MF Global Ltd. F4Q09 (Qtr End 3/31/09) Earnings Call Transcript

May.21.09 | About: MF Global (MFGLQ)

MF Global Ltd. (MF) Q4 2009 Earnings Call May 21, 2009 8:00 AM ET


Jeremy Skule – Senior VP Investor Relations

Bernard Dan – Chief Executive Officer

Randy MacDonald – Chief Financial Officer


Niamh Alexander – KBW

[Alex Klan – Barclays Capital]

Richard Repetto – Sandler O'Neill

Christopher Allen – Pali Capital

Howard Chen – Credit Suisse

Kenneth Worthington – J.P. Morgan

Michael Vinciquerra – BMO Capital Markets

Donald Fandetti – Citigroup


Welcome to the fiscal fourth quarter 2009 MF Global earnings conference call. (Operator Instructions) I will now pass the presentation over to our host for today's call, Mr. Jeremy Skule, Senior Vice President of Investor Relations.

Jeremy Skule

Good morning and thank you for joining MF Global's fiscal fourth quarter and 2009 year end call. With us today are Bernie Dan, CEO and Randy MacDonald, CFO. The conference call is being recorded on behalf of MF Global and consists of copywrited material. It may not be recorded, reproduced or otherwise used without MF Global's express written permission.

The information made available on this conference call contains certain forward-looking statements that reflect MF Global's view of future events and financial performance as of March 31, 2009. Any such forward-looking statements are subject to risks 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 SEC rules. The reconciliation of these measures is included in the company's earnings release which can be found on our website or in the company's SEC filings.

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

Bernard Dan

Good morning and thank you for joining us. I'd like to start out today by updating you on our progress on our long term strategy. From there, I'll give you an overview of the quarter. Randy will then lead a more detailed discussion on our results.

So please turn to Slide 3. I'll start by saying that I'm not satisfied with our fourth quarter results, but I believe the changes we've been making through our company will position us to deliver stronger financial performance. The quarter's $257 million in revenue and adjusted non-GAAP EPS of $0.04 illustrates a couple of different dynamics.

While we're clearly affected by the adverse market environment during the quarter and the year, our business has proven to be very resilient. I strongly believe that we're making the right decisions to prepare MF Global for the future.

Instead of focusing on market dynamics outside of our control, we've dedicated ourselves to the areas where we can make positive changes. Several months ago we initiated a process to evaluate all aspects of our business. We then developed a strategic plan to position MF Global to take advantage of emerging opportunities.

Now we're in the execution phase of our strategy. While we're making significant progress, the organization is in a period of transition. Ultimately we believe all of these actions will lead to greater growth and profitability over the long term.

From an operational and financial perspective, very few if any other companies in our industry have achieved all that we have in the last few months, and I'm very proud of what we've accomplished.

Slide 4 illustrates how we've transformed MF Global and set ourselves apart from the competition. First, we raised efficiency company wide by establishing a new global governance model. Overseeing our business on a global basis, rather than regionally, enabled us to essentially manage our capital which ultimately led to the release of $250 million of excess capital by our regulators in the U.K.

Further, we significantly decreased the number of projects we're engaged in and reduced associated costs. Our external audit fees are one of the many areas where we rationalized expenses and improved internal controls which made the audit process more efficient. The result of this effort was $6.5 million in anticipated savings over three years. As time goes on, I expect our governance model will deliver more examples of increased cost management.

In addition, our global approach has strengthened our highly effective risk management framework which is coordinated globally on a 24 hour basis. We are focused on continuous improvement as we position MF Global to be best in class in risk management.

Along with the changes we've made internally to be more efficient and competitive, we've also focused on effectively allocating our resources. We significantly reduced our balance sheet by more than 40% over the last 14 months.

We believe that effectively allocating our resources also means prioritizing initiatives for growing our business. In the last six months, we've expanded in several areas and hired new teams with extensive experience to better meet customer demand and develop our global product and service offering.

Finally, we've also successfully brought greater scale to our business. One example is how we've leveraged the reputation and proven track record of Lynd Waldock, our leading retail brand in the United States by expanding its service model into Canada. At the same time, we closed our retail branches in Western Canada to concentrate on efforts in the country's financial centers. Further, we consolidated Canada's operational functions in Chicago. All of these changes leveraged our flexible infrastructure and improved our offerings to clients.

By executing our strategy, we've begun to meet our objectives of increasing efficiency, strengthening risk management, optimizing our capital and delivering greater scale. While we're already experiencing the benefits of our actions, we know it could take time before we realize the full rewards of our efforts. I'm confident that as we remain committed to our strategy, we'll maximize our company's potential.

Let's turn to Slide 5 and look at the results for the quarter. There were a few factors driving our performance. First, there was the impact of the broader economic environment. Historically, our industry has experienced declines in volume, narrowing spreads and near zero interest rates, but it's an aberration that all of these dynamics are occurring simultaneously.

I believe that the situation is temporary and will reverse itself over time and we're beginning to see some positive signs. The diversity of our business continues to support our results in the quarter. The breadth of products we offer, our global presence and diversity of clients we serve have enabled MF Global to remain resilient during these challenging conditions. Among our various businesses, foreign exchange, particularly in Asia, performed well in the quarter.

Our results include factors unique to this quarter as well. You may remember on our last call we discussed a couple of significant anomalies. For one, our fixed income business performed exceptionally well last quarter due to widening spreads. Volatility driven by the collapse of Lehman has subsided from unprecedented levels and as expected, our fixed income business returned to more normal levels in the fourth quarter as spreads came in.

In addition, we recorded gains for mark to market in the third quarter from investing client balances in a portfolio of agency securities. We noted that this gain was unlikely to be repeated. In the fourth quarter, we experienced an anticipated shift in the mark to market, and Randy will discuss this change in greater detail shortly.

These two unique situations along with macro drivers of our business drove the revenue decline in the quarter. We also saw several positive developments in the quarter. Our market share of U.S. segregated funds or client balances increased. MF Global's market share in the U.S. was 4.7% in December, and increased to 5.1% at the end of March.

Further, our total client balances increased about 6% to approximately $12 billion. While client balances will continue to ebb and flow due to a variety of factors, we believe that MF Global is well positioned to gain share over the long term.

If you turn to Slide 6, a few core industry metrics also demonstrated signs of stabilization during the last few months. Open interest rebounded slightly, growing in three of the last four months. This progress is reason for measured optimism as open interest is often an early indicator of increased volume. It may continue to fluctuate over the short term, but I see this initial move as encouraging.

It's also important to note that the VIX dropped sharply from its October peak of about 90, so high that many market participants opted to sit on the sidelines. This week, the VIX closed below 30 for the first time since Lehman's collapse and recent activity gives reason to believe that risk aversion has begun to abate within the market.

Since the timing and pace of a broader economic recovery are uncertain, we at MF Global are focused on creating opportunity in any environment. If you turn to Slide 7, you'll see that a key element of this effort has been to optimize our capital structure.

MP Global is one of the few, if not the only financial services company to repurchase debt with cash on hand during this very difficult economic environment. For the first time, we have no short term financing risk. We recently paid off our term debt of $240 million, highlighting our company's capital flexibility and with liquidity. We will continue to look at ways to make our capital structure more efficient.

Slide 8 illustrates our focus on leveraging our points of differentiation including our industry leading risk management, our largely agency model and our strong balance sheet. Customers have been expressing a preference for our approach which we believe is evidenced by our increased market share of client assets that I mentioned earlier.

During the quarter, our errors and bad debt strength to 1.7% and were 2.1% for the year, again proving the effectiveness of our enterprise risk management approach. We operate in an environment where risk management has taken on critical importance and I'm extremely pleased with our success in this area.

On our last call we talked about the trend of the perceived flight to quality. Excess assets were flowing to large banks as the markets took comfort in the government's financial support of these struggling institutions. However, we believe that our clients and the financial services industry generally, are beginning to get a better handle on the tremendous burden that toxic assets are for large banks.

Level three assets to equity ratios show the enormity of the problem. Banks are now contending with ridding themselves of this crushing weight and trying to re-price assets on their balance sheets. In contrast, we have a transparent balance sheet and our only level three assets are exchange memberships.

Along with clients, some of the industry's top talent have embraced our value proposition by leaving competitors to join our company. Slide 9 provides a perspective on how we've been taking advantage of the current economic environment and hiring new teams around the world.

Last quarter, we added 22 new members to our fixed income team, 8 professionals to our energy group and expanded our equities team in Hong Kong. Through the strategic recruiting effort, we've hired successful teams from virtually every major institution on Wall Street. We see this effort as an important investment in MF Global's future as we pursue our strategic goals.

Slide 10 summarized the opportunities we believe will create the most value for shareholders in fiscal year 2010. Further developing our global product and service offering is one of our top priorities as we expect it will lead to increased market share. We added 40,000 new accounts during the year; many of them originated in Asia.

Markets in Asia and around the world continue to develop and I expect that MF Global will benefit from this dynamic. We also believe that expanding our high growth, high margin businesses presents potential to increase profits. As I mentioned, the retail space is an area where we see great promise.

We expect that increased debt issuance globally as well as dislocation in the banking sector, should bring greater opportunity to our fixed income business. We're taking advantage of the macro environment to add new teams where we historically had little presence.

For example, we hired professionals dedicated to high yield debt, investment grade corporate debt and expanded our mortgage backed and agency teams. We're growing our largely agency model into these areas to meet our client's needs and expand profit potential, while also maintaining a consistent appetite for risk.

At the same time, we're improving our client service globally. During the quarter, we rolled out a client solutions group which is dedicated to delivering a consistent, unified offering to our customers. We believe that this initiative will strengthen our relationships with clients and lead to expanded revenue opportunities.

The final area where we're creating value for MF Global is by diversifying our revenue stream. In the coming months, we will launch MF Global alternative investment strategies, providing retail clients with premier access to the best managers in the managed futures sector. We believe this initiative will allow our clients to diversify their holdings while establishing a form of fee based revenue for our company.

Before I turn things over to Randy, I want to reiterate that I'm very pleased with all that we accomplished within the last few months, and our success in delivering greater value to shareholders and clients. In a challenging economic environment, we've leveraged our experience to position our company for the future and differentiated ourselves from the competition.

With that, I'll turn things over to Randy.

Randy MacDonald

In the continuing efforts to make our financial model more transparent, we've created some slides we believe will help the readers of our financials better understand two things. One is the continuing results of our business and the other is the sensitivity of drivers of our business on our results.

So we'll start with Slide 11, which is a reconciliation of our GAAP EPS to our adjusted non-GAAP EPS. The GAAP EPS of $0.98 loss included some major items. The first is the write down of intangible assets, primarily good will. The impairment is a reflection of significantly lower market values of financial institutions and the current macro economic conditions. This was triggered by a sustained period of error market value deemed below the tangible book value.

It's important for our investors to note that the impairment has no impact on operations, regulatory capital, cash or liquidity. Altogether, this was $82 million or $0.46 of EPS. All the other items after this, except for the last row, are things like IPO costs. They're the same things you historically see and then totaled $0.09 of EPS.

On the last row, and what I'd say is at first seems counter-intuitive, is that we add back the diluted effect of shares. So let me say that another way. If the shares were included in the GAAP EPS, then the loss would have been much smaller. That impact was $0.39 of EPS and that's what gets us to the adjusted EPS of a $0.05 loss.

There are two major items in the quarter that were aberrant. We rationalized a number of expenses this quarter including closing our Western Canadian branches, and they all resulted in one time costs of nearly $14 million or $0.06 of EPS. And then we had the recent court decision on an eight year old law suit which resulted in a judgment net of insurance and legal costs of $8 million or $0.l03 of EPS and that gets us to adjusted non-GAAP EPS of $0.04.

Not on this page, but in addition, there are two items that are unique to this quarter that equal another $0.05 of EPS. The first is, we had a seismic shift in the source of our income to the U.S. and that has had a negative impact on our effective annualized tax rate and that's equal to another $0.04. In the short run, we can't predict that this will shift back, however many of our growth areas are expected to be in Asia.

The second is, we expect about $2 million or $0.01 of EPS to help each business function create work streams so they can deliver on increased operating leverage and efficiency.

To better help understand the effect of macro drivers had on our EPS, we created the next slide. That is Slide 12. In this slide, we analyzed the change in adjusted non-GAAP EPS from the December quarter of $0.19 to the current quarter of $0.04. You notice that the horizontal axis matches the categories that we've used to explain our net revenues and the vertical axis shows the drivers of the change in EPS.

The compensation line for each column not including the other column was assumed to be 37% of net revenues and the tax line was assumed to be approximately 39%. The first column title commissions, both the composite exchange and MF volumes were each down about 4% equal to $0.08 of EPS.

In the next column, title fixed income, there was rate compression equal to about $0.17 of EPS and I should also remind you that the December quarter included anomalous spread opportunities as well as the fees for the wind down of the Lehman repo book.

Then in the next column, we had lower net principal over the counter volumes and narrower spreads and that was equal to $0.07 or 22% decrease, and I'll have more color on this in a subsequent slide.

In the client balances column, although average client balances were down $1.1 billion, this only counted for about $0.01 of the $0.30 decrease. The rest of the decrease is attributable directly to Fed funds having contracted by 88% or 175 basis points since October '08. In the other revenue column, lower interest rates decreased the cost of our borrowing equal to $0.03 and then our other revenue came down from a more normalized level equal to $0.04.

We also had respective tax on these changes as well as the higher effective tax rate this quarter equal to $0.04.

I'll discuss the positive impact of compensation of $0.19 and the non compensation expense of $0.07 on the next slide. I should also note that we paid off our term debt of $240 million in April, so the interest expense savings of that is not reflected here, but that would be another $0.01 of EPS for the quarter.

So in summary, rates, balances and volumes were all down and how did we do? Not only did we make money, but we controlled our costs while spending money to improve the infrastructure and the organizational model.

We significantly upgraded the talent pool. We paid off nearly a quarter billion of our debt We distinguished ourselves with the quality of our balance sheet as we have less than 2% of our assets classified as level three, and all of which were exchanged for shares.

We've seen nearly a quarter billion of free cash in addition to excess capital of over half a billion dollars and we managed the risk model to navigate the tumultuous markets without having significant write downs most of the banking peers experienced. So our diversified, independent model delivered again.

Let's now take a look at some of the other key financial metrics for the quarter and the year that showcase the strength of that model. On Slide 13 you can see net revenues for the quarter were down about $111 million or 30% from the sequential quarter. Now I'll got through all this on the next slide.

Compensation expense excluding the severance was 56% of net revenues for the quarter and 55% for the full year. While we maintain compensation expense at 55% for the full year, we worked exceptionally hard during that period to effectively manage compensation arrangements.

Given three things, one might think the compensation expense might actually have been higher by some of our peers' experience. The first factor is the huge decrease in net interest income which generally doesn't impact producer pay. Secondly, we have hired head count to fulfill our promise of delivering greater operating leverage in the longer term for higher shareholder value as well as some pockets of upgrades in the talent pool.

And lastly, as net revenues fell, the fixed component of compensation expense becomes a much larger percentage of total compensation, creating upward pressure on total compensation as a percentage of net revenues. We'd expect that as revenues bounce back, we'd begin to see the benefits of our greater operating leverage.

Non compensation expenses improved by $12 million or 11%. While I still believe our non comp costs are fairly fixed, we've been effective in rationalizing projects, reducing spend in certain areas, yet investing in others. The biggest changes were the improvements in errors and bad debts.

As Bernie highlighted earlier, our errors and bad debt expense represented 1% of net revenue for the quarter. In absolute dollars, that's $5 million lower this quarter than the sequential quarter.

Interest on borrowings was 27% less this quarter than in the December quarter, and that was mainly as a result of two factors. One, LIBOR rates declined with Fed funds partially offset by a 50 basis point increase in the $500 million drawn on our revolver which was a result of a Moody's downgrade in January. But another factor was lower debt levels as we paid off our $100 million bridge loan at the end of last quarter.

The effective adjusted tax rate increase year over year is almost entirely due to geographic mix shift in our business presence in the U.S. and in addition, a litigation charge which reduced U.K. income. You see that in some slides we have in the appendix.

Let me remind you that this pre tax income includes severance and U.K. litigation charges. So for the quarter, we are paying all of our pre tax income in taxes. The tax rate would have been 36.5% except that we had the catch up for the first three quarters which were all at lower rates. So that brings us to zero net income.

However, when we eliminate the minority interest which is net of tax, then that get's us to $2.5 million loss. The EPS is a positive $0.04 because of the convertible debt we eliminate interest expense of approximately $8 million, but then add the diluted shares to get to a fully diluted EPS.

Let's drill down on the net revenues. Go to Slide 14. Overall, this quarter was met with some challenging macro conditions that resulted in the mix of our business. This is the first quarter in our history where commissions based businesses, max principal and net interest revenue streams all decreased sequentially.

So let's start with commissions. In row 12, commissions this quarter were $187.6 million or 5% lower than in the December quarter. In row 13, column A, 386 million trades are down from 403 million in the December quarter. These volumes were down in line with the 4% exchange composite decline.

Going back to column B, in row 11, net execution only commissions decreased to $58.9 million from $63.4 million in the December quarter. Volumes related to this in row 13 decreased 12% to 106 million trades. The decrease came mostly from lower levels of trades at the exchanges as well as less activity from some of the banks and brokers.

Column B row 15, execution only yields were $0.56 this quarter which was up from the previous quarter. In column C row 11, the net clear commissions were $108 million compared to $121 million in the sequential quarter. The volumes were down 2% and the yield was down almost 7%. The yield from clearing which is row 15 was $0.41 this quarter which was $0.04 lower than the December quarter as higher margin activity from commodity trading advisors decreased.

Let's jump over to the net interest section. In column G, rows 3 and 4, what you'll notice is the sum of the interest income and principal transaction revenue total $26.5 million in the quarter. That represents a return of 78 basis points on average client and company funds of $13.6 billion in row 14. Now I'll elaborate on the returns of this portfolio on a subsequent slide.

Let's now take a look at the net principal businesses in columns E and F and let's start with F, the principal transactions. Rolling up in column F would be energy, metals, agriculture and foreign exchange. Principal transaction net revenues totaled $44.9 million and that was down from $57.8 million in the December quarter.

Our commodities businesses including metals, energy and agriculture, experienced lower volumes and tighter spreads. Our fixed income businesses experienced a similar trend as there was less risk aversion in the market and that led to narrow spreads and that was not offset by higher volumes.

Let's go to Slide 16 to analyze the yield on our fixed income and our stock/borrow loan business. The total revenue and interest from these businesses was $45.6 million, down from $72.4 million in the December quarter. The decline was primarily due to narrowing spreads. Although the fixed income yield was down by a third to 88 basis points from the December quarter's 127 basis points, it was still better than the first two quarters this year and more than double that of a year ago.

2009 average balances for this business have stayed in the same range. I should remind you that the December quarter included fees for unwinding the Lehman repo book and reflects opportunities we had in those very anomalous markets at the time.

Let's drill down into the yield on client balances, particularly on our agency portfolio. Let's turn to Slide 17. The reason we have this slide is that a number of you asked about the geography of the principal transactions versus the net interest income which combined the effective yield, and especially if the portfolio converts to par over its life.

The background on this portfolio is that we ramped it up by $2 billion in the December quarter. The question is, if as a result of falling interest rates the portfolio had a mark to market increase as it did in the December quarter, then how do you keep the value if the portfolio converges back to par?

The quick answer is twofold. We sold Fed funds contract strips to hedge increases in interest rates, and given how anomalous the markets were, although we purchased these instruments at a premium because of the higher coupons, they were still trading at a significant discount to the actual coupons.

So for example, we purchased instruments with an average coupon of about 4%, but only paid a premium equal to about 1%. You might ask why the market would have allowed this phenomenon. I need to remind everyone that most firms were fleeing to overnight cash positions and treasuries in particular. On the other hand, we decided to invest in two year agencies as they were safe, liquid and had a higher return.

Two other points to make about this portfolio; about a third of it was invested in Treasuries with a zero coupon and they will accrete to par and the other half went to pure government agencies. The further protection that we could have taken to ensure that we realized the mark to market gain would have been to sell the portfolio, but we would have then had reinvestment risk.

In a falling rate environment, that would not have allowed us to realize incremental returns from the average coupon over the premium pay.

So looking at the slide, the last row is the benchmark rate for understanding how we are doing with the total portfolio. Fed funds are currently 25 basis points and the Fed fund effective is trading 6 basis points below that. In the row above, that's the total blended spread of 78 basis points for all Treasury monies.

The source of these funds were all the client monies from around the world, including the U.K. versus the U.S. and retail versus institutional as well as the house money. Above that, is the return from the agency strategy of extending duration into two year U.S. government agency paper with an average maturity of one year?

That spread is 150 basis points which means that approximately $9 billion of the monies invested are more like 56 basis points to get to the average total portfolio yield of 78 basis points. So then looking at the first row, many investors may incorrectly assume this is the mark to market reversing from the December quarter. However, it is simply the amortization of the premium paid, which naturally erodes over time and as the value of that premium shifts, in geography for principal transactions to interest income.

Lastly, if interest rates were to move back up, then any loss in mark to market on the agencies would be offset by the gains on the hedge against such movement, and as many of you know, our target rate on client balances is to be beat Fed funds less 30 day T bills.

So as you can see, through the proactive management of client balances and the expertise of our investment team, we've seized opportunity in the market that has allowed us to beat our target hurdle rate in a near zero rate environment.

So now let's take a look at our balance sheet. Let's go to Slide 18. The company stock is still trading below the tangible book value. So for instance, if we took all the assets and liabilities and we liquidate the balance sheet, we'd return to our common shareholders, approximately $1 billion in cash. Assuming 120 million of diluted common shares, that's $8.21.

The decrease from last quarter was primarily a result of restructuring charges, U.K. litigation and some other non-GAAP items. How do we think about our liquidity? Let's turn to the next slide.

Let's go to Slide 19. Some of you have asked for more detailed breakdown of our liquidity and long term capital structure. Looking at the first row, here you can see that we have $1.8 billion of capital in our regulated companies and that's against $1.3 billion of required capital resulting in $553 million in excess capital.

Now looking at the second row, we also have $491 million in free cash at March 31 and of course this was reduced in April when we repaid the term loan for $240 million.

Looking at the last row, the company's liquid position remains very strong with $3.4 billion of available liquidity and no debt payments due for more than three years from now.

So Bernie, I'm finished if you want to take over.

Bernard Dan

Concluding with Slide 20, we remain committed to the objectives that are critical to our organization's success, maximizing profitability, driving growth, effectively allocating capital, delivering scale to the organization and balancing risk with reward.

We have already made great strides in each of these efforts and I expect our strategy to bring even further benefits to all of our constituents in fiscal year 2010.

With that, we would like to open up the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Niamh Alexander – KBW.

Niamh Alexander – KBW

A lot of information there on the call so I appreciate you going through in detail especially on the financial. A few things on the quarter specifically I wish to follow up on, but the rate per contract really dropped for the cleared contracts and considering the volumes as well, the volumes are pretty much in line. I was trying to understand, was there something specific to the quarter and should we think about this as more sustainable?

Randy MacDonald

I think it's very similar to what we said last quarter. We have a lot of competition. When volumes decrease, you see a lot more of the institutional business coming in, so I think it's mostly in line with what we would expect in terms of mix of business. I don't think there was anything that was truly secular about it.

For the other contract rates go up, which is very consistent every quarter I've been here. It's within a tolerance range either up or down and I'm not surprised with the low volumes that the mix of business has shifted to the more competitive rates of the institutions as other people have stood on the sidelines with as Bernie pointed out, the VIX was pretty high.

Niamh Alexander – KBW

On that, in terms of the volatility, with the volatility back to more normalized levels for where we are now, should that be a bit more favorable for different types of customers coming back in so then should we think about RPC coming back up a little bit?

Randy MacDonald

What I mentioned in my remarks specifically were the CPA's. They were the people who I think in a volatile market are the guys who tend to sit on the sidelines. They're looking for more longer term upward trends and to the extend that they're getting whip sawed in the market, they're not great participants and that's frankly the higher margin business in that area.

Niamh Alexander – KBW

On the quarter specifically, the non comp expense is really impressive core reduction here, when we look at the recurring rate down to the 90 range, and I think last quarter you talked about maybe a run rate of 100 or so for the year, so is this kind of the new low now that we should expect to model going forward or should we expect some growth in that number?

Randy MacDonald

If there is any growth in that number it's because of something that we will specifically talk to you about related to Bernie's remarks about how we are engineering the firm for that scalable profitable growth, but we'll have for instance; one of the things that I mentioned today is I did mention in spite of the decline by $11 million to $12 million, we spent $2 million having some folks come in and assist all the businesses and all of the functional areas to create their long term road map for that coordinated effort so that we do have scalable profitable growth.

So as it happens, we'll be talking about it. But if I were you, I would stick with the $100 million or so.

Niamh Alexander – KBW

The primary dealer application, this could be a nice little earnings opportunity for you as well as I think from a reputational perspective pretty important. If you could address that, and then the other thing is if you look at Geithner's comments last week, my interpretation is, this could be very positive for MF because it opens new electronic territory. You would have all the connectivity in play in products that you probably are not trading right now that you could trade growing forward. Am I interpreting that correctly?

Bernard Dan

As far as our fixed income effort, I'd say there's two broad areas to focus on. One is the general expansion of the team and the products, and I mentioned that we hired professionals dedicated to high yield debt and investment corporate grade debt and things of that nature. So we expect in the whole cash side of our industry in the fixed income world, to have more meaningful activities which we anticipate to drive future financial performance. That's point one.

As part of that effort, and as part of our desire to scale that capability, we continue to work directly with the Fed in terms of establishing our track record and demonstrating our capabilities to perform as a primary dealer and we remain optimistic about that process and we're continuing to work through that with the Fed. And that's really all I can say on that at this stage.

The second thing with respect to the regulatory environment, clearly I'd say two comments specifically on what Geithner and others have proposed is a little bit difficult, but directionally, you're thinking about it right because the themes are really three fold; one, greater transparency in terms of pricing, two is essentially cleared model which is obviously very directionally favorable to MF Global and three, a greater number of products more than likely created or generated as a result of hedging a lot of these instruments.

So when you factor all that together, MF Global is uniquely positioned globally and product line wise to capitalize on what we see will be a significant shift from a bilateral transaction to a transaction that gets prices and essentially cleared that we'll clearly participate in, and that's one of the measures of optimism that I point to about the future. So the regulatory changes are very favorable in my judgment to this company.


Your next question comes from [Alex Clan – Barclays Capital]

[Alex Klan – Barclays Capital]

I don't know if you mentioned this but over the last couple of quarters, we've seen the sales commission pick up not so much in absolute dollars but as a percentage of the cleared business which I think that's really related to. Are there any shifts going on in terms of introducing brokers and those relationships or anything else in there?

Bernard Dan

That shift is due to what Randy had mentioned earlier. Part of that compensation percent that we've communicated includes interest income, net interest income and the fact that those interest rates are near zero that has the effect of driving that percentage up. So the fact that we've come in at 55.2 or whatever it is for the year, in contrast to what the interest rates have done is actually remarkable. It's a demonstration of our ability to get our arms around it.

So there's nothing internal that's changed. There's no dynamics associated with introducing brokers. It's just a pure function of what that calculation is and the impact of the interest rates.

[Alex Klan – Barclays Capital]

Coming back to the fixed income business, if you think a little bit more longer term, it looks like you're really starting to see a shift from having been a futures business, a broker, and now using these opportunities to really grow the fixed income OTC business, so if you think about the next couple of years here, maybe even a little bit longer, do you think that the futures business will actually be a minority? What is MF Global going to look like in a few years? Is it really more an agency broker for all types of business and how big can these businesses get in relationship to the futures business?

Bernard Dan

Just a couple of general comments. It was clear from the first call that I participated with this company, we had a goal of diversifying revenue streams and ensuring that investors and shareholders understood that we weren't tied solely to the fortunes of exchange listed futures volume. So it's been a concerted effort and part of the transparency efforts that Randy and team have produced, is to demonstrate this diversity. It's kind of point one. So clearly we're focused on that.

Two is, as part of these filters that we've introduced of growth, profitability, scale, risk and capital, we're focusing on areas that have higher margins and it's clear directionally that there is going to be an increased issuance of debt not only in the United States but in every major market around the world and we are scaling our fixed income team that was largely centered on agencies and Treasuries, to participate in what we believe will be one of the most meaningful opportunities over the next couple of years which is in the whole cash fixed income credit world and we're going to so maintaining our largely agency model.

So that's clearly a focus. So I think if you look in the future of MF Global, clearly the mix and focus on broader asset class participation of cash, futures and OTC, we want to be well diversified. I also introduced today that we're going to launch this fund to fund product to create fee based revenues.

In addition, I've also talked historically about how we're evaluating all the existing businesses which are largely exchange listed futures teams, about how to optimize them and better position them relative to what the macro environment is today and how we anticipate that to be in the future.

So I think if you look at the next couple of years, we want to be well diversified, participate across cash futures and OTC and ensure that we're allocating the resources of this company to those opportunities that maximize growth and profitability.

[Alex Klan – Barclays Capital]

On the excess capital, I think you said something like $500 million or so. Is there anything left that you can free up? I think you had a slide in the past and it's not here this time. I think on U.K. versus U.S. and if there are other opportunities. Are there actually more opportunities to free up cash and if you can, what would be the use of the free cash flow?

Randy MacDonald

That is pretty much split between the U.K. and the U.S. and I've said in the past that in the U.S. that excess capital was available to us by prescription of law. The other approximately $0.25 billion in the U.K. is something that probably is not currently available but as we work with the FSA on this new governance model, it's my belief that they're getting more and more comfortable with that global governance model.

Given that we don't have a global regulator, it's important that we get them comfortable with our global governance model, so it would be my expectation that in the future, they'll continue to work with us.

I am going to say that I don't think there are any firms I know of who have worked with the FSA and the FSA has said, "Oh by the way, go and take $0.25 billion of cash out of the regulated company." And that's on the heels of having taken out another $175 million since I've been here.

So I think we've made great strides with the FSA in particular. I think that's a real vote of confidence in what we're doing there as well as around the globe in terms of this new governance model.

[Alex Klan – Barclays Capital]

The new administration has made some comments about multi-national companies and tax shelters and you in particular I think are incorporated in Bermuda I believe, and have you look at this at all? Is there any risk to your tax rate and the kind of things that you've been doing?

Randy MacDonald

The recent discussions have been mostly around permanently invested funds so people who have not repatriated, so they're primarily focused on U.S. based companies and people who have that money, U.S. companies who have that money essentially invested overseas on a permanent basis. So if that money were to be either deemed or actually repatriated, would become immediately taxable and we're as you correctly point out, not a U.S. based tax payer. So as currently thought of, discussed, we're not subject to some of those discussions.


Your next question comes from Richard Repetto – Sandler O'Neill.

Richard Repetto – Sandler O'Neill

In the release you talked about a receivable from Mann Group. I wasn't aware of this before. I know it's only $30 million, but could you talk about that?

Bernard Dan

As part of our broader effort that we initiated last year, Randy and I and the broader management team have looked at every aspect of this business and verifying everything historically etc. So the issue that arose is that Mann Group owes MF approximately $30 million which is due to the recapitalization at the IPO.

We've made a request for that. Mann requested an arbitration and the way we've treated it and communicated it, and this is all in the spirit of what I communicated on my first call, we're going to be very transparent when we know news, is that we reduce shareholders equity by $30 million. We recorded a receivable from the shareholder for an offsetting amount.

It clearly doesn't affect prior earnings, our income statement or any cash position and if successful, MF Global is going to restore shareholder equity. Really beyond that, I'm not going to say anything, but we wanted to make sure that what we've stated in the announcement is we'll frankly just limit our comments to that.

Richard Repetto – Sandler O'Neill

The add back of the convertible interest was higher this quarter than prior. I think it was $8.5 million compared to somewhere in the $4 million range last quarter. I'm trying to understand why that would happen.

Randy MacDonald

I think that's mostly because of the tax effect, the higher tax rate.

Richard Repetto – Sandler O'Neill

The increased transparency and the efforts you've made to lay out the business are obvious and at least from my feeling would get an A plus. After listening to the call, the complexity now that we have this transparency trying to understand what's actually going on, it's gotten more difficult at least in my opinion because all this transparency, now we're not exactly sure given all the moving parts what's happening. It's just a comment. I don't know if you have any feedback in regards to that comment.

Bernard Dan

Believe me, I empathize. I haven't been here more than four calls now, but thank you for the kudu's. The think that Bernie and I are trying to do, and I think we're being very successful is getting a lot of legacy issues behind us.

I think part of what you're seeing this quarter is the result of that as well as frankly we're concluding on our stocks. So it's year end and I think Henry and his team have done a wonderful job of reorganizing themselves. We've brought some additional folks in, cleared up roles, responsibilities, and adopted the governance model, improved processes and technology.

All of that has resulted in a number of things that have created what I refer to as noise, what you would refer to as a lack of clarity about what might happen next quarter. So I think again, two things.

We absolutely want to get all this legacy stuff behind us. As you know from my prior reincarnation, I'm not big on all this non-GAAP so we're going to looking in the future to maybe speak more to just the GAAP numbers and not have as much noise going on, and that for me would be a big success story.

I think that's part of why I came here, was to not only create the transparency but create a model that is clear and understandable and obviously I don't have the crystal ball on some of these drivers like interest rates and volumes. We all understand that's sort of your jobs. But I hopefully will get to the point where you'll have less noise in the quarter.


Your next question comes from Christopher Allen – Pali Capital.

Christopher Allen – Pali Capital

Starting out with the yield on the fixed income stock loan book, the ADA dips which is higher than the first two quarters of '09, how do we think about that going forward? Obviously a lot of it will depend on rates and spreads, but should there be any pressure points on that or can it remain stable and potentially expand from here?

Randy MacDonald

My comments last quarter were that the two previous quarters so quarters one and two were probably the more normalized rates that the team tries to shoot for and that the third quarter, the $127 million was pretty aberrant for the two reasons I talked about in the call. We had some very anomalous situations going on between instruments and between spreads.

The other thing is we were named as the folks to manage the unwinding of the Lehman repo book and so we were paid for that. So when you consider the third quarter to be an aberrant spread, I would consider the fourth quarter to be quite a good spread and there may have been in January some anomalous situations we're still taking advantage of.

I would look back more to the first and the second quarter, those basis points as being more indicative of what the guys are aiming to make.

Christopher Allen – Pali Capital

On the comp to revenue ratio, given where we are in the cycle and the pressure on interest income, would it be fair to say that this should be somewhat of a high point in terms of the comp to revenue ratio? I would expect it to come down as things move out of the cycle. Is that a fair statement?

Randy MacDonald

It is fair, and that is what I said in my remarks.

Christopher Allen – Pali Capital

Can you give us any range where you think you could get to over time in a more normalized environment?

Randy MacDonald

I really can't be pinned down on that for a couple of reasons. One is, what we're doing right now is creating these road maps for our operating efficiency and depending on that, depending on how successful you are with our new HR efforts, we have a brand new head of HR who is working with us on all of the standardization of contracts and things.

Third is the success of the retail model and the asset gathering model. Bernie made a point of saying that we are in the manufacturing business now with the new product that we're putting together and that would be a distribution channel through retail. So the compensation related to such a product is very, very low.

We've also started to rationalize our retail business around the globe and as you know from the online brokers, those margins are very, very different. So without understanding, I don't have a crystal ball on what's going to happen to retail business in the next year or two, but certainly I can tell you with a fair degree of certainty, if the mix of business favors the alternative investment strategy in the retail business, I know which way those percentages are going to go. They're going to go down.

Christopher Allen – Pali Capital

Any comments of how the expense base splits now between the fixed and variable?

Randy MacDonald

We're working on that and some of that has to do with these studies that we're doing. I think we're a big global organization. We're working very diligently to get through our vision for what we ultimately want to be in the next 18 to 36 months in terms of how we deliver operating leverage, so more to come.


Your next question comes from Howard Chen – Credit Suisse.

Howard Chen – Credit Suisse

In the last quarter, you spoke about competitive environment and particular vis a vis TARP affected institutions and that being a negative. In your minds is that still the case? Has the tone shifted at all back to a more normalized environment in your mind?

Bernard Dan

What I'd say is a couple of things that I alluded to in my comments. It's going to be a positive sign if some of the TARP backed banks can actually pay back the bail out that the government provided them. That will be in my mind very positive for MF Global because a, it will create a different sort of risk profile for those banks and they'll be more focused on maybe their core business as opposed to being highly influenced by prospective governments around the world.

Two is, it will put them at the same risk profile as the counterparties, MF Global. And three, it allows to really differentiate ourselves because while they might pay back the TARP banks, they're still going to have a significant amount of level three assets on their balance sheet which have been difficult to price. So I'm going to like that environment is point one.

Two is that we've been successful from both a new employee perspective and new client perspective of having them recognize the value proposition of MF Global and our largely agency only model where they recognize we don't have any of those risks of those banks. So I think the short answer to your question is, I mentioned earlier it was going to be a short term sort of phenomena.

We're beginning to see the benefits of this model both from a client perspective and new employee perspective, and I think as the playing field levels so to speak, and clients and other constituents recognize the significant risk that banks still have whether they pay TARP back or not, is going to be a very good positive sign for MF Global.

Howard Chen – Credit Suisse

Your volume growth appears to have lagged that of major futures exchanges. I know that comparison can be lumpy over time. Is it something that you look at, and if so, any sense as to why that's occurring in the near term?

Bernard Dan

I think part of this response I'm going to give you is really related to our focus to diversify, so we've been focusing a lot on OTC and cash instruments and being more actively managing the portfolios that we have etc. So part of it is as point one, the active focus on diversifying away from the lower margin businesses to where it makes sense. Number one.

Number two is, we participated in exchanges all over the world and I think what you might be looking at is just a narrow band of the largest exchanges, so we are very significant players in market places all over Asia which I referenced, is beginning to drive greater growth.

So I think we should take this offline about which data you're looking at because part of the mix we have has been very, very positive and it is being reflected in a, new accounts, b, increase in client assets and c, the diversity of both the cash and the OTC activities that we're involved in.

Howard Chen – Credit Suisse

Following up on that OTC growth opportunity you've alluded to a couple of times, I hear your comments. It makes a lot of sense about the higher margins, the efforts to diversify the franchise, but longer term how do we think about the capital intensity of the company and the business mix going forward vis a vis having a highly agency SGM exchange focus today?

Bernard Dan

As mentioned, even in the pursuit of the primary dealer, we don't have any demands for increase of capital. Our risk appetite is going to stay consistent. We have as the schedules presented by Randy demonstrate, sufficient liquidity and net capital to support all of our growth strategies and so I think in the near term, we're not going to be seeking any capital and we have more than enough to drive the growth.

Randy MacDonald

I agree with that, and I think it has very much less to do with who your clients are as opposed to how you participate and we're an intermediary. So we don't need lots of capital.


Your next question comes from Kenneth Worthington – J.P. Morgan.

Kenneth Worthington – J.P. Morgan

On Geithner, MF is planning to move maybe more bilateral trades to cleared OTC. I know MF is more than an FCM, but I don't think you have a real prime broker. What really is the road map to the benefit that you could see there? It feels like you really should benefit, but when I dig down into it, I'm trying to figure out exactly how that process works.

Bernard Dan

There's a couple of things. First off, as I mentioned is that the details of this approach are at the early stages and so the legislation, the rules, the regs and the impact are yet to be defined. That's point one.

Point two is, we created this client solutions group with the clear intent to bring all these capabilities together and that we offer across cash futures and OTC and we'll use that as an opportunity to identify whatever gaps we have to actually support a prime brokering capability for these clients, and we can do that in terms of certain partnerships that we could form.

Three is, the key thing of all the changes is the fact that a standardized "OTC" products that currently trade today, and there's the significant part of what's in the OTC market is really representative as "standard", those are all geared already to be exchange light traded. And that's the real opportunity.

So that will be on existing infrastructure that exists today and I think the example I point is just the interest rate swap market. It's the largest market in the world. It's a standard product and I think shorter term you'll start to see those that have more features like exchange trading products be first, and that's why I'm optimistic about this company benefiting from it, because it requires no new capability. It's new product suite and it represents one of the largest markets in the world.

Randy MacDonald

The other thing happening today, we actually do give up two PV's, so we actually have that model today, many, many of our clients, and that's our execution only business.

Kenneth Worthington – J.P. Morgan

Does this actually in any way free up capital? Does this maybe reduce the capital intensity of your business? Could this free up more capital in the U.K. or the U.S. as this transition takes place?

Bernard Dan

It's going to depend on how we service those clients, whether they're fully disclosed on our books and we're carrying all their assets. Or, to Randy's point whether we executing and giving up to somebody else.

So it's hard to judge that. I think what I would focus on is, if you look at the capital and liquidity charts that Randy presented, and you divide that by 10% as just a benchmark, that's how much more client assets we could have before we worry about new capital. So the point is, we are really positioned for growth in that if in fact we see models emerge that require a different way to service it or carry it or support it, then we'll respond accordingly.

But it is very difficult at this stage, because it's just been announced. There's a lot of steps to go through before anything becomes final and I think as we get greater clarity on that, we'll be able to respond to your question in more detail.

Kenneth Worthington – J.P. Morgan

One of the Obama initiatives was to change the tax structure of derivative trading going from the 60/40 to really ordinary income. Is that a big deal? Whether it gets passed or not, I think there's a lot of debate about that, but if it does get passed, is that meaningful for your business?

Bernard Dan

I'm going to give you some broad general industry comments first. Clearly, 60/40 treatment has been a significant benefit historically for the market makers and those who provide liquidity. It's allowed them to put more capital at risk which has in turn created narrower spreads which has reduced the cost of hedging for users all around the world. That's what it was designed to do and it's been very, very effective, so it's point one. It's a critical element.

Two is, as the world's become kind of more electronic and more global where users sitting in the U.S. or Europe can trade any market in the world, for some profile abusers it's probably not as significant if they're a market maker in the U.S. trading only European products because it won't qualify. So I think we have to understand the scope.

And three is, it's clear that as part of the pursuit and coming out of this economic and financial crisis, that the Obama administration is focused on greater regulatory oversight and I think it's very critical that we recognize the positive role of the CFTC and this asset class. It's been the best performing asset class over the last 18 months with respect to this crisis.

That agency requires additional funding to bring in more asset classes and more oversights, so from an industry perspective, I'm supportive of somehow funding greater efforts for the CFTC to bring additional integrity to this industry.

As far as MF Global goes, again this is one of these proposals that was recently announced. We're getting a profile of which segment of our individual market makers could be negatively impacted, but I'd say that largely right now, I don't have a specific answer for you but our core business is really institutional, retail, OTC, CTA based trader, so a big chunk of our business isn't even within this scope today.

So again, as this legislation develops or discussion develops and if it actually becomes law, between this and the transaction tax, I think it's been in every proposed budget since I've been in this industry. So we have to wait to see if they actually get out of it.

Kenneth Worthington – J.P. Morgan

The sales commissions did go up. I didn't understand the explanation. If cleared commissions went down and net interest income went down, is this just like a fourth quarter true up that the sales commissions went up or can you explain it again?

Randy MacDonald

I don't think I probably explained it well the first time, so let me give it another try. We have over 700 introducing brokers that would fall into this bucket of sales expenses, point one. Point two, the profiles of all the clients that enter this company through these introducing brokers are all different and the same sort of trends that we've reported on a macro basis of what our mix of business is, that introducing broker mix is equally impacted by that.

So some of our introducing brokers that have larger capital bases and may have a larger payout ratio associated with that, could have reaped the benefit of assets and business migrating from smaller associated with IP's. So we'll get a more detailed answer for you and come back to you offline, but there's nothing unique that drove it in terms of change in compensation structures or agreements or anything else.

In fact, one of our efforts has been to fully document all of these agreements as part of our internal transparency methods and we're continuing to do so. But we'll come back off line with Henry or Jeremy on the detail for you.


Your next question comes from Michael Vinciquerra – BMO Capital Markets.

Michael Vinciquerra – BMO Capital Markets

On the U.S. retail, I just wanted to get a little more detail if you can on Lynd Waldock. You're expanding it now into Canada. Can you share with us any details on the size of that business, the number of accounts? Is it only futures trading? It looks like you offer other product trading, but I'm guessing that it's 90% plus futures? Anything you can share will be helpful.

Bernard Dan

The initial effort in Canada will be future and options on futures using the electronic medium of Lynd Waldock and also order and also offering what we call Lynd Plus which is for some voice assisted participation as well. So for right now it's going to be the core offering into Canada.

We had a fairly significant retail effort in Canada from a voice perspective, so we're trying to migrate all those clients onto Lynd Waldock as we speak. It's difficult for me to say right now the acceptance rate associated with that so I don't want to quote any number of accounts at this stage. We're just rolling that out and we'll just report on that in future calls in terms of what the success of what that migration has been.

Michael Vinciquerra – BMO Capital Markets

And the relative size of that is there anything you can share with us on the demographics or the number of accounts?

Bernard Dan

We've reported in terms of our broader retail assets which largely are attributed to almost $4 billion of client assets associated with the retail, so it's a fairly significant portion of our overall assets. One of the key strategic future opportunities we've seen in trying to position is the growth of our retail platform.

So you're seeing the first stage of this go into Canada and we're hopeful that focus of $3 billion t $4 billion of retail assets grows. So that's kind of the scale.


Your next question comes from Donald Fandetti – Citigroup.

Donald Fandetti – Citigroup

Just given your background in interest rate futures, I was just curious on your outlook if you think you're positive on the volume outlook, and just kind of get a sense of how powerful that snap back could be or where there are some structural issues that keep it a little more muted.

Bernard Dan

That's a great question. One of the reasons why we're so focused on the fixed income and broadening our participation in the underlying cash is because I personally think that that trend is going to be much stronger shorter to mid term than to see a significant change in the future volumes associated with the debt issuance.

So I think there will be a lot of activity in the cash side. The reason why I say that is because there's a lot less leverage in the industry today. There's no investment banks anymore. They're all commercial banks. Risk profiles have changed dramatically. There's going to be new regulation that probably governs some of the largest institutions in the world from a historical perspective.

So I think the future side of the Treasuries is going to just lag a little bit. And that's why we're really focused on getting the fixed income capability broader and really focused on the cash side.


There are no further questions at this time. I'll turn the call back to Mr. Bernie Dan for any closing remarks.

Bernard Dan

We just want to thank all of you on the phone for your interest and support of MF Global. We look forward to speaking to you in the next quarter. Thank you.

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