StoneX Group Inc (SNEX) 2011 Q3 法說會逐字稿

Good day, everyone. Welcome to the INTL FCStone Q3 FY '11 earnings conference call. Today's call is being recorded, and at this time I'd like to turn the call over to Mr. Bill Dunaway. Please go ahead, sir.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone Incorporated. Welcome to our earnings conference call for the third quarter of fiscal 2011, ended June 30, 2011. After the Market closed yesterday, we issued a Press Release reporting our earnings for the fiscal third quarter. The Press Release is available on our website at www.intlfcstone.com as well as a slide presentation which we will refer to on this call in both our discussions of the quarterly and year-to-date results. This slide presentation is available by clicking on the Investor Relations link on the website and then going into Events and Presentations page. You will need to sign on to live webcast in order to view the presentation. Both the presentation and an archive of the webcast will also be available on our website after the call's conclusion.

Before getting underway, I'd like to cover a couple of housekeeping items. On these conference calls and in Management's discussion portions of our SEC filings, we present financial information on a non-GAAP basis in order to take into account marked-to-market adjustments in our Commodities business. As discussed on previous conference calls and in our filings, the requirements of Accounting Principles Generally Accepted in the US, which I will refer to as GAAP, to carry derivatives at fair market value of physical commodities inventory at the lower of cost or market value may have a significant temporary impact on our reported earnings. Under GAAP, gains and losses on Commodities inventory and derivatives, which the Company intends to be offsetting, are recognized in different periods. Additionally, GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities.

For this reason, we believe that the GAAP numbers do not reflect the commercial results of our Commodities business and therefore of the Company as a whole. Instead, we assess our business, as do our banks, on a fully marked-to-market basis in our daily and monthly internal financial reporting. We also calculate commodity trader bonuses on the basis of fully marked-to-market results, not the GAAP results. Readers of our form 10-Q should take a look at item 2 in our selected summary of financial information for a summary of both GAAP and non-GAAP information. This section also gives the reconciliation between GAAP and non-GAAP information required by the SEC. Please note that whenever we talk about an adjusted number on this call, we are talking about a non-GAAP number.

Secondly, we are required to advise you, and all participants should note, that the following discussions should be taken in conjunction with the most recent financial statements and notes thereto as well as the form 10-Q filed with the SEC. This discussion may contain Forward-looking Statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These Forward-looking Statements involve known and unknown risks and uncertainties which are detailed in our filings with the SEC. Although the Company believes that its Forward-looking Statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the Company's actual results will not differ materially from any results expressed or implied by the Company's Forward-looking Statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Readers are cautioned that any Forward-looking Statements are not guarantees of future performance.

With that, I will now turn the call over to Sean O'Connor, the Company CEO.

Thanks, Bill, and good morning, everyone. In our view, the financial performance for the third quarter was a good result. Our net adjusted earnings were $9.2 million or $0.48 per share, representing a 37% increase over Q2 and up over 109% from a year ago. Year-to-date non-GAAP earnings from continuing operations for the 9 months were $27.2 million or $1.44 a share, up 140% from the prior year, and represented an ROE of 13%, which is very close to our target of 15%. GAAP year-to-date earnings from continuing operations is $29.4 million, almost identical to our marked-to-market earnings for the period. Excluding one-off and exceptional items lifts our year-to-date ROE to well over 15%, despite near zero interest rates, and gives us a better indication of the true underlying operating performance of the Company. These exceptional and one-off items include non-cash accounting charges for changes in acquisition-related contingent payments, exceptional bad debts related largely to the hangover of the 2008 liquidity crisis, which are now largely through the system, amongst other items.

Marked-to-market operating revenues were up 43% for the quarter and 57% for the 9 months year-to-date. All segments showed strong revenue growth in both the quarter and the year-to-date. Bill will take us through the earnings in more detail in just a moment. We will be using our financial dashboard with highlights the key components of our results and is color-coded to indicate where we are achieving objectives and where we are not. This dashboard can be found on our website under the Investor Relations section and will be referred to a little later on. It is probably obvious the green highlights indicate a result or trend that is above target, red is below target, and yellow color represents acceptable but perhaps trending negatively. Normally, I cover any strategic initiatives; and perhaps for the first time in two years do not have anything material to add in the way of new acquisitions or initiatives, which I think is good news after all the corporate activity we've had over the last two years.

As we said last time, we have now assembled all the capabilities to provide our target customers, which are midsize corporations, with a comprehensive range of risk management treasury and investment banking services; and the Management team is now fully focused on execution and integration to realize the very substantial inherent potential we believe we have in our business and strategy. We have a simple two-pronged focus and are still very much in the early innings. Firstly, rolling [our time hands] capability and product suite to our growing mid-market customer base. This has already resulted and will continue to do so in both incremental earnings from existing customers and additional margin from existing products where our new capabilities are last to internalize margin rather than pay it away to the market.

Secondly, we are aggressively expanding our footprint, especially internationally, where we believe there is significant untapped growth opportunities with mid-market commercial customers looking to manage price volatility. In some large markets, structural changes are exposing thousands of potential customers to price risk for the first time, and they need help. We provide a high touch, value-added service, and it takes a long time to reach critical mass in these new markets. We started many of these initiatives a year or two ago and are now seeing accelerating progress in on-boarding customers and generating incremental revenues. Many of these initiatives have now reached or are past breakeven, which under margin has a meaningful impact on our aggregate results. We are starting to see evidence of good progress and tangible results on all fronts, which is now starting to drive revenues and net earnings. However, much remains to be done and the Management team is focused on realizing this potential we see in front us.

Despite the growth in revenue and increased customer activity, we remain very liquid. On a marked-to-market basis, we now have long-term equity capital of $291 million with total bank facilities at quarter end of $365 million, of which $121 million was drawn, and we held unrestricted cash of $144 million. I will now hand you over to Bill Dunaway for a more detailed discussion of the financial results. Bill?

Thank you, Sean. Let me remind everyone, as I said at the outset of the call, that the fully marked-to-market numbers are not in accordance with GAAP. The differences between the GAAP and fully marked-to-market numbers arise in our Commodities and Risk Management services segment. In all of our other business segments, GAAP results and marked-to-market results are the same. As noted earlier, we have posted on our website, www.intlfcstone.com a slide presentation which I will now walk through in the discussion of both the third quarter and year-to-date results as compared to the prior fiscal year. I would like to start my discussion with a review of the quarterly results and I'll refer to the third page of this slide presentation titled Quarterly Financial Dashboard. This slide lays out the quarterly operating results as well as related balance sheet information in comparison to the prior-year period, as well as in some cases the internal target which Management has for our operating results.

Adjusted operating revenues were $103.5 million for the current period, up 43% from the $72.6 million in the third quarter of 2010. With the exception of the clearing execution segment, every segment of the Company experienced growth at adjusted operating revenues in the third quarter as compared to the prior-year period. Operating revenues for the third quarter include a marked-to-market gain of $1.7 million, on interest rate swaps entered into to manage a portion of our aggregate interest rate position as discussed on previous earnings calls. The objective of these interest rate swaps is invest the bulk of our customer segregated funds in high-quality, short-term investments and swap the resulting variable interest earnings into a more stable, medium-term, interest stream at the Holding Company level. From a cash flow standpoint, ignoring the marked-to-market effect of these swaps, they had the effect of increasing our operating revenues by $1.2 million in the third quarter.

Adjusted operating revenues in our core Commodity and Risk Management services segment increased 71% from the prior-year period to $63.6 million in the third quarter of 2011. Extreme [traded] volumes were 894,000 contracts which was a 4% increase over the prior-year period. The Company's Australian operations continue to gain traction, which along with the acquisition of Hencorp Futures at the beginning of the first quarter of 2011 drove the growth in exchange traded volume and commission revenues. Over-the-counter or OTC contract volumes increased 116% over the prior-year period. OTC revenues increased over the year-ago period, driven by an increase in underlying volatility in agricultural commodities, caused by the effect of increasing worldwide demand and weather conditions in the United States. In addition, the acquisition of the Hanley Companies in the fourth-quarter of 2010 has led to an increased offering of structured OTC products to our Commercial customers, which, combined with strong demand from Brazilian customers for structured products, has contributed to the significant increase in operating revenues in the third quarter of 2011.

Investible client balances increased 126% in this segment over the prior year to $1 billion, driven by both volume increases and increased margin requirements. Adjusted operating revenues in our precious metals product line increased 14% to $6.6 million in the third quarter as compared to the prior-year period, as a result of widening spreads as an increase in underlying volatility driven by global economic conditions, while the number of ounces trader was flat as compared to the prior year. In addition, the base metals adjusted operating revenues increased from $3.4 million in third-quarter 2010 to $5.7 million in the current period. In our Foreign Exchange segment, operating revenues in the third quarter totaled $14.3 million representing a 21% increase over the prior year of $11.8 million.

The volume of the trades in the Company's Global Payments business increased as the Company experienced continued growth in the number of financial institutions utilizing the Company's treasury services. In the current quarter, both the Proprietary Foreign Exchange Arbitrage desk and Customer Speculative Foreign Exchange business were flat with the prior year. Operating revenues from customer hedging activity increased from the prior year primarily driven by an increase of hedging by customers of our Brazilian operations. Operating revenues in the Securities segment increased by 31% from $4.2 million in the third quarter of 2010 to $5.5 million in the third quarter of 2011. Within this segment, operating revenues in the equity market making product line increased 7% to $4.5 million as compared to the prior year as volumes have increased with the increased levels of activity in the global equity markets. Revenues in our Debt Capital Markets business increased to $1 million in the third quarter of 2011 as compared to breakeven in the prior-year period, primarily driven by the acquisition of the Provident Group at the beginning of the current fiscal year.

In the Clearing and Execution segment, operating revenues were $15.9 million for the third quarter of 2011 as compared to $17 million in the prior-year period. This decrease in operating revenues was driven by a 10% decrease in exchange traded volumes over the prior-year period. This decline in revenue is partially offset by trading gain of $800,000 related to open commodity positions acquired from an under-margin customer. Interest income, which is a key component of this segment, continued to be constrained by the effect of historically low, short-term interest rates, decreasing 41% to $500,000 for the third quarter of 2011, despite a 41% increase in underlying client, investible balances.

Finally, the other segment which contains both our asset-management and commodity origination and financing product lines increased 38% to $3.3 million, driven primarily by an increase in committed credit facilities available to the Company to finance customer inventories as well as the expansion of our physical origination business into the Feed Ingredient industry. Overall, operating revenues continued to be constrained by historically low, short-term interest rates. However, interest income increased 44% to $2.3 million for the third quarter as a result of an increase of activity in our Commodity Financing product line as well as the 76% increase in overall average customer assets on deposit to $1.8 billion.

Now moving onto the expense side of things. None interest expenses were $86.1 million, up 39% over the third quarter of 2010, primarily the result of the increase in variable compensation associated with the increase in adjusted operating revenues, as well as the four acquisitions made during the calendar year 2010, and geographic expansion in South America, Europe, and Asia, which has led to a 51% increase in fixed cost in the third quarter of 2011 to $40.5 million as compared to the prior-year period. During the third quarter of 2011, non-interest expenses including bad debt expense, net of recoveries of $1.2 million, which is down from the $2.1 million recorded in the prior-year period. During the current period, we wrote down our remaining exposure of $2.7 million to a precious metals customer to whom we advanced gold. Netted against this write-down was a recovery of $1.8 million of bad debts related to a previous customer account deficit provisioned for, based upon payments received subsequent at the end of the quarter.

Internally, the Company targeted to keep variable expenses as a percentage of total expenses in excess of 50%. During the current quarter, the majority of non-interest expenses were variable with 53% of total non-interest expenses being variable in nature as compared to 57% in the prior-year period. As discussed earlier, the four acquisitions made during calendar year 2010 as well as geographic expansion in South America, Europe and Asia have led to an increase in fixed cost in the current period, primarily in the area of fixed compensation, communication and data services as well as occupancy in equipment rental. The Company targets key total compensation expenses as percentage of operating revenues at less than 40%. However, with the recent acquisition of the Provident Group, which is just beginning to ramp up, as well as other growth initiatives, total compensation related expenses represented 42.5% of total adjusted operating revenues in the current period, slightly above our target.

The average number of employees increased 854 for the third quarter 2011, as compared to 631 in the prior-year period. Adjusted net income from continuing operations for the third quarter was $9.2 million, representing an 80% increase over the $5.1 million in the prior-year quarter. Looking at the trailing 12 months, adjusted net income and adjusted EBITDA increased 144% and 128% respectively over the prior year. The Company looks to achieve our minimum return on equity of 15% or greater on its adjusted stockholders equity. The return on equity for the third quarter increased nearly 5% as compared to the prior-year period to 12.8%, slightly below our stated target. The increase in investible customer funds is 76%, discussed earlier in the segment discussion, drove the increase in total assets on the balance sheet of 86% to over $2.8 billion, while adjusted stockholders equity closed the period at $291.2 million, a 14% increase over the prior year.

Another key metric the Company focused on is keeping a 1 to 1 ratio between revenue-generating employees and administrative or operating employees. Along these lines, the Company targets to have at least $500,000 in annualized revenues across the entire employee base. For the current period, this metric increased by 6% to $485,000 per employee. RO is still slightly below the Company's target. Finally, in closing out the review of the quarterly results, the trailing 12-month results have lead to an increase of 10% in the book value per share, closing out the quarter at $16.01 per share.

Moving on to the next slide of the presentation. I will speak briefly on the year-to-date results through the first nine months of the fiscal year. Adjusted operating revenues increased 57% over the prior-year period to $311.3 million. All of the Company's operating segments realized growth in revenues over the prior-year period with Commodity and Risk Management Services segment and Security segment growing at 95% and 59% respectively. As with the quarterly results, total non-interest expense increased 50% to $259.5 million primarily as a result of both the four acquisitions made in [Keller] in 2010 and geographic expansion. Variable cost represented 56% of total expenses keeping in line with the Company's goal of having a primarily variable expense model. Total compensation expense and percentage of adjusted operating revenues was nearly in line with the Company's target at 41.6%. Adjusted net income for the 9 months ended June 30, 2011, were $27.2 million, a 131% increase over the prior-year, comparable period.

For the year-to-date period, the Company achieved a 13.3% return on adjusted stockholders equity, slightly below the target of 15%. Through the first 9 months of the fiscal year, the annualized revenue per employee increased 27% to $534,000. This exceeded the stated goal of $500,000 per employee, while the average number of employees increased to 778 for the first 9 months of the fiscal year. With that, I would like to turn it back to Sean to wrap up.

Thanks, Bill. We believe that our current performance stands in stark contrast to the industry in general which seems to be struggling to adapt their business model to a new reality of low interest rates, reduced leverage, and less speculative activity in general. The markets have taken a decided turn for the worse recently and with bad economic data as well as continued problems in Europe, which have dimmed recent optimism, this has been reflective in a fairly dramatic re-rating of the market stocks. We believe that our business model and strategy are sound, profitable, and growing fast. Our business is based on providing a comprehensive approach to managing price volatility and risk for our mid-market, commercial consumer base. This is a growing need for less sophisticated commercial entities globally driven by structural changes and the need to manage price volatility to be able to provide bottom-line results to attract capital into their businesses.

We are uniquely placed to satisfy this need and have the capabilities, product suite, and international footprint to capitalize on this. During the last three quarters, we have validated the strategy and highlighted the long-term earnings potential of the Company. We are in the early stages of the integration process, which, combined with an aggressive customer expansion initiative, should provide medium and long-term revenue growth as well as margin expansion which should provide a very attractive earnings growth. With that, I would like to turn back to the operator and open up for question and answer session. Operator?

(Operator Instructions) Graeme Rein, Bares Capital.

Sean, could you talk a little bit about the OTC desk? Volumes were up over 100%. Is that driven by market conditions? Is that driven by you guys building out more products? If so, how many more products do you have to bring onto that desk?

One of the critical factors in assessing that part of the business would clearly be the acquisition we made of Hanley, which allowed us to internalize the margin that FCStone was traditionally paying away to banks to [we're sending] them the product.

FCStone previously made a lot of money doing the OTC, but a significant portion of the margin was paid away and was captured by an effective [free market count bodies]. In acquiring Hanley, and this was the logic at the time of the transaction, it allowed us to internalize that margin.

A lot of what you are seeing there in terms of the additional revenue and earnings growth is the execution of that acquisition, and that has gone a lot better than we envisaged originally. One of the reasons it's gone better is market conditions were very favorable at the time for OTCs.

Not only did we internalize margins, but the market volatility really helps us in the structured products area. We've had both things happening at once for us. The volumes is really a factor of the market more than anything. I think we have a better product suite. I think the market helped us, and both of those things led to higher volumes and, of course, higher margins.

Hopefully, that answers the question in terms of is it product growth, additional products. I think it's probably fair to say that by far the bulk of the money we are making in the OTC instruction product area is focused on the grains, which is traditionally FCStone's strong suite.

We have started pushing out into some of the other commodity complexes, such as sugar, done some cotton, coffees, and metals. I think that's the future growth area for that business. Tapping into our growing footprint both in Europe and the UK where we have now put people on the ground for the OTC Hanley business.

We think there's a lot of potential to go in that business. We think having the capability internally allows us to be more successful with customers, because we have actually sit with customers and customized the product rather than selling them someone else's product.

Market conditions have been helpful as well. But we think there is a long road to go. Market conditions do have a direct impact on that business.

The profitability in the Securities business, you had good revenue growth, but it looks like there is a negative segment income. Is that from Provident Group giving back all the fees to the prior owner, or is there something else going on?

No. Well, there are 2 parts to the Securities business. There's the old equity market making business that we've had. That business is profitable for us; it's a great business. We make a great return on that business. But the last 2 years, that business has been below where it was previously. And that is just a function.

Effectively, we are picking up, through other broker dealers, retail float, largely. Since 2008, there's just been less volume. I think our market share has gone up to offset that a little bit, but that business is, although doing well, is below where it was 2 years ago. So that's 1 part of the business.

The second part is the Provident business, and we are very much in the ramp-up stages of that business. We have all of the costs at the moment. Some of the revenues that have come in the door were legacy transactions, which we undertook to pay out all of those revenues to the prior owners of Provident.

At this point, we have had 100% of the costs and a very small percentage of the revenues. Clearly, we hope that will turn around. I think there's good evidence that is turning around, but investment banking and advisory is a chunky business; it has long lead time. We're very happy with the pipeline. There are more mandates than they can handle at the moment. But these take a long time to turn to cash.

Those are the two things in that segment. I don't know, Bill, if you want to add anything else.

No, you covered it well. The equity market making business is positive to the bottom line segment income wise, Graeme. But just that increase in fixed costs in the debt business from the Provident acquisition does weigh down on the segment income piece.

Do you have any impact from the S&P downgrade relating to margin or what you hold in terms of US treasuries? Can you just talk generally about how that decision may affect any part of your business?

I don't think we are affected in any way directly by that decision. We don't hold assets that will be impacted in any way. I don't think it's any direct impact. Clearly, the knock-on effects will affect us. Low interest rates, we don't like that.

If this leads to less market activity because people are fearful, we don't like that. Those are the impacts we're going to see. The directs of the immediate impact of a downgrade, that doesn't affect us at all.

Can you talk about how you've done the last few days? I know the equity business usually does well in times of panic. Have you seen increased performance in the last few days?

Not really this time, actually. It seems to be a little bit different than what we've seen before. It's hard to speculate, but the market moves do seem very unusual. It seems to me that something else is going on that we don't understand here.

This is not just a normal market correction based on a change or based on some numbers that have come out. It really looked like some liquidation or some liquidity event was happening. We're not far enough in to know. You're right; normally we would do well out of that. We didn't do badly out of that market move, but I don't think we had a spectacular windfall.

Can you talk about the grain financing business? It was really good growth there. Can you talk about what it is and what's driving that improvement?

Yes, that's part of our physical activities which we have expanded recently. As you know, we were in the physical metals business and one of the things we want to do is to expand our physical capabilities more significantly across more product areas. We have started to do that in niche markets on the agricultural side.

As part of that activity, we are providing great re-pos to some of our customers. Basically, it is funded by our banks. We pass that through to our customers. We take a mark up on it. It's a very safe, easy business for us. It helps us develop that physical side of our business and we've made an additional margin doing that.

Not very complicated. It's not huge amounts of money in the overall scheme of things, but it is a business that is growing nicely and we have high hopes for it.

Bill Jones, Singular Research.

I think you've already answered some of my questions, but maybe you can give a little more color on the integration process with Provident and some of the others and where we are with that.

In terms of integration, I think it's going really well. Both with Hanley and Provident, the concept was to take those capabilities and roll them out to our 8,000 commercial customers. In both instances we have pretty quickly overwhelmed both of those businesses. They put their hands up early on and said, enough already, let us deal with what we've got on our plates.

The problem there a little bit is not so much of integration, but of capacity. What we need to do is build additional capacity in both of those businesses and we've certainly done that in Provident. That's one of the reasons we have higher costs and our Securities segments aren't performing.

Part of our game plan is to grow their capacity and to get a lot more people in to handle a besieged flow. And it's coming through. I think it's more a capacity issue than an integration problem.

And then on Hencorp, which is our most recent acquisition, that's really going well. Those guys have really embedded themselves into the business. They are starting to touch all of our capabilities, expand their customer base. So again, that's going really well. Oscar runs a great business down there for us.

Pete Anderson is on the line. Pete, I don't know if you want to add anything to that question?

From an integration perspective, almost all the acquisitions are running smoothly with all regions and all aspects of the Company and are just continuing to ramp up and plug into the various services and products that we can offer.

I would say to the second prong of the strategy, which is not so much integration but expanding our footprint organically, that's where we've opened up offices in Asia and Australia, Shanghai. We've put people on the ground in Europe, Latin America, and so on.

That's going well, but as we've said on this call before, that's a long-term process. When you are starting up doing the kind of business we do, which is very relationship-oriented, it takes a year or 2 years before you get the customers on.

We see huge potential in those markets, but we just have to be patient. We are now coming out of the back end of the first phase where a lot of those initiatives are now -- they've won over customers, they are covering costs. They are starting to get momentum behind them. That's just a long-term process that we've got to grind out.

We've got to hire people and make sure we have the right people and train them up, but I think that's progressing well now. That was a drag on our earnings last year. Those initiatives are now definitely not a net drag, and probably a net positive; and we see that net positive accelerating pretty quickly and should accelerate for years as those businesses grow.

Probably worth mentioning also is a fairly significant expansion we are undertaking at the moment in London. The Ambrian acquisition is still going through final approvals.

We will be looking to expand activities significantly there on the metals and LME sides. Also, put some new people on the ground in London to expand FCStone's traditional risk advisory business significantly in Europe. Lots going on there which hasn't yet contributed to the bottom line.

The cash flow was very strong again in the quarter. I know in the prior quarter we talked about the OTC business, the acceleration of the OTC activities helps the cash flow. Is that true again?

I would caution looking at our cash flows in the traditional sense. We are a little bit like a bank. To a certain extent, we can create whatever cash flow we want by shrinking our business. In some instances, cash flow is not necessarily the indicator you think it is. So I would just caution looking at that, Bill.

Liquidity is clearly what one should focus on, and, yes, we're very liquid. The OTC business does generate liquidity for us. All of our businesses are operating. We have more than enough capital. We have more than enough bank lines, and we have a lot of surplus cash.

Liquidity is something we are fearful of. It's something we think about all the time. We seem to be going into another rocky period, so this is the time to stay liquid. We are very comfortable with our liquidity. But I wouldn't look at our cash flow statement as an indicator of free cash. That just depends on how our balance sheet is flexing at the time.

(Operator Instructions) [Bartley Cohen].

I have 2 quick questions. The first was as far as risk goes, do you think the best thing to look at is the number of days you lost over $1 million or something like as far as how you'd be managing the risk? What else do you guys look at?

We divide risk into a couple different categories. We run a very limited exposure to market risk. We don't take much at all in the way of directional views on markets. Our objective is to provide execution liquidities to our clients and either make a commission or a short-term spread in doing that.

In terms of looking at market risk, yes, that table that we provide with the distribution of daily marked-to-market earnings is a good indicator of that. I think that demonstrates, and has for many years demonstrated, that we take a very conservative view on market risk.

It is a bell-shaped curve with a pretty tightly bunched distribution of earnings around a positive mark. That's a sign of what I just described, the kind of business we like to have. If we were taking a lot of views on markets, you would see that flatten out or potentially turn into a saucer with a big outline, winning and losing days, and the objective there being to have more winning than losing days.

We almost always have winning days. We are taking out a spread for providing a service or providing access to the marketplace. So, yes, certainly look at that for market risk. We also focus on credit risk. That table's not going to help very much on credit risk.

There, really the best indicator that you will see is bad debt provisions and what's going on. The provisions are overall tapering off, and I think we've got our credit in good control, and the one additional provision we took was related to a previously existing problem. We had really no new issues during the quarter. And a number of recoveries.

Just to be clear, when Scott is talking about credit risk, what we are really talking about is our customers, and our customers' ability to fulfill their obligations to us. Just to be clear, this isn't credit risk in the sense that we are taking market positions on credit instruments. This is [counts of party] and customer risk. We see that as probably the biggest part of our risk.

We also spend a fair amount of time looking at liquidity risk as well. Those of you who listen to our calls in the past, we probably haven't mentioned it in a long time, but we've always said that for a financial institution, liquidity is one of the biggest issues that you have to address.

We also try to be very conservative in that respect and make sure that we've got plenty of financing available to us and limit the size of transactions that we enter into so that when any unexpected events or delays in payments, which are inevitable from time to time, happen that we can bridge those gaps easily. Does that answer your question?

Has your perception of uncertainty changed where you think you need a higher capital cushion? Do you think that might affect the return on equity? Or is it pretty much the same as it's always been?

I think we've been pretty conservative with that from the outset. We've come through 2008, and I think we came through that pretty well. We are accumulating our capital pretty fast right now. Our equity cushion grows every day virtually in our business. I don't think we necessarily see it change.

The interchange in market conditions, and that may affect our revenues and returns, but I don't think we think that there is anything out there that would cause us to require more capital. I think we have more capital than we need. We've got more than a sufficient capital cushion. And we have more liquidity than we need. I don't see anything there that would change our view on capital and how much cushion we need to keep.

There are no further questions in the queue. I'd like to turn the call back over to our speakers for closing remarks.

Thanks very much for joining us. Nothing further to add. We look forward to speaking to you at the next quarter, which will be our year end. I don't know if anyone else on the management team has anything to add. Bill?

No.

Thanks very much.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.