MF Global Ltd. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: MF Global (MFGLQ)

MF Global Ltd. (MF) F3Q09 Earnings Call February 5, 2009 8:00 AM ET

Executives

Jeremy Skule – Vice President, Investor Relations

Bernard W. Dan – Chief Executive Officer

Randy MacDonald – Chief Financial Officer

[Henry – Unidentified Company Representative]

Analysts

Robert Rutschow – Deutsche Bank Securities

[Leanne Alexander – Unidentified Company Name]

[Alex Klam – Unidentified Company Name]

Kenneth Worthington – JP Morgan

Richard Repetto – Sandler O'Neill & Partners L.P.

Mike Carrier – UBS

Michael Vinciquerra – BMO Capital Markets

Jonathan Casteleyn – Wachovia Capital Markets, LLC

Operator

Ladies and gentlemen, good day and welcome to the fiscal 3rd quarter 2009 results conference call. My name is Adera (ph) and I will be your conference call coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's conference call. I will now turn the presentation over to your host for today's call, Mr. Jeremy Skule, Senior Vice President of Investor Relations. Please proceed.

Jeremy Skule

Good morning and thank you for joining MF Global's Third Quarter Call. With us today is Bernie Dan, CEO and Randy McDonald CFO. This conference call is being recorded on behalf of MF Global and consists of copyrighted material. It may not be recorded, reproduced, or otherwise used without MF Global's express written permission. This information is made available and contains certain forward looking statements that reflect MF Global's view of future events and financial performance as of December 31, 2008. Any such forward looking statements are subject to risk and uncertainties, indicated from time to time in the company's SEC filings. Therefore, the company's future results of operations could differ from historical results or current expectations, as more formally discussed in our SEC filings. The company does not undertake any obligation to update publicly, any forward looking statement. The information made available also includes certain non-GAAP financial measures as defined under the SEC rules. The reconciliation of these measures is included in the company's earnings release which can be found at our website or in our SEC filings.

With that, I'll now turn the call over to Bernie.

Bernard W. Dan

Thank you. Good morning, and thank you for joining us today. Three months ago, in my first call as CEO of MF Global, I outlined three priorities to better position the company, to capitalize on emerging trends within the financial services industry, and to drive greater shareholder value.


Before turning to our results for the quarter, I'd like to update you on our progress thus far. We've already completed the first priority, a strategic planning process that identified short, medium, and long-term opportunities to grow the business.

Secondly, I said that we'd enhance our governance model. We've since accomplished that as well, establishing a new organizational structure that reflects the global nature of our business and the emerging needs of our customers.

The final priority is to align the organization around our key strategic initiatives and deliver the anticipated value. This effort also is well underway. Later in the call, I'll expand on the specific initiatives we've undertaken, but I'd first like to say that I'm excited about our market position, our operating model, and our future prospects. There's a define feeling of renewed enthusiasm throughout MF Global, particularly as we capitalize on a broad range of product, customer, and geographic driven initiatives.

I'd like to now give you an overview of the quarter. Randy will then provide more details on our financial performance. After that, we'll be happy to take your questions. So, let's now turn to slide three. Like every company within the financial services industry, our business has been impacted by the broad economic downturn. However, through sound business judgment and a greater focus on risk adjusted returns, we've maintained profitability and demonstrated consistent performance.

Our diverse business model has enabled us to maintain adjusted net revenues of $367 million in the most challenging macroenvironment the global financial services industry has ever experienced. This consistency reflects our geographic and product diversity. For example, while our exchanged traded business has been challenged by declining volumes, particularly in the US and Europe, most of our non listed or matched principle business performed very well.

Additionally, proactive management of the interest rate and spread environment allowed us to expand our yield.

We also continue to generate solid EBITDA of $62 million for the quarter. When calculated according to our debt covenants, we have a three month cushion against those covenants. A recent positive development was the release of $100 million excess capital by the Financial Services Authority in the United Kingdom. We're pleased with this initial success, and we expect more capital to be returned as we continue to go through this process.

During the quarter, we had to make some tough decisions to improve our market model and position MF Global for the future. We also maintained our strong commitment to shareholders by delivering adjusted non-GAAP earnings per share of $0.19.

Slide four provides an illustration of how our balance model has delivered consistent results. For example, transaction based revenues range from 51% of total net revenues in the first and second quarters, to 38% this quarter, as exchange traded volumes decline. At the same time, revenues from principle transactions in the last three months was up from the previous two quarters. Our focused efforts during this period allowed us to deliver these steady net revenues.

Slide five illustrates how proactive we've been in taking advantage of one of the prevailing market trends; widening spreads between certain asset classes. We've extended duration and broadened the assets in which we invest client payables. Of course, while remaining within the guidelines established by the CFTC, and staying well within our level of risk tolerance. Although our client balances have declined in response to heightened economic uncertainty, our efforts to capture the benefits of widening spreads have made a significant contribution to our strong bottom line performance.

Slide six provides a good example of how MF Global has been benefiting from wider spreads. As many of you know, we pay interest on client balances between the prevailing 30 day and 90 day T-bill rates. Our strategy has been to selectively extend duration into a variety of asset classes, including two year treasuries and agency notes. Through these efforts we've captured additional revenue. The current situation may not be sustainable over the long term, but we remain proactive in seeking the most profitable opportunities for ingesting our client payables.

Moving to slide seven, I believe that the most successful companies will be those that consistently demonstrate strong risk management. Our philosophy is to take measured risk and mitigate unnecessary risk. In the last quarter, we've made significant progress in our enterprise risk management strategy. We've introduced new and refined existing procedures, and we've further developed technology to insure seamless interaction among our risk-management staff.

We believe the reorganization of our risk team is largely complete. A validation of our efforts came at a recent report from Moody's, which highlighted the fact that we've strengthened our risk management, compliance, and operational risk management. We're focused on fine tuning our enterprise risk management systems and procedures, with the goal of being the recognized leader in this area.

Slide eight highlights a significant contradiction within the financial services industry. During the quarter, we continue to observe what we believe is a short-term movement of client funds, largely from agent — only intermediaries like MF Global, to TARP back banks. The contradiction lies in the fact that these TARP backed banks are the same institutions that have contributed to the global financial crisis, most notably due to their lack of management oversight and failed risk management systems.

In contrast, the majority of MF Global's business activities are in jurisdictions with rules and regulations requiring that client funds are segregated. Further, our balance sheet is representative of our agent only focus, and we continue to generate strong cash flows. Our dedication to improving our risk management systems and customer service, along with our enhanced governance model, have enabled us to successfully manage through these unprecedented times. We believe that ultimately we will reap the rewards of our leading enterprise risk management culture.

As the various governments continue to address the failures on the part of the banks and we continue to improve the product and service offering of MF Global, I'm confident that customers will better understand our value proposition.

Throughout the financial crisis, customers have sought experienced brokers with extensive market knowledge and product expertise to help them capture opportunities and better manage risk. As highlighted on slide nine, our matched principle business, particularly our foreign exchange, metals, and fixed-income teams, have successfully responded to this increased demand.

Revenue per transaction increased for our fixed-income metals and foreign exchange businesses. On slide 10 you'll see an illustration of this revenue increase in our fixed-income business. During the last several quarters, we worked to reduce the size of our balance sheet, and one example is the decline in the size of our repo book. At the same time, revenues associated with our repo business expanded to $72 million in the third quarter. This trend of lower balances and higher revenue may not continue, but our results highlight our success in managing risk adjusted returns.

Turning to slide 11, in addition to seeking extensive product expertise, our clients are demanding that their intermediary offer access to a wide breadth of products. MF Global operates on more than 70 markets globally, and our activity over the last two quarters continues to reflect this diversity. So, although our exchange traded volumes split below the exchange composite for the quarter, we continue to add new customers, many of whom trade on markets not reflected in the exchange composite, including clients within the growing Asia-Pacific region.

Our diverse product offerings were a strong influence in helping us add 11,000 new accounts during the quarter. Many of these accounts originate in Asia where we see tremendous opportunity for expansion.

We're further building our offerings to clients by improving the information flow and cross-selling opportunities across our various products and reasons. On slide 12, you'll find our new global product-driven organizational structure. We've appointed global leaders of our five major product groups; fixed income, foreign exchange, commodities, equities and equity derivatives, and interest rate products. Additionally, we've named two global co heads of our retail customer business who are focusing on increasing revenue from private clients, CTAs, and professional traders.


We expect our new governance model to drive greater efficiency and increase accountability as we execute our key strategic initiatives.

If you turn to slide 13, we highlight several of the near, medium, and long-term opportunities for our business. Our teams around the world are actively working to enhance the transparency of our model and are making decisions that will increase profitability and position us for success.

Despite the recession, MF Global is in a period of measured deliberate expansion, which highlights our ability to grow organically. Recent expansion in Asia, particularly in commodities and equity derivatives, are just two examples of MF Global pursuing profitable growth.

Additionally, as market participants look to mitigate risk and shift business away from the over the counter markets to essentially cleared environment, we believe there will be opportunities for MF Global to benefit. In fact, we're already at the forefront of this shift. We participated in the first trade on the International Derivatives Clearing House, which provides a transparent environment to clear and settle interest rate swaps.

We also see opportunity in renewing our focus on customer service. As part of our global reorganization, we've established a corporate solutions group. This team is already working on capturing a larger share of business and fostering more cross selling across products and geographies.

On the regulatory front, the financial services industry has been debating many topics, including those concerning market structure. MF Global is actively involved in these discussions and is very supportive of greater transparency. We will continue to monitor developments and position the company appropriately.

In addition to organic growth, we're monitoring the landscape for possible acquisitions. I expect such opportunities will increase if our smaller or less diverse competitors find it difficult to generate cash flow in this difficult market environment. Clearly, our focus is on generating greater scale.


Before I turn the call over to Randy, I want to note that in the last three months we've worked very hard to restore our credibility and build profitability. Both of these efforts take time and we've accomplished a significant amount already. I'm also pleased with our progress on the strategic priorities I laid out last quarter. We said that we'd undergo a strategic planning process and enhance our governance model, both of which we've completed. Now we're focused on executing our strategy and delivering value to shareholders.

With that, I'll now turn the call over to Randy MacDonald. Randy?

Randy MacDonald

All right. Thanks, Bernie. The following slides — what I'll do is I'll go through the details of the income statement, the balance sheet, and then liquidity which includes our capital structure, and I'll note in this marketplace it's been characterized by declining volumes, interest rates, and client balances. This is the third quarter in a row where we achieved about $370 million in net revenues. So, as Bernie pointed out, these results truly highlight the balance and the diversification of MF Global's model.

So, let's turn to slide 14. In the September quarter, our adjusted non-GAAP EPS was $0.21 versus the $0.19 this quarter. Now, the difference between the adjusted non-GAAP in the September quarter and the non-GAAP of $0.14 was mainly the Lehman bad debt of $0.02 and severance of $0.05.

Now, three things primarily accounted for the difference this quarter between our non-GAAP earnings per share from the last quarter, and it all netted to about a penny. There was a slight decrease in the net revenues, and that was offset by both lower balances and lower rates which lowered our cost of borrowings, and then of course we had the dilution from the increased share count because we had the first full quarter under our new capital structure.

And then adding back one item that we believe is anomalous to the quarter — we had severance of $0.06 mostly related to our former CEO, to get to adjusted non-GAAP earnings per share of $0.19 in this current quarter.

So, as our solid bottom line performance illustrates, we're focused on making positive changes to the company, but not at the expense of delivering results. So, let's take a look at that in a more detailed fashion.

Let's turn to slide 15. Now, I'll be discussing the net revenues in some amount of detail on the following slides, but again, one thing to note is that the 367 million of adjusted net revenue, excludes the 55 million in insurance proceeds from a claim for settlement.

Now, we also continue to manage the expense equation. So, excluding severance, year to date comp as a percentage of net revenue is 51.5%, and that's down from 55.5%. It's roughly flat. While the third quarter's compensation expense as a percentage in net revenues, adjusted net revenues, was 56%, which is up slightly from the last quarter. That slight increase in the comp percentage is a result of revenue mix shift towards the matched principle business, and that typically has slightly higher comp payouts.

Then the non comp expenses have also remained in line as we continue to effectively balance that risk and reward Bernie talked about. We execute on these new opportunities we've been discussing, including expanding on the existing initiatives and then rationalizing some others. So, excluding the Lehman bad debt last quarter, expenses were up 4%.

The bad debt expense, which we include in the G&A line, the general and administrative, that represented 2.4% of net revenue for the quarter. And then this was partially offset by a gain in currency translation of 3 million.

Now, I'd expect that our G&A is going to increase about $10 million over the next 12 months as we're going through insurance renewals, and they're resulting in increase in premiums.

Interest expense on borrowings was lower this quarter than in September, and that's directly related to the significant drop in LIBOR during the quarter, and also because we paid off the $100 million of remaining bridge loan at the end of November.

The effective adjusted tax rate increased 1% to 31.8%, and that was due to a shift of US-based fixed income revenue which is, of course, a higher tax jurisdiction. And then that was partially offset by some one-time tax benefits.

Our focus on revenue and expenses has resulted in EBITDA of 62 million this quarter, which has helped us maintain a healthy capital cushion of about three months of EBITDA in relation to our debt covenants. As a matter of fact, the calculation for the EBITDA covenants is actually 85 million.

So let's drill down now on the net revenues, go to slide 16. So, this is where I'll go through the revenues in some detail. Overall we saw our matched principle businesses deliver strong revenue performance this quarter, while our exchange traded net revenue was down, but roughly in line with volumes. As Bernie mentioned, our diversity was demonstrated through our metals and fixed income businesses, which performed exceptionally well this quarter, and are not volume dependent.

Now, for comparison purposes, you may want to refer to the next slide which is number 17, and that shows you the same information for the second quarter of 2009.

So, let's start with the commissions. Go to row 12, and commissions this quarter were 197 million, or 60 million lower than in the September quarter, and this was due almost entirely to the lower volumes. So, in row 13 of column A, you have 402 million trades which are down from 501 million in the September quarter.

So then going back to column B, but let's go to row 11. The net execution only commissions decreased 16% to 63 millions. The volumes related to this in row 13 decreased 7% to 121 million trades, and that decrease came mostly from lower levels of trading on the exchanges.

Now, column B on row 15, the execution only yields, were $0.53 this quarter, which was $0.05 lower than the previously quarter. And that decline is primarily the result of lower volume coming from some of your higher yielding clients, as well as continued declines in the Indian markets.

Going over to column C, row 11, the net cleared commissions were 27 million lower from the previous quarter at 121 million. Now, although the volumes were down 22%, the yield was up almost 5%. The yield from clearing, which is in row 15, was $0.45 this quarter, and that was $0.02 higher than the September quarter, as our retail business accounted for a higher proportional mix of volumes.

As I said last quarter, with mixed shifts, there is always going to be changes in these yields, and the fluctuations will naturally occur as you have a mix in the customers, the products, and even the geography.

So, now let's jump over to the intersection. In column G at row three and four, you're going to notice that we recorded interest income and principle transaction revenue totalling $72 million dollars, which was $12.7 million higher than the September quarter.

The average of client funds down at row 14 was $12.5 billion, or 19% lower than the previous quarter.

Now, go up to row four. This isn't new for column G. Let me explain the principle transaction revenue, which we've not recorded previous quarters. As part of our effort to effectively manage those client balances, and several months ago we saw the opportunity in this two-year treasury market, and we purchased paper of varying maturities.

Now, the value of those securities has appreciated considerably as rates have come down. So, we seized the opportunity to lock in those investment gains to a $31.3 million market to market, which we record as principle transactions. So, this unrealized gain is reflected in our calculation of the yield that you see of 2.33%.

Excluding that gain, our yield was 1.34%. So, we achieved a higher yield than if we had kept our entire portfolio in overnight securities. Now, we're remaining pretty cautious, and we've begun to hedge this investment.

So now let's move over to the MF capital column, which is H, and in row 15 you can see that the yield is down nearly 150 basis points, lower than the client funds yield. And that difference was primarily due to LIBOR falling about 200 basis points during the third quarter. And at row 14, the capital structure also decreased, but that was primarily due to the early retirement of the hundred million of remaining bridge loan.

So, now let's take a look at the matched principle businesses in columns E and F. Now, we've combined fixed income and stock lending into one column since we look at yield on a combined basis, so let's start with column F, the principle transactions.

Now, looking up in column F would be energy, metals, agriculture, and foreign exchange. Principle transaction net revenues totalled 57.8 million. That's a decrease of 2% from the September quarter. Now, metals had a strong quarter. It was driven by the addition of new accounts, significant volatility in base metals, and wider spreads across many of the products that we trade. And that was offset by declines in our energy and agricultural markets.

So, let's go to column E, the fixed income and securities lending. The total revenue and interest from these businesses was 72.4 million. That's up more than double from the September quarter. The significant growth was mainly from increased scale in our fixed income businesses, as we continue to effectively market our expertise and add new customers.

Additionally, the fixed income business realized the financial benefits for managing Lehman's US treasury and agency book this quarter, and we also captured wider spreads as market participants paid us a premium for our expertise and quality of execution.

So, how did the yield on these businesses actually do? Let's turn to slide 18. As you can see, the average balances on the balance generated by the fixed income and stock borrow/loan businesses, have increased about 10% from the last quarter, but the yields grew by about 60 basis points. The yield has increased significantly so far this year for many of the reasons that I just discussed; the demand for expertise, the wider spreads, and favorable developments in the competitive landscape.

Now, I've also included in these returns, our yield from the book that we run through the fixed income clearing corp. So, we have significantly delivered these businesses. At the same time, we have emphasized those parts of the business that produce the highest yields. So, in the last year we've more than tripled the yield to 127 basis points on an annualized basis.

So, how much have we delivered the balance sheet? Well, let's take a look at slide 19. With broad assets down another 17 billion this quarter and 52% since December of 2007 — this is primarily due to fixed income, stock borrow/loan balances, but also lower client payables.

Our client payables declined by roughly 3 billion this quarter. As Bernie mentioned, we continue to see large institutional clients sweeping near excess towards TARP backed banks.

So what does this all mean for shareholders? Well, let's turn to the next slide, slide 20. So, all of this translates to MF Global's valuable franchise. When we take the liquid assets of 32 billion and we net off the liquid liabilities of 29.9 billion, the net result is liquid assets of 2.2 billion. If we then paid all the debt from the balance sheet of 1.1 billion, what we would be left with is liquid equity of $1 billion. This is a 17% increase in liquid equity from the last (Audio Silent 26:58 – 27:29) last quarter.

So, said another way, we took all the assets and liabilities and liquidated the balance sheet. We returned to our shareholders, approximately $1 billion in cash. Assuming 120 million of diluted shares, that's $8.74 per share, but how liquid is our balance sheet? Let's turn to slide 21.

Our client assets are invested in cash and liquid securities, so on the left side of this slide are the client assets. And as you can see, 82% are in cash, and the balance in highly liquid agencies with high credit quality. On the right side it's securities owned, and so you see that these are also highly liquid and of high credit quality. So, how does this translate into a stronger financial position?

Well, let's go to slide 22. Now, if you go down under the caption long-term capital and you go to the last line, you can see that as of March 31st last year, we had $11 million dollars of permanent capital. We've since created permanency of capital, moving to more than $1.4 billion. We've also staggered our remaining maturities of debt, and if you look at the next row, we've also increased our available liquidity by over $300 million to $3.3 billion. So, liquidity is not one of our big concerns any longer, and we're in a position of financial strength.

Go the next slide 23. So, in addition to that strong liquid equity, we estimate that our excess capital is approximately $1 billion, most of which is in the United Kingdom. Now, we're in the process of going through our era (ph) review in the United Kingdom, and we continue to have a positive dialogue with the FSA, the regulator there. Now, we continue to work with the FSA regarding additional excess capital releases over the coming months, but as part of our discussions last week, the FSA — we've secured an initial release of 100 million of excess capital.


As we free up capital around the world, we'll continue to look at the most effective ways to deploy those resources to create shareholder value. Now, there are multiple opportunities for our capital, and we view the optimization of our capital structure and the investment in growth as our core priorities.

However, throughout this process, I think it is very important to note that there are two very key outside factors that are really beyond our control. The first I've mentioned; we need the FSA to approve the additional release of excess capital, and second, we need to evaluate and consider how the rating agencies will view any capital allocation decision the company makes.

So, let's go to the next page, and in summary, over the last nine months we've produced consistent revenue performance, we've managed risk effectively, in some pretty unprecedented conditions, and we've created an effective capital structure.

So, this all speaks to not only the balance, but the diversification of MF's model. Also, the depth and breadth of our talent, the strengthening of our management team, and of course all the improvements that we've made to the overall governance model. We remain focused on the future, and we think there are many opportunities to create value and deliver results for both our shareholders and our customers. I think at this point we're going to take questions from the participants.

Jeremy:

Sure. Operator, if you'd like to open the call to Q&A.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of Rob Rutschow.

Robert Rutschow – Deutsche Bank Securities

Hi. Good morning. I just wanted to understand the 31 million in principle transactions a little bit better. Does that include any of the interest income, or that's just purely the unrealized gain?

Randy MacDonald

That's just the unrealized gain. We extended about $2 billion into agencies, average maturities about a year. It goes from overnight to about two years. They're mostly two-year agencies.

Robert Rutschow – Deutsche Bank Securities

Okay. And then in terms of your overall interest rate position, can you give us an idea of what the duration of your earning assets looks like and what the recent rate cuts in Europe — how they're going to impact your cost of funds and yield?

Randy MacDonald

Sure. Well, as I mentioned, 2 billion of that portfolio is an average of a year. The overall portfolio though is 43 days. So, the overall portfolio is actually pretty short, and as I mentioned in my remarks on that piece that is actually extended, we've already started to go out and hedge that. So, we're not going to anticipate that rates will continue to fall. We're not going to take that chance.

Robert Rutschow – Deutsche Bank Securities

Okay.

Randy MacDonald

Does that answer your question?

Robert Rutschow – Deutsche Bank Securities

Yeah. It does. And then I guess you said you took on a little bit more risk this quarter, would that just mean that the duration went out a little bit, a few days?

Randy MacDonald

Right. It's duration risk. That's exactly right.

Robert Rutschow – Deutsche Bank Securities

Okay.

Randy MacDonald

It's actually not necessarily duration risk. Because the client deposits, and we're actually going through that study right now, we're learning that the client deposits actually do have a lot of duration to them. So, we don't think we're actually — we actually think, interestingly enough, we have risk the other way, that our assets are too short.

However, with rates as low as they are, I'm loathed to go and lock in the left side of the balance sheet at low rates if suddenly rates reverse themselves.

Robert Rutschow – Deutsche Bank Securities

Sure.

Randy MacDonald

I want to take advantage of rising interest rates.

Robert Rutschow – Deutsche Bank Securities

Okay. Sure. If I could shift to the commissions, were there any significant shifts in client activity? I know you mentioned the retail was more active. Any other notable shift that helped keep the rate per contract up?

Bernard W. Dan

This is Bernie. We had a lot of activity in Asia in the CFD market, specifically in Australia which has been great. The retail foreign exchange out of Japan and the local Indian market, all three have been very, very successful this past quarter, and that was my comment about the diversity of our model as 0.1 and 0.2 is that the exchange composite does not capture that activity. So, that's where we're going to shift a little bit away from that focus because a lot of our activity and growth is in market not covered in that exchange composite.

Robert Rutschow – Deutsche Bank Securities

Okay. And you also mentioned that a lot of activity is going from OTC to exchange traded. Are you guys considering trying to get into the IDB market and the OTC markets either via acquisition or hiring?

Bernard W. Dan

Well, we're already competing in the IDB world today with our match principle business and the LTC energy and metals and agricultural world, so we're already in that business number one. Number two is that my comments on that is that a lot of the OTC business, particular in the financial world, is really bilaterally cleared.

So, the fact that we were the first ones to actually execute and clear the first interest-rate swap product that actually centrally cleared at IDCG, is kind of the trend that I'm focused on. So, we are active there, we'll continue to leverage the distribution we have across all these product lines, and this whole convergence of OTC to centrally clears provides a unique opportunity for MF.

Robert Rutschow – Deutsche Bank Securities

And if I could just ask one more. The ratings agencies have changed your outlook to more stable after some recent downgrades. What have they told you you need to do to reverse the trend and possibly get an upgrade in rating?

Randy MacDonald

I think the comments that you got from Moody's that we're very well capitalized in terms of our balance sheet, no illiquid or risky assets, and now a very solid capital structure. Those were their concerns before. I think their concerns now have little to do, frankly, with MF, and more to do with the overall industry.

So, there's obviously not a lot we can do about that. That's why Bernie and I are focused on these strategic initiatives. What are the things that we do have control over? And I think this quarter's a good example where in light of falling rates, falling balances, falling volumes, we're able to maintain revenues for the third quarter in a row. So, we're not going to just sit by and wait for volumes to come back. We're taking action to continue to diversify across clients, product, and geography. And they recognize that. But unfortunately, we are part of an industry that's undergone tremendous upheaval, and there's tremendous uncertainty.

Robert Rutschow – Deutsche Bank Securities

Thank you.

Randy MacDonald

Thank you.

Operator

Your next question comes from the line of Leanne Alexander (ph).

[Leanne Alexander – Unidentified Company Name]

Good morning. Thanks for taking my questions, and congrats on a good quarter.

Randy MacDonald

Thank you.

[Leanne Alexander – Unidentified Company Name]

I just wanted to loop back to the FSA and the era review, congrats on the $100 million release. I think that was a little higher than you'd even expected initially, but can you help me understand the priority? I mean, I understand there's some of your notes outstanding are trading a pretty discount or — what's the priority for you, sir.

Bernard W. Dan

Leanne, this is Bernie. Let me answer the first part of that and then Randy can answer kind of the second. As I mentioned in my comments, we're continuing to work with the FSA to release even more capital and so Randy and I were in London last week and early this week, and part of the success we had in the 100 was the process we've been following.

So, from my perspective on the first part of your question, we continue to work with them to get additional capital relief.

And then I think Randy talked about a number of options for that. I don't know, Randy, if you want to recap some of her comments for her?


Randy MacDonald

Yeah, Leanne. I think you could go down the list and probably help us with the priority, like any other good analyst or shareholder, but I mentioned that there are two speed bumps, and Bernie just mentioned one. So, we first have to understand how much of our excess capital really is going to be free capital to us and in what time frame.

The second speed bump is, frankly, how the rating agencies — I just answered a question about concern about our rating and we've now got a lot of permanent capital and it took a lot of discussion with the rating agencies to understand how we are optimizing our capital. So, I think before we would say anything about how we're going to use excess capital, I think the first conversation would be with our board and the second conversation would then be with the rating agencies.

So, I hesitate to tell you in what priority we would use our excess capital, but we do have — Bernie mentioned there is possible consolidation in the industry. We do have a number of growth opportunities, so as of this moment we are working hard on thinking through that, but I don't have a very clear and concise answer other than say there are a number of factors.

[Leanne Alexander – Unidentified Company Name]

Okay. All right, Randy. I appreciate that. And maybe another way of thinking about it too is you said you had about a three month cushion with the debt to EBITDA ratio, and you did have a pretty strong quarter considering what was going on, but also you did have that markup in the treasuries which was smart on your part, but I'm just concerned that next quarter a more normalized level will be lower. So, where are you comfortable with a cushion for that ratio?

Bernard W. Dan

This is Bernie. I'd say the one point you highlight is on the market to market. Our run rate for the quarter was $0.13, which relative to this environment was really, really strong. So, Randy, maybe you want to answer the second part of that?

Randy MacDonald

In other words, without that —

Bernard W. Dan

Without that it's still very —

Randy MacDonald

— sixth sense property of market to market, you still had a really good quarter. So, I think there are two things in the way I would answer that. The EBITDA is vis-à-vis continuing earnings, and the reason for the debt covenant is — I'll remind everyone on the call, it's strictly the two-year note. And the balance of that two-year note is due in about 15 or 16 months, and the balance is 240 million.

So, when I point you to that slide where I say we have excess capital of $1 billion, one of the things that we look at is our ability to repay that note. If things do get really, really dire for this industry, obviously we would take actions before we ever got a point where that $0.12 or $0.13 run rate was deteriorating. But that's what we have to think about and that's what we would have to talk to our board about, is what would we do with that excess capital vis-à-vis the two year note.

So, obviously we'd have to talk to the rating agencies as well, so it really goes back to the question you originally asked which is if you have excess capital, how do you optimize it for all of those conditions?

[Leanne Alexander – Unidentified Company Name]

Okay. That is really helpful. Thank you. And then just quickly going over to the revenue side of the income statement. You mentioned that you participated in the first cleared interest rate swap on the non LCH venue, but already a substantial number of swaps are cleared with LCH turnout. Is that something that you could maybe participate in? Arguably, the FCNs have a much better connectivity from the whole straight through processing for the customers to the back end to the clearing houses —

Randy MacDonald

We're already members of LCH. We currently participate there today. So, what I was highlighting is that within the US was the first venue, and so whether it's in Europe or US or Asia, kind of the point I was making is that our distribution, our customer focus, our product focus, we're just uniquely positioned to take advantage of it. So, we're clearly participating in all the venues today.

[Leanne Alexander – Unidentified Company Name]

That's great. And so do you think — I mean, as we see more OTC move to central clearing — so I'm not talking about exchange traded, I'm talking about just clearing of OTC. Do you think that could really move the needle this year in terms of your earnings?

Randy MacDonald

I think industry wise it's going to take a little bit of time for that transition to take shape. So, whether it does or not, I mean it's not anything we're factoring in, but it's clearly a trend we're monitoring and it's something that I think directionally is very positive for this model.

[Leanne Alexander – Unidentified Company Name]

Okay. That's great. Thanks for taking my questions.

Operator

Your next question comes from the line of Alex Klam.

[Alex Klam – Unidentified Company Name]

Hey. Good morning, Randy and Bernie.

Randy MacDonald

Good morning, Alex.

[Alex Klam – Unidentified Company Name]

First on the fixed income business. Now, you had a very strong quarter here, so I'm interested how that really broke down in terms of getting new client activity, but also the higher spreads in the business, and related to that, we're seeing actually a lot of new agency fixed income shops really pop up here and also hiring a lot from I guess the bridge (ph) bracket because they can get higher payout ratios and things like that. Are you participating in that? Are you attracting new groups that are coming over, and then what's your outlook in terms of this year shaping up with what's going on in the competitive environment?

Bernard W. Dan

Alex, we've been very active in the fixed-income sector, building capabilities, adding new individuals to our already proven team, and we're continuing to focus on the emerging trends of potentially a $1 trillion of new US debt being issued. So, the advantage for MF Global is we have a well established fixed-income team that's delivered consistent performance over the last several quarters, and we're able to work with some of those resources that are available because of the problems at the banks, and frankly, supplement our team and effort.

So, it's a key strategy for us to continue to develop it and it's clearly part of our fiscal year 2010 kind of growth plans.

[Alex Klam – Unidentified Company Name]

Now, would you say in the last quarter it was a lot more volume shifting for you, or was it actually the environment and the spread?

Bernard W. Dan

It's both. We've had new clients, we've had increased volume from existing customers, and we've also taken advantage of all the dislocations in the various spreads. So, it's been all three.

[Alex Klam – Unidentified Company Name]

Okay. Now, shifting to the cost side, when you came out a couple of a months ago, you said that getting the businesses a little more lean would be one of your real priorities here. So, first off, can you give us a little bit of an update on what you have identified, what the opportunities are, and then more importantly, are there any goals that you can share with us that we can measure you by? For example, any sort of dollar number on fixed expense that you want to get out over the next, I don't know, 12 to 18 months, and then give us update on a regular basis?

Bernard W. Dan

I am not going to share specific numbers, but what I will say is that the governance changes that we announced are very strategic because it's allowed us to do three things. One, we're essentially managing today firm capital and client capital really for the first time, and that's allowing us then, as a second point, to measure all activities against these five filters that I previously communicated about characteristics of growth and profitability and risk and scale and capital.

And then the third kind of attribute of this governance model changes — accountability is increasing, and that's going to be the key driver. And so, we've gone through a very thorough kind of strategy process and budget process with our key leaders in this company. We've shared it with the board, and we're setting up a fairly detailed expectations for us internally, and I think what we'll do with you and others on this call is as things become realizable in our own sense, we'll be sharing those appropriately, but I can't right now share any detailed things today.

[Alex Klam – Unidentified Company Name]

Anything in the real short term given that some of the industry volumes have come down a little bit, or is that not really not something that you can address quickly?

Bernard W. Dan

Yeah. Look, I think our fixed costs at MF Global are largely low. And as Randy's pointed out in this call and in the last quarter, they don't fluctuate much. So, what we focused on is while the volumes have come down, and I think the volumes you're referring to are kind of on the six or seven largest exchanges in the world, we participate in over 70. What I was trying to highlight is that we've had great growth in kind of nontraditional exchange activity that has contributed to our revenues being consistent for the last three quarters.

So, we're going to continue to drive efforts in those growth areas which right now for us are, in particular, in Asia. It's across foreign exchanges, CFDs, local futures markets where we're direct there, as well as capitalizing on teams that are joining MF Global. I think I talked about two OTC commodity teams in my comment as well as a new equity derivative team in Hong Kong. So, we are being very focused on adding people and teams around the world to help us address some of the lower volumes that exist in the traditional markets; Europe and the US. So, that will continue.

[Alex Klam – Unidentified Company Name]

Okay. Thanks. And then just one last one before I move on. The pricing; on the cleared commission it went up 4% sequentially, but if you look at the underlying metrics, it seems like the professional traders were a much lower component, and if you look at the nonprofessional traders, it went down something like 11% sequentially. So, can you just comment real quickly on what's driving these negative pricing trends in cleared or if it's just mixed or (interposing) some erosion?


Bernard W. Dan

Yeah. Well, some of it's mixed, some of it's volatility. I mean, when VIX in this quarter was approaching 80, a lot of client profiles, including professional traders, back away from the market. So, this quarter is fairly unusual when you start to look at — and even the quarter before about impact on yield because volatility has been so high.

So, I think the key for us is we're continuing to focus with our governance change on specific product groups and profiles in some of the understanding of the various mix of business and/or profile of that trading is going to become more apparent as time goes on, but I would not look at the past quarter as kind of anything normal given — I mean, I think VIX went from 25 to 80 in the month of September.

Randy MacDonald

Yeah. And the other fact is, Alex, is that it's outside of the US. The commissions have everything to do with the value of the underlying stocks. So, they're completely tied. So, although the buy ins in India were great, the problem is, the value of the underlying securities was low. So, it's sort of a paradoxical thing there.

[Alex Klam – Unidentified Company Name]

A fair point. Thanks.

Operator

Your next question comes from the line of Ken Worthington.

Kenneth Worthington – JP Morgan

Hi. Good morning. First on the investment in the two-year securities, it seemed like the decision was a great one for the quarter, but if I'm interpreting it correctly, if rates are spread, went the other way or against you, the 30 million gain could have been a 30 million loss? Am I thinking about that correctly?

And then for Bernie, it seems like you guys took balance sheet risk here. Is that something that we should kind of continue to see in the future or was this kind of a one-off investment? What are your thoughts there?


Bernard W. Dan

I'll tackle that one, Ken. So, what we're doing is we're buying agencies — US, full faith in the credit of Uncle Sam, so in terms of balance sheet risk, it's actually duration risk. And as I pointed out, on the right side of the balance sheet are deposits. We're guessing they are a year, two years, three years. We're going through that study now, but the early yield of that worth is that in fact there is a core deposit that has a long life.

So, in terms of matching duration, we've not been matching duration. The left side of our balance sheet has not matched the right side. So, in terms of balance sheet risk, I would actually argue the opposite. In terms of purchasing the agencies, that market to market gain is because of rates going down. So, when we buy into that security, we could hold to maturity and maintain that original purchase price.

The fact that rates went down and the value of those securities went up is something that we're now looking at and saying let's go out and hedge that and lock that gain in. So, could we have had a $31 million loss if rates had gone the other way? On an unrealized basis yes, on a realized basis we would just hold to maturity and it would actually converge back to the original purchase price, and of course we'd always get the interest earned on the underlying securities.

So, the downside is really not there. It's strictly upside.

Randy MacDonald

Ken, the other thing I'd say is our risk profile on this activity is consistent with historic practice. I think the magnitude of what you commented on is just a function of where the spreads have been going for this quarter.

Kenneth Worthington – JP Morgan

No. It was a good explanation and I appreciate that. Sticking with sort of the interest rates, short-term rates in the US kind of collapsed in December going to a zero interest rate environment, but I know funky things happen when you get to very low interest rates. Interest rates are falling in Europe as well.

So, what happens to NII in coming quarters — I know you said the duration of the assets was 43 days, how should we think about net interest income going forward over the next two or three quarters or so if we continue to be in a zero interest rate environment? And I apologize Randy, I know you've given us a lot of explanation, but I just wanted to press this a little further.

Randy MacDonald

Yeah. I think we're not in the game of predicting interest rate movements. We've done the best job we can to manage in just about every rate environment. I will say globally that as absolute rates have fallen, there has been compression on spreads. That's obvious. That's the entire industry. That's not unique to MF Global. The reverse will be true when rates increase, so that's the good news and the upside.

So, I think that the advantage that MF has is the market intelligence of our fixed-income desk. And so, one of the things that we have is day in and day out insights that others don't enjoy. Adam actually pointed out how these fixed-income experts are highly sought after right now. There are a lot of very anomalous things that are — I said Adam, I meant Alex. There are some very anomalous things that are happening.

We have a graph in there where we show — we try to match Fed funds, and in fact you actually saw that there was an aberration that we were able to then go and take advantage of. I can't predict what those anomalies will be going forward. I can't predict what new part access there will be, but there will be some, and I think we're poised to take advantage of that if and when they occur.

Same thing on the down side. I think we're pretty good risk managers. I think we've demonstrated that we're taking very measured risk. So, I can't really answer your question in any explicit way without knowing what's going to happen and unfold with both spreads, not just absolute interest rates, but both absolute interest rates as well as spread.


But what I can tell you is that we are armed and poised to take advantage of any anomalies that we see.

Kenneth Worthington – JP Morgan

Okay. Could I answer the question for you; put words in your mouth and tell me if I'm right or wrong? Lower interest rate environment will continue to pressure net interest income, but you've been able to use savvy and flexibility to kind of manage it so far, and that strategy will just continue to play out and hopefully mitigate the lower interest rate environment in coming quarters? Is that about right?

Randy MacDonald

Yes.

Kenneth Worthington – JP Morgan

Okay. Last question, cleared volumes sell more than the execution only volume. You mentioned that client balances migrated to TARP firms away from non-TARP firms. Is that the same reason that the cleared volume may have fallen only than the execution only volume, or significantly —

Randy MacDonald

There are two things. I think that's one element. The second element is exchange volumes down whatever CME volumes down 30 some odd percent. So, I think it's a combination of both.

Bernard W. Dan

I would say yes, but there's not — I don't see any direct correlation because the IM balances and the VM balances that we're seeing are holding up, and we're not seeing transfers. And frankly, what I do see are it's more the professional trader and the retail guys.

So, proportionately, it's the institutions who are continuing to trade. Where you're seeing a decline in volumes is more the professional trader and the retail trader. I think they're getting whip sawed. I think they're staying on the sidelines. I think they're afraid. And I think until the VIX gets back to more reasonable levels, you'll probably continue to see them sit on the sidelines.

Kenneth Worthington – JP Morgan

Thank you very much.

Randy MacDonald

Thank you, Ken.

Operator

Your next question comes from the line of Rich Repetto.

Richard Repetto – Sandler O'Neill & Partners L.P.

Good morning, guys.

Randy MacDonald

Hey, Rich.

Richard Repetto – Sandler O'Neill & Partners L.P.

Randy, just a follow up on that question on the gain, the $31 million gain. If I heard you right, you recognize that this quarter, if it was the other case and you still held to maturity — suppose rates had moved the opposite against you, would that have run through the P&L as well?

Randy MacDonald

Yeah. So, you would have had an unrealized loss in the quarter, you would have held to maturity for recovery in the next quarter or the next few quarters. What is true is, is with falling rates, those instruments are more valuable. If we don't go out and hedge that upside, then you would converge back to par if you held to maturity.

Bernard W. Dan

Rich, this is Bernie. So the other thing is look, we actively took this position knowing what was going on around the world where all the pressure on every central government was to cut rates. So, this is not just — it wasn't like this was —

Randy MacDonald

This was not —

Bernard W. Dan


This was about being very active, very strategic, understanding what's going on across the macro financial world and taking advantage of the expertise. So, I don't want it to sound like it just happened to be a gain. I mean, this was a conscious decision because of the trends we saw in managing these balances.

Richard Repetto – Sandler O'Neill & Partners L.P.

I understand. I was just trying to — I didn't know whether Randy was saying that the held to maturity thing, then you wouldn't run it through the P&L. I see where you make a conscious decision and if you hedge it it's there for good.

Okay. The next —

Randy MacDonald

— transaction line is it's not overnight. So as soon as you have duration and it's market to market, it's running through the geography of principle transactions.

Richard Repetto – Sandler O'Neill & Partners L.P.

Okay. And then just a quick accounting thing. I can get — the slide 16 is excellent. The only numbers that I can't get is on the other income and how you separate between principle transactions and other income?

Randy MacDonald

On the —

Richard Repetto – Sandler O'Neill & Partners L.P.

Between 16 and the actual income statement, because everything else you can foot exactly, but I don't know how you split out principle transactions at 109.9 and the other income 19.3, between the two lines on the actual income statement.

Randy MacDonald

So, in other words, what's the composition of other income?

Richard Repetto – Sandler O'Neill & Partners L.P.

Exactly. Yeah. Because I know you show 19.3 on row 10 on slide 16 to use your language, Randy, but I see that 19.3. I don't know where the plug is exactly coming from.

Bernard W. Dan

Yeah. Henry (ph), you want to answer that one?

Henry

Sure, yeah. Hi, Rich. So the other income is, if you recall, it really relates to all of our sort of ancillary services that go hand in hand with sort of the business activities we do. So, for example, charges for screens, charges for facility fees, etcetera — giving access to customers. So, it's sort of a mix across all of the different businesses, and we don't allocate that out to the different columns. One thing to note also is if you look at the face of our income statement, our other income is also a higher number on there, because included in the GAAP numbers is also the settlement that we had during the quarter, whereas we're showing this slide 16 on a normalized basis so it excludes the sediment piece which is non GAAP.

Richard Repetto – Sandler O'Neill & Partners L.P.

Okay. Now, two other quick things; Bernie, on the FSA, you get the 100 million in relief here, and I know you don't give an exact number, but sort of in orders of magnitude of the potential that you see is one question, the other part is what does the FSA need to, you think, to take that leap of faith here to release more?

Bernard W. Dan

A couple of things — I just a few general comments, Rich. I mean, we have significant excess capital in the UK, even after the 100 million withdrawal. That's point one.

Point two is we've been working with the FSA in explaining their new governance model about how we have operated in a variety of jurisdictions around the world, largely covered by jurisdictions that have client money and client protection rules. And what we've tried to do over the last couple of visits that Randy and I have had there, which have been successful, is demonstrate that we manage our capital and our liquidity on a centralized basis, and that they have comfort through all the regulated entities and all the regulated companies that are regulated entities such as MF Global, that we have sufficient liquidity to meet some of the short-term demands that may arise in the UK.

Given the significant levels of excess capital we have today, we're fairly confident with the process we follow that we're going to have opportunities in the near term to release even more. It's hard for me to judge though what that number is, other than to say that relative to activities in the UK, we have more than enough to satisfy the concerns of the FSA in terms of meeting local liquidity, and we've demonstrated our ability, I think successfully, that throughout the group we're in a position to meet any demand above and beyond the capital in that local requirement.

Richard Repetto – Sandler O'Neill & Partners L.P.

Got it. Okay. And, Randy, last question, sorry to go on here. Bad debt 2.4%, a little bit higher than what you've been running at lately, is that just a sign of the times here?


Randy MacDonald

Yeah. A couple of Australia, UK, two things we're just — guys weren't able to stand up to their positions and we called them on margin, liquidated the position, and that was the delta on the trade.

Richard Repetto – Sandler O'Neill & Partners L.P.

Understood. Thanks, guys.

Bernard W. Dan

Thank you.

Operator

Your next question comes from the line of Mike Carrier.

Mike Carrier – UBS

Thanks, guys. Just one other question just on the net interest income side. If interest rates remained steady from the end of the quarter into next quarter, I just want to understand this. When we look at that 31 million, it should be this stable. You wouldn't realize anything else. If rates continue to go down then you could have a further gain. I'm just trying to understand more of the accounting.

Randy MacDonald

If in the absence of hedging, which I said we're going to go out and hedge that position.

Mike Carrier – UBS

Right.

Randy MacDonald

In the absence of that if interest rates went down, then that security becomes more precious so people would bid up that security. So, you would have more gain.

Mike Carrier – UBS

Okay. And then I guess if I just look at the core business, if I look at that 31 million, and granted it was a gain and you managed the interest rate environment well, but if that's not to recur, then the $0.19 EPS would be close to $0.04, meaning just related to that again, unless you have a lot of —

Randy MacDonald

Thirteen — $0.13.

Bernard W. Dan

Michael, $0.13. That 31 represents about $0.06.

Randy MacDonald

Yeah. It'd be $0.13, Michael.

Mike Carrier – UBS

Okay. So there's a lot of expenses related to that?

Henry

Yeah. There would be some compensation related to that, and then also that's in the US, so the tax rate would be a higher rate to the part of the mix that's in the US.

Mike Carrier – UBS

Okay. That's helpful. And then if I'm looking at I guess the core business on the pricing, we've seen I guess, more compression just on the execution side, but year-over-year it's hard to tell because you did have acquisitions there so that led to some of that shift. If we just look at the core business, and this is just more trying to gauge what the downside is or the potential lift as you get a better mix in terms of the customer balance on the volumes.

I'm just wondering, could you ever give a range either by execution versus clearing or even products on something like the range of customers on where pricing comes in? I guess that's just so we don't go down the route of cash equities where pricing continues to drag lower and lower. Just curious if you have any color on that. I know in the past you've been hesitant to do that, but just wanted to check.

Randy MacDonald

We'll continue to —

Mike Carrier – UBS

Continue? Yeah.

Randy MacDonald

Yeah. I mean, for obvious competitive reasons you don't want to publish rates, especially in the institutional world. I think the presumption that there's a lot of compression in this industry is probably not — over time I complete agree with electronification, reduce friction, you have seen in the cash markets. I lived it at TD Ameritrade, right? We actually changed the game.

But I think here we're talking about so much diversification of product line geography that the presumption that there is yield progression is something I am not seeing yet, and I'm not anticipating see that in the near term future. I think there's still too much market dislocation. I think there's still too much value add that you're not going to see that.

I think over the long term, that's part of what we plan to be poised to take advantage of. I think in the retail world you'll see that sooner than you will in the institutional world.

Bernie, you want to chime in there?


Bernard W. Dan

No. I think, Randy, you covered it all.

Mike Carrier – UBS

Okay. One final one then. This is — I think everyone in the financial industry is going through this right now, but when you look at your capital and a lot of things have shifted and things have (inaudible) stabilized. When you look at what's required by the regulators versus — because a lot of firms are well capitalized by any major on the brokerage side. But I guess from a shareholder perspective, a lot of shareholders are focused on just the overall leverage in the model. And I know you guys have come down from being over 40 times to around 24 times. And when you strip out the repo business it's very low, but you can say that for a lot of firms.

So, I guess given where the stock is and given that the core business is still operating fairly well, is that where you still see there's some questions just in terms of the overall leverage? And then going forward, you have brought down the balance sheet over the past year, should we continue to expect that or should things start to stabilize there?

Bernard W. Dan

Well, I think two things. One, as I mentioned earlier, we're trying to get more excess capital out of the FSA which helps kind of the broader question you have. And two is, we're going to continue to be mindful of kind of risk returns and insure that we manage the balance sheet appropriately relative to the risk and reward we expect. And I think that trend for us is going to continue, but there's not much we can do about minimum requirement in the regulated world and what we have to do is insure that we demonstrate our risk management capabilities to insure that the excesses required to keep in the various jurisdictions are as low as possible. Okay?

Mike Carrier – UBS

Okay. Thanks a lot.

Operator

Your next question comes from the line of Mike Vinciquerra.

Michael Vinciquerra – BMO Capital Markets

Thank you. I know we're late in the call here so I'll just keep it to one question. I just want to ask on — can you give us an update on the mix of revenue across geographies? You guys used to give that to us from time to time. I'm wondering how it's shifted. It sounds like it's definitely shifted toward Asia.

And second of all, with the drop in rates, particularly in Europe now and the appreciation of the dollar, can you give us a sense, Randy, for the impact on your earnings from exchange rate differentials? I assume it's going to be a negative impact for you from your European operations.

Randy MacDonald


Is this on the first —

Bernard W. Dan

Now wait a minute, Michael. So, you said only one question —

Randy MacDonald

You did two.

Bernard W. Dan

— so which of the two do you want us to answer?

Michael Vinciquerra – BMO Capital Markets

They're both related to your global business.

Bernard W. Dan

It's Bernie. So, Michael, on the first part of your question, on nine month year to day, the net revenues from North America are 53%, from Europe they're 35%, and from Asia 12%.

Michael Vinciquerra – BMO Capital Markets

And that was higher in the most recent period I assume, the 12%? I think that's for the quarter, right?

Bernard W. Dan

Year to date, North America was 53%, Asia was 12%.

Michael Vinciquerra – BMO Capital Markets

Yeah. So that's year to date.

Bernard W. Dan

For the quarter, Asia was nine and North America was 63. A lot of that has to do with the market to market 31.25. That's why the tax rate's also higher.

Randy MacDonald

Michael, it's better to look at the year to date because the quarter gets skewed a little bit.

Bernard W. Dan

Yeah. I think that's more representative.

Michael Vinciquerra – BMO Capital Markets

Okay. And on the exchange rate, any impact, Randy?

Randy MacDonald

Well, in the UK, the functional currency is the dollar. We do accumulate Sterling and Euros there, but they're primarily there for paying payroll and heat, light, and power, and things like that. So, we choose not to hedge that because we pay it out in the future through expenses. Or, we're just going to simulate it to make an acquisition — we're going to use it somewhere in Europe so there's no sense in hedging it if you're going to use it as the Euro or the Sterling.

Michael Vinciquerra – BMO Capital Markets

Okay. So, even on the GAAP basis you're saying your revenue is in dollars anyway, therefore it's not going to impact things?


Randy MacDonald

Yeah. That's why the functional currency is the dollar because the vast majority of everything we make in Europe is in dollars.

Michael Vinciquerra – BMO Capital Markets

Okay. That's helpful. Thank you guys.


Bernard W. Dan

Thank you.

Operator

The last question will come from the line of Jonathan Casteleyn.

Jonathan Casteleyn – Wachovia Capital Markets, LLC

Yeah. Thanks, good morning. I'm just wondering, Bernie, if you can comment broadly on the strategic environment? Are people still having conversations or is it literally just managing to keep your head above water? Can you just talk about that historically?

Bernard W. Dan

Well, John, this is Bernie. I mean, what we've done is we're clearly focused at MF Global, our model, managing capital, managed liquidity, geographic product expansion and things of that nature. And as I mentioned, what I think you're talking about is kind of M&A transactions. We're going to be very strategic and opportunistic in that regard, but we're not going to share those dialogues or conversations with anybody.

Jonathan Casteleyn – Wachovia Capital Markets, LLC

Right, understood. Okay, and then secondly, just on the customer balances moving to TARP related entities, is there anything you can do to stem those losses? Is there a way to raise rates on what you pay back to your clients or is it literally just trying to clear through the most highest rated unit entity?

Bernard W. Dan

I think it's just a short-term kind of phenomena as a result of all the bank failures around the world. Governments around the world have created some confidence or tried to in the banking world. So, if in this environment it's an easy decision to say you'll go to a bank that's guaranteed by the government, and it's one of these things that I think adds, as this transpires, this whole situation in the next several quarters, I think it'll go back to normal, although recognize that companies like MF Global who have no significant balance sheet risk, profitable during this period, global platform and things of that nature — the attributes of our model will get magnified and I'm highly confident that those assets will begin to leave those same institutions that clearly have failed in a number of ways, specifically risk management and management oversight.

Jonathan Casteleyn – Wachovia Capital Markets, LLC

Um-hum. But once they are there, I mean, what's the proposition for coming back out to —

Bernard W. Dan

Well, most of those clients are there and have always had a concern about potential conflict that exists with the bank and proprietary positions. So, our model, I think, is another attribute of the fact that we don't directionally trade, and that's significant. So, I think it's very highly likely that those assets will come back.

Jonathan Casteleyn – Wachovia Capital Markets, LLC

Okay. That makes sense. And then just lastly, is there any timing on the FSA release? Are you kind of targeting a timeframe or any feedback from them?

Bernard W. Dan

We can't dictate the time, so Randy and I are very active on it as we can say. We've made progress in a relatively short period of time and we hope that trend will continue.

Jonathan Casteleyn – Wachovia Capital Markets, LLC

Understood. Okay, thanks for your time.

Bernard W. Dan

Okay. Over the last several months we've developed and we've been executing on a plan to improve efficiency, strengthen governance, deliver scale, and drive profitable growth for MF Global. While we already achieved a great deal, we have much more to accomplish to meet our goals. All of us at MF Global are enthusiastic about the opportunities ahead in each quarter.

As the results of our collective efforts translate into solid results, I believe our investors will recognize the inherent strengths of this activity. Thank you for your interest in MF Global and enjoy your day.

Operator

Ladies and gentlemen thank you for your participation in MF Global's fiscal Third Quarter 2009 Earnings Conference call. This concludes the meeting. You may now disconnect and have a great day.

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