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Executives

Jeremy Skule – Chief Communications Officer

Jon Corzine – Chairman and CEO

Henri Steenkamp – Controller, Chief Financial and Accounting Officer

Analysts

Chris Allen – Evercore Partners

Richard Repetto – Sandler O’Neill & Partners

Michael Carrier – Deutsche Bank Securities, Inc.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Roger Freeman – Barclays Capital, Inc.

Howard Chen – Credit Suisse

Kenneth Worthington – JPMorgan Securities

MF Global Holdings Ltd. (MF) F1Q 2012 Earnings Call July 28, 2011 7:30 AM ET

Operator

Good day ladies and gentlemen and welcome to the MF Global’s First Fiscal Quarter 2012 Earnings Conference Call. My name is John 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.

I would now like to 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 our call today. With us today are Jon Corzine, Chairman and CEO and Henri Steenkamp 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 June 30, 2011. Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in our SEC filings. Therefore, our future results of operations could differ from historical results or current expectations as more formally discussed in our SEC filings.

The company does not take 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 or in our SEC filings.

With that I’ll now turn the call over to Jon Corzine.

Jon Corzine

Good morning, everybody, thank you all for joining our fiscal first quarter call. This morning Henri Steenkamp, our CFO, and I will update you on our financial progress in the quarter, as well post you on continuing build out of our strategic plan. Quarter’s results is summarized on slide three in your packet, reflect the positive outcome of the reshaping of our business and continuing evolution as a broker dealer.

In summary, our firm delivered our highest quarterly revenues and GAAP earnings in nearly three years. These results were delivered, as you know, in a challenging environment with respect to volumes, volatility, interest rates, and pricing. Our results benefited from strong contributions from client facilitation and principal trading was solid if not an exciting contribution from our brokerage FCM business. Structured equity, metals trading and debt finance activities was away.

Our financial results were also achieved while returning compensation costs to a trajectory consistent with our long-term 50% compensation to net revenue objective. While culturally and in practice our compensation structure continues to evolve, we’ve made substantial progress in aligning the interest of our employees with shareholders. We anticipate further progress in this area over the longer-term with broadening application pay for performing system.

Slide four, gives a visual presentation of the changing mix of our business. You will note the growing the contribution of trading over the past four quarters. This perspective reinforces our strategic view that diversifying in the client dealing and principal trading works to reduce dependence on a single line of business and allowed us to grow revenues even in a difficult environment. We obviously understand that trading carries attended risks, but it was also subject to diversification and focused risk management.

As I often repeated, I believe our business transition would be roughly a four to six quarter process. As shown on slide five, we are on track to meet that timetable and we will be aggressive in our actions over the next few months in closing out our core restructuring efforts. To that end, we are working to reframe our profile and our capital markets units. Besides reallocating resources within those businesses, geographically and functionally, we’re right sizing and refocusing our client activities towards underserved middle markets, natural resource and commodity-oriented clients.

In each of our product lines, we are upgrading and broadening our trading and sales capacity. In all of our capital markets activities, we have sought to expand client facilitation services. We’ve been particularly active building up our mortgage and credit related business including the early steps necessary to develop an underwriting capacity.

Just two days ago, we announced the addition of key leadership personnel in these product lines. New clients and deeper penetration with existing clients have begun to drive new capital market opportunities and exposures as reflected in growing trading activity and volumes. We continue to see deleveraging and derisking of our larger competitors, which opens opportunities for us to fill a growing risk intermediation void among investing clients.

We have up to this point evolved our business while decreasing leverage and holding risk has measured by VAR as relatively consistent levels, roughly on average between $3 million and $5 million. And while we continue to emphasize short duration risk and a high turnover philosophy, I would expect some growth in both the balance sheet and VAR in quarters ahead, if we are to serve our clients effectively, expand their number and grow revenues.

To this point, I focused most of my comments on our newly formed Capital Markets Group. But let me be clear, we’ve also been hard at work strengthening our Retail and Prime Services groups. Both groups are charged with building less VAR revenue streams that lever off of our historical FCM Brokerage Franchise. And while it is a difficult and uncertain period, especially with respect to regulatory framework, together these groups drove our market share higher in listed derivative products as our client volumes on exchanges increased 10% quarter-over-quarter.

In addition, client balances trended higher 20% year-over-year. These indicators, which we see resulting from our strategic reorganization in targeted client and functional focus are building an attractive call on future revenues for FCM as market and interest rate conditions normalize.

Our retail group has and will continue to benefit from our efforts to integrate globally all of our product operational and branding initiatives. Some of this integration is most visible in our newly initiated global media campaign. While our integration is a work in progress, we are experiencing positive recognition in response from our clients and expect growing market share and financial contribution from these investments.

Finally, we continue to evaluate both organic and strategic initiatives that can accelerate our transformation and financial progress. Taking in an organic initiatives will, however, be done in the context of earnings growth. Earnings must be a precedent condition for incremental expansion; we must earn to grow. That said, our long run objective is to move from a broker dealer to an investment bank.

We seek the diversification, to that purpose we continually evaluate corporate finance options to accelerate the achievement of our strategic objective on an accretive basis. Just as we reduce strategic options we have and will be opportunistic in our capital markets sections as this morning’s announcement of a convertible offering and repurchase arrangement with regard to a 9% senior notes demonstrates. Henri will comment further.

Let me close by reiterating that our results demonstrate solid improvement in a challenging and competitive environment. We embrace the progress there is much more to do.

With that, I will turn the things over to Henri

Henri Steenkamp

Thank you, Jon and hello to everyone. As Jon mentioned, we continue to make progress in our transformation and our results in this quarter demonstrate the benefits of our diversification efforts. Our GAAP EPS of $0.05 is a $0.04 increase from last year’s Q1 of $0.01, this is our first best quarter since December 2008.

We are also very happy to be chatting with you today on July 28, having released earnings a week earlier than past years. Our goal is to continue to report on this accelerated timeframe going forward. Reporting earlier is part of our commitment to bring greater transparency to the business model. In addition, this better aligns our reporting with many of our peers and expands our time to access the capital markets for better execution.

As I mentioned last quarter, we intend to reorganize the geography of execution and clearing fees and sales commission on the income statement in the future to better reflect the presentation of a broker dealer. This will allow for easier comparison to the reporting of those in our peer group.

We will aim to move towards this presentation in the future as our transformation begins to mature. We are also preparing to report by business unit, capital markets, retail services and client services and we are on track to deliver this in the second half of the fiscal year. With that let’s take a look at our earnings performance this quarter on slide six.

GAAP net income increased substantially this quarter to approximately $8 million up from $1 million last year. GAAP EPS was $0.05 per share this quarter up from $0.01 per share last year. The adjusted results of $20 million or $0.10 per fully diluted share compared with $28 million or $0.16 per fully diluted share for the same period last year.

When comparing our results from the first fiscal quarter to the same period last year, there were three items that benefited last year and were anomalies when considering our current business. Firstly, volumes and commissions benefited greatly from unique dislocations in the market last year, specifically the flash crash.

Secondly, we took steps to improve our capital structure, which included issuing additional equity not yet reflected in the share count last year. And thirdly, MF Global was a much different firm. A year ago, we were squarely head count and cost reduction mode. Today, we are in a growth and investment phase as our strategy continues to progress.

The sum of these three items benefited last year’s first quarter by approximately $0.12. The strategic actions and investments we’ve made over the past year have produced a more diversified revenue profile and stronger earnings potential. This difference in our bottom line performance now reflects our investments in people and infrastructure to facilitate our continued expansion as well as the additional capital we have raised over the past year. The conversions of our GAAP and adjusted numbers this quarter also reflects a smaller number of adjustments and the declining size of those adjustments.

As John mentioned over the current quarter, we will continue to evaluate our businesses, global footprint and the resources we are allocating versus the returns we are generating. Therefore, we expect our next reporting period could include further restructuring charges of approximately $15 million to $30 million excluding any charges related to our capital structure.

Let’s now look at the details of our quarterly results starting with net revenues on slide seven, to begin at row nine, total net revenues in column A were $315 million again that’s our best performance since December 2008. When factoring in the fed fund rate started at December 2008 quarter 175 basis points higher than today’s rate, this quarter’s financial performance compared very favorably.

Net revs were up $25 million or 9% from a year ago and up $22 million or 8% from the sequential quarter. The increase in total net revenue this quarter reflects continued progress in our assets to diversify the revenue base by increasing client’s facilitation and principal trading activities. There was also higher revenue from certain structured equity, commodities and fixed income products partially offset by a lower rate per contract from commission-based revenues.

Column B, present our commission revenues of $110 million. Total commissions are down 23% from the same quarter last year and down 12% from the March quarter. We experienced higher volumes over both periods. Our volumes, which are in row 10 were $575 million contracts up 10% from the same quarter last year. This compares favorably to an 8% decline in the exchange compensate volume.

On a sequential quarterly basis, volumes were up 13%. This exceeded the market composite increase of 6%. The yield was $0.19 this quarter compared to $0.27 last year and $0.24 for the sequential quarter. The majority of the gain in market share is the result of additional equity, direct market access or DMA volumes. We have been expanding our DMA business around the globe and so a particular uptick in new clients in Europe this quarter.

This business is lower yielding, but is a key point of entry for our middle market plans. Year-over-year the decline in the rate of contract was also impacted by a mix shift towards cleared volume. As we have discussed in prior quarters we exited certain execution only businesses last year which historically had a higher rate for contract, but a generally lower margin. In column C, our principal transactions and related interests, these are revenues from all of our client’s facilitation and principal activities, including our structured equity financing, and our core product areas including Fixed Income, Energy, Metals and Foreign Exchange.

Net revenues from these businesses totalled $150 million, the highest level in our history, this was up 72% from $87 million last year and also up $40 million from $109 million in the sequential quarter. The increase from both periods reflect our continued focus on diversifying revenue. This quarter, we benefited from seasonal opportunities and structured equity finance products. We also saw continued trading opportunities in our commodities business as well as in European Sovereigns. Moreover, the traction we have begun to generate with current and new client is beginning to support the growth in our Capital Markets business.

As mentioned last quarter, we continue to enter into resell and repurchase transactions to maturity in U.S. government Securities and European Sovereigns. This enables us to capture arbitrage opportunities in these markets, and we continue to believe market risks to these trades is minimal as these are held to maturity. While we retain exposure to the underlying credit throughout the maturity period, the duration of trade is short-term in nature.

As part of this effort, we also continue to reshape the balance sheet away from lower margin activities. As such, our matched repo and stock borrow loan book continues to move lower from last year and is now closer to a steady state range. You can see in row 13, our average balances for the repo and stock borrow loan book were reduced by 25% over the past year and up 6% from the March quarter.

Lastly, in column D is our net interest income from client balances and associated yields. In row 11, the average assets are $15 billion, which is $2 billion higher than last year and slightly up from the March quarter. In the row below this, row 12, is the net interest income yield of 123 basis points. This is 19 basis points lower than last year and 11 basis points lower from the March quarter.

As we previously mentioned, many of our callable bonds were called during the quarter decreasing the extended portion of our portfolio. We will continue to evaluate short-term opportunity to increase yield and look to maintain our laddered approach of maturities.

At June 30, we had approximately $6 billion or 42% of our average balances invested in longer-dated maturities. This compares to 59% last year. The average maturity of the extended portion is 18 months compared with 29 months a year ago assuming no calls on that portfolio. The blended portfolio of $15 billion has an average duration of nine months down from 17 months last year, again, assuming no calls on the portfolio.

So, now that we’ve summarized revenue, what have we done with our costs? Let’s review on slide eight. The adjusted compensation to net revenue ratio reflects the continued focus on changing the internal culture to one that is centered around a pay-per-performance and one firm philosophy. This quarter, the comp ratio was 54% down from an average of 56% in fiscal 2011 and significantly lower than an average of 63% in fiscal ‘10.

The improvement to our comp ratio year-over-year is mainly due to three factors. Higher revenues, a different mix of revenues which was a shift from agency commissions towards capital markets activities and the implementation of the discretionary compensation policy linked to both the productivity of individuals and profitability of the firm overall. This latter part of this process has been facilitated by the significant turnover we have experienced over the last year.

Looking ahead and depending on revenue levels, we still anticipate that comp ratio will remain in the mid-50s in the near-term with an intermediate objective of the ratio moving below 50%. Let’s also look at non-compensation on the next slide, slide nine.

Adjusted non-comp expenses of $109.5 million remain within the updated range we provided last quarter. As you can see on the chart, our cost increases have been focused on precisely the areas we have talked about over the last several quarters. For example, Communication & Technology quarterly costs have increased on average 16% from fiscal 2011. These costs are going towards consolidation to a single front-end platform as well as investing in the company’s operating and reporting infrastructure. Occupancy & Equipment increased on average 25%. Our London and New York offices were moved to new space due to lease expirations and space constrains for our sales and trading operations.

And Professional Fees and General and Other increased on average 13% reflecting higher recruiting fees as we have restructured the organization and upgraded talent, including nearly 1,200 people out of the organization and nearly 800 in since last year. Increased legal expenses and an alignment of our marketing efforts globally and rebranding of our retail businesses. We do expect for non-compensation to stay around these levels for the foreseeable future, this is consistent with our commitment to ensure we adequately support the implementation of the strategic plan including our revenue diversification initiatives.

That said, we are also moving forward with strengthened cost control initiatives to help develop a culture that is aware and cognizant of our shareholder interest in every spending decision that is made. We don’t expect these initiatives to result in material short-term savings but over time, we believe it will continue to embed a greater expense discipline in our culture.

Now, what are our plans with our capital structure? Let’s turn to slide 10. You will see that our equity increased $16 million from March. This is internally generated at sale capital base and improves our tangible book, which now calculates to $8.12 per outstanding common share. We remain focused on generating internal capital to drive our growth strategy.

As many of you may have seen in our announcement this morning, we will continue to be opportunistic in the capital markets. Our goal in all of our capital markets actions is to strengthen our existing capital structure through achieving our four objectives, permanency and tenor of capital, diversifying sources of our capital, lowering our weighted average cost of capital and flexibility to be able to match up against evolving regulatory landscape.

In connection with these goals, we had agreed, subject to financing conditions, to repurchase 109 million of our outstanding 9% convertible senior notes from a limited number of holders in privately negotiated transaction. The redemption of these securities should save approximately $13 million annually in interest expense. And we’ll also reduce adjusted number of shares by 10.8 million shares or 5.5%. Said another way, this transaction is accretive to adjusted EPS. We will also continue to take the necessary steps to achieve our capital structure objective.

Let’s look at slide 11 to see the current state of our liquidity and how a new credit facility we entered into impacts us. The company has $2.2 billion in total capital, we have $1.6 billion of required and nearly $342 million of excess capital sitting in regulated entities. And we also have $54 million of free cash in our financial holding company.

Moving down the page, the undrawn portion of the historical revolver has been strengthened with the addition of the $300 million revolver in our U.S. broker dealer FCM. This quarter, we successfully closed on a new one-year, $300-million senior secured committed revolving credit facility for our combined U.S. broker-dealer FCM with a large syndicate of banks.

We can use this new committed credited facility for general corporate purposes, paying interest at a favorable rate of LIBOR plus 125 basis points on drawn portions. This new committed facility has enabled us to increase the total undrawn portion of all committed revolvers to $1.2 billion. We also have $1.6 billion of intra-day liquidity in non-segregated plan payables and collateral. And this adds up to total available liquidity of $3.2 billion, up significantly from March 31, 2011.

So, in summary, our transformation is beginning to take shape and our financial performance reflects these efforts.

With that I’ll now turn the call over to the operator so we can take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Chris Allen with Evercore Partners

Jon Corzine

Good morning, Chris.

Chris Allen – Evercore Partners

Good morning guys, can you hear me?

Jon Corzine

Yes we can.

Chris Allen – Evercore Partners

Sorry about that. Yes, I just wanted to delve a little bit into the principal transaction revenues, which was a solid performance, an incredibly strong performance this quarter. I mean you talked about some of the opportunities, I mean you took in for the sovereign and treasury trades, your performance in structured equities and other areas. Can you just kind of give us a flavor for what you think is, not one time, but opportunistic, but in the quarter given the environment versus what is kind of the sustainability of some of these opportunities moving forward?

Jon Corzine

Well, the fees with regard to our commodity activities, I think is very, very repetitive and expandable. Inside things that we didn’t mention we believe there is room for very significant expansion. You will note, I didn’t tick off U.S. Treasury primary dealership or the fact that we had some contribution from our mortgage business and our equity derivative. All of those things we think have tremendous expansion capacity.

The structured equity world, we believe, is very, very attractive business, very client focused, taking advantage of environmental credits, coal, energy receivables monetization efforts, which we’re spending a lot of time on. So, we think that that’s very substantial. The U.S. Treasury and sovereign activities depends on shapes of yield curves, and we want to keep it in short-duration instruments, though that obviously has different opportunities available depending on what Central Bank policies are and other general policies, economic policies of countries are.

Chris Allen – Evercore Partners

Okay great. And then just a...

Henri Steenkamp

Yes, Chris. Yes, this Henri. Just to add, probably consistent with prior quarters, the mixed clients’ facilitation principal trading has remained approximately 50-50. And I think we’ve sort of demonstrated over the past couple of quarters below the mix might change a little sort of on a quarterly basis that there is a major repetitiveness or repeatability, lumpiness in that revenue.

Jon Corzine

Chris, we didn’t put it in our comments, but we have a very significant, rolling account penetration. There’s almost a 60% increase on a number of new accounts opened. And we’re transacting with 47% more clients in the principal client facilitation area. And so, I think that what we expect to see happen is in the client facilitation area across the board we will see a bigger and larger book of business with greater diversification of how those revenues will flow through the performance in future quarters.

Chris Allen – Evercore Partners

Great. Thanks. It’s very helpful. And then just wanted to touch on the competition revenue ratio, you talked about getting below 50% over time. The restructuring you alluded to that may happen this quarter, would that be a catalyst to further reduce that or is it more going to be a function of our top line growth?

Jon Corzine

A, I think it will be more a function of top line growth in the end for instance and we certainly are counting on it. We haven’t built our business plans about it, but if interest rates were ever to go up in short term parts of the yield curve, you’d see significant generation of revenues that don’t carry the compensation to revenue burden that other kinds of revenues may generate; same for some of our principal trading activities in the proprietary side.

On the other hand, the biggest change comes from how we are reworking our pay-for-performance system, and probably the clearest way that you can see that we’re taking very strong structure is a picture that Henri put in his remarks that there have been 1200 people leave the firm in the last 5 quarters and 800 in. Each one of those 800 in comes in under a very clear understanding of what pay-for-performance means. We’re reworking contracts of existing personnel and we think that the combination of all these factors give us much more managerial flexibility that I think is good for the shareholders and, frankly, I think is good for the employees.

Chris Allen – Evercore Partners

Thanks, guys.

Operator

We’ll take our next question from Rich Repetto with Sandler O’Neill.

Richard Repetto – Sandler O’Neill & Partners

Yes, good morning guys and congrats on a solid quarter. Hey Jon, I guess one question, I actually went back and read the appendix back here. Page 18, it seems like there is a significant shift going on in the geographic mix other revenue towards Europe. And I was just wondering if you could give us some color behind that mix that the – you have the mix change and – well as it relates to all the other things that you’re changing as well, the focus on client facilitation and principal trading.

Jon Corzine

Well, there are couple of things that are happening, I think Henri alluded to one that there were opportunities in both structured equity and in the European sovereign markets that we addressed in the quarter.

Second of all, I think Henri mentioned that we are moving rapidly in our DMA businesses in Europe. And so, I think all of that combines at least within the context of this quarter. When I say that, I don’t think that this 10% for the rest of the world is long lasting, we are working very hard on our business plans particularly for Asia and some other areas in the rest of the world. I had a lot of focus on how we build up those revenues.

Actually, one of the reasons, I’m pretty excited about our future is taking some of the things that are working in our current environments to those particular areas. So, I think there is some seasonality particularly in structured equity work, there is as I’ve said growing DMA and some of the sovereign volatility created opportunity as well.

Henri Steenkamp

Rich, and I also think that’s one of things that’s part of us changing the model. In the past, the mix was a lot more consistent because it was only agency-commissioned volume-type business. Now, it’s about the capital markets business finding dislocations in the market, finding opportunities wherever it is in the world and therefore, you could see some changes sort of on a quarter-over-quarter basis.

Jon Corzine

I think you will see particularly in the near term quarters, if we’ve made the right judgments with regard to our mortgage and credit businesses, which we put a lot of effort into building. And in the context of these programs of garden weaving, it takes a while between marriage and work to actually get people to work. I think you will see a pickup in our diversification of earnings with a lot more impact in the United States in particular. And as I suggest, the rest of the world is placed where we’re giving a lot of strategic thought, and making real efforts to improve our earnings and revenue production.

Richard Repetto – Sandler O’Neill & Partners

Okay. That’s helpful. And I guess my follow-up, Jon, would be on the strategy going forward, still asset management. It appeared to be one of the core strategies several or the businesses you want to get into several quarters ago. And I’m just trying to see if that’s the case or where – is that a significant component? And before I get out, I just want to say my team wants to thank Henri for lowering the numbers, things you got to reconcile between GAAP and non-GAAP as well.

Henri Steenkamp

Very well.

Jon Corzine

I think we’ve made clear in other calls we want to get that to an absolute minimum and that’s one of the reasons we stress four to six quarters is where we’re wrapping that down to its close. Let me just say that I put a paragraph in my comments because we are very active in the evaluation of strategic initiatives.

When we laid out our plans to you all, I think it now is three quarters ago and worked out with our board. Asset management is absolutely on that agenda but we want to do it right and want to do it accretively. And when we find the right asset, it will provide that framework and we are very active in our evaluation process.

Richard Repetto – Sandler O’Neill & Partners

Okay. Thank you very much.

Operator

And we will take our next question from Michael Carrier with Deutsche Bank.

Jon Corzine

Hi, Mike.

Michael Carrier – Deutsche Bank Securities, Inc.

Hi thanks, guys. Henri, maybe just quickly on the pricing, you had some volatility around that. And I think from our – like what we can see is, you can see the pricing but, obviously, what you alluded to there’s a lot more than just the pricing. There is the profitability which if we look quarter over quarter, obviously, the profitability of the overall firm you guys improved. So, when you’re thinking about it, it was just a big swing sequentially.

So, was there something in terms of, you mentioned the DMA where a lot – like a lot of clients brought on board this quarter and that’s what moved it. I guess like retail activity probably was lower, so that could have put some pressure on it. But just any more granularity around that number and why the big swing just this particular quarter?

Henri Steenkamp

Sure. I mean, I think we’ve seen it in the past Mike at $0.02 to $0.03 swing is not unique even in just – there’s not much else happening other than it just being sort of standard business as usual. And I think though, this quarter as you mentioned, there was a much bigger swing year-over-year which we had been expecting. It was that IDB-type execution only business that we exited in the first half of last year. And so we were expecting a big swing in relation to that this year and then also the comparative.

But in addition to that, there was also, as you mentioned and as I mentioned in my remarks, an additional swing especially related to the equities DMA business very much block trade-type business. Lower yielding, but from our perspective still, a good in the profitable business from a bottom line perspective. So it’s a different than the execution in IDB business. And one that we did see an uptick in clients especially in Europe, as I mentioned, this quarter and we sort of hope that that will continue. That did sort of from our perspective when we look at the composite sort of appears if we beat it larger than sort of we had and that’s why I sort of outlined that in my remark.

Jon Corzine

Let me just say, Mike, we have the pipes in place, so we’d like to put more volume through that. This is not high commission, but it’s also not high payout on one basis of working at it. But probably more important, which is the thrust of everything we are trying to do. If we have the client relationship then how do we expand it in the cash markets? How do we expand into deploying services? How do we look at order flow and then have the ability to leverage off of it both for the advantage of the client, if we are able to produce ideas around that average flow, which we wouldn’t have if that plan flow wasn’t here.

I have jokingly said it’s one of the reasons that our strategy is in place. One of these days, I think the street will be paying people for clients who have commissions that is just not a growth business. There would constantly be compression. There has been since I’ve been looking at this business in the 70s and I would expect it to continue. You have to use that flow for purposes of finding new ways to make revenue and that’s certainly what we’re doing in establishing and deepening the relationships.

Michael Carrier – Deutsche Bank Securities, Inc.

Okay that’s helpful. And may be just on the follow-up. Jon, when you set out like the strategic repositioning, you’ve taken out the cost, you hired the talent, you’re showing progress despite a fairly tough and volatile macro backdrop. So, when you look over the next two, four, six quarters across both the institutional and the retail business. kind of separating it from maybe the asset management advisory, longer-term, where do you think you are in terms of maybe an inning in terms of what you’ve done and maybe more importantly where do you still see the big opportunities as you transition to that new business model?

Jon Corzine

We are in the early innings – on the transformation with the restructuring piece, I think we’re late in that process. I think we have the footprint. Now, we have to earn to grow. We have to show our shareholders and all of you and our people as well that we can be a successful organization; that’s condition number one.

And we’ve got – we’re really in the early innings of that in my view. I think there are tremendous opportunities that I’ve alluded to about the de-risking and de-leveraging that is going on as a result of the systemic changes that are occurring among many, many competitors. And not only just for us, but for others I think there is an opportunity for the aspiring firms to fill some of those gaps that come from smaller balance sheets and smaller commitments to capital.

And risk intermediation is very valued and we see it among our clients particularly in mid-level or mid-tier clients, although we see it all the way across the food chain. Demand for liquidity is very much there. And so we think that it is an attractive part of the business to be in, in a controlled disciplined format.

I’d also say that there will continue to be some pushing out of risk into the asset management business and that’s one of the reasons that we want to be there. You’ll see some of the warehousing of risk that has occurred increasingly going into CTAs and hedge funds as opposed to in dealer and brokerage businesses. Again, because of the changing regulatory framework, we want to have a footprint in each of those.

Michael Carrier – Deutsche Bank Securities, Inc.

Okay. That’s helpful. Thanks a lot.

Operator

We will take our next question from Niamh Alexander with KBW.

Jon Corzine

Hi, Niamh.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Hi, how’re you doing? Thanks for taking my questions. And on the convertible, if I could just understand, it sounds like you have already negotiated to buyout a 110 of the other convertible. And please correct me if I’m wrong there, but then why do you need another $200 million in capital? Am I correct in thinking maybe you might be closer to some inorganic growth opportunities that you want to have that ready or is it some other new business areas that you are looking to expand into?

Henri Steenkamp

Yes, well...

Jon Corzine

Well, let me first say our lawyer is sitting at right hand and he is shaking his head, so you can....

Henri Steenkamp

Yes, that’s right. And obviously, as we’re in an open offering period, it’s a little hard for me to talk too much about it. What I would say as we disclosed we do have the commitments as was disclosed in our announcements for the 109. It’s a big part of our strategy to bring down our sort of cost of capital. We do have different sources, different uses of the capital that we are thinking about and just strengthening on capital structure, extending our duration. And from our perspective, as we mentioned, we are spending money on this redemption of nine as well as this call spread to effectively reduce dilution for our shareholders so that this transaction will be accretive at the end of the day.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. All right, fair enough. I guess I’ve kind of heard in the past that you would only necessarily need to come back to the markets for capital if you felt that there was an acquisition or something like that lined up, shall we say.

And but, if you could with my follow-up question, the CFTC proposals and the Rule 1.25, you’ve had questions on this in the past, we haven’t seen anything new from the CFTC, but maybe you’ve had another three months since to align your business or maybe address some changes or better figure out how to operate the future’s commissions margin, if for example, the proposals were put into effect that’s currently laid out. Help me understand how you’re thinking about that now?

Jon Corzine

Good question, it is a work in progress, as you well know, with the CFTC. We are aligned in one way with certainly the CFTC’s recommendations. We believe in the diversification and the maintenance of liquidity that I think is the theme of their rule proposal. We think in some aspects of it – and we have made this clear on our comment letters to the CFTC that they may be too granular, i.e. 5% concentration limits, we suspect on repo might be too damaging and very, very costly to implement for a lot of folks not just for us.

But probably the real issue of debate goes at the sanctity of repurchase arrangements that would happen with in-house and affiliate transactions. And we are making very clear through the FIA and our own comments to the Commission how we feel about that particular issue, which could be – could require some restructuring of how we go back doing business. We’ve done a lot of thinking about it, so we think we’re prepared if worse comes to worse, but I think it is one that we would like to continue to have dialogue both as an industry and as an individual firm with regard to the sanctity of repo and doing affiliate and in-house transactions.

So, I can’t tell you, how it’s going to turn out. We think we have systematic ways to address it, but it have to be carry cost, but in general, we think – well, I can’t say we think, we’re all going to have to wait until the final ruling on CFTC.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. Fair enough. Thanks, Jon.

Operator

We’ll take our next question from Roger Freeman with Barclay’s Capital.

Roger Freeman – Barclays Capital, Inc.

Hi. Good morning.

Jon Corzine

Hi, Roger.

Roger Freeman – Barclays Capital, Inc.

Good morning. I wanted to I guess ask a couple – two questions to try to think about your business with respect to your dealer competitors. I guess, first on FICC, as you think about rates, FX, credit, commodities and structured securitized products. How would you say your business breaks down today on maybe rough percentages both looking at just on a principle basis. And then also including agency-like riskless principle business?

Jon Corzine

Henri, why don’t you try to get that precise number or at least the rough justice number on the break out?

Roger Freeman – Barclays Capital, Inc.

I just want to see where the concentrations are.

Jon Corzine

It has moved much more to the principal aspect than – I think it’s north of 3.75, if not slightly more than that. And I would expect we would get into and I suggested this in other periods of time that our overall leverage will come down or certainly not grow while our level II assets, things that are slightly less liquid will grow i.e., corporate bonds, mortgage securities, derivatives those kinds of things will become an increasing part.

But if you evaluate our balance sheet and I think I’ve said at other points we have a pretty clean balance sheet, you will find that those elements will be growing marginally. We’re not going to let them get out of hand. We believe in a high turnover philosophy in those areas, but we think those are higher margin products than we have been under invested in them. And that’s why I made the point in my remarks about the addition of really high-quality, proven folks with regard to mortgage securities and high yield and investment grade credit that we’ve brought to bear on our business and we think it will contribute significantly.

Earlier quarters we added equity derivatives and we have been reshaping our foreign exchange business into an area that will have a different tender than just trading spot market. I think that’s important, we are doing that in almost each of our product lines as we build out the dealer business. It requires real discipline for high turnover, short duration concepts being applied to each of those markets.

Henri Steenkamp

And, Roger, I think what you described at stake is probably what we sort of classify as clients’ facilitation and principal activities, which if you look at slide four and when you look at the sort of the green part of the bar, that continue to grow in Q1 last year, 23% growing to 53% last quarter and 43% this quarter and from a split perspective, we’ve been saying it’s about 50-50 between principal and client facilitation.

Roger Freeman – Barclays Capital, Inc.

By product areas?

Jon Corzine

Within the principal trading area we are within that green box, we are becoming more of a principal trader that’s the 75% or more that I’m talking about. We usually do what is called match principal which is just another way to broker transactions and that’s a business philosophy. We are trying to be dealers just as we are in the primary dealership. And we have to show up with a bid at every auction...

Roger Freeman – Barclays Capital, Inc.

Right.

Jon Corzine

...and generate the kind of activity that would justify being a primary dealer and we want to build those kinds of activities in other principal areas.

Roger Freeman – Barclays Capital, Inc.

Okay. And just by product in that green area can you give a rough idea of...?

Henri Steenkamp

We don’t break that up currently between products, Roger.

Roger Freeman – Barclays Capital, Inc.

Okay. Is it down there like commodities?

Jon Corzine

Commodity, as we said in this particular quarter, we gave you the three things that was the highest percentage contributors.

Roger Freeman – Barclays Capital, Inc.

Okay, all right. Then my other question was just on capital. Your dealer peers have been sort of getting row forwards to something like end of next year expected pro forma Tier 1 common ratios under Basel III. Can you give us a sense given anticipated capital structure changes, and the shift in your business, a ballpark at least where you come out?

Henri Steenkamp

Well, I think we’ve said in the past that if you do use the sort of Basel risk-weighted asset class calculation, we are north of 10% at the moment on those calculations. So...

Roger Freeman – Barclays Capital, Inc.

The Basel III?

Henri Steenkamp

Yes. So, at the moment it’s still a working process, we’re feeling okay with our sort of current ratios.

Roger Freeman – Barclays Capital, Inc.

Okay. All right, thanks.

Jon Corzine

Such an easy question to answer, if we meet our earnings objectives over the next year we’ll generate a lot of internal capital.

Roger Freeman – Barclays Capital, Inc.

All right.

Operator

And we’ll take our next question from Howard Chen with Credit Suisse.

Howard Chen – Credit Suisse

Hi, good morning Jon, good morning Henri.

Jon Corzine

Good morning, Howard.

Henri Steenkamp

Good morning, Howard.

Howard Chen – Credit Suisse

Just another question on the progress in client facilitation and Jon what you described as kind of the value-added risk intermediation. How do you think about building that all up just given tough environments where asset prices are moving, volumes aren’t that great. I mean we’ve gone through the major investment bank reporting period and everyone’s – many are speaking to very difficult client facilitation, the impact of inventory mark down. As you build this up how do you avoid that or is it inevitable?

Jon Corzine

Well, I don’t believe any trading operation has no risk or that there will ever be periods or that there will be never be periods to set back. It is the dimension and the degree of turnover that you bring to bear and the disciplines that generate, I think, most consistent returns. And as you know, we have tried to build other elements of revenue streams into our business plans. That’s why we’ve given real focus to our retail business. That’s why we’re giving real focus to the Prime Services and I would expect that you’ll see something by this time next year in the asset management business that will diversify away from those risks.

And underlying everything that we do and that client facilitation business is still our FCM activities, which will be a tremendous diversifier and will one day rise up and be probably the largest contributor in the context of what we have.

We are trying to build diversity, diversity, diversity into our activities and we will do that within the client facilitation areas as well. We have to have multiple places where we are taking risk so that we’re not dependent on any one area. Like not to be as dependent as we are today and we will – we are working every day to try to spread that risk and I think that’s the best methodology of managing risk over a period of time.

Howard Chen – Credit Suisse

Great thanks. And then one for Henri, Henri in your prepared remarks you mentioned the desire to take down reduced cost of capital overtime and where would you peg your weighted average cost of capital today or yesterday?

Henri Steenkamp

Probably, it’s about just – probably just below 10 and that’s part of why we believe we can be accretive through capital raisings and improving our capital structure not just in the form of doing acquisitions but in also changing the nature of the components of our capital structure. As you know, we’ve got some high-yielding dividend paying instruments and there we have got these nines which are very high yielding. And so by changing this mix of our capital structure it can be accretive to the firm.

Howard Chen – Credit Suisse

Great. And just a follow-up to that, Jon, when I think about the longer term vision and the value proposition for shareholders, if we think about that 10% return target you’ve spoken in the past with the weighted average cost of capital not far from that, I mean how do you think about that in the context of creating and generating shareholder return over time? Thanks.

Jon Corzine

Well first of all, we have a cost of capital that was driven by extreme conditions in 2008 and I think we’ve demonstrated that we’re working to change that and the actions – well, I better stop. We will take opportunities to lower that cost of capital in every conceivable way as those opportunities present themselves.

You know we have to look at an array of financing arrangements and we look at the full cash cost and capital cost relative to what we think we think we can return over a period of time. I do definitely believe that we’re better – we’re involved in an industry that will still produce returns on capital that are north of 10%. That’s the first step I think I’ve talked about. So, we want to drive the cost down and the returns up. We believe we can do that overtime, that’s what our plans say we can do and that’s why I come to work every day.

Howard Chen – Credit Suisse

Makes sense, thanks.

Operator

We’ll take our next question from Ken Worthington with JPMorgan.

Kenneth Worthington – JPMorgan Securities

Hi, good morning. Are there any meaningful implication of the outcome from the U.S. debt ceiling debate, either for your clearing business or for that matter the institution business? And I guess I’m not really interested in the near-term implications for volume or volatility but are there any like structural changes or long-term implications for MF or is it just a bunch of noise?

Jon Corzine

Well, I can’t avoid the short-term ones. We’ve warehoused the liquidity and we’re aware that generally in these stressed periods, margin requirements change and so you have to be prepared for that kind of event. And we’ve sort of more than planned and are prepared for generally those kinds of conditions. We’ve also certainly reviewed history and how the reaction to crisis mode is handled with regard to liquidity by the Federal Reserve and its implications for the banking system and primary dealers. This is a very complex issue that certainly different under the stress of default versus downgrade.

We think both may have long run implications with regard to margin on the other hand that’s rolls through to our clients as well as to each individual clearing member. And we think, in fact, people may want to diversify their clearing members. And it’s quite clear that many of the let’s say larger firms have in particularly systemically significant ones will have very real considerations and buffer requirements that I think, again, push out demand for these services in other places. And so, as long as we can maintain our capital position in a strong and growing place, I think we are in a position to be taking on some of that push up.

Kenneth Worthington – JPMorgan Securities

Great. That was very helpful. Thank you.

Jon Corzine

Okay.

Operator

That concludes today’s question-and-answer session. At this time I’d like to turn the call back over to management for final remarks.

Jon Corzine

We appreciate everybody’s participation and we look forward to next quarter’s conversation. Take care, everybody.

Operator

Ladies and gentlemen, thank you for your participation in MF Global’s First Quarter Earnings Conference Call. This does concludes the meeting. Have a good day.

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