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Executives

Jeremy Skule – Vice President of Investor Relations

Kevin R. Davis – Chief Executive Officer & Director

J. Randy McDonald – Chief Financial Officer

Henry [Steamcamp] – Chief Accounting Officer

Analysts

Roger A. Freeman – Lehman Brothers

Nimh Alexander – Keefe, Bruyette & Woods, Inc.

Richard H. Repetto – Sandler O’Neil & Partners, LLP

Kenneth B. Worthington – JP Morgan

Michael Carrier – UBS

Mike T. Vinciquerra – BMO Capital Markets

Howard H. Chen – Credit Suisse North America

Christopher Allen – Bank of America

Donald Fandetti – Citigroup

MF Global, Ltd. (MF) F4Q08 Earnings Call May 20, 2008 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 MF Global earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions) I would now turn the presentation over to your host for today’s call Mr. Jeremy Skule, Vice President of Investor Relations.

Jeremy Skule

Good morning and thank you for joining MF Global’s fiscal fourth quarter and year end conference call. With us today are Kevin Davis, CEO and Randy McDonald, CFO. This conference call is being recorded on behalf of MF Global and consists of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without MF Global express written permission.

This information made available on this conference all contains certain forward-looking statements which reflect MF Global’s view of future events and financial performance as of March 31, 2008. Any such forward-looking statements are subject to risk and uncertainties indicated from time-to-time in the company’s SEC filings. Therefore, the company’s future results of operations could differ materially from historical results or current expectations as more formally discussed in our SEC filings. The company does not undertake any obligation to update publically 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 the company’s earnings release which can be found on the company’s website and in the company’s current report on Form 8K furnished to the SEC in advance of this call. I will now turn the call over to Kevin Davis.

Kevin R. Davis

Good morning everyone. Thank you for joining us on our fourth quarter earnings calls. With me is our new chief financial officer Randy McDonald. Randy joined us in April and brings with him extensive industry expertise, most recently having held the post of CFO at TD Ameritrade, the world’s largest online equities brokerage. Randy has a deep understanding of the brokerage business and many of you know him very well. He has already begun to make a significant contribution to our organization. Randy, welcome.

This morning I’ll speak to you about our record results, our growth strategy and our outlook going forward. Randy will then address the financial details, the strength of our balance sheet and an update on our capital plan. Before we begin I’d like to stress to our analysts and investors one very key point, MF Global’s business is in rude and robust health. To validate that point we have today taken the unique step of providing some key information about our April performance the first four months following the trading incident and Bear Stearns event.

Staying with the fourth quarter of FY08, we delivered record adjusted results. We have strengthened our risk systems and processes and we’ve taken significant steps to strengthen our capital structure and have set out a plan to refinance the balance of our bridge loan. First, we signed definitive agreements with J. C. Flowers in which they’ve committed to purchase up to $300 million of equity securities from MF Global. Following the filing of our 10K in June we’ll conduct a public offering of at least $300 million of the equity securities of which J. C. Flowers will purchase a minimum subscription of $150 million. In addition, we have sold for the June payment. At the suggestion of our banks we are drawing down $350 million from the revolver.

Whilst all that has been going on, we’ve significantly reduced our peak funding needs and in so doing added further optionality to our funding and capital alternatives. We’ve achieved this reduction by mending our fx agreement with non-investments as previously announced and by making important changes to our fixed income and equity derivative business in Europe. These prudent and proactive actions have reduced our peak liquidity needs from $1.5 billion to $900 million. This allowed us to utilize $350 million in freed up liquidity on our revolver. Additionally, today we have more than $600 million in excess capital which provides $300 million for debt repayment and ample resources to fund future growth initiatives. This leaves between $800 and $900 million in financing needs which Randy will speak about in more detail.

MF Global has faced some of the most difficult market conditions in decades together with some never before seen challenges and today this company’s resiliency and tenacity has never been more evident. As you know, in the last three months we have sorted through the aftermath of an unfortunate aberrational unauthorized trading loss and subsequently endured vicious and false rumors regarding our liquidity. Both of which have significantly impacted our share price and our credit ratings. That said, from the outset this management team has been working around the clock to ensure the continued health and strength of our franchise and I’m pleased to tell you that not only do I believe the worse is behind us but also that we are now able to fully focus our efforts on the future growth of the enterprise.

Today, we reported record volumes in adjusted net revenues as well as adjusted pre-tax profit and earnings per share. Looking at Slide Three, you will note that in the fourth quarter our volumes grew 38% from last year to $594 million. That’s faster than any of the major exchanges. Our adjusted net income grew 23% from fourth quarter 2007 to $464 million. And, we reported adjusted earnings per share of $0.48 again, another record. On Slide Four you can see that we delivered a record fiscal year for 2008. Our volumes grew 40% and our adjusted net revenues grew by 23% and, we generated nearly $440 million of EBITDA which affords us a very manageable EBITDA to debt ratio of two times.

I would like to briefly address our yield or rate per contract. As you’ll recall the addition of Dowd/Westcott and BrokerOne in 2008 brought significant professional trader volumes which come at a lower rate per contract. As we’ve explained in the past these acquisitions seemingly have the effect of showing the yield compression. Later in this call Randy will clearly demonstrate that there is continued stability in our rates per contract. As we move forward through fiscal year 2009 and in the absence of any further infusion of professional trader business we should see volumes and net revenues growth in a more linear fashion. Our success is also measured through an ability to gain market share in each of the exchanges in which we participate.

As Slide Five illustrates our average daily volume in the fourth quarter was 9.7 million lots. In fact, if MF Global were an exchange we would be the second largest in the world behind only CME and CVOT. Indeed, had they not merged we would be the largest. Our volume growth in the fourth quarter outpaced every major exchange and we continue to gain share on a global scale. We experienced several record days during the quarter in our interest rate and energy businesses in particular. Continued uncertainty over the direction of interest rates, commodity prices and ongoing geophysical uncertainty have generated continued volatility and heightened levels of market activity. We do not expect these factors to abate any time soon. Our growth has and continues to be further propelled by the successful execution of our stated strategy as well as secular trends driving our industry.

Looking at our successful growth strategy on Slide Six, we remained focused on enhancing our market leadership position in retail by expanding and broadening the range of products we offer. We are also expanding our OTC businesses. We recently recruited an emerging markets fx team in Chicago that focuses on non-G7 currencies as well as a new fixed income sales team in Chicago. We are also in negotiations with several more production teams across the globe. We are also continuing to expand our presence in the high growth region of Asia Pacific. In one year Asia Pacific has grown from 8.6% of our business to 12%. The growth opportunities there remain sizeable and will be augmented as opportunities unfold for industry consolidation and further geographic expansion. In all, our diversification across product, markets and geographies continues to provide a balance picture of growth.

Turning to the secular trends in our industry, Slide Seven demonstrates that volatility is fueling global market activity and increasing volumes. The desire for markets built upon center term counterparties is growing ever stronger as is the demand for the truly independent and unconflicted business model that MF Global uniquely offers. Despite any broader market issues our clients continue to be very supportive of MF Global. As Slide Eight indicates the decline we experienced in our customer assets is not something we are overly concerned about. While client segregated assets is a metric that we’ve never used to gauge the company’s success of failure I do understand our analyst and investors’ interest in it at this particular time. It is important to put client assets in to context. There is no absolute correlation between client assets and trading volumes, net revenues or profit. We’ve had years an quarters where client assets had declined but volumes and/or net revenues have increased.

The decline in assets we did experience in the third to the fourth quarter was predominately linked to year end sweeps of excess collateral and declines in the value of our customers’ own positions. We saw very little transfer of customer position away from MF Global and, as is evidenced by our excellent April performance. Indeed, we are confident that the small amount of business we did loss in late February and March will return promptly when our ratings are stabilized and the capital plan is fully executed. Absence the withdrawal of excess funds, our customers’ segregated assets are substantially where they were a year ago between $15 and $16 billion. In fact, as you will see on Slide Nine of our presentation we’ve experienced net client asset in flows since March 31st. I believe these inflows accelerate as we ultimately move off negative watch and more clients and counterparties come to appreciate the very liquid nature of our balance sheet and agency models.

The best possible illustration of the resilience of our franchise is our performance in April where on Slide 10 you can see volumes were 178 million lots, that revenue was $136 million and net interest income was $42 million. [Inaudible] may have expected April to have been well down on the run rate of the previous financial year, the reverse was actually the case. And, as these numbers demonstrate, our franchise remains very much intact. I realize that many of you are concerned about our risk reviews and the rating agency downgrade we suffered after the unauthorized trading incident. Let me assure you that since that event we have maintained a regular, positive and open dialog with our rating agencies.

As you can see on Slide 11 the rating agencies identified three areas that they believed we needed to address: one, the health of the franchise; two, the implementation of our long term capital plan; and three, assurances with respect to our risk management processes. Through our quarterly and annual results we’ve clearly demonstrated that this franchise is in excellent health. Now, let me address the other remaining areas. As we shifted through the various options that were presented to us by financial sponsors, MF Global’s management directors were determined to find the solution that would enable our existing loyal shareholders to participate while still getting the deal done quickly. Today’s agreement allows our existing shareholders to participate and at substantially the same term as our new partners led by J. C. Flowers. Additionally, as I previously mentioned the renegotiated terms of our fx arrangements with non-investments and the strategic refocus placed on European equities businesses on higher margin opportunities have reduced our peak liquidity needs from a high of $1.5 billion at the time of the IPO to a maximum of $900 million today. Whilst the European equities business may look far more difference going forward, we remain very confident in Europe’s ability to regain their full revenue contribution revenue in fairly short order. Thus, I believe MF Global is more liquid today than at any time in its history.

In relation to our risk review, as you know we recently announced the preliminary results from our independent consultants and they have found our risk management processes and systems globally to be operating as intended. However, their independent risk reviews will continue. We are hiring additional risk monitoring staff around the world and also expect to announcement the employment of our new chief risk officer in the coming weeks. As I said previously, we ended this year with an excellent reputation opposite risk management. I want to ensure you all that not only do we intend to regain that reputation but also we intend to do everything impossible to ensure that MF Global consistently leads the industry in risk management best practices.

Someone who will be instrumental in assisting our company in this transition would be Randy McDonald, our new chief financial officer to whom I would now like to turn.

J. Randy McDonald

Although retirement was a great excuse for me to learn to play golf, I kept going to the sandbox every day and none of the other kids were under 80 years of age. I guess all the guys my age are down in Florida or still working on Wall Street. Anyway, I’m very excited to be here. Both in my past life and more recently on the GFI Board I’ve found this industry to be really, really interesting. I think this is an outstanding business model, had strong growth and very focused vision clearly, a market leader. I love the agency only model, it’s hugely profitable, great operating leverage and you have an outstanding management team here and I’ve also found it to be a great cultural fit. The job clearly has great professional challenges for me and I believe I can also contribute and help ensure the future success of this market leader.

What I’m going to do is I’m going to start with the income statement and with regard to revenues I thought I’d start with the transaction part of our business, the execution only in clearly commissions. Then, I’d move on to principal transactions and then end with net interest income. So, let me step you through this by starting with Slide 12 and this is the execution only commission. I think it’s safe to say that the uncertainty in the credit markets has led to a lot of uncertainty in many other sectors which resulted in pretty high volatility and MF’s business volumes have benefited from that volatility. If you look on the left side of the Slide the quarter-over-quarter execution only commissions increased 25% to $131 million. That increase came mostly from our equities and our interest rate products. On the right side of the Slide year-over-year revenue increased 26% to $486 million. We saw significant increase in equities and interest rate products.

Let’s turn to Slide 13; on the left side of the Slide that’s quarter-over-quarter cleared commissions and they increased 22% to $440 million and this was driven by higher volumes in interest rate products and this was a direct consequence of the uncertain credit markets and the interest rate markets. On the right side of the Slide, year-over-year cleared revenue increased 19% to $1.5 billion with higher volatility in the lower friction of trading electronically there was increased exchanged traded volumes. Now, lower friction, that comes from anonymity, speed and also as Kevin mentioned, very importantly, reduced counterparty risk.

Let’s turn to Slide 14; this is the execution and clearing yield. These are rates and volumes on transactions. Now, in the spirit of more transparency, we believe this disclosure will help make our business model easier to understand and I think that’s very important. Now, you’ll not that the methodology has evolved and the yields are slightly different than last quarter. That’s an evolution and refinement of this process but in no way does it mean that there’s a change in the basic trend line results and that there’s little compression in the yield per trade. We’ve also provided you with the reconciliation of last quarter’s methodology with this quarter and that’s in the appendix of the presentation. So, now let me describe the Slide.

We’ve provided you with the net revenues associated with each type of transaction and the reconciled it back to our income statement. So, in the first column are the vast majority of our transactions and New York Exchange traded. In the second column are the non-exchanged traded and the related net interest. In the third column is the remaining net interest and that’s from our yield enhancement efforts which we have described as client assets. Now, the top row, that’s your net revenues, the middle rows are the volumes and then at the bottom we calculate the yields. So, for the execution only yield it was virtually no change, it was $0.65 per transaction this quarter and $0.66 in the December quarter. Now, the yield from clearing was $0.44 this quarter versus $0.40 in the December quarter. I’d say fluctuations naturally occur as the mix of customers, product and geography all change and that was the case this quarter.

Let’s turn to the next Slide, Slide 15; this is principal transactions. As we stated last quarter the best way to analysis principal transaction revenue is to combine it with the net interest that’s generated with that principal transaction. So, on the left side of the Slide you have adjusted principal transactions including the net interest revenue and that increased 20% in the fourth quarter to $115 million. That was mostly driven by an increase in revenue from the metals business. On the right side of the Slide year-over-year adjusted principal transaction revenue, that increased 25% to $433 million and that was mostly due to increases in our equities, fixed income and the foreign exchange businesses.

Turning now to Slide 16; this is the relationship of net interest to the underlying assets and that includes the principal transactions but let’s see how we think about the yield on assets. Before I do that I’d like to speak broadly about the treasury function and its improved efficiency. Financial service companies, they’ve recently been facing a lot of headwinds, 275 bips of reduction in Fed funds since mid September and of course MF client funds have declined by $3 billion offset a little bit by widened spread between agencies and treasuries and yet, MF yield improved and you see the MF net interest declined by less than 10%. Let me now turn to the Slide, the top part of the Slide is the fourth quarter and the bottom is the previous quarter. Looking horizontally there are four ways of thinking about how we earn interest. Now, the first is from the client cash, the second is from our stock bar alone activity, the third is our repo or our matched book and lastly from investing the firm’s capital.

The first row, that’s the net interest earned for the quarter. The second row is the interest we annualized and the third row are the average balances for each quarter. So, as we’ve mentioned, the balances generally came down from the December quarter however, we maintained our spread so that is as the credit crisis happened, the interest rates on our liabilities they actually outperformed the interest rates on our assets meaning the spreads widened. Also, not a surprise is the impact lower Fed funds had on the net yield. Other than the client cash, the other three activities don’t require regulatory capital so as the balances in stock borrow and the match book grow, the firm’s total average yield will decrease from this shift in the mix however, the absolute amount of net interest will increase.

Let’s turn to Slide 17; this is our operating leverage. Now, compensation expense as a percentage of revenues continues to trend down. Year-over-year it’s nearly three points. The non-comp expenses as a percentage of revenue increased 60 basis points however, it included two non-recurring items so excluding these items non-comp as a percentage of revenue was actually flat year-over-year. That all netted down to pre-tax margins improved 200 basis points meaning MF delivered on its promise of significant margin improvement. Now, the two non recurring items in adjusted non-comp is about $7 million of expenses and that was in connection with the firm’s inaugural yearend audit of the 10K and all the associated reporting and then there is $5 million of currency translation adjustments and of course, that comes from the conversion of subsidiary earnings back in the consolidation. For fiscal year 09, we’d expect the same general trend for compensation expense and I should note that although we took the bonuses back from the senior managers, for this calculation they’re actually in there so that’s a normalized number. For the non-comp expenses we would expect to spend on some infrastructure for efficiency, scalability and capacity but we would expect that as we take a more disciplined approach to our non-comp expenses that we’ll gain some efficiencies elsewhere to pay for these costs. Therefore, we would expect that non-comp expense would be basically flat with fiscal year 08.

Let’s turn to the next Slide 18; so what is all this translated to? Well, record bottom line growth for both the quarter and the year. On the left side of the Slide you have EPS for the fiscal fourth quarter, it was a record, it eclipsed the previous record which was the second quarter $0.42. For the full fiscal year EPS increased 44% for a record adjusted EPS of $1.67. Now, there were two new non-GAAP measures in the quarter. Early in this quarter we paid out $50 million to close out a rate lock and then at the end of this quarter we’ve now decided to charge this off the P&L. It’s specifically running through principal transactions and that’s because the strict documentation standards for hedging accounting were no longer being met so we can’t amortize that in to future periods. The other item was the broker related bad debt of $141 million and then we offset that with senior management bonuses that we reclaimed and other related costs and that all resulted in an adjustment of $94 million.

Let’s now turn to the balance sheet; Slide 19. Now, what I’ve done here is we’ve summarized our balance sheet in to those assets and liabilities related to client and then all else. This balance sheet prepares the changes from the December quarter to the March quarter. You’ll note that we strategically shifted MF’s balance sheet to be a more liquid balance sheet and in doing so we increased the amount of excess capital. The fact that we reduced the overall [inaudible] of our balance sheet by nearly a third in a matter of weeks, that’s testimony to the liquidity of our balance sheet.

So, how liquid is it? Well, let me show you and how we think about it. Let’s turn to the next Slide, Slide 20. Now, the top half of this balance sheet is simply taking the previous slide and reordering it so all the client driven activity is at the top half. Client activity determines the amount and the timing of the cash flow on the balance sheet. The bottom half of the balance sheet is how we utilize those funds. Now, we make sure we keep these funds liquid and safe in high credit quality instruments. We’ll also increase or decrease the size of the match book and the stock borrow long book to take advantage of yield opportunities relative to client securities or client needs. Now, when we look at the first row these are the client payables or what most people follow as our client assets. You can see though that actually the amount of net client funds includes client receivables as well as those funds passed on to the clearing organizations or other broker dealers as deposits for margin or in settlement.

So, as you look at the December balance of $19.4 billion and you go to the March balance of $15.3 billion you see over $4 billion of decline in client assets. Now, this resulted from a combination of both mark-to-market and client positions as well as calls by clients on their money. I’m going to remind you this all occurred within days. MF met its obligation without having to draw on any other sources of liquidity as you can see in the last column. So, MF has a highly liquid balance sheet invested in high credit quality instruments. By the way, this concluded the exchange requirements on Man Investments’ fx business and that was often as much as $800 million in a day and had averaged about $350 million a day since the IPO.

But, I think a fair question to ask is if it was so liquid then why did MF decrease its footing so dramatically? Well, the answer is the capital is precious so in evaluating which businesses have high yields we determined that shifting that capital to higher return lines of products was the right thing to do for the long term shareholder value. However, the March events including that large bad debt and the crisis around Bear Stearns and all the rumors just caused us to significantly accelerate that whole process but let’s go through an example.

Turn to Slide 21; in the contract for difference product, the new method rules forced financial institutions to offer clients the option of putting their positions in to segregated accounts. Now, as those institutional clients opted for that MF found itself having to meet the exchange requirements on T but not collecting the margin until T plus three so the cost of floating that was significant, significant amounts of capital and it made this type of product much less profitable. So, as a result we significantly raised our margin requirements on this product and now we’ve refocused our CFD efforts towards retail clients. Why? Because they have higher profitability which then can accommodate the higher funding cost that such segregation requires. So, the complexity of CFD business also caused us to use precious capital so the example I’m showing to you here is the use of a CD as collateral to effect the CFD business. Now, it’s not matched in either the type of instrument or the duration to the underlying contract even though it is a hedge transaction so that means more capital. So, the use of these instruments, that’s what results in capital requirements that become very costly for MF.

By reducing the footings for this type of business that then allowed us to free up the capital that was tied up in this very marginally profitable product. It’s important for our investors to understand one of the very basic underpinnings of this business is its self funded. Again, in the wake of Bear Stearns and that sell off concerns, they were expressed by our investors, our company and specifically about our balance sheet. Well, unlike an investment bank this is an agency business and our balance sheet is driven by customer activities.

Let’s look at what our balance sheet looks like today in terms of that liquidity and the asset class. Let’s turn to Slide 22. Our client assets are invested in cash and liquid securities so on the left side of this Slide are the client assets. As you can see, 95% is invested in cash and the balance is in highly liquid CDs with high credit quality. On the right side are the securities owned and you can see that these are also highly liquid and of high credit quality. So, what does this all result in? Let’s turn to Slide 23; all of the actions that I described result in much greater amounts of excess capital, over $600 million. Given all the changes in the business including the decreased client balances, a reasonable question to ask is doesn’t this mean decreased profitability?

Let’s go to the next page, Slide 24. The answer is no. We’ve refocused our efforts from lower margin capital intensive products to more profitable lower capital products. The April results bear this out. Although the client balances and interest rates are down and that was offset somewhat by wider spreads between agencies and treasuries, net interest income was a near record. So, the efficiency of the capital allocation is alive and well at MF Global.

Now, let me talk a little bit about optimizing our capital structure. Let’s go to Slide 25. MF shareholders have really been suffering from some depressed values and we believe that the current shareholder value does not reflect the robust business model of MF. We believe the past uncertainty of how we planned to recapitalize our balance sheet in light of the bridge loan coming due has weighed heavily on people’s minds. Given that increase uncertainty due to recent events like the credit crisis, the Bear Stearns and the resulting rumors about MF’s health, that execution risk was increasing with the passage of time. So, before the cost of our capital might increase any further we decided to eliminate the execution risk on this re-capitalization. What this deal does is it locks in a certain amount of proceeds and it cements economic terms for a total solution for our capital structure. So, to that end we substantially reduced the execution risk of that refinancing by entering in to an agreement with J.C. Flowers and negotiating a comprehensive debt plan with our bank group. We believe this will provide the necessary relief to our shareholders to the cloud of continued execution risk on our future capital structure is dissipated. To that end we have a commitment from J. C. Flowers for $300 million in equity. Between this and excess capital it should reduce our debt to under $1 billion and extend its term.

Now, let’s turn to the next Slide and I’ll show you how we plan to refinance the bridge loan; Slide 26. The way we will finance this $1.4 billion bridge loan is first we’ll execute on the first leg of the bank’s plan. They suggested that we use the excess that is our current revolver, its $1.5 billion agreement and treat that as term debt. The excess in the revolver is $350 million. I’ll discuss that on the next slide. The next step is to use excess capital in the firm to pay down the bridge with about $300 million of the $600 million of excess capital. Then we will simultaneously close on debt and equity for the $300 and the $450 million respectively.

Let’s turn to the revolver. At the IPO, this is Slide 27, what we did is we negotiated a five year committed revolver at 40 basis points over LIBOR. Now, taking collectively the adjustments we previously described including eliminating providing up to as much as $800 million for the exchange requirements on the Man Investment foreign exchange business, what’s that done is it has reduced our peak liquidity needs from a high of $1.5 billion to only a maximum of maybe $900 million and that’s stress liquidity. That’s not even liquidity we use every day. That would be in the case where we had tremendous stress and needed to go to it. So, building back up to the utilization of that total revolver, if we start with our current level of stress liquidity we had already drawn down $150 million and our bank group’s proposal to draw down another $350 for a total of $500 million. Then, what’s left over is we still have another $100 million of excess capacity in the revolver.

Turning to the next Slide, Slide 28. Of course, we’re very pleased to announce the J.C. Flowers deal and as partners in this deal the shareholders should see this for what I believe this to be and that is it’s a strong endorsement by a very high profile, well regarded sponsor. J. C. Flowers has very extensive experience in the financial markets. And, we’d like to of course thank all the other participants in this process for participating in the process of due diligence. It’s gone on for almost six weeks now. I’m just sorry we couldn’t accommodate all the parties. However, in this very intense due diligence it’s just another validation of our robust business model and all the other aspects of our business. Now, as I’ve mentioned this is a meaningful injection of equity capital that greatly strengthens our capital base and it provides us with the foundation to move forward with our debt plans. With regard to the pricing, we started this process certainly after the Bear Stearns rumors. At that time the volume weighted average price, or from then to now the volume weighted average price is a little over $10. Then, when we consider the embedded option that we paid to ensure that our shareholders can participate in this transaction, we think the price is very, very good.

Turning to Slide 29, the debt terms. We’ve negotiated extensively with our banks. That process continues. This is the indicative terms, the broad terms, I’ve listed them here. These negotiations to date have been very constructive and they’ve resulted in a plan put forth by our lead banks. As you can imagine our equity investor has been very focused on the nature and timing of this debt raise and we believe that with their commitment in hand we’ll now be able to move quickly to a committed facility. So, we’re very gratified by the level of interest that has been indicated by our banks for this transaction and we plan to have news on this new debt facility in the next few weeks.

In summary, MF has demonstrated that its agency only model was able to come through the storm of the century meeting all its clients’ needs for liquidity. And, as demonstrated by April’s results it continues to deliver significant shareholder value.

Kevin R. Davis

Before we open up the call to questions and answers I would like to address the three financial objectives we laid out at the time of our IPO. First, the 20% top line on net revenue growth. Well, on an adjusted basis we’ve achieved 23% revenue growth for the fiscal year 2008. Assuming exchange volumes stay in their current levels and that we maintain our current credit rating, we feel very confident of achieving 15% to 20% net revenue growth in fiscal year 2009. Our second objective was to achieve 20% pre-tax margin over the medium term which we had defined as two to three years. At the time of the IPO we said we would deliver 150 to 200 basis points of margin improvement per year. Well, our pre-tax margin actually increased by 200 basis points in our first fiscal year from 16.5% to 18.5%. Furthermore, we believe that our 20% pre-tax margin target remains imminently achievable in the two to three year time frame we originally set forth. Finally, we set an objective of 20% return on equity which we stated would be achieved over the longer term of three to five years. Having gone from 12.3% in 2007 to 17.6% return on equity in 2008, using our current capital structure of $1.2 billion, we remain committed and confident in reasserting this target as well.

As has been evidenced already this morning, our business is performing very well indeed. We have faced down enormous challenges in recent months during which time we’ve lost virtually no front office staff or customers. Today, I can resolutely tell you that I believe that MF Global has weathered this storm and emerged as a stronger, leaner and more efficient organization. Having put in place and effectively achievable capital plan the management team is now able to fully focus on resuming our wonderful tradition of growth. I remain very confident in our prospects for the future and with that operator I would like to open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Roger A. Freeman – Lehman Brothers.

Roger A. Freeman – Lehman Brothers

I guess I wanted to come back to the proposed capital raise. I heard your comment in terms of how you sort of thought about the conversion price but I guess if you look at some of the other deals that have been done in financial you see them coming for a premium and this is obviously a reasonable discount from where the stock is trading now. How did you evaluate the range of proposals out there? Was there any feeling on your part to get something done sooner than later that drove these terms?

Kevin R. Davis

Clearly, we wanted to expedite the transaction. When you think about conversion price it really would be fair to view the [inaudible] which is $10.07 since March. Of course, when we started talking to the Flowers crowd it was trading in the $10 range. This investment brings certainty to our refinancing and it was very, very important to my co-directors and I that we came up with a structure that would enable us to include our existing shareholders. At this price we’ve effectively bought an option to have our existing shareholders participates in MF’s future success.

J. Randy McDonald

You have to think about this really as two pieces. Yes, there is essentially a sponsor for half of it but they’re back stopping the other half that’s an issuance of shares to the public. So, I think you’re comparing a traditional up 20 coupon five, six to a deal where you have an investor who’s basically we’re purchasing from them a call option so I think the basic structure is different.

Roger A. Freeman – Lehman Brothers

That’s a fair point. I just want to be clear then, so the existing shareholders will have the right, the guarantee to participate on a pro rata basis, the 150/150?

J. Randy McDonald

That’s exactly the point. In your traditional convert sold to a sponsor the dilution would be 100% of whatever you’re issuing. In this case, the dilution if it all went to J.C. Flowers our shareholders would be diluted 16%. However, how we structured this, if our shareholders were to take half of this then the dilution is only 8%. That’s a big structural difference. So, the board felt very, very strongly about this, that they wanted the shareholders to be able to participate and not have 16% dilution. It’s a very basic difference in the structure.

Roger A. Freeman – Lehman Brothers

And as you look at your shareholder base do you think it’s likely that they would all want to participate? I know there’s probably some restriction on shareholders that do or don’t buy converts because this obviously requires additional capital to be invested. Obviously, the terms are favorable but not everybody buys converts.

Kevin R. Davis

I think those that can we’d be very surprised if they didn’t and so we do expect everybody that is structurally able to participate to do so.

Roger A. Freeman – Lehman Brothers

As you thought about the amount here what were the sort of constraints? Was it that you could only do a $450 million refinancing of the bridge? What got you to $300 and $450 there?

J. Randy McDonald

The constraint here was, time was one constraint. As you know, the rating agencies have put us on negative watch and that is based on refinancing risk. Our 10K, although we expect it to be filed sometime in June, I don’t think the rating agencies would have allowed us to wait until the summer to eliminate the execution risk on our refinancing so that meant that we needed to take action. The other constraint is because once you go over or you hit 20% or more of your shares by definition, that’s a public offering. So, what we had to do was be constrained to keep this under 20% and also meet the time constraint. Did that answer your question Roger?

Roger A. Freeman – Lehman Brothers

Let me ask one last question and then I’ll jump in the queue. When you show the decline in customer balances over the quarter, the biggest portion of that is the decline in value of those assets. Can you explain to me where – how clients were positioned? Because I look at sort of energies, sort of commodities broadly and we’ve had a real rally in prices. Is it that your clients are sort of net short? Is that why we saw such a big decline in the balances?

Kevin R. Davis

First of all you should remember that the period we’re referring to was in the weeks immediately following Saint Patrick’s day when you actually did see most of the commodity markets come to a stopping halt and gold and silver in particular had their largest ever one day fall in the days after March 17th. So, the vast majority of our very significant clearing customers are trend following fund managers which means that their positions typically would be positions in line with whichever trend is prevailing at any point in time. When [inaudible] trends come to a halt they are clearly positions opposite that change in the trend and they take some short term pain as the markets come up. But, yes it’s true that energy has been on a major [inaudible] for some time but it has had a moment’s breath. But, most particularly other commodities did have a false breath in the second half of March. I think the key and most important points are one, virtually none of the decline in our customer balances was linked to the transfer of positions and more importantly, since March we have experienced net cash inflows as opposed to outflows.

Operator

Your next question comes from the line of Nimh Alexander – Keefe, Bruyette & Woods, Inc.

Nimh Alexander – Keefe, Bruyette & Woods, Inc.

If I could stay on the financing, or get back to the financing for a question, I just wanted to clarify something, the terms and the holders of the convertible securities can convert at any time. Does that apply to J.C. Flowers as well? Help me understand their kind of commitment shall we say.

J. Randy McDonald

I think economically the way these converts work is there’s a dividend and there’s a yield there and then there’s a conversion price. I think that’s economically something that the holder of that instrument determines when it’s the right time. They bought an option and they determine economically when the best time it is to convert.

Nimh Alexander – Keefe, Bruyette & Woods, Inc.

So there’s technically no restrictions on J. C. Flowers’ ability to convert?

J. Randy McDonald

I don’t think so.

Nimh Alexander – Keefe, Bruyette & Woods, Inc.

Just on the subject of the financing, thank you very much for the chart it was really helpful on Page 26. Tell me again what’s next with the rating agencies because I guess we’ve already seen Fitch make some comments on your investment rating but with regards to the counterparty ratings, do we have to see this financing executed? Is this what kind of the rating agencies are waiting for to get you back off negative watch? Or, is it kind of the full and final risk assessment review as well?

Kevin R. Davis

In speaking with the rating agencies which we have done extensively these past few weeks, they identified three areas of concern. The first was the health of the franchise. Was this company’s franchise materially damaged by the events of the aberrational trading incident and then the unfortunate date of Saint Patrick’s day back in March. Well, clearly as we’ve demonstrated today by giving you a lot of detail on our actual numbers, we have demonstrated that our business is very much intact. I might had that despite the greatest efforts of some of our rivals to relieve us of staff and customers we’ve lost virtually no front office staff and very, very, very few customers. So, we’ve hit the first box. The second issue was the risk review. We’ve already had confirmation by both FTI and [Promitry] that our risk processing systems are sound although they are given us some advice and ideas on how we can further improve it which we will do and that’s a process that will never end. We will constantly be looking to upgrade and improve our risk management processes. The final piece was the capital plan. Today’s developments clearly are a very, very significant step towards satisfying that particular process. So, once we have the bank funding finally committed and in place we would expect to move off negative watch in short order.

Nimh Alexander – Keefe, Bruyette & Woods, Inc.

Then, just to clarify your CFO’s commentary with regards to the trend and comp to revenue ratio do you kind of expect to continue that trend or should we say continue that level of around 55%?

Kevin R. Davis

We expect the trend to continue although there will be months and quarters that because of mix shift between the retail institutional you might see it pop up a bit. But, the trend will continue to pull over time and it’s going to continue to pull over time not because we’re taking money out of our colleagues pockets and reducing comp arrangements in the front office but because as our retail and online businesses grow the comp ratio in those types of our businesses do tend to be somewhat lower and therefore over time you would expect to see continuation of a decline in the comp ratio. It is already come down quite a significant distance since the IPO. I can’t promise that there won’t be, as I said, the old quarter or month where it pops up 1% or 2% but the general trend is lower.

Nimh Alexander – Keefe, Bruyette & Woods, Inc.

Then just lastly and I’ll get back in line, can you give me an update on just a market environment right now. I guess one of the interdealer brokers which is a different kind of market they operate in, a lot more of the over-the-counter business but, you also participate in over-the-counter markets. Can you maybe help me understand are you seeing any kind of impact of the delivering more so on the OTC business that you have versus the exchange traded business? Or, are you as optimistic as you were say three quarters ago or two quarters ago?

Kevin R. Davis

There is no question that there has been some element of derisking in the overall financial market. However, we have one enormous advantage that IBBs don’t have and that is that our businesses largely revolve around central clearing counter parties. That being the case we believe that any trend in derisking from [inaudible] or management companies and other sorts of investors will be offset by the increasing demand for products which trade with central clearing counter parties. So, we still remain very confident and comfortable with our growth prospects.

Operator

Your next question comes from the line of Richard H. Repetto – Sandler O’Neil & Partners, LLP.

Richard H. Repetto – Sandler O’Neil & Partners, LLP

I guess the first question and I think it’s in there but there’s a lot of number falling through but it was to Randy, the $50 million in bonuses that weren’t paid out because of the trading loss, are those in the $0.48 number?

J. Randy McDonald

Yes, we added those back so it’s a more normalized number. It’s also the chart where we have the percentage of revenues, we added it back there as well so it is included.

Richard H. Repetto – Sandler O’Neil & Partners, LLP

I guess the next question is all this sort of hinges, sort of a well timed financing I guess, but we are three weeks away from mid June. I guess the question is if the J.C. Flowers and the back stop depends on this mid June event, how close are we? And, why not, if we were close, try to get so you can have all the parts together here and put everything to bed?

J. Randy McDonald

I think that’s a good question and the answer is that I think we’re an interesting company and do some capital markets but I would say that J.C. Flowers is a much bigger capital markets player than us so I think the answer is twofold. One, I think we already had negotiations going on with the banks so it’s not like this hasn’t been happening concurrently. We’ve been working very hard with the bank group but frankly, I think there are two intangibles that come with a relationship with someone as big and as influential as J.C. Flowers and that is their expertise on this as well as their influence.

Richard H. Repetto – Sandler O’Neil & Partners, LLP

I guess all other things being equal, like prior before when we, last night or yesterday, we were looking at $400 million, $350 million that needed to be refinanced in the bridge and incrementally you’ve improved that and now you’ve cleaned up the whole bridge but we’re still looking at around $400 million. But, you would say incrementally we are way closer to getting this $400 million refinanced because we’ve got a credible transaction by the other component of it?

Kevin R. Davis

First and foremost the June repayment which is $350 million has absolutely been taking care of because at the bank’s suggestion we will be drawing down $350 million from our excess capacity in the revolver. Randy’s taken you through the details of how we intend to cover the balance of the $1.5 billion. But, you should remember that doesn’t fall due until around Christmas time. So, we absolutely intend to get that dealt with long before that because we don’t want to remain on watch any longer than we have to. But, we have an effective plan that will work and that we all have a great deal of comfort in. And of course, as Randy pointed out, the advantage of having a partner like J.C. Flowers means that process will be that much easier. I wanted to say that we’ve known the J.C. Flowers team for quite a few years. We got to know them during the [Revco] transaction and we also share a building with them which is also rather convenient. We could not be more happy with our private equity partner in this regard.

Richard H. Repetto – Sandler O’Neil & Partners, LLP

One last one, this is sort of just a minor question but it just caught my eye, the IPO award, the 25.3 is well above the run rate of the three quarters, I’m just wondering how the accounting and economics works there?

J. Randy McDonald

Henry do you want to try that one? This is Henry [Steamcamp].

Kevin R. Davis

Our Chief Accounting Officer.

J. Randy McDonald

Who makes everything happen.

Henry [Steamcamp]

The IPO related costs was actually $4 million for the quarter. It was in total $56 million for the year and $51 was really for the nine months after [inaudible]. The $4 million I think, as we previously discussed in other calls, relates to our Sarbanes-Oxley implementation which is currently under way and falls within the IPO costs as well, some consultancy fees related to that. Then finally, as we discussed previously some rebranding and marketing costs that we had to incur post IPO that we’re still running through this quarter but those are basically done. But, we’re really left looking forward in the next quarter or so to the Sarbanes-Oxley implementation costs which will continue.

Richard H. Repetto – Sandler O’Neil & Partners, LLP

I was looking at the $25.3 million, it says employee comp relating to non-recurring IPO awards.

Henry [Steamcamp]

That is the line consistent with the previous period which relates to the [R] issues that were issued at the IPO and that’s a run rate number I think of about $6 million a month. It was higher this quarter because we had an accelerated charge related to the departure of our former CFO. When she departed we had to include an accelerated charge related to that according to GAAP.

Operator

Your next question comes from the line of Kenneth B. Worthington – JP Morgan.

Kenneth B. Worthington – JP Morgan

A couple of questions, first on the customer on the customer asset side, thank you for the additional – actually first, the presentation I thought was very comprehensive overall but, on the customer assets thanks for the additional disclosure. We can’t see what the mark-to-market gains are in the supplemental information you provided. But, to what extent have customers that took assets out of the firm, to what extent have they returned? And, if you could maybe provide an outlook? What is the roadmap to kind of win those customers back to MF Global?

Kevin R. Davis

Ken, the most important question is how many positions were moved away. Because, it’s quite typical for customers to leave significant amounts of excess balances with us. What we saw in late February and March was a very, very small amount of position transfers. So, this concept of customers coming back will imply that many customers had left and that absolutely isn’t the case. The absolute vast majority of the decline in customer assets was either linked to withdrawal of excess, and by the way, March 31 was the period end and last year at the same time we saw about $1 billion of year end sweeping by our customers. The remainder of the decline in customer assets, as we explained was the decline in mark-to-market for our customers’ own positions. So, this whole idea about us waiting for customers to come back well, our inflows are outpacing our outflows. I get an email from any customer that withdraws more than $100,000 and I haven’t had an email like that for quite a few weeks.

Kenneth B. Worthington – JP Morgan

That was actually very helpful and actual sort of leads me in to the next question, I actually felt like the outflows were lower than I expected. Did you have to reduce fees or commissions to retain customers? Either preventing them from leaving or was there anything like that, any fee changes to lock customers up?

Kevin R. Davis

Absolutely not.

Kenneth B. Worthington – JP Morgan

Secondly, maybe for Randy, Randy it’s nice to catch up with you again, on compensation can you kind of walk us through any of the unusual items in this quarter for compensation? And, one in particular, MF was going to migrate to stock-based comp for its back office personnel, was that implemented? Was there any sort of true up or catch up accruals from that migration to stock-based comp in this quarter? How did that accrual take place? Was it last quarter? This quarter? Has not happened yet? What’s going on there?

Kevin R. Davis

What we have said is we want to make stock a higher component of our overall compensation arrangement and as things stand today, we have not taken that step yet.

Kenneth B. Worthington – JP Morgan

So that’s probably on the comb for next year?

Kevin R. Davis

Yes.

J. Randy McDonald

Then the second half of the question, minor $3.5 million UK plan, Henry what are the details there?

Henry [Steamcamp]

That’s correct. There’s a very small UK planned benefit plan for a couple of [inaudible] and as part of the IPO we had to transfer over the plan in to MF Global’s name. That resulted in just a charge we had to take in Q4, $3.5 million once they did the accounting valuation comparing the assets against the plan obligation and that’s reflected in the non-GAAP table as well. That is an add back for comps quarter-to-quarter.

Kenneth B. Worthington – JP Morgan

Then maybe lastly for Kevin, I think the big issue that investors have was the run on the bank. And, it seems like there was a run on your business and yet not for some of your smaller peers, even those that were independent. In your opinion does kind of the run, or maybe it’s just the perceived run not an actual run but the perceived run, was that all or largely due to the rogue trader that you had? Or, do you think there are other structural issues with MF that caused at the very least the investor concern, if not the customer concern as well? The sort of follow up there is you’re addressing the capital structure, you’ve improved disclosure, are there other things that you are doing or plan to do to help improve the stickiness of the customer base and the perception by both investors and customers?

Kevin R. Davis

First of all, I don’t know how many ways I can say this to you but there was no run on the bank. In fact, in the days immediately following the aberrational trading incident we actually saw our say funds create new highs for I think three consecutive days. The point at which we saw a decline in customer excess, we saw some evidence of customers doing year end withdrawal and generally speaking withdrawing excess balances. That occurred in the week following the weekend of Bear Stearns where as you will recall we were the victims of some malicious and false rumors about our liquidity which clearly were absolutely untrue. So, in terms of what are we doing about the stickiness of our customers well, our customers are free to transfer their positions any day of the week any time they would like to do so. As Randy explained, given the fact that almost all of their assets are held in cash, we’re perfectly capable of doing so. The best way for us to improve the stickiness of our customers it to continue to deliver a very high quality product which is what we do. One of the great benefits of MF Global over all of our rivals is that we are the only global broker which is completely and utterly independent. We do not have any ownership that is conflicted with the interest of our customers. We don’t have any businesses which are in conflict with the interest of our customers.

Once the rating housing stabilizes, given the events of the past few months in the wider financial marketplace we would expect to see a level of customer inflows accelerate. But, I should also point something else out, clearing, a customer clearing is not 100% of our business. It’s much more, much closer to about a third of our business and of course, in our execution only businesses which is a very, very significant part of our business all these issues are completely and were completely irrelevant. The great news is inflows outpaced outflows and all of this is demonstrated by the resilience and strength of our franchise. If we had had the run on the bank that you just described our rate flow numbers would have reflected that; but they didn’t. What they showed was that our business, as I said before, in rude and robust health.

Operator

Your next question comes from the line of Michael Carrier – UBS.

Michael Carrier – UBS

Just a question on page 26, Randy when you go through the funding you’ve kind of given what you think on the bank financing, what the rate will be and then on the private equity you have the terms once it’s finalized. I guess just in terms of the accounting treatment on the preferred, how do we look at that because they’re all a little bit different given all the different raises by all the financial firms. In some you include the full 24 million in shares in terms of dilution, some you include the 6% or you do a test each quarter to determine which one is more dilutive.

J. Randy McDonald

This instrument does have a little bit of accounting to it in that the price to the extent that it get issued at a price below the closing price then it’s assumed that there’s a hedge instrument in there. What you would do is you would take the difference, let’s assume it was $15 minus $12.50 or to make it easier use $15.50 minus $12.50 that $3 is assumed to be the equivalent of paying a dividend. Who was the example we looked at the other day?

Henry [Steamcamp]

It was Countrywide.

J. Randy McDonald

Take a look at Countrywide. They just did a similar issuance where it was slightly different but the disclosure is treat it like a dividend, the difference.

Michael Carrier – UBS

Just on the $350 for the revolver and $300 for internal sources, what is like the cost of the funding for those? Especially on the revolver going forward?

J. Randy McDonald

Current is LIBOR plus 40 but the indications from the banks are too sweeten that a little more and make it like term debt and maybe increase that to LIBOR plus 150.

Michael Carrier – UBS

Then when you guys take a look at your business and you just said when you look at the maximum liquidity you need, that came down from like $1.5 billion to $900 million. How do you get a sense of what those needs are? Because one is maybe some portions of your business have gone down, you change the relationship with Man Financial so those needs came down but then on the flip side given the volatility and the current environment is fairly high and people are worried just in terms of counterparty. So, how do you balance that and feel comfortable with that $900 million?

Kevin R. Davis

We do extensive work to analysis all our peak liquidity needs could be in a stressed environment. You should remember that we had that arrangement in place, as Randy pointed out with Man Investments for many, many years but most importantly certainly since the IPO. The average utilization has been $350 million per day and on very many days it reached $800 million. But, at no point during this financial year did we ever need to call on our revolver to handle those liquidity requirements because, as Randy also said, this is a self funded businesses and we have typically ample liquidity in place to accommodate those needs. How do we assess it? It’s a great deal of work, much of it’s done with third party accounting firms, etc. and we analyze what if a whole combination of circumstances were to occur, what could we need on any given day and take a very conservative prudent approach. The number is $900, we’ll still be left with $1 billion.

In terms of the overall capital efficiency that we talked about, clearly structural changes in the UK, the [inaudible] and of course the [Pelliter] requirements which came out of [inaudible] both of those put together meant that we had to take another look at some of the businesses that we were engaged in. Particularly those where we were segmenting customer assets on one hand and on the other facing OTC markets with three [inaudible] extra days of settlement. We’ve done that, we’ve reassessed the way which we structure that business. We’re going to focus our UK equity derivatives business much, much more closely on direct retail, although we’ve always been the market leader I might add, and much less focused on doing business for other brokers and institutions. Does that answer your question?

Michael Carrier – UBS

Just on 514, you guys gave more disclosure just kind of the breakdowns of the business by the exchange traded and then the non. I’m just wondering what portion in the non-exchange traded related net income, you look at like the $15 million in contracts on the volume side, you did $165 million in revenues and it’s like 3% of volumes, 30% of revenues so it seems like a great business. I’m just trying to figure out what area is that?

Kevin R. Davis

It’s the spread and spreads have widened most particularly between agents and treasuries and clearly we have told our investors for some time that we very much likely, this gives us the opportunity to mark up and we have consistently and steadfastly sought to build on those visitors. In particular, I mentioned in my own comments a couple of businesses, our non-G7 fx business which is in Chicago. The spreads on that business are vastly better than is the case when you’re trading in traditional currency. I also mentioned to you that after Saint Patrick’s day we recruited a fabulous team in fixed income sales, also in Chicago and these guys are bringing us businesses, bring us customer flows in businesses with very high mark up potential.

Michael Carrier – UBS

Randy, when you mentioned next year non-comp expenses being in line with fiscal year 08, I’m just wondering there was a lot of noise this year so can you give kind of what you view the core non-comp expense for fiscal year 08?

J. Randy McDonald

Well, I think what I said was that that run rate that you see there for fiscal year 08, that’s an adjusted number so we’re trying to normalize our numbers in that chart. So, that’s what I’m saying, that is sort of how we’re thinking about it on a normalized basis. Is that what you meant Michael?

Michael Carrier – UBS

I think so. Are you talking about the chart where you have the ratio?

J. Randy McDonald

Yes. The guidance is that we’re going to invest in infrastructure but we think we can find efficiencies elsewhere in non-comp to offset that. But basically that run rate feels good to us.

Operator

Your next question comes from the line of Mike T. Vinciquerra – BMO Capital Markets.

Mike T. Vinciquerra – BMO Capital Markets

I wanted to follow up on the last question just for a second Randy, the non-exchange traded there’s a reason I guess you did not put a yield, you put n/a in the yield line there. Can you just explain to us how we should be looking at these numbers? What are they telling us and is there anything about these numbers that we can use to drive our models because it sounds like it’s a kind of potpourri of a variety of different items and that’s why you couldn’t be more specific on the yields.

J. Randy McDonald

Very astute and I’m going to follow up on the heels of what Kevin said, the reason is that it’s n/a is that this business in the OTC market doesn’t have the efficiencies and necessarily the transparency that you have with exchange traded businesses. So, what you have are people who it’s high touch, the mark ups and the mark downs on the trades, the net interest that we earn is not very standard. It depends on the product, the geography, the sophistication of the transaction. So, it sort of doesn’t make sense and I think if we had a rate in there it would bounce up and down for that reason and therefore I’m telling you I don’t really have a good way of measuring that. But, I think –

Kevin R. Davis

I’d only add to that, that when you’re trading these markets they don’t, unlike futures trade in predetermined unit sizes. So, every customer will trade in a different amount. So, trying to create a future look equivalent would be misleading.

Mike T. Vinciquerra – BMO Capital Markets

So this is a combination of equity shares, its fixed income instruments, its OTC derivatives.

Kevin R. Davis

And foreign exchange.

Mike T. Vinciquerra – BMO Capital Markets

Let me just go back to one more thing and then I’ll get off, the client assets one more time Kevin, the thing I still am just trying to figure out when I look at the other large FCMs out there all of them saw their client segregated assets flat to slightly up February 29th to March 31st and with yours being down so much you mentioned it was a mark-to-market on positions and so forth. Why weren’t the other FCMs, why weren’t their client seeing the exact same impact?

Kevin R. Davis

We also said that we saw customers withdrawing excess funds from us. Clearly, we’re not going to delude ourselves, we were not broker of the month in March and so we are not going to deny that we saw more sweeping by customers than other of our rivals do. But, I want to emphasis something to you that I have said consistently since before we went public and even when I was a director of Man Group, which is seg fund balances are really little more than virility index. They do not have a direct link to our profitability. If you go back to FY 2005 to 2006 you will see that our seg fund balances were almost completely flat yet our profits grew by 66%. I think it would be a big, big mistake for anyone to spend too much time obsessing about what was going on with [inaudible].

Operator

Your next question comes from the line of Howard H. Chen – Credit Suisse North America.

Howard H. Chen – Credit Suisse North America

Very simply, how do you arrive at the revised $900 million financing needs for the company? And, how do you allocate that to the separate business lines? I guess what I’m getting at is given your earnings are predominately generated from agency only FCM I would think that your current capital needs could be much less significant?

J. Randy McDonald

The capital structure is there. We do have margin requirements and I think when the company went public, of course I’m still studying this but I think between the US and the UK there was a certain amount of capital that needs to be there as basic regulatory capital. As we think about the business and how we’re going to move forward we have basically reorganized the treasury function to focus on capital allocation. I think what we will do is a whack calculation and look at not only what our shareholders want for return but frankly what we’re paying the debt markets and that cost of capital will be measured against what we’re using that for. I need time to do that.

Kevin R. Davis

Can I add to that? I want to emphasize that the revolving facility is very much a stress liquidity capacity which in actual fact leading up to the aberrational trading incident we had only ever used twice since we’ve gone public and in both cases it was to test that it worked. We drew down $200 or $300 million once in the UK and once in the United States just to test all the systems and the processes in the event that we were of the need to use it. But, of course, up until February the 27th, 28th, we have not used it at all to accommodate our ongoing businesses. In there I can assure you it’s not there for day-to-day use.

J. Randy McDonald

I misunderstood your question Howard. If you’re asking about the stress liquidity, in treasuries what we do is we first look at what we have in terms of capital and then we look in our boxes. We have our own cash, we have all the securities which are in the boxes, we collect margins from our customers, there are haircuts on those things so in terms of levels of liquidity the revolver is absolutely the last level of liquidity and frankly the only time we used it was for Dooley which was truly extraordinary. So, it’s there for emergencies but for instance, Man Investment tying up $800 million in a day that’s a tremendous amount of capital exchange margin required and I think what that just demonstrates is that between stock borrow loan and the repo for us to move cash and securities around, that says a lot about the liquidity of how we manage our balance sheet.

Howard H. Chen – Credit Suisse North America

As another way, a separate conversation from the stressed liquidity requirement but how much capital do you think you need to operate your entire business today? How much buffer of capital do you want on top of that to feel comfortable? And, how does that compare to where it was pre-provision of fx arrangement with the group?

J. Randy McDonald

I think in the US 8% has been the standard that we’ve used in the US, that’s early warning and I think that’s more than enough capital for an agency owned business, early warning capital. In the UK, it’s actually evolving because as you know the [Basel] rules being implemented I think there it’s a question we ask ourselves like every other financial institution is asking itself now. I don’t know that I have a real good rule of thumb right now. I think we have to get through but we right now look at our capital and we think we have about $600 million of excess capital. That’s above that early warning, including what we think is available in the UK so we think we have a ton of excess capital but I don’t have a hard and fast rule yet for you on the UK.

Kevin R. Davis

The vast majority of our capital is used for regulatory capital purposes. And, of course, there is a degree to which having plenty of capital is what we would regard as creditability capital when you are outfitting the company business, the larger your net worth the easier it is to attract larger clients. But, that’s what the capital is for, it’s predominately regulatory capital.

Howard H. Chen – Credit Suisse North America

Then with regard to the revision of the fx arrangement with the group I guess clarify and reconcile with Slide 26, how much capital have you currently alleviated from that revised arrangement? How much is left to go? And, where does that sort of fit in to that slot?

Kevin R. Davis

First of all, the most important element to the rearrangement with our very, very good friends and former colleagues at Man Group was it reduced our stressed liquidity needs or it was part of the reduction from $1.5 billion to $900 million. Because that relationship was held in the UK, unlike the United States where we can just take customer assets put a formula on it and off we go to the races, it’s very difficult to give you absolute precision on how that isolated arrangement impacted our UK capital needs. In the UK it’s a combination customer asset, overhead risk, operational risk, concentration risks, the counterparty, it’s a whole series of semi formula assumptions that makes it actually much harder to tell you, “Oh, this account is using that much of capital and this relationship is using that much.” For example, if you had three customers and each with exactly the same amount of business doing exactly the same thing you would say theoretically that if one of those customers left that your rate cap requirements would come down by 33%. Well, actually they wouldn’t because at that point you’d end up increasing your concentration risk. As I said, it’s not nearly as easy to calculate these matters as is the case in the United States.

Now, having said that, the steps we’ve taken other than Man Investment and of course, the changes we’ve made to our equity derivatives and fixed income in Europe have cumulatively had a significant downward impact on our reg and working capital needs. This has clearly given us enormous flexibility and has gone a long way towards helping us solve our long term funding needs.

Howard H. Chen – Credit Suisse North America

Final one for me, Randy thanks for all the detail on the net interest income. If I put aside the capital structure impact for a minute, can you touch on the interest rate sensitivity on the balance sheet at fiscal year end? And, how you think about the impact of future direction of rates particularly in that client cash business?

J. Randy McDonald

I think that’s something we’re going to work on over the next quarter or two. You know how I work, I’d like to create a sensitivity model. So, I’m not really ready to answer that question in sort of the first, what is this the 35th day. I had to go out and raise $300 million in capital and prepare for an earnings release so that is something I think I will work towards. I think that’s a good thing for investors in helping to not discount future cash flows if you have better ideas of what happens in a sensitivity model. So, I will make that promise to you that over the next few quarters we’ll get there. I wanted to follow up, I think I’m better understanding what you’re getting at. The $900 million that you keep referring to is how we do what if scenarios, not how we actually operate our business. So, I don’t want to confuse you. There is capital that is needed for something like the Man Investment foreign exchange but frankly, they provide that capital.

What we’re doing with stress capital is, let me give you an example, let’s say that we had a customer who was taking physical delivery and we go to settlement and they don’t bring in the security. So now the stress is how big is that position and if we’re obligated to now deliver cash and it’s a mammoth position and we don’t have the security that’s really what we’re trying to get at there. Assuming we had no other sources of liquidity like we could take similar securities and go and pledge them to that particular institution on a secured basis, assuming none of that can happen for whatever reason, we play this what if game and we ask ourselves, “So, how big are these things? And assuming we had no other ability to solve that liquidity then we go against the revolver.” To Kevin’s point we’ve never done that. That’s the point of the stress liquidity is it is very much a what if game, not how do we run the business every day and allocate capital. So, I think I’m better understanding why you’re asking about that stress liquidity number.

Howard H. Chen – Credit Suisse North America

I think pretty simplistically Randy, what I’m trying to get at is the difference between the stress liquidity and how you operate day-to-day if you have a lot of excess liquidity, if you’ve alleviated a lot of capital requirements with the revised group relationship, how necessary is it to go out and raise capital? That’s the fundamental question.

J. Randy McDonald

The Man Investment foreign exchange, those exchange requirements, that’s a pretty big number, right. I mean, $800 million is real money and so that would be one of the items that we look at and say, “If ever we had to put that money up, if we ever had to, boy that’s a lot of money.” That’s what we do and by removing that business from us, all of a sudden, that’s not the outlier anymore. The outliers are much, much lower therefore when we stress the model it’s not in there and therefore we have much lower thresholds when we stress ourselves. It’s strictly a what if game.

Operator

Your next question comes from the line of Christopher Allen – Bank of America.

Christopher Allen – Bank of America

Just a quick question on Slide 24, just thinking about in terms of the run rate, so April is $43.5 million net interest, that’s about an $8 million decline from the average of the prior six months, right? I’m just think about on an annualized basis we’ll get almost about $100 million and I would think there would be pretty hefty margin on the net interest generated so any comments around that would be helpful.

J. Randy McDonald

I would caution you not to take any narrow slice of time and every annualize it, that’s a bit dangerous. I think what we’re showing here is there is seasonality to the business, there have been changes to the complexion of the business. My comments were around rates and balances, as Kevin pointed out, balances are trending back up and we don’t know what’s going to happen with rates but I think we’ve done a good job of increasing our yields and our efficiency in treasury via the repo book, the match book as well as the stock borrow loan program. I think the reason we have it in here is to demonstrate that April was a pretty good month not that you should take this and annualize it.

Christopher Allen – Bank of America

I guess I was just thinking about it as you’re shrinking the balance sheet so in essence unless you’re going to start blowing it back up again, which might happen with client assets coming back up but there’s going to be some lower level of run rate going forward, is that fair to assume?

J. Randy McDonald

I don’t know if that’s fair to assume because the reason we’re shrinking the balance sheet is if it was capital that had a cost to it. So, I think when you take those client positions off, I think you also have to consider the cost of capital dedicated to those positions and I think that’s what we were doing was reallocating our capital to higher margin businesses.

Operator

Your next question comes from the line of Donald Fandetti – Citigroup.

Donald Fandetti – Citigroup

I wanted to move on to sort of a broader question in the business, I wanted to get your updated thoughts on Project Rainbow and your thoughts on some of the potential developments at [Life] and LCH in terms of regaining control of open interests?

Kevin R. Davis

First of all, for the purposes of full disclosure I should tell people that don’t know I am a director of the LCH, I’ve got to clear that. So, I’m going to be even more careful about what I say. The Rainbow Project is continuing, there are quite a lot of different options available to Rainbow and it really is a project that revolves around and is centered upon opportunities which we have identified in pre-existing competition law. The answer to that is Rainbow is reviewing a variety of different options available to it. Clearly, we are interested in finding different ways for our clients to cheaply and effectively increase their options for trading in Europe. As you know, the existing futures exchange market it’s shucked in to one which makes it very difficult for exchanges to compete with other exchanges simply because there’s no access to the open [inaudible]. We believe and our partners in Rainbow believe that message and pre-existing competition law go some way toward, not some way a very large way towards resolving that matter. But, as we’ve said in the past, we don’t want people to bake in to their expectations on our future prospects any assumptions with success in Rainbow. If it works, it will be wonderful. If it doesn’t, we’ve still got a fantastic business.

Donald Fandetti – Citigroup

Lastly Randy, what is baked in to your sort of 15% to 20% net revenue growth? Are there any acquisitions in there? And when Kevin, do you think you might be able to start talking about some acquisitions?

Kevin R. Davis

In terms of what’s baked in we’ve basically had done a thorough, as we always do, a thorough process with all our business leaders across the world and when taking in to account their expectations for the fourth coming year we are confident when we say 15% to 20%. You should remember that our life doesn’t begin and end with the CME. We’ve got, and we shouldn’t just track our fortunes towards having [inaudible] exchanges. We have a very, very significant and growing business in Asia Pacific and we believe although those businesses have done extremely well there is still a very long way to go in terms of growth. In terms of acquisitions we’re always looking out there for opportunities. We don’t expect there to be more than two or three consolidation opportunities for us in Europe and North America because we’ve already consolidated almost the entire independent futures industry. However, there still remains ample opportunity for consolidation in Asia Pacific and for broadening our product mix in the region. For example, I’m delighted that this year our COD business in Asia Pacific which is centered largely in Sydney Australia has been the first brokerage company to roll out COD products to various different parts of the region including Malaysia, Singapore and ultimately Hong Kong as well. There’s lots of areas for us to grow and we are fortunate enough that it happened slowly in line with what was happening in Chicago or New York.

I believe that’s the end and I want to thank everybody who participated in the call. Randy and I are thrilled to have been with you this morning particularly with the wonderful news about our new partner J.C. Flowers and of course with everything wonderful that we’ve had to say about the strengthen and [inaudible] of our business. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: MF Global, Ltd. F4Q08 (Quarter End 03/31/2008) Earnings Call Transcript
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