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GFI Group Inc. (NYSE:GFIG)

Q4 2013 Results Earnings Conference Call

February 14, 2014; 08:30 a.m. ET

Executives

Colin Heffron - Chief Executive Officer

Jim Peers - Chief Financial Officer

Mark Brazier - Senior Vice President

Analysts

Jillian Miller - BMO Capital Markets

Dan Fannon - Jefferies

Chris Donat - Sandler O'Neill

Patrick O’Shaughnessy - Raymond James

Michael Wong - Morningstar

Operator

Good morning and welcome to the GFI Group, fourth quarter and full year 2013 results conference call.

All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mark Brazier, Senior Vice President. Please go ahead, sir.

Mark Brazier

Thank you, Denise. Good morning everyone and welcome to the GFI Group, fourth quarter and full year 2013 earnings conference call. We issued a press release yesterday providing the financial results for our full year and fiscal quarter ended December 31, 2013, which is available on our website at www.gfigroup.com. We've also posted monthly revenue and trading day count information for the quarter on our websites under Supplementary Financial Information.

To begin this morning's call, Colin Heffron, GFI's Chief Executive Officer will review our business performance for the full year and fourth quarter, highlight some current developments and discuss our trading activity in 2014 to-date. Then Jim Peers, GFI's CFO, will review the fourth quarter financial results in greater detail, after which Colin will conclude with a few remarks. Thereafter we will open up the call to your questions.

Our discussions during this conference call will include certain forward-looking statements. These statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in such forward-looking statements. More detailed information about the risks, uncertainties and other factors that may cause actual results to differ from such forward-looking statements are discussed in our filings with the SEC, including our most recent Annual Report on Form 10-K.

Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with U.S. Generally Accepted Accounting Principles. Reconciliations of non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures were included in the company's earnings press release, which was furnished on a current report on Form 8-K dated February 13, 2014. These reports are available on our website under the Investor Relations section.

I would now like to turn the call to Colin Heffron, Chief Executive Officer of the GFI Group.

Colin Heffron

Thank you, Mark. Good morning everyone. Thank you for joining us today. I'm pleased to report GFI's fourth quarter non-GAAP results. Challenging trading conditions remained in the fourth quarter, with continued impact to ongoing regulatory change in certain markets, negatively impacting trade volumes. In the pace of this, GFI's net revenue decreased 2%, while brokerage revenues decreased 5% versus the fourth quarter of 2012.

Despite these challenges GFI’s electronic matching sessions continued to provide significant revenues in the fourth quarter. In the Americas and EMEA, matching sessions represented approximately 46% and 21% of fixed income revenues, as compared to 25% and 7% in the fourth quarter of 2012. In fixed income products globally, matching session revenues nearly tripled in derivative products and more than doubled in cash products year-on-year.

The parts of technology used in our electronic matching protocol, was internally developed and is a key focus of our electronic strategy. GFI’s Trayport and FENICS software analytics and market data business had record revenue and profits in 2013, as they leveraged their customer base and expanded their products and services. Software analytics and market data revenues increased to 7% in the fourth quarter to $24.1 million.

On the cost side management has continued to make significant progress in migrating our front office cost structure from one with significant fixed component to one that is more performance based. This is reflected at a 130 basis point improvement in GFI compensation ratio for the fourth quarter, despite lower overall revenues in the prior year. We are pleased that GFI’s front office productivity had stabilized and started to increase after more than two years of decline.

Non-compensation expenses were in line with the prior year, as well as those of the prior three quarters. We believe that our cost cutting efforts will provide considerable operating leverage when volumes improve.

I will now discuss our performance by product category for the fourth quarter. GFI’s fixed income group that consists of cash and derivatives represented 27% of total brokerage revenues. Cash revenues were up 1% and represented 65% of GFI’s overall fixed income business in the quarter. Revenues from fixed income derivatives decreased 3% as a result of regulatory uncertainty and lower market volatility and represented 35% of GFI’s overall fixed income business.

Financial products were our largest product category representing 29% of total brokerage revenues for the period. Financial product revenues decreased 2% from the prior year. Equity products represented 18% of GFI’s total brokerage revenues in the quarter. Equity product revenues decreased 14% from the prior year.

Commodity product revenues represented 26% of GFI’s total brokerage revenues in the quarter. Commodity product revenues decreased 5% due to lower trading volumes in North America. From a geographical perspective, GFI’s brokerage revenues were flat in the Americas, 9% down in EMEA and 4% down in Asia Pacific from the prior year.

November Trayport acquired Contigo, a provider of energy trading risk management solutions. This acquisition strengthens Trayport’s post-trade offering known as Trayport Complete and provided a suite of products for Trayport’s European energy customers. Trayport’s revenues grew 7% in the fourth quarter of the prior year.

Many of GFI’s major customers now have access to GFI’s SEF platform, GFI Swaps Exchange. We are bringing on more participants and executing more trades on GFI’s Swaps Exchange every month. We are pleased with the volume of trading and are optimistic that the mandated SEF trade deadline in the first half of this year will have a positive impact on volumes going forward.

GFI Swaps Exchange utilizes our market tested trading systems, together with established connectivity to customers, clearing houses, data warehouse and post-trade service providers.

I will now review GFI’s non-GAAP expenses for the quarter. GFI’s compensation ratio decreased to 71.9% of net revenues as compared to 73.2% in the fourth quarter of 2012. We believe that this improved compensation ratio will provide increased operating leverage and improve profitability in a more favorable revenue environment.

Compensation and employee benefits expense increased in the fourth quarter in comparison to the third quarter, as we continue to invest in our electronic trading and SEF platforms. Non-compensation expenses were in line with the prior year; cost reduction included lower communications, market data and T&E expenses. Offsetting these reductions were higher interest costs on our debt.

GFI’s cost reduction efforts are focused on a broad array of compensation and non-compensation expenses and on building more flexibility into our current office compensation arrangements. These reductions to our cost base are most apparent in our improved compensation ratio, despite the lower revenue environment. Additionally, non-compensation expenses on a dollar basis have remained relatively flat over the past five quarters on a non-GAAP basis.

We generated non-GAAP cash earnings of approximately $12 million or $0.10 per diluted share in the fourth quarter. GFI’s balance sheet remains strong and the company is in full compliance with all of its debt covenants. First quarter 2014 total revenues to the first two weeks of February are attracting approximately 4% lower when compared to the same period in 2013.

We are prepared for the mandated SEF trading deadlines that go into effect next week and we believe that this will have a positive impact on our market share and revenues. However, we do expect some disruption across derivative market, as it will take time for customers to become comfortable with the new market structure and the competing set of offerings.

Before offering my concluding remarks, I will now turn the call over to Jim Peers, our CFO, for his comments.

Jim Peers

Thank you Colin and good morning everyone. Our GAAP fourth quarter 2013 net revenues of $170.8 million decreased by $2.7 million or 1.5% compared to $173.4 million in the prior year's fourth quarter. Our non-GAAP fourth quarter 2013 net revenues were $171.4 million compared to $174.9 million in the prior year’s fourth quarter, a decrease of $3.5 million or 2%.

Our GAAP brokerage revenues in the fourth quarter of 2013 were $143.5 million compared to $150.4 million in the fourth quarter of 2012, a $6.9 million decrease of 4.6%.

Total revenues for software and analytics, and market data were $24.1 million, up $1.6 million or 7.2% from the prior year's fourth quarter. On a sterling basis, Trayport’s revenues increased 6.5% to GBP10.7 million in the fourth quarter of 2013, as compared to the same quarter last year.

For the full year our non-GAAP net revenues decreased $36 million or 4.6% as compared to 2012. Also on a full year basis our non-GAAP brokerage revenues decreased $50.7 million or 7.3% compared to 2012, and on a full year basis Trayport revenues increased GBP3.8 million or 10.3% as compared to 2012.

On a GAAP basis GFI's fourth quarter 2013 net loss was $30.9 million, which mainly resulted from a $19.6 million charge or impairment of good will on intangibles, primarily FX compared to a net loss of $11.4 million in the fourth quarter 2012.

On a non-GAAP basis, GFI’s fourth quarter 2013 net loss was $6.6 million compared to a net loss of $2.9 million in the prior year's fourth quarter. On a non-GAAP basis GFI's full year 2013 net income was $9.1 million compared to $8.9 million in 2012.

GFI’s diluted GAAP earnings per share for the fourth quarter of 2013 was a loss of $0.25 compared to a loss of $0.10 in the fourth quarter of 2012, and our diluted non-GAAP earnings per share for the fourth quarter of 2013 was a loss of $0.05 compared to a loss of $0.02 in the prior year’s fourth quarter. GFI’s full year diluted non-GAAP earnings per share was $0.07 for both 2013 and 2012.

Our GAAP brokerage revenues were down $6.9 million or 4.6% when comparing the fourth quarter of 2013 to the prior year's fourth quarter. Fixed income was down 0.8% with derivatives down 3.2%, offset by a cash increase of 0.6%. Equities were down 14.3%, financials were down 2% and commodities were down 3.6%.

Our sign-on and retention bonuses paid in cash and RSU’s granted for the fourth quarter of ’13 were $2 million, compared to $2.4 million for the fourth quarter of ’12 and $2.7 million for the third quarter of ’13. On a full year basis our sign-on and retention bonuses paid in cash and RSU’s grated were $17.1 million compared to $32.4 million for the same period in 2012.

Our non-GAAP amortization of previously paid sign-on bonuses in both cash and RSU’s was $8.7 million in the fourth quarter of ’13 compared to $10.1 million for the fourth quarter of ’12 and $8.5 million for the third quarter in ’13. Our non-GAAP amortization for the full year of 2013 was $37 million, compared to $38.7 million in 2012.

Our brokerage personnel headcount at the end of the fourth quarter of 2013 was 1121, down 67 from the fourth quarter of 2012 and down 23 from the third quarter of 2013. Our broker productivity of $127,000 in the fourth quarter of 2013 was up $2,000 from the fourth quarter of 2012, and our broker productivity at $560,000 for the full year was almost flat compared to 2012.

On a GAAP basis, our pretax margin as a percentage of net revenue for the fourth quarter of 2013 was negative 16.3%. This compares to a negative 5.4% in the same quarter last year. On a non-GAAP basis, our pretax margin for the fourth quarter of 2013 was a negative 3%, compared to a negative 3.7% in the fourth quarter of 2012. On a non-GAAP basis, our pretax margin for the year and in 2013 was 2.1% compared to 1.3% in 2012.

In summary, our key performance drivers on a non-GAAP basis for the fourth quarter of 2013 are as follows. Non-GAAP net revenues were down $3.5 million or 2% compared to the fourth quarter of 2012. On a full year basis our non-GAAP net revenues were down $36 million or 4.6% compared to the same period in 2012. Our compensation cost which includes all employees, not just brokers, were 71.9% of net revenues in the fourth quarter of 2013 compared to 73.2% for the fourth quarter of 2012.

On a full year basis compensation costs were 69.2% of net revenues as compared to 70.2% in 2012. Our non-compensation costs were 31.1% of net revenues compared to 30.5% for the fourth quarter of 2012 and 30.3% for the third quarter of 2013. On a dollar basis, the fourth quarter non-compensation costs were $53.2 million compared to $53.3 million in the fourth quarter of 2012 and $53.6 million in the third quarter of 2013.

On a full year basis our non-compensation costs were 28.7% as compared to 28.4% in the same period of 2012. On a year-to-date basis our non-compensation costs are down $8.2 million, despite an increase and interest on borrowings of $3.4 million, primarily due to higher coupon interest rates on our senior notes.

GFI’s effective non-GAAP tax rate for the full year of 2013 was 36% compared to a rate of 11.9% in 2012. Taxes were impacted by higher losses in the fourth quarter of ’13 and forecasted as valuation reserve catch-up for certain non-U.S. entities. The valuation reserve catch-up accounts for approximately $0.02 of the $0.05 loss in the fourth quarter of ’13. Lower 2012 rate is primary driven by release of a tax liability.

In the fourth quarter valuation allowance was recorded against differed tax assets in certain non-U.S. jurisdictions. Total GAAP valuation allowance taken on these items in 2013 was $4.9 million, of which $3.4 million related to deferred tax assets recognized in prior years.

Our fourth quarter non-GAAP items are as follows: On the revenue side, non-GAAP results exclude a loss of $600,000 related to the mark-to-market on forward hedges of future foreign currency revenues. We have highlighted on previous calls, we are long euros on the revenue side and short sterling on the cost side in Europe. Accordingly GFI continued to enter into a number of FX forward contracts, which serve as an economic hedge of our exposure to certain euro and sterling cash flows.

On the expense side, the fourth quarter of 2013 our non-GAAP results exclude a $19.6 million charge relating to the impairment of goodwill and intangibles, which includes GBP11.5 million at Kyte. At the time of acquisition we recorded an estimated liability of GBP12.7 million related to the potential earn out, which resulted in the corresponding increase to goodwill.

Over time the GBP12.7 million estimated earn out was written down to almost zero to our GAAP results, but was removed I should say from our non-GAAP results, as this was a non-cash and non-operating item. The impairment of goodwill and intangibles recorded in this quarter likewise has no cash impact and was excluded from our non-GAAP results.

Taking together the two items mentioned above have almost no net cumulative impact on earnings. Our non-GAAP results also exclude $2.3 million of expenses related to the amortization of accrued intangibles and $200,000 of other non-reoccurring expenses.

Our costs related to the SEF startup and compliance for the fourth quarter of ’13 and third quarter of ’13 were approximately $3 million and $2 million respectively. Our cash earnings per share for the fourth quarter of 2013 is $0.10 compared to $0.16 in the same period last year, mainly impacted by higher tax provision and the increase in the number of shares outstanding.

Cash earnings per share on a year-to-date basis is $0.69 compared to $0.75 for the same period of 2012. This non-GAAP performance metric is reconciled in our Investor Relations website.

On a trailing 12-month basis we generated adjusted EBITDA of $121 million compared to $118.4 million for the same period in 2012. The reconciliation of GFI's adjusted EBITDA is included in our Investor Relations website and adjusted our GAAP net income for interest, taxes, depreciation, amortization, non-GAAP items and non-cash amortization of our RSU’s and sign-on bonuses.

Our balance sheet continues to be strong and our cash position, which includes cash and cash equivalents, clearing cash and which excludes client money, was $227 million at the end of 2013, compared to $225.3 million at the end of the third quarter of 2013. GFI's total balance sheet cash per share was $1.84 at the end of December 2013, compared to $1.83 at the end of the third quarter 2013.

GFI is compliant with all of its bank covenants. Our consolidated capital must be greater than $375 million and currently we are greater than $407 million. Our leverage ratio cannot exceed three times and currently we are at 2.07 times and our fixed charge must be greater than 1.4 times and currently we are at 1.9 times.

The number of weighted average diluted shares for the quarter ended December 31, 2013 were $121.8 million for both GAAP and non-GAAP.

That concludes my remarks. Now I will turn the presentation back to Colin for some closing comments.

Colin Heffron

Thank you Jim. In summary we continue to invest in our electronic trading and SEF platforms, providing customers with a comprehensive network with end-to-end trading solutions. We firmly believe that our proprietary trading technology across multiple asset classes will give us a clear competitive advantage in evolving regulatory landscape.

We are executing on our strategy of expanding GFI’s hybrid technologies, reduced our expense base to front and back office cost initiatives. Moreover, we have added greater flexibility to compensation arrangements, and have held the line on non-compensation expenses and in the process we have added considerable operating leverage to the business. As reported in our release, we are pleased to declare a quarterly cash dividend to our shareholders of $0.05 a share.

Thanks for your time and attention today. We are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Jillian Miller of BMO Capital Markets. Please go ahead.

Jillian Miller - BMO Capital Markets

Thanks. Your compensation expense in the quarter was higher than last quarter. I guess despite the fact that revenues were lower and pretty clearly the looks like 2014, at least until we get the steps prove in-place mid-year isn’t great, and then I’m just not sure what’s driving that. Like I saw you add a quite a few number of brokerage employees. I’m not sure if that’s compliance related, spending or something else. I’m just kind of surprised at the upward overall movement in the comp number during the quarter. Maybe your guys could give me a little bit color on that?

Colin Heffron

Sure, the ratio. I’m talking about the ratio first. Actually its up a little higher than one would expect, because with the revenues being down, so that has an impact. But the absolute dollars amounts were up, because of three things mainly. First of all we brought on Contigo in the middle of November, which added 44 people. Okay so that was a big increase. We’ve also had an increase in our e-commerce, mainly related to SEF costs, which I mentioned, and the third one was we had a slight increase in the sterling exchange rate, which had an impact as well. Those were the main drivers.

Jillian Miller - BMO Capital Markets

Okay, and the Contigo is going to building out your Trayport operation? Could you just give a little bit more detail on exactly like what was attractive to you about that? How you see it kind of contributing to the top line going forward?

Colin Heffron

So they have specific expertise in trade processing and risk management for the energy business. They build great software and it was a way of accelerating our product Trayport Complete, which is our answer for post trade solutions for the energy markets, to get their trades into data warehouses. So it seems like a great fit and it was a bite size acquisition, so we think that the post trade solutions market is one that is very, very interesting to us, particularly with our strong position in the energy markets in Europe.

Jillian Miller - BMO Capital Markets

Okay, and I guess kind of related to my prior question, but a little bit different, a lot of your competitors are currently in the process of doing second round of cost reductions like ICAPs cutting tens and millions this year and so is BGC. I just wanted to think on how you guys are thinking about the cost base going forward, just given the revenue environment that we kind of continue to be in.

Colin Heffron

Okay, so we started the end of 2011, worked all the way through 2012 and all the way through 2013. I think we reduced headcount by 23 in the fourth quarter of 2013, so as opposed to broad initiatives that we announced two years ago, I think we’re in just cost control mode and cost cutting mode and continue to build flexibility and performance based type arrangements with all of our employees, which in think you’ll see a continued effort to reduce our cost base and hold the line of non-comp expenses as well.

Jim Peers

One of the things that we have seen very positively is that the actual compensation cost related to the front office has gone down quite significantly. However some of that has been offset by the increase in the back office as I mentioned the bringing on Contigo and then also trying to get ready for the SEF, and getting compliance. So that’s had an increased cost, which we didn’t anticipate with all the changes that were made and the rules in the middle of the year.

Jillian Miller - BMO Capital Markets

Okay, fair enough. And then final question for me; the investigations into rate setting, now we’re kind of moving into FX and you guys have a pretty sizable FX business. I just wanted to see if you’ve looked at any potential exposure there and any kind of reinsurances you can give us on that front.

Colin Heffron

So we’ve looked at all of the things that we do in terms of data collection and providing data for (inaudible) etcetera. We have no exposure and we have not been contacted by any regulator in terms of our foreign exchange options business. I believe that most of the related investigations that are going on have to do with the foreign exchange stock markets, which we don’t have any debt to broker or foreign exchange stock.

Jillian Miller - BMO Capital Markets

Thanks. That’s helpful.

Operator

Our next question will come from Dan Fannon of Jefferies. Please go ahead.

Dan Fannon - Jefferies

Thanks. I guess if we could start with what products you expect to be traded on the SEF when we start later this week or as it progresses in the coming months and where do you think your best positioned to benefit from this.

Colin Heffron

Okay well, this one we have in the credit index space and we successfully migrated our large market share and the credit index space over to our SEF through October, November and December. We expected when things are made available to trade, that other people will try to or want to be involved with the SEF.

We are sending out the rulebook to non-traditional clients who are asking for the ability to join the SEF. So we think that there is potential that some of those clients will come on. Some clients I think will choose to go through their current market maker to get traded onto SEF. It’s really a little bit unknown at the moment. That’s sort of an opportunity for us to grow and leverage an existing business where we have a large market share.

The other opportunity is in interest rate Swaps, where we are in – we’re currently launching and have launched an electronic trading platform; a hybrid system with brokers as well who are talking to clients and inputing prices into the SEF, but also we have Open Match, which is our matching sessions that sits in between where we have streaming liquidity provided by a couple of different banks and its actually only about two days old in the launch, but we’ve already seen a couple of trades go through in Open Match.

What I would describe, they are banks, but they are non-traditional clients within the banks, more the prop-desks and the market making desks, so I’m encouraged. However its only two days in, three days in. I’m encouraged by the profile of the customers that are interested in trading Swaps and using our plan to technology.

Dan Fannon - Jefferies

Okay, and I guess just you mentioned a hand full of times the potential leverage in a more improved revenue environment. I guess what makes you think there is – I guess how do we think about a better revenue environment. I mean it seems like there’s just a lot of hope in that, so I guess what are the things you’re doing? And some of it’s the SEF's, but like other things that you expect from a product launch or I guess do you have to hire people or is it just waiting. How do we think about the revenue environment? It seems like we’ve been talking about this for four years. What is different today than when you started out last year?

Jim Peers

Dan, that’s a great question. It’s the crystal ball question, but in reality if you remember when tapering started to become an issue, I think it was out of May or June last year. We had lot of volatility and then had a great two weeks. We’ve seen that now actually start to happen. We saw the effect that it had on emerging markets and we saw sort of a more broader increased revenue or daily revenue rate when that happened in January. So if January is January and it was reasonable on a daily revenue basis and it was just because it was January, then we’re going to have another slow year, another exciting year.

But I believe that there are market forces now that are genuinely going to offer more volatility. I think that the SEF, stuff is behind us, but whereas there’s still, you know people felt to get on SEF and things like that. So I genuinely believe that there’s a reason to think that volumes at their low end have a chance to grow.

Dan Fannon - Jefferies

And then I guess on that, so if revenues are flat this year, do your margins improve?

Jim Peers

Yes.

Dan Fannon - Jefferies

All else, equal?

Jim Peers

All else equal, they improve.

Dan Fannon - Jefferies

Any context around the amounts, just assuming mix is the same.

Colin Heffron

No, we don’t give out that sort of forward look, but we would see an improvement.

Dan Fannon - Jefferies

Okay, thank you.

Colin Heffron

Thanks Dan.

Operator

Your next question will come from Niamh Alexander of KBW. Please go ahead.

Kyle Voigt - KBW

This is actually Kyle Voigt stepping in for Niamh. Guess I just had a question on Trayport. Could you just give us an update on what you are seeing from client demand for Trayport and what do you think – with growth slowing a bit over the past two years, what do you think this 9% to 10% revenue growth range is? Are they normal for Trayport or whether we should expect growth to maybe reaccelerate in 2014 or even later in 2015?

Colin Heffron

I think I said a couple of quarters ago that we were in the process of getting everybody on SEF, which is the hosted version of Trayport and I also said that I think we rewrote the entire front to go in and system and launched [Jewel] (ph). It took a little longer to do all those things and we’re still in the process. I think it might be as much as a 30% way through getting everybody on SEF. So those two things, I think I’d say would add growth in the second half of 2014.

I still think that the growth rate that Trayport has had, considering the eruption and the lack of growth in Europe in general was impressive and I think now that we’re seeing real signs of European growth and recovery on top of the fact that we’ve continued to do deals and offer post trade services, and I think the environment, the legislative or regulatory environment, its pretty good for Trayport.

I think we’ve had some clarity on fiscally traded forward versus the future, so it’s a better environment for us. So overall yes, I think we’re going to see the growth that I talked about in the second half of this year and into ’15.

Jim Peers

Even though we don’t give specific growth levels for FENICS or Trayport, I will say we are pleased with the growth that we saw in the comp in general.

Kyle Voigt - KBW

Okay, thanks for the color and also I appreciate the color around like the open access trading on the SEF’s and you said that you had seen some other maybe non-bank type clients come to try to access your SEF. I mean could you speak a little bit more to that? Do you see that becoming a large portion SEF business or is it you had announced previously some sponsored access deals. Do you see that driving more volume onto the SEF?

Colin Heffron

I think that the answer might be bulk. It’s a little hard to tell right now, because people are really trying to investigate a SEF, they are looking up the rulebooks; they are trying to decide whether they’ll be better off getting liquidity through a market maker or a bank. It depends on the profile of the customer.

I’d like to think that the next earnings call will have more color on who actually decided to become a SEF member? How they handled that with their traditional bank relationships? So it’s a little bit – that’s mostly for us in the credit area. The response back to the stuff that we have announced and are looking at is in our interest rate swap offering and what I said earlier was, it was a bank, but it was a proprietary debt at a bank, so I think that that was interesting to me, because its effectively, something that would have typically come through a dealing there, so that’s a type of open access.

We’re not going to be by-side members on SEF yet, but we think that in the Swaps market there is much more potential for them to come through their SEM or prime broker or bank.

Kyle Voigt - KBW

Okay, thanks for the color.

Colin Heffron

Cheers.

Operator

Your next question will come from Chris Donat of Sandler O'Neill. Please go ahead.

Chris Donat - Sandler O'Neill

Hi, good morning everyone.

Colin Heffron

Good morning.

Chris Donat - Sandler O'Neill

Just wanted to make sure I heard – just thought I heard Jim correctly. On the $3 million of expenses related to SEF’s, that was for the quarter right, not for the year?

Jim Peers

Correct, the $3 million in the fourth quarter, $2 million in the second, sorry in the third quarter or $3 million, third quarter $2 million.

Chris Donat - Sandler O'Neill

Okay. And as we think about being sort of towards the end of the rule making process, is it possible that some of those expenses will be going away in the future or should I think of them as kind of run rate costs.

Jim Peers

Well, we would hope so, but if they keep moving the goalposts all the time, it’s hard to judge. So right now I think as we go forward we think the rate of spend might be the same as we saw in the last half of the year or at least in the first half of this year anyway, and because that’s – hopefully it does go down.

Chris Donat - Sandler O'Neill

Okay. And then I know a couple of others have asked the question before, but I’ll try it in a little different way. With the common, with the brokerage revenues being really at multi year lows, but more electronic trading going on, does that give you any levers to pull on the compensation side or in other places. If the business mix is shifting more to electronics, can you put more pressure on the comp ratios?

Colin Heffron

What happens is, as the business mix switches to more electronic basis, sure those are higher margin trades to the firm, because the front office recognizes that the expense of building the technology and marketing technology has to be shared by everyone, so yes, as that makes changes, our top lines improve and we’re seeing that makes change.

You know the matching sessions that we talked about doubling and tripling in credit, we also have the same matching sessions going on in the financial division and we continue to work to increase that, because it’s a kind of a win-win situation for our staff. They sit in the place where there’s electronics trade is to have a large contribution in, because they have to find the mid points and they work with their customer assessor, but they can also do the more technical voice trades. So what we’re trying to do is improve that share, so it becomes incredibly valuable and valuable to attain and retain the best there.

Chris Donat - Sandler O'Neill

Okay, and then kind of related to that. As I look back at the stats on employees and brokerage personnel, like for the fourth quarter 54% of employees were brokers. If I go back five years, it was more like two-thirds of employees were brokers. Are we moving to a world where they are just, I don’t know, at some point half your employee base will be non-brokers, because they are developers and people like that or your there trying to get reversed maybe as we get the SEF rules more in level.

Colin Heffron

I think the shift you’ve seen is probably the shift that’s probably going to remain, because we’re going to have a lot more marketing SEF and it will be really driven by the success of the electronic offerings and the market share gains.

Chris Donat - Sandler O'Neill

Okay, that’s helpful. Thanks Colin.

Colin Heffron

Cheers.

Operator

(Operator Instructions) The next question will come from Patrick O’Shaughnessy of Raymond James. Please go ahead.

Patrick O’Shaughnessy - Raymond James

Hey, good morning. So my first question is, as we look at your revenues by geographic mix, I think its interesting that the Americas revenue was essentially flat year-over-year, while EMEA and Asia Pacific were down and certainly given that a lot of the regulatory stuff that we’re seeing and you guys are having to deal with is U.S. based; I think that was pretty interesting.

How much of that kind of dichotomy is due to the fact that you have these harmonization issues out there and you have European clients who don’t want to trade against U.S. clients etcetera, or what other factors might be going into play there?

Colin Heffron

I think the regulatory stance that occurred in the second half of last year definitely had an impact on some of our emerging markets, trading banks, so we’re trying to figure out whether they needed to be in a SEF or whether they needed to be in an MTF. So I think that had a negative impact on some of the European trading.

I also think just European trading is depressed because of the long, drawn out crisis that seems to have gone on in Europe and I think we got ahead of it in America. Some of the other things that you might not talk about is the acquisition of Phoenix Partners Latin Group. It had a larger contribution in North America than it did in Europe, so that kind of weights into revenues and overall I think that Europe is now coming out of it, so I’d expect them to catch up.

Patrick O’Shaughnessy - Raymond James

Okay great, that’s helpful, thanks. The second question from me is Colin your kind of talking about your foreign exchange business and how you guys are pretty heavy and have that options and certainly Dod Frank and some other rules that we’re seeing are going to apply to FX options and eventually they are going to have to trade on a SEF or an exchange. Can you talk about how the timeline that you think that’s going to take for those rules to be finalized and implemented and how you think that you guys can continue to play a role in that post SEF world.

Colin Heffron

Yes, so we originally when the SEF was introduced in October, there was a lot of debate over U.S. persons and if a bank was or customer was in New York, but they were trading in an international entity, whether they’re a U.S. person or they are not a U.S. person. I think we’ve gotten more clarity on that and they are a U.S. person, so those trades are now going into the SEF by and large. Trades that occur overseas are sometimes going to MTF if they are two foreign entities.

So I think that the clarity continues to go through and harmonization between Europe and the United States will continue. So I think our business will continue to do quite well. I think its really going to be not a great deal of change, until things become made available to trade and the product gets cleared. So until then it’s going to be effectively in a step but a bilateral product.

Patrick O’Shaughnessy - Raymond James

Yes, but foreign exchange in particular, I understand that there is kind of issues trying to figure out how they are actually going to clear these things and it will take a while for foreign exchange to actually move over to a SEF world as compared to interest rate Swaps and credit default Swaps. It seems like they are a little bit closer. Is that your understanding as well and kind of what sort of timeline are you expecting for foreign exchange?

Colin Heffron

Yes, that is my understanding as well. So I don’t see much change in the structure from the currency option market until – you know if I had a crystal ball, I’d say the end of next year.

Patrick O’Shaughnessy - Raymond James

Okay, that’s helpful, thank you. And then lastly from me, Kyte; so you guys basically wrote down the earn out that you had accounted for when you guys bought these guys kind of a few years after that deal. So how do you feel about it at this point? Do you feel like its strategically important to you guys? Do you feel like that there is earnings upside or is maybe some of the upside that your originally thought was going to be there, not going to be there and maybe this is something that you guys could look to divest going forward.

Colin Heffron

I think the original drivers behind the acquisition were, you know were at OTC house, that had a lot of DNA in OTC products and we looked at Kyte and saw a listed house that knew a lot about clearing, a lot about risk management. So I think those original drivers in it were we thought would be a very, very vastly changing world. We thought it would be a good asset to have if that accelerated.

As times got on, they are looking more like a broker shop to us, because their revenues are up and they go up and down with market volumes. So I haven’t thought about divesture, but I think that the original thought behind things going clear and things going to buy back customer and things like that. That would kind of inherent in the decision marking process. It’s probably less important at this point in time.

Patrick O’Shaughnessy - Raymond James

All right, that’s helpful. Thank you very much.

Operator

And our next question will come from Michael Wong of Morningstar. Please go ahead.

Michael Wong - Morningstar

Good morning.

Colin Heffron

Good morning.

Michael Wong - Morningstar

Are you seeing any meaningful differences in activity of growth between your dealer-to-dealer business and more direct to end customer or (inaudible) business?

Colin Heffron

At this point in time, no we are not. We are dealer-to-dealer by and large and SEF’s, as things become made available to trade and other customers choose to want to be part of the SEF offering, then we expect that we’ll see some of that interest. At this point in time there is dozens that are looking at our rulebook, but at this point in time we are not seeing any increase by and large from customers that are outside our traditional circle.

Michael Wong - Morningstar

Okay and its still early days from the SEF, but from your perspective is most of the SEF volumes still hybrid voice assisted volumes or is there a decent component of fully electronic trade matching going on.

Colin Heffron

There is a significant component that’s fully electronic.

Michael Wong - Morningstar

Okay. Well, thank you.

Colin Heffron

Thank you.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mark Brazier for any closing remarks.

Mark Brazier

Thank you Denise. This concludes the GFI Group, fourth quarter and full year 2013 earnings conference call. Thank you all for joining.

Operator

Ladies and gentlemen the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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