News Column

JEFFERIES GROUP LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

July 9, 2014

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, 2013 and filed with the SEC on January 28, 2014;



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";

the discussion of our risk management policies, procedures and



methodologies contained in this report under the caption "Risk Management"

included within Management's Discussion and Analysis of Financial Condition and Results of Operations; the 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 will not 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. For a further discussion of the factors that may affect our future operating results, see "Risk Factors" in Part I, Item IA of our Annual Report on Form 10-K for the year ended November 30, 2013.



Consolidated Results of Operations

On March 1, 2013, Jefferies Group, Inc. converted into a limited liability company (renamed Jefferies Group LLC) and became an indirect wholly owned subsidiary of Leucadia National Corporation ("Leucadia") pursuant to an agreement with Leucadia (the "Leucadia Transaction"). Each outstanding share of Jefferies Group LLC was converted into 0.81 of a common share of Leucadia (the "Exchange Ratio"). Jefferies Group LLC continues to operate as a full-service investment banking firm and as the holding company to its various regulated and unregulated operating subsidiaries, retain a credit rating separate from Leucadia and remain an SEC reporting company, filing annual, quarterly and periodic financial reports. Richard Handler, our Chief Executive Officer and Chairman, was also appointed the Chief Executive Officer of Leucadia, as well as a Director of Leucadia. Brian Friedman, our Chairman of the Executive Committee, was also appointed Leucadia's President and a Director of Leucadia. For further information, see Note 1, Organization and Basis of Presentation in our consolidated financial statements. 76



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES In Management's Discussion and Analysis of Financial Condition and Results of Operations, we have presented the historical financial results in the tables that follow for the periods before and after the Leucadia Transaction. Periods prior to March 1, 2013 are referred to as Predecessor periods, while periods after March 1, 2013 are referred to as Successor periods to reflect the fact that under U.S. generally accepted accounting principles ("U.S. GAAP") Leucadia's cost of acquiring Jefferies Group LLC has been pushed down to create a new accounting basis for Jefferies Group LLC. The Predecessor and Successor periods have been separated by a vertical line to highlight the fact that the financial information for such periods has been prepared under two different cost bases of accounting. Our financial results of operations are discussed separately for the periods (i) three and six months ended May 31, 2014 and the three months ended May 31, 2013 (the "Successor period") and (ii) the three months ended February 28, 2013 (the "Predecessor period"). The following table provides an overview of our consolidated results of operations (in thousands): Successor Predecessor Three Months Ended Six Months Ended Three Months Ended Three Months Ended May 31, 2014 May 31, 2014 May 31, 2013 February 28, 2013 Net revenues, less mandatorily redeemable preferred interests $ 722,992 $ 1,622,020 $ 655,070 $ 807,583 Non-interest expenses 623,855 1,340,614 589,817 668,096 Earnings before income taxes 99,137 281,406 65,253 139,487 Income tax expense 37,323 104,200 25,007 48,645 Net earnings 61,814 177,206 40,246 90,842 Net earnings to noncontrolling interests 488 3,448 738 10,704 Net earnings attributable to Jefferies Group LLC / common stockholders 61,326 173,758 39,508 80,138 Effective tax rate 37.6 % 37.0 % 38.3 % 34.9 % As indicated in our Quarterly Report on Form 10-Q for the three months ended August 31, 2013 and our Annual Report on Form 10-K for the year ended November 30, 2013, we have made correcting adjustments to our historical financial statements for the first quarter and second quarter of 2013. We do not believe these adjustments are material to our financial statements for the quarterly period ended February 28, 2013. For additional information on these adjustments, see Note 1, Organization and Basis of Presentation, and Note 26, Selected Quarterly Financial Data (Unaudited), of the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended November 30, 2013.



Executive Summary

Three Months Ended May 31, 2014

Net revenues, less mandatorily redeemable preferred interests, for the three months ended May 31, 2014 were $723.0 million. Our fixed income and equities revenues reflect the challenging market conditions with continued tapering of the U.S. Federal reserve monetary stimulus, persistent global geopolitical concerns and, towards the end of the quarter, a sharp reduction in volatility to record lows across many asset classes manifesting in lower client activity. Reflected within Net revenues for the second quarter of 2014 is positive income of $26.4 million from the amortization of premiums arising from recognizing our long-term debt at fair value as part of the pushdown accounting for the Leucadia Transaction, and gains of $39.6 million in aggregate from our investments in KCG Holdings, Inc. ("Knight") and Harbinger Group Inc. ("Harbinger"), the latter of which we sold to Leucadia in March 2014. Non-interest expenses were $623.9 million for the three months ended May 31, 2014 and include Compensation and benefits expense of $404.9 million recognized commensurate with the level of net revenues for the three month period. Compensation and benefits expenses as a percentage of Net revenues was 56.0% for the three months ended May 31, 2014. Non-interest expense includes $2.1 million in additional lease expense related to recognizing existing leases at their current market value, incremental amortization expense of $3.5 million associated with intangible assets and internally developed software recognized at the Leucadia Transaction date and $3.9 million of additional amortization expense related to the write-up of the cost of outstanding share-based awards which had future service requirements. 77



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At May 31, 2014, we had 3,785 employees globally, slightly below our headcount at November 30, 2013 of 3,797.

Six Months Ended May 31, 2014

Net revenues, less mandatorily redeemable preferred interests, for the six months ended May 31, 2014 were $1,622.0 million reflecting strong revenues in investment banking and equities. Our fixed income revenues were solid, particularly given challenging market conditions, continued tapering of the U.S. Federal reserve monetary stimulus and global economic pressures. The results for the six months of 2014 reflect within Net revenues positive income of $52.5 million from the amortization of premiums arising from recognizing our long-term debt at fair value as part of the pushdown accounting for the Leucadia Transaction and gains of $26.5 million in aggregate from our investments in Knight and Harbinger. Non-interest expenses were $1,340.6 million for the six months ended May 31, 2014 and include Compensation and benefits expense of $912.8 million recognized commensurate with the level of net revenues for the six month period. Compensation and benefits expenses as a percentage of Net revenues was 56.3% for the six months ended May 31, 2014. Non-interest expense includes $4.2 million in additional lease expense related to recognizing existing leases at their current market value, incremental amortization expense of $7.0 million associated with intangible assets and internally developed software recognized at the Leucadia Transaction date, and $7.5 million of additional amortization expense related to the write-up of the cost of outstanding share-based awards which had future service requirements.



Three Months Ended May 31, 2013

Net revenues, less mandatorily redeemable preferred interests, for the three months ended May 31, 2013 were $655.1 million. The results for the second quarter of 2013 reflect within Net revenues positive income of $24.4 million representing the amortization of premiums arising upon increasing the balance our long-term debt to fair value in connection with the pushdown accounting for the Leucadia Transaction and an unrealized mark down of $5.7 million on our share ownership in Knight Capital, Inc. Non-interest expenses were $589.8 million for the three months ended May 31, 2013. Non-interest expenses include Compensation and benefits expense of $373.9 million for the quarter recognized commensurate with the level of net revenues. Compensation costs as a percentage of Net revenues for the three months ended May 31, 2013 were 57.1%. Non-interest expense also includes approximately $22.1 in costs associated with the closing of the March 1, 2013 Leucadia Transaction. These costs are comprised of $9.0 million in investment banking and filing fees, $2.1 million in additional lease expense related to recognizing existing leases at their current market value, incremental amortization expense of $6.1 million associated with intangible assets and internally developed software recognized at the Leucadia Transaction date, and $4.9 million of additional amortization expense related to the write-up of the cost of outstanding share-based awards which had future service requirements at the Leucadia Transaction date. In addition, occupancy and equipment includes a $7.3 million charge associated with our relocating certain staff and abandoning certain London office space.



At May 31, 2013, we had 3,785 employees globally.

Three Months Ended February 28, 2013

Net revenues, less mandatorily redeemable preferred interests, for the three months ended February 28, 2013 were $807.6 million, which include strong investment banking revenues, particularly in debt and equity capital markets, and a gain of $26.5 million on our then share ownership in Knight. Non-interest expenses of $668.1 million for the three months ended February 28, 2013 reflect compensation expense consistent with the level of net revenues and professional service costs associated with the Leucadia Transaction. Compensation costs as a percentage of Net revenues for the three months ended February 28, 2013 were 57.9%. 78



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Revenues by Source The Capital Markets reportable segment includes our securities and commodities trading activities, and our investment banking activities. The Capital Markets reportable segment provides the sales, trading and origination and advisory effort for various equity, fixed income, commodities, futures, foreign exchange and advisory products and services. The Capital Markets segment comprises many business units, with many interactions and much integration among them. In addition, we separately discuss our Asset Management business. For presentation purposes, the remainder of "Results of Operations" is presented on a detailed product and expense basis, rather than on a business segment basis. Net revenues presented for our equity and fixed income businesses 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 sales and trading activities, which is a function of the mix of each business's associated assets and liabilities and the related funding costs. The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary from period to period due to fluctuations in economic and market conditions, and our own performance. The following provides a summary of "Revenues by Source" for the Successor periods three and six months ended May 31, 2014 and three months ended May 31, 2013, and the Predecessor period three months ended February 28, 2013 (amounts in thousands): Successor Predecessor Three Months Ended Six Months Ended Three Months Ended Three Months Ended May 31, 2014 May 31, 2014 May 31, 2013 February 28, 2013 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Equities $ 177,238 24 % $ 366,061 23 % $ 141,590 21 % $ 167,354 21 % Fixed income 217,706 30 503,634 31 229,187 35 352,029 43 Total sales and trading 394,944 54 869,695 54 370,777 56 519,383 64 Equity 83,726 12 178,464 11 53,564 8 61,380 7 Debt 147,000 20 320,038 20 133,714 20 140,672 17 Capital markets 230,726 32 498,502 31 187,278 28 202,052 24 Advisory 100,423 14 246,967 15 89,856 14 86,226 11 Total investment banking 331,149 46 745,469 46 277,134 42 288,278 35 Asset management fees and investment income (loss) from managed funds: Asset management fees 4,927 1 14,373 1 11,332 2 11,083 1 Investment income (loss) from managed funds (8,028 ) (1 ) (7,517 ) (1 ) (805 ) - (200 ) - Total (3,101 ) - 6,856 - 10,527 2 10,883 1 Net revenues 722,992 100 % 1,622,020 100 % 658,438 100 % 818,544 100 % Interest on mandatorily redeemable preferred interests of consolidated subsidiaries - - 3,368 10,961 Net revenues, less mandatorily redeemable preferred interests $ 722,992$ 1,622,020$ 655,070$ 807,583 Net Revenues Net revenues for the three months ended May 31, 2014 were $723.0 million, reflecting solid revenues in investment banking, and a steady performance in Equities and Fixed Income despite lower client trading volume. Further, European and Asian revenues for the second quarter of 2014 were the third highest quarter on record. The three months results include gains of $39.6 million from our investments in Knight and Harbinger. Net revenues for the six months ended May 31, 2014 of $1,622.0 million. The six months results include gains of $26.5 million from our investments in Knight and Harbinger. 79



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Net revenues for the three months ended May 31, 2013 of $658.4 million reflect improved performance in our core equity sales and trading business and continued strength in our investment banking platform. However, there was a significant slowdown in fixed income activity during March and April 2013, that offset better fixed income results in May 2013. The three months ended May 31, 2013 include an unrealized loss of $5.7 million reflecting the Knight stock price at the end of the 2013 second quarter compared to the end of the prior quarter. Asset management revenues from management fees and investment income were consistent across all asset classes of funds and investment income. Net revenues for the three months ended February 28, 2013 of $818.5 million were the third highest quarter on record as a result of improved overall market activity, with all of our business lines demonstrating strong results. Within Equities revenues, net revenues include Principal transaction revenues of $26.5 million from gains related to our investment in Knight during the quarter. In 2013, interest on mandatorily redeemable preferred interests of consolidated subsidiaries represents primarily the allocation of earnings and losses from our high yield business to third party noncontrolling interest holders that were invested in that business through mandatorily redeemable preferred securities. These interests were redeemed in April 2013.



Equities Revenue

Equities revenue is comprised of equity commissions, principal transactions and net interest revenue relating to cash equities, electronic trading, equity derivatives, convertible securities, prime brokerage, securities finance and alternative investment strategies. Equities revenue is heavily dependent on the overall level of trading activity of our clients. Equities revenue also includes our share of the net earnings from our joint venture investments in Jefferies Finance, LLC ("Jefferies Finance") and Jefferies LoanCore, LLC ("LoanCore"), which are accounted for under the equity method, as well changes in the value of our investments in Knight and Harbinger. In March 2014, we sold our investment in Harbinger to Leucadia at fair market value.



Three Months Ended May 31, 2014

Total equities revenue was $177.2 million for the three months ended May 31, 2014. Equities revenue includes gains of $39.6 million from our investment in Knight and Harbinger and an unrealized gain of $3.7 million from marking to market the option on Leucadia shares embedded in our 3.875% Senior Convertible Debentures. Also included within interest expense allocated to our equities business is positive income of $11.9 million related to the amortization of premiums arising from the adjustment of our long-term debt to fair value as part of accounting for the Leucadia Transaction. The second quarter of 2014 was characterized by U.S. stock prices continuing their upward trend as company earnings and economic data largely met expectations and monetary policy looked to remain favorable. Towards the end of the fiscal quarter, our equity option trading desk benefited from a decrease in volatility, although offset by reduced trading revenues on our U.S. equity cash desk driven by decreased customer flows, and lower trading revenues from equity block trading. Our securities financing business contributed solidly to revenues during the quarter while reduced liquidity in the secondary market due to fewer new issuances led to lower revenues from our convertibles desk. In Europe, with the economy continuing to show signs of strengthening, increased commission and trading revenues resulted from improved customer flows. Asian equity commissions for the second quarter of 2014 also were up driven by an increase in client activity. Revenue contributions from our Jefferies Finance joint venture was consistently strong while revenue from our LoanCore joint venture was lower during the three month period ended May 31, 2014 as compared to the three months ended May 31, 2013 due to fewer securitizations during the 2014 six month period.



Six Months Ended May 31, 2014

Total equities revenue was $366.1 million for the six months ended May 31, 2014. Equities revenue includes unrealized gains of $26.5 million from our investments in Knight and Harbinger and an unrealized gain of $5.7 million from marking to market the option on Leucadia shares embedded in our 3.875% Senior Convertible Debentures. Additionally, during the first quarter of 2014, we recognized a mark-to-market gain of $12.2 million in 80



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connection with our investment in CoreCommodity Management LLC, which was transferred to Leucadia on February 28, 2014. Also included within interest expense allocated to our equities business is positive income of $23.6 million related to the amortization of premiums arising from the adjustment of our long-term debt to fair value as part of accounting for the Leucadia Transaction.

Equities revenues from our Jefferies Finance and LoanCore joint ventures decreased during the six month period ended May 31, 2014 as compared to the three months ended May 31, 2013 and the three months ended February 28, 2013 due to fewer loan closings and securitizations by the ventures over the periods. In addition, during the three months ended February 28, 2014, we deconsolidated certain of our strategic investment entities as additional third party investments were received during the period. Accordingly, the results from this business reflected in equities revenues for the six months of 2014 represent trading revenues solely from our managed accounts. Results from our strategic investments business in prior periods represented 100% of strategic investment trading revenues, a portion of which was attributed to noncontrolling interests.



Three Months Ended May 31, 2013

Total equities revenue was $141.6 million for the three months ended May 31, 2013. Equities revenue includes within Principal transaction revenues an unrealized loss of $5.7 million recognized on our investment in Knight Capital and an unrealized loss of $3.2 million from marking to market the option on Leucadia shares embedded in our 3.875% Senior Convertible debenture. In addition, included within Interest expense is positive income from the allocation to our business of the amortization of premiums arising upon adjusting our long-term debt to fair value as part of acquisition accounting. U.S. equity market conditions during the second quarter of fiscal 2013 were characterized by increasing stock prices, although trading volume was low. In equity markets, the NASDAQ Composite Index, the S&P 500 Index and the Dow Jones Industrial Average increased by 9.4%, 7.7% and 7.6%, respectively, over the quarter, with the S&P Index reaching a new high in May 2013. The New York Stock Exchange and NASDAQ exchange volumes were down 12% and 2%, respectively, compared to the three months ended May 31, 2012. Although market volumes were subdued, our U.S. equity cash and electronic trading desks experienced greater customer flow for the second quarter of 2013 as compared to prior periods. In Europe, liquidity has returned to the market as compared to 2012 aiding results, although our results are still impacted by relatively low trading volumes. Additionally, Asian equity commissions are stronger, particularly in Japan with new monetary policies increasing trading volumes on the Nikkei Exchange. Our Securities Finance desk also contributed solidly to Equities revenue for the 2013 second quarter. The performance of certain strategic investment strategies were strong during the 2013 second quarter. Equity revenues from our investments in our joint ventures, Jefferies Finance and LoanCore, were impacted by additional interest expense on new long term debt issued by both ventures during the second quarter of 2013, the proceeds of which have not yet been deployed in the business.



Three Months Ended February 28, 2013

Total equities revenue was $167.4 million for the three months ended February 28, 2013 and includes within Principal transaction revenues an unrealized gain of $26.5 million recognized on our investment in Knight. While U.S. equity markets posted gains during our first quarter, with the S&P index up 7%, investors remained cautious as evidenced by declining volumes. Although market volumes declined, our equity trading desks experienced ample client trading volumes. For the three months ended February 28, 2013, performance from certain strategic investments benefited from the increase in the overall stock markets and other positioning.



Fixed Income Revenue

Fixed income revenue includes commissions, principal transactions and net interest revenue from investment grade corporate bonds, mortgage- and asset-backed securities, government and agency securities, municipal bonds, emerging markets debt, high yield and distressed securities, bank loans, foreign exchange and commodities trading activities.

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Three Months Ended May 31, 2014

Fixed income revenue was $217.7 million for the three months ended May 31, 2014. Included within Interest expense for the period is positive income of $14.5 million from the allocation to our fixed income business of a portion of the amortization of premiums arising from adjusting our long-term debt to fair value as part of acquisition accounting. The second quarter of fiscal 2014 was characterized by mixed U.S. economic data combined with increased geopolitical risks. Credit spreads continued to tighten and volatility was extremely low. These conditions impacted trading revenues in our U.S. rates, corporates, emerging markets and mortgage business, though this effect was partially offset by investors migrating to certain parts of the latter asset classes in search of higher yields. While investor interest in high yield asset classes continues to be strong, distressed credit trading was more subdued in the second quarter than during the first quarter of 2014. Municipal securities as an asset class continue to outperform and experience increasing customer inflows benefiting our municipal securities business. Yields in Europe also tightened during the three months ended May 31, 2014 and, during the latter part of the quarter, economic data for certain European countries negatively impacted results for the period from our international rates and mortgage businesses. Futures sales and trading revenues for the three months ended May 31, 2014 declined as compared to the same 2013 period primarily attributable to low volatility in the foreign currency markets as well as generally subdued client demand. During the second quarter of 2013, we redeemed the third party interests in our high yield joint venture, Jefferies High Yield Holdings, LLC. As a result of this redemption, effective April 1, 2013, results of this business are allocated to us in full. Six Months Ended May 31, 2014 Fixed income revenue was $503.6 million for the six months ended May 31, 2014. Included within Interest expense for the period is positive income of $28.9 million from the allocation to our fixed income business of a portion of the amortization of premiums arising from adjusting our long-term debt to fair value as part of acquisition accounting. The first part of the six month period ended May 31, 2014 was characterized by weaker U.S. economic data, which continued to be mixed throughout the six month period. Additionally, geopolitical factors created market uncertainty. Credit spreads continued to tighten as the U.S. Federal Reserve continued to taper its bond buyback program at a measured pace. These factors continued to motivate investors to take on more risk in search of yield, which has reduced demand in U.S. rates while benefiting other of our fixed income businesses. Overall, volatility was low reducing client trading demand across most of the fixed income platform with the exception of increased customer flow in our municipal securities business. Futures sales and trading revenues for the six months ended May 31, 2014 were negatively impacted by challenging market conditions for foreign currency trading given political and economic instability in various global environments.



Three Months Ended May 31, 2013

Fixed income revenue was $229.2 million for the three months ended May 31, 2013. Included within Interest expense for the period is positive income from the allocation to our business of the amortization of premiums arising from adjusting our long-term debt to fair value as part of acquisition accounting.

The second quarter of fiscal 2013 was characterized by improving U.S. macroeconomic conditions, and, through the first half of May 2013, the U.S. Federal Reserve's policies resulted in historically low yields for fixed income securities motivating investors to take on more risk in search for yield. However, in May 2013, the fixed income markets became concerned about a possible tapering of the quantitative easing program leading ultimately to negative returns for the period across nearly all of the U.S. fixed income markets. Spreads tightened significantly in the U.S. rates market, with a significant sell-off in the market in May 2013 creating a challenging environment to monetize client flow. Corporate credit spreads also compressed during the second quarter of 2013 and a difficult trading environment prevailed. Conversely, spreads widened for mortgage products and market volatility was amplified during the period resulting in sizable write-downs in our inventory. Municipal securities underperformed as an asset class as the yields compared to other asset classes when considering the risk of the asset class did not 82



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES appear attractive to investors. Our leverage credit business produced solid results as investors also sought investment yields in this fixed income class and issuers of bank debt were active with the supply level creating a positive effect on liquidity in the secondary market. Additionally, foreign exchange revenues were negatively impacted by volatility in the markets. Europe experienced strong trading volume as U.S. and Japanese investors began to search for yield, despite continuing macroeconomic and political risks in the eurozone. International mortgage revenues benefited from the demand for European mortgage bonds in the second quarter of 2013. Revenues in our international credit business were affected by an overall slowdown in market activity, as renewed uncertainty over the debt crisis in certain peripheral European countries remain.



Three Months Ended February 28, 2013

For the three months ended February 28, 2013, fixed income revenue was $352.0 million. Credit spreads narrowed through the first quarter of 2013. In January 2013, global macroeconomic conditions appeared to be improving, with the U.S. economy expanding and the U.S. Federal reserve continuing quantitative easing. U.S. rates revenues were robust, with strong treasury issuance and strong demand and yields at historic lows. Revenues from our leveraged finance and emerging markets sales and trading businesses were sound as investor confidence returned in 2013 and investors were attracted to the relatively higher yield on these products. Revenue in our emerging markets business is reflective of our efforts to strengthen our position in this business and revenues for the period include significant gains generated by certain high yield positions. Revenues from our international mortgage desk were positively impacted by the demand for European mortgage bonds and foreign exchange revenues demonstrated a successful navigation of volatile currency markets. Revenues also benefited from new client activity associated with our expansion of our global metals desk in the latter part of 2012. However, international rates sales and trading revenues were negatively impacted by investor concerns over the European markets resulting in restrained trading volumes and a high level of market volatility. Of the net earnings recognized in Jefferies High Yield Holdings, LLC (our high yield and distressed securities and bank loan trading and investment business) for the three months ended February 28, 2013, approximately 65% is allocated to minority investors and are presented within interest on mandatorily redeemable preferred interests and net earnings to noncontrolling interests in our Consolidated Statements of Earnings.



Investment Banking Revenue

We provide a full range of capital markets and financial advisory services to our clients across most industry sectors in the Americas, Europe and Asia. Capital markets revenue includes underwriting and placement revenue related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities. Advisory revenue consists primarily of advisory and transaction fees generated in connection with merger, acquisition and restructuring transactions. The following table sets forth our investment banking revenue (in thousands): Successor Predecessor Three Months Ended Six Months Ended Three Months Ended Three Months Ended May 31, 2014 May 31, 2014 May 31, 2013 February 28, 2013 Equity $ 83,726 $ 178,464 $ 53,564 $ 61,380 Debt 147,000 320,038 133,714 140,672 Capital markets 230,726 498,502 187,278 202,052 Advisory 100,423 246,967 89,856 86,226 Total $ 331,149 $ 745,469 $ 277,134 $ 288,278 83



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Three Months Ended May 31, 2014

During the three month period ended May 31, 2014, strong equity and debt markets, low borrowing costs and an improving U.S. and European economic environment, increased the volume of both capital market transactions and mergers and acquisition activity compared to the same period last year.

Investment banking revenue was $331.1 million for the quarter. From equity and debt capital raising activities, we generated $83.7 million and $147.0 million in revenues, respectively. During the three months ended May 31, 2014, we completed 171 public and private debt financings that raised $42.5 billion and we completed 42 public equity financings and one convertible offerings that raised $12.6 billion (35 of which we acted as sole or joint bookrunner). Financial advisory revenues totaled $100.4 million in the second quarter of 2014, during which we acted as financial advisor on 31 merger and acquisition transactions with an aggregate transaction value of $14.5 billion.



Six Months Ended May 31, 2014

Investment banking revenue was $745.5 million for the six months of 2014. From equity and debt capital raising activities, we generated $178.5 million and $320.0 million in revenues, respectively. During the six months ended May 31, 2014, we completed 300 public and private debt financings that raised $95.6 billion and we completed 79 public equity financings and 4 convertible offerings that raised $24.0 billion (68 of which we acted as sole or joint bookrunner). Financial advisory revenues totaled $247.0 million, including revenues from 59 merger and acquisition transactions with an aggregate transaction value of $35.6 billion.



Three Months Ended May 31, 2013

During the 2013 second quarter, capital market conditions continued to show signs of improvement with increased corporate bond issuance amid record-low borrowing costs; however the market weakened towards the end of May due to uncertainty regarding the timing of the Federal Reserve's tapering of its stimulus plan.

Investment banking revenue was $277.1 million for the three months ended May 31, 2013. From equity and debt capital raising activities, we recognized $53.6 million and $133.7 million, respectively, in revenues. During the three months ended May 31, 2013, we completed 138 public and private debt financings that raised $54.4 billion in aggregate, as companies took advantage of low borrowing costs and we completed 38 public equity financings that raised $8.4 billion (33 of which we acted as sole or joint bookrunner). Advisory revenue for the three months ended May 31, 2013 was $89.9 million. During the second quarter of 2013, we served as financial advisor on 33 merger and acquisition transactions with an aggregate transaction value of approximately $42.0 billion.



Three Months Ended February 28, 2013

For the three months ended February 28, 2013, investment banking revenue was $288.3 million, including advisory revenues of $86.2 million and $202.1 million in revenues from capital market activities, the third highest on record. Debt capital markets revenue were $140.7 million, driven by a high number of debt capital market transactions as companies took advantage of lower borrowing costs and more favorable economic and market conditions. During the three months ended February 28, 2013, we completed 121 public and private debt financings that raised a total of $42 billion. Equity capital markets revenue totaled $61.4 million, completing 30 public equity financings that raised $10.0 billion (25 of which we acted as sole or joint bookrunner). Reflective of a subdued mergers and acquisition deal environment, despite improving fundamentals, for the three months ended February 28, 2013, advisory revenue totaled $86.2 million. During the first quarter of 2013, we served as financial advisor on 31 merger and acquisition transactions and two restructuring transactions with an aggregate transaction value of approximately $21 billion.



Asset Management Fees and Investment Income (Loss) from Managed Funds

Asset management revenue includes management and performance fees from funds and accounts managed by us, management and performance fees from related party managed funds and accounts and investment income (loss) from our investments in these funds, accounts and related party managed funds. The key components of asset management revenue are the level of assets under management and the performance return, whether on an absolute basis or 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. 84



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES On September 11, 2013, we restructured our ownership interest in CoreCommodity Management, LLC ("CoreCommodity"), our commodity asset management business. Pursuant to the terms of that restructuring, we acquired Class B Units in what is now called CoreCommodity Capital, LLC. As a consequence, subsequent to September 11, 2013, we no longer report asset management revenues, assets under management and managed accounts attributed to the commodities asset class. On February 28, 2014, we sold our Class B Units to Leucadia at fair market value. The following summarizes the results of our Asset Management businesses for the three and six months ended May 31, 2014, and the three months ended May 31, 2013 and February 28, 2013 (in thousands): Successor Predecessor Three Months Ended Six Months Ended Three Months Ended Three Months Ended May 31, 2014 May 31, 2014 May 31, 2013 February 28, 2013

Asset management fees: Fixed income $ 2,571 $ 3,909 $ 1,329 $ 1,154 Equities 3,364 8,647 2,323 2,295 Convertibles (1,008 ) 1,817 1,755 1,376 Commodities - - 5,925 6,258 4,927 14,373 11,332 11,083 Investment income (loss) from managed funds (8,028 ) (7,517 ) (805 ) (200 ) Total $ (3,101 ) $ 6,856 $ 10,527 $ 10,883 As a result of deconsolidation of certain strategic investment entities during the first quarter of 2014, results above attributed to Equities now includes asset management fees from these entities. Fixed income asset management fees represent ongoing consideration we receive from the sale of contracts to manage certain collateralized loan obligations ("CLOs") to Babson Capital Management, LLC in January 2010. As sale consideration, we are entitled to a portion of the asset management fees earned under the contracts for their remaining lives. Investment income (loss) from managed funds comprise net unrealized markups (markdowns) in private equity funds managed by related parties.



Assets under Management

Period end assets under management by predominant asset strategy were as follows (in millions): May 31, 2014 November 30, 2013 Assets under management (1): Equities $ 227 $ 14 Convertibles 435 492 Total $ 662 $ 506



(1) Assets under management include assets actively managed by us, including

hedge funds and certain managed accounts. Assets under management do not

include the assets of funds that are consolidated due to the level or nature

of our investment in such funds. 85



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Non-interest Expenses

Non-interest expenses for the three and six months ended May 31, 2014, and three months ended May 31, 2013 and February 28, 2013, were as follows (in thousands): Successor Predecessor Three Months Ended Six Months Ended Three Months Ended Three Months Ended May 31, 2014 May 31, 2014 May 31, 2013 February 28, 2013 Compensation and benefits $ 404,876 $ 912,775 $ 373,880 $ 474,217 Non-compensation expenses: Floor brokerage and clearing fees 54,020 103,533 48,902 46,155 Technology and communications 70,257 134,563 63,839 59,878 Occupancy and equipment rental 26,673 53,175 32,225 24,309 Business development 24,917 51,393 22,732 24,927 Professional services 25,345 50,164 29,519 24,135 Other 17,767 35,011 18,720 14,475 Total non-compensation expenses $ 218,979 $ 427,839 $ 215,937 $ 193,879 Total non-interest expenses $ 623,855 $ 1,340,614 $ 589,817 $ 668,096



Compensation and Benefits

Compensation and benefits expense consists of salaries, benefits, cash bonuses, commissions, annual cash compensation awards, historical annual share-based compensation awards and the amortization of certain nonannual share-based and cash compensation awards to employees. Cash- and historical share-based 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 substantial portion of awards granted at year end as part of annual compensation is fully recorded in the year of the award. Included within Compensation and benefits expense are share-based amortization expense for senior executive awards granted in January 2010 and September 2012, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting. Such awards are being amortized over their respective future service periods and amounted to compensation expense of $51.6 million and $117.7 million for the three and six months ended May 31, 2014, respectively, and $67.1 million and $68.8 million for the three months ended May 31, 2013 and February 28, 2013, respectively. In addition, compensation and benefits expense for the three and six months ended May 31, 2014 includes approximately $3.9 million and $7.5 million, respectively, of additional amortization expense related to the write-up of the cost of outstanding share-based awards which had future service requirements at the Leucadia Transaction date. Compensation and benefits expense as a percentage of Net revenues was 56.0% and 56.3% for the three and six months ended May 31, 2014, respectively, and 57.8% and 57.9% for the three months ended May 31, 2013 and February 28, 2013, respectively. Employee headcount was 3,785 at May 31, 2014 and 3,797 at November 30, 2013.



Non-Compensation Expenses

Three Months Ended May 31, 2014

Non-compensation expenses were $219.0 million for the three months ended May 31, 2014, equating to 30.3% of Net revenues. Non-compensation expenses include approximately $3.5 million in incremental amortization expense associated with fair value adjustments to identifiable tangible and intangible assets recognized as part of acquisition accounting reported within Technology and communications expense and Other expense, and $2.1 million in additional lease expense related to recognizing existing leases at their current market value in Occupancy and equipment rental expense. 86



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Floor brokerage and clearing expenses for the period are reflective of the trading volumes in our fixed income and equities trading businesses. Technology and communications expense includes costs associated with development of the various trading systems and projects associated with corporate support infrastructure, including communication enhancements to 520 Madison Avenue, our global headquarters and executive offices. For the quarter, Occupancy and equipment rental expense reflects office re-configuration expenditure at 520 Madison Avenue. Seasonally higher Business development costs reflect our continued efforts to build market share, including our loan origination business conducted through Jefferies Finance joint venture. We continue to incur legal and consulting fees as part of implementing various regulatory requirements, which is recognized in Professional services expense.



Six Months Ended May 31, 2014

Non-compensation expenses were $427.8 million for the six months ended May 31, 2014, equating to 26.4% of Net revenues. Non-compensation expenses include approximately $7.0 million in incremental amortization expense associated with fair value adjustments to identifiable tangible and intangible assets recognized as part of acquisition accounting reported within Technology and communications expense and Other expense, and $4.2 million in additional lease expense related to recognizing existing leases at their current market value in Occupancy and equipment rental expense.



Three Months Ended May 31, 2013

Non-compensation expenses were $215.9 million for the three months ended May 31, 2013. Included within Non-compensation expense is approximately $8.2 million in amortization expense associated with fair value adjustments to identifiable tangible and intangibles assets recognized as part of acquisition accounting, recognized within Occupancy and equipment rental expense, Technology and communications expense and Other expense, and $9.0 million in investment banking filing fees related to the Leucadia transaction, recognized within Professional services expense. Additionally, during the 2013 second quarter, a $7.3 million charge was recognized in Occupancy and equipment rental expense due to vacating certain office space in London. Non-compensation expenses as a percentage of Net revenues was 33%, or 29% excluding these expenses.



Three Months Ended February 28, 2013

Non-compensation expenses were $193.9 million for the three months ended February 28, 2013, or 23.7% of Net revenues. Floor brokerage and clearing expense for the 2013 first quarter is commensurate with equity, fixed income and futures trading volumes for the quarter. Occupancy and equipment expense for the period includes costs associated with taking on additional space at our global head office in New York offset by a reduction in integration costs for technology and communications as significant system migrations for Jefferies Bache have been completed. Professional services expense includes legal and consulting fees of $2.1 million related to the Leucadia Transaction and business and development expense contains costs incurred in connection with our efforts to build out our market share.



Income Taxes

For the three and six months ended May 31, 2014, the provision for income taxes was $37.3 million and $104.2 million, respectively, equating to an effective tax rate of 37.6% and 37.0%, respectively. For the three months ended May 31, 2013 and February 28, 2013, the provision for income taxes was $25.0 million and $48.6 million, equating to an effective tax rate of 38.3% and 34.9%, respectively. At May 31, 2014, the effective tax rate differed from the U.S. federal statutory rate of 35% primarily due to the impact of state income taxes, the effect of which is partially offset by international earnings taxed at rates that are generally lower than the U.S. federal statutory rate.



Earnings per Common Share

Diluted net earnings per common share was $0.35 for the three months ended February 28, 2013 on 217,844,000 shares. Earnings per share data is not provided for periods subsequent to February 28, 2013, coinciding with the date we became a limited liability company and wholly-owned subsidiary of Leucadia. See Note 17, Earnings per Share, in our consolidated financial statements for further information regarding the calculation of earnings per common share. 87



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Accounting Developments

For a discussion of recently issued accounting developments and their impact on our consolidated financial statements, see Note 3, Accounting Developments, in our consolidated financial statements.



Critical Accounting Policies

The consolidated financial statements are prepared in conformity with U.S. GAAP, which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. Actual results can and may differ from estimates. These differences could be material to the financial statements.



We believe our application of U.S. GAAP and the associated estimates are reasonable. Our accounting policies and estimates are constantly 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.

We believe our critical accounting policies (policies that are both material to the financial condition and results of operations and require our most subjective or complex judgments) are our valuation of financial instruments, assessment of goodwill and our use of estimates related to compensation and benefits during the year.



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 in our Consolidated Statements of Earnings.



The following is a summary of the fair value of major categories of financial instruments owned and financial instruments sold, not yet purchased, as of May 31, 2014 and November 30, 2013 (in thousands):

May 31, 2014 November 30, 2013 Financial Financial Instruments Instruments Financial Sold, Financial Sold, Instruments Not Yet Instruments Not Yet Owned Purchased Owned Purchased Corporate equity securities $ 2,359,225 1,684,304 $ 2,098,597$ 1,823,299 Corporate debt securities 3,203,168 1,513,621 2,982,768 1,346,078 Government, federal agency and other sovereign obligations 5,500,264 3,788,221 5,346,152 3,155,683 Mortgage- and asset-backed securities 4,092,391 16,837 4,473,135 34,691 Loans and other receivables 1,564,688 903,856 1,349,128 695,300 Derivatives 253,184 226,288 261,093 180,079 Investments 123,432 - 101,282 - Physical commodities 47,166 39,173 37,888 36,483 $ 17,143,518$ 8,172,300$ 16,650,043$ 7,271,613 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 88



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES 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 and broker quotes that are considered less observable. 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 classified in Level 3 of the fair value hierarchy involves the greatest amount of management judgment. For further information on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Note 2, Summary of Significant Accounting Policies and Note 5, Fair Value Disclosures, in our consolidated financial statements. Level 3 Assets and Liabilities - The following table reflects the composition of our Level 3 assets and Level 3 liabilities by asset class at May 31, 2014 and November 30, 2013 (in thousands): Financial Instruments Sold, Financial Instruments Owned Not Yet Purchased May 31, November 30, May 31, November 30, 2014 2013 2014 2013 Loans and other receivables $ 138,643$ 145,890$ 31,534$ 22,462 Investments at fair value 118,071 101,242 - - Residential mortgage-backed securities 71,962 105,492 - - Collateralized debt obligations 42,313 37,216 - - Corporate debt securities 31,648 25,666 2,780 - Commercial mortgage-backed securities 24,246 17,568 - - Corporate equity securities 16,402 9,884 38 38 Other asset-backed securities 45,444 12,611 - - Derivatives 913 1,493 16,195 8,398 Total Level 3 financial instruments 489,642 457,062 $ 50,547$ 30,898 Investments in managed funds 56,119 57,285 Total Level 3 assets $ 545,761$ 514,347 Total Level 3 financial instruments as a percentage of total financial instruments 2.9 % 2.7 % 0.6 % 0.4 % While our Financial instruments sold, not yet purchased, which are included within liabilities on our Consolidated Statements of Financial Condition, are accounted for at fair value, we do not account for any of our other liabilities at fair value, except for certain secured financings that arise in connection with our securitization activities included with Other secured financings of approximately $20.3 million and $39.7 million at May 31, 2014 and November 30, 2013, respectively, and the conversion option to Leucadia shares embedded in our 3.875% Convertible Senior debenture of approximately $3.9 million and $9.6 million reported within Long-term debt at May 31, 2014 and November 30, 2013, respectively. 89



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES The following table reflects activity with respect to our Level 3 assets and liabilities (in millions): Three Months Ended Six Months Ended Three Months Ended Three Months Ended May 31, 2014 May 31, 2014 May 31, 2013 February 28, 2013 Assets: Transfers from Level 3 to Level 2 $ 66.4 $ 58.9 $ 48.5 $ 112.7 Transfers from Level 2 to Level 3 95.4 95.1 54.9 100.5 Net gains (losses) 14.8 31.3 (3.4 ) 14.5 Liabilities: Transfers from Level 3 to Level 2 $ - $ 3.4 $ - $ 0.7 Transfers from Level 2 to Level 3 15.6 2.8 2.3 - Net gains (losses) (8.5 ) (12.1 ) 0.4 (2.7 )



See Note 5, Fair Value Disclosures, in our consolidated financial statements for additional discussion on transfers of assets and liabilities among the fair value hierarchy levels.

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. Goodwill As of May 31, 2014, goodwill recorded on our Consolidated Statement of Financial Condition is $1.7 billion (4.0% of total assets). The nature and accounting for goodwill is discussed in Note 2, Summary of Significant Accounting Policies and Note 11, Goodwill and Other Intangible Assets, in our consolidated financial statements. Goodwill must be allocated to reporting units and tested for impairment at least annually by comparing the estimated fair value of each reporting unit with its carrying value. Our annual goodwill impairment testing date is August 1, which did not indicate any goodwill impairment in any of our reporting units at August 1, 2013. We use allocated equity plus goodwill and allocated intangible assets as a proxy for the carrying amount of each reporting unit. The amount of 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. Refer to the discussion of our Cash Capital Policy of the Liquidity, Financial Condition and Capital Resources section within Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations to this Quarterly Report on Form 10-Q for further information. 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, for certain reporting units, a net asset value method. Under the market approach, the key assumptions are the selected multiples and our internally developed forecasts 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. In addition, as the fair values determined under the market 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. 90



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Substantially all of our goodwill is allocated to our Investment Banking, Equities and Fixed Income reporting units.

Compensation and Benefits

A portion of our compensation and benefits represents discretionary bonuses, which are finalized at year end. In addition to the level of net revenues, our overall compensation expense in any given year is influenced by prevailing labor markets, revenue mix, profitability, individual and business performance metrics, and our use of share-based compensation programs. We believe the most appropriate way to allocate estimated annual total compensation among interim periods is in proportion to projected net revenues earned. Consequently, during the year we accrue compensation and benefits based on annual targeted compensation ratios, taking into account the mix of our revenues and the timing of expense recognition.



For further discussion of these and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements.

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Liquidity, Financial Condition and Capital Resources

Our Chief Financial Officer 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, arising principally from traditional securities brokerage and trading activity. The liquid nature of these assets provides us with flexibility in financing and managing our business.



Analysis of Financial Condition

A business unit level balance sheet and cash capital analysis is 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 and adjusted balance sheet limits are established. 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. Substantially all of our Financial instruments owned and Financial instruments sold, not yet purchased are valued on a daily basis and we monitor and employ balance sheet limits for our various businesses. In connection with our government and agency fixed income business and our role as a primary dealer in these markets, a sizable portion of our securities inventory is comprised of U.S. government and agency securities and other G-7 government securities.



The following table provides detail on key balance sheet asset and liability line items (in millions):

May 31, November 30, 2014 2013 % Change Total assets $ 43,610.0$ 40,177.0 9 % Cash and cash equivalents 3,958.3 3,561.1 11 % Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations 3,288.5 3,616.6 -9 % Financial instruments owned 17,143.5 16,650.0 3 % Financial instruments sold, not yet purchased 8,172.3 7,271.6 12 % Total Level 3 assets 545.8 514.3 6 % Securities borrowed $ 6,097.1$ 5,359.8 14 % Securities purchased under agreements to resell 4,609.4 3,746.9 23 % Total securities borrowed and securities purchased under agreements to resell $ 10,706.5$ 9,106.7 18 % Securities loaned $ 2,901.2$ 2,506.1 16 % Securities sold under agreements to repurchase 11,668.1 10,779.8 8 % Total securities loaned and securities sold under agreements to repurchase $ 14,569.3$ 13,285.9 10 % 92



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Total assets at May 31, 2014 and November 30, 2013 were $43.6 billion and $40.2 billion, respectively. During the three and six months ended May 31, 2014, average total assets were approximately 16% and 14%, respectively, higher than total assets at May 31, 2014. Jefferies Bache, LLC (our U.S. futures commission merchant) and Jefferies Bache Limited (our U.K. commodities and financial futures broker-dealer), receive cash or securities as margin to secure customer futures trades. Jefferies LLC (a U.S. broker-dealer), under SEC Rule 15c3-3, and Jefferies Bache, LLC, under CFTC Regulation 1.25, are required to maintain customer cash or qualified securities in a segregated reserve account for the exclusive benefit of our clients. We are required to conduct customer segregation calculations to ensure the appropriate amounts of funds are segregated and that no customer funds are used to finance firm activity. Similar requirements exist with respect to our U.K.-based activities conducted through Jefferies Bache Limited and Jefferies International Limited (a U.K. broker-dealer). Customer funds received are separately segregated and "locked-up" apart from our funds. If we rehypothecate customer securities, that activity is conducted only to finance customer activity. Additionally, we do not lend customer cash to counterparties to conduct securities financing activity (i.e., we do not lend customer cash to reverse in securities). Further, we have no customer loan activity in Jefferies International Limited and we do not have any European prime brokerage operations. In Jefferies Bache Limited, any funds received from a customer are placed on deposit and not used as part of our operations. We do not transfer U.S. customer assets to our U.K. entities. Our total Financial instruments owned inventory at May 31, 2014 was $17.1 billion, an increase of 3.0% from inventory of $16.7 billion at November 30, 2013, primarily driven by increases in inventory positions of equity and corporate debt as a result of greater customer trading demand and the shifting yield curve as impacted by the U.S. Federal Reserve bond buyback program, partially offset by decreases in inventory positions of mortgage- and asset- backed securities due to the tightening of credit spreads in agency and commercial mortgage-backed securities. Financial instruments sold, not yet purchased inventory was $8.2 billion and $7.3 billion at May 31, 2014 and November 30, 2013, respectively, with the increase primarily driven by increased trading by our U.S. and international rates businesses. Our overall net inventory position was $9.0 billion and $9.4 billion at May 31, 2014 and November 30, 2013, respectively.



The change in our net inventory balance is primarily attributed to a reduction in our net inventory of U.S. government and agency securities and sovereign obligations and mortgage- and asset-backed securities inventory, partially offset by an increase in net equity inventory.

We continually monitor our overall securities inventory, including the inventory turnover rate, which confirms the liquidity of our overall assets. As a Primary Dealer in the U.S. and with our similar role in several European jurisdictions, we carry inventory and make an active market for our clients in securities issued by the various governments. These inventory positions are substantially comprised of the most liquid securities in the asset class, with a significant portion in holdings of securities of G-7 countries. For further detail on our outstanding sovereign exposure to Greece, Ireland, Italy, Portugal and Spain as of May 31, 2014, refer to the Risk Management section within Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, within this Quarterly Report on Form 10-Q. Of our total Financial instruments owned, approximately 74% are readily and consistently financeable at haircuts of 10% or less. In addition, as a matter of our policy, a portion of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. Additionally, our Financial instruments owned primarily consisting of bank loans, investments and non-agency mortgage-backed securities 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 maximum levels.



At May 31, 2014 and November 30, 2013, our Level 3 financial instruments owned was 3% of our financial instruments owned.

Securities financing assets and liabilities include both financing for our financial instruments trading activity and matched book 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 borrowed and 93



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES securities purchased under agreements to resell increased by 18% from November 30, 2013 to May 31, 2014 commensurate with the change in our net inventory position of U.S. government and agency securities, partially offset by a decline in matched book activity driven by less customer trading activity. The outstanding balance of our securities loaned and securities sold under agreement to repurchase increased by 10% from November 30, 2013 to May 31, 2014 due to an increase in firm financing of our inventory, partially offset by a decrease in our matched book activity. By executing repurchase agreements with central clearing corporations to finance liquid inventory, rather than bi-lateral arrangements, we reduce the credit risk associated with these arrangements and decrease net outstanding balances. Our average month end balances of total reverse repos and stock borrows and total repos and stock loans during the three months ended May 31, 2014 were 18% and 10% higher, respectively, than the May 31, 2014 balances. 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): Successor Predecessor Six Months Nine Months Three Months Ended Ended Ended May 31, 2014 November 30, 2013 February 28, 2013 Securities Purchased Under Agreements to Resell Period end $ 4,609 $ 3,747 $ 3,578 Month end average 5,924 4,936 5,132 Maximum month end 8,081 6,007 6,288 Securities Sold Under Agreements to Repurchase Period end $ 11,668 $ 10,780 $ 7,976 Month end average 13,090 13,308 11,895 Maximum month end 14,643 16,502 15,168 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 over the periods presented 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. 94



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Leverage Ratios The following table presents total assets, adjusted assets, total equity, total member's equity, tangible equity and tangible member's equity with the resulting leverage ratios as of May 31, 2014 and November 30, 2013 (in thousands): Successor May 31, November 30, 2014 2013 Total assets $ 43,609,986$ 40,176,996 Deduct: Securities borrowed



(6,097,098 ) (5,359,846 )

Securities purchased under agreements to resell (4,609,422 ) (3,746,920 ) Add: Financial instruments sold, not yet purchased

8,172,300 7,271,613

Less derivative liabilities



(226,288 ) (180,079 )

Subtotal 7,946,012 7,091,534 Deduct: Cash and securities segregated and on deposit for



regulatory purposes or deposited with clearing and

depository organizations



(3,288,517 ) (3,616,602 )

Goodwill and intangible assets



(1,983,744 ) (1,986,436 )

Adjusted assets $ 35,577,217$ 32,558,726 Total equity $ 5,527,101$ 5,421,674 Deduct: Goodwill and intangible assets (1,983,744 ) (1,986,436 ) Tangible equity $ 3,543,357$ 3,435,238 Total member's equity $ 5,496,205$ 5,304,520 Deduct: Goodwill and intangible assets



(1,983,744 ) (1,986,436 )

Tangible member's equity $



3,512,461 $ 3,318,084

Leverage ratio (1) 7.9 7.4 Tangible gross leverage ratio (2) 11.9 11.5 Leverage ratio - excluding merger impacts (3) 10.0 9.3 Adjusted leverage ratio (4) 10.0 9.5



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

member's equity. The tangible gross leverage ratio is used by Rating Agencies

in assessing our leverage ratio.

3) Leverage ratio - excluding impacts of the Leucadia Transaction (a non-GAAP

financial measure) equals total assets less the increase in goodwill and

asset fair values in acquisition accounting of $1,957 million less

amortization of $37 million and $27 million during the period since the

Leucadia Transaction to May 31, 2014 and November 30, 2013, respectively, on

assets recognized at fair value in acquisition accounting divided by the sum

of total equity less $1,349 million and $1,326 million at May 31, 2014 and

November 30, 2013, respectively, being the increase in equity arising from

consideration of $1,426 million excluding the $125 million attributable to the assumption of our preferred stock by Leucadia, and less the impact on



equity due to amortization of $48 million and $25 million at May 31, 2014 and

November 30, 2013, respectively, on assets and liabilities recognized at fair

value in acquisition accounting.

4) Adjusted leverage ratio (a non-GAAP financial measure) equals adjusted assets

divided by tangible total equity.

Adjusted assets is a non-GAAP financial measure and excludes certain assets that are considered of lower risk as they are generally self-financed by customer liabilities through our securities lending activities. We view the resulting measure of adjusted leverage, also a non-GAAP financial measure, as a more relevant measure of financial risk when comparing financial services companies. 95



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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 Maximum Liquidity Outflow. 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 liquidity stress event, including, but not limited to, the following: (a) repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance; (b) maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral; (c) higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements; (d) liquidity outflows related to possible credit downgrade; (e) lower availability of secured funding; (f) client cash withdrawals; (g) the anticipated funding of outstanding investment and loan commitments; and (h) 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, preferred stock and the noncurrent portion of long-term borrowings. Uses of cash capital include the following: (a) illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments; (b) a portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements) and (c) drawdowns of unfunded commitments. To ensure that we do not need to liquidate inventory in the event of a funding crisis, we seek to maintain surplus cash capital, which is reflected in the leverage ratios we maintain. Our total capital of $11.9 billion as of May 31, 2014 exceeded our cash capital requirements. Maximum Liquidity Outflow. 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 crisis, 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 crisis, 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 a Maximum Liquidity Outflow that could be experienced in a liquidity crisis. Maximum Liquidity Outflow 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 Maximum Liquidity Outflow:

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

crisis.



No diversification benefit across liquidity risks. We assume that liquidity

risks are additive. 96



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES The calculation of our Maximum Liquidity Outflow 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 trades 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 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 brokerage 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 tax payments.

Based on the sources and uses of liquidity calculated under the Maximum Liquidity Outflow 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 May 31, 2014, we have sufficient excess liquidity to meet all contingent cash outflows detailed in the Maximum Liquidity Outflow. We regularly refine our model to reflect changes in market or economic conditions and the firm's 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 (in thousands): Average balance May 31, Quarter ended November 30, 2014 May 31, 2014 (1) 2013 Cash and cash equivalents: Cash in banks $ 690,979 $ 543,088 $ 830,438 Certificate of deposit 50,003 50,005 50,005 Money market investments 3,217,306 1,900,604 2,680,676 Total cash and cash equivalents 3,958,288 2,493,697 3,561,119 Other sources of liquidity: Debt securities owned and securities purchased under agreements to resell (2) 1,201,761 1,090,394 1,316,867 Other (3) 663,711 782,793 403,738 Total other sources 1,865,472 1,873,187 1,720,605 Total cash and cash equivalents and other liquidity sources $ 5,823,760 $



4,366,884 $ 5,281,724

Total cash and cash equivalents and other liquidity sources as % of Total Assets 13.4 % 13.1 % Total cash and cash equivalents and other liquidity sources as % of Total Assets less Goodwill and Intangibles 14.0 % 13.8 % 97



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

(2) 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, Canada, Australia, Japan, Switzerland or

the USA; and securities issued by a designated multilateral development bank

and reverse repurchase agreements with underlying collateral comprised of

these securities.

(3) 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 and additional funds available under the committed senior secured revolving credit facility available for working capital needs of Jefferies Bache. 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. As of May 31, 2014, we have the ability to readily obtain repurchase financing for 74% of our inventory at haircuts of 10% or less, which reflects the liquidity of our inventory. We continually assess the liquidity of our inventory based on the level at which we could obtain financing in the market place 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 May 31, 2014 and November 30, 2013 (in thousands): May 31, 2014 November 30, 2013 Unencumbered Unencumbered Liquid Financial Liquid Financial Liquid Financial Liquid Financial Instruments Instruments (2) Instruments Instruments (2)



Corporate equity securities $ 2,055,459 $ 345,514 $ 1,982,877 $ 137,721 Corporate debt securities

2,347,417 15,994 2,250,512 26,983 U.S. Government, agency and municipal securities 2,555,155 250,025 2,513,388 400,821 Other sovereign obligations 2,412,164 1,028,114 2,346,485 991,774 Agency mortgage-backed securities (1) 3,342,120 - 2,976,133 - Physical commodities 47,166 - 37,888 - $ 12,759,481$ 1,639,647$ 12,107,283$ 1,557,299



(1) Consists solely of agency mortgage-backed securities issued by Freddie Mac,

Fannie Mae and Ginnie Mae. These securities include pass-through securities,

securities backed by adjustable rate mortgages ("ARMs"), collateralized

mortgage obligations, commercial mortgage-backed securities and interest- and

principal-only securities.

(2) Unencumbered liquid balances represent assets that can be sold or used as

collateral for a loan, but have not been.

Average liquid financial instruments for the three and six months ended May 31, 2014 were $17.9 billion and $17.5 billion, respectively, and for three and twelve months ended November 30, 2013 were $15.7 billion and $16.1 billion, respectively.

In addition to being able to be readily financed at modest 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, convertible debt, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables.

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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Secured Financing We rely principally on readily available secured funding to finance our inventory of financial instruments. 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. Approximately 81% of our repurchase financing activities use collateral that is 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. The tenor of our repurchase and reverse repurchase agreements generally exceeds the expected holding period of the assets we are financing.



A significant portion of our financing of European Sovereign inventory is executed using central clearinghouse financing arrangements rather than via bi-lateral arrangements repo agreements. For those asset classes not eligible for central clearinghouse financing, we seek to execute our bi-lateral financings on an extended term basis.

In addition to the above financing arrangements, in November 2012, we initiated a program whereby we issue notes backed by eligible collateral under a master repurchase agreement, which provides an additional financing source for our inventory (our "repurchase agreement financing program"). At May 31, 2014, the outstanding amount of the notes issued under the program was $220.0 million in aggregate, which is presented within Other secured financings on the Consolidated Statement of Financial Condition. Of the $220.0 million aggregate notes, $60.0 million matures in November 2014, a second $60.0 million in February 2015 and $100.0 million matures in March 2015, all bearing interest at a spread over one month LIBOR. For additional discussion on the program, refer to Note 9, Variable Interest Entities, in our consolidated financial statements. Weighted average maturity of repurchase agreements for non-clearing corporation eligible funded inventory is approximately three months at May 31, 2014. 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. As of May 31, 2014, short-term borrowings as bank loans totaled $12.0 million. Interest under the bank lines is generally at a spread over the federal funds rate. 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 bank loans for the three and six months ended May 31, 2014 were $181.3 million and $97.6 million, respectively.



Total Capital

As of May 31, 2014 and November 30, 2013, we have total long-term capital of $11.9 billion and $11.2 billion resulting in a long-term debt to equity capital ratio of 1.16:1 and 1.07:1, respectively. Our total capital base as of May 31, 2014 and November 30, 2013 was as follows (in thousands): May 31, November 30, 2014 2013 Long-Term Debt (1) $ 6,414,241$ 5,777,130 Total Equity 5,527,101 5,421,674 Total Capital $ 11,941,342$ 11,198,804



(1) Long-term debt for purposes of evaluating long-term capital at May 31, 2014

and November 30, 2013 excludes $65.0 million and $200.0 million,

respectively, of our outstanding borrowings under our long-term revolving

Credit Facility and excludes $250.2 million and $255.7 million of our 5.875%

Senior Notes, respectively, as the notes mature in less than one year from

the quarter ends. 99



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Long-Term Debt On August 26, 2011, we entered into a committed senior secured revolving credit facility ("Credit Facility") with a group of commercial banks in Dollars, Euros and Sterling, for an aggregate committed amount of $950.0 million with availability subject to one or more borrowing bases and of which $250.0 million can be borrowed by Jefferies Bache Limited without a borrowing base requirement. On June 26, 2014, we amended and restated the Credit Facility to extend the term of the Credit Facility for three years and reduced the committed amount to $750.0 million. The borrowers under the Credit Facility are Jefferies Bache Financial Services, Inc., Jefferies Bache, LLC and Jefferies Bache Limited, with a guarantee from Jefferies Group LLC. At May 31, 2014 and November 30, 2013, we had borrowings outstanding under the Credit Facility amounting to $65.0 million and $200.0 million, respectively. Interest is based on the Federal funds rate or, in the case of Euro and Sterling borrowings, the Euro Interbank Offered Rate and the London Interbank Offered Rate, respectively. The Credit Facility is guaranteed by Jefferies Group LLC and contains financial covenants that, among other things, imposes restrictions on future indebtedness of our subsidiaries, requires Jefferies Group LLC to maintain specified level of tangible net worth and liquidity amounts, and requires certain of our subsidiaries to maintain specified levels of regulated capital. On a monthly basis we provide a certificate to the Administrative Agent of the Credit Facility as to the maintenance of various financial covenant ratios at all times during the preceding month. At May 31, 2014 and November 30, 2013, the minimum tangible net worth requirement was $2,607.5 million and $2,564.0 million, respectively and the minimum liquidity requirement was $572.4 million and $532.8 million, respectively for which we were in compliance. Throughout the period, no instances of noncompliance with the Credit Facility occurred and we expect to remain in compliance given our current liquidity, anticipated additional funding requirements given our business plan and profitability expectations. While our subsidiaries are restricted under the Credit Facility from incurring additional indebtedness beyond trade payable and derivative liabilities in the normal course of business, we do not believe that these restrictions will have a negative impact on our liquidity. On June 26, 2014, we amended and restated the Credit Facility to extend the term of the Credit Facility for three years and reduce the committed amount to $750.0 million.



As of May 31, 2014, our long-term debt, excluding the Credit Facility, has a weighted average maturity exceeding 8 years. Our 5.875% Senior Notes with a principal amount of $250.0 million matured in June 2014.

Our long-term debt ratings as of May 31, 2014 are as follows:

Rating Outlook Moody's Investors Service Baa3 Stable Standard and Poor's BBB Stable Fitch Ratings BBB- Stable We rely upon our cash holdings and external sources to finance a significant portion of our day to day operations. Access to these external sources, 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. Deteriorations 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 May 31, 2014, 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 100



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES downgrade of our long-term credit rating below investment grade was $43.2 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 credit rating downgrade. The impact of additional collateral requirements are considered in our Contingency Funding Plan and calculation of Maximum Liquidity Outflow, as described above.



Contractual Obligations and Commitments

The tables below provide information about our commitments related to debt obligations, investments and derivative contracts as of May 31, 2014. The table presents principal cash flows with expected maturity dates (in millions):

Expected Maturity Date 2016 2018 2020 and and and 2014 2015 2017 2019 Later Total Debt obligations: Unsecured long-term debt (contractual principal payments net of unamortized discounts and premiums) $ 250.2$ 512.1$ 368.2$ 1,694.0$ 3,840.0$ 6,664.5 Senior secured revolving credit facilty 65.0 - - - - 65.0 Interest payment obligations on senior notes 165.8 329.8 589.2 468.7 1,449.4 3,002.9 $ 481.0$ 841.9$ 957.4$ 2,162.7$ 5,289.4$ 9,732.4 Commitments and guarantees: Equity commitments $ 1.6$ 7.50$ 0.90 $ - $ 475.40$ 485.4 Loan commitments 10.8 26.3 515.1 175.9 - 728.1 Mortgage-related commitments 862.0 387.9 496.5 - - 1,746.4 Forward starting repos 206.2 - - - - 206.2 Derivative Contracts: Derivative contracts-non credit related 37,589.9 1,141.8 43.7 1.2 534.5 39,311.1 Derivative contracts - credit related - - - 420.8 - 420.8 $ 38,670.5$ 1,563.5$ 1,056.2$ 597.9$ 1,009.9$ 42,898.0



(1) Certain of our derivative contracts meet the definition of a guarantee and

are therefore included in the above table. For additional information on

commitments, see Note 19, Commitments, Contingencies and Guarantees, in our

consolidated financial statements.

In addition, in April 2014, we entered into an information technology outsourcing agreement. Beginning in June 2014, we have a contractual obligation to pay $957,000 per month for eight years, with a total obligation to pay of $91.9 million. 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 value of derivative contracts are reported in the Consolidated Statements of Financial Condition as Financial instruments owned - derivative contracts or Financial instruments sold, not yet purchased - derivative contracts 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, Note 5, Fair Value Disclosures, and Note 6, Derivative Financial Instruments, in our consolidated financial statements. We are routinely involved with variable interest entities ("VIEs") in connection with our mortgage-backed securities securitization activities. VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic 101



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. Where we are the primary beneficiary of a VIE, we consolidate the VIE. We do not generally consolidate the various VIEs related to our mortgage-backed securities securitization activities because we are not the primary beneficiary. At May 31, 2014, we did not have any commitments to purchase assets from our securitization vehicles. At May 31, 2014, we held $363.1 million of mortgage-backed securities issued by VIEs for which we were initially involved as transferor and placement agent, which are accounted for at fair value and recorded within Financial instruments owned on our Consolidated Statement of Financial Condition in the same manner as our other financial instruments. For additional information regarding our involvement with VIEs, see Note 8, Securitization Activities and Note 9, Variable Interest Entities, in our consolidated financial statements. Due to the uncertainty regarding the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded from the above contractual obligations table. See Note 18, Income Taxes, in our consolidated financial statements for further information.



Equity Capital

On March 1, 2013, all of the outstanding common shares of Jefferies Group LLC were exchanged for shares of Leucadia and Jefferies Group LLC became wholly-owned by Leucadia with Leucadia as the sole equity owner of Jefferies Group LLC. The aggregate purchase price was approximately $4.8 billion and therefore, as a result of the Leucadia Transaction, our member's equity capital approximated $4.8 billion upon consummation. Further, we do not anticipate making distributions in the future.



As compared to November 30, 2013, the increase to total member's equity as of May 31, 2014 is attributed to net earnings and foreign currency translation adjustments during the six months ended May 31, 2014.

Net Capital

As broker-dealers registered with the SEC and member firms of the Financial Industry Regulatory Authority ("FINRA"), Jefferies and Jefferies Execution are subject to the Securities and Exchange Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital and which may limit distributions from the broker-dealers. Jefferies and Jefferies Execution have elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital. Additionally, Jefferies Bache, LLC is registered as a Futures Commission Merchant and is subject to Rule 1.17 of the Commodities Futures Trading Commission ("CFTC"). Our designated self-regulatory organization is FINRA for our U.S. broker-dealers and the Chicago Mercantile Exchange for Jefferies Bache, LLC. As of May 31, 2014, Jefferies, Jefferies Execution and Jefferies Bache, LLC's net capital, adjusted net capital, and excess net capital were as follows (in thousands): Net Capital Excess Net Capital Jefferies $ 1,090,453 $ 1,016,424 Jefferies Execution 5,307 5,057 Adjusted Net Capital Excess Net Capital Jefferies Bache, LLC $ 196,264 $ 80,938 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 and Jefferies Bache Limited which are subject to the regulatory supervision and requirements of the Financial Conduct Authority in the United Kingdom. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010. 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. While entities that register under these provisions will be subject to regulatory capital requirements, these regulatory capital requirements have not yet been finalized. We expect that these provisions will result in modifications to the 102



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES regulatory capital requirements of some of our entities, and will result in some of our other entities becoming subject to regulatory capital requirements for the first time, including Jefferies Derivative Products, Inc. and Jefferies Bache Financial Services, Inc., which registered as swap dealers with the CFTC during January 2013.



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

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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Risk Management 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 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. Accordingly, 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, Compliance, Legal and Finance Departments. Our risk management policies, procedures and methodologies are fluid in nature and are subject to ongoing review and modification.



For discussion of liquidity and capital risk management refer to, "Liquidity, Financial Condition and Capital Resources" within Item 2. Management's Discussion and Analysis in this Quarterly Report on Form 10-Q.

Governance and Risk Management Structure

Our Board of Directors Our Board of Directors and its Audit Committee play an important role in reviewing our risk management process and risk tolerance. Our Board of Directors and Audit Committee are provided with data relating to risk at each of its regularly scheduled meetings. Our Chief Risk Officer and Global Treasurer meet with the Board of Directors on not less than a quarterly basis to present our risk profile and liquidity profile and to respond to questions. Risk Committees We make extensive use of internal committees to govern risk taking and ensure that business activities are properly identified, assessed, monitored and managed. Our Risk Management Committee meets weekly to discuss our risk, capital, and liquidity profile in detail. In addition, business or market trends and their potential impact on the risk profile are discussed. Membership is comprised of our Chief Executive Officer and Chairman, Chairman of the Executive Committee, Chief Financial Officer, Chief Risk Officer and Global Treasurer. The Committee approves limits for us as a whole, and across risk categories and business lines. It also reviews all limit breaches. Limits are reviewed on at least an annual basis. Other risk related committees include Market Risk Management, Credit Risk Management, New Business, Underwriting Acceptance, Margin Oversight, Executive Management and Operating Committees. These Committees govern risk taking and ensure that business activities are properly managed for their area of oversight.



Risk Related Policies We make use of various policies in the risk management process:

Market Risk Policy- This policy sets out roles, responsibilities, processes

and escalation procedures regarding market risk management. Independent Price Verification Policy- This policy sets out roles,



responsibilities, processes and escalation procedures regarding independent

price verification for securities and other financial instruments.



Operational Risk Policy- This policy sets out roles, responsibilities,

processes and escalation procedures regarding operational risk management.

Credit Risk Policy- This policy provides standards and controls for credit

risk-taking throughout our global business activities. This policy also

governs credit limit methodology and counterparty review.

Risk Management Key Metrics

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 limit reflects our risk tolerance for a certain activity under normal business conditions. Key metrics included in our framework include inventory position and exposure limits on a gross and net basis, scenario analysis and stress tests, Value-at-Risk, sensitivities (greeks), exposure concentrations, aged inventory, amount of Level 3 assets, counterparty exposure, leverage, cash capital, and performance analysis metrics. 104



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Market Risk The potential for changes in the value of financial instruments is referred to as market risk. Our market risk generally represents the risk of loss that may result from a change in the value of a financial instrument as a result of fluctuations in interest rates, credit spreads, equity prices, commodity prices and foreign exchange rates, along with the level of volatility. Interest rate risks result primarily from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads. Equity price risks result from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. Commodity price risks result from exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices. Market risk arises from market making, proprietary trading, underwriting, specialist and investing activities. We seek to manage our exposure to market risk by diversifying exposures, controlling position sizes, and establishing economic hedges in related securities or derivatives. Due to imperfections in correlations, gains and losses can occur even for positions that are hedged. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and results of the trading groups. Value-at-Risk We estimate Value-at-Risk (VaR) using a model that simulates revenue and loss distributions on substantially all financial instruments by applying historical market changes to the current portfolio. Using the results of this simulation, VaR measures the potential loss in value of our financial instruments over a specified time horizon at a given confidence level. We calculate a one-day VaR using a one year look-back period measured at a 95% confidence level. This implies that, on average, we expect to realize a loss of daily trading net revenue at least as large as the VaR amount on one out of every twenty trading days. 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 of positions that cannot be liquidated or offset with hedges in a one-day period. Published VaR results reflect past trading positions while future risk depends on future positions. While we believe the assumptions and inputs in our risk model are reasonable, we could incur losses greater than the reported VaR because the historical market prices and rates changes may not be an accurate measure of future market events and conditions. Consequently, this VaR estimate is only one of a number of tools we use in our daily risk management activities. When comparing our VaR numbers to those of other firms, it is important to remember that different methodologies and assumptions could produce significantly different results. Our average daily VaR decreased to $14.94 million for the three months ended May 31, 2014 from $16.27 million for the three months ended February 28, 2014. The decrease was primarily driven by lower equity price risk as a result of the sale of our holding in Harbinger Group Inc. to Leucadia. We saw a decrease in the diversification benefit across asset classes. Market risk from interest rates, currency rates and commodity prices risk did not change significantly from the prior fiscal quarter. Excluding our investment in Knight, the average VaR for the three months ended May 31, 2014 and February 28, 2014 was $8.63 million and $12.64 million, respectively. Excluding both our investment in Knight and Harbinger Group, Inc. our average VaR for the three months ended May 31, 2014 was $7.97 million. On March 18, 2014, we sold our investment in Harbinger Group Inc. to Leucadia at the closing price on that date.



The following table illustrates each separate component of VaR for each component of market risk by interest rate, equity, currency and commodity products, as well as for our overall trading positions using the past 365 days of historical data (in millions).

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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Value-at-Risk In Trading Portfolios Daily VaR for the Three Months Daily VaR for the Three Months VaR as of Ended VaR as of Ended Risk Categories May 31, 2014 May 31, 2014 February 28, 2014 February 28, 2014 Average High Low Average High Low Interest Rates $ 5.58$ 6.82$ 8.62$ 5.58 $ 5.78 $ 7.09$ 8.69$ 5.78 Equity Prices 9.11 9.97 14.68 7.85 11.27 11.64 12.95 9.60 Currency Rates 1.14 0.67 1.95 0.26 0.75 1.14 4.05 0.15 Commodity Prices 0.48 1.11 2.14 0.25 0.83 0.92 1.57 0.35 Diversification Effect (2) (0.11 ) (3.63 ) N/A N/A (3.03 ) (4.52 ) N/A N/A Firmwide $ 16.20$ 14.94$ 19.68$ 10.70 $ 15.60 $ 16.27$ 18.05$ 13.90



(1) VaR is the potential loss in value of our trading positions due to adverse

market movements over a defined time horizon with a specific confidence

level. For the 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.

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 chart below reflects our daily VaR over the last four quarters:

[[Image Removed: LOGO]] The primary method used to test the efficacy of the VaR model is to compare our actual daily net revenue for those positions included in our VaR calculation with the daily VaR estimate. This evaluation is performed at various levels of the trading portfolio, from the holding company level down to specific business lines. For the VaR model, trading related revenue is defined as principal transaction revenue, trading related commissions, revenue from securitization activities and net interest income. 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, net trading 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 May 31, 2014, results of the evaluation at the aggregate level demonstrated one day when the net trading loss exceeded the 95% one day VaR. Excluding trading losses associated with the daily marking to market of our position in Knight, there would have been no days when the net trading loss exceeded the 95% one day VaR. 106



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Certain positions within financial instruments are not included in the VaR model because VaR is not the most appropriate measure of risk. 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, monitoring concentration risk and tracking price target/stop loss levels. The table below presents the potential reduction in net income associated with a 10% stress of the fair value of the positions that are not included in the VaR model at May 31, 2014 (in thousands): 10% Sensitivity Private investments $ 24,587 Corporate debt securities in default 4,386 Trade claims 4,673 Daily Net Trading Revenue There were 11 days with trading losses out of a total of 63 trading days in the three months ended May 31, 2014. Excluding trading losses associated with the daily marking to market of our position in Knight and Harbinger Group, there would have been six days with trading losses. The histogram below presents the distribution of our daily net trading revenue for substantially all of our trading activities for the three months ended May 31, 2014 (in millions). [[Image Removed: LOGO]]



Scenario Analysis and Stress Tests

While VaR measures potential losses due to adverse changes in historical market prices and rates, we use stress testing to analyze the potential impact of specific events or moderate or extreme market moves on our current portfolio both firm wide and within business segments. Stress scenarios 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 our 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, changes in the shape of the yield curve and large moves in European markets. In addition, we also perform ad hoc stress tests and add new scenarios as market conditions dictate. Because our stress scenarios are meant to reflect market moves that occur over a period of time, our estimates of potential loss assume some level of position reduction for liquid positions. 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 is performed and reported regularly as part of the risk management process. Stress testing is used to assess our aggregate risk position as well as for limit setting and risk/reward analysis.

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Counterparty Credit Risk and Issuer Country Exposure

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 trading counterparty to other broker-dealers and customers, as a direct lender and through extending loan commitments, as a holder of securities and as a member of exchanges and clearing organizations. It is critical to our financial soundness and profitability that we properly and effectively identify, assess, monitor, and manage the various credit and counterparty risks inherent in our businesses. Credit is extended to counterparties in a controlled manner 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 on an enterprise level in order to limit exposure to loss related to credit risk.



Our Credit Risk Framework is responsible for identifying credit risks throughout the operating businesses, establishing counterparty limits and managing and monitoring those credit limits. Our framework includes:

defining credit limit guidelines and credit limit approval processes;

providing a consistent and integrated credit risk framework across the

enterprise;



approving counterparties and counterparty limits with parameters set by the

Risk Management Committee; negotiating, approving and monitoring credit terms in legal and master

documentation; delivering credit limits to all relevant sales and trading desks; maintaining credit reviews for all active and new counterparties;



operating a control function for exposure analytics and exception management

and reporting;



determining the analytical standards and risk parameters for on-going

management and monitoring of global credit risk books; actively managing daily exposure, exceptions, and breaches; monitoring daily margin call activity and counterparty performance (in

concert with the Margin Department); and



setting the minimum global requirements for systems, reports, and technology.

Credit Exposures



Credit exposure exists across a wide-range of products including cash and cash equivalents, loans, securities finance transactions and over-the-counter derivative contracts.

Loans and lending arise in connection with our capital markets activities and

represents the notional value of loans that have been drawn by the borrower

and lending commitments that were outstanding at May 31, 2014.



Securities and margin finance includes credit exposure arising on securities

financing transactions (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. Derivatives represent over-the-counter ("OTC") derivatives, which are



reported net by counterparty when a legal right of setoff exists under an

enforceable master netting agreement. Derivatives are accounted for 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 include both interest-bearing and non-interest

bearing deposits at banks.

Current counterparty credit exposures at May 31, 2014 and November 30, 2013 are summarized in the tables below and provided by credit quality, region and industry. 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. Of our counterparty credit exposure at May 31, 2014, excluding cash and cash equivalents, 65% are investment grade counterparties, compared to 66% at November 30, 2013, and 108



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES are mainly concentrated in North America. When comparing our credit exposure at May 31, 2014 with credit exposure at November 30, 2013, excluding cash and cash equivalents, current exposure has increased 19% to approximately $1.2 billion from $1.0 billion. All business areas contributed to the increase over the quarter, with the largest increase from securities and margin finance.



Counterparty Credit Exposure by Credit Rating

Securities and Margin Cash and Total with Cash and Loans and Lending Finance OTC Derivatives Total Cash Equivalents Cash Equivalents As of As of As of As of As of As of May



31, November 30, May 31, November 30, May 31,

November 30, May 31, November 30, May 31, November 30, February 28, November 30, (in millions) 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 AAA Range $ - $ - $ 0.3 $ 0.2 $ - $ - $ 0.3 $ 0.2 $ 3,217.3$ 2,680.6$ 3,217.6$ 2,680.8AA Range - - 117.9 104.8 10.5 14.7 128.4 119.5 162.2 144.1 290.6 263.6 A Range - - 453.9 374.4 65.4 56.7 519.3 431.1 575.9 734.7 1,095.2 1,165.8 BBB Range 69.4 71.0 53.5 39.9 27.6 16.2 150.5 127.1 2.9 1.7 153.4 128.8 BB or Lower 85.9 120.3 189.8 115.4 27.0 9.5 302.7 245.2 - - 302.7 245.2 Unrated 94.6 86.6 2.7 - 28.9 18.6 126.2 105.2 - - 126.2 105.2 Total $ 249.9$ 277.9$ 818.1$ 634.7$ 159.4$ 115.7$ 1,227.4$ 1,028.3$ 3,958.3$ 3,561.1$ 5,185.7$ 4,589.4



Counterparty Credit Exposure by Region

Securities and Margin Cash and Total with Cash and Loans and Lending Finance OTC Derivatives Total Cash Equivalents Cash Equivalents As of As of As of As of As of As of May 31, November 30, May 31, November 30, May 31, November 30, May 31, November 30, May 31, November 30, February 28, November 30, (in millions) 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Asia/Latin America/Other $ 13.6 $ - $ 58.3 $ 30.9 $ 5.2$ 11.6$ 77.1 $ 42.5 $ 183.5$ 183.3 $ 260.6 $ 225.8Europe - - 232.0 180.3 56.3 47.6 288.3 227.9 359.7 269.3 648.0 497.2 North America 236.3 277.9 527.8 423.5 97.9 56.5 862.0 757.9 3,415.1 3,108.5 4,277.1 3,866.4 Total $ 249.9$ 277.9$ 818.1$ 634.7$ 159.4$ 115.7$ 1,227.4$ 1,028.3$ 3,958.3$ 3,561.1$ 5,185.7$ 4,589.4



Counterparty Credit Exposure by Industry

Securities and Margin Cash and Total with Cash and Loans and Lending Finance OTC Derivatives Total Cash Equivalents Cash Equivalents As of As of As of As of As of As of May 31, November 30, May 31, November 30, May 31, November 30, May 31, November 30, May 31, November 30, February 28, November 30, (in millions) 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Asset Managers $ - $ - $ 18.5 $ 7.1 $ 1.0



$ 0.5 $ 19.5 $ 7.6 $ 3,217.3$ 2,680.7$ 3,236.8$ 2,688.3 Banks, Broker-dealers

- - 409.1 354.9 93.8 73.8 502.9 428.7 741.0 880.4 1,243.9 1,309.1 Commodities - - 41.5 35.6 8.2 9.4 49.7 45.0 - - 49.7 45.0 Other 249.9 277.9 349.0 237.1 56.4 32.0 655.3 547.0 - - 655.3 547.0 Total $ 249.9$ 277.9$ 818.1$ 634.7$ 159.4$ 115.7$ 1,227.4$ 1,028.3$ 3,958.3$ 3,561.1$ 5,185.7$ 4,589.4



For additional information regarding credit exposure to OTC derivative contracts, refer to Note 6, Derivative Financial Instruments, in our consolidated financial statements included within this Quarterly Report on Form 10-Q.

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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 country risk as the country of jurisdiction or domicile of the obligor. The following tables reflect our top exposure at May 31, 2014 and November 30, 2013 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): As of May 31, 2014 Issuer Risk Counterparty Risk Issuer and Counterparty Risk Fair Value of Fair Value of Net Derivative Cash and Excluding Cash Including Cash Long Debt Short Debt Notional Securities and OTC Cash and Cash and Cash Securities Securities Exposure Margin Finance Derivatives Equivalents Equivalents Equivalents Italy$ 1,222.9$ (1,143.3 ) $ 630.5 $ 0.9 $ 0.1 $ - $ 711.1 $ 711.1 Great Britain 398.0 (212.4 ) 96.4 84.7 27.3 184.1 394.0 578.1 Netherlands 616.6 (249.2 ) (0.6 ) 13.0 1.7 - 381.5 381.5 Canada 145.8 (61.7 ) 30.6 148.2 6.6 3.7 269.5 273.2 Belgium 51.4 (24.4 ) - 2.0 - 166.0 29.0 195.0 France 630.2 (334.5 ) (155.3 ) 11.5 5.0 - 156.9 156.9 Puerto Rico 137.2 - - 0.2 - - 137.4 137.4 Hong Kong 23.7 (8.1 ) - 3.1 - 105.2 18.7 123.9 Austria 131.7 (44.7 ) - 1.2 - 0.6 88.2 88.8 Portugal 165.0 (99.9 ) - - 2.9 - 68.0 68.0 Total $ 3,522.5$ (2,178.2 ) $ 601.6 $ 264.8 $ 43.6$ 459.6$ 2,254.3$ 2,713.9 As of November 30, 2013 Issuer Risk Counterparty Risk Issuer and Counterparty Risk Fair Value of Fair Value of Net Derivative Cash and Excluding Cash Including Cash Long Debt Short Debt Notional Securities and OTC Cash and Cash and Cash Securities Securities Exposure Margin Finance Derivatives Equivalents Equivalents Equivalents Great Britain $ 418.8 $ (181.5 ) $ (27.2 ) $ 42.5 $ 20.7$ 113.1 $ 273.3 $ 386.4 Germany 462.0 (226.1 ) (70.5 ) 93.2 10.9 3.3 269.5 272.8 Netherlands 445.7 (198.8 ) (2.3 ) 5.2 1.5 0.3 251.3 251.6 Italy 1,181.4 (1,017.6 ) 74.2 1.8 0.1 - 239.9 239.9 Canada 140.6 (59.0 ) 18.8 99.5 0.2 2.2 200.1 202.3 Spain 352.3 (159.8 ) 0.3 3.0 0.2 0.1 196.0 196.1 Puerto Rico 130.1 - - - - - 130.1 130.1 Luxembourg 75.0 (15.1 ) - 0.1 - 68.0 60.0 128.0 Hong Kong 33.9 (18.3 ) (0.9 ) 0.3 - 104.3 15.0 119.3 Austria 130.2 (32.8 ) - 5.0 - 0.1 102.4 102.5 Total $ 3,370.0$ (1,909.0 ) $ (7.6 ) $ 250.6 $ 33.6$ 291.4$ 1,737.6$ 2,029.0



Exposure to the Sovereign Debt, Corporate and Financial Securities of Greece, Ireland, Italy, Portugal and Spain

The table below reflects our exposure to the sovereign debt of and economic derivative positions in Greece, Ireland, Italy, Portugal, and Spain at May 31, 2014, and our exposure to the securities of corporations, financial institutions and mortgage-backed securities collateralized by assets domiciled in these countries. This table is presented in a manner consistent with how management views and monitors these exposures as part of our risk management framework. Our issuer exposure to these European countries arises primarily in the context of our market making activities and our role as a major dealer in the debt securities of these countries. While the economic derivative positions are presented on a notional basis, we believe this best reflects the underlying market risk due to interest rates or the issuer's credit as a result of our positions. Long and short financial instruments are offset against each other for determining net exposure although they do not represent identical offsetting positions of the same debt security. Components of risk embedded in the securities will generally offset, however, basis risk due to duration and the specific issuer may still exist. Economic hedges as represented by the notional amounts of the derivative contracts may not be perfect offsets for the risk represented by the net fair value of the debt securities. 110



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES As of May 31, 2014 Fair Value Notional Amount (3) Long Debt Short Debt Net Cash Long Short Net Total Net (in millions) Securities (1) (4) Securities (2) (4) Inventory Derivatives Derivatives Derivatives Exposure Greece Sovereigns $ 5.2 $ 6.3 $ (1.1 ) $ - $ - $ - $ (1.1 ) Corporations 3.0 0.6 2.4 - - - 2.4 Financial Institutions 2.1 0.4 1.7 2.1 1.6 0.5 2.2 Total Greece 10.3 7.3 3.0 2.1 1.6 0.5 3.5 Ireland Sovereigns 7.4 2.1 5.3 - - - 5.3 Corporations 2.5 8.6 (6.1 ) 2.4 2.4 - (6.1 ) Financial Institutions 19.5 5.0 14.5 - - - 14.5 Total Ireland 29.4 15.7 13.7 2.4 2.4 - 13.7 Italy Sovereigns 1,024.1 1,124.5 (100.4 ) 965.6 (5) 335.7 (5) 629.8 529.4 Corporations 31.2 13.8 17.4 - - - 17.4 Financial Institutions 121.6 5.0 116.6 0.6 - 0.6 117.2 Structured Products 46.0 - 46.0 - - - 46.0 Total Italy 1,222.9 1,143.3 79.6 966.2 335.7 630.4 710.0 Portugal Sovereigns 135.5 86.2 49.3 - - - 49.3 Corporations 0.3 0.9 (0.6 ) - - - (0.6 ) Financial Institutions 18.4 12.8 5.6 - - - 5.6 Structured Products 10.8 - 10.8 - - - 10.8 Total Portugal 165.0 99.9 65.1 - - - 65.1 Spain Sovereigns 134.5 223.6 (89.1 ) - - - (89.1 ) Corporations 9.9 6.1 3.8 - - - 3.8 Financial Institutions 65.3 7.1 58.2 - - - 58.2 Structured Products 23.1 - 23.1 - - - 23.1 Total Spain 232.8 236.8 (4.0 ) - - - (4.0 ) Total $ 1,660.4 $ 1,503.0 $ 157.4$ 970.7$ 339.7$ 630.9$ 788.3 Total Sovereign $ 1,306.7 $ 1,442.7 $ (136.0 )$ 965.6 $



335.7 $ 629.8$ 493.8

Total Non-sovereign $ 353.7 $ 60.3 $ 293.4 $ 5.1 $ 4.0 $ 1.1 $ 294.5



(1) Long securities represent the fair value of debt securities and are presented

within Financial instruments owned - corporate debt securities and

government, federal agency and other sovereign obligations and mortgage- and

asset-backed securities on the face of the Consolidated Statements of

Financial Condition and are accounted for at fair value with changes in fair

value recognized in Principal transactions revenues.

(2) Short securities represent the fair value of debt securities sold short and

are presented within Financial instruments sold, not yet purchased -

corporate debt securities and government, federal agency and other sovereign

obligations on the face of the Consolidated Statements of Financial Condition

and are accounted for at fair value with changes in fair value recognized in

Principal transactions revenues.

(3) Net derivative contracts reflect the notional amount of the derivative

contracts and include credit default swaps, bond futures and listed equity

options.

(4) Classification of securities by country and by issuer type is presented based

on the view of our Risk Management Department. Risk Management takes into

account whether a particular security or issuer of a security is guaranteed

or otherwise backed by a sovereign government and also takes into account

whether a corporate or financial institution that issues a particular

security is owned by a sovereign government when determining domicile and

whether a particular security should be classified for risk purposes as a

sovereign obligation. The classification of debt securities within the table

above will differ from the financial statement presentation in the

Consolidated Statements of Financial Condition because the classification

used for financial statement presentation in the Consolidated Statements of

Financial Condition classifies a debt security solely by the direct issuer

and the domicile of the direct issuer.

(5) These positions are comprised of bond futures executed on exchanges outside

Italy. 111



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES For the quarter ended May 31, 2014, our exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain calculated on an average daily basis was as follows (in millions): Remaining Maturity Remaining Maturity Greater Than or Equal Less Than One Year to One Year Total Average Balance Financial instruments owned - Debt securities Greece $ - $ 6.2 $ 6.2 Ireland 2.6 2.4 5.0 Italy 1,018.9 2,124.7 3,143.6 Portugal 3.7 120.0 123.7 Spain 15.5 312.9 328.4 Total average fair value of long debt securities (1) 1,040.7 2,566.2 3,606.9 Financial instruments sold - Debt securities Greece - 2.7 2.7 Ireland 2.1 1.3 3.4 Italy 222.5 1,686.3 1,908.8 Portugal 0.1 78.9 79.0 Spain 38.8 361.9 400.7 Total average fair value of short debt securities 263.5 2,131.1 2,394.6 Total average net fair value of debt securities 777.2 435.1 1,212.3 Derivative contracts - long notional exposure Italy - 131.4 (2) 131.4 Total average notional amount - long - 131.4 131.4 Derivative contracts - short notional exposure Italy - 340.7 340.7 Total average notional amount - short - 340.7 340.7 Total average net derivative notional exposure (3) - (209.3 ) (209.3 ) Total average net exposure to select European countries $ 777.2 $ 225.8 $ 1,003.0



(1) Classification of securities by country and by issuer type is presented based

on the view of our Risk Management Department. Risk Management takes into

account whether a particular security or issuer of a security is guaranteed

or otherwise backed by a sovereign government and also takes into account

whether a corporate or financial institution that issues a particular

security is owned by a sovereign government when determining domicile and

whether a particular security should be classified for risk purposes as a

sovereign obligation. The classification of debt securities within the table

above will differ from the financial statement presentation in the

Consolidated Statements of Financial Condition because the classification

used for financial statement presentation in the Consolidated Statements of

Financial Condition classifies a debt security solely by the direct issuer

and the domicile of the direct issuer.

(2) These positions are comprised of bond futures executed on exchanges outside

Italy.

(3) Net derivative contracts reflect the notional amount of the derivative

contracts and include credit default swaps and bond futures. 112



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES In addition, our non-U.S. sovereign obligations recorded in financial instruments owned and financial instruments sold, not yet purchased are routinely financed through reverse repurchase agreements and repurchase agreements, of which a significant portion are executed with central clearing organizations. Accordingly, we utilize foreign sovereign obligations as underlying collateral for our repurchase financing arrangements. At May 31, 2014, repurchase financing arrangements that are used to finance the debt securities presented above had underlying collateral of issuers domiciled in Greece, Ireland, Italy, Portugal and Spain as follows (in millions): As of May 31, 2014 Reverse Repurchase Repurchase Agreements (1) Agreements (1) Net Greece $ - $ - $ - Ireland 4.9 74.8 (69.9 ) Italy 1,214.4 1,355.2 (140.8 ) Portugal 102.9 154.3 (51.4 ) Spain 266.1 236.8 29.3 Total $ 1,588.3 $ 1,821.1$ (232.8 )



(1) Amounts represent the contract amount of the repurchase financing

arrangements.

Our collateral management of the risk due to exposure from these sovereign obligations is subject to our overall collateral and cash management risk framework. For further discussion regarding our cash and liquidity management framework and processes, see "Liquidity, Financial Condition and Capital Resources" within Part I, Item 2. Management's Discussion and Analysis in this Quarterly Report on Form 10-Q.



Operational Risk

Operational risk refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies. In addition, the transactions we process have become increasingly complex. If our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk. In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients', our counterparties' or third parties' operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. Our Operational Risk framework includes governance, collection of operational risk incidents, proactive operational risk management, and periodic review and analysis of business metrics to identify and recommend controls and process-related enhancements. 113



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Table of Contents JEFFERIES GROUP LLC AND SUBSIDIARIES Each revenue producing and support department is responsible for the management and reporting of operational risks and the implementation of the Operational Risk policy and processes within the department. Operational Risk policy, framework, infrastructure, methodology, processes, guidance and oversight of the operational risk processes are centralized and consistent firm wide and also subject to regional operational risk governance.



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. 114



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JEFFERIES GROUP LLC AND SUBSIDIARIES


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