MF Global Holdings Ltd. F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

| About: MF Global (MFGLQ)

MF Global Holdings Ltd. (MF) Q3 2010 Earnings Call February 4, 2010 7:30 AM ET


Bernard Dan – CEO

Randy MacDonald – CFO


Roger Freeman – Barclays Capital

Richard Repetto – Sandler O’Neill

Ken Worthington - JPMorgan

Niamh Alexander – KBW

Michael Vinciquerra – BMO Capital

Mike Carrier - Deutsche Bank

Patrick O'Shaughnessy - Raymond James

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Bernard Dan

In anticipation of a potential bond sale, we introduced a new set of debt investors to MF Global.

We intended to use the proceeds to further pay down a portion of our revolver which is our nearest term maturity. We were favorably received by investors, however the offering coincided with a number of factors including the financial crisis in Dubai.

As a result we decided it wasn’t the right time for the offering. We subsequently took $200 million of our free cash and in December paid down a portion of our revolver early. We will continue to be opportunistic with our capital structure, our conversations with the regulators to secure the release of further excess capital are ongoing.

These discussions are an important piece of our efforts to reduce the amount of debt on our balance sheet. Turning to slide six, we made important progress in our key strategic initiatives during the quarter. These activities are designed to position us as the preferred choice for clients in cash and derivative markets and increase our firm’s market share and profitability over the long-term.

During our last call I mentioned our plan to scale our institutional businesses. We’ve launched that effort within equities, recently announcing the strategic realignment of that group. This initiative leverages MF Global’s expertise in global equity and derivative markets.

We hired top industry professionals and listed index and stock options, portfolio trading, and direct market access. We believe these areas represent the best opportunity to scale our equities business in the US.

As part of the realignment we agreed to sell our US equity interdealer broker business. This move is part of our strategy to exit low margin activities, so that our core high margin businesses can grow to the fullest extent possible. The interdealer broker business represented $20 to $30 million in annualized revenue for fiscal year 2010, which we believe will be more than offset over time by the new capabilities we’ve added to our US equities group.

During the quarter we advanced our objective of building a strong unified retail offering. We saw progress in our retail business in Canada, where we rolled out the [Lynn Walbuck] brand a few months ago. In September we launched a dedicated advertising and marketing campaign which generated increased account openings.

Finally as we’ve discussed during past quarters, we begun to focus more than ever before on elevating the level of service and quality of offerings we deliver to our clients. Our client solutions initiative is gaining traction. We’ve established a relationship management group within client solutions, hiring top client service professionals from large global banks.

They’re working with our sales staff to make sure we’re doing everything possible to maximize institutional client relationships with the firm and to enhance their experience with MF Global. Further we’re already seeing results from the overhaul of our account opening process. Today clients across all markets and regions can begin trading more quickly and have the efficient market access they require.

In Asia for example these new procedures are essential to maximizing the growth of our retail business across a range of products including CFDs, FX and futures. While the success of our strategy is not fully evident in our financial results, our efforts have had a positive impact on our market share.

Slide seven shows that during the quarter our share of US segregated funds climbed to its highest level in the past year. Further we’re seeing the results of some of our retail focused initiatives with our segregated funds from our introducing brokers or IB business, up 26% from December, 2008 to December of 2009.

IBs are an important driver of growth for us as they are third party distributors of the products we offer. While we expect client balances to fluctuate slightly from month to month, we’re trending in the right direction.

I’m confident that we’re on the right path for increasing shareholder value. We’ve reduced our overall debt and remain on solid financial footing. We’re well positioned to benefit when the macro environment improves, and our proactive efforts to control key elements of our business, growing our retail and institutional product offerings, to enhancing client service have begun to diversify our business and show early results.

So with that I’ll now turn things over to Randy.

Randy MacDonald

Thanks Bernard, against the backdrop of all those exogenous events that Bernard just commented on for the December quarter, like falling interest rates and collapsing spreads and anemic volumes, we had a number of bright spots.

For instance we paid off $200 million more on our revolver, successfully extended participation in our equity-based incentives across all product lines, gained more market share in US FCM assets, in addition to an increase in trading volume. We gained more market share in trades. We expanded our spread earned on client balances and we expect a lower effective tax rate going forward.

And this all helped offset the further collapse in spreads we experienced across the fixed income businesses, so let’s go to slide eight to see the specific drivers of net revenue in the quarter.

Column A contains the total net revenues for the December quarter at row 11 which is equal to $251 million which almost exactly matches the September quarter of $252 million. And as Bernard pointed out if not for the collapse in the spreads for the fixed income business, then we would have had a stronger quarter.

For instance GAAP EPS would have been $0.06 higher using the September spreads or $0.08 using the June quarter spreads. I’ll come back to this, but let’s start with commission revenue. Volumes are in row 13 and total volume for the quarter in column A was 425 million contracts. That’s 7% higher than the September quarter and this compares to only a 2% increase in exchange volumes again demonstrating that we increased our market share.

The commission rate or the yield on these trades are at row 15. [inaudible] to yield slightly decreased this quarter by 5% or less, that’s not unusual, that’s a pretty common fluctuation. Column B is for trades we execute but give up the clearing to another broker and $0.02 decrease from the September quarter was primarily driven from a change in mix to the more competitively priced institutional equities business.

And that resulted in higher volumes but lower margins. Column C is for trades that we both execute and clear and this also dropped $0.02 from the September quarter. As we saw a significant decline in the [VIX] that volatility drove professional trader volumes higher. These are also more competitively priced trades resulting in lower margins.

If we then take the product of the two factors of volumes and rates then we get the net revenues for the quarter in row 11. Now to sum the net revenues for columns B, C, and D, that’s the $200 million at row 12. So although the volumes were up 7% and the yields were down 5%, that resulted in net revenues being up 2%.

Now moving over to column E, that’s matched principal, I’m going to come back to that in a minute, but let me first speak to column F which includes revenue from energy, metals, and foreign exchange. Principal transaction net revenues totaled $33.7 million and that was basically flat to the $32.3 million in the September quarter.

Our foreign exchange businesses experienced a higher level of volume and the commodities business particularly energy, benefited from increased volumes and volatility during the quarter. Now let’s jump over to net interest section or column G. In row 14 the average assets are $14 billion. This is nearly $350 million higher than the last quarter.

Had we not paid off the $200 million in debt, then average balances would have been up nearly $450 million. In the row below, this row 15 is the spread earned of 127 basis points. And this is a 34% increase and offsets most of the decrease in the fixed income product.

In spite of narrower spreads and a decline of four basis points in the effective Fed fund rate, we were able to increase our yield by 32 basis points and that success is primarily driven by two things. First is the active global conversion of all low earning assets to higher yielding deposits for margining with exchanges. And second is reasonable strategies for extracting value between asset classes.

And we’ve maintained our laddered approach to maturities consistent with last quarter by extending approximately $7 billion or about 53% of the average balances into longer dated maturities. Average maturity extended portion remains about 13 months and the blended portfolio of $14 billion has an average duration of seven months basically the same as last quarter.

We feel comfortable with the life of the portfolio given consensus to use the rates are going to increase in the near-term. Now going back to column E, some of you might remember a couple of years ago when MF Global discussed the accounting geography created by total return swaps, the dividends on the cash instruments were used to hedge the swap were accounted for in the interest income line, whereas the mark to market on the swaps went through the principal transactions line.

Well we had a similar accounting result this quarter for some equity futures transactions. The hedging instrument for an equity future is the underlying cash equity, the way we finance the underlying equity is through stock borrow loan transactions. In addition MF Global receives interest for an [non] stock borrow loan and so all of this is accounted for in the interest line.

What is relevant about the accounting treatment of this transaction is that any dividend related to the equity goes through the interest line while the futures contract is mark to market for the dividend through the principal transaction line. So to be more specific we purchased the stock through a futures contract and sold short the cash instrument. Therefore reported a negative $28.4 million in column E.

This is simply interest of $36.4 million we earned elsewhere in the business offset by a $64.8 million of dividends which went through the interest line. And then conversely this same $64.8 million value is the mark to market adjustment recorded through the principal transactions line for the futures contract.

So that changed a $10.8 million loss from other mark to markets to a $54.5 million gain in column E. You’re going to see the impact of this $64.8 million on the next slide and its going to be noted as a large change in the securities lending lines. But of course our focus is solely on the net revenues generated and the only reason we’re showing this is that you can agree these amounts back to our income statement.

So let’s look at the fixed income business for column E in greater detail. So on slide nine the fixed income environment faced a challenging rate and spread environment as volatility across markets abated the overnight credit spreads continue to decline including another 50% drop in short-term spreads.

And that was on the heels of a 65% drop in the September quarter. So spreads have come down significantly over the last six months and that created challenges for the repo portion of fixed income business. Dropping to the bottom of this page, despite our continued broadening of participation in the fixed income markets, we’re not immune from a narrowing market spread.

Our fixed income revenues were down $15 million or $0.06 EPS on a GAAP basis from the September quarter, down from $26 million. Now last quarter we thought we were at the low end of a continuous spreads for our fixed income business but we [inaudible] as spreads across the product spectrum declined significantly from the September quarter.

The loss you see on this slide is the same $10.8 million loss I referenced on the previous slide. And this was the result of slight back up in interest rates in the treasury and agency portfolio. However this was just accounting geography as the offsetting gain is accounted for in the net interest section. US government is announcing they intend to conclude their $1.2 trillion mortgage backed security buying program this March and we think the removal of this liquidity from the marketplace could have a positive effect on bid offer spreads.

Now let me take you through the rest of the income statement, slide 10 we turn to the simplified income statement and on sequential quarter basis net revenues were flat but I discussed that on the previous slides. Compensation expense is down $13 million to 60% of net revenues, and this is primarily because the extension of equity based incentives across all product lines.

This to be sure employees are making good long-term decisions and their interest are properly aligned with shareholders and other constituencies. Now of the $13 million decrease at least half was this new equity program. The other half is pretty evenly split between either a lower bonus pool for the support personnel or a linear reduction in the producer compensation and that’s because our net interest margin was a larger percentage of net revenues this quarter and we generally don’t pay producers on net interest.

Non-compensation is higher almost entirely due to reengineering costs and our domestication to Delaware. We’ve said that our run rate will start to move back to about $100 million per quarter for the ramping up of our reengineering efforts. We continue to see that to be the trend.

Our interest expense was positively impacted by two things, a slight decrease in LIBOR rates and then of course in December we reduced our revolver debt by $200 million and that cash came from the free cash in our hold co and I’ll discuss our capital structure on a later slide.

The other perspective good news is that our effective adjusted tax rate fell from 46% to 38% for the quarter and that change in rate was due to two things. First was our structural rate increased significantly not only due to a change in the mix of where we are reporting taxes, but also a change from an annual estimated profit to a loss.

And the second reason is there’s a positive impact, that’s more than offset this increase of non-deductible items because they have a less impact going forward or smaller impact going forward. Now we estimate that the effective rate will move closer to being approximately 40%. As we’ve mentioned in previous calls, since the IPO in July of 2007 we’ve recorded deferred tax assets on our balance sheet of approximately $60 million related to our equity awards.

About half of this relates to RSUs issued at the IPO and they were at a fair value of $30.00 a share. Now the vast majority of these awards vest in the September quarter of next year so that $60 million will accrete to $70 million at that time. And then for example the stock price at $10.00 next September then about one quarter of the deferred tax asset related to the IPO RSUs would be written off or about a $19 million noncash charge.

Then the rest of the deferred tax assets or other equity awards with longer vestment periods and lower issuance prices and are not as at risk. Now in the appendix of this presentation we have a reconciliation that takes you from the GAAP EPS of $0.18 loss to adjusted net income per share of $0.01.

And there are really three reasons for the difference, the first two occur each quarter and equaled to $0.18 this quarter. The first is we add back the IPO stock compensation and then count the underlying shares as dilution and then we assume the senior debt and preferred instruments are converted. In total that’s a $0.17 increase. And that gets us to negative $0.01 of EPS.

And then the second adjustment is a one-time tax adjustment of $0.01 which decreases the recorded tax benefit so that’s an add back. And this has arisen as a result of our Bermuda treasury portfolio becoming subject to US tax following our domestication of Delaware and then the last adjustment, the third one, is an add back of $0.01 for severance.

This $0.01 of adjusted EPS was the same amount in September quarter and then finally EBITDA on an adjusted basis was $28 million for the quarter and that’s 13% higher when compared to the $25 million for the September quarter.

Slide 11 visually depicts the progress we’ve been making in our earnings power. In the September quarter we recorded pre-tax GAAP loss of $13 million, however we had a $9 million decrease in unrealized gains on some exchange memberships. Adding back that one-time item the pre-tax loss was $22 million and then comparing this to the current quarter, there are three things this quarter to bridge us.

The first was a minor decline in net revenues, the second was primarily a small increase in reengineering and domestication costs, and then third was lower compensation of $15 million. So that gets us to a pre-tax GAAP loss of $12 million and that means we’ve improved on last quarter’s loss by $10 million or 45%.

Now I would like to review the company’s sensitivity to the changes in interest rates, so if we turn to slide 12, many of you have asked me how a change in interest rates would impact the financials of the company so let’s look at slide 12. The first column, simply the actual numbers for this December quarter, you can see the average effective Fed fund rate was 12 basis points and we well seated this with our yield in client funds reaching 127 basis points.

And then towards the bottom you can see that our compensation net revenue this quarter was 60% and the two columns on the right, those are pro forma calculations of our interest income and then compensation costs at differing Fed fund target levels and we used 2% and 4% and we assumed no incremental yield is earned above these rates.

So in the middle column if the Fed fund target rate was at 2% and then we assumed a 30% payout on this to the producers then interest revenue would be $70 million and compensation as a percentage of net revenue would be 57%. And then annualizing the incremental net interest revenue and then deducting the 30% payout to the producers we then pay an effective tax rate of 40%, use the basic GAAP shares and that gets us a sense of the sensitivity and an increase in interest rates that might, what that interest rate might have on MF Global.

And its an incremental $1.30 EPS at the 4% Fed funds rate. So said another way for each 25 basis point move that could equal about $0.12 of annual EPS. This is probably, there is probably upside to the calculation since I expect that we will continue to earn higher rates then the Fed fund rate and this calculation doesn’t include any improvement in the spread environment and the extension of duration.

And the other thing is we generally don’t pay compensation on interest income. So let’s now turn to the balance sheet which is slide 13, and not coincidently the first two lines are the same balances from our business model on slide eight, the first row are the client balances and firm capital structure as we reinvest those for spread.

There’s a slight increase in balances but more importantly we grabbed more market share. The second row is the matched book we went through in detail on slide nine. And the next line are balances due from other brokers in the exchange of the normal course of business and they are up relatively unchanged with the matched book. And then we have our other assets like exchange memberships, intangibles, the leasehold improvements, etc.

And these are essentially unchanged as well. And there was little change in shareholders equity and then the free cash decreased to $70 million and that was due to our $200 million payment towards the outstanding credit facility. So MF Global continues to be well capitalized with adequate liquidity so let’s see on slide 14 the details of that.

On slide 14 on the first row is the capital for the regulated companies of $1.9 billion. Then on the second row is the capital for the unregulated companies primarily our holding company and the finance companies. So the total capital for the firm is $2.1 billion, the required capital to the firm is $1.4 billion, and then our required capital increased about $100 million from the last quarter. The majority of this is the increase attributable to all the new client assets.

Then the next column is excess capital, excess capital decreased $115 million to $468 million from the September quarter and the change includes the $50 million released out of the US broker dealer and the increase in the required capital. And we always stated in the long run our goals for our capital structure are to de-lever the company, extend maturities, have flexibility of instruments, and all under reasonable terms.

So with this repayment made in December we again have de-levered the capital structure. Total debt is now $648 million compared to $848 million in the September quarter. The company remains well capitalized so this excess capital would support more than a 34% increase in client balances or approximately $4.5 billion before we need another dollar of capital.

And then thinking about our liquidity position we have $1 billion undrawn on our revolver and another $1.4 billion of other client assets outside the regulated companies also available for liquidity events. That all adds up to nearly $2.9 billion of liquidity for a client facilitation. So we remain well capitalized and have a strong liquidity position and as we do each quarter we continue to look to optimize our capital structure and with that Bernard, I’m going to turn it back to you.

Bernard Dan

Thanks Randy, concluding on slide 15 as we look ahead we expect multiple developments in the macro environment, and in specific markets to drive greater profitability. For example we’re well positioned to benefit from emerging trends, rising interest rates, increasing client balances, and migration of the OTC markets to a cleared environment to name a few.

In addition although its very early in the process we believe proposed market structure changes out of Washington are largely positive or neutral for our firm. Regulators and legislators are highly focused on restricting certain businesses of our competitors from raising their capital requirements to limiting proprietary trading and other activities.

Our client centric model dictates that we put our clients’ needs first. The majority of proposed changes support our belief that over time, the MF Global model will be the preferred approach for all stakeholders, from clients to shareholders and employees to regulators.

With that we’d be happy to take some questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Roger Freeman – Barclays Capital

Roger Freeman – Barclays Capital

I guess just first maybe on the adjustment and sort of the comp plan, can you just maybe give us a little bit more detail around that, is this going out to a three or five year vest on the stock. Just trying to think about how to sort of model in the, how that basically deferred comp is going to come into the P&L over the next couple of years.

Randy MacDonald

We’re in the process of rolling it all out so many of the details are still being announced to our employees so we can’t be terribly specific but historically our plans have been three year vesting.

Roger Freeman – Barclays Capital

And they’re just in equal thirds.

Randy MacDonald


Roger Freeman – Barclays Capital

And then I guess on the comments you made around the portfolio duration that you had been moving that out but I think you also said average maturities are basically unchanged, I’m not sure if I caught that.

Randy MacDonald

All I’m trying to point out is there’s a certain amount of the portfolio about $7 billion, that we do go out beyond overnight and I said that the average blended duration of the portfolio is seven months and that hasn’t changed.

So the increases that we got from 95 to 127 basis points had nothing to do with us extending duration and had everything to do with the treasury team doing a great job of finding things that weren’t earning us the kind of returns that they really should.

Roger Freeman – Barclays Capital

And then just in terms of how you given the significant amount of investments you do have at the front end of the curve managing for those rates rising possibly even before Fed funds, is that why when we look at your interest rate sensitivity that from the current, up to 2% a year your net spread doesn’t change by the same amount that you’re factoring in the—

Randy MacDonald

I’m not factoring in moving up on the yield curve so that would be addition interest income that we would earn so I’m not even factoring that in, I’m just looking at if Fed funds increase I would expect that we would earn at least Fed funds. Right now we’re earning 127 basis points when Fed fund effective is 12. I’m just assuming we’d earn at least Fed funds.

Roger Freeman – Barclays Capital

And then on the, when you look at your cleared commission performance sequentially versus execution only that was a better comparison, I’m just, can you just talk a little bit about what’s going on in the environment in terms of your capturing more, I guess it sounded like it was actually more professional trader driven as opposed to maybe earning share from larger dealers in terms of prime brokerage, that sort of things.

Bernard Dan

I think its actually a combination of both, our segregated funds is measured by the CFTC are trending upwards and as I mentioned we have our highest level in a year, number one. And number two on the composite that we maintain, we’re 7% higher than the exchange, we were up 7% and the exchange composite was up 2% for the quarter.

So it is a combination of success working on our client solutions and relationship management group to bringing in institutional accounts on our books, it’s the success of the fixed income effort and those sales folks and that group as well as a higher portion of professional traders contributing to our volume growth.

Randy MacDonald

I think the $0.03 on both the executional and the cleared, to me that’s just normal mix change not a big deal. I was just trying to elaborate on what we saw but relative to other movements we’ve seen in other quarters, to me $0.03 is sort of [inaudible].

Roger Freeman – Barclays Capital

Just on securities loan on that slide nine was down about 40%, was that a function of what you were talking about in terms of the equities business or is that just showing me, so that’s not showing a slowdown like we saw in the dealers in the fourth quarter where fixed income trading has slowed to a halt.

Randy MacDonald

No, the only thing that happened, that’s correct. The only thing that really effected fixed income were collapsing spreads, lots of new clients, I think the team is doing a phenomenal job, the volume is there. Where you really see that is in the absolute average balances so frankly I think they’re doing a really good job but just got hurt with these collapsing spreads, the bid offer is just incredibly narrow right now and there’s just a number of these liquidity programs that the federal government has been offering and it’s affected us.


Your next question comes from the line of Richard Repetto – Sandler O’Neill

Richard Repetto – Sandler O’Neill

I guess a little bit of a follow-up on the fixed income, I see the average balances so I guess well the question is one, any update on the dealer status and then I guess you’re saying that your volumes on the notional value trade is about flat, I’m looking at slide 13 I guess.

Bernard Dan

Let me take the first part of that, so as you know the New York Fed issued a revised policy governing primary dealers including a detailed application process. Any sort of status of a dealer candidacy post these announcement of new policy and application process is between any particular firm in this case MF Global, and the Fed and beyond that I don’t have anything to add.

Randy MacDonald

So in terms of the balances the average balance for the quarter isn’t going to necessarily indicate the velocity because you could have higher velocity but have the same basic average balances but I would say the answer to your question is that the average balances and the velocity were pretty much unchanged from the last quarter.

Richard Repetto – Sandler O’Neill

And then you didn’t talk about the equity business and the changes you’re making in the equity business, the selling of the I guess interdealer broker, so I guess the question is can you elaborate on the strategy there. You did say about DMA and stock options, the equity business seems like a pretty competitive business, what’s the strategy to grow that.

Bernard Dan

I think a couple of things, first off eliminating that low margin business which is what we essentially did to really focus on structuring products and activities in risk management scenarios for institutional clients consistent with what we’ve done in fixed income. So the whole plan in equities is to have a client centric model that’s focused on institutional clients, leveraging our fixed income, foreign exchange and equity platform and providing really them prime broking type services.

And so our entry into options and the portfolio trading and direct market access is at a level that’s really catering to client specific and really helping them manage risk globally and so we have similar modeling in equities as we’ve shown in fixed income in terms of risk reward and compensation so it’s a far greater sort of margin business, higher margin business than what this company had here historically.

And I think you’re right to say its very competitive. And that’s one of the reasons why we dropped that business because frankly it wasn’t the best use of our capital.

Richard Repetto – Sandler O’Neill

And you mention opportunities with regulatory driven opportunities from the Volker Plan, and I’m just trying to see how you’re coming to that I guess statement, is it your assessment of what you see in the proposed regulatory changes, is it from talks with clients, is it, just a little bit more depth on it.

Bernard Dan

Just a couple of general comments, first off all of these things are just proposals, right. Its dynamic process, its very fluid, its driven by a whole bunch of populism across multi US as well as Asia and Europe, but when you break down all the individual components, there’s two or three themes that are clearly have emerged.

One is for most of our competitors they’re going to have higher capital requirements. There’s just no doubt about it. Number two is they’re going to have to provide provisions for liquidity in order to basically guard against stress risk scenarios, for those positions.

And three, if the governments around the world are focused on limiting activities in a lot of our bank competitors, in my judgment what that’s going to do is create a migration of talent away from those banks and these people will from new customers for MF Global because they will be proprietary trading companies that stood outside those banks.

And so we’re very confident that the way we’re positioned and how we focused on clients, and it kind of leads into why we’re doing what we’re doing in equities anticipating these things to happen so that we’re going to be viewed as the preferred choice non-conflicted kind of independent provider of services across these three major product groups of FX, fixed income, and equities to serve not only existing clients but what we believe will be a whole new set of clients putting capital at risk.


Your next question comes from the line of Ken Worthington - JPMorgan

Ken Worthington - JPMorgan

First on the spreads you kind of characterized spreads as collapsing in fixed income, to what extent are they collapsing versus just normalizing post credit crisis.

Randy MacDonald

That’s a good question, so I think its really more the bid offer spread. I know we try to help all of you understand relative to some index. What’s difficult to see are the real bid offer spreads and that’s really what’s collapsed, whether its chicken or egg, I’m not smart enough to tell you the answer to that.

Bernard Dan

And I think there’s two things going on, while spreads are narrowing and what we’re commenting on is the significant change quarter on quarter, there’s also just less opportunity in the marketplace. So the participation is significantly down as well, generally speaking.

So you’re really focused on the combination of both.

Randy MacDonald

That was the velocity question that Richard asked about.

Ken Worthington - JPMorgan

And then on the, this probably is all related, the 127 bps you earned on the client fund, how sustainable is that. Its seems like you said that the treasury department did really well this quarter is it prudent for us to kind of think that that falls back down into the 90 basis point region or is it kind of sustainable at these higher levels given where rates are.

Randy MacDonald

The most recent increase was mostly because they were able to locate low earning assets around the globe and put them to work in a reasonable way. But I would say that they’ve done a good job of identifying some differences between asset classes that we’ve been able to benefit from. One example is purchasing [callable] agencies so to the extent rates back up they get called, well that’s not that big of a deal for us.

We can hold those to maturity. The risk is reinvestment risk, well as rates did back up a little bit they were able to actually go back into the marketplace, reinvest, but frankly rates moved right back up and we were able to take advantage of those higher rates.

So how sustainable is that spread over 12 basis points, right now we’re enjoying a big spread over Fed funds, I don’t know how sustainable it is long-term

Bernard Dan

And the only thing I’d say is we’ve had the last two quarters was 99 and 92 so what we’re focused on is as Randy mentioned the opportunities that present itself within the quarter and our team is highly focused on that so we’re optimistic but its difficult for us to say its normalized.

Randy MacDonald

You go back to a year ago, December, there were lots of opportunities and lots of opportunities we were able to take advantage of. We went out and did those two year agencies when everybody fled to treasury and they were trading at zero and we were able to go out and take advantage of nicely priced agencies because we can afford to have the duration. We have long dated deposits.


Your next question comes from the line of Niamh Alexander – KBW

Niamh Alexander – KBW

I guess the other term you’d use was reasonable strategies for extracting value and you talked to looking abroad and getting into the callables, and was there some kind of moving into maybe commercial paper or some of the other investments that you are typically allowed to do with some [inaudible] and stuff like that.

Randy MacDonald

No, our philosophy is safety and soundness. These are client funds so we’re really first restricted by Rule 125, so no, the answer is that would not be as part of our investment standards, no.

Niamh Alexander – KBW

But with respect to the business, you expanded quite a lot, you’re in credit agencies and looking to get into treasuries, as a dealer, where to next, should I think of MF Global as trying to gear itself more towards next would be maybe investment banking and research because you’ve already got the research in London, you’re moving there in Asia, what other areas would you like to fill out in terms of the vision for the business.

Bernard Dan

We’re really focused in three areas, one is clearly on the retail platform which we have been talking about for the last year and getting that aligned and seeing great success in certain parts of the world. Two is developing our institutional capability across fixed income which includes interest rates, equities and foreign exchange and to serve at a macro level those clients that drive activity on global markets.

And then three is to really develop our client solutions and relationship management to drive greater assets on our books and I’d say that that full service in terms of serving clients globally is our focus and we’re targeting to be a preferred intermediary in the cash and derivative markets globally and to do so with a client centric focus first.

Niamh Alexander – KBW

So I should not think about advisory or some other areas like that that you would extend into.

Bernard Dan



Your next question comes from the line of Michael Vinciquerra – BMO Capital

Michael Vinciquerra – BMO Capital

Just to follow-up on Richard’s question on the equities, can you just lay out for us today what capabilities you actually have in terms of the US equities market in terms of DMA technology and that type of thing just so we know where we’re starting from and then what you think you need to add on that platform.

Bernard Dan

We currently have all the infrastructure and technology to support direct market access. We’ve currently been doing it, it serves as our backbone for our global equities business whether its in Europe or in Asia Pacific or North America. So the good thing is and I kind of alluded to it in the last call the infrastructure to scale this business already exists unlike the fixed income business from a year ago, we had to develop a lot of capability.

So what we’re putting on top of that now is portfolio trading teams which we announced group from Poly Capital I believe, a broader sort of direct market access team that’s focusing on multiple products across that platform, further development of our options team.

We had a full complement of teams down on the CBOE floor, we’re bringing that off the floor to serve markets CBOE as well as global markets. So we’re getting it positioned where it’s a centralized offering and we’re leveraging the backbone and the infrastructure we already have. The people we’ve hired which you probably saw the announcement are all leaders in their respective fields and in a very short period of time we expect them to begin to drive greater revenue and as I mentioned in my comments we anticipate it to exceed the levels that the low margin business that we eliminated had.

Michael Vinciquerra – BMO Capital

And then on the interest rate, futures trading that we saw a very nice pickup in January particularly at life and I presume that you have seen a similar lift here early in the year.

Bernard Dan

One of the things that we focus on each quarter is our growth versus this composite and the last couple of quarters we’ve clearly been growing beyond that. I’m not going to comment specifically on January but clearly if you look at the last couple of quarters, we’ve exceeded that and you can interpret what that means for your own model but it was good to see whether its [inaudible] or CME across a variety of products, there was strong growth in the industry coming out of January.

And frankly that’s what’s helped us drive greater activity at this company today.


Your next question comes from the line of Mike Carrier - Deutsche Bank

Mike Carrier - Deutsche Bank

First question just on the equity business you gave the annual revenue impact of the $20 to $30 million just curious on the expense impact, are you still, on a non-comp basis are you still around that $100 million level for the foreseeable future.

Bernard Dan

Yes, we’re not changing any sort of comment or direction on the $100 million non-comp. We feel good about that as both Randy and I have commented in prior quarters. So that’s not going to change.

Mike Carrier - Deutsche Bank

And then just in some of the growth areas, whether its equities or some of the fixed income areas, the current environment it makes sense that a lot of these firms have pulled back. You’re starting to see more and more reinvestment and each of the investment banks are targeting their normalized revenue opportunity in the fixed income market or the equities market, and all of them of multiple of where they were in 2009. And some of it is in the less risky business which is where you’re in, how do you balance that with obviously the revenue opportunity for just normalized rates and then also the potential particularly in the fixed income areas for higher capital requirements even just globally even in some areas that are deemed not that risky.

Bernard Dan

So just a couple of things, first off the changes in kind of capital requirements for MF Global are negligible. They really only apply to the US and they only apply to the non-customer sort of activity which for us is immaterial. It’s a significant change though for our competitors. And part of my comments alluded to that fact, that they’re going to have to have significant amounts of capital set aside in order to support existing activities.

So all of those trends in that regard are very favorable to our model is kind of point one. Two is that as mentioned the banks generally through all the proposed regulatory and legislative changes that are in the domain either in Washington or UK, broader Europe or Asia, are all really targeted towards those institutions that largely contributed to the financial and economic crisis that we’re all just coming out of.

And so in that regard a lot of the changes in there, I believe will result in a talent migration away from those banks and forming new client activities which is why we’re positioning ourselves to take advantage not only of the existing sort of client opportunities that exist out there but frankly new and emerging ones as a result of all these reforms.

And we’re already seeing results of that which is why our customer assets are going up and our market share and versus the exchange composite is higher. And then third is that what we try to focus on is internally is these filters we introduced 18 months ago about risk and capital, scale and profitability and growth, and what we’ve tried to do as a management team is ensure that the activities and service and products we provide are consistent with those five criteria so that we know we’re not only delivering for the client and what they want in terms of managing risk across global markets, but frankly delivering for shareholders.

And all the steps that we’ve taken over the past 18 months is to get that alignment right and frankly with some of the things that I had mentioned and Randy did just putting this new scaled platform in a different environment with some more spread opportunities I think we’re trying to give you and others the idea that we’ve created that scale and as Randy had said in his comments, we’re not immune to that right now but we’re definitely going to take advantage of it when the market changes.

And that’s what we feel good about.


Your final question comes from the line of Patrick O'Shaughnessy - Raymond James

Patrick O'Shaughnessy - Raymond James

I was wondering if you could tell me a little bit about the progress that you’re seeing hiring the new fixed income traders that last few quarters, what sort of traction they’ve gotten so far and where that’s showing up in your results.

Bernard Dan

Let me make a couple of comments, we have full complement of top industry, well experienced, proven professionals join this group over the past 12 to 18 months. These guys have hit the ground running in terms of new accounts, new capabilities, new products, larger activity. What clearly they’re impacted by is the existing rate environment.

And Randy had mentioned from the first quarter to the second quarter spreads were down 65%, from the second quarter to the third quarter compressed even further another 50%, so within their sort of scope of opportunity they are basically working and trying to drive as much revenue as they can but frankly with that compression its made it difficult. What we’re optimistic about is the client contact they have, the capability they’ve demonstrated and as we model their expertise and capability in client facilitation across an environment that we think is more normal we’re very confident that over the medium to long-term these guys are going to meet kind of the objectives that we both have.

But we’d have to recognize that they can only perform to the extent that the market allows them to do and in that regard they’re doing great.

Patrick O'Shaughnessy - Raymond James

And then do you have an early read on the impact of extending CDS clearing to the buy side, basically what sort of traction you’re seeing in some of the buy side folks picking that up as well as how you think that might impact MF down the road.

Bernard Dan

A couple of things, one is [ICE] Trust is obviously the leader thus far in that sector. CME has recently started and from initial reports they have some activity but I’d say its not been fully sort of realized yet. From an MF Global perspective one of the teams that we’ve hired and that we’re optimistic on is to serve as an executing broker for CDSs.

And so our first approach is to really get involved in that space providing high level execution services and that team has started and we have a couple of great guys that are leading that that are very experienced and then from there what we’ll focus on is opportunities that allow us to potentially offer a full service including clearing and as you know, there is multiple solutions out there.

In the US there’s Ice Trust, there’s CME, LCH has solutions, [inaudible] and so what we’ve done is monitor all four or five of those solutions that are out there and I think as the market begins to respond favorably to one or two of those, we’re poised to in some structure participate in that growth. But I don’t want to be too early on that and I want to first get the relationship with the clients which is why we added this team in fixed income. And we’ll just continue to monitor as either Ice Trust, CME or others begin to gain traction.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Bernard Dan

I just want to thank everybody for joining the third quarter call, and appreciate your time, interest and questions on MF Global. Thank you.

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