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Executives

Jon Corzine - Chairman and CEO

Randy MacDonald - CFO

Analysts

Howard Chen - Credit Suisse

Rich Repetto - Sandler O'Neill

Niamh Alexander - KBW

Roger Freeman - Barclays Capital

Ken Worthington - JP Morgan

Chris Allen - Ticonderoga

Michael Carrier - Deutsche Bank

Donald Fandetti - Citi

Robert Rutschow - CLSA

MF Global Holdings Ltd. (MF) F2Q11 (Qtr End 09/30/10) Earnings Call November 4, 2010 7:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fiscal Second Quarter 2011 MF Global Earnings Conference Call. My name is Justin and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's conference call.

I will now turn the presentation over to your host for today's call, Mr. Jeremy Skule, Chief Communications Officer. Please go ahead sir.

Jeremy Skule

Good morning and thank you for joining our second quarter's earnings call. With us today are Jon Corzine, Chairman and CEO; and Randy MacDonald our CFO. The information made available on this conference call contains certain forward-looking statements that reflect MF Global's view of future events and financial performance as of September 30, 2010. Any such forward-looking states are subject to risks and uncertainties indicated from time to time in our SEC filings. Therefore future results of operations could differ from historical results or current expectation as more formally discussed in our SEC filings.

MF Global does not undertake any obligation to update publicly any forward-looking statement. The information made available also includes certain non-GAAP financial measures that's defined under SEC rules. Direct conciliation of these measures is included in our earnings release which can be found on our website and in our SEC filings.

I will now turn the call over to our Chairman and CEO, Jon Corzine.

Jon Corzine

Thank you, Jeremy. Good morning everyone and thanks for joining us today. Randy and I will update you on our second quarter results, the progress we've made since April when transforming MF Global from a broker to a broker dealer. The metrics that demonstrates our restructuring and the next steps will to implement our developing strategic plan. While we’ve made a good start in our transformation, we have significant work ahead of us. That said, I believe we’re on track and that positive signs of improvement are evident.

Slides three and four provide an array of metrics over the last six months and by comparison year-over-year. To summarize, our balance sheet is smaller and has remained very eloquent. As we have reduced leverage; we have expanded our earnings capacity. At the end of the quarter total assets were down 12% since year-end and 25% year-over-year. Our leverage ratio has declined meaningfully on both a simple absolute measure and on an adjusted basis deducting so called zero-wait assets. Our level three assets are diminimus and overall, we are working with a very clean balance sheet.

Our equity capital was higher by 21%, its permanency significantly improved in its cash cost lowered. At the same time, we have seen growing client confidence in the firm reflected in the growth and credit balances which reached a two-year high by the quarter’s end. These new balances expanded our earnings capacity.

The dashboards also show there is still work to be done on the revenue front, even as head count compensation and co-ops have been significantly cut. Revenues were lower on reduced volumes of client and market activity in the quarter that was evident across the globe. Our volumes were also held back by personnel reductions, planned and unplanned; the unplanned primarily in our European brokering businesses. Even with fewer sales personnel, our exchange volumes and market share remained stable for the quarter and year-over-year.

Additionally, investing credit balances was challenging as US dollars short rates remained at historically lows. Interest income was even in that context somewhat enhanced by our global reach and diversification.

Our principle trading activities contributed modestly to quarterly revenues as we cautiously moved into dealer and strategic trading activities. Our average daily VAR for the quarter was $4.8 million well below 50% of the risk appetite authorized by our board. Trading activities and market exposure will grow as we take on new personnel gain experience working together and as opportunities present themselves.

While these observations reflect progress our positive year-over-year adjusted net income numbers of $3.8 million for the quarter and $32.2 million for the first six months of the fiscal year are in no way satisfactory. It is also noted that our GAAP results are impacted by a number of items we believe are not reflective of operating performance and were anticipated by our guidance last quarter. Randy will walk you through those numbers.

In this context our near-term imperatives are to increase top line revenue, deliver GAAP profitability, and move towards double digit returns on equity. As I said last quarter, we believe that transformation process will take between 4 and 6 quarters. I reiterate as I did it at starting my remarks we are on course to meet that timeline.

Now, just as we have made measurable progress in the numbers we are also advancing our strategic agenda by enhancing our executive leadership and producer ratings. Slide 5 gives an overview of the key aspects of our restructuring process. In this regard, most important for our long-term success is the quality of our people and their leaders.

During the quarter, we brought on strong new leadership for our operations, technology and control activities, the Asia Pacific region and institutional sales. Public announcements are already out on Brad Abelow joining us as our new Chief Operating Officer and Michael Blomfield as our Managing Director for Asia Pacific. Both have extensive market and managerial experience. The biographies are available on our corporate website.

Within days, we will publicly announce the leader for our Global Institutional sales group who also brings a wealth of experience in markets and sales management and we’ll spear ahead our efforts to deliver our capital market products to our institutional client base globally. This entire reflects our strategic commitment to better segment our distribution activities and sharpen our client focus.

We are also in the process of realigning key leadership responsibilities among our current team. To that end, I would ask Randy MacDonald to read the restructuring of our retail business, a step also reflecting a better alignment of distribution activities and the need of this client segment.

We are committed to building out a globally integrated multi-asset distribution platform. As you know, Randy brings extensive experience in building and managing the retail business. Randy will continue his responsibility as CFO for several quarters and will work closely with Henri Steenkamp, our CAO to ensure that focus and continuity are maintained with regard to our financial functions.

In addition to staffing these leadership positions. We brought in new talent in a number of our businesses across the globe, particularly in fixed income and equities. In addition, we have hired a class of roughly 30 associates and (inaudible) with strong university and early credentials who will be placed after extensive training in positions across the firm holding a bench and refreshing our corporate culture.

We also recently established the Principle Strategies Group to enhance revenue growth and help build the measured risk taking culture. Several key hires were made during the quarter for this effort.

Last week, we announced the acquisition of the Washington Research Group, a policy-focused investment research firm severing leading institutional equity investors. The firm which follows the market implications of both regulatory and congressional developments has consistently ranked in the top three for Macro/Washington Research, an institutional investor magazines American all-star poll.

The acquisition cost of the Washington Research Group was $2.4 million and we believe that will be accretive over the next 12 months. Through this acquisition we will grow our US cash equities revenue, broaden our client penetration and enhance the insight we offer our clients and ourselves.

This acquisition and our hires reflect our view that we are moving strategically as opportunities are available even as we restructure our operations and culture.

Finally, as we move forward in our transformation to a broker-dealer and ultimately a full service global investment bank we have been reviewing every aspect of our current business and undertaken in extensive strategic planning process to achieve this objective. We retained a top national consulting group to assist us in validating and challenging our direction. Their mandate is to consult with the board and management on the alignment of our plans with the evolving regulatory structure and boarder market trends. As noted, we expect them to challenge each of us in management on our ideas and give us sequencing recommendations and estimates on resource requirements for realigning our objectives. We expect this planning process to be completed by year end.

With that overview, I'll turn it over to Randy for a more detailed look at our physical second quarter results.

Randy MacDonald

As Jon stated, our transformation from a broker to a broker-dealer is firmly underway. This is reflected in our balance sheet in a number of ways including a lower leverage ratio, including debt to EBITDA and a stronger capital structure. This is also reflected in our earnings profile including a greater diversification of revenues, improved market share and client balances, improved margins for both treasury investments and the repo book, the celebration of the retirement of lower margin products, an improved compensation structure and less non-compensation expenses.

Let's start with the EPS slide which is number six. Let me clearly take you through how we get the $0.02 of adjusted EPS this quarter. We can see the first three items that we announced at our last earnings call which we knew would impact this quarter. The fourth item is the anti-dilutive shareholder impact we have each quarter, the details of which are on slide 18. The first item of $0.15 is primarily related to deferred tax asset on our balance sheet that we recorded at the IPO of July 2007.

The second item of $0.26 is the EPS impact of the $53 million premium paid in July for the exchange of some of our convertible notes and preferred shares. This was accounted for as a loss extinguishment of debt of $2.7 million or $0.01 of EPS. That was related to the convertible notes exchanged. Then there was a deemed dividend of $48.8 million or $0.25 of EPS related to the exchange of preferred shares.

The third item of $0.03 is related to some restructuring expense including severance related to the workforce reduction we began in the June quarter. The fourth item is the anti-dilutive effect of sharing a loss over more shareholders by going from using 160.9 million shares to 195.5 million and then gaining back to dividends and interests on the converted shares which accounts for the $0.17.

[Absent] being been opportunistic with our capital structure we expect the December quarter will be much cleaner as the vast majority of these charges are non-recurring. The financial information I will address this quarter will exclude all these items. They are on a comparable basis.

Let's go now to some key financial metrics on slide 7. Starting with the top left quadrant we have three columns. The first column are actual savings for the first half of fiscal year ’11. As you can see, we have delivered cost savings of $35 million. The second column is what we estimate the savings to be in the first half of year. As you can see the $35 million of actual savings was achieved sooner than expected. In the third column are the estimated annual savings and we are on target to achieve the $60 million to $75 million estimate.

The chart on the upper right has some good massages. First is the compensation in net revenue ratio is down from the first half of the same period last year by 9 points. Last quarter I had set an expectation that 57% was normalized rate for that quarter. Now, for the September quarter we achieved 56%. However, one would have expected it to be higher than 57% given that net revenues were $49 million lower this quarter.

Said in another way, had our net revenue been at the same level as the June quarter, we estimate that the comp ratio would have been closer to 52%. On the other hand, if we did not reduce our head count or changes our comp structure and ratios; we estimate that the comp ratio for this quarter would have been approximately 61%.

In calculating the year-to-date compensation ratio for fiscal year ’11, we exclude a year-to-date restructuring charges of $13 million, the UK bonus pacts are $3 million from the last quarter, an additional severance of $4 million. As drop in rate was achieved through the reduction of workforce we enacted last quarter, re-characterization of the compensation structure to include company stock as a portion of an employee’s total compensation, and the realignment of pools for bonuses.

We have been able to keep our compensation ratio in range, while hiring 100 people and retaining key staff around the world. Our goal remains to see our compensation ratio in the mid to low 50s over the next few quarters, but obviously that is also dependent on the amount of compensation in net revenues.

Moving to the bottom left hand of the chart, you see that we continue to manage our non-compensation costs, which on a year-to-date basis were flat to down. Communication and technology costs were up as we continue to spend on our infrastructure. However, professional fees were successfully managed lower as we reduced our legal and other consultant fees by moving services in house. Annual savings and amortization from the goodwill write-off taken in previous quarters.

Turning to the chart on the bottom right, you see the benefit from our focus on higher margin activities and a more efficient cost structure. Adjusted EBITDA is calculated by adding that to the adjusted earnings before tax, amortization, depreciation, stock compensation and interest expense. On year-to-date basis, adjusted EBITDA increased 86% to $104 million in 2011, a much healthier level compared to the $56 million last year.

Increased client facilitation, principal trading, and control of our expenses has allowed us to start generating a better return to our shareholders and have a more constructed dialogue with the rating agencies. That is how we managed our cost and cash flow.

Let’s take a look at some of the specifics on revenues for the quarter. On slide eight, you can see our revenue was impacted by several key internal and external factors in the quarter. The sequential decline in volumes was fairly severe and had accounted for roughly a $37 million decline in revenue and seasonality for some of our matched principal businesses contributed to reduction of revenue approximately $12 million.

We also estimate that the impact on the September quarter from our headcount reductions including some unplanned departures contributed to another $24 million decline in revenue. However, we believe our new strategic initiatives generate approximately $24 million in additional revenue this quarter. We said previously that we would make every effort to offset the revenue implications of headcount reductions through these some initiatives. Since many of our revenue initiatives during their early stages, we were unable to create enough opportunities to offset effects of the broader market conditions.

Let us look at some of the specifics of the net revenues on the next slide. Turning to slide nine, in row 10 total revenues in column A were $240 million and column B presents our commission revenues are $112 million. Our volumes which were in row 11 were $430 million contracts, 9% higher than the same quarter last year. This matched the 9% composite exchange volume increase.

What is gratifying about maintaining market share is that it is indicative of our ability to retain much of the client base, opposite both the plan and unplanned headcount reductions. In row 13, the yield in our commission based businesses decreased $0.09 to $0.26 from the same quarter last year. This drop in yield reflects the change in focus away from inter-dealer based businesses, such as rationalizing our interest rate product business and the sale of the equities IDB business, all which have occurred over the past year.

Again, this volume represented the largest portion of our execution commissions in fiscal year 2010, which is higher in yielding in clear commissions but is less profitable. As clear commissions have become a larger portion of the pie and professional traders are a higher for portion clear commissions year-over-year, the blended rate has fallen in column C, our principle transactions and related interest. These revenues are income spreads, which includes fixed income, energy, metals and foreign exchange products as well as the stock for our loan business and the newly formed Principle Strategies Group. Net revenues from these businesses totaled $65 million, which was down 11% from 73 million last year.

The commodities foreign exchange and fixed income markets experienced a greater than normal seasonal slowdown during the quarter and spread continue to be challenging in certain portions of our fixed income business.

Our Energy revenues was also challenged due to significantly smaller number of producers in this business. Our Agricultural Group although a small portion of this column had a very good quarter driven by healthy level of volatility and from expanding consultation of client trades.

We have taken concerted effort to effectively manage the use of our capital and focus it towards higher yielding parts of our business. In doing so, we see in row 14 as our averaged balances for the repo and the swaps, the stock borrow loan book were reduced by $12 billion as this business's yield has remained at low levels.

Our fixed income business has evolved over the past year. As we expand into additional products and transaction types and take part in Federal auctions our revenue is no longer just derived from a treasury agency repo book. That said, we feel that calculating yield on the fixed income stock for our loan balances is no longer in accurate measure of productivity.

Lastly, we have column D or net interest margin. In row 12, the average assets are 14 billion. In the row below this, row 13, is the net interest income yield of 149 basis points. This is 55 basis points higher than last year. We have maintained our latter approach maturities consistent with prior quarters by extending approximately $9 billion or 64% of our average balances into longer dated maturities compared to 53% last year.

The average maturities extended portion is seven months as opposed to 13 months, one year ago. The blended portfolio in $14 billion has an average duration of 4.5 months, which is down from seven months last year. This is even more impressive when you consider that fed funds were flat and duration has decreased. Now, we’re looking for opportunities to extend the life of this portfolio given consensus views, the rates are not expected to rise for the next few quarters.

Let us take a look in details of how we have enhanced our capital structure and improved our credit profile on slide 10. We took a number of steps during the June quarter to improve the company’s capital structure. Starting with the first row, we extended and amended our revolving credit facility in a favorable rate. We balanced the size and duration of the revolver by electing to extend $690 million to June 2014.

Moving down to the next row, we only retire $9.3 million of senior convertible notes. When you view this is confidence in our future success by remaining bondholders. Moving down to the Series B Preferred shares, we successfully tendered 73% or $94 million. The combination of the after-tax interest saves on the senior notes plus the reduced Series B preferred dividends equals about $11 million per year of cash flow.

Moving down to equity, our arbitration with Man Group was resolved in our favor, which resulted in $32.6 million decreased equity for MF Global.

In summary, we have extended our debt maturities, improved our permanency of capital, reduced high cost elements of the capital structure and increased the equity content of our balance sheet. We will be opportunistic in the market place with debt, take advantage of low interest rate environment if the opportunity presents itself. I mentioned last quarter that we intended to use some of our internally generated capital from June quarter to retire another $142.5 million and I will address this in a latter slide.

The company still maintains a strong liquidity position so, let us turn to slide 11. On the first row is total capital for the regulated companies of $1.8 billion. On the second row is the capital for the unregulated companies, primary our holding company and finance companies. The total capital in firm is roughly $2.2 billion. The reported capital of the firm is $1.6 billion and this is $267 million higher than the June quarter. This reflects significantly higher client balances and increasing regulatory capital requirements in UK and US.

These increased requirements negatively impacted our excess capital and free cash. The next column is the excess capital. In comparing the September and June quarter, excess capital declined to $253 million from $512 million. Additionally, the free cash declined by $157 million to $145 million at September 30 and I will go through this in greater detail on the next slide.

Thinking about our liquidity position, we have $758 million undrawn on our revolver and another $1.6 billion of client assets outside the regulated companies also available for liquidity events and that all adds up to $2.7 billion of liquidity for client [solicitation]. We are still on a very strong liquidity position.

Let us go on the next slide the details of quit pressure on the free cash and excess capital. On slide 12 this shows demands during the quarter on the excess capital and free cash, and the important business priorities that demanded our attention.

Our capital increased by $33 million from the settlement with Man Group. Although, higher clients balances are a positive improvement for the company it does increase capital requirements which is an eloquent problem for the firm to have but one we need to address nonetheless. In a higher interest rate environment, we would expect the net interest margin earned on these balances would self generate the necessary capital. However, the timing is extended because of such low interest rates.

As regulatory authorities are becoming increasingly vigilant of financial firms, they have been increasing their demands for regulated capital. The combination of these two increased our capital requirements by over $334 million for the quarter. We also paid premiums and cost related to the exchange of convertible notes in preferred shares and the extension of our revolving credit facility which used $62 million of excess cash. We also spent $27 million internally on product initiatives and global expansion. The other includes tax payments, dividend payments, and other miscellaneous costs. The combination of all these events decreased our available cash and excess capital to $398 million. Therefore, we believe the best use of our resources was to fund the internal opportunities and address regulatory requirements as oppose to reducing low cost debt.

Finally, as Jon mentioned, we further de-levered the balance sheet while improving the yields. Let’s take a detailed look at this. On slide 13, this slide shows the footings of our balance sheet. The first line, client balances and corporate funds, is made of a cash and liquid securities as mandated by CFTC and other regulatory rules. The balances related to the fixed income and stock borrow loan book have three important characteristics: a very short duration, fine credit quality and very liquid. To quantify, 86% duration is 90 days or less and 61% are treasuries and agencies.

Looking at the bottom of the page, the overall calculation at gross leverage is 30 times. This is magnified by a repo book which really grosses up our balance sheet with very liquid low risk securities. We recalculate our leverage by applying Basel concepts to our assets. We excluded all government backed and centrally cleared securities from the calculation, which gets zero risk rating weighting Basel. This is the majority of our repo book. Calculated in this manner and at global leverage is 11 times, which is consistent with how we view our balance sheet and comparable to the best capitalized banks in our industry.

With that, I am going to turn the call over to the operator so we can take questions.

Question-and-Answer Session

Operator

Thank you very much Mr. MacDonald. Ladies and gentlemen, the question and answer session will be conducted via the phone today. (Operator Instructions). We’ll go to Howard Chen with Credit Suisse for the first question. Please go ahead.

Howard Chen - Credit Suisse

First one, Jon, one broad question on hiring, you noted the 100 hires during the quarter. Could you just give us a sense of the timing for when they come off guard and leave, begin producing and when did they show up in the comp run rate? Then also just a flavor for what are the hiring needs going forward in your mind? Thanks.

Jon Corzine

A number of the people are on this garden leave you probably could infer that from the fact that I didn’t announce the individual runs of the institutional sales group. We have that element in a number of the hires that we have. By the way, I suspect for the balance of this quarter, the hiring process will slow dramatically because we are not much interested in buying our bonuses that people have accumulated. The run rate is still little bit lower than what we are showing in the numbers this quarter, but remember 30 of those people are new graduates and folks that are early in their careers that we hired to put together training class.

I don’t think it is a major change in our run rate since a lot of the people who are leaving also overlapped into this quarter on run rates and plus we had other elements of charges that go with people leaving severance charges et cetera. I don’t think it’s going to be major impact but there will be some growth, but we think that’s accretive, that’s why we are hiring these folks.

Howard Chen - Credit Suisse

Randy, quick one on the numbers. Could you just provide us with the fixed income and sec lending spread during the quarter that’s been helpful in the past and I am thinking about the difference between the dealer facilitation businesses with the repo?

Randy MacDonald

Yeah, it’s clearly down from year ago, but it’s up from the sequential quarter. Last quarter we’re in 29 bits and this quarter, it’s up to 35. I would that was a good improvement. Some of the hires in fixed income were good hires, key hires. Clearly, as I said and as Jon stated, listen, we sized down that repo book, we wanted to make sure that we’re using our capital in the smart way and 29 bits on those balances, just wasn’t make a lot of sense.

Jon Corzine

There is, by the way, a minimum to which you can’t take this matched book repo activity particularly as we continue in efforts to be recognized as primary dealer. We need to be involved in the 12 of the activity and we also want to be able to efficiently finance the firm's position as we take them serving clients and/or opportunistically in our trading books.

Howard Chen - Credit Suisse

Is there a sense on what you think that threshold is?

Jon Corzine

It can be smaller, but not dramatically. You’ve seen the bulk of the reduction. As Randy has tried to make clear, he said 90 days or less 83% of the assets well over 50% treasury and agency. We’re in very strong shape in the quality of that. Even when you look at the balance of that above 60% roughly looking in euro covenants, the most liquid ones.

Operator

Next we’ll go to Rich Repetto with Sandler O'Neill. Sir your line is open.

Rich Repetto - Sandler O'Neill

Jon, I don’t know why you spend time sort of comparing earning contrast, but yet there is another broker going to the transformation [Knight], going to midsize investment bank they are coming from the equities based, you at least in my perception coming for more than commodities and futures base. They have run into some obstacles as they grow fixed income. Could you compare like what your advantages are or disadvantages and how you both are going out if you have spend any time on looking at that?

Jon Corzine

I can't say that I've studied Knight extensively I follow their public announcements. What I can tell you is that we are in that right space with respect to futures and options, and exchange, and exchange cleared instruments, clearing activities. We believe that the regulatory environment is moving in our direction or instruments that a previously been over the counter that’s going to be good for us. As I've said in previous calls, it has issues with regard to some of the capital charges. Frankly, we think that know-how and our position in clearing house and exchange traded activities is enormous asset. We’re been validated that by our studies that are going on in part of our strategic planning process and we intent to lever it quite extensively across the globe.

We are in the right spot to use that as a springboard into that intermediate size investment bank. I also think the commodity piece is extremely important. We have absolutely a top leading position in metals, a solid position in energy, a developing position in agriculture. Then we have good bases in equities and fixed income and foreign exchange. We have the right product mix to move forward.

Randy MacDonald

I would also add to that two things. Just in terms of Tomy Jason poised the great job but they are coming from market maker position. We come from dealing with clients, that’s the core foundation. I would say that’s one major contrast, one thing that we do well is provides client first solutions and our clients not being a market maker.

The second thing is when you think about fixed income we’ve been at this for long, long time. As you know, we bought the Repco assets but it’s the experience in the infrastructure and frankly the participation and we are already participating especially the short-end of the curve. We are already 5 to 6% of the auctions and everything that we do in the fixed income arena. We are already a very, very large player and been at this for many, many years. I don’t think that that can be underestimated.

Rich Repetto - Sandler O'Neill

It’ll be interesting to see you get back to your retail routes Randy as well. Anyway, my one follow up question would be on the principle strategies group, Jon, and proprietary trading. You did mention the bar during the prepared remarks, but can you talk about the opportunity, the people you’re getting, what products will be? The bank says, let’s say transforming their proprietary just in, could you just give us color on your strategy there?

Jon Corzine

First of all as you can follow in the Financial Press, we have had an opportunity to have conversations with some of the most successful and productive proprietary traders we’ve hired two individuals to join a team of someone that is inside the firm today and we will look for one or two additional individuals. We want to stay in high turnover mode within our proprietary activities.

We will be in the liquid in for the most part of our activities. Don’t expect it to have dramatic impact on our earnings in the near term although we do work to steadily growth book. It is important in two respects. One obviously from the revenue generating aspect, but as you know this firm historically worked from a broker model and had less understanding and comfort with a market making risk management culture with respect to activities in risk taking. It is important for seeding that inside our organization as we go forward to demonstrate not just for the purpose is success for the Group but that we can take and manage risk successfully for purposes generating revenue will help enhance the culture in our day-to-day trading activities.

Believe me, we are going to go slow. I chose my words very carefully. We’re going to know the people. We’re going to know the risk appetites in addition to the metrics that are necessary and very closely involved with the strength (ph) felt.

Operator

Moving on, we’ll go to our next question from Niamh Alexander with KBW. Please go ahead.

Niamh Alexander - KBW

Randy, you are moving over to management of the retail side of the business in the transformation there, can you help us, I mean that you and Jon, how do you think about may be where the first opportunities are or what your first priorities are there, I mean, there is a lot of distances of the normal front end and the back end but where do you see the near-term opportunities?

Jon Corzine

I going to make one statement and then turn it over to Randy. The primary issue in all of our businesses in all of the market segments are foreign clients and serving their investing needs well. And it is important and it’s actually one of the most important strategic thing that we are taking on is segmenting out our market activities with our clients so that we can be much more focused and precise to that how we’re serving their needs because they’re significantly different. In that context Randy how we have build our business.

Randy MacDonald

That’s a different call, Niamh, it’s a great question. When we think about the big opportunity, we haven’t published just how big the retail business is. Obviously it’s big enough that Jon has asked me to turn my attention to it. We think about it as distribution. As Jon correctly points out, the strategy is understand client needs and deliver those needs. A high prophesies is pretty simple which is as I took my previous two firms around the globe, the challenge was infrastructure. The hardest thing you do are the settlements, the clearing systems, the security masters et cetera, I call it the pluming.

What we have here at MF is a tremendous geographical footprint in product and what we are missing is a distribution platform to the retail client. In United States, we are known as a Lind-Waldock, in Japan we are known as FXA, we clearly do FX in Europe, we’re known as GNI Touch, BrokerOne shows us how to go on. We’re very disparate.

If we’re going to build a multi-asset platform, what we want to do is build it on top of these relational databases that we spent two years building and take the advantage of the great product knowledge that we have and all the connectivity that we have to the 70 plus exchanges, the 14 countries or 12 countries were involved in. Distribute to the retail business, there are multi-asset platform i.e., build it once and deliver it many times.

We have great flexibility so, as products roll out, we’ll be able to add those products ever easily. As Jon pointed out, our big advantage is we’re really good at FX and CFDs and fixed income. The other firms typically are good at cash and options, while guess what our big advantages. There are lots of people wanted to understand futures and there was a tax advantages. There is a lot of opportunity for us given all of our infrastructure to go distribute this in a very, very smart way, build it once, deliver it many times.

Niamh Alexander - KBW

It sounds like it’s primary it’s organic and not necessary to acquire those kind of internally first, is that fair?

Randy MacDonald

We want to exclude looking at acquisitions as you know, Niamh, done a quite few of those. No, I don’t think that you need to necessarily think about it as on, off win/lose. What you’re building or buying or renting, we have to do this in a smart way and have first move or advantage. It would not exclude making an acquisition.

Niamh Alexander - KBW

to go the principal trading group and proprietary trading group, I mean I understood MF and the SCM, a major call in (inaudible) that you are independent and you had the anonymity and you didn’t have a proprietary trading that’s maybe some of your competitors out there might be perceived as competing and how you’re managing that aspect of kind of billing out of products with your clients?

Jon Corzine

First of all, the unit will be separated from the trading arenas where client activity flows. We think that we have a long standing culture that is focused on client activities and we are enhancing all of the compliance and control activities on that and we feel like we can manage this and I am very familiar with trading activities and a market making book as you interface with clients and so I just – I don’t think there has to be as long as you are very disciplined and you make it clear to end of the jobs that clients interest come first and they are separated from the day-to-day activities of what our clients are doing with our market making and brokerage activities.

Operator

Roger Freeman with Barclays Capital has our next question. Please go ahead.

Roger Freeman - Barclays Capital

I just want to come back to the hiring, so as 100 sales folks this quarter, I wonder if you kind of break that down little bit in terms of areas, I guess we are looking on the website just looking at job positing that doesn’t have but most of them look like you are over in Asia. I am wondering is the focus mostly, I understand, numbers are in sort of the traditional business expanding that geographically or is sort of the principal piece of this may be just being done off-line? When you think about may be growing from 3 to 4,000 roughly like you mentioned a couple of months ago, how much that is sort of principal versus agency in your mind, Jon?

Jon Corzine

Roger, the 3,000 to 4,000 was aspirational when it presumes that we would take forward that full investment banking model by forgetting my remarks which will be build out over several years and it’s one of the things that will make more precise in the context of strategic plan. I don’t want anybody to mistake only think though that we’re going to just only deal with the revenue streams that we have today.

I believe, we need diversification and that’s going to have implications whether it comes in the money management area, whether it comes in the advisory area, we’re enhancing some of the activities that we are involved in today. For instance, the Washington Research Group, has about 30 people in it. This feels a very logical hold, by the way, we have a number of these in various activities around the globe but we had a research function in Japan and a research function in London for our equities and cash business and nothing in the United States where you can offer yourself with the global participant when you don’t have all of the instruments on a global basis and particularly elements in the most important or at least one of the primary market….

One of the primary markets across the globe. And we have a number of spots like that we have fill in. That said we also see some places where there are high margin opportunities to participate in serving our clients. Equity derivatives, direct market access, across our whole host of product lines and we are just getting started in a number of these areas and so we will be looking for teams.

I actually should see we are looking to build teams not hire teams. We are more interested in doing things on a one off basis and making sure we are professionals and then we can train new people in those efforts so I would expect to see additional training classes, folks who we can have committed to a culture of change with regard to compensation and how we think about things. We certainly want to leverage also experience of the quality individuals but we want to build our team as close to higher large teams just sort of tradition of the past in MF Global.

Roger Freeman - Barclays Capital

Randy, you put up interesting slide there at the end of them on a Basel standards as I guess that two questions there one do you expect the working assumption that the Basel 3 will ultimately fight MF Global and secondly as you done some of these calcs do you actually look at it tier 1 common ratio standpoint. That’s how most of the markets is this?

Randy MacDonald

Yes, because we’re in FCM the answer to question is we’re not subject to 2002 or 2003. We’re doing that to get us to apples-to-apples because, I am been in FCM makes us unique from the comparable everybody compares us as the banks. The simple answer is no we’re not subject to the things that you just mentioned. We’ll continue to, look at those things and help make comparison so that you better understand balance sheet but no we’re not, we’re not subject to those things.

Jon Corzine

I would just add now whether it’s a risk or whether it’s testimony to how we grow our business. For instance if we were designated a primary dealer, I am not speculating about whether happens or it does not happen. If it were to happen it may very well be possible that you would be designated a systemic way important. And therefore be more subject to those kinds of analysis.

Analysis by regulator around the globe than would otherwise be the case. Quite obviously if we are successful in a two or three year timeframe in building this franchise in the direction that we’ve outlined and we’ll be more specific with respect to our strategic plans that we frame for our board and for our people and how we manage our business going forward. I'll be disappointed if we aren’t systemically important within two or three years. We’re going to have to have a mind bind towards that as we build our business.

Randy MacDonald

Roger, is that instrument with the rules, we have to say for instance all we’ve principles as well as the rules are based on that. We’re quite intimate with the rules but your specific question about subject to answers not yet but not important…

Roger Freeman - Barclays Capital

I was actually getting in what Jon was saying which is if you successful, you will be so you’re probably do need to assume that.

Operator

We’ll go next to Ken Kenneth Worthington with JP Morgan. Please go ahead.

Ken Worthington - JP Morgan

Randy, on the slide for couple of usage you’ve indicated that $334 million of higher capital requirements on the customer balances in the new regulatory requirements, is it possible to splint out what is the additional capital in the client balances versus the change in regulation and given the reduction in free cash in the excess capital, at what point, do you need to take steps to may be slowdown the customer asset growth? And I guess, are you anywhere close to thinking about taking those kind of steps?

Randy MacDonald

Let me do the reverse because the reverse is easier. Listen, we want very elegant problem of more client assets. The real strong indication of what’s been accomplished over the last six months that people are moving their balances to MF Global. We welcome that elegant problem. And if the attendant capital that we have to have for that –that’s a very elegant problem for us to go the Street and raise capital. I mentioned that we’d be opportunistic in the debt market. Your specific question about the breakdown, I must say was roughly half and half, half of that are regulatory requirements, certainly the UK is very focused on firms these days. And clearly all my previous remarks I said around 8 to 10% of client balances are the capital requirements, so that’s how you do the math can use broadly, $2 billion 10% that’s 200 million that’s roughly half of what we put off on the slide.

Ken Worthington - JP Morgan

Then quick run to the next one, yield on customer balances up sequentially up year-over-year, very impressive 149 basis points, I guess that’s well above the risk-free rate, so I guess I am ultimately after what kind of risk so you are taking in terms of the active management to get there. And given that you delver, LIBOR has come down, you’ve got lot of assets, 90 days less, a lot of assets treasury and agencies and agency also come down a tremendous amount in the last four five months, you guys are kind of alluding to that mean not go up but you guys aren’t saying that’s going to plummet either so a little more flavor there would be very comforting?

Jon Corzine

International sovereign rates from Australia to Europe are actually higher. We are in lot of markets. We are seeing new markets open up, some in Hong Kong which most of you are all familiar with bank deposits, there are opportunities that you don’t limit yourself to only US short term investments.

Randy MacDonald

Ken, I don’t mean to be glib about this, but the fixed income themes in particular are really great and strong. I mean we get a lot of great ideas from those guys that we stay very liquid, obviously we have to stay within the rules of CFTC, 1.25 for the US and all the rules of method in the UK. The fact of the matter is that there are opportunities, there are things that we see. For instance I’ve mentioned on previous calls hey we’ve looked at callable agencies and said hey this s a great opportunity and you go there and capture the premium. And if we get called, that’s all right, we have the reinvestment risk, but you know what? Rates bounce right back up and we’re able to reinvest. I don’t mean to be glib, but that’s one of the arcs that the great things about having treasury associated with a really good strong fixed income team whose everyday job is to keep their ear to the track.

Operator

Chris Allen with Ticonderoga has our next question. Your line is open.

Chris Allen - Ticonderoga

In the past you guys have talked about non-comp expenses about running about 100 million obviously made some really good progress there, I mean how do we think about these expenses going forward. Is there going to be any need to build out certain areas that might cause it to rise?

Randy MacDonald

The reason I’ve, kept saying 100 mil is we do have infrastructure, I mean Brad’s announcement is key in terms of infrastructure or risk management all the controls of the firm. We’ve done a good job of building all the relation of databases. We now have to go on, and really execute on the middle way and certainly these distribution platforms whether it’s be institutional side or the retail side. We’ve done a lot of really good speed work the foundations in. I listen I mean, you’re right I mean every quarter I say, it’s going to be 100 million I feel Alison Jane has come into the call and saying got we, we did it, we did it quite short they can keeping down around 90 million.

Listen we have, we do have some investments to make, I would, I would right now I feel, so we have our business plan at the end of this quarter and really understand how we’re going to go do things. We started know directional where we headed but we flushing out all the details and until I get to that point where I have seen the plan and better understand what we’re go build and how and when I'll just keep telling you that it’s probably going to creep back up to about 100.

Jon Corzine

I want to address the other thing is that make no mistake. We’re, we’re looking to produce earnings now and we are, we are keeping a short buy on cost in the short run the whole strategic planning as you and I can emphasize enough has a lot to do with sequencing what you wanted to study don’t bike too quietly on running up cost in front of revenue growth so very mindful of that. As you know, folks have done a pretty good job of actually holding down these non-comp cost. We’re going to have to make the investments that Randy talked about but we’re going to be very, very mindful of making sure that that is in sink with growing top line revenues.

Chris Allen - Ticonderoga

Just one follow up, just with the strategic realignment that you guys have in that, can you give us any sense in terms of may be which asset class is the most important as a percentage of revenues, not a specific numbers what asset class you will be thinking about in terms of the biggest impact that will be done through the small?

Jon Corzine

Chris, if there is one concept that I have emblazoned on my forehead it is diversification. I don’t like being ill hostage to a given product line or given revenue steam i.e. commissions, interest income we want the income. We want to be able to follow our client needs but we want to generate revenues on a portfolio approach. And I’ll take a step further relative to what the market was before my 12-year time-out in this process. Assets are now priced relative to each other across asset classes in a way that, is much more dominant than it was the case in the 90s and the 80s. And clients are looking broader asset classes so while we will run product line activities fixed income equities, foreign exchange commodities, retail. It will still be based on the fact that we want a broad portfolio and I would be very disappointed if in two or three years we didn’t have a major additional functional stream of income to wean into our commission, trading and interest income flows that we have today.

Operator

(Operator Instructions) We’ll go next to Deutsche Bank, Michael Carrier. Please go ahead.

Michael Carrier - Deutsche Bank

Randy, just one quick question on the pricing side, if you look at some of the reduction that you took last quarter, you existed some of the businesses on the IDB, so is this again you are taking any consideration mix going forward, but we had a better level in terms of that net rate per contract at $0.26 you are going forward?

Randy MacDonald

Yes, so, I mean if you look at last quarter, it was fairly comparable versus a year ago that was my point is we’ve dramatically changed the character of clients and the source of that now. If I haven’t made the point clear, I want to make the point clear now that although the cleared commission rate is lower rate what carries, what comes with that though are the balances. That’s this dirty little secret on Wall Street of what you want to do, hey it’s the carry business and right now rates are low but hopefully they won’t always be low and asset gathering is a core foundation of our strategy.

Michael Carrier - Deutsche Bank

Then Jon just on the strategy, if by year end, you’re finished with the review and then, maybe there’s some more hiring and there might be multi-stages taking that into consideration but, by mid year, next year, do you feel like from a strategic standpoint, a lot of hiring, could be in place. And then I guess, how do you guys balance, because it seems like it’s great to be in a position to be able to determine what your business mix is going to be as, the environment and the regulatory environment changes. Just in the quarter, given that uptake, in required regulatory capital, how do you balance that going forward that, it’s just going to couldn’t necessarily be increased capital requirement, as the regulators continue to tweak, models so anyway just timing on that and then your view on the capital side, thanks.

Jon Corzine

Randy responded to the capital issue pretty clearly that debt markets sort of sounds like QE2s around for a while and certainly intermediate rates would appear to be, going to be in a stable mode for some period of time and we will opportunistically look at that, we have capacity in that area. I expect I made that clear, this is a four to six quarter project on transformation we were two quarters into that, nothing to write on the more without on the quarterly adjusted income but its two quarters in a row and we think we have earnings potential and capacity that we’ve tried to demonstrate today. We intend to generate capital internally.

If you start generating that at 10%, 13% on your capital base we will be more than able to deal with some of these issues, they are if rationalization also of how we allocate capital out among our entities and some restructuring that is a part of the strategic planning process that is ongoing. I will leave some of the details of that to later discussions but there is some efficiency and use of capital that we also have available and I’ll stop there. It is always going to be a challenge, just because that’s the nature of business. We want to be using our capital as intensively as possible but if you are in growth mode, you’ve got to generate earnings and you’ve got make sure you have the right mix of different elements in the capital structure and we are very mindful of that and we have lots of capacity along those lines.

Randy MacDonald

I would also add that this particular quarter was more of a step function then a linear function for the increase regulatory capital. These reviews tend to be periodic, some in US are much more real estate. In other parts of the globe there are, they are more much more periodic in nature. And so, I wouldn’t interpret the increase in regulatory capital this quarter as being somewhat linear with everything else is going on the business.

Operator

Donald Fandetti with Citi has our next question. Your line is open.

Donald Fandetti - Citi

Jon, I just wanted to dig in a little bit more and clearly there is a very good long-term story here since like you’re making the right step. I just a little struggling within next sort of four to six quarters on, how you can generate GAAP EPS or just given the feds on hold you’ve got a significant amount of hires it sounds like the match books coming down a bit?

Jon Corzine

The match book is, was pretty wide contributing to earnings. I there maybe some match book opportunities outside the United States marketplace that we will examined. I feel like if you look at more normalized levels of activity on exchange rated elements or traditional commission business can be higher than where it is, it was in the first quarter of our fiscal year and has been in many of the quarters if you look back and we’re holding on to our market share and as we’ve said we’ve done somethings to be able to sustain that will have actually new people replacing some of the unplanned assets.

I feel like we’re in reasonable shape to capture increase in volume in exchange-traded elements is clear that we are growing our client balances and we are doing a reasonable job of using those appropriately. If they keep growing, we think, we will keep improving on the performance editions there. We’re taking a step-by-step approach with regard to our principle strategies group but I expect that to be more significant and its contribution so over the next two to four quarters and our business is that we have brought on line.

Again, I talk about Randy mentioned agriculture. We talked about direct market access, our equity derivatives. And we think the Washington Group, it’s got to be accretive. We’ve got a lot of good things going on. And hopefully, we’ll be able to bring additional elements that will enhance the franchise over the next few months both in people and strategic steps that we’re working on.

The volumes are as lowest they were in July and August, it’s a challenge. It was not just a challenge for MF, it’s a challenge for everyone. That’s why we were diversifying away from these FCM strategies. You know inside our projects you probably even saw us we marketed a new fund out in Taiwan got off to a great start and raised good money. We want to make sure we have the systems and the ability to manage. You’re going to see new revenue streams coming online as we work through this next year.

Operator

We’ll move to our final question Robert Rutschow with CLSA. Please go ahead.

Robert Rutschow - CLSA

Just a couple of quick numbers question, in terms of the transaction related expenses, they cleared expense and the sales commission picked up little bit after turning down, I know you talked about the overall rate per contract but is that just a function of volume or does that reflect shift in the types of trade?

Randy MacDonald

Yeah, I mean, the fact it goes from execution in order to executing and clearing, you would expect that Rob, so yes, you’re correct.

Robert Rutschow - CLSA

Other question was just in terms of you know you talked about capital, the cash balance on the balance sheet how much of that would you consider to be excess cash and then also if you have tangible book value calculation?

Randy MacDonald

Yeah, tangible book is what slide that guys (inaudible) we actually have a capital ratio there. Number 22, Rob, it’s the actual calc.

Then the answer to your question is on the cash is the slide that I went through on number 11. If you look at the column free cash. The way about brokers, SCN's brokers has excess capital. You could have all cash or no cash in a broker. The fact is that you can always generate cash in a broker. It’s really excess capital that you are worried about outside the regulated company, yes, and then what free cash do you have. That’s why I break it down the way I do want on page 11.

Jon Corzine

Okay folks. I appreciate very much everybody who is joining the call and I look forward to talking to you in three months.

Operator

Ladies and gentlemen, thank you very much for your participation in MF Global’s fiscal second quarter 2011 earnings conference call. This concludes the meeting. You may now disconnect. Have a good day.

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