurchase or reverse repurchase agreements (collectively “repos”), respectively. During the three months ended August 31, 2023, an average of approximately 65.0% of our cash and noncash repurchase financing activities used collateral that was considered eligible collateral by central clearing corporations. Central clearing corporations are situated between participating members who borrow cash and lend securities (or vice versa); accordingly, repo participants contract with the central clearing corporation and not one another individually. Therefore, counterparty credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and variation margin calls from repo participants. The comparatively large proportion of our total repo activity that is eligible for central clearing reflects the high quality and liquid composition of the inventory we carry in our trading books. For those asset classes not eligible for central clearing house financing, we seek to execute our bi-lateral financings on an extended term basis and the tenor of our repurchase and reverse repurchase agreements generally exceeds the expected holding period of the assets we are financing. The weighted average maturity of cash and noncash repurchase agreements for non-clearing corporation eligible funded inventory is approximately five months at August 31, 2023.

Our ability to finance our inventory via central clearinghouses and bi-lateral arrangements is augmented by our ability to draw bank loans on an uncommitted basis under our various banking arrangements. At August 31, 2023, short-term borrowings, which must be repaid within one year or less, totaled $924.9 million and include bank loans, overdrafts, borrowings under revolving credit facilities, and a fixed rate callable note. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Average daily short-term borrowings outstanding were $837.0 million and $728.2 million for the three and nine months ended August 31, 2023, respectively.

At August 31, 2023 and November 30, 2022, our borrowings under credit facilities classified within bank loans in Short-term borrowings in our Consolidated Statements of Financial Condition were $920.8 million and $517.0 million, respectively. Our borrowings include credit facilities that contain certain covenants that, among other things, require us to maintain a specified level of tangible net worth, require a minimum regulatory net capital requirement for our U.S. broker-dealer, Jefferies LLC, and impose certain restrictions on the future indebtedness of certain of our subsidiaries that are borrowers. Interest is based on rates at spreads over the federal funds rate or other adjusted rates, as defined in the various credit agreements, or at a rate as agreed between the bank and us in reference to the bank’s cost of funding. At August 31, 2023, we were in compliance with all covenants under these credit facilities.

For additional details on our short-term borrowings, refer to Note 14, Short-Term Borrowings, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

In addition to the above financing arrangements, we issue notes backed by eligible collateral under master repurchase agreements, which provides an additional financing source for our inventory (our “repurchase agreement financing program”). The notes issued under this program are presented within Other secured financings in our Consolidated Statements of Financial Condition. At August 31, 2023, the outstanding notes totaled $1.50 billion, bear interest at a spread over the Secured Overnight Funding Rate (“SOFR”) or the Euro Short-Term Rate (“ESTER”) and mature from September 2023 to July 2025.

For additional details on our repurchase agreement financing program, refer to Note 8, Variable Interest Entities, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Total Long-Term Capital

At August 31, 2023 and November 30, 2022, we had total long-term capital of $17.09 billion and $17.49 billion, respectively, resulting in a long-term debt to equity capital ratio of 0.75:1 and 0.69:1, respectively. See “Equity Capital” herein for further information on our change in total equity. Our total long-term capital base at August 31, 2023 and November 30, 2022 was as follows (in thousands):

(1) The amounts at August 31, 2023 and November 30, 2022 exclude our secured long-term debt. The amounts at August 31, 2023 and November 30, 2022 exclude $385.9 million and $393.0 million, respectively, of our 5.500% Senior Notes and also exclude $46.4 million and $13.2 million, respectively, of structured notes. The amounts at August 31, 2023 also exclude $541.9 million of our 1% Euro Medium Term Notes. These amounts are excluded as the notes mature within one year.

Long-Term Debt

During the nine months ended August 31, 2023, long-term debt increased by $688.4 million to $9.46 billion at August 31, 2023, as presented in our Consolidated Statements of Financial Condition, primarily due to net proceeds of $990.6 million from the issuance of our 5.875% Senior Notes, due 2028 during the three months ended August 31, 2023. This was partially offset by a $350.0 million paydown on a credit facility during the three months ended August 31, 2023. At August 31, 2023, all of our structured notes contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument-specific credit risk presented in other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transactions revenues. The fair value of all of our structured notes at August 31, 2023 was $1.63 billion.

At August 31, 2023 and November 30, 2022, our borrowings under several credit facilities classified within Long-term debt in our Consolidated Statement of Financial Condition amounted to $767.9 million and $933.5 million, respectively. Interest on these credit facilities are based on an adjusted Secured Overnight Financing Rate (“SOFR”) plus a spread or other adjusted rates, as defined in the various credit agreements. The credit facility agreements contain certain covenants that, among other things, require us to maintain specified levels of tangible net worth and liquidity amounts, and impose certain restrictions on future indebtedness of and require specified levels of regulated capital and cash reserves for certain of our subsidiaries. At August 31, 2023, we were in compliance with all covenants under these credit facilities.

In addition, one of our subsidiaries has a Loan and Security Agreement with a bank for a term loan (“Secured Bank Loan”). At August 31, 2023, borrowings under the Secured Bank Loan amounted to $100.0 million and are also classified within Long-term debt in our Consolidated Statements of Financial Condition. The Secured Bank Loan matures on September 13, 2024 and is collateralized by certain trading securities with an interest rate of SOFR plus 1.25%. The agreement contains certain covenants that, among other things, restricts lien or encumbrance upon any of the pledged collateral. At August 31, 2023, we were in compliance with all covenants under the Secured Bank Loan.

HomeFed funds certain of its real estate projects in part by raising funds under the Immigrant Investor Program administered by the U.S. Citizenship and Immigration Services pursuant to the Immigration and Nationality Act (“EB-5 Program”). This debt is secured by certain real estate of HomeFed. At August 31, 2023, HomeFed was in compliance with all debt covenants which include, among other requirements, limitations on incurrence of debt, collateral requirements and restricted use of proceeds. Primarily all of HomeFed’s EB-5 Program debt matures in 2024 through 2028.

At August 31, 2023, HomeFed has construction loans with an aggregate committed amount of $62.0 million. The proceeds are being used for construction at certain of its real estate projects. The outstanding principal amount of the loans bears interest based on the SOFR plus 3.00%, subject to adjustment on the first of each calendar month. At August 31, 2023, the weighted average interest rate on these loans was 8.07%. The loans mature between October 2023 and May 2024 and are collateralized by the property underlying the related project with a guarantee by HomeFed. At August 31, 2023 and November 30, 2022, $49.3 million and $57.0 million, respectively, was outstanding under the construction loan agreements.

At August 31, 2023, our unsecured long-term debt has a weighted average maturity of approximately 8.8 years.

For further information, see Note 15, Long-Term Debt, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Our long-term debt ratings at August 31, 2023 are as follows:

At August 31, 2023, the long-term debt ratings on our principal subsidiaries, Jefferies LLC, Jefferies International Limited (a U.K. broker-dealer) and Jefferies GmbH are as follows:

Access to external financing to finance our day to day operations, as well as the cost of that financing, is dependent upon various factors, including our debt ratings. Our current debt ratings are dependent upon many factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share and competitive position in the markets in which we operate. Deterioration in any of these factors could impact our credit ratings. While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact on our business and trading results in future periods is inherently uncertain and depends on a number of factors, including the magnitude of the downgrade, the behavior of individual clients and future mitigating action taken by us.

In connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, we may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of a credit rating downgrade. At August 31, 2023, the amount of additional collateral that could be called by counterparties, exchanges and clearing organizations under the terms of such agreements in the event of a downgrade of our long-term credit rating below investment grade was $75.2 million. For certain foreign clearing organizations, credit rating is only one of several factors employed in determining collateral that could be called. The above represents management’s best estimate for additional collateral to be called in the event of a credit rating downgrade. The impact of additional collateral requirements is considered in our Contingency Funding Plan and calculation of MLO, as described above.

Equity Capital

Common Stock

At August 31, 2023, we had 565,000,000 authorized shares of voting common stock with a par value of $1.00 per share. At August 31, 2023, we had outstanding 210,427,746 common shares, 14,556,639 share-based awards that do not require the holder to pay any exercise price and 5,064,470 stock options that require the holder to pay a weighted average exercise price of $22.69 per share. The 14,556,639 share-based awards include the target number of shares under the senior executive award plan until the performance period is complete.

The Board of Directors has authorized the repurchase of common stock under a share repurchase program. Additionally, Treasury stock repurchases include repurchases of common stock for net-share withholding under our equity compensation plan.

The table below presents information about common stock repurchases pursuant to the share repurchase program during the nine months ended August 31, 2023 (in thousands, except share and per share amounts):

At August 31, 2023, we had $250.0 million remaining authorization of future repurchases. On June 27, 2023, our Board of Directors increased our share buyback authorization back to a total of $250.0 million.

On January 9, 2023, the Board of Directors declared a dividend of $0.30 per common share which was paid on February 24, 2023 to common shareholders of record at February 13, 2023. On March 28, 2023, the Board of Directors declared a dividend of $0.30 per common share which was paid on May 26, 2023 to common shareholders of record at May 15, 2023. On June 27, 2023, the Board of Directors declared a dividend of $0.30 per common share which was paid on August 25, 2023 to common shareholders of record at August 14, 2023. On September 27, 2023, the Board of Directors declared a dividend of $0.30 per common share to be paid on November 28, 2023 to common shareholders of record at November 13, 2023.

Non-Voting Common Stock

On June 28, 2023, shareholders approved an Amended and Restated Certificate of Incorporation, which authorized the issuance of non-voting common stock with a par value of $1.00 per share (the “Non-Voting Common Shares”). The Non-Voting Common Shares are entitled to share equally, on a per share basis, with the voting common stock, in dividends and distributions. Upon the effectiveness of the Amended and Restated Certificate of Corporation on June 30, 2023, the number of authorized shares of common stock remains at 600,000,000 shares, comprised of 565,000,000 shares of voting common stock and 35,000,000 shares of Non-Voting Common Shares.

Series B Preferred Stock

On April 27, 2023, we established Series B Non-Voting Convertible Preferred Shares with a par value of $1.00 per share (“Series B Preferred Stock”) and designated 70,000 shares as Series B Preferred Stock. The Series B Preferred Stock has a liquidation preference of $17,500 per share and rank senior to our voting common stock upon dissolution, liquidation or winding up of Jefferies Financial Group Inc. Each share of Series B Preferred Stock is automatically convertible into 500 shares of non-voting common stock, subject to certain anti-dilution adjustments, three years after issuance. The Series B Preferred Stock participates in cash dividends and distributions alongside our voting common stock on an as-converted basis.

Additionally, on April 27, 2023, we entered into an Exchange Agreement with Sumitomo Mitsui Banking Corporation (“SMBC”), which entitles SMBC to exchange shares of our voting common stock for shares of the Series B Preferred Stock at a rate of 500 shares of voting common stock for one share of Series B Preferred Stock. The Exchange Agreement is limited to 55,125 shares of Preferred Stock and SMBC will pay $1.50 per share of voting common stock so exchanged. During the three months ended August 31, 2023, SMBC exchanged 21.0 million shares of voting common stock for 42,000 shares of Series B Preferred Stock and we received cash of $31.5 million in connection with the exchange. As a result of the exchange, our equity attributed to our voting common stock decreased by $21.0 million, our equity attributed to the Series B Preferred Stock increased by $42,000 and additional paid-in capital increased by $52.4 million, resulting in a $31.5 million net increase in our shareholders’ equity, or $0.12 per common share on an as-converted, fully-diluted, basis at August 31, 2023. During the three months ended August 31, 2023, we paid $6.3 million, or $0.30 per share on an as-converted basis, of cash dividends on the Series B Preferred Stock.

In January 2023, we distributed all of our ownership interests in Vitesse Energy on a tax-free pro rata basis to all of our shareholders, resulting in a distribution of capital of $527.0 million. In addition, in February 2023, $125.0 million of mandatorily redeemable convertible preferred shares were converted to 4,654,362 common shares.

Net Capital

As a broker-dealer registered with the SEC and a member firm of the Financial Industry Regulatory Authority (“FINRA”), Jefferies LLC is subject to the SEC Uniform Net Capital Rule (“Rule 15c3-1”), which requires the maintenance of minimum net capital, and has elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Jefferies LLC, as a dually-registered U.S. broker-dealer and futures commission merchant (“FCM”), is also subject to Rule 1.17 of the Commodity Futures Trading Commission (“CFTC”), which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. One of our subsidiaries, Jefferies Financial Services, Inc. (“JFSI”), a registered swap dealer, is subject to the CFTC’s regulatory capital requirements and holds regulatory capital in excess of the minimum regulatory requirement. Additionally, JFSI is registered as a security-based swap dealer with the SEC and is subject to the SEC’s security-based swap dealer regulatory rules. Further, JFSI is registered with the SEC as an OTC derivatives dealer, and is subject to compliance with the SEC’s net capital requirements. As a security-based swap dealer and swap dealer, JFSI is subject to the net capital requirements of the SEC, CFTC and the NFA, as a member of the NFA. JFSI is required to maintain minimum net capital, as defined under SEC Rule 18a-1 of not less than the greater of 2% of the risk margin amount, as defined, or $20 million. Under CFTC Rule 23.101, JFSI is required to maintain minimum net capital of not less than the greater of 2% of the uncleared swap margin, as defined in CFTC Rule 23.100, or $20 million.

At August 31, 2023, Jefferies LLC and JFSI’s net capital and excess net capital were as follows (in thousands):

FINRA is the designated examining authority for Jefferies LLC and the National Futures Association is the designated self-regulatory organization for Jefferies LLC as an FCM.

Certain other U.S. and non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject to the regulatory supervision and requirements of the Financial Conduct Authority in the U.K.

The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our regulated subsidiaries.

Other Developments

In February 2022, Russia invaded Ukraine. Following Russia’s invasion, the U.S., the U.K., and the European Union governments, among others, developed coordinated financial and economic sanctions targeting Russia that, in various ways, constrain transactions with numerous Russian entities, including major Russian banks and individuals; transactions in Russian sovereign debt; and investment, trade and financing to, from, or in certain regions of Ukraine. We do not have any operations in Russia or any clients with significant Russian operations and we have minimal market risk related to securities of companies either domiciled or operating in Russia. We continue to closely monitor the status of global sanctions and restrictions, trading conditions related to Russian securities and the credit risk and nature of our counterparties.

Off-Balance Sheet Arrangements

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, purchases and sales of corporate loans in the secondary market 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.

In the normal course of business we engage in other off balance-sheet arrangements, including derivative contracts. Neither derivatives’ notional amounts nor underlying instrument values are reflected as assets or liabilities in our Consolidated Statements of Financial Condition. Rather, the fair values of derivative contracts are reported in our Consolidated Statements of Financial Condition as Financial instruments owned or Financial instruments sold, not yet purchased as applicable. Derivative contracts are reflected net of cash paid or received pursuant to credit support agreements and are reported on a net by counterparty basis when a legal right of offset exists under an enforceable master netting agreement. For additional information about our accounting policies and our derivative activities, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2022 and Note 4, Fair Value Disclosures, and Note 5, Derivative Financial Instruments, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Risk Management

Overview

Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our activities is critical to our financial soundness, viability and profitability. Accordingly, we have a comprehensive risk management approach, with a formal governance structure and policies and procedures outlining frameworks and processes to identify, assess, monitor and manage risk. Principal risks involved in our business activities include market, credit, liquidity and capital, operational, legal and compliance, new business and reputational risk.

Risk management is a multifaceted process that requires communication, judgment and knowledge of financial products and markets. Our risk management process encompasses the active involvement of executive and senior management, and also many departments independent of the revenue-producing business units, including the Risk Management, Operations, Information Technology, Compliance, Legal and Finance Departments. Our risk management policies, procedures and methodologies are flexible in nature and are subject to ongoing review and modification.

In achieving our strategic business objectives, our risk appetite incorporates keeping our clients’ interests as top priority and ensuring we are in compliance with applicable laws, rules and regulations, as well as adhering to the highest ethical standards. We undertake prudent risk-taking that protects the capital base and franchise, utilizing risk limits and tolerances that avoid outsized risk-taking. We maintain a diversified business mix and avoid significant concentrations to any sector, product, geography, or activity and set quantitative concentration limits to manage this risk. We consider contagion, second order effects and correlation in our risk assessment process and actively seek out value opportunities of all sizes. We manage the risk of opportunities larger than our approved risk levels through risk sharing and risk distribution, sell-down and hedging as appropriate. We have a limited appetite for illiquid assets and complex derivative financial instruments. We maintain the asset quality of our balance sheet through conducting trading activity in liquid markets and generally ensure high turnover of our inventory. We subject less liquid positions and derivative financial instruments to particular scrutiny and use a wide variety of specific metrics, limits, and constraints to manage these risks. We protect our reputation and franchise, as well as our standing within the market. We operate a federated approach to risk management and assign risk oversight responsibilities to a number of functions with specific areas of focus.

For discussion of liquidity and capital risk management, refer to the “Liquidity, Financial Condition and Capital Resources” section herein.

Governance and Risk Management Structure

For a discussion of our governance and risk management structure and our risk management framework, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended November 30, 2022.

Risk Considerations

We apply a comprehensive framework of limits on a variety of key metrics to constrain the risk profile of our business activities. The size of the limits reflects our risk appetite for a certain activity under normal business conditions. Key metrics included in our risk management framework include inventory position and exposure limits on a gross and net basis, scenario analysis and stress tests, Value-at-Risk (“VaR”), sensitivities, exposure concentrations, aged inventory, Level 3 assets, counterparty exposure, leverage and cash capital.

Market Risk

Market risk is defined as the risk of loss due to fluctuations in the market value of financial assets and liabilities attributable to changes in market variables.

Our market risk principally arises from interest rate risk, from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads, and from equity price risks from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. In addition, commodity price risk results from exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices, and foreign exchange risk results from changes in foreign currency rates.

Market risk is present in our capital markets business through market making, proprietary trading, underwriting and investing activities and is present in our asset management business through investments in separately managed accounts and direct investments in funds. Given our involvement in a broad set of financial products and markets, market risk exposures are diversified, and economic hedges are established as appropriate.

Market risk is monitored and managed through a set of key risk metrics such as VaR, stress scenarios, risk sensitivities and position exposures. Limits are set on the key risk metrics to monitor and control the risk exposure ensuring that it is in line with our risk appetite. Our risk appetite, including the market risk limits, is periodically reviewed to reflect business strategy and market environment. Material risk changes, top/emerging risks and limit utilizations/breaches are highlighted, through risk reporting, and escalated as necessary.

Trading is principally managed through front office trader mandates, where each trader is provided a specific mandate in line with our product registry. Mandates set out the activities, currencies, countries and products that the desk is permitted to trade in and set the limits applicable to the desk. Traders are responsible for knowing their trading limits and trading in a manner consistent with their mandate.

VaR

VaR is a statistical estimate of the potential loss from adverse market movements over a specified time horizon within a specified probability (confidence level). It provides a common risk measure across financial instruments, markets and asset classes. We estimate VaR using a model that simulates revenue and loss distributions by applying historical market changes to the current portfolio. We calculate a one-day VaR using a one year look-back period measured at a 95% confidence level.

As with all measures of VaR, our estimate has inherent limitations due to the assumption that historical changes in market conditions are representative of the future. Furthermore, the VaR model measures the risk of a current static position over a one-day horizon and might not capture the market risk over a longer time horizon where moves may be more extreme. Previous changes in market risk factors may not generate accurate predictions of future market movements. While we believe the assumptions and inputs in our risk model are reasonable, we could incur losses greater than the reported VaR. Consequently, this VaR estimate is only one of a number of tools we use in our daily risk management activities.

The table below shows firmwide VaR for each component of market risk by interest rate and credit spreads, equity, currency and commodity products using the past 365 days of historical data (in millions):

(1) For the firmwide VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used.

(2) The diversification effect is not applicable for the maximum and minimum VaR values as the firmwide VaR and the VaR values for the four risk categories might have occurred on different days during the period.

(3) The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories and arises because the market risk categories are not perfectly correlated.

The table below shows VaR for our capital markets trading activities, which excludes the impact on VaR for each component of market risk from our asset management activities by interest rates and credit spreads, equity, currency and commodity products using the past 365 days of historical data (in millions):

(1) For the capital markets VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used.

(2) The diversification effect is not applicable for the maximum and minimum VaR values as the capital markets VaR and the VaR values for the four risk categories might have occurred on different days during the period.

(3) The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories and arises because the market risk categories are not perfectly correlated.

Our average daily firmwide VaR decreased to $13.87 million for the three months ended August 31, 2023 from $15.14 million for the three months ended May 31, 2023, primarily due to lower equity exposure over the quarter. Our average daily capital markets VaR decreased to $8.89 million for the three months ended August 31, 2023 from $9.71 million for the three months ended May 31, 2023, primarily driven by an increase in interest rates and credit spreads, offset by an increase in the diversification effect.

The efficacy of the VaR model is tested by comparing our actual daily net revenues for those positions included in VaR calculation with the daily VaR estimate. This evaluation is performed at various levels, from the overall level down to specific business lines. For the VaR model, revenue is defined as principal transactions revenues, trading related commissions, revenue from securitization activities and net interest income. VaR backtesting methodologies differ for regulated entities with approved capital models.

For a 95% confidence one day VaR model (i.e., no intra-day trading), assuming current changes in market value are consistent with the historical changes used in the calculation, losses would not be expected to exceed the VaR estimates more than twelve times on an annual basis (i.e., once in every 20 days). During the three months ended August 31, 2023, there were zero days when the aggregate net trading loss exceeded the 95% one day VaR.

The chart below shows our daily firmwide VaR and capital markets VaR over the last four quarters. VaR steadily increased in the first quarter of 2023 driven by higher equity exposure mainly related to our asset management activities. VaR was relatively stable throughout the second quarter of 2023 while volatility increased modestly throughout the third quarter of 2023.

Daily Net Trading Revenue

There were six days with firmwide trading losses out of a total of 64 trading days in the three months ended August 31, 2023. The histogram below presents the distribution of our actual daily net trading revenue for substantially all of our trading activities for the three months ended August 31, 2023 (in millions):

Other Risk Measures

Sensitivity analysis is viewed as the most appropriate measure of risks for certain positions within financial instruments and therefore such positions are not included in the VaR model. Accordingly, Risk Management has additional procedures in place to assure that the level of potential loss that would arise from market movements are within acceptable levels. Such procedures include performing stress tests and profit and loss analysis. The table below presents the potential reduction in earnings associated with a 10% stress of the fair value of the positions that are not included in the VaR model at August 31, 2023 (in thousands):

(1) Includes investments in hedge funds, fund of funds and private equity funds. For additional details on these investments refer to “Investments at Fair Value” within Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

The impact of changes in our own credit spreads on our structured notes for which the fair value option was elected is not included in VaR. The estimated credit spread risk sensitivity for each one basis point widening in our own credit spreads on financial liabilities for which the fair value option was elected was an increase in value of approximately $1.5 million at August 31, 2023, which is included in other comprehensive income.

Other Risk

We are also subject to interest rate risk on our long-term fixed interest rate debt. Generally, the fair market value of debt securities with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise. The following table represents principal cash flows by expected maturity dates and the related weighted-average interest rate on those maturities for our consolidated long-term debt obligations, inclusive of any related interest rate hedges. For the variable rate borrowings, the weighted-average interest rates are based on the rates in effect at the reporting date. Our market risk with respect to foreign currency exposure on our long-term debt is also shown below (dollars in thousands).

Stress Tests and Scenario Analysis

Stress tests are used to analyze the potential impact of specific events or extreme market moves on the current portfolio both firm-wide and within business segments. Stress testing is an important part of our risk management approach because it allows us to quantify our exposure to tail risks, highlight potential loss concentrations, undertake risk/reward analysis, set risk controls and overall assess and mitigate our risk.

We employ a range of stress scenarios, which comprise both historical market price and rate changes and hypothetical market environments, and generally involve simultaneous changes of many risk factors. Indicative market changes in the scenarios include, but are not limited to, a large widening of credit spreads, a substantial decline in equities markets, significant moves in selected emerging markets, large moves in interest rates and changes in the shape of the yield curve.

Unlike our VaR, which measures potential losses within a given confidence interval, stress scenarios do not have an associated implied probability. Rather, stress testing is used to estimate the potential loss from market moves that tend to be larger than those embedded in the VaR calculation. Stress testing complements VaR to cover for potential limitations of VaR such as the breakdown in correlations, non-linear risks, tail risk and extreme events and capturing market moves beyond the confidence levels assumed in the VaR calculations.

Stress testing is performed and reported at least weekly as part of our risk management process and on an ad hoc basis in response to market events or concerns. Current stress tests provide estimated revenue and loss of the current portfolio through a range of both historical and hypothetical events. The stress scenarios are reviewed and assessed at least annually so that they remain relevant and up to date with market developments. Additional hypothetical scenarios are also conducted on a sub-portfolio basis to assess the impact of any relevant idiosyncratic stress events as needed.

Counterparty Credit Risk

Credit risk is the risk of loss due to adverse changes in a counterparty’s credit worthiness or its ability or willingness to meet its financial obligations in accordance with the terms and conditions of a financial contract.

We are exposed to credit risk as a trading counterparty to other broker-dealers and customers, as a counterparty to derivative contracts, as a direct lender and through extending loan commitments and providing securities-based lending and as a member of exchanges and clearing organizations. Credit exposure exists across a wide-range of products, including cash and cash equivalents, loans, securities finance transactions and over-the-counter derivative contracts. The main sources of credit risk are:

• Loans and lending arising in connection with our investment banking and capital markets activities, which reflects our exposure at risk on a default event with no recovery of loans. Current exposure represents loans that have been drawn by the borrower and lending commitments that are outstanding. In addition, credit exposures on forward settling traded loans are included within our loans and lending exposures for consistency with the balance sheet categorization of these items. Loans and lending also arise in connection with our portion of a Secured Revolving Credit Facility that is with us and Massachusetts Mutual Life Insurance Company, to be funded equally, to support loan underwritings by Jefferies Finance. For further information on this facility, refer to Note 9, Investments, in our consolidated financial statements included in this Quarterly Report on Form 10-Q. In addition, we have loans outstanding to certain of our officers and employees (none of whom are executive officers or directors). For further information on these employee loans, refer to Note 23, Related Party Transactions, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.
• Securities and margin financing transactions, which reflect our credit exposure arising from reverse repurchase agreements, repurchase agreements and securities lending agreements to the extent the fair value of the underlying collateral differs from the contractual agreement amount and from margin provided to customers.
• OTC derivatives, which are reported net by counterparty when a legal right of setoff exists under an enforceable master netting agreement. OTC derivative exposure is based on a contract at fair value, net of cash collateral received or posted under credit support agreements. In addition, credit exposures on forward settling trades are included within our derivative credit exposures.
• Cash and cash equivalents, which includes both interest-bearing and non-interest-bearing deposits at banks.

Credit is extended to counterparties in a controlled manner and in order to generate acceptable returns, whether such credit is granted directly or is incidental to a transaction. All extensions of credit are monitored and managed as a whole to limit exposure to loss related to credit risk. Credit risk is managed according to the Credit Risk Management Policy, which sets out the process for identifying counterparty credit risk, establishing counterparty limits, and managing and monitoring credit limits. The policy includes our approach for:

• Client on-boarding and approving counterparty credit limits;
• Negotiating, approving and monitoring credit terms in legal and master documentation;
• Determining the analytical standards and risk parameters for ongoing management and monitoring credit risk books;
• Actively managing daily exposure, exceptions and breaches; and
• Monitoring daily margin call activity and counterparty performance.

Counterparty credit exposure limits are granted within our credit ratings framework, as detailed in the Credit Risk Management Policy. The Credit Risk Department assesses counterparty credit risk and sets credit limits at the counterparty master agreement level. Limits must be approved by appropriate credit officers and initiated in our credit and trading systems before trading commences. All credit exposures are reviewed against approved limits on a daily basis.

Our Secured Revolving Credit Facility, which supports loan underwritings by Jefferies Finance, is governed under separate policies other than the Credit Risk Management Policy and is approved by our Board. The loans outstanding to certain of our officers and employees are extended pursuant to a review by our most senior management.

Current counterparty credit exposures at August 31, 2023 and November 30, 2022 are summarized in the tables below and provided by credit quality, region and industry (in millions). Credit exposures presented take netting and collateral into consideration by counterparty and master agreement. Collateral taken into consideration includes both collateral received as cash as well as collateral received in the form of securities or other arrangements. Current exposure is the loss that would be incurred on a particular set of positions in the event of default by the counterparty, assuming no recovery. Current exposure equals the fair value of the positions less collateral. Issuer risk is the credit risk arising from inventory positions (for example, corporate debt securities and secondary bank loans). Issuer risk is included in our country risk exposure tables below.

JEFFERIES FINANCIAL GROUP INC.

For additional information regarding credit exposure to OTC derivative contracts, refer to Note 5, Derivative Financial Instruments, in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Country Risk Exposure

Country risk is the risk that events or developments that occur in the general environment of a country or countries due to economic, political, social, regulatory, legal or other factors, will affect the ability of obligors of the country to honor their obligations. We define the country of risk as the country of jurisdiction or domicile of the obligor, and monitor country risk resulting from both trading positions and counterparty exposure, which may not include the offsetting benefit of any financial instruments utilized to manage market risk. The following tables reflect our top exposure at August 31, 2023 and November 30, 2022 to the sovereign governments, corporations and financial institutions in those non-U.S. countries in which we have a net long issuer and counterparty exposure (in millions):

Operational Risk

Operational risk is the risk of financial or non-financial impact, resulting from inadequate or failed internal processes, people and systems or from external events. We interpret this definition as including not only financial loss or gain but also other negative impacts to our objectives such as reputational impact, legal/regulatory impact and impact on our clients. Third-party risk is also included as a subset of Operational Risk and is defined as the potential threat presented to us, or our employees or clients, from our supply chain and other third-parties used to perform a process, service or activity on our behalf.

Our Operational Risk framework includes governance as well as operational risk processes, comprises operational risk event capture and analysis, risk and control self-assessments, operational risk key indicators, action tracking, risk monitoring and reporting, deep dive risk assessments, new business approvals and vendor risk management. Each revenue producing and support department is responsible for the management and reporting of operational risks and the implementation of the Operational Risk Management Policy and processes within the department with regular operational risk training provided to our employees.

Operational Risk events are mapped to Risk Categories used for the consistent classification of risk data to support root cause and trend analysis, which includes:

• Fraud and Theft
• Clients and Business Practices
• Market Conduct / Regulatory Compliance
• Business Disruption
• Technology
• Data Protection and Privacy
• Trading
• Transaction and Process Management
• People
• Cyber
• Vendor Risk

Operational Risk Management Policy, framework, infrastructure, methodology, processes, guidance and oversight of the operational risk processes are centralized and consistent firmwide and additionally subject to regional and legal entity operational risk governance as required. We also maintain a firmwide Third-Party (“Vendor”) Risk Management Policy & Framework to ensure adequate control and monitoring over our critical third parties which includes processes for conducting periodic reviews covering areas of risk including financial health, information security, privacy, business continuity management, disaster recovery and operational risk.

Model Risk

Model risk refers to the risk of losses resulting from decisions that are based on the output of models, due to errors or weaknesses in the design and development, implementation, or improper use of models. We use quantitative models primarily to value certain financial assets and liabilities and to monitor and manage our risk. Model risk is a function of the model materiality, frequency of use, complexity and uncertainty around inputs and assumptions used in a given model. Robust model risk management is a core part of our risk management approach and is overseen through our risk governance structure and risk management controls.

Legal and Compliance Risk

Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti-money laundering and record keeping. These risks also reflect the potential impact that changes in local and international laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups. We also maintain an anonymous hotline for employees or others to report suspected inappropriate actions by us or by our employees or agents.

New Business Risk

New business risk refers to the risks of entering into a new line of business or offering a new product. By entering a new line of business or offering a new product, we may face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we currently face. The New Business Committee reviews proposals for new businesses and new products to determine if we are prepared to handle the additional or increased risks associated with entering into such activities.

Reputational Risk

We recognize that maintaining our reputation among clients, investors, regulators and the general public is an important aspect of minimizing legal and operational risks. Maintaining our reputation depends on a large number of factors, including the selection of our clients and the conduct of our business activities. We seek to maintain our reputation by screening potential clients and by conducting our business activities in accordance with high ethical standards. Our reputation and business activity can be affected by statements and actions of third-parties, even false or misleading statements by them. We actively monitor public comment concerning us and are vigilant in seeking to assure accurate information and perception prevails.

Quantitative and qualitative disclosures about market risk are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Risk Management” in Part I, Item 2 of this Form 10-Q.

Our Management, under the direction of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in our internal control over financial reporting occurred during the quarter ended August 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Information regarding our risk factors appears in Item 1A. of our Annual Report on Form 10-K for the year ended November 30, 2022. These risk factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. In addition, the following amends our discussion of risk factors contained our Annual Report on Form 10-K for the year ended November 30, 2022:

Abrupt changes in market and general economic conditions have in the past adversely affected, and may in the future adversely affect, our business and profitability and cause volatility in our results of operations.

Economic and market conditions have had, and will continue to have, a direct and material impact on our results of operations and financial condition because performance in the financial services industry is heavily influenced by the overall strength of general economic conditions and financial market activity.

Recently, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States, in particular those with exposure to certain types of depositors and large portfolios of investment securities. On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation. On March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services. On May 1, 2023, First Republic was closed by the California Department of Financial Protection and Innovation. In each case, the Federal Deposit Insurance Corporation (the “FDIC”) was appointed as receiver. While we do not have any exposure to SVB, Signature Bank, or First Republic, we do maintain our cash at financial institutions, often in balances that exceed the current FDIC insurance limits. If other banks and financial institutions enter receivership or become insolvent in the future due to financial conditions affecting the banking system and financial markets, our ability to access our cash, cash equivalents and investments, including transferring funds, making payments or receiving funds, may be threatened and could have a material adverse effect on our business and financial condition. In addition, the operating environment and public trading prices of financial services sector securities can be highly correlated, in particular in times of stress, which may adversely affect the trading price of our common stock and potentially our results of operations.

Our investment banking revenue, in the form of advisory services and underwriting, is directly related to general economic conditions and corresponding financial market activity. When the outlook for such economic conditions is uncertain or negative, financial market activity generally tends to decrease, which reduces our investment banking revenues. Reduced expectations of U.S. economic growth or a decline in the global economic outlook could cause financial market activity to decrease and negatively affect our investment banking revenues.

A sustained and continuing market downturn could lead to or exacerbate declines in the number of securities transactions executed for clients and, therefore, to a decline in the revenues we receive from commissions and spreads. Correspondingly, a reduction of prices of the securities we hold in inventory or as investments would lead to reduced revenues.

Revenues from our asset management businesses have been and may continue to be negatively impacted by declining securities prices, as well as widely fluctuating securities prices. Because our asset management businesses hold long and short positions in equity and debt securities, changes in the prices of these securities, as well as any decrease in the liquidity of these securities, may materially and adversely affect our revenues from asset management.

Similarly, our merchant banking businesses may suffer from the above-mentioned impacts of fluctuations in economic and market conditions, including reductions in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. In addition, other factors, most of which are outside of our control, can affect our merchant banking businesses, including the state of the real estate market, the state of the Italian telecommunications market, and the state of international market and economic conditions which impact trading volume and currency volatility, and changes in regulatory requirements.

In addition, global economic conditions and global financial markets remain vulnerable to the potential risks posed by certain events, which could include, among other things, level and volatility of interest rates, availability and market conditions of financing, economic growth or its sustainability, unforeseen changes to gross domestic product, inflation, energy prices, fluctuations or other changes in both debt and equity capital markets and currencies, political and financial uncertainty in the United States and the European Union, ongoing concern about Asia’s economies, global supply disruptions, complications involving terrorism and armed conflicts around the world (including the conflict between Russia and Ukraine), or other challenges to global trade or travel, such as those that have occurred due to the COVID-19 pandemic. More generally, because our business is closely correlated to the general economic outlook, a significant deterioration in that outlook or realization of certain events would likely have an immediate and significant negative impact on our business and overall results of operations.