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Executives

Jeremy Skule - Chief Communications Officer

Jon Corzine - Chairman and CEO

Randy MacDonald – CFO

Analysts

Niamh Alexander – KBW

Rich Repetto – Sandler O’Neill

Patrick O’Shaughnessy – Raymond James

Mike Carrier – Deutsche Bank

Chris Allen – Ticonderoga

Mike Vinciquerra – BMO Capital Markets

Howard Chen – Credit Suisse

Ken Worthington – JP Morgan

Ed Ditmire – Macquarie

Rob Rutschow – CLSA

MF Global Holdings Ltd (MF) F4Q10 Earnings Call May 20, 2010 8:30 AM ET

Operator

(Operator Instructions) Welcome to the Fiscal Fourth Quarter 2010 MF Global Earnings Conference Call. I will now turn the presentation over to your host for today's call, Mr. Jeremy Skule, Chief Communications Officer.

Jeremy Skule

With us today are Jon Corzine, Chairman and CEO and Randy MacDonald, CFO.

The information made available on this call contains certain forward looking statements that reflect MF Global's view of future events and financial performance as of March 31, 2010. 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 our SEC filings.

I will now turn the call over to Jon Corzine.

Jon Corzine

Thank you all for joining us as we announce MF Global’s fourth quarter and fiscal 2010 results. Let me begin by saying I’ve enjoyed the opportunity to meet with many of you in the recent weeks, actually 57 days, and through many of those conversations I’ve been exposed to a variety of prospectus, have truly been helpful to me as I’ve assumed this new role and responsibilities as Chairman and CEO. I appreciate the warm welcome by many and the confidence also.

As most of you know, after joining the firm seven weeks ago I initiated a comprehensive tactical review. I’ve engaged clients, regulators, investors, and employees to assess our many challenges and opportunities. Today I’d like to share a few of my initial evaluation points and make clear the immediate priorities and action steps. I’ll also discuss early perspectives on developing a broader long term strategy for the firm. After that Randy will provide details on the financial results.

Let me note though with respect to those results, let me state the obvious. Our fiscal 2010 performance presented on slide three is completely unacceptable as was our fourth quarter result. Going forward, these are not the kinds of results that MF Global management will tolerate nor should its shareholders. To provide some context but without excuse, our fourth quarter results do include a number of significant adjustments reflecting changes to our incentive structure and impairment of intangibles on past acquisitions. Both actions sign unnecessary shift in our firm’s culture and activities.

Early in the new year, as we continue to modify MF Global’s strategic direction I expect that we will incur further adjustments, adjustments that are likely to include a final deferred tax asset write down stemming from the IPO, severance charges stemming from the currently ongoing reduction in workforce, and costs associated with restructuring of our capital position.

Turning to slide four, even with adjustments considered, our immediate mandate is to achieve profitability on a GAAP basis, establishing near term return on equity and deliver an improved capital structure again driven by earnings.

To achieve these ends, we’ve taken several immediate steps. First, we’ve initiated a new compensation structure to more closely reflect current practices in our industry. If we are to grow and profit as a company we need to adopt a one firm mentality and culture in all of our activities. This will require implementing a reward system that aligns employee, client, and shareholder interests.

Going forward, each business unit will have a compensation to net revenue ratio objective prescribed in their business plans as well as the firm’s total budget. Compensation will be tied to both companywide results and individual performance. So the mark shifts from an individual production philosophy that does not adequately provide for shareholder returns. Building a one firm culture also requires that employees be committed to the future of MF Global.

To this end we’ve eliminated future service requirements on the majority of previously granted sign on bonuses and other retention payments. These payments were originally structured to be earned over time with the purpose of locking in personnel. Writing them off in the fourth quarter will allow greater flexibility in managing our workforce while also driving a cultural shift that I believe is essential to our future success.

Another key initiative is a 10% to 15% reduction in workforce to be executed in the first quarter fiscal 2011. This action follows on a previously implemented hiring freeze, combined with the firm’s natural turnover. These measures will further reduce compensation costs. Our expectation is that cost reductions, the compensation will be north of 10%.

Of course we will make sensible re-staffing decisions to meet regulatory needs and to address mission critical gaps in our skill set and particularly our control environment. Taken together, these actions structurally reduce compensation costs and provide the ability to upgrade our workforce over time. Our efforts will also put on a pathway to align our compensation ratios with better practices in our industry, which in my experience is below 50% of net revenues.

In addition to our focus on compensation, we’re taking steps to modify our business activities to more quickly achieve profitability. We’re weeding out low performing businesses and those that require long lead times and their contribution to earnings. In this regard I would note that the firm had a good track record in reducing non-compensation related costs but I think we have additional room for improvement.

New projects that aren’t absolutely essential this year and that aren’t accretive to earnings or central to our client’s demands will be postponed, downsized, or canceled. Resources saved by these efforts will be reallocated or will go towards reducing costs. At the same time we’re pressing forward with our reengineering project which you’ve heard in other calls to improve our operational efficiency.

All of our actions of the last few weeks are designed to improve MF Global’s earnings profile in the near term. We expect these decisions to translate into a minimum savings of more than $60 million over the next fiscal year. In fact, early indicators for April and May give bite to some of these initiatives, though some of our early positive returns are surely owed to increased volatility and volume.

As we wrap up our tactical review, we’ll turn our efforts toward building an updated strategic plan, several vital elements of which have already been focused on with the management committee. Central to our strategic direction and critical to our future as a firm is a reworking of our capital structure. The task is a near term impairment, as carrying costs and impermanency of capital continue to burden the firm’s bottom line and risk our credit standing.

To that end we will seek extended terms on our debt and liquidity facilities. We will continue the important work of de-levering our balance sheet including a reallocation of capital across our geographic footprint to pay down debt, and we will look for market opportunities to reduce interest costs on our hybrid capital and improve earnings per share.

On the business side, we’ve clearly seen near term strategic potential to enhance our retail distribution activities. We expect to press forward in the design, build, or acquisition of an integrated multi-currency, multi-product global platform. And we will use our one firm philosophy to expand on existing efforts to deepen our client relationships with institutions and high net worth individuals. I intend to be personally involved in this much under attended cross selling effort. Both of these initiatives will be built on investor driven equity, economic, and quantitative research.

Lastly, a natural extension of our existing approach to client services, which has traditionally been organized around an agency brokerage model, over the near term we will extend our client facilitation efforts to include principal risk taking across most product lines. Our fixed income and US Treasury businesses already incorporate this approach. It’s clear to me that we can expand revenues meaningfully by this extension. We’ll provide our clients with better market execution which in time will facilitate growth of client balances, derivative commissions, and trading profits.

As we grow these activities we will be mindful of the necessity to enhance and reconfirm our operational and control functions and to secure the talent necessary to manage attendant market risks. I want to be clear, I don’t anticipate increasing our current risk appetite in the near term but we will encourage facilitation desks to operate more aggressively within our existing limits. Again, this intensity requires another element of cultural shift because we have often thought of simply agency business as the way we approach our clients.

While MF Global is in transition so too are the regulatory and macro economic environments. We expect these changes on balance to benefit MF Global. For example, financial reform efforts across the globe are greater emphasis to exchange trading and clearing arrangements. This development plays directly to our core strengths.

Let me close by saying I can tell you that after 57 days on the job I’m more excited about the MF Global opportunity than the day I joined the firm. Among its peers MF Global has a substantial geographic footprint, significant underutilized resources, and leading positions in key commodity sectors like metals and in emerging financial markets like India. I’m confident that by improving revenue and controlling costs, by addressing our capital structure and building a one firm culture we can deliver profitability and value to shareholders and stakeholders alike, near term.

With that I’ll turn things over to Randy and after discusses the quarter in more detail I’ll be back for some questions.

Randy MacDonald

Since Jon was announced as the new CEO, there’s been an electricity in the air for the employees of MF Global. Jon has presented the organization with a compelling vision and the energy levels are very high. As we anticipate great things for the future let me take the time to reflect on this past year.

In spite of the disappointing financial results for fiscal year ’10 we have succeeded in putting in place many of the building blocks we need for MF Global to be a profitable and a compelling leader in financial services. For instance, in the past 12 months we spent over $25 million architecting our new straight through processing systems, yet we were able to cut our non-comp expenses by more than $15 million. We also successfully reduced our debt by nearly $440 million and we increased our market share of US segregated assets.

The further actions that we’re taking in the June quarter helps us to continue to build on the foundation we laid over the past 12 months and we remain squarely focused on delivering greater profitability and generating better returns on our capital. Before I get to the March quarter’s results I want to mention that in April we began to see the benefits of our cost initiatives and when coupled with May’s increased market volatility we feel good the business is trending in the right direction for the June quarter.

Now turning to the results in the quarter let’s go to slide five. Moving left to right, what this schedule does, it navigates you through our performance for the quarter including our net revenue, the pre-tax results, the net loss applicable to common shareholders, and full diluted EPS. From there we take you through GAAP loss before taxes of $0.78 per fully diluted share to our adjusted loss of $0.17 per fully diluted share.

The first four items are the things that you’ve seen before. We add back our normal adjustments such as IPO related compensation of $0.02, the anti-dilutive impact of using more shares for the adjusted EPS, that’s $0.29, and we have the mark to market on our exchange seats of $0.02 and severance was $0.01. The fifth item was a tax item for $0.04 which arose when our parent, which had deferred tax assets at a 0% tax rate before it moved to Delaware last January, recorded tax on those deferred assets at 38% after the move.

The next two items are non-recurring. The first item relates primarily to the intangible assets of the Refco acquisition which were mostly customer relationships and these assets did not survive the annual two pronged test for recoverability. Many years ago when these assets were recorded the anticipated velocity of trading and the assumed attrition rate reflected a much healthier assumption than the current environment. As a result, we have written off $51.7 million of the $125 million of net intangible assets which equates to $0.20 per fully diluted share.

The second item is designed to help facilitate the cultural shift Jon just discussed. We are eliminating restrictions on previously granted sign on bonuses and retention payments in the amount of $27.5 million or $0.11 per fully diluted share. The real economic impact of this decision was only a matter of timing as most of these folks will be with us and they would have earned a retention payment.

Replacing these restrictions will help us ensure that all members of our team support the long term direction of the firm. If you remember last quarter, we extended our equity plan with a three year vesting to include producer compensation which serves as a retention tool and has the added benefit of aligning the employee with shareholder interest.

That all gets us to a loss of $0.17 per adjusted diluted share. However, as a footnote to all this but now shown here, we also had about $0.12 per adjusted diluted share of aberrant items and there are four of them. We had a receivable from 2008 for $0.03 and the circumstances on its collectability changed so we wrote it off. We had another $0.03 for some recruitment fees; some retroactive VAT and some disputed clearing fees. Then we had $0.04 for some tax valuation allowances against loss carry forwards that may not be fully realized. Lastly, we had $0.02 of tax due to the change in our structural rate.

Then we’ve announced a 10% to 15% headcount reduction and a cap on some bonus pools for savings of at least 10% of fiscal year ’10 compensation. The savings will be moderately impacted by folks hired during fiscal year ’10 whose partial compensation last year will now be in the full year of fiscal year ’11. As you can see on the far right side of the slide the net savings we expect to realize is about $60 to $75 million. I’ll go through this in a bit more detail on a subsequent slide.

First let’s go through the net revenues for the quarter. Let’s turn to slide six. In our press release announcing Jon’s appointment we estimated that our net revenues should come in somewhere between $235 and $245 million. If you look at column ‘A’ row 11 you’ll see that in fact we came in within the range at $240 million.

Our volumes are in row 13 and total volumes for the quarter in column 11 was 426 million contracts and that was almost identical to the December quarter of 425 million. This compares unfavorably to an 11% increase in exchange volumes. The main difference from the markets volume performance was the much of the markets volume growth came from European interest rate products. This is a business we’ve been right sizing over the past year.

Additionally, our sale of the equity derivatives IDB business in February further contributed to us not keeping pace with market volumes. Where you see this is in the execution volumes in Column ‘B’ which were 73 million contracts this quarter but 101 million last quarter.

Execution yield shown in row 15 increased 18% or $0.10 reflecting the absence of the lower margin equity IDB business. Volume in column ‘C’ from clearing services increased 8% from the December quarter to $311 million contracts due to increased volume from professional traders who sat out the holiday season of our December quarter. The yield earned on third volumes shown in column ‘C’ decreased $0.03 which we consider a normal mix shift reflecting the increased volume from professional traders.

You see a total column ‘E’ and that’s the sum of columns ‘B’ through ‘D’. Going forward we will be presenting all of our commission based revenue and volume as one line in the income statement and therefore we will be condensing these columns. We believe showing commission revenues as one item is more representative of how we’re managing the business and that should also limit some of the noise that mix shifts create in our yield per contract. If we then take the product of the two factors of volumes and rates then we get the net revenues for the quarter on row 11.

Row eight, column ‘E’ you can see that the sum of the net revenues for columns ‘B’ ‘C’ and ‘D’ is the $191 million. We then deduct the sales commissions to get net commissions at row 12 of $133 million which was only 4% lower than the December quarter. Although our volumes were flat, overall commission yields were slightly down causing the decrease in revenue on a sequential quarter basis.

Moving over to column ‘F’ that’s matched principal for fixed income and stock borrow loan business and I’ll come to that in a minute. Let me first speak to column ‘G’ which includes revenue from energy, metals, and foreign exchange. The principal transaction net revenues totaled $34.2 million that was up 1% from $33.7 million in the December quarter. Our metals business experienced wider bid ask spreads and increased market participation as many of our corporate hedgers returned and forced to the market. This was partially offset by lower revenues experienced in foreign exchange and energy.

Now let’s jump over to the net interest section or column ‘H’. In row 14 the average assets are $13.7 billion and this is down about $250 million from the last quarter. However, we maintained our market share of US segregated assets from the December quarter. In the row below this, row 15, is the net interest income earned of 122 bps. This is five basis points lower than the December quarter. The slight decline in the spread was expected as we had two less calendar days, our balances were slightly lower and some of our callable bonds were called as interest rates declined.

We’ve maintained our laddered approach to maturities consistent with previous quarters by extending approximately $7 billion or 48% of our average balances into longer dated maturities. The average maturity to extended portion is 16 months and the blended portfolio of $14 billion has an average duration of nine months.

Now let’s take a look at the fixed income business or column ‘F’ in greater detail. Let’s turn to slide seven. The fixed income group faced the challenging rate spread environment once again. Overnight spreads continued to decline including another 20% drop this quarter and that was on the heals of 50% drop in the December quarter and a 65% drop in the September quarter. Spreads have come down significantly over the past year and that created challenges for the repo portion of the fixed income business.

If you drop to the bottom of the page, despite our continued broadening of participation the fixed income markets were not immune from a narrowing of market spreads. Our fixed income revenues were down $5 million resulting in a yield of 25 basis points. This compares to 27 basis points for the December quarter.

You can see that there is a -$13.6 million in net interest revenue under securities lending this quarter. This is due to the same transactions that I discussed in December quarter where the accounting rules for certain equities futures transactions do not allow us to net offset cash flows. Therefore, offsetting $19.9 million of dividend revenue recorded in principal transactions is an offsetting expense in net interest revenue. Additionally, the loss in fixed income of $2.5 million that you see on this slide is a mark to market on inventory being held. In summary, our focus on the total net revenues generated and yields earned.

Let me take you through the rest of the income statement so turning to the simplified income statement on slide eight. As I discussed earlier on a sequential quarter basis net revenues were down 4%. Compensation expense was up $5 million or 3% versus the December quarter. It would seem reasonable to expect compensation to be slightly lower given the decrease in net revenues, however, with slightly higher for two reasons. One, the bonus pool for the support groups hit a floor and two this time each year is when FICA, 401K matches reset so one would expect this quarter to be slightly higher.

In the June quarter we are subject to the new UK bonus tax enacted in April and we estimate the impact is $10 to $20 million.

Moving on to the next line on the slide, the adjusted non-compensation expenses of $113 million were 19% higher than the December quarter of $95 million. Without some of the aberrant items I mentioned earlier the non-comp was actually more in line this quarter with previous quarters and below the $100 million run rate that I mentioned. It was higher than last quarter which reflects increased reengineering costs.

As we continue on our path for reengineering for straight through processing over the next year or so I would expect non-comp to be below $100 million each quarter. Our interest expense was slightly lower as in December we reduced our revolver debt by $200 million. Our effective adjusted tax rate fell from 38% to 29% for the quarter bringing our effective tax rate for the year to 29% compared to 37% for fiscal year 2009.

The structural rate was 39% but there were two things that lowered it to 29%. The first is we couldn’t get credit for losses in some legal entities and that was equal to seven of the 10 point difference. Then number two was that we had non-deductible items that didn’t help to offset our loss and that was the other three points. As we deliver profitable quarters we estimate that the effective rate will move closer to 40%.

As we’ve mentioned in previous calls, since the IPO in July 2007 we’ve recorded deferred tax assets on our balance sheet of approximately $61 million related to our equity awards. About half of this asset relates to the restricted stock units that were issued at the IPO and at a fair value of $30 per share. The vast majority of these rewards vest in the September quarter of fiscal year 2011. The $60 million will accrete to $70 million by that time.

If, for example, the stock price is $10 this coming September then about two thirds of those deferred tax assets related to the IPO issues will be written off or about $22 million in a non-cash charge. The rest of the deferred tax assets are other equity awards that have longer vesting periods and lower issuance prices and therefore they’re not as at risk.

Let’s go back to some of the changes that we’ve implemented or announced. Let’s go to slide nine. To show the impact of the March quarter events, as well as the anticipated events of the June quarter we used the mid point of our estimates and created a pro-forma for fiscal year ’10 and fiscal year ’09 GAAP results. The two left hand columns those are the reported GAAP amounts for net revenues, compensation, and non-compensation. The next two columns they start with the GAAP amounts but then they get adjusted for the pro-forma impact of the items we’ve listed.

To reconcile our adjusted compensation amounts from the previous page we listed the three things that were adjusted. The severance and IPO RSUs or the adjusting items that we’ve had each quarter since the IPO. The write down of the unamortized balances of the majority of up front compensation payments comes next. That gets us to the adjusted compensation from the previous page. We then have what we anticipate saving by reducing headcount and capping bonus pools and then below that is the future benefit of not having the amortization of those retention payments.

The last pro-forma adjustment is to annualize or recognize the full year of compensation for those employees who were only here for partial year during fiscal year ’10. That gets us to $578 million on compensation expense or 57% of net revenues. That’s $127 million or 12 points lower than the actual GAAP number in fiscal year ’10. If you look at the higher net revenues for fiscal year ’09 then our compensation ratio drops to 52%.

On the lower half of the page we did the same effect for non-comp and you see that that remains below the $100 million that I just discussed. We would expect that this severance cost associated with the headcount reduction in the June quarter will be part of a larger restructuring plan.

Let’s take a look at our current capital structure on slide 10. Our total debt is currently $648 million. Prior to the conclusion of our arrow review in the UK the regulators have informed us that we may remove $50 million of excess capital. We will use this to modify our capital structure. I have always stated that our principals for good capital structure include de-levering the company, extending the maturities, having flexibility of instruments and ensuring the terms are reasonable.

As the credit markets and the company’s financials have evolved from when this capital structure was put in place we’ve responded accordingly. We have to continually assess our capital structure and the opportunities to reposition it. The factors we take into consideration as we move down this path include the rating agency viewpoints, our growth strategy, near term profitability, and the return to our shareholders. These are our top priorities as we work through any capital allocation decisions.

With that I’m going to turn it back to you, the operator, for questions.

Question-and-Answer Session

Operator

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

Niamh Alexander – KBW

With respect to the capital structure rework is it primarily around debt that we should expect you guys to be working right now?

Jon Corzine

I think that we are looking certainly at our debt structure but I think I hope made clear that we’re also looking at the hybrid capital.

Niamh Alexander – KBW

You’re having conversations with the rating agencies, you’ve been consistently been having conversations with the rating agencies over the last couple years, is there any need given this earnings, hopefully this is shall we say the trough but do you feel the rating agencies would prefer to see more equity capital in the structure?

Jon Corzine

One thing is for certain, the rating agencies expect us to produce earnings. I think every one of the reports underscores that as forcefully as I did in my remarks. We understand that, I think that the impermanency of capital is a question that any reasonable analyst, whether you’re at a rating agency or an investor would have on your question list, your to do list.

Niamh Alexander – KBW

You’ve been there about two months now and you’re truly very fired up and you see the opportunity. What product areas do you think could help turn the revenue story up a little bit more faster than maybe weren’t working before. You talked about cross selling for example that you feel there’s big opportunity there. Is there an area that you feel that you could hire in that people could hit the ground running that we’re not thinking about right now?

Jon Corzine

I think we have a product line in place today, it’s not necessarily the only product lines we’ll have in place three years from now or five years from now. We have a product line in place today with the changes that I outlined, particularly the extension into principal trading as a facilitation effort with respect to our clients that can produce markedly different revenues then we are now producing with that. There may be some places where we need to add personnel.

There has been a cultural commitment to the agency and brokerage concepts within the firm for extended period of time and I’m now in the process of reviewing whether people are in place, if they’re not in place in foreign exchange, in metals, and in our equity areas which we are intending to be in principal activities to start with but have yet to fully get into operational mode. I think in all of those areas and some of the subsets that will be a part of them we will run customer facilitation books, not prop books, not closet hedge funds but customer facilitation books.

What I tried to make clear, we have allocated from the Board, delegated authority on risk limits that we don’t use. We need to intensively use those to service our clients and I completely believe that that will produce more commission income, more client balances, as well as trading profits.

Niamh Alexander – KBW

The hiring environment, from what we’re hearing the larger dealers have kind of quickly grabbed market share back and also have been hiring and have made some attractive offers to poach from non-bulge bracket firms. It’s a tough time for MF to be restructuring compensation, freezing hiring, and maybe arguing that folks should be taking less an individual and more on corporate performance. How do you balance that with maybe going out and hiring people when you might have to pay top of the market given where folks are right now in the competition?

Jon Corzine

I came here because I see an opportunity to create wealth. The steps that were taken before I showed up to begin to put equity into employees hands and to move to a pay per performance arrangement on our professional staff, I think absolutely will give us a chance to compete for quality talent. It is a great building opportunity and its my responsibility to be able to create a vision of what that can turn into for an individual based on business plans, based on how wealth creation patterns can be established here, fully intend to do that.

I think while it’s always difficult getting the right people, I’m confident that we will have the ability to have the right staff in place. There’s a transition period that we’re a part of but I’m confident we will accomplish it and I am also pleased that I’ve discovered that there are a number of very, very good people inside MF Global that we need to do the same kind of convincing to.

Operator

Your next question comes from Rich Repetto – Sandler O’Neill

Rich Repetto – Sandler O’Neill

On the write off of the bonuses, is that a cash payment that you accelerated? Randy said something about the timing.

Randy MacDonald

The payments are up front and then amortized over the period of service. It’s a non-cash charge.

Rich Repetto – Sandler O’Neill

Even though the cash payments will still be the same we’ve accelerated the charges into this quarter.

Randy MacDonald

No, if you came to work here at MF two years ago I might have written a check to you in lieu of this stock you left on the table at your previous employer. That’s when the cash changed hands. I would expect that you would pay me back if you left earlier then your service period. As you march through time with us that payment is recorded on the balance sheet and amortized over your service period and the whole point is our contractual relationship is if you leave sooner than the service period is up I would withhold your bonus, I would expect you to pay me back so that’s what we’re writing off.

We’re severing that contractual relationship and saying Rich you’re not longer obligated to work here to have earned that so there’s a change in contractual relationship between us and that allows us to now write off the remaining unamortized balance.

Jon Corzine

This goes to the heart of the cultural shift that I think needs to be made here. I don’t want people here who don’t want to be here under the terms of how we have to shift to pay for performance and if there are people that feel like they’re going to be financial prejudice to leave but their heart isn’t in the game, their mind isn’t in the game, their motivation isn’t, I think we’d be better served for their benefit and ours they went somewhere else.

Operator

Your next question comes from Patrick O’Shaughnessy – Raymond James

Patrick O’Shaughnessy – Raymond James

Around the headcount reductions that you’re pursuing, can you talk a little bit about is this front end personnel or is it back office personnel the 10% to 15% reduction? Along with that, what the potential implications might be on the top line revenues is this going to potentially trim your revenues in some areas?

Jon Corzine

It is across the board but I would say it is not evenly applied across the board. If you look at our compliance and control areas it’s a lot lighter and may even in certain areas be non-existent. In other areas where we have underperformance over a period of time I talked about non-essential businesses, long lead time businesses, it might be substantially higher than those kinds of quoted numbers.

Do I think there will be some revenues that walk out the door when this happens? I think that’s always realistic to expect. We have worked to rate people so that we have done a performance review. I’d like to think that it’s the bottom 10% to 15% of performers. In most instances save those situations where we’re hiving off activities that non-essential in the near term. We also know that there are enormous duplications and lack of integration of activities within the firm that where some of those places, some of those reductions take place we actually might benefit.

I’ll just give you one example. They have foreign exchange operation in New York, a foreign exchange operation in Chicago, and the people in Chicago are calling clients in New York. I don’t think that makes a heck of a lot of sense. I don’t think that we need to have that kind of duplication. Plus the synergies that come from seeing the activity of all of that in one place will, in my view, lead to greater revenues.

As I said, and tried to emphasize, we’re implementing this roll out of principal risk taking to facilitate clients at the same time this is going on. In my mind, we still have a responsibility to grow revenues in 2011.

Operator

Your next question comes from Mike Carrier – Deutsche Bank

Mike Carrier – Deutsche Bank

When I look at the strategic outlook or the review, it makes a lot of sense. I think it’s hard to argue that the current business mix or model was working. When you look at the cost structure it seems like non-comp we’re still around that $95 or $100 million that’s unchanged. You look at the comp ratio also like mid 50% hopefully going down to 50% but the mid 50% was where expectations.

Jon Corzine

I hope it goes lower than 50%.

Mike Carrier – Deutsche Bank

It seems like a lot of the upside will also be on the revenue side, making sure that you’re in businesses where the revenue growth or the profitability is more attractive. When I think about that, the agency business tends to be pretty competitive; you may get some talent flight so you lose some revenues. It seems like the area that you can make it up is on the principal side. On the principal side it tends to require more capital and more equity and it also tends to force valuations on price to book rather than price to earnings because there’s risk in the capital that you’re using.

I’m trying to balance that. Do you think over time the amount of capital required in the business goes up but if you execute well your returns will follow?

Jon Corzine

The short answer is yes to that last question. We’re doing more than just moving to principal risk taking. I think we have an underdeveloped use of our institutional distribution channels. We have a completely under built and under utilized retail platform for distribution which we have all kinds of un-integrated elements which I alluded to as a near term responsibility. I look at the multiples of those businesses that focus on that area alone. It is a high multiple area by comparison to the principal risk taking.

We want to be in the less volatile elements of principle risk taking and far more aggressive in developing the retail platform then we are today and I should say integrating the retail platform that we have today. We need to maximize our institutional distribution efforts, particularly in areas where we have an edge. I singled two of them out in my remarks; hopefully we’ll find one or two more.

We have a special franchise in metals in the commodity business. The client list is extraordinary and the reach is substantial. Our inden broker dealer had tremendous potential and is a model for what we should be doing in other emerging markets. If we were only going to move to principal risk taking I think your argument about multiples would probably be the real world, I can’t argue with it. But we’re going to build something that is quite substantial and proportionate basis on our future business strategy.

Some of that has to be refined specifically and that’s work to be done beyond the 57 days. It may very well be that we look for fee based activities not too far down the future but right now at this moment in time in the next several quarters we have to make this machine work and we’re going to.

Operator

Your next question comes from Chris Allen – Ticonderoga

Chris Allen – Ticonderoga

I wanted to follow up on the capital. I wanted to see where the moving pieces going forward the UK freeing up of capital and then the potential write down related to the deferred tax assets, is there anything else that we need to be thinking about there. Looking at the capital structure have you had any conversations with the convertible holders about maybe converting them to equity or other opportunities right now to improve the near term situation?

Jon Corzine

We certainly are thinking about that. When we think about it we think about what we ought to do about it. I don’t think I’m free at this point to be much more precise than that. We certainly have every intension, which I think I’ve said to each of you, that we intend to extend and amend our liquidity facility and I didn’t like the capital structure we had in place the day I walked in the door and we have had, because of the restrictions that accompany the announcement of earnings and windows no real ability to deal with that, we move into a different period.

Operator

Your next question comes from Mike Vinciquerra – BMO Capital Markets

Mike Vinciquerra – BMO Capital Markets

You mentioned, related to the execution only volumes that the impact was predominantly from lower European rate activity as well as the sale of the IDB. Can you give us a little bit more detail on the impact that had on both volumes and revenues this quarter so we can kind of reset our expectations minus the changes you’ve made in each area?

Randy MacDonald

You mean the June quarter?

Mike Vinciquerra – BMO Capital Markets

I’m talking about the March quarter numbers you mentioned that execution only volumes were down specifically because of those two categories and I’m trying to get a sense for where we should be starting the June quarter without those two, I don’t know what impact the IDB had when you exactly sold it, that type of thing.

Randy MacDonald

Last quarter we said that the equity IDB business was about $20 or $30 million a year. The volumes I went through had 74 million contracts versus the December quarter was a little over 100, the interest rate products probably being the largest component. The market clearly being up was largely people coming back to that market. Part of the comp ratios that we’ve had have been the historical futures business which is execution only, we don’t clear that business for the most part, and large payouts and so that’s the business that we spent a lot of time over the last year right sizing so not surprising to us its been a little bit of a erosion of market share there.

Mike Vinciquerra – BMO Capital Markets

Safe to say then that the European business that you’ve lost say in the rates not very attractive in terms of in margin today or even margin going forward based on the way it was structured before?

Randy MacDonald

That’s correct.

Jon Corzine

I believe this area of discussion in focus is probably where we have the biggest risk of cultural clash with the changes that I believe need to be made for long run shareholder returns. We’re going to do everything we can to hold those revenues but that still is a business that operates generally with market practices somewhat different then the direction we’re taking.

Operator

Your next question comes from Howard Chen – Credit Suisse

Howard Chen – Credit Suisse

A follow up on compensation, I was hoping for some more detail on what you see as the targeted ratios. You threw out below 50% is that the target and what’s a reasonable timeframe to get there in your mind?

Jon Corzine

The only thing that I can say specifically about that is the kind of numbers that I saw on page nine, 69%, 59%, those don’t work, period. I’m accustomed to seeing in the low to mid 40%. I don’t think we can be successful for our shareholders with these kinds of rates. There’s an adjustment process. Some people have contracts, we have the impact of the UK bonus tax that are going to impact this number, we have the tag ins of the IPO write downs that are going to impact this number.

When the air clears this year, this year, I expect to be pushing down towards that number. I can’t give you a precise number, if I predicted it’d be over promising. You know where I want to get, that’s the first intermediate stop.

Operator

Your next question comes from Ken Worthington – JP Morgan

Ken Worthington – JP Morgan

In terms of extending the client facilitation I think you were clear on what the opportunities are. What are the risks in this strategy? I hate var as a metric, where would you expect var to go and what is the chance that you could incur some sort of loss that’s big enough to cause rating agency action here, or is that really almost an impossibility given your risk systems?

Jon Corzine

It’s not risk systems that will determine whether we have losses. It will be mistaken judgments in the first instance that go beyond limits, which I don’t intend to allow to happen. We have a var that reflects that there would not be a material impact on earnings, that doesn’t mean that we’re not going to have losses because operating costs don’t have revenues to match against them which should occur in part because we are increasing our principal risk taking activities.

The goal here is not be a prop trader. If we change that view we’ll speak to it directly. We’re of the view that I think the greatest risk is that it undermines revenues in a given quarter or given timeframe but I don’t think that we will be in a risk taking position substantial enough to have it be the kind of thing that the rating agencies would say “holy cow these guys got a different business strategy then what we told them we had.”

Ken Worthington – JP Morgan

Var is low right now, where would you reasonably expect var to go as you implement?

Jon Corzine

Over the next six months I don’t expect to change our var. I might change the mix of it and if we grow it, it will be immaterial just because we ended up with more product lines that we could get people that had the capacity to take relatively marginal risk. I’m going to give one example just so people get an idea.

We have a var for our foreign exchange business of $1 million. I ask any of you to go check what the var, again that’s one in, one day 99, its infinitesimal. That’s one of the places we might want to increase marginally say to $2 or $2.5 million, still infinitesimal by the standards that most major capital market players or significant capital market players.

Randy MacDonald

Jon said earlier in his remarks it’s not a matter of raising the var or the limit as we understand it but we have been under utilizing the existing var. The culture here has been risk adverse that is we would never think to interpose or provide client facilitation and that’s the opportunity.

Jon Corzine

$1 million var, 30% use.

Operator

Your next question comes from Ed Ditmire – Macquarie

Ed Ditmire – Macquarie

Any update on the primary dealer application?

Jon Corzine

We’re working hard at the application. I think most of you know the Fed has been pretty directive about not commenting on when and where. I think it would be an important contribution. It is part of a whole cloth, however, not the crossing of the Jordan.

Ed Ditmire – Macquarie

Any idea if the pursuit of the primary dealer application was abandoned what the cost savings would be?

Jon Corzine

I think that we would want to maintain a very aggressive posture of underwriting and distributing, facilitating customer activity and the government securities business, which we’re doing now. I think that what I see is pretty much a fairly fully functionally dealer operation and just doesn’t have primary in front of it.

Operator

Your next question comes from Rob Rutschow – CLSA

Rob Rutschow – CLSA

In the past we’ve talked about the benefits that you might get from higher rates and with the European initiatives it seems like maybe the timeframe for the higher rates is being pushed out. Is there anything that you can do to…?

Jon Corzine

It depends on which country you’re talking about.

Rob Rutschow – CLSA

Is there anything that you can do to shift your rate exposure to possible get benefits earlier? Is there anything you can do to make the rate contribution less important?

Jon Corzine

One of the fundamental attractiveness elements of this franchise over a period of time is the accumulation and maintenance of client balance; I think we’re in an extraordinary rate environment by any kind of historical standards. We don’t want to use that rate environment as an excuse for us not being successful but the reality is that I don’t want to walk away from that business. In fact, I hope that I’m sending an absolute pure signal that the client facilitation with principal risk taking should help us build that.

I think that credit spreads have actually widened a bit, overnight credit spreads are better than they have been certainly in the last couple of quarters. We see other movements in interest rates that properly taken advantage of in other parts of the world can give us opportunities. We’re in the process of thoroughly reviewing all of the asset investment elements that come with those client balances to make sure that we’re maximizing what is possible there and I think at the margin there are a few more things to do.

The one thing we don’t want to do is build in improper risk into that either term or credit. We have to be careful about how we manage that book and we will but I think there’s room for improvement in spreads and probably some adjustment of the book on a more time sensitive basis.

Randy MacDonald

Right now there’s heightened regulatory concerns over client money by regulatory jurisdiction so understand your question. Right now probably not as much opportunity to shift the book around the world for higher rates in the current regulatory environment.

Rob Rutschow – CLSA

On the proprietary risk trading and facilitation, I think before you had talked about it being evolutionary and then it would happen over a period of quarters. Has that timeframe moved up at all and will we see benefits in the next quarter?

Jon Corzine

We’re 57 days along the train. I believe that, for instance, I think you probably get the idea that I’ve been focused on foreign exchange. I think there has been significant revenue potential in serving our clients that has been missed in a fairly unit directional market move in the foreign exchange markets because we don’t take significant principal risk. Some areas we’ll move sooner, depending on the talent that we have or are able to acquire.

Operator

Your next question comes from Rich Repetto – Sandler O’Neill

Rich Repetto – Sandler O’Neill

On the comp ratio, if you look at the businesses and businesses maybe you’ve come from in the past, the way you get down to the 40% or below 50% whether banking and more principal risk taking versus the agent. Are you associating the lower comp ratio with this same movement from increased principal risk taking? What metrics can we look at, what’s your percentage of revenues that need to get there to get to a comp ratio that’s as low as you’re targeting?

Jon Corzine

My view is that if we don’t have revenues we don’t pay above 50% of what we have. If revenues per chance were shrinking dramatically we have to shrink compensation, that comes with risk as you all know. I think it makes no sense for our shareholders to bear that burden.

Rich Repetto – Sandler O’Neill

My question goes at least traditionally with the models that are closest to yours the brokerage payouts it seems like they’ve always been up above 55% to 60%.

Jon Corzine

We have net interest margin efforts that produce exclusive generally of the payout ratios. I do believe that increases in some of the revenues that come with trading will help us accomplish that. I think I laid a long shadow that we will be looking for advisory activities that we will inlay into our business. I would say that if you to other geographies around the world cost structures, apart from the two major hubs, are significantly different then they are in some of them in more developed marketplaces.

Operator

There are no further questions. At this time I would like to turn the conference over to Mr. Jon Corzine for any final remarks.

Jon Corzine

I’ll only say thank you. I appreciate the good questions. As I said at the beginning, I appreciate the conversations we’ve had with many of you and where we go from here. I look forward to talking with you a quarter from now.

Operator

Thank you for your participation in MF Global’s fiscal fourth quarter and full year 2010 earnings conference call. This concludes the meeting. You may now disconnect.

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Source: MF Global Holdings Ltd F4Q10 (Qtr End 03/31/10) Earnings Call Transcript
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