Bgc Group Inc (BGC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2 2013 BGC Partners Incorporated Earnings Conference Call. My name is Debra and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes and I would now like to turn the call over to Mr. Jason McGruder, Head of Investor Relations. Please proceed, sir.

Good morning. Our second quarter 2013 financial results press release was issued this morning which can be found in either the News Center or Investor Relations section of our website at bgcpartners.com. During this call, we will also be referring to a presentation that summarizes our results which includes other useful information. This too can 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 today's press release for GAAP results. Please also see the section of today's press release entitled distributable earnings, distributable earnings results compared with GAAP results, reconciliation of revenues under GAAP and distributable earnings and reconciliation of GAAP income to distributable earnings for definition of these terms and how, when and why management uses them.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all the financial comparisons we will be making on today's call will contrast the second quarter of 2013 with the second quarter of 2012.

I also remind you that the information on this call contains 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 and for its industry as well as statements about our future financial 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 BGC's filings with the U.S. 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 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 and risk factors set forth in our most recent public filings in Form 8-K, 10-K and 10-Q, which we incorporate today by reference.

I would now like to turn the call over to your host, Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason. Good morning and thank you for joining us for our second quarter 2013 conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

Before we discuss our second quarter's results, I'd like to describe a new program we have put in place to redeem partners' units by providing them with fewer restricted shares of common stock which reduces our share count. It pays their withholding and other taxes and reduces the value of their loans to us. Taken as a whole, this plan created effectively a 32.2 million share buyback on tremendously cash and tax efficient terms to the Company.

In addition to reducing the Company's fully diluted share count, we also plan to reduce the rate of equity issuance to partners and employees going forward. This program provides us the opportunity to extend and modify our partners' contracts while providing partners with a defined multi-year schedule to monetize their economic interest in BGC. We believe this program serves as a powerful incentive to attract and retain key partners and employees.

At the end of the quarter we redeemed 77.4 million units from the partners of BGC. The Company expects to issue 45.2 million common Class A BGC shares, of which 39.1 million are restricted shares. So taken together, the Company's fully diluted share count decreased by 32.2 million shares.

BGC plans to pay approximately $106 million in distributions and taxes owed on behalf of its partners. The redemptions also resulted in a $95 million post tax reduction in the value of employee loans on the Company's balance sheet. These two items add up to $201 million. So taken together, the net reduction in BGC's fully diluted share count of 32.2 million cost the Company the effective equivalent of $201 million or $6.24 per unit.

These new restricted shares are expected to be saleable by partners in good standing after either five or 10 years, depending on their current contract. Partners who agree to extend the lengths of their employment agreements and/or other contractual modifications sought by the Company are expected to be able to sell their restricted shares over a shorter time period.

We believe that the expected contract modifications will also materially reduce the rate of employee/partner share issuance going forward, even as we maintain the ability to retain and incentivize our key employees and partners through restricted shares and partnership units.

We received $750 million in cash upon the closing of our recent NASDAQ OMX transaction. After taking into account the future expected cash payments required to pay distributions and corporate taxes related to this transaction and the distributions and withholding taxes related to the reduction in fully diluted share count, we expect to have approximately $459 million remaining from the eSpeed proceeds in addition to our already strong cash position.

We intend to use these proceeds to repay debt, make accretive acquisitions, invest in organic growth in both of our segments, and repurchase additional units and/or common shares. We also expect to maintain our regular common dividend for the foreseeable future.

I am happy to report that our Board declared a $0.12 dividend for the quarter. We are confident in the sustainability of our current dividend and at yesterday's closing stock price, the dividend yield on BGC is approximately 7.6%.

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

Thanks Howard and good morning everyone. In our Financial Services segment, volatility in rates and foreign exchange picked up toward the end of the second quarter, and we were at or above historical averages. This resulted in stronger industry volumes in these asset classes. In Equities and Credit, however, volatility remains below historical averages, which kept volumes down.

While market conditions were mixed, revenues for our Financial Services segment increased by 2.3% in the quarter. This performance was better than the top line growth reported so far by our inter-dealer broker competitors, and we believe we continued to gain market share.

Our Financial Services segment generated revenues of $316.3 million and $56.4 million of pre-tax earnings. A year earlier, this segment generated $309.2 million in revenues and $58.5 million in pre-tax profits.

Looking at results by asset class, our revenues from electronic rates products, excluding eSpeed, increased by approximately 24% in the quarter, driven mainly by strong growth from certain desks in interest rate derivatives. Revenue from our voice/hybrid rates desks also grew, while eSpeed rates revenues were generally flat. BGC's overall rates revenues increased by 2.9%.

Our fully electronic credit revenues grew by approximately 8% in the quarter, but our overall credit revenues declined by 3.9%. Although some of our cash credit desks showed strong growth, the overall credit derivatives market continues to remain challenged.

Our foreign exchange revenues increased by 14%, driven by both double-digit growth from our voice/hybrid FX desks and by approximately 27% increase in revenue from our spot FX business. This growth exceeded the comparable volume figures reported by CLS, CME, EBS, and Reuters.

Global equity markets also continued to be generally difficult according to most exchanges and central clearing organizations. For example, equity-related volumes were down between 4% and 42% according to the Deutsche Borse, Euronext and DTCC. In comparison, BGC's revenues from equities and other asset classes decreased by 2.5%. Excluding eSpeed, Financial Services electronic trading, market data and software technology revenues increased by 12.2% to $21.9 million or 6.9% of segment revenues in the quarter, compared with $19.6 million or 6.3%. What excites us is the growth of our remaining fully electronic business. It's now about the same size as the eSpeed business we sold and is clearly growing at a faster pace.

The growth of our retained technology products has continued to exceed most comparable industry volumes. They generate a pre-tax margin of around 45% and we believe that these businesses will continue to grow faster than our overall Financial Services segment.

We ended June with 1,587 brokers and sales people in Financial Services, down from 1,757 a year earlier due to our having selectively reduced front office headcount earlier in the year. Our average revenue per broker/salesperson in the segment improved by 13.3% to approximately $201,000 in the second quarter compared with $177,000.

Turning to our Real Estate Services segment, industry metrics continued to move in a positive direction in the second quarter. With respect to leasing, vacancy rates, asking rents, and net absorption rates improved year-on-year. Our NGKF research team believes that these positive U.S. leasing trends will continue as the year progresses.

According to Real Capital Analytics, overall U.S. commercial property sales volume grew by 13% year-over-year in the second quarter, while CoStar says that commercial property prices were up by 9.4% as of the most recent data. Commercial real estate continues to be a relatively attractive investment given the low interest rate environment, and so NGKF's research team expects that these positive trends will continue for an extended period of time.

With respect to NGKF's results, management services and other revenues increased by 3.6%. On April 13, 2012, BGC purchased certain assets of Grubb & Ellis. As part of the transaction NGKF collected $21.7 million during 2012 not related to our ongoing Real Estate Services business, of which $12 million were recognized in the second quarter of 2012. These revenues are primarily associated with the collection of receivables related to deals initiated by Grubb & Ellis brokers who left prior to the acquisition. As a result, Real Estate Services revenues and pre-tax distributable earnings for the second quarter of 2012 were higher than they would otherwise have been.

Excluding these non-core purchased assets, NGKF's brokerage revenues improved by 9.7%, while overall revenues improved 7.9%.

In order to help you better understand year-over-year comparisons, we have broken out these non-core NGKF revenue figures for you in our earnings presentation going back to the second quarter of last year.

As a reminder, commercial real estate services firms tend to generate the least revenues and profits in their first calendar quarter and their largest top and bottom lines in the fourth quarter.

Given this seasonality, positive industry trends and the superior execution of our strategy by the executives and brokers of NGKF, we expect our real estate results to be above current levels for the rest of the year.

NGKF had 898 brokers and salespeople at quarter end, up 5.2% compared with the year-earlier figure of 854. Average revenue per real estate broker was approximately $115,000 in the second quarter, compared with $114,000 and excluding the non-core purchased assets.

BGC's overall front-office headcount decreased by 4.8% to 2,485 brokers and salespeople as of June 30. BGC's total average revenue per front office employee was up 5.2% to approximately $170,000. A year earlier, these figures were 1,780 brokers and salespeople at an average of approximately $162,000 each.

With regards to regulation, we expect to be approved to operate a Swap Execution Facility or SEF under the Dodd-Frank Act later this year. Although rules in Europe and Asia have yet to be finalized, we also expect to operate successfully under the various non-U. S. regulations concerning the OTC markets.

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

Thank you, Shaun and good morning everyone. BGC generated revenues of $471.1 million, up 1.3% compared with $465.1 million. Our revenues from the Americas were approximately flat at $245 million. Revenues from Europe, Middle East and Africa were up by approximately 5% to $176 million and Asia-Pacific revenues decreased by approximately 5% to $50 million.

Excluding the Real Estate Services segment, our global April 2013 revenues were up by approximately 8% to $108 million. May was down by approximately 4% to $113 million, while June was up by approximately 2% to $106 million, all when compared with a year earlier.

Turning to expenses, compensation and employee benefits were 61.1% of revenues compared with 59.5% of revenues. Our compensation ratio increased mainly due to the mix of revenues by geography and product. Non-compensation expenses were down on an absolute basis and as a percentage of revenues, to 27.5% compared with 28.4%. The decrease in non-compensation expenses was due mainly to lower professional and consulting fees and occupancy and equipment costs, partially offset by expenses related to the higher interest expense as a result of the June, 2012 issuance of senior retail notes.

We are on target to reduce overall costs by a total of at least $50 million on a go-forward basis by the end of 2013 as compared with the second half of 2012 run-rate. This reduction will include comp and non-comp expenses. Our pre-tax earnings were $53.8 million, compared with $55.9 million. Our pre-tax margin was 11.4% compared with 12%. BGC's effective tax rate for distributable earnings was unchanged at 14.5%.

Our post-tax distributable earnings were $44.9 million or $0.13 per fully diluted share, compared with $46.5 million or $0.17. Our post-tax earnings margin was 9.5% compared with 10%.

Our fully diluted weighted average share count was 378.1 million for the second quarter of 2013 for both GAAP and distributable earnings. This included 39.8 million shares associated with our convertible senior notes.

A year earlier, our fully diluted weighted-average share count was 313.8 million, though our GAAP fully diluted weighted-average share count was lower because certain share equivalents were dilutive for distributable earnings but not for GAAP.

As of June 30, 2013, our fully diluted share count was 349.7 million, assuming conversion of the 39.8 million shares underlying the convertible senior notes. Absent acquisitions or significant hiring, we expect our fully diluted share count growth to be significantly less than in recent quarters.

During the quarter there were a number of items that impacted our GAAP results both positively and negatively, but that were not part of our ordinary, operating business.

A number of GAAP charges were excluded from our calculation of pre-tax distributable earnings and totaled $464.6 million. These non-cash, non-dilutive GAAP compensation charges related to the 32.2 million share count reduction, and consisted of the following items, the redemption of 77.4 million partnership units, the expected issuance of 45.2 million Class A common shares, of which 39.1 million are restricted, a reserve related to employee loans, which represents the grossed-up amount related to the $95 million reduction of loans, forgivable loans and other receivables from employees and partners.

Our calculations of distributable earnings also exclude GAAP items which totaled a positive $681.1 million. These items consisted of the following, a $723.1 million gain related the eSpeed sale, other charges with respect to dispositions, acquisitions and/or resolutions of litigation and a non-cash reserve related to our commitment to make future charitable contributions related to the Company's Annual 9/11 Charity Day.

We believe that excluding these items best reflects what our ongoing business will look like going forward. We expect to include the payments associated with BGC's receipt of NASDAQ OMX stock in our calculation of distributable earnings. To make comparisons more meaningful, one-quarter of the annual contingent earn-out amount will be included each quarter as other revenues. This amount will be calculated each quarter based on approximately 248,000 shares of NASDAQ OMX stock multiplied by their share price on the last day of the quarter.

We are exploring hedging these shares, and the dollar amount we include in distributable earnings will be net of any adjustments relating to hedging.

As of June 30, 2013, our cash position, which we define as cash and cash equivalents plus unencumbered securities held for liquidity purposes, was approximately $1.1 billion, notes payable and collateralized borrowings, and notes payable to related parties were $423.8 million, book value per common share was $2.76 and total capital which we define as redeemable partnership interest, non-controlling interest in subsidiaries and total stockholders' equity was $838 million.

In comparison, as of December 31, 2012, our cash position was $420.4 million, notes payable and collateralized borrowings and notes payable to related parties were $451.4 million, book value per common share was $2.11 and total capital was $506.3 million.

As you can see we reduced our debt by approximately $28 million so far this year. We expect to pay approximately $185 million in taxes and distributions for the eSpeed sale, the bulk of which will be paid in the middle of September. In addition we expect to pay $106 million in distributions and withholding taxes on behalf of partners, the bulk of which will also be paid around the middle of September.

With that, I am happy to turn the call back over to Howard.

Thanks, Graham. I did note that we had a statistic that was a little off. So BGC's total average revenue per front office employee was up 5.2% to approximately $170,000. A year earlier, these figures were 2611 brokers and sales people and they were each at an average of about $162,000. So just to make sure that statistic was clear.

So thank you, Graham. Excluding Real Estate Services and eSpeed, our preliminary revenues for the first 21 trading days of July were down by 7.9% compared with a year earlier. Our fully electronic businesses continued to outperform our overall Financial Services results. Our third quarter outlook reflects both the trends we are seeing in our Financial Services business and the growth we expect from NGKF.

So we expect to generate distributable earnings revenues of between $410 million to $440 million as compared with $446 million. We expect pre-tax distributable earnings to be between approximately $36 million and $46 million as compared with $46.7 million last year.

If we reach the high end of our range, we will have made up virtually the entire earnings of the eSpeed business that we sold while still having over $450 million of additional dry powder to grow and expand our business. We anticipate an effective tax rate for distributable earnings of approximately 15% compared with 14.5%, and we intend to update our third quarter outlook around the end of September.

We are excited about the growth of our technology-based businesses, the strength of Newmark Grubb Knight Frank, and we are focused on cost reduction. Together, these will drive the earnings of our Company going forward.

So, operator, we'd now like to open the call for questions please.

(Operator Instructions) Rich Repetto.

Good morning. So, I guess, Howard, the first -- the question is going to be on eSpeed. And if you looked at sort of both the fully electronic revenue, it was down slightly year-over-year and up from the first quarter, but down slightly. This is just the fully electronic. And then if you look at the overall eSpeed revenue, it was down slightly sequentially as well as year-over-year.

So anyhow, the question is, given the environment, wouldn't you expect eSpeed to have performed as one of its best quarters this past quarter, or not? Are we looking at the wrong indicators?

Now, what has happened is quantitative easing has suppressed the business fundamentals of the treasury business. It's holding it down. And as you imagine the federal government continues to issue government bonds and the Federal Reserve is buying it, right. So instead of them going out in the world and trading and being hedged and all of the natural velocity we get from that, it's just being suppressed by quantitative easing.

And Fed volumes were down a couple of percent, and that's simply because of quantitative easing. It's in an oddity. The discussion of tapering would be a good thing for NASDAQ and all these kind of discussions. The ending of quantitative easing will be excellent for the US treasury business.

Our view was because of quantitative easing it was constrained, but as quantitative easing ends and it will end someday, this will result in an excellent acquisition for NASDAQ. It's just being suppressed now by quantitative easing. And then some today when the Federal Reserve starts to liquidate their $3.3 trillion deficit, they are holding a bond that they're holding on their books, this will become one of the great issuers of all time. So you now have the US Treasury as an issuer and someday you'll have the Fed Reserve as an issuer and that would be really great for the business. So the basics of the treasury business are it's a great business. It's being suppressed today, but it has enormous potential and opportunity tomorrow and that's just the economics of quantitative easing. They are odd; there is nothing out of the way to say it. It's just odd.

Okay. That's helpful, Howard. And then I guess, Graham, did the tax rate on the cash proceeds change? I thought it was 20% before. Is it now being calculated at 25%?

Yes, I mean, it has changed a little bit now as we went through all the detail. It's the same number, but as we went through it, it came out at 25%, still lower than 40%, though.

Okay. And then, Howard, well I guess two last quick things, you talked about a SEF later in the year. I'm not sure whether you put your application in already or not. But you can see some of the others getting temporary approval like Bloomberg. So just trying to see exactly where you stand. And I guess on the real estate just the progression, is each quarter normally better? I know you said first is the worst, fourth is the best. I am just trying to get a feel for what's embedded in 2Q for the real estate and the progression.

The first question is, we've not yet applied but we are working and we expect to operate successfully as a SEF and that's just going apace. And with respect -- what was your second question? Why don't you repeat it for me.

On just the real estate, does it normally build throughout the year or -- I don't know whether it's that predictable, the real estate, you said 1Q was the worst, 4Q is normally the best. I'm just trying to see how --

Right, 3Q, yes. So it normally builds throughout the year. So first Q, second Q third Q and then the fourth quarter more than makes up for whatever you thought was missing in the first quarter. So the fourth quarter tends to be much, much better which is seasonally attractive for us because obviously the third and fourth quarters in the financial service business tend to be weaker just because of the vacation schedules of the summer and then Thanksgiving and Christmas. So this should help sort of balance that out, but, yes, it should grow.

So you saw taking out some of the benefits we received in the structure of the way we bought Grubb & Ellis made us look better than the ordinary business would have been presented. In the second quarter of last year we had nice growth over that, obviously significantly higher than the first quarter. We expect the third quarter to be higher again and we expect the fourth quarter to be again higher. So we expect it to grow throughout the year and I think you will be very impressed with the numbers put up by NGKF. It is a first-class company. We really think very, very highly of the management and the way the company is growing, it really, really feels excellent.

Got it. Thank you. That color was very helpful. Thanks.

Patrick O'Shaughnessy.

Hey. Good morning, guys.

Good morning.

So several questions for you. The first is, as you look at the M&A landscape, and certainly you still have a lot of dry powder for M&A, what sort of opportunities are on your radar right now, and what sort of timeline do you think we're looking at to see some of those actually executed?

Well, however popular we felt that we were before having over $1 billion in cash makes you much more attractive now. I think there are numerous opportunities that are worthy of consideration for the Company and that is in both the real estate business as well as in our financial service business.

I think we will be able to invest our money very accretively and at rates well in excess of whatever equity yields people would expect would be the cost of our equity at the Company. So I think we really should be able to find investments that really give us excellent accretive terms. And we want businesses that fit nicely with us. We're not really looking for strategic investments, more like businesses that naturally fit with us that we can leverage our scale and scope.

And I think there are opportunities, both large scale and small scale, but they have to be on the right terms. We are very, very focused on the right price and on the right terms. We will take our time, we will do it right, on the right times and on the right terms. And the regulatory landscape will create opportunities for us. It just will, and having the powder will make some transactions occur that might not otherwise have occurred. We are in no rush, but we expect to invest it wisely and very accretively.

All right. Understood. The next question, if I heard Graham correctly, I think you said that your quarter-end share count was about 350 million shares.

Yes.

And that includes that 32.2 million that were essentially redeemed in that. I am getting to about -- 20 million shares were issued during the second quarter to get from your end of first quarter share count, I think, of 360 million. So take 360 million plus 20 million minus 30 million gets you back to 350 million. Can you talk about why share issuance was so strong again in the second quarter? And then you talk about how it's going to drop markedly going forward. How markedly like, a handful of million per quarter, 10 million, kind of can you give us a range?

Yes, I think we're looking at around 5 million a quarter, plus or minus, but around that sort of level.

Okay. That's helpful.

This is certainly significantly lower than what I have seen over recent quarters, and obviously arising out of the program that Howard outlined.

Okay. And then just the elevated issuance again during the second quarter, is that just kind of a function of bringing more people on board in the real estate unit?

Yes, to a degree, yes.

Okay, understood. Just wanted to touch on expenses a little bit. So this $681 million add-back to non-GAAP earnings, I think within that, basically there is about a $50 million component for other charges and non-cash reserve related to future charity contributions. If I recall correctly, don't you normally take your charity contribution hit during the third quarter rather than the second quarter?

Yes, I mean that is true. Historically that's been the case and we've always added that back for DE purposes. But we made a commitment for future charitable contributions in Q2 and so we've actually provided it in Q2.

So this is a multi-year -- because it's a commitment to do the Charity Day going forward, this is really the GAAP charge of multi-years of it. And since it doesn't affect DE and it would have been a GAAP charge anyway, it really doesn't have any -- it won't have any effect on DE had we done it the old way or this way. But this is just since we have committed to do it, we took a charge, and that charge is the lion's share of this non-cash charge.

Okay. So substantially bigger than around the $10 million, $10.5 million charges you've taken in previous years?

Yes, because this covers multi years.

Okay. So kind of as we think about, at least modeling out your GAAP for future years, that's probably not going to be a charge going forward.

Yes.

Okay. Thank you for that color. A legal question for you. Tullett Prebon in its earnings release they talked about how they expect resolution on their lawsuit against you guys by the end of this year. Is that consistent with your expectations? And if you can provide any color on the proceedings that'll be useful.

I think the answer is yes for part.

As in you expect part of the case to be resolved and part of it to continue beyond this year?

They have brought so many cases. The last particular one, we had a positive result and they had to actually -- they had brought the case. Our brokers had brought a countersuit, and the net result was Tullett lost its case and the brokers received money -- hundreds of thousands of dollars were paid to them from Tullett. So that was the last determination in one of these cases. We do expect one of the cases to resolve, but we'll see after that. We will see.

Okay, understood. And one last one, then I'll jump back in the queue. Graham, you talked about you repaid some debt during the quarter. I think your debt has decreased $28 million year-to-date. Can you just talk about which one of your debt components has actually been paid down and how you're going about that?

This is actually predominantly part of the NASADAQ transaction where we repaid a part of the lease financing debt.

Okay. That's helpful. All right. I'll jump back in the queue. Thanks, guys.

Niamh Alexander.

Hi. Thanks for taking my question. Can you just expand a little bit on the distributions? I want to -- just to make sure I understand it correctly. The employee loan rebalance, was that cash you paid out in the past to them that you kind of recorded as an asset or something, or what is that? Is it kind of sometimes you pay cash bonuses and forgive the loan or something, so it's cash bonuses you've paid in the past you're no longer reporting as an asset.

Yes, this was cash paid out as loans to employees in the past.

And was it as loans, as in bonuses or something like that, or why are you writing it down now?

We used -- so we had loans to our employees which we expected to be repaid and by reducing the value on our books, we obviously have the expectation that we may not get repaid. And the point of that is to the extent they don't repay us that value plus the taxes we've paid on their behalf, you add those two together and we reduced the units that the employee had, and those two net each other out at about $6.24.

So if you think about it sort of in a general way, the employees have effectively, right, repaid their taxes, number one. We expect that they will pay back less of the loan, number two. And if you add those two things together, right, you get to $6.24 and they had less shares, less units by 32.2 million. So sort of those are the two expenses and the benefit is the 32 million shares. So the $201 million is the gross, sort of, cost to the company of doing this and the benefit is 32.2 million shares.

It's a good way to look at it because it shows that it's about $6.24 was the effective cost to the company and the benefit was a retiring or a redemption of 32.2 million shares.

So have you forgiven those loans, is that it? Because I guess there were kind of cash bonus (inaudible) that forgive the loans for tax purposes, or are the loans forgiven now? You are saying you are not expecting to be repaid. Is that because you are forgiving them?

Well we put up a reserve against that receivable because that's a more prudent thing for the Company to do. If we had completely forgiven it then we could never possibly get paid the money. So we set up a reserve against it because in the famous words, you never know. As our business is better, as people do better, there may be an opportunity to collect on those loans later, but we have correctly analyzed them and set up a reserve against that receivable.

But if we write it off, you get a grossed up amount and you get a tax reduction and those two things just go against each other and so that's how it works.

If you look at it it's as if rather than having our employees pay us back all the money and then buying the units from them with that money, we've just used those two against each other. But we've done it in a more clever way for the Company. Rather than writing off the notes, we've just reserved them because there may be the possibility that opportunity comes in the future where we could collect on the notes.

Now remember these particular notes were only paid back from distributions from the partnerships. So that was the particular part of the note that makes it sort of special.

Okay. So that's where the kind of dividend goes directly towards kind of repaying the loan rather than into the bank account of the employee or something like that, is that fair -- is that correct?

Say that again.

It's where your dividend distributions have historically gone towards repaying those loans for the employees rather than kind of into their bank accounts. Is that kind of what you that (inaudible) of it?

Correct. So before they used to take the distributions and pay the -- and those distributions went to pay these notes. Now they are -- we expect that their dividends from the stock will pay those notes. But obviously since we've redeemed 32.2 million of them, they just have less -- they have less shares to pay the notes. So we have to sort of preserve against it, because that's math.

So if that is done now with respect to the proceeds you have got, you figured there's $200 million there kind of allocated towards kind of employees, partners, insiders and us. Your ownership is no down to 34%. So is that part of it done for now with respect to the deal, or could there be something else next quarter, an adjustment? If you kind of see if there is good acceptance of the new employment agreements, could you potentially change it?

I mean, this part of the deal is done. There may be some little bit of noise probably next quarter as we go through particular people plus or minus a little bit, but nothing consequential. So this part of the arrangement is duck, right.

Okay. Fair enough.

So what we'll do next quarter or any other time is we have the cash and we may, as we said, will either pay off debt. We may buy back units, we may buy back shares, and we do expect to buy back units and buy back shares over time. We do expect to pay off debt over time, and we do expect to creatively invest. And how we do them and what level we do them will be presented itself over time.

Okay, fair enough. I guess my next question was like on the dash. I mean, can you give me a little bit more color on maybe how much -- because you had some -- you have quite a few different issuances. Ones are to Cantor; these are the converts, and then there is the retail offering. And help me think about maybe how you think about prioritizing which item you'd kind of address first or which one will be most attractive to kind of pay down first.

Obviously, the next maturity of our convert was issues during the crisis, right during the financial crisis and the coupon is high. We would like and look forward to that not being there.

Is that the one you entered to the Cantor or to the public?

Yes. Well, Cantor bought it because it paid a higher price than we could get elsewhere.

So that was about $150 million, am I correct?

Yes.

Okay. Okay. All right. Thank you. That's helpful. And then just back to Tullett thing if I correct, have you reserved anything for that so far?

We just don't comment on that.

You don't comment on reserves, okay. All right. Fair enough. And then back to kind of the core business, what you guys do every day, the rates business, I guess, just back to Rich's question --,I beg your pardon, Rich. I know you talked about QE generally, but June was huge and QE kind of all the uncertainty about QE actually drove a ton of volume in the rates markets and a lot positioning and a lot of repositioning. So it was a bit odd not to see that flow through to actually higher volume, higher revenue in eSpeed. So can I have another go and see? Generally, I get what you're saying about QE kind of limiting activity overall. But we did see a lot of activity in that month but it doesn't seem to have translated into revenue there.

June was good. If April were June and May I guess were June, it's just math. I mean, there is nothing special about it. The volumes were volumes, the math is the math and I don't know anything.

Okay, fair enough. And the SEF, I guess, you haven't applied yet. A few others have started already. It's like October is approaching to when these things take effect. I mean, is there some risk that you might not be kind of ready when clients need to go on that day in October? And then help me understand if you think of Bloomberg is so kind of prolific in the industry and people do so many trades on Bloomberg and now they are a SEF, so in a way they are kind of going to be competing a little bit more directly with you as a trading venue, how you address that with your clients.

With regards to applying for SEF registration, we are on target, we feel comfortable and we will be applying. As for competitors such as Bloomberg or many other competitors, we face them every day. Competitors such as Bloomberg and many others, be it exchanges, be it our traditional competitors, they all -- we all occupy different parts of the market and sometimes we compete against each other in the same part. So we are comfortable.

So you don't see them as kind of -- you don't see any potential change to the market structure or anything like that with it?

Well, I think the market is going to change and it has changed dramatically already with the customer bases widened out, the types of products now being electronically traded with us and with others has grown significantly. Collaboration between ourselves and some of our customers has happened as we know, and you can expect that to come from us too. So just generally, the market is changing, it's evolving; it's exciting. I think there's great opportunity going forward for us in this space.

I think Shaun is exactly right, which is that as the discussion of the Dodd-Frank rules has multilateral platforms being a key part of it, meaning clients will not do business in a private narrow setting. They're supposed to be doing business in a broad setting. That business has never been sort of included in our opportunity. Now it will be included in our opportunity. So you're talking about a much larger opportunity together with many other competitors, right. But it's really a much larger opportunity with many other competitors, and I think Shaun says it simply; we just like our chances in that world. We've competed very successfully across all of these types of businesses before and we expect if you make the rules, extend the client base and given our tools and our knowledge base of being a broker in the brokerage business and what we're good at, we're just better at doing what we do than virtually anyone else in the world and the more things you bring into multi-lateral, multiple buyer, multiple seller marketplace, the better we think BGC does, period.

Okay. Fair enough, Howard. And I'll get back in the line. Thanks.

Michael Wong.

Good morning.

Good morning.

Do you expect your modified equity compensation program to actually change your compensation ratio on a GAAP or distributable earnings basis or possibly just shift it to more cash instead of equity?

Over time, we would expect it to decrease but that's a macro. The micro is as we grow our real estate business materially, those brokers come in at a higher compensation ratio than my financial service people, but they come in with less other sort of technology support costs than our financial service people. So the comp ratio we would expect to decline over time in financial services, but because of the growth of our real estate business, it may not present itself as simply. But that's over time, nothing in the short period.

Okay. And just a quick question, how does regulatory uncertainty affect your confidence in pulling the trigger for hiring more brokers or doing a material acquisition?

Talented people and successful people, we're always interested in hiring, right. No matter what the rules, whatever the regulations, whatever the platforms, whatever the -- whatever you throw at a talented person who knows people, who understands the business, they're successful. So we're interested in hiring talented people and we have our view of the business going forward and if a company presented itself that was attractive to us and where we think the world is going, that's a set of business risks that we are comfortable taking. We understand our business. We understand the platforms going forward. We think and we are confident in our view going forward. And if we can find the right company at the right price on the right terms, we would be happy to make those moves today. I mean the rules have basically been discussed a lot. I mean I think we have a sense of where they're going and we're confident.

Okay. Thank you.

Thank you. We have no further questions. (Operator Instructions)

Operator?

We have no further questions.

So, thanks everyone for joining us today and we look forward to speaking to you next quarter and updating you at the end of the quarter. Have a great day today and we look forward to speaking to you soon.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.