Bgc Group Inc (BGC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2009 BGC Partners, Inc. earnings conference call. My name is Noelia and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Jason McGruder, Head of Investor Relations. Please proceed, sir.

Thank you all for joining us on the call. Before we begin I want to make sure that you know that our second-quarter 2009 financial results press release was issued yesterday. It can be found either at the news center or investor relations section of our website at www.BGCPartners.com. We also have a PowerPoint summarizing our results which includes our monthly revenue figures going back to January 2007 in the investor relations section of our website.

Throughout today's call we will be referring to our results on a distributable earnings basis. Please see the sections of yesterday's financial results release entitled distributable earnings and reconciliation of GAAP income to distributable earnings for a definition of this term and how, when and why management uses it.

I also refer you to the statement titled Discussions of Forward-Looking Statements contained in our press release. I'll remind you that the information in the release and on this call contain forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 as amended, Section 21e of the Securities and Exchange Act of 1934 as amended.

Such forward-looking statements include statements about the outlook and prospects for BGC Partners and for its industry as well as statements about our future financial and operating performance. Such statements are based upon current expectations that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because of a number of risks and uncertainties that include, but are not limited to, the risks and uncertainties identified in the earnings release and BGC Partners' filings with the US Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we take no obligation to update these statements in light of subsequent events or developments.

Please refer to the complete disclaimer with respect to forward-looking statements set forth in yesterday's earnings release and the risk factors set forth in public filings which we incorporate by reference. I would now like to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners, Inc.

Good morning and thank you for joining us today on our second-quarter 2009 conference call. With me today is our President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

I have the pleasure of opening this call by reporting that both our revenues and distributable earnings exceeded the high end of our previous outlook. In the second quarter of 2009 revenues for distributable earnings were $294 million and would have been approximately $19 million higher if not for the year-over-year increase in the value of the US dollar relative to other major currencies.

Pretax distributable earnings were $32.1 million or $0.15 per fully diluted share while post-tax distributable earnings were $23.8 million or $0.11 per fully diluted share. So despite the challenging conditions in the global financial markets, BGC's second-quarter revenues would have increased approximately 2% on a constant currency basis. We saw a 31% increase in revenues from our overall credit business compared to the second quarter of last year as well as strong year-over-year growth in revenues and volumes from fully electronic credit and foreign exchange products.

In addition, we generated year-over-year and sequential revenue growth in our fully electronic US Treasury business. The massive scale of the US deficit coupled with the rebounding banking sector makes our outlook for US Treasury business superb. While the Treasury business faced strong headwinds last year we expect this to change dramatically and become a tailwind behind our Treasury business and the Company.

With respect to ELX, the exchange's volumes and market share have been growing every week since its strong debut on July 10. And ELX has picked up momentum in all four futures contracts the exchange currently offers. ELX opened with about a 1.5% market share and has climbed every week to currently over 3%.

What I find most impressive about the markets on ELX is that they are consistently as tight as the CME's and are actually better correlated to the US Treasury market which is something I don't think most participants had expected, other than our partners, of course. ELX expects to expand its product offering in the near future and all of our partners in the venture are excited about the exchange's prospects.

With respect to BGC's brokerage headcount, I am pleased to announce that we added 141 brokers during the quarter, which includes the 70 Liquidez brokers from our acquisition in Brazil. New brokers have historically reached our average productivity in their second year with the Company because of our global technology platform and product network. Therefore the addition of 141 brokers bodes extremely well for BGC's future revenue growth. We continue to expect to hire and acquire accretively and these additions set the stage for a strong 2010.

In addition, it is becoming increasingly clear that those firms with breadth and scale, both in terms of fully electronic trading capability and liquidity pools, will have a distinct competitive advantage going forward. The fact that the world's leading banks and trading firms chose BGC's trading technology to create ELX and the fact that we grew fully electronic revenues across rates, credit and FX in the second quarter underscores our leading position as electronic trading becomes more widespread and/or required.

I'm also pleased to report that our Board has declared a dividend of $0.09 per share for the second quarter which is payable on August 31 to common stockholders of record on August 17. I'd now like to turn the call over to Shaun Lynn.

Thanks, Howard, and good morning to everyone. Although Graham will provide more detail on our overall financial performance, I want to take a moment to talk about our recent successes in fully electronic trading. In the second quarter of 2009 BGC generated another significant year-over-year increase in revenues and volumes from the fully electronic trading of credit default swaps and foreign exchange options.

In the second quarter of 2009 the combined notional volumes of these new products increased by over 30% sequentially and by over 125% year over year. This is even more impressive when one considers the difficult overall markets for CDS and FX options in the first half of 2009. As Howard mentioned, we also saw improvement in our fully electronic rates business, particularly in US Treasuries.

US Treasuries make up the majority of what we call fully electronic volume, excluding new products. And this figure was up sequentially in the second quarter of 2009 by almost 24% after having grown over 20% from the fourth quarter to the first. This compares very favorably to sequential Treasury futures volumes which were up 9% and faced US Treasury volumes which were up 15%.

We believe the continued record Treasury issuance will provide significant growth to our rates business, both voice and electronic. In the second quarter alone we invested approximately $25 million on some of our huge technology platform which supports our hybrid and fully electronic trading offering in order to both improve the productivity of our brokers and to keep the pipeline of potential new fully electronic offerings growing.

Although most fully electronic trading for CDS occurs in Europe, BGC executed its first fully electronic CDS trade in the US in February of this year. We've seen additional traction in the second quarter and we also continue to roll out CDS eBroking in products in Asia. In rates we launched BGC Trader for ELX, offering our clients the ability to trade ELX and CME basis without exposing themselves to risk on each part of the trade.

Overall BGC's second-quarter of 2009 revenues related to fully electronic trading were up 7.1% to $22.5 million. This represented 7.7% of total revenues for distributable earnings compared to 6.9% in both the first quarter of 2009 and the second quarter of last year.

I'd like to add a few comments to Howard's discussion of broker headcount. As of June 30, 2009 BGC had 1,411 brokers. This compares to 1,270 at the end of March and 1,247 as of June 30, 2008. We currently have a number of new hires that are not yet included in this headcount, and therefore we expect to profitably increase our revenue across a number of geographies, products and asset classes. With that I would now like to turn the call over to Graham.

Thank you, Sean, and good morning, everyone. For the second quarter of 2009 BGC Partners generated revenues for distributable earnings of $294 million compared with $306.7 million in the second quarter of 2008. Our brokerage revenues were $270.7 million in the second quarter of 2009 versus the $278.6 million recorded in the prior year period. On a sequential basis brokerage revenues increased 2.7% and overall revenues increased by 2.8%.

Both our brokerage revenues and our overall revenues for the second quarter of 2009 would have been approximately $19 million higher if not for the increase in the value of the US dollar as compared to the second quarter of 2008. Our total revenues for distributable earnings were approximately $96 million in April of 2009, $95 million in May and $103 million in June.

Comparing the second quarter of 2009 to the second quarter of 2008, rates revenues were $126.8 million compared to $143.1 million; credit revenues were $90.8 million, which was an increase from $69.1 million; other asset classes was $32.2 million versus $32.3 million last year; and foreign exchange was $21 million, decreasing from $34.1 million.

Comparing the second quarter of 2009 to the second quarter of 2008 as a percentage of distributable earnings revenues, rates represented 43.1%, decreasing from 46.7%; credit represented 30.9%, increasing from 22.5%; other asset classes represented 11%, increasing from 10.5%; and foreign exchange represented 7.1%, decreasing from 11.1%.

Second-quarter credit revenues increased by 31.3% year over year driven by strong performance from our corporate bond desk from fully electronic credit default swap trading. Voice driven rates revenues declined year over year due in part to the stronger dollar as well as lower volumes in some emerging markets products. Fully electronic rates revenues were up slightly year over year for the second quarter of 2009.

Foreign exchange revenues decreased by 38.4% year on year. This was primarily due to lower foreign exchange option volumes industry wide partially offset by increased fully electronic foreign exchange trading. Revenues from other asset classes were roughly flat year on year.

Fees from related parties' revenues declined by $5.4 million or 28.9% when compared to the second quarter of 2008. This decline was due to an equal reduction in our costs of providing services to Cantor. Interest income declined by $3.2 million or 82.1% compared to the second quarter last year due largely to lower market yields on cash and cash equivalents.

Moving on to expenses, total expenses for distributable earnings decreased by 1% year over year to $261.9 million in the second quarter of 2009. Compensation and employee benefits represented 60.6% of distributable earnings revenues in the second quarter of 2009 compared with 57.2% in the second quarter of last year. The increase in our compensation ratio compared to the second quarter of 2008 was due in part to lower overall revenues since our broker payouts vary with revenues, but our back office compensation expenses are relatively fixed.

In addition, as we mentioned on our last earnings call, we have replaced some of our vendors and consultants with full-time employees. This increased our compensation expenses and reduced expenses related to professional and consulting fees when compared to the second quarter of last year. This is more economical for us and reduces overall expense levels. The net impact is that we expect our compensation related expenses to remain around 60% of revenues.

We also remain vigilant about containing non-compensation expenses. For the second quarter of 2009 non-compensation expenses declined by 6% to $83.7 million or 28.5% of distributable earnings revenues. This compares with $89 million or 29% in the prior year quarter. We expect non-compensation expenses to increase slightly as we increase our broker headcount.

In the second quarter of 2009 BGC Partners' pretax distributable earnings were $32.1 million, or $0.15 per fully diluted share, compared with $42.3 million, or $0.22 per fully diluted share, in the second quarter of 2008. The Company's pretax distributable earnings margin was 10.9% in the second quarter of 2009 versus 13.8% in the prior year period.

BGC Partners recorded post tax distributable earnings of $23.8 million or $0.11 per fully diluted share in the second quarter of 2009 compared with $32.2 million or $0.17 per fully diluted share in the second quarter of 2008. Our post-tax distributable earnings margin was 8.1% in the second quarter of 2009 versus 10.5% in the prior year period.

Our effective tax rate for distributable earnings was 26.5% in the second quarter of 2009 compared with 22.1% in the prior year quarter. We expect our effective tax rate for distributable earnings to be approximately 27% for 2009.

Our fully diluted weighted average share count was $211.1 million for the second quarter of 2009 compared to $190.1 million in the year earlier period, and $200 million in the first quarter. The three key drivers of the sequential increase were -- first, we issued approximately $2 million REUs in connection with the Liquidez acquisition. Second, we issued approximately $3.6 million REUs to newly hired brokers. Third, we issued the balance to our staff as 2008 year-end compensation affective April 1, 2009 and other ordinary brokerage compensation.

Amortization relating to equity issuance is included in our compensation expense and, accordingly, is included in our 60% compensation ratio guidance. We believe that equity compensation improves employee retention and aligns the interest of our employees and partners with those of our outside shareholders. This issuance was partially offset by our ongoing stock repurchase program.

From March 1, 2009 through April 30, 2009 the Company repurchased approximately 4 million shares of its Class A common stock for an aggregate purchase price of approximately $7.9 million as detailed in our financial results press release.

In addition, the Company has approximately $32.4 million remaining from its $100 million repurchase authorization and prospectively we still plan to use the distributable earnings available after paying dividends to common stockholders in order to repurchase shares. Our share count stood at approximately 212.7 million fully diluted shares as of June 30, 2009.

Turning to the balance sheet, as of June 30, 2009 the Company's cash position, which we define as cash and cash equivalents, cash segregated under regulatory requirements and reverse repurchase agreements, was $378 million; notes payable were $150 million; book value per share was $2.48; and total capital, which we define as redeemable partnership interest, non-controlling interest in subsidiaries, and total stockholders equity, was $451.9 million.

In comparison, as of December 31, 2008 the Company's cash position was $361.3 million; notes payable were $130 million; book value per share was $2.31; and BGC Partners' total capital was $443.8 million. Now I'll turn the call back over to Howard who will provide our outlook for the third quarter.

Thank you, Graham. BGC generated distributable earnings revenues of approximately $98 million in July of 2009 and we anticipate a traditional seasonally slower August. In 2008 distributable earnings revenues were $81 million in August, but jumped to $118 million in September, largely as a result of the impact of Lehman Brothers.

We expect to generate distributable earnings revenues of between $265 million and $285 million in the third quarter of 2009. This revenue outlook would have been approximately $9 million higher if not for the relative appreciation of the US dollar when comparing it to last year. We expect third-quarter 2009 pretax distributable earnings of between $21 million and $29 million, and post-tax distributable earnings of between $15 million and $21 million. So, operator, we would now like to open the call for questions, please.

(Operator Instructions). Daniel Harris, Goldman Sachs.

Good morning, guys. So we finally got ELX off the ground this quarter and it certainly seems like it's taken a nice foothold into the market in a relatively short period of time. But I just want to make sure that you can walk us through what the impact is to you guys in terms of income. I know obviously from a book value perspective when the gains happen my guess is you would take them there. But on quarterly basis how should we be thinking about that?

In a couple of ways. Number one, we provide all the software and infrastructure for ELX to operate and they operate across our global network. So as their exchange and ELX chain exchange grows their relative share paying for their share of the network grows and therefore they will pay our expenses and therefore we get scale and value marginally across our expense base. So as, for example, they were to pay for use of our network, since we already own the network we're already expensing the network, any expense repayment that they pay for will improve our bottom line effectively dollar for dollar. So that's number one.

And then number two, we do other software work together with them and that also has a very valuable scale benefit to it. For example, I will give you one example which is when we opened the group of partners wanted to make sure that our system was substantially faster than the CME's and together with BGC we partnered together, meaning ELX paid for half and BGC paid for half for a variety of things to be done to the system and to the network that would speed it up dramatically.

And so therefore the Company got the benefit of their including their scale in our investment. So we were able to work on the network for half the cost that it otherwise would have cost us because they were sharing that burden. And lastly, we generally own about 25%. And so to the extent we -- the Company makes money, distributes money or earns money you'll see that in our financials.

So, is it fair to say in these early days and probably next couple quarters that it's operating at a sub breakeven level?

Sure.

Okay.

But remember, the cash for the Company has already been put in by the partners and so therefore it's a non-cash item. And that's why we don't put it in our distributable earnings because it's a -- while the Company is operating below breakeven obviously today it does not cost us any cash, that cash was funded by the partners.

Okay, that's helpful. Thanks, Howard. Just staying in rates but not on ELX, can you talk about your rates business and where you're seeing the most activity? And to that end, as I think about the overall rates business, it's cash bonds and swaps and Treasuries and maybe even some exchange blocks. But can you sort of flesh that out for us a little bit more about where you're seeing higher levels of activity? I know that you've pointed to Treasuries as an area of growth and where you aren't seeing such strong activity which may be being pressured by smaller balance sheets or volatility or something along those lines?

Well, the credit crisis created just smaller volumes. We saw last year Treasury volumes and Treasury futures volumes fell over 40% and that was not for lack of volatility, it was for lack of -- a number of counterparties for instance trading at 15 times their capital and they pulled back because of their prime brokers cutting back their credit to five times.

And that just meant they traded less and they focused -- as I had spoken to them they were stuck, many of them, in some corporate bond positions, CDO positions, other things that were much less liquid and therefore they were forced to use their margin to support less liquid businesses, promising us that when they ever got out of these positions they would forevermore stay in more liquid things because they had learned their lessons.

We'll see when and if that happens. But it is a positive sign for the future. Number two, you get a great sense out there that the business of being in a broker-dealer feels excellent today. You have Nomura investing dramatically, the Canadian banks investing dramatically, people who had -- you had seen numbers of years ago pull out are now piling back into these capital markets because they see the opportunities being left behind by the departure of Bear, by the departure of Lehman, by the consolidation of Merrill, by a variety of other issues happening that gives them a lot of opportunity.

And so we are seeing many, many, many more customers emerge and potentially large customers emerging and that will help across the product lines. What that hurts in the short run is when a large group leaves their current employee and goes to work at Nomura, right, they just don't hit the ground running at the same volume they were doing yesterday.

And so all of this turnover to TD Bank, to Scotia Bank, to Nomura, Jeffries announcing it's going to become a primary dealer and all of the other things where people are hiring, it has a short-term three months, six months, nine months as these people set up their businesses, get scale in their businesses, it has a dislocating effect for a short period of time. And then of course on it comes from there.

And so we expect eventually that these things will not only add tremendously to our customers, add to our bottom line and to overall volumes, but generally improve the markets as well by having just less consolidation or less lumpiness in only the top. So it's distributable as well, which is good for our business.

So as a think about the rates business then and it's been going up a little bit the last couple quarters, what I think you're saying is that should the dislocations in headcount stabilize or decline and as the Treasury continues to issue and there's the lag of time between the issuance and the more active trading volumes, that by 2010 we could be looking at a nice increase in quarterly run rates for this business?

Right. But I think the swaps business -- as the credit markets improve, as the balance sheets of these big banks stabilize, as the big banks see that their trading areas were not the things that lost them the money and they give them more rope to go out and play, the rates space now is spectacular for moneymaking. Our customers are doing a sensational job earning money to their bottom line and therefore I think the core business of rates in the markets that we participate in is just going to relentlessly improve over the next year, year or so.

So I think the underlying economics, the underlying wins, which last year were headwind will be shifting to a tail wind and you'll see both Treasury markets around the world by issuance of volumes grow, interest rate swap markets around the world start to grow and the rates business generally just improve as more participants play and their firms give them more latitude to play bigger.

Okay, that's great. And then just lastly from me, on the Liquidez transaction, it closed late in the quarter. What products are they focused on mostly down in Brazil? What areas do you think they can grow and how does that impact your results going forward? Thanks a lot.

This is Shaun. For as we see that with that platform which we can lay over the top of them, we give them the opportunity of moving into Treasuries and into the rates -- the traditional rate products that we have. They focus mainly on equities, (inaudible), interest-rate options and interest rate swaps, as I said a second ago. But the really exciting thing for us is us laying our platform over the top of them. Giving them technologies they don't have now and the opportunity could grow and build and the -- I wouldn't say financial muscle, but it gives them the opportunity to grow and build.

Thank you.

Rich Repetto, Sandler O'Neill.

Good morning, Howard. The first question is on the Treasury issuance. And I'm trying to relate the tailwind that you're talking about, but balance that versus the caps you have to deal with with the major broker-dealers. Because -- and balance that also with this lag effect you're talk about, because if you look at the data the issuance was pretty mighty in the second quarter as well as the first quarter. And we're just trying to see are caps going to -- how do the caps impact you and is this lag -- is it the caps or is it the lag effect that's holding in check the small sequential growth in the rates?

Well, so number one, we do have fixed-price arrangements with a substantial number of the largest banks of the world with us. But adding new large customers to a fully electronic system that is already in place, already installed and already built and paid for has an extraordinary effect on the bottom line.

And so when you see that Nomura just hired 40 people to work in their rate space, Scotia just hired a huge amount of people, TD Bank hires the Treasury team from Morgan Stanley, right? All of these things create -- Jeffries announces it wants to be a primary dealer, a variety of other firms suggest, MF global is suggesting it wants to be a primary dealer.

I mean you can go down this list, that is a list of new players who, if and when they trade a lot, they will either enter into long-term agreements to pass fixed fees like the biggest players in the world which will just drop straight away to the bottom line. And because our expenses, as we discussed, because ELX will be shouldering more and more of them, our expenses are going down and our revenues will be going up.

Overall volumes though, there are huge numbers of customers of the world who don't have fixed fee deals. And so as the volumes grow by those with our fixed fee we obviously make variable revenue on our trades. And again, they come with such, such large margins. The benefits of the business are very simple for us, it's a great business because our foundation is with the large banks who are committed to us for a long period of time and the variable was painful last year when volumes declined, but now we are going to see the benefits.

And for years and years to come, I mean the deficits that are coming and the issuances that are coming, if you go back to my historical comments of how we viewed the business, nothing is better than core fundamental stuff to play with. And the Treasury is going to give us core fundamental stuff to play with for the rest -- it looks like for the rest of our lives. I once upon a time had to answer on a conference call what if there's so much budget surpluses there are no more US Treasuries? I can now confidently tell you I can't possibly imagine how that's going to happen.

I think I was on that conference call, Howard. I might have asked the question. Anyway, that's a fair assessment. Next, on ELX. Just similar to the last question, but I guess I'm not sure -- I guess it's not being run through distributable earnings now, is that correct?

That is correct because the partners other than BGC funded the venture and so while the venture today is obviously not profit-making, those losses are not being paid from cash so therefore it's a non-cash event with respect to BGC. So therefore it's not in distributable earnings which is really a cash manner of determining our profits.

Okay. So once it turns profitable and cash gets distributed, in other words, once it starts making money you're going to start accounting for it, but right now you're not because it's a loss but it's non-cash?

Correct.

Okay. I understand it. Last question is other asset classes. It's small, but that showed the biggest increase quarter to quarter as far as the brokerage revenues. And I know you list a few things like equity derivatives, index futures, commodities, energy derivatives. I'm just trying to see what was going on in that nice increase you had in the other asset classes of brokered revenue?

We have enormous amounts still to grow in, for example, equity derivatives, commodity derivatives; our French business across the French landscape does extraordinarily well. I think that was Shaun's point which is when we started in France we acquired a company very similar, Liquidez, it has a nice platform. It was a nice foundation on which to build, they didn't have technology. They didn't have the capability of doing all the things we do in France now -- we layer in the technology, we higher superb people on top of that.

What ended up happening was because we were able to put our technology in the productivity of the brokers in Paris got much, much better which became a drawing card for others. And so our other revenues was very successfully added to in France and I think you'll see the same thing in Brazil. As we put our technology into Brazil and add others in Brazil you'll see equity derivatives, a variety of emerging markets, obviously Brazil will drive our commodity business because they have a great commodity business and that's a wonderful place to do it.

So these are the kinds of products, commodity swaps, equity derivatives, classic businesses for us that we're going to add and build our platform on. So I would say equity derivatives first and then now that we're in Brazil I think we've got a great head start to head towards commodity derivatives as well.

Great. And just to sneak a quick accounting. Shaun, what will the fully diluted share count look like, any guidance for 3Q fully diluted share count?

Third quarter; he's just saying what do you think it's going to be.

Because you had the issue at the end of the quarter, the Liquidez REUs.

The bulk of the Liquidez REUs have already been issued. There's 2 million already in the share count.

We start the quarter, that's why I think Graham gave you the statistic of 212. Since you start the quarter at 212, you've got to get the sense that the average -- it's got to start at 212 and then whoever we hire this quarter and I think Shaun told you we have -- we have people who we've hired obviously. The statistic we gave you was just the second-quarter hires not the third-quarter hires, obviously we've hired people who started with us this quarter and the next quarter we'll give you that total and how many we've hired.

Okay, fair enough. Thanks, guys.

(Operator Instructions). Rob Rutschow, CLSA.

Good morning, guys. First question was on the balance sheet, is the growth -- I think it was about $1 billion, is that related to ELX or are there other items there?

There are normal activities of financial intermediary. We do take positions on our balance sheet that are fully hedged in order to facilitate transactions with our customers. At the end of the 30th of June we had some positions like that and they rolled off very quickly. But they do come on and off periodically.

Okay, so if I was to look at the balance sheet today it would be more similar to the year-end level or first-quarter level?

Yes, yes.

Okay.

But it is lumpy meaning we do use our balance sheet to provide value added service to our clients. And when there's an opportunity to service them and provide them a complex transaction and be an intermediary with that complex transaction we can make money and it's just our clients. So we are judicious obviously with that and we are risk-averse, as you know. But there are opportunities for us to do this kind of business and we do so and sometimes they go over quarter end. But they are -- as Graham said, they are hedged transactions that swiftly resolve themselves and settle off our balance sheet.

Is that tied to a particular business line rates or is it just kind of spread across all of them?

It's generally -- I can give you an example which is there are dividend trades where you'd have the equity and sell a total return swap to a counterparty and one sells the other by its delivery. That would be an example of a transaction that would have a balance sheet that would show as equities on our balance sheet, but in effect has no market risk to us.

And then we do business amongst and between some of the largest banks in the world. I mean that's our client base. So we are very comfortable with that business. And so therefore we like the opportunity that it places with us and we're capable and smart and judicious. And I think we have successfully shown you that we can operate these kinds of businesses for long, long, long periods of time without those kinds of market risks.

I mean, Lehman going nuclear on a weekend sort of gave you the clearest example possible of what our exposures were to credit and they were minimal.

Okay.

Can I just say, I mean another reason why our balance sheet can move around a little bit is because we have -- we can have failed trades that are on the balance sheet for a very short period of time on a match basis which again have no risk attached to them. But they do have the effect of blowing on the balance sheet on any one particular day.

Okay, fair enough. If I could shift over to the -- you talked a little bit about the swaps market. I'm wondering if you can give us a little bit of commentary in terms of volumes versus spreads and what's impacting your earnings or revenue generation there more?

I'm not sure if I understand your question. Do you want to -- volumes versus spreads, maybe you can --?

Well, in terms of activity levels, I guess I'm impressed that your activity levels are as high as they are given some of the dynamics in the market with rates being so low. We hear that people haven't necessarily been hedging as much as they have in the past. So I'm curious as to what you're seeing in terms of activity levels and then whether or not you're earning more on these trades relative to where you were say a year or two ago?

Well, I think, okay, so, there are credit -- a variety of things changed, credit widened out, capital at risk became a significant issue, banks constrained their capital at risk because their mortgage books and real estate books and other illiquid financing books dramatically caused them losses and constrained them. As that works its way out and as we said throughout the last year the businesses that we do business with within these banks had spectacular years last year because trading was not a difficult market last year, it was one direction.

So I think these banks have now come back to be comfortable with giving their traders the room to make a lot of money. And they have been making money and I think you're seeing that. So, yes, credit spreads are narrowing, but we don't make more or less money if the spreads are wider or narrower. What makes us more money is when our banks trade more and trade more confidently and there are more of them. So what you're seeing now is more of them, trading more confidently, making more money and doing more business.

So I think the marketplace for rates is improving. We make of course more money per transaction on an interest rate swap then we would on a US Treasury. However, US Treasuries trade often swiftly and in vast volumes. And with the issuance coming they're going to trade in ever bigger chunks of volumes, because obviously if the US government is going to do $35 billion issuance trading 1 million or 2 million at a clip isn't very effective. So people are going to trades 10s if not 50s and 100s at a clip, which of course is great for our business.

So the swap business versus the Treasury business, the spread business versus each other, the ability to hedge yourself in Treasuries versus corporate bonds -- all of these things are the classic virtuous circle. And when you see our credit business do better you'll see our rates business do better. They bring each other along because they can all trade on the same platform and we can offer those things together.

If you think about ELX when people are on our system trading futures, Treasury futures, what's the probability they're on our system trading Treasury cash? And our system offers, as Shaun mentioned, the ability to ask our system to trade one versus the other and our system will guarantee that it will never miss. And if such a spread does exist the system will do both sides of the trade without missing.

And this is the only platform in the world that can offer that and so therefore it's an exciting product that means that the more futures business we do the more Treasuries business we do. And obviously the majority of the futures business is not with fixed rate people. So it's a great business opportunity for us that we are going to focus and harvest. But spread is not really how we make money -- it may be how banks make money, but we make money on volume, and volumes are improving even if spreads were widening the market -- underlying market structure is improving.

Okay, that's helpful, thanks. The last question is just can you walk us through the difference between the GAAP tax rate and the distributable earnings tax rate, just what the major moving parts are there? Thanks a lot.

Yes, no, they're just certain items which we have to add back that go through the GAAP earnings statement by which we have to add back for tax purposes, which increases the tax rate which is deducted then for distributable earnings purposes. So they're not included in distributable earnings.

Okay. I'll follow up with you off-line, thanks.

Okay.

At this moment I'm showing you have no further questions. I would now like to turn the call over to Howard Lutnick for closing remarks.

Well, everyone, thank you for joining us today. We appreciate you spending the time with us and we look forward to speaking to you again next quarter. Have a great day today, everyone, and thanks for being with us.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.