Bgc Group Inc (BGC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 BGC Partners Incorporated Earnings Conference Call. My name is [Sally] and I'll be your Operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Jason McGruder, Head of Investor Relations. Please proceed.

Good morning. Before we begin, I want to make sure that you know that our first quarter 2010financial results press release was issued yesterday. It can be found either at the News Center or Investor Relations sections of our website at www.bgcpartners.com. During today's call we will also be referring to a Power Point presentation that summarizes our results and which includes other useful information. This can also be found in the Investor Relations section of our site.

Throughout today's call we will be referring to our results only on a distributable earnings basis. Please see the sections of yesterday's financial release entitled Distributable Earnings and Reconciliation of GAAP Income to Distributable Earnings for a definition of this term and how, why, and when management uses it. Unless otherwise stated when we refer to financial statement items such as revenues, expenses, pretax earnings, or post tax earnings, we are doing so on a distributable earnings basis although the balance sheet is GAAP.

I also refer you to the statement entitled Discussions of Forward-looking Statements contained in our press release. I remind you that the information on the release and on this call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities 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 operating performance.

Such statements are based upon current expectations and 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 undertake 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 our public filings, all of which are incorporated by reference.

I'm very happy now to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners, Inc.

Good morning. Thank you for joining us today for our first quarter conference call. With me today are BGC's President, Shaun Lynn, our Chief Operating Officer, Sean Windeatt, and our Chief Financial Officer, Graham Sadler.

BGC's revenues were up 22% to $348.9 million in the first quarter of 2010, pretax distributable earnings were up 49.1% to $44.8 million. Our pretax distributable earnings were $0.20 per fully diluted share and our post tax distributable earnings were up by 68.7% to $38.1 million or $0.17 per fully diluted share.

We had strong results across most of our products during the quarter. We generated double digit revenue increases in rates, foreign exchange, equities, and other asset classes. I'm also pleased to report that our quarterly revenues related to fully electronic trading were up by over 57% compared to last year.

During the quarter we completed our global compensation restructuring related to the modification of premerger employee contractual arrangements. Graham will discuss the details with you later in the call.

We also began our partnership enhancement program to strengthen our employment arrangements by leveraging BGC's unique partnership structure. These new employment agreements will, among other things, extend our employment contacts with our broker partners and increase the percentage of compensation these partners receive in the form of restricted partnership units.

The overall performance of the Company continues to improve as we increase revenues generated from fully electronic trading, extend our employment agreements, increase the percentage of compensation partners receive in the form of restricted partnership units, and lower our effective tax rate for distributable earnings.

As a result we expect to increase the amount of cash available for dividends and share repurchases. Taken together, these developments enhance shareholder value and further improve BGC's competitive position in the marketplace. They improve employee retention and gradually lower our compensation ratio for distributable earnings. This aligning of shareholder and partner interests creates a powerful dynamic for growth, profits, and dividends.

I'm also happy to report that our board has declared a record dividend of $0.14 per share for the first quarter which is payable on May 28 to common stockholders of record of May 14. This represents an increase of 133% sequentially and 56% as compared to last year.

I would now like to turn the call over to Shaun Lynn.

Thanks, Howard. Hello to everyone. As we have previously indicated, the three main factors that drive revenue and earnings growth at BGC are, number one, growth in overall industry volumes and our continued increasing market share, two, accretive acquisitions to our front office headcounts, and three, the ongoing growth of our fully electronic business.

Each of these items had a positive impact on our results in the first quarter. Industry volumes are heavily influenced by volatility and prime issuance both of which help drive secondary market trading. Global serving debt issuance continues to grow substantially. Analysts and economists expect issuance to remain at these high levels for the foreseeable future as governments finance their future deficits and roll over their sizable existing debt.

In addition, as the US Federal Reserve and other central banks reign in their quantities, we anticipate increased rates activity. For example, as of the end of April, the Federal Reserve held over $1.6 trillion worth of long dated Treasuries and HC market securities, all of them unhedged. As the Fed unwinds its balance sheet, purchases of these $1.6 trillion in mortgages and debt will need to hedge their exposure using US Treasuries, G7 sovereign debt, interest rate swaps, and future. The massive issuance expected from the world's treasuries and central banks and the subsequent hedging activity driven by this issuance will continue to increase activity across our world-class rates franchise.

As we've said before, both sovereign and corporate issuance together drive interest rate swap and CDS volumes. Although overall CDS market activity remains below its 2008 peak, we continue to see significant volumes in the sovereign CDS market due to the fiscal issues facing Greece and other European governments. These issues are also increasing our rates and FX volumes.

Corporate issuance also remains strong. In the US, the first quarter was the highest ever in terms of high yield debt issuance, another near record for investment grade debt. Because interest rates are near historic lows and because the bank lending market remains closed for many corporate issuers, we expect these high levels of corporate bond issuance to continue.

The overall FX market is also growing as credit is returning from many local banks to trade foreign exchange, particularly in emerging markets. CLS which settles about 75% of bank to bank spot and forward FX transactions reports that its average daily value of trading grew by 25% year over year in the first quarter after being down 13% for the full year of 2009.

With respect to BGC's spot FX business, our volumes grew significantly faster than the corresponding CLS figures in 2009 and for the first quarter of 2010. Given our continued headcount growth and expansion of hybrid and joining trading, it's not surprising that our overall volume growth out performed the strong industry wide increases.

For the first quarter of 2010, BGC's fully electronic notional volumes were up by more than 55% compared with last year. BGC's first quarter 2010 revenues related to fully electronic trading once again improved year over year both in absolute terms and as a percentage of revenue up by 57.9% to $31.3 million. This represented 9% of total revenues compared to 6.9% last year.

This increase, in line with broking was broad based. We generated double digit year on year revenue growth and fully electronics rates brokerage with the volume growth in US Treasuries significantly higher than that reported by the Fed or our competitors. BGC also generated solid e-broking growth in Canadian and European government bonds. Over the same timeframe we more than tripled overall revenue from fully electronic FX and creative trading with strong volume gains from corporate bonds, corporate and sovereign credit default swaps, as well as from FX, options, non-billable forwards, and spot FX.

BGC net generates fully electronic revenues from nearly 40 desks compared to fewer than ten at the time of the eSpeed merger in April 2008. We expect this figure to grow further as we roll out BGC Trader and Volume Match to ever more desks around the world. As we have said, e-broking growth leads to higher margins and great profit over time even if overall Company revenues remain consistent. We expect to continue to see margin improvement as a result of our e-broking success.

The third element driving our growth is front office headcount. We expect the trends towards more centrally clearing, straight through process, and hybrid and fully electronic trading will be beneficial for large, technologically advanced companies like BGC. Because of our strong technology platform and unique partnership structure, we have continued to profitably grow our front office. Our front office headcount as of March 31, 2010 was up by 19% as compared to last year. So, 1,551 brokers and sales people. Average quarterly revenue per broker sales person was up 5.2% year over year and up 17% sequentially to approximately $220,000. This represents our strongest ever productivity increases and our highest revenue per front office employee since the third quarter of 2008.

BGC revenue producers generally achieve higher productivity levels in their second year with the Company. We therefore expect continued improvement in this metric as our newer brokers ramp up their production.

With that, I'd now like to turn the call over to Graham.

Thank you, Shaun, and good morning, everyone. For the first quarter of 2010, BGC generated revenues of $348.9 million, up 22% compared with $286.1 million in the first quarter of 2009. Brokerage revenues were $325.2 million, up 23.4% versus $263.5 million for the prior year period.

BGC's revenues from the Americas were up 47.1% in the first quarter of 2010. Asia-Pacific revenues increased by 27.2% and Europe, Middle East, and Africa increased by 9.5%, all compared to the first quarter of 2009. Europe represented 53.7% of revenues. The Americas, 32.3%, and Asia, 14%. In the year earlier quarter, Europe represented 59.8% of revenues, the Americas, 26.8%, and Asia, 13.4%.

Turning to our monthly revenue figures, BGC's January 2010 revenues were up approximately 18% to $180 million compared to last year, up by 27% to $108 million in February and up by 21% to $122 million in March. Comparing the first quarter of 2010 to the first quarter of 2009, rates revenues increased by 27.6% to $145.4 million compared to $113.9 million. Equities and other asset classes increased by 72.9% to $45.5 million versus $26.3 million a year ago. Foreign exchange revenues rose by 39.8% to $44.7 million compared with $32 million last year.

Credit revenues were roughly flat at $89.7 million versus $91.3 million; however, they were up 27.4% sequentially. Comparing the first quarter 2010 to the first quarter of 2009 as a percentage of revenues, rates represented 41.7% compared to 39.8%. Credit represented 25.7% versus 31.9%. Equities and other represented 13%, increasing from 9.2% and foreign exchange represented 12.8%, increasing from 11.2%.

Moving on to expenses, total expenses were up year over year $304.1 million in the first quarter of 2010 versus $256 million last year but down 230 basis points as a percentage of revenues. Compensation and employee benefits were $214.7 million and represented 61.5% of revenues in the first quarter of 2010. This compares with $174.3 million or 60.9% of revenues in the year earlier period. We expect this later to decrease as a percentage of revenue as new brokers ramp up productivity and as we continue to increase the percentage of our revenue related to fully electronic trading and as we roll out our partnership enhancement program.

For the first quarter of 2010, non-compensation expenses were $89.4 million or 25.6% of revenues. This compares with $81.7 million or 28.6% of revenues in the first quarter of 2009, a 300 basis points improvement. Because they are relatively fixed, we are expecting our non-comp expenses to increase at slower rate than our top line over time.

In the first quarter of 2010, BGC's pretax distributable earnings were $44.8 million or $0.20 per fully diluted share, up 49.1% compared with $30.1 million or $0.15 per fully diluted share in the first quarter of 2009. The Company's pretax distributable earning margin was 12.8% in the first quarter of 2010 versus 10.5% in the prior year period.

BGC produced post tax distributable earnings of $38.1 million or $0.17 per fully diluted share in the first quarter of 2010, up by 68.7% compared with $22.6 million or $0.11 per fully diluted share in the first quarter of 2009. Our post tax distributable earnings margin was 10.9% in the first quarter of 2010 versus 7.9% in the prior year period, a 300 basis points improvement.

With respect to the one-time non-recurring $41.3 million GAAP charge related to the modification of premerger contractual arrangements, while a portion of the charge was cash, none of the charge related to ongoing operating results or was related. As such, we've excluded it from distributable earnings.

Our effective tax rate for distributable earnings was 14.9% in the first quarter of 2010 compared with 26.6% in the prior year period. We expect our tax rate to remain around 15% for 2010 and the foreseeable future.

I would like not to return to our partnership enhancement program and our global compensation restructuring. As part of this program, participating partners generally agreed to extend the lengths of the employment agreement and to other contractual modifications sought by management. Participating partners also generally agreed to accept a larger portion of their compensation in restrictive partnership units.

Turning to unit redemption and share repurchases, we redeemed a total of 4.6 million units for $28.4 million in cash or $6.17 per unit. Under GAAP, the Company was required to take a first quarter charge of $15.7 million relating to this redemption. We exclude these charges from distributable earnings because this transaction was similar to allowing partners to exchange units into common Class A shares coupled with a simultaneous buyback by the Company of the same number of shares. Such redemptions are generally tax deductible and must lower our effective tax rate to distributable earnings. Redeeming units for cash provides employees with liquidity while minimizing transaction costs and potential market disruption and gives the Company another mechanism to reduce fully diluted share count.

From January 1, 2010 through April 30, 2010, BGC Partners reduced its fully diluted share count by a total of approximately $7.5 million at an average cost of $6.08 by both share repurchase and partnership unit redemptions.

The Board has increased its stock repurchase authorization by $85 million to $100 million. Additionally, we filed a $100 million shelf registration statement on Form S3 with the Securities and Exchange Commission. Besides general corporate purposes, including acquisitions, this registration, along with our share buyback authorization is designed s a planning device in order to facilitate the redemption process I've just described. In the future we may, one, redeem units for cash and reduce our fully diluted share counts under our repurchase authorization or, two, having redeemed units, we may chose to sell Class A shares under this registration. Because these units or shares would've already been included in our fully diluted share count, we do not expect either of these scenarios to be dilutive although the second would increase the Company's free float.

Redemptions and exchanges are generally tax deductible unless reduce our effective tax rate to distributable earnings. We therefore expect our tax rate to remain around 50% for the foreseeable future. Because GAAP does not allow for the inclusion of our diluted instruments when calculating earnings per share, our GAAP fully diluted weighted average share count was the same as our basic share count of 82.9 million for the three months ended March 31, 2010; however, when calculating distributable earnings, our fully diluted weighted average share count was 222.6 million for the first quarter of 2010 compared to 200 million in the first quarter of 2009. Our fully diluted share count stood at 220.2 million as of March 31, 2010.

On April 1, 2010, we issued $150 million in 8.75% convertible senior notes due 2015. Beginning in the second quarter of 2010, our distributable earnings per share calculations are expected to include an additional 21.4 billion shares but are also expected to exclude the $3.3 million of interest expense associated with these notes.

Regarding the balance sheet as of March 31, 2010, the Company's cash position which we define as cash and cash equivalents, cash segregated under regulatory requirements, and reverse repurchase agreements was $391.9 million. Notes payable and naturalized borrowing were $166.1 million. Book value per share was $2.21 and total capital which we define as redeemable partnership interest, non-controlling interest in subsidiaries and total stockholder's equity was $393.4 million. In comparison, as of December 31, 2009, the Company's cash position was $471.5 million. Notes payable under naturalized borrowings were $167.6 million. Book value per share was $2.44 and total capital was $437.9 million.

The decline in cash from year end 2009 was due primarily to the payment of year end bonuses, the repurchase and redemption of shares and partnership units and the settlement of payables to related policies.

Now I'll turn the call back over to Howard.

Thank you, Graham. With respect to our outlook, in 2009, BGC generated total revenues of approximately $96 million in April, $95 million in May, and $103 million in June. Our April 2010 revenues were up approximately 17% year over year to $112 million including the recent strengthening of the dollar versus the Euro. We therefore expect to generate revenues of between $320 million and $340 million in the second quarter of 2010. This would represent an increase of approximately 9% to 16% over the $294 million we generated last year. We anticipate pretax distributable earnings to increase by 18% to 40% and to be in the range of $38 million to $45 million and we expect post tax distributable earnings to be between $32 million and $38 million, an increase of approximately 34% to 60% compared to $23.8 million in last year's quarter.

So, Operator, I'd now like to open the call for questions, please.

Your first question comes from the line of NiamhAlexander with KBW. Please proceed.

Good morning. Thanks for taking my questions. If I could just go back to the shelf offering this morning, is that primarily to repurchase stock converted from REUs? So it's related to compensation? Is that fair?

I guess. It's not directly related to that. The firm is expected to buy back those units directly from the partners and then at some later time the firm may chose to sell under the shelf registration units to make basically common stock so it would be economically -- if once you counted those numbers the same it would be economically an equal amount of cash. But the purchase of the units is tax deductible and of course shares under the shelf which are separate and different would just be shares.

That's helpful. Thanks. The compensation, can you give me a little bit more information. You've extended the duration. You've increased the cash portion. I guess it was quite a big non-distributable earnings chunk there. It was almost like $60 million that went through the GAAP. Can you just help me understand a little bit better exactly what's changed here?

I think there are a couple of things there. We had premerger contractual arrangements with employees that were not production based, meaning they were not about percentages and they were premerger. They were basically before the IPO and before the merger. So, once the merger happened, we decided and appropriately took the charge this quarter, a portion of that charge, as Graham said, was cash but a portion of course was not cash as well.

With respect to our partnership enhancement program, we have sought and have received and we have continued to talk to our partners about extending the length of their contracts and also having them accept from the Company at the Company's discretion an increased amount of restrictive partner units in lieu of cash as part of their compensation and we have been successful with that so far and we are rolling out that program around the world and we have been extending our contracts and having our employees agree that they will allow us to pay them additionally in restricted equity units.

Howard, help me gauge. Is it down from a three year duration to a five year duration? Just in terms of the stock I know it's difficult to give too much information but help me understand maybe just directionally. Has it gone from 30% stock to 50%? Or has it gone from 10% to -- I won't say stock. It's already used. But 10%? Just to help me maybe gauge where you've gone from and to?

I just want to be clear. The one-time charges are one-time charges. Whatever other partnership enhancement issues we have, we do not expect them to have one-time non-recurring charges. With respect to extensions, most of our employees were receiving a small percentage of their compensation in stock in and around 10% is a general area of the average that our partners were receiving in restricted stock before and we do expect that percentage to grow.

I can't say, because we're rolling out the program to a level it will grow to but we don't expect it to grow only a point or two. We expect that our partners are willing to accept ever more of their compensation in equity because they want their interests aligned with the Company and they haven't felt, also, because we are buying back their units at the Company.

They have been getting liquidity and when you provide people units and restricted stock and they do get liquidity in the stock performance as well as the Company is performing, you do get a virtuous circle where they're happy to take stock, they're happy to drive the earnings of the Company and revenues of the Company higher, they work ever harder because they have an ever bigger percentage of the Company and then, when they sell that stock at appreciated prices, the tax deduction dramatically decreases our effective tax rate which increases the amount of our dividends, which increases the value of their stock, which then we get to do it again and they all -- it's a circle of very, very strong positive numbers. You have seen tremendous out performance of this Company by the entire industry.

This quarter is so starkly different from everyone else and we think a large part of that is the intense desire to win that our partners have to drive this Company to ever more success and share it with their partnership ownership and the public's shareholdership which are getting ever closer together, especially as the public's tax rate declines. Remember, these tax deductions are not for the benefit of the employees. The employees already own the stock in partnership form. The benefit of this structure is now accruing singularly to a lower tax rate provided to the public shareholders.

Thanks, Howard, for that. The tax deduction goes through, that's a pretty positive there. You kind of indicated -- I know it's difficult to predict entirely but is it this year? Is it this year plus another six months? Is it fair for us to kind of when we're trying to value and look at forward estimates net shareholders, should we be thinking about the same rate for next year?

Yes.

And then if I could, a real quick question on the revenue. The FX was so strong. Do you think it's rebased at a higher level or maybe there was just kind of a lot of activity related to the sovereign prices which continue into this quarter arguably? Is it more of a rebase as a result of the new hires and the acquisitions hitting new productivity?

Remember, it was in the footnotes, we just reclassed one of our -- just to be -- just for you guys to make sure you understood, we reclassed one of our divisions from rate to FX. So, there wasn't a consequential change to it, it was just from a how we look at our business, we put a finer point to it and shifted it but it didn't change the business or the models or the gross revenue or anything. It was just a categorization model.

With respect to foreign exchange, two things are going on. One, the business topics are just creating huge volume. All the press about the Euro, the Eurozone currencies and the countries, IMF, the Euro bailouts, the paper today talking about they have to do way more than the $700 billion that the US did. All of these things create volatility, expectation of issuance, movement, and are therefore volumes in our business. They are the things that drive our Company's growth rates and volumes. These structural things really are extraordinary.

Issuance levels, we can't imagine how they could go away now. They have such vast deficits everywhere in the world. Bailouts create ever more issuance. So, structurally, I think the business is set up for the long, long run to be spectacularly large. With respect to the narrow portion of it, we do a substantial amount of our business in Europe and we do earn quite a bit of our profits in Euro and pounds and as the dollar has rallied dramatically against the Euro, on a constant currency basis our business is doing spectacularly but when we presented in dollars it does restrained slightly how we look.

So, our guidance was restrained to the $320 million to $340 million simply because you've seen the Euro, right? Weaken against the dollar. And we make lots of money in Euro as we do, we have a spectacular Greek franchise and doing the business when Greece is on the cover of the newspaper every day, it's really good for our Greek brokers. They're very happy.

Your next question comes from the line of Rich Repetto. Please proceed.

Good morning, Howard.

Good morning.

First question just a little bit on the accounting here. On the guidance for post tax distributable earnings, did that include the interest expense, the $32 million to $38 million, does that include the interest expense?

It's included as a deduction. Alright? It's included as it would be normally.

Okay.

The cost is included. It only comes out if you add the shares for an EPS analysis, you take out the expense because you're going to take it out of the dividend and the earnings per share. That becomes dilutive at what number?

At about $0.15?

So, between $0.15 and $0.16 of earnings, the revert becomes dilutive to our EPS but you ignore that and just count the interest expense when doing our earnings.

Right. So, we cannot just take $32 million to $38 million -- let's just take the mid $35 million and divide that by the share count, if we have the convert in there.

Right. What you want to do - the earnings will be $32 million to $38 million and then if you want to do earnings per share, you'd add back in $3.3 million and divide by -- you'd add into the total share count, 21.4 million shares. So, when doing the EPS, you'd take out the expense or add in $3.3 million to the earnings and then add 21.4 million shares and basically the math is between $0.15 and $0.16. It's nothing. At $0.17 it starts to be dilutive. So, at our $0.17 earnings, slightly dilutive.

Got it. Next question, back to the restructuring here, Howard. The premerger agreements, were they amortized over the life of the expected career of the employee? Taking the charge?

No. They were not life of employee type of agreements. They were contracts that had specific payments that were not related to production.

I guess we can take this offline, but the question, maybe not related to production but it appears related to retention. If you didn't restructure them in this quarter, there would be no accounting for them?

This was together with our auditors the appropriate accounting for them now. They determined this was the appropriate accounting now and so we took the charge.

Okay. Alright. We can talk about it more.

I just want to be clear. It has nothing to do with operations. It has nothing to do with production based. It was done premerger. These were contracts that were part of the I guess incentive program that made people excited that we were just hiring for the Company to go public. But they were done to employees that were already here and that has expired. Those issues have expired and so it was appropriate together with E&Y that we take the charge this quarter.

Okay. I guess the last question would be we've spent fair time looking at the compensation structure, so what will the compensation ratio trend down to? Let's just say, what would be your guidance? Because I know it's going to trend down. Let's put it that way. It should trend down.

It is our expectation and intention to trend down our compensation ratio. It's going to come in two ways. It's going to come from increased electronic trading as we've discussed which comes at a lower cost to the Company and as that becomes a higher percentage and the cost of doing that electronic trading goes lower, you will see our compensation ratio by just the math of it decline. And number two, our employees are willing to extend their contracts, as we've discussed, without the same upfront costs that have historically been associated with rolling our contracts forward because of their huge stake in the Company and their continuing growing stake in the Company and that virtuous circle of driving the stock price up by their lower compensation, in fact drive their holdings up which makes them more money which more than offsets that and becomes a very positive cycle.

So, while we're in the early stages of our partnership enhancement program, I can't say with the same knowledge as when I'm finished how this will go because we've just begun the process sort of at the end of the first quarter. So, I can't put a finer point on it other than to say we do expect it to continuously decline, although not in big giant chunks. Rather it will, I think, smoothly decline over time and we will continue to add over time hundreds of basis points of benefit to our bottom line.

Understood. Thank you.

(Operator Instructions) Your next question comes from the line of Daniel Harris with Goldman Sachs. Please proceed.

Hi. Good morning, guys. How are you?

Good morning.

I was hoping you could give us a little bit more detail around the revenues that were related to fully electronic trading which were, I think you said 9% in the quarter? Can you give us some flavor on how many clients are actually using some of your electronic platforms today and what percentage of their total revenues or volumes are coming from that to actually generate that 9%?

The electronic platform is a global platform now. We trade electronically everywhere from Australia to North America. Over 40 different desks, as we said on the early part of the earnings call. With regards to credit derivatives and FX options, Volume Match is a big proponent and a big part of that electronic revenue and we think that's going to continue to grow and expand across all of the customers that are prevalent in each individual marketplace. Let's say of the top 20 customers, all will have electronic capability globally.

Okay. So, what you're saying is that a lot of those revenues or most of those revenues are coming from the top 20 guys. Is that fair?

Sorry, it's much broader based than that, Daniel. We have over 600 different banks live electronically. It's everyone, everywhere. To be specific, we have it from Paris, Frankfurt, North America, Canada, South America. It's everywhere.

Okay. Just trying to get some more color on what percentage impact it was. Moving on to what you guys were talking about with some of the sovereign issues, how should we think about that, the way it's impacting the credit and maybe some of the rates and FX revenues. Obviously Greece has got some issues and some other countries in the Eurozone are also experiencing some duress. Do you anticipate that is -- has that really spiked revenues or are you guys just seeing a steady ramp up based on hires and new desks that you guys have had?

We have such a broad business that certain markets spike up and become more volatile and transact more volumes and others are slower. You'll see, if you look at our regional business, in 2008 and 2009 the US, there were all sorts of discussions and huge business in CDS in the US and now you've moved to sovereign CDS in Europe. It goes back and forth.

So, I would think the key to having such a large broad based global business is you're there to capture whatever volatility and volume is available in the world at that time. The fact that we have a world-class rates platform all over the world means that when Greek sovereigns trade, we will do extremely well and when that moves to Italy, it becomes a central focus of everybody, then that will trade really well and when it goes to the UK, that will trade really well and then it will come back to the United States whose only running trillions of dollars of deficits and that will be well. And then when we start talking about California and its deficits, that will be well back in America.

So, we get the benefit of being in all of these different places but I would not suggest that if Greece, if it bailed out Greece tomorrow and Greece came off the topic, the cover of the newspaper, I don't think you would see any impact quarter to quarter on our business. It would simply be something that we wouldn't highlight next time that we're doing well with because there would be something else we'd be doing well with somewhere else in the world. It doesn't actually matter. So, from a macro perspective, it's a nice growth rate across a broad spectrum of businesses. Last year we did spectacularly well in Paris. This year, Paris, the froth has come off some of the business in Paris, but the froth is on Greece, right? When the froth comes off of Greece, it's my view that the froth will just be somewhere else in the world and the issuance in the US and the issuance from all these governments around the world is so huge, I don't think it's froth anymore. I think just the size of the cup is much, much bigger.

Okay, Howard. Thanks. I'm surprised actually we got this far into the call without getting your views on regulatory reform. But clearly at this point you're probably paying as much attention to the stuff coming out with regards to moving swap dealers into separate subsidiaries or changing the way banks think about derivatives. How do you think about that changing for the positive or neutral or negative?

I don't know what the language is going to be. As I said on the last call, I have read more things that I'm certain will not become law than I've ever done in my life before. It is disruptive. That is for sure. It is a change. That is for sure. I don't think the macros that they talk about changing or disrupting should have an overly difficult set of circumstances for us.

We are a multilateral, multiuser place. We are electronically capable of capturing and making transparent any information they want. We are capable of doing business on an exchange if that were required. We do own a partnership with 12 of the largest players in the world in futures exchange. I think while it's difficult to understand what will happen, I think from an overall perspective I can't imagine us being in a better position but I don't know what position I was hoping to be in because the law is there.

I think what we can say is we have more positions covered than anywhere else and we are better positioned to deal with whatever comes out than anyone else but I don't know what that's going to be and so therefore I can't really opine whether and how it's going to impact us other than I think it is important for us that the regulators value a hybrid voice and electronic model that we think those two together are very, very valuable and we continue to stress their value.

However, I think we cover as a Company, we have an exchange and partnership with everyone. We have electronics. We have the capacity to do transparency. We have as many of the bases covered as we can and you couldn't cover those bases when they started talking about it. You either made this massive investment in infrastructure and technology over many, many years or you've positioned to do it or you've not.

I think we're just in a super position, as good as we can. We are linked to all the central counterparties that matter already. We have the OCC link also built in as well. We are well positioned with central clearing if central clearing is required. That's something that we've always been a proponent for nondiscriminatory access to central clearing. I think we're as good as we could be but I guess the answer is stay tuned because we'll have to read it with you.

I know. It should be an interesting couple of months. Just lastly, a quick numbers question for Graham. Other expenses dropped pretty sharply this quarter. Should we expect them to stay down there? What's behind that drop and how should we think about that going forward?

There will always be sort of one-off movements, up and down, right? The trend -- I guess this is a little bit of a down quarter, right? I would expect the trend to gradually drift as the firm expands. This is what we've said in the past.

So expense is drifting up at a much slower rate than revenues and continue to expand our margins. So, our expenses, while fixed, we do give our -- we tend to pay our back office people more money next year. So, our expenses will continue to grow; however, at a much slower rate than we expect our revenues to grow and therefore we expect to have margin expansion. So, it's going to remain an ever lower percentage of our gross revenues.

Thank you.

Your next question comes from the line of NiamhAlexander with KBW. Please proceed.

Hi. Thanks for letting me in again. If I could talk about acquisitions and hiring because that's been a really interesting part of the growth this year. Has the pace eased off? What's the hiring environment like? What areas are you most interested in? And then with respect to acquisitions, how do you feel about expectations now? Should we expect it to pick up pace again?

We are always looking to hire profitably and acquire accretively. And we were -- while our stock was at a lower multiple, it was difficult for us to acquire small regional brokerage companies because they had not reset their expectations along with the market. As our Company continues to grow and succeed in our outperformance this quarter as a classic example, I think we should be able to begin to acquire smaller regional brokerage companies accretively and you should expect us to do that over the course of the next year. So, we think we will be able to acquire accretively over the next year and profitably so, much as you've seen us do in Paris successfully and now, very successfully, obviously in Brazil, and we expect to continue that process.

With respect to attracting brokers, I think it's clear that the two things we have that attract the brokers is our partnership structure is a magnet because they can share in the upside of the Company and they have lots and lots of friends here who are partners who have been very successful and the more successful they are, the better that acts as a magnet in the restaurants and places where these guys meet each other and talk. They know that the brokers are happy here because the partnership has been successful and our huge investment in electronics, our volume matched product around the world, as Shaun just talked about. If you don't have that on your desk and you're working at a competitors, our guys are using these assets and these tools to better their business. It's going to attract people to us.

So, Volume Match is attracting people to us. BGC traders are attracting people to us and just the class of electronic system is attracting people to us and I think we're winning. I would expect us to not slow the pace of hiring or acquiring.

That's helpful. Thanks, Howard. I appreciate the color there. While I am back on, just with respect to the compensation again, I'm trying to understand how this is not amortized. Did your employees have a separate production agreement then in that proportion? Because if I look at other interdealer brokers, when they re-up or assign new employees, that's amortized through the P&L but it seems like when you were re-upping or signing these one-times, it doesn't flow through your distributable earnings. So, help me understand. Is there a separate production employee contract that does flow through the comp ratio?

I need to be crystal clear. When we sign someone up front and pay them up front either to extend their contract or we sign someone new that does go through our distributable earnings and it is amortized. All equity that we give them is amortized according to GAAP and you see there is no exception between GAAP and distributable earnings with respect to the amortization we do for our partnership equity. If we give someone cash then obviously you amortize it over the life of their contract. If we give them a forgivable loan, the amortization goes by the terms of the forgivable loan. All of those things go through our distributable earnings as appropriate, right? The one-time charge was pre-IPO related, non-production, non-contract extension related. It was separate. All that was left were residual forfeiture conditions. And we determined that they were unnecessary. So, it was all unrelated to future service. You have to understand these were just separate things. This was not a write-off of up front payments. This was not that.

Okay. I appreciate it. Thank you. And then with respect to the offering, help me just understand your thinking there. Is there a time period where we should expect something? Do you think at these levels of stock price that it's not something we should expect immediately?

We are not expecting the shelf registration for you to consider that there's going to be dilutive issuance as we sit here now. It's certainly not our expectation as I sit here today. We do expect over time to buy back units from our employees and we may determine over time that that amount of purchase is not either timed the way we want or priced the way we want or any other model but as we buy back units from our employees which we do expect to do, there may be separate times where the Company decides we want to raise additional money and we sell and we may chose to sell shares under the shelf. But effectively, taken as a whole over a long period of time, I don't think with respect to that model which I think Graham tried to articulate, he didn't think over time in a broad spectrum that you should consider that - with respect to that, managing the partners and we expect to include more shares issuance.

Okay. Thanks for taking my second question.

Your final question comes from the line of Rich Repetto with Sandler O'Neill. Please proceed.

She had two shots but she didn't get it right either time. My name, I'm talking about. But that's okay. The last question, Howard, is ELX, any updates there? I know there's been more activity and technical issues, but any updates on ELX?

I would say I guess the most exciting thing coming is that on June 18, ELX would be rolling out Eurodollar. So Eurodollar contracts will now add to its US Treasury Futures division and there will now be two products being traded on ELX. I think that's very exciting. The system works great and it continues to grow. You've seen we've had record volumes. It was either last week or the week before. It continues to move along very nicely, next product, Eurodollar, June 18.

Got it. Thank you.

This concludes the question and answer session. I will now hand the call over to Howard Lutnick.

Thank you, everyone, for joining us. It is a pleasure to spend the day talking to you. I hope you all have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.