MF Global CEO Discusses Q3 2011 Results - Earnings Call Transcript

Feb. 3.11 | About: MF Global (MFGLQ)

MF Global Holdings Ltd. (MF) Q3 2011 Earnings Call February 3, 2011 8:00 AM ET


Jeremy Skule – Chief Communications Officer

Jon Corzine – Chairman and CEO

Randy MacDonald – CFO


Rich Repetto – Sandler O'Neill

Michael Carrier – Deutsche Bank

Howard Chen – Credit Suisse

Ken Worthington – JP Morgan

Roger Freeman – Barclays Capital

Niamh Alexander – KBW

Patrick O'Shaughnessy – Raymond James


Good day, ladies and gentlemen and welcome to the Fiscal Third Quarter 2011 MF Global Earnings Conference Call. My name is [Brendon] 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 towards 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 proceed.

Jeremy Skule

Good morning and thank you for joining us for our fiscal third quarter 2011 earnings call. With us today are Jon Corzine, our Chairman and CEO; Randy MacDonald, our CFO and Henri Steenkamp, our CAO.

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 December 31, 2010. Any such forward-looking statements 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 of operations could differ from historical results or current expectations as more formally discussed in our SEC filings.

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

With that, I'll now turn the call over to our Chairman and CEO, Jon Corzine.

Jon Corzine

Thanks Jeremy. Good morning everyone and thank you for joining our earnings call. Today, Randy and I will update you on our third quarter results, our ongoing transitional activities and an overview of our recently Board approved strategic plans.

As we described over the past two quarterly calls, our transition primarily a FCM-broker to a more diversified broker-dealer would take four to six quarters. On this short term objective, we are solidly on track.

Comparing with the short-term transformation, we've been developing an overarching strategic plan, a plan that lays out a path over three to five years for building a full service global investment bank. Our plans have now been embedded and endorsed by our Board of Directors after review and challenged by our management team as well as by a pre-eminent outside consulting firm.

Executing our strategic plan will fundamentally reshape how we serve our existing client base, give reason for the expansion of those we serve and diversify how we generate revenues. In short, we will be resetting the charter, the character and the strategic direction of our Board.

Effective execution of our diversification plans will significantly change our growth trajectory and profitability profile. We’re setting objectives to double revenue, grow margins and deliver sustainable double digit returns on equity. I’ll say more on these plans in a moment.

First, let me review our third quarter and year-to-date results. On this slide, we’d refer you to dash -- to the dashboard on slide three which tracks many of the metrics of our transition. Randy will give the more detailed presentation on the quarterly numbers.

Let me begin by saying we take no satisfaction in our current level of revenue and earnings. While the adjusted earnings are somewhat better for the comparable nine months, they are not what we will expect as we move deeper into this transitory -- transitionary time frame.

Positively, the adjusted EBITDA has increased by nearly 25% on a quarterly comparison and 66% for the nine months. We do however believe these financial metrics reflect a relatively effective bridging in the transition from a high-cost provider of brokerage services to a more diversified, more efficient broker-dealer.

The reduction in compensation to net revenues, a four percentage points through the same quarter, compared to the same quarter a year ago, reflects our initial restructuring of compensation and a broader trend for the year as a whole for the comparable as eight percentage points lower this year. In addition, our per capita productivity and profitability are both moving in a positive direction.

We believe these trends will continue, reflecting a significant upgrading personnel and a different focus for many. In short, for the quarter and through the first nine months, our trading businesses have made up the revenues’ loss from the 12% net personnel reduction and often world market buyers.

Over the nine months, the expansion of client facilitation and principal trading activities represented roughly 20% of our total revenue. As previously noted, these activities will continue to grow over time and represent a larger share of our client activities and financial performance. They’ll also take on a greater share of balance sheet, capital and use of our risk limits.

I would point out that today our transition to the broker-dealer has been accompanied by a reduced balance sheet, 17% for the nine months and reduced leverage 24% for the nine months. Similarly, our VaR measurements have remained relatively unchanged and well below or delegated authorizations.

I would note that we have seen higher spikes in VaR usage in third quarter and I would expect within limits that pattern will continue. We expect to follow a trading philosophy, however, emphasizing high turnover.

As many of you have seen from the yesterdays Federal Reserve Bank of New York announcement, we become one of the first firms to be designated a primary dealer under their revised application policies. Obviously, this is an important positive step in our transformation to a broker-dealer.

We would expect this designation to support the building of our client base, broadening of our financing capacity, and an improvement in our understanding of the flow of funds in the global marketplace. An essential element in retooling ourselves into broker-dealer activities and ultimately in executing our long-term strategy will depend on the talent we have on our desk.

To this point, we are seeing and hiring a number of high-performance professionals. As recently announced Jon Bass joined the firm as global head of sales and we’ve recently hired Munir Javeri to head global trading.

This week, we are transitioning Michael Stockman into the role of Chief Risk Officer. And during the quarter, we also smoothly integrated Washington Research Group into our equity operation, and we are already seeing the benefits of our partnership. More personnel adjustments are likely in the period ahead as the market for high-performance talent is fluent.

Now, let me turn to an overview of our strategic plan, our strategy recognizing the extraordinary shifts now occurring in the global macroeconomic structure and recognizing the evolving in significant retooling of regulatory regimes across the globe. Our plans also anticipate the probable growth in the global economy even if it comes with two speeds we’re merging versus advanced economies.

Slide four details our high level outline of our strategy. By transitioning to our broker-dealer model, we have already began the diversify revenue and ship the way from high dependency on market volume and the level of interest rates. As we move toward in investment banking model, we believe further diversification will create greater potential for sustainable double-digit returns for shareholders while deepening our reason to be with our clients.

Within our strategic plan, there are five distinct pillars which we see as our best opportunities to grow our client services and deliver returns to shareholders. Inherently, these activities shift our priorities from a product-driven organization to a client-focused firm, positioning us to complete -- compete in global capital markets particularly among under service the mid market corporate and financial participants.

Each of these pillars will incorporate our expertise and commodities and maximizes our longstanding leadership and the exchange greater derivatives. One, we remain committed to our core broker execution business while we seek to make it more efficient and more aligned with client needs. These activities are low users of capital.

We will continue to right size aspects of these activities if there are low margin providing low little bottom line contribution. Two, we will increase revenue by expanding our broker-dealer activities in building a measured-risk taking culture. As noted, these activities have already contributed to our performance over the last nine months and we expect this contribution to grow.

These activities should be higher margin but more capital intensive. Our institutional capital markets business will have house or core FCM and existing product lines inclusive of principle trading structured products and eventually advisory and underwriting services.

Three, we will integrate our retail offering to deliver the full benefits of our global firm. We will apply technology to improve operating leverage and profitability. Few firms have both our geographic reach and substantial product offering, certainly not among the aspiring retail focused clients.

These lot of strengths or point of differentiation that will bring great opportunities to our clients across the global, particularly as we present them with a unified brand and platform. Our client based will include high network family self directed individuals and other general brokerage clients.

Four, we will align our business to capitalize on our transaction services infrastructure on a fee basis. A key piece of this effort will be establishing a client services offering and developing a specialized sales effort across regions to deliver an integrated offering. This service pillar will be responsible for building our direct market access and white label clearing activities.

And finally, we will leverage our existing strengths in commodities and exchange activities to expand in the asset management. This move will further diversify our business into fee-based revenue as we establish a stronger presence within the commodity trading advisor arena and eventually into broader advisory services. Over time, we intend to use this platform to develop a family of alternative funds.

Slide five details how we will align our organizational structure to support our transformation and meet the full range of our client’s needs. Our business model will center around four main elements, institutional capital markets, retail services, transaction services and asset management. Practically, we will expand some areas of our businesses as outlined that currently exist. We will retool others and build or buy businesses to round out or improve our offering.

In creating our strategic plan, we gained a solid understanding of where we can increase the value we deliver to clients. Our strongest opportunities that into three different areas are shown on slide six, markets where there are pockets of competitive opportunity, areas where the market is expanding and businesses where there is substantial potential to meet the needs of clients.

Of course, our plan will require investing in our business as long as that is done on a measured basis that does not unduly hamper the internal generation of capital. We expect to grow profitability as we execute our plan.

Obviously, we'll be vigilant and opportunistic with regard to capital market transactions that will strengthen our capacity and supplement our ability to execute our plans. Randy will give you additional comments on these issues.

In closing, I firmly believe we have constructed an attractive business plan that will yield substantial benefits for our clients, shareholders and employees. Without question, our strategy is ambitious but in my view and in my experience, it is absolutely doable.

Reflecting my own confidence that we will meet or exceed our 2015 goals, I have agreed with our Board to extend my contract three additional years starting in April. Today, at least I’m excited about our future.

With that, I will turn things over to Randy and then come back to question.

Randy MacDonald

That's great, Jon. Welcome back for another three years. As you just heard, Jon has been quite articulated that our strategy in direction. As a result of how we organize ourselves and operate under this new strategy, you’ll see much of the initial impact to this transformation beginning in the March quarter.

However, because we knew the general direction of our new strategy before we had developed its finer points, we began some baseline changes over the last three quarters. For instance, we’ve been focused on three things. One, changing the mix of business, so we’re more diversified. Two, linking pay to performance in a scalable infrastructure.

As we move into the implementation phases of our strategy, our commitment to earnings will be paramount. However, we may incur short-term expenses to ensure that the right platform and people are in place for us to achieve our vision.

With this earnings call, another window opens for us to access the capital markets. As we have done each quarter, we will evaluate these capital market opportunities to optimize our capital structure as well as to support the long-term growth of the business.

Our revolving credit facility is meant to be a liquidity pool and not a component of our long-term capital structure. Because, we remain committed to doing what is in the best long-term interest with our shareholders, we are sensitive to the cost for capital structure including any dilution to earnings. However, given the world class nature of our revolving credit facility, any refinancing could mean higher costs.

So, let’s move on to our performance of this quarter and let’s start with EPS on slide seven. On slide seven, we start with the GAAP loss of $0.06, which was a loss of $0.18 for the same quarter last year. Then we had two recurring adjustments. Number one, assuming dilution for conversion of our convertible debt and preferred instruments, we add back $0.06 for their anti-diluted effect on a loss or said in another way, our starting point is breakeven.

In each quarter, we also add back severance, which this quarter was equal to $0.02. The third item this quarter was a non-recurring item. We have a preliminary settlement of the class action lawsuit that which our obligation is $2.5 million or penny per share. It was related to the unauthorized trading incident of February, 2008.

As a result of this settlement, the only remaining financial issue will be the resolution of MF Global’s claim on our fidelity bond coverage for over $140 million plus interest from the date of claim. So the net of those three items gets us to $0.03 of adjusted EPS, which compares to a penny for the same quarter last year.

However, there is one other aberrant item this quarter worth noting. Our year ago on November, we had an exchange offer of the IPO auctions for our RSUs. Although, the exchange was done on the basis of fair value, for accounting purposes the deferred tax asset was reported at the IPO share price of $30 and after the exchange remained recorded at this price.

This is the first of three anniversary dates for these newly exchanged RSUs vesting, and as the price at vesting was well below the originally recorded fair value of the IPO, there was $0.02 of the EPS write-down of such deferred tax assets. So adding this back would get us to $0.05 per share.

Let’s start our detailed discussion of results with our net revenues on slide eight. On slide eight, at row 10, total net revenues in column A were 247 million. These are down about 4 million from a year ago. But they are up about 6 million from the September quarter.

And column B presents our commission revenues of 121 million. Our volumes, which are in row 11, were 427 million contracts which were flat from the same quarter last year. And this compares unfavorably to a 9% increase in exchange composite volume.

MF’s flat volume performance is mainly attributable to head count reductions. On a sequential quarter basis, volumes were down less than 1% which is very similar to exchange composite volumes. So, after the initial reduction in force last summer in the loss of market share, we have recovered and have regained our momentum to move more in tandem with the overall market.

The row 13, the yield in our commission base businesses decreased $0.05 from the same quarter last year but was up $0.02 from the September quarter. So year-over-year, even though our volume was flat, there was a major mix shift towards cleared volume which is lower yielding and broader blended rate down.

This dropping yield from last year reflects progress and restructuring away from high rate for contract but low margin business. The $0.10 increased from the September quarter is a slight change in mix of business, away from professional traders and is within the expected (inaudible) change.

In column C, our principle transactions and related interest, these our revenues are in from spreads which includes fixed income energy metals and foreign exchange products as well as the stock borrow loan business and newly formed Principle Strategies Group.

Net revenues from these businesses totaled 67 million, up 12% from 60 million last year. And this is also up about 2 million from the September quarter. The expansion of our Principal Trading’s activities in the last year has helped to offset declines in our commodity’s fixed income and foreign exchange businesses.

This is part of a concerted effort for its capital, towards higher yielding parts of our business. In doing so, you see in row 14, our average balances for the repo and stock for our loan book were reduced by $14 billion over the past year and $3 billion from the September quarter as the incremental returns in this year, it remained relatively low.

In row four, you can see the shit of revenue from interest to principal transactions. The diversity of revenue from our fixed income business has evolved over the past year and will continue to do so. As we take part in Federal auctions and expanded Principal Trading into additional products and transaction types, we expect our revenue are no longer be principally derived from the wholesale financing business.

Lastly, we have column D, our net interest margin. In row 12, the average assets are 15 billion, which is 1 billion higher involved the same quarter last year and from the September quarter. In the row below this, row 13 is the net interest income yield of a 132 basis points. This is five basis points higher than last year that stayed on 17 basis points from the September quarter.

The drop in basis points from the September quarter is because the callable agency portfolio were able to take advantage of in prior quarters has narrowed significantly. As the portfolio has rolled off or being called, we’ve had to seek alternative investments but with lower yields. This is been partially offset for higher yields in the Asian markets.

We have maintained our laddered approach and maturities consistent with prior quarters by extending approximately 9 billion or 57% of our average balances into longer dated maturities compared to 53% last year. To take advantage, I was keeping yield curve, the average maturity of the expanded portion to 17 months compared with 13 months one year ago.

A given consensus views the rates are not expected to rise than the next few quarters. We will likely not expand our portfolio beyond this. So the blended portfolio, 15 billion has an average duration of 10 months, which is up from seven months last year.

Now, let’s move on to some other key financial metrics on slide nine. Starting at the top of slide nine, with the top left margin, we have two columns. And the first column shows the actual savings for the first nine months of fiscal year ‘11. And as you can see, we’ve already realized costs savings of 62 million, which exceeds the annualize savings, estimated annualize savings for the lower end of the estimated next column.

The chart on the upper right tells us of the year-to-date compensation, the net revenue ratio is down from the same period last year by eight percentage points. So given that, the year-to-date revenues were flat year-over-year. You can see the benefits from the changes that we’ve implemented and how we have been able to better manage compensation.

That being said, although we’re able to manage the ratio so far this year, we continue to hire additional key people and there are people we want to retain. While our goals this year of comp ratio in the mid to low 50s over the next few quarters lower net revenues and summary placement hirers may put pressure on this ratio in the short run.

Moving to the bottom left of the chart, you see that our year-to-date non-compensation costs on an adjusted basis were flat and remain in the expected range at mid 90s to 100 million per quarter. The quarter on an adjusted basis, non-comp expenses were up 2 million. Occupancy and equipment moved higher as we incurred relocation costs and additional rent expense associated with previously leased office space.

Professional fees were up due to higher consulting fees. These increases were partially offset by lower depreciation and amortization expense. So we expect non-compensation to be around a 100 million per quarter for the foreseeable future.

Now, turning to the chart on the bottom right, you see the benefits from our focus on higher margin activities in a more efficient cost structure. EBITDA is calculated by adding back following non-cash items to earnings before tax. Amortization, depreciation, stock compensation and of course interest expense. This is then adjusted for severance and the class action settlement amount that gets us to the adjusted EBITDA.

Year-to-date, adjusted EBITDA increased 66% to a 138 million in 2011, which is up from 84 million for the same period last year. Increased client facilitation, principal trading and control of our expenses have allowed us to start generating a better return for our shareholders.

Let’s now look at the specifics on our balance sheet leverage on slide 10. This slide shows the calculation of adjusted leverage ratio for the company. The first column is how we have displayed our balance sheet to you on the previous calls. The first row, our client balances, whose investment is mandated by CFTC and other regulatory rules plus our corporate funds.

The second row are the balances related to the fixed income in stock borrow loan book, which are liquid and short duration. The next two rows of receivables are non-interest earning assets are self-explanatory. In the middle column and looking at the bottom of the page, the raw calculation of gross leverage is 28 times. But this is magnified by a matchbook, which grosses up our balance sheet with very liquid low risk assets.

So we calculated 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 under Basel. This is the majority of our repo book. Calculated in this manner, MF Global leverage is five parts, which is consistent with how we view our balance sheet and comparable to the best capitalized banks in our industry.

Now, I want to share with you some color, I want to spent some of my time on this past quarter and that is working on reorganization of the global retail business on slide 11. This slide illustrates the breadth and depth of the geographic reach of our retail business and the products offered.

We estimate our business today comprises 60% from the U.K., Europe and Asia with the other 40% from North America. We see Asia Pacific as a very exciting growth region for our business as GDP growth, savings rates and trading mentality creates significant opportunity for our product set.

Growth in North America will come from the eventual introduction of new products such as FX and potentially CFDs or binaries as they get approved by regulators. We see growth in Europe as an expansion of our general brokerage business to new markets and customer segments.

Let’s look at the opportunities we see in our strategy moving forward on slide 12. We believe we have a very compelling starting point for retail business, for they are measured by customer served, products offered and as we just discussed geographic footprint. We have a very exciting current business space. We already have significant market connectivity or the pipes in place that would take our competitors’ years and significant investments to duplicate.

Given our existing scale of our operations, we can afford reinvestment technology and infrastructure which will translate until leveragable growth over time. The revenue opportunity is significant. We see limited competition for our global strategy, given the investment takes to duplicate our footprint, pipes and product revenue.

We also believe there is a growing market for the products and services we offered to our clients, significant investable assets are outside North America. Online account growth continues to grow rapidly. Europe, Middle East and Asia are in the early innings with the online brokerage models.

We see opportunity in certain client segments which match up well with our capabilities such as self-directed investors with less than a $1 million investable assets and professional traders.

Moving to the far right side of the slide, we realize continued growth in margin expansion. We are intensifying our focus on our execution priorities. We are moving to a customer-centric model from a product-driven organization. And we’re in the process of moving to a single brand approach to maximize our marketing spend.

We would be relentless about our focus on increasing operating leverage whether that’s constructing and offering a multi-asset trading platform when valid approach to our clients, being smart to be at our pricing disciplines, both creating (inaudible) processing for clients.

And key benefit to our unify global approach will be to quickly translate and replicate thus practices around the organization for the benefit of our customer segments. Also identify opportunities to under -- to retire underperforming businesses and reallocate our capital to higher growth opportunities. So I'm very encouraged by the opportunity exists and our ability to capture them.

So with that I’ll turn the call over to the operator so we can take questions.

Question-and-Answer Session


Thank you (Operator Instructions) we’ll take our first question from Rich Repetto with Sandler O'Neill.

Rich Repetto – Sandler O'Neill

Yeah, yeah good morning. First, congrats Jon on the extension of your contract.

Jon Corzine

Thanks Rich.

Rich Repetto – Sandler O'Neill

Okay, I guess my…

Jon Corzine


Rich Repetto – Sandler O'Neill

I guess the question, there is an -- in your earlier slide on the new businesses, about asset management shows, probably the biggest incremental contribution and the highest margins coming from asset management. And then there is an article, I'm sure you saw this morning about the Wall Street Journal reportingly. You’re closed to reporting an acquisition.

I'm just trying to see, can you give us more color and you’re spending a lot of time looking at properties and the space, could we expect to see something soon, because it is probably the biggest spot that isn’t already there in the plan?

Jon Corzine

Rich, I think you understand I couldn’t respond it even if I wanted to. So, I think I’ll leave it there. On the other hand, let me just say about our other businesses. I think Randy just went through very clearly what we are thinking about in the retail space and think it can be -- they’re very major contributor to our firm fee based and very likely to be less volatile than certain other areas that people have tended to focus on including in that article.

Yeah, we will be in the risk intermediation business in the principal risk taking and retail -- not retail, but institutional capital markets businesses that we will commit capital. But those are very high margin businesses, traditionally through a longer period of time.

So I am very optimistic that our mix of businesses will come to a combination that will cushion us through various different market cycles. And yeah, the investment management piece would be an important ingredient to help in that cushioning, so that when one instrument in the orchestra is working as well as we like to see, such as we’re seeing right now with regard to low interest rate levels and occasionally low volume, we will have other things that I think we’ll fill that space.

Rich Repetto – Sandler O'Neill

Okay. Thank you. I didn’t hear the instruction. Do you get a followup or we just taking one question?

Jon Corzine

Well, you get one followup, Rich.

Rich Repetto – Sandler O'Neill

And the followup right on the retail question, I guess, Randy after starting in and we certainly aware of your background, solid background. But you mentioned the size of multi asset or multi currency platform as far as I am aware there isn’t any of that as far as the technology platform, there isn’t any out there and I’m just trying to see if you put any parameters on how much this is going to cost and what timeframe it will take and is that the guts of the strategy, don’t -- don’t you need this to really move forward?

Jon Corzine

There are two things that are the guts of the strategy, actually three, the market opportunities may be the third most obvious. In terms of the ability to execute, I would emphasize the tightening that we have already. So, in thinking about an institutional business that already has all the connectivity, whether it’s gathering quotes or security masters or settlement systems. We have a huge leg up on anyone there because as a retail business we would have to build all that and the great advantage that the retail segment has, is it’s going to be able to leverage all of that great institutional infrastructure.

With regard to your, your other question about how we face our clients, that is something that obviously I'm pretty familiar with. And it’s a combination of build, rent and buy and it’s -- it’s not that there is a silver bullet it is. It is how we go about delivering that and, I'm -- I'm pretty -- pretty bullish on that, I'm pretty confident that we can get that done. And, it won’t happen over night but it will take a number of quarters but we’ve already made some strides in that area. We started already.

The key thing Rich is, we started really almost three years ago, building relational databases and in terms of expansion and flexibility of systems. That’s a key cornerstone for being successful there right. That’s how I’d answer that question.

Rich Repetto – Sandler O'Neill

Okay. Thank you very much for the feedback.


We’ll take our next question from Michael Carrier with Deutsche Bank.

Michael Carrier – Deutsche Bank

Thanks guys. The first, I think on slide four and then on slide five, you guys gave the industry strategic plan in the outlook. I guess just trying to figure out going and this is more from a timing standpoint because you guys have indicated there is going to be some expense or investment in the near-term and then you’ll see you have the pickup in revenues.

I guess from that the investment period like how much of that’s gone, how much more you have to go and particularly looking at like those near-term target because the long-term like the three to five years we can deal with that later but just on the near-term side like what is already been put in place versus what else we had to do.

Jon Corzine

Michael, lot has been important place to this point. We have invested significantly to be prepared to be a primary viewer, that is tremendous amount of work and infrastructure that had to be built. I think indicative that we have put ourselves into position to be designated primary dealer.

There are other initiatives with regard to our equity activities that we have invested in the most obvious piece of the addition of the Washington Research Group. We have been reshaping some of that element this year, but there is a tremendous amount of investment already put in place. We work to build our equity derivatives, platform and capacity higher number of outstanding individuals.

We think there are more investments in all of these areas that will make us even stronger but I made very clear and our previous conversations and intend that we produced as we invest made that clear in the comments. We intend to generate internal -- internally generated capital to finance or growth and we don’t want to go faster than we have the capacity to do that.

I do -- did recognize nine months ago that there would be a transitionary period that we needed to restructure. There was something that truly needed to be addressed and they would be costly and would be a one-time nature. We have worked very hard to be focused on making sure that we stayed in framework of what we’re producing now on earnings.

And as I have said repeatedly four to six quarters, I think that transitionary element comes to closure and we begin to build that internally generated capital that we will invest back in the business. We will be opportunistic as I think both Randy and I talked about with respect to taking capital that we see places where that would be accretive for shareholders. But I believe in the philosophy that we are generating internal capital to invest, not just betting on the comp so to speak with regard to earnings.

Michael Carrier – Deutsche Bank

Okay. That’s helpful. Look like this one opportunity and then Randy, I think you mentioned just at the beginning, in terms of optimizing the capital structure. So if you just look at where your position currently and ideal scenario are directionally what would be -- I don’t know the structure that you had been more comfortable with or given the build out and given the long-term plans, where you’d want that to be?

Randy MacDonald

Well, I think we’ve always in our every quarter since I’ve been here almost -- almost three years. There are certain principals to good capital management. And I think all I'm saying is, with an opening window with -- with this earnings call, it’s another quarter where we’re looking to optimize that capital structure. I don’t know what the markets will yield.

But, every quarter we have just about every quarter, I think almost every quarter, we have done something in our capital structure. And I was just emphasizing that the revolving credit facility is a great piece of paper but it is really not meant to be part of our long-term capital structure. And so, every quarter we’ve been working on that and there is -- I think there is another opportunity there. But, that is a liquidity facility and we need to treat it as -- as the asset it is, but it’s a liquidity facility.

Michael Carrier – Deutsche Bank

Okay. That makes sense. Thanks guys.


Our next question comes from Howard Chen with Credit Suisse.

Howard Chen – Credit Suisse

Hi. Good morning, Jon and Randy.

Jon Corzine

Good morning Howard.

Howard Chen – Credit Suisse

I know you’re working to diversify away from being market and rate dependent but, I'm just curious, what type of market and rate assumptions are you using to get to that $200 million, $300 million pre-tax income range? I'm just trying to get a sense of how much you think is within your control or versus what’s more market and macro dependent in the broadband?

Jon Corzine

Howard, repeatedly I have said that we have to be successful in a time -- in times whether interest rates are flat, volumes are weak. We -- the whole premise of this strategy is to get into the diversification of revenues, where we’re not dependent on any one aspect of how we’re generating revenues.

And we -- our task becomes easier if there is a rise in the short-term yield curve. It will do a lot to bridge our transition over this period from broker to broker-dealer to investment bank. Because there is a pretty clear sensitivity to rising short-term rates into the earnings given our client balances in from funds.

But the whole plan of our exercise and strategic thinking is to make sure that’s not the only basis in which we are working on. My short-term interest rate deal is that we won’t see that kind of significant rise in the next year, do expect through our economic analysis we have a very strong economics team and also assessing how I read, what else others are predicting. You could expect reasonable positive volume considerations given that the economy looks to be strengthening and there is growth on a global basis that we have the footprint to be able to capture.

And our yield, if you will, and our earnings on our balances are not just denominated in dollars. So it is important for us to look at a global basis, we are factoring in that we will be able to integrate into that global model even more deeply than what we are today. And we do work for growth and that should be good on volumes. And it also will lead to trading opportunities that I think because we are in risk intermediary for our clients and prepare to take risk or so that there will be significant opportunities in the market. I’m quite optimistic as what I’m saying.

Howard Chen – Credit Suisse

Okay. Thanks, Jon. I appreciate that. And you are not a bank holding company so I assume it not subject to Basel III, but I’m just curious as you look to target the build out some of these trading businesses. Are you seeing any change in the landscape as the dealers, the major dealers get ready for Basel III in order risk-weighted asset inflation that they have to undergo?

Randy MacDonald

Well, there is a strategic premise that I talked about in my remarks. I think that it is almost irrefutable that there is de-leveraging and de-risking taking place that is a function of the changing regulatory environment. And sadly, there are probably fewer people committing capital to risk intermediation today than at other times.

And third, we have that growing backdrop on a global basis economy that seeking the excess capital and savings are growing. So there is a mismatch and I think there is a very real opportunity for aspirants within measured risk taking, within the evolving regulatory regime that we all build and responsibly must build it. To fill that open space and I think it provides a tremendous opportunities not just for ourselves but for some other aspirants to fill that -- that need that I think a growing economy will demand.

Howard Chen – Credit Suisse

Okay. Thanks for answering that question.


Our next question comes from Ken Worthington with JP Morgan.

Ken Worthington – JP Morgan

Hi, good morning.

Jon Corzine

Good morning Ken.

Ken Worthington – JP Morgan

First, I wanted to get a better sense of the business for the quarter. Which products and services worked particularly well this quarter and maybe which didn’t, in the past you talked about like maybe commodity is not going to cover off the ball, we heard from some of the balls bracket that fixed income is weaker, so any color there?

And then, at the back of the deck you have kind of business by geography, if you can give us a little more color like if Japan is doing well or some particular regions are doing or did well or poorly in the quarter that would be great?

Jon Corzine

We had a quarter where there was pretty good balance across our businesses. We think as I noted in my remarks, we have not dramatically increased and haven’t even substantially increased our VaR except on very short-duration basis. And, for the consequence, we’ve had relatively steady production out of our fixed income businesses. We’ve had improvement in our traditional interest rate products or execution activities. We -- we have begun to see a leaning in of revenues that are being generated from our equity businesses that we’ve invested in before I actually came here.

And then, with regard to the Washington Research Group that are out and it’s a very diversified group and our Principal Strategies’ activities have contributed. But as I made very clear, all of our principal trading is still only 20% and that’s about 50-50 among whether it’s taking place in the client, it will face businesses along with what, somewhat called proprietary trading.

It is a -- it’s been a broad mix of how we are approaching and exactly what we would like to see. I would expect that 20%. I think I’ve said this in previous calls, we’d grow to something like 30, 35. There will be times when it spikes slightly higher, slightly lower. But it is a very strong performance and frankly November, December and January have been reflective of growing earnings capacity and leverage on the franchises that we’re building.

But I -- we’ll go back to another phrase that I put into our earnings call. There is no -- we’re not satisfied. We’re just hungry to continue to grow these businesses on a measured basis and build up this business plan.

Ken Worthington – JP Morgan

Excellent. And then I’m ready for the followup. Are you dramatically reduce the size of the balance sheet. Is that getting to be about the right size for where you guys want to take the business?

Jon Corzine

Ken, let me take that one. As we grow capital that we will be able to grow this balance sheet. I think it will fluctuate pretty much around the levels we’re at today as long as the mix is what it is today. If the mix would have changed and you would have more slowly moving or lower turnover type assets on that balance sheet that I want to take the leverage down.

I mean, I could very easily have a leverage number on the balance sheet, that we have that would be tremendously risky or you could have balance sheet like ours and that’s why we try to stress the adjusted leverage numbers. And I think most people would be comfortable. We, at this point, I have said this in other quarterly calls have a clean balance sheet as a virtually no level III assets on it and I would see our leverage, probably coming down a little bit as we expand some of the things that turnover less frequently.

I could see it spiking up if it were only going to be in the kinds of assets that we now have on the mix. So it will be driven by mix more than it will be by just a lock step view of what the leverage number should be. That said, I think we were too highly leveraged when we came here on, just on an outright basis, 37, 40 to 1, just isn’t good business practices. And I think you will see us inside 30 most all of the time regardless of what the mix is.

Ken Worthington – JP Morgan

Great. Thank you very much.


We’ll move to Roger Freeman with Barclays Capital.

Roger Freeman – Barclays Capital

Hi. Good evening.

Jon Corzine

Hi, Roger.

Roger Freeman – Barclays Capital

Just want to go back to regulatory environment. I just want to understand what your working assumptions are. So are you assuming that you’re not going to be subject to Dodd-Frank broker that maybe (inaudible) derivatives because, you'll be designated a major SWOT participant. And then, on Basel III do you assume that will not apply to you, although the Fed back with Basel II had required the mono lines Goldman, Morgan, Lehman, Baird to get a Basel that even another one bank, I'm just want to understand what's in your framework right now?

Jon Corzine

I think as a primary dealer we will likely have some element of Basel requirements applying, we’re presuming that. On the other hand, we don’t think we will be designated that low probability that we would be designated to systematically significant within the context of the Dodd-Frank framework.

There is plenty of the uncertainty that all of us must deal with as we go forward but it’s -- I think an environment where we clearly will avoid being a depository -- deposit taking institution anytime soon. And I think that actually was the purposes of Velcro initiative. And I think it will be reflected by how we are able to manage our balance sheet. All that said the kind of question that can ask with regard to how we take on leverage. How we manage our liquidity, how we manage risk, how we look at turnover of assets, how we manage our business and we don’t feel any less responsible for what it is our requirement.

And I think we are trying to demonstrate that to the marketplace, while we’ve made very clear that we are interested in offering risk intermediation services to our clients. We have done that on a very measured basis and intent to continue to do that. But that doesn’t mean that would be subject to all of the same rules that some of the Bulge Bracket firms like we subject to.

Randy MacDonald

And Roger, if I could…

Roger Freeman – Barclays Capital


Randy MacDonald

…give you an example.

Roger Freeman – Barclays Capital


Randy MacDonald

Actually, the FSA because of our significance, in terms of being an intermediary, we’re concerned of a high impact firm, which is a good thing, it’s recognition of just our market share. And so the FSA requires us to follow the principles of Basel in the U.K. and we do that.

And not coincidentally to Jon’s point, based on the business that we do, the way we deal with our capital is exactly the way Basel calculates it. It is based on how clean the balance sheet is or liquidity profile. So I think everything Jon said is evidenced by just how we operate under those Basel principles in the U.K.

Roger Freeman – Barclays Capital

Okay. That’s helpful. Thanks. And I guess my followup separately just around the continued talent build out, can you help us just think about the trajectory embedded, it looks like, I guess, you add there is 40 people came on the quarter, but I think about 17 or so that was the Washington Research. So it’s some hiring not a lot, but you’ve also talked in the past about and over some longer period of time going from like 3000 to 4000 people and then how does -- where does this ramp up do we see….

Randy MacDonald

Let me be precise about this, since I joined, 791 people have either left on their own or we have restructured and repositioned. And we have 429 people who have joined firm and includes the Washington Research Group. It includes a training class, probably between Europe and the United States, almost 40 people folks who are instrumental in my view and how we will change the culture over a period of time.

You are seeing the tip of the iceberg with some of the major hirers, but Jon Bass has already been able to bring exceptionally talented individuals to fill in some of the holes we have. We are adding people in those areas of detail where we want to build out this niche capital market activity.

Our whole Principal Strategies Group is essentially a startup. There is a lot going on with people. We did slowdown in the fourth quarter because we had no interest in paying bonuses….

Roger Freeman – Barclays Capital


Randy MacDonald

…for folks who have worked for another firm for a year and we will be very active. And one of the things that we think is quite attractive is, is that on a personnel front is not only what is happening in some of the larger firms that are adjusting to the regulatory regime. But the model that in many people have written about it, the model of strictly brokerage is coming to question.

And so that there are lot of folks that are reevaluating whether that is -- will be a successful model and so there are good people that are available under that premise as well. So we are seeing talented individuals. By the way just hiring people doesn’t mean that there is going to be successful and that there was successful at other prices have to build the culture we’re working on those aspects. They don’t show up in earnings calls as much as they do on a day-to-day activities of how we interfaced with our clients. And we think we’re making real progress along those lines.

Roger Freeman – Barclays Capital

Right. Okay. Thanks.


We’ll take our next question from Niamh Alexander with KBW.

Niamh Alexander – KBW

Hi. Good morning. Thanks for taking my questions.

Jon Corzine

Hi, Niamh.

Niamh Alexander – KBW

Hi. Thanks for -- and the color on page five of the presentation just on how you think about streamlining the business going forward, this is really helpful. And but I know that we talked before, how do you think about, when you look outside the firm, I guess still now focused on being primarily natural resources and rates, which is kind of the core strength of the former FCM part of the business or should we think about kind of really broadening out to different (inaudible)

Jon Corzine

As I tried to make clear in my remarks, we have two really -- three really strong strengths. We have a global reach that is quite unusual for firm of our size. We have a very deep franchise with respect to a number of commodity activities. And we as Randy says, we’ve got the pipes, the institutional connecting links to an incredible reach of exchanges.

And we are going to build half of our strengths in this strategy that will be things that are adjacent to those elements that we want to emphasize. But, we certainly believe that commodity markets look like they are going to provide risk and remediation opportunities in the years ahead. Tremendous flows on a global basis between different parts of the world and we’re connected to those and we know something about those markets and we like that and it’s increasingly a very important asset class for institutional and even retail investors now with GTS and other things.

So, we think we’re positioned there. We think we’re positioned for futures and options, exchange traded derivatives. And, some of the instruments are moving in that direction. We want to capture that opportunity. And, by separating out in a simplistic basis our institutional and our retail clients, we think we can deliver using the same expertise tremendous value for our clients. Our capital committing activities will be inside the broker-dealer aspects to whether it's servicing the retail clients or the transactional services.

But, the -- we are making sure that we have focused on the strengths that we have. I will say, even apart from our traditional and I mentioned the three commodities, exchange activities and our global footprint, we have developed a tremendously high quality effort in our fixed income and most particularly in our government securities business.

I’ve spent a lifetime in this and I feel like we have developed an expertise that is consistent with a very best in class.

Niamh Alexander – KBW

This is helpful. Thank you, Jon. And I guess on the fixed income and the government side, that lead me into your primary dealers so got my congratulations and I guess it’s been a while with the government kind of changed the goal post, we understand the things went along. But, just in terms of the next six to nine months, can you tell me what do you do with that now, how do you lever that to kind of bring in business outside of just government to the desks that you’re building?

Jon Corzine

Well, the first issue is to introduce ourselves to people who had made that a threshold issue about how they deal with their intermediary projects. And across the globe, that’s really quite substantial. And so, we have a major responsibility to broaden out our client interface given that we now have the ability to get an appointment that we would not have otherwise had. And when we do that, we should be seeking to try to talk about more than just government securities. Certainly, our financing elements of the firm will be on that agenda when we get those calls on our -- on our -- at January.

And so, I think there is just a lot of work for us to begin that relationship building with a lot of people that we were held back from. With our existing clients, I think it gives us a chance to have another conversation about our broader product reach. We’ve been working on that independent of whether we were a primary dealer. But, I think it is -- it is not defining in how relationships we’re worked but it is very integral in having an opportunity to present your credentials. And then you have to execute, you have to execute because, when people see the term they expect you to be good and I think then -- then it’s your responsibility to deliver.

Niamh Alexander – KBW

Okay. Thanks so much. I appreciate the color.


We’ll take our next question from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy – Raymond James

Hey, good morning. I know we’re running a little bit long, so I’ll just keep it to one question. There has been some discussions about the CTC perhaps and limiting the investment vehicles that you can put customer segregated funds. And I was curious, where you think that discussion at the CTC level is headed and what are the potential impact on MF Global might be?

Jon Corzine

Well the draft rules on 125 would be what we refined attractive. We have been very, very proactive in our speaking to that set draft rules. I don’t want to speculate on how that will compel. They’re looking for comments and we expect to be very proactive in that process as we go through.

So, I -- we have barely frequent dialogue and it is encouraged by the CFTC with regard to all of these regulatory structures 125 that happens to be one or more important for our FCM business. All the more reason now to be in a position where you have a diversified revenue base and you’re approaching your clients on some basis other than just being in FCM.

I think that the strategic risk taken when you are a monoline is just a very, very high risk even though it may look like a low market exposure or a low even credit exposure business. You’re subject the strategic changes that some level that you don’t control. And, the time thing that [121 in 5] might bring without other tools in the (inaudible) could be very, very hard hitting lines strictly in FCM.

Patrick O'Shaughnessy – Raymond James

Gotcha. So, just a closer loop on that, if 125 does get enforces as currently framed, should have a material impact on your yield?

Jon Corzine

We -- we think that we’re developing responses if that would occur and it will certainly make more difficult in what we do. But, we don’t think that it’s material and quite frankly, we’re expecting some modification in rule 125. But, one other reasons that we’d been diversifying and one other reasons that we’re thinking of that contingency planning, is so that we would be prepared for these kinds of changes if they were to occur.

Patrick O'Shaughnessy – Raymond James

All right. Thank you very much.


And we have no further questions in our queue. I would like to turn the call back over to Mr. Jon Corzine, for any additional or closing remarks.

Jon Corzine

All right. Just want to thank everybody for staying on for a long call and we look forward to working closely with all of you in the weeks or months and years at.


Ladies and gentlemen, thank you very for your participation in MF Global's Fiscal Third Quarter 2011 Earnings Conference Call. This concludes the meeting. You may now disconnect. Have a good day.

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