Brokers benefit from banksÆ disarray

Bernie Dan took over the chief executive role at MF Global in October 2008, at a time when its share price was being hammered by investors thanks to a $140 million rogue-trading loss and just as trading volumes were collapsing. The former head of the Chicago Board of Trade was faced with a tough job.

The broker's results for the last quarter of 2008 reflect the difficult environment. Adjusted net revenues were $367.4 million, down from $422 million in the last quarter of 2007 -- a consequence of the fall in exchange-traded futures and options volumes, which were down to 402.5 million contracts from almost 500 million a year earlier. Hefty severance costs following the resignation of Kevin Davis, the former chief executive who was forced out because of the trading scandal, meant that net income was just $18.8 million, compared to $46.7 million in the last quarter of 2007.

But last year's troubles are in the past, says Dan. MF Global's business is diverse and resilient, and its investment banking competitors are losing ground amid their own much bigger problems.

What was your goal when you joined MF Global last summer?
What we focused on is positioning MF Global, in the context of where the industry's going, to take advantage of new client profiles and the changing competitive landscape. What we're finding is that clients are trying to identify intermediaries that don't have conflicts with respect to directional trading and can offer global access. So while our chief competitors, the banks, are all in disarray, we have re-aligned ourselves along global product lines -- equities, fixed income, interest rates, commodities and FX -- and global functions -- accounting, finance, treasury and risk management.

So the crisis is an opportunity for agent-only brokers?
It's a great opportunity for MF Global. We have no balance sheet risk and no directional trading, we're really an agent only, whereas the banks have significant write-off risks. They have pricing mechanisms that obviously failed and they have uncertainties with respect to their capital structures -- and they still haven't figured out how they're going to make money in the future. Large clients are looking to eliminate some of those uncertainties so they can get on with their own business, and that significantly favours our model. We don't have any of those risks. We're focused on value-added services, trade ideas, risk management, technology, customer service and what I would say is just going to be a new focus on how clients view intermediaries.

How difficult is to manage a business that is so dependent on market volumes?
I look at MF Global in a much broader sense. We have significant diversity across geography, asset class, product and clients. The benefit we have now, and one of the reasons we've kept net revenue consistent, is the fact that we're able to capitalise and be opportunistic on which part of the marketplace and which part of the world is creating opportunity.

Beyond opportunism, what is your long-term direction?
One of the big trends we're trying to position our company for is the fact that the US government in particular is going to be issuing more debt. We're a big fixed income company today and we're in pursuit of primary dealership. There are 279 auctions planned in the US alone in 2009, up from around 150. The European governments are going to proceed along the same path. So we're focused on that.

As an agent-only broker, why are you interested in primary dealership?
It's because clients want to participate directly with an agent as opposed to a direct competitor. Another reason is that a lot of those primary dealers that existed five years ago aren't here today -- Lehman, Bear Stearns, Merrill Lynch -- so the government's looking for a broader distribution platform. And the third thing is that government issuers like the Federal Reserve of New York look to a company like MF Global for market information about gold and silver and grains. They want to be treated like a client and we're one of the few companies that has enough geographic presence, together with product expertise, to do that. So we're confident that we're well-positioned to win that designation.

How is the increased focus on the regulatory environment going to affect your business?
Clearly there's going to be discussions in review of regulatory practices in probably every asset class we participate in. I'm going to make sure, at least in the role that I serve in this company -- I'm on the board of the FIA (Finance and Investment Association) as well -- that we have good comment and discussion about the value and virtue of these asset classes, and how well the current structure has actually performed, and we'll evaluate what sort of changes, if any, arise. We're going to be a part of the dialogue.

Are you optimistic?
We have to balance the importance of rules and regulations against the value of speculators and hedgers coming together for price discovery and transferring risk. One thing I'm very bullish on is that the regulatory changes will lead to more of the OTC (over-the-counter) market at a minimum being centrally cleared and priced. So the regulatory changes could benefit significantly a model like MF Global. Some view the regulatory scrutiny as negative, but frankly I think it's going to be well-balanced and in the case of OTC could be significant. Ultimately people still have to hedge, they have to transfer risk and every major government in the world understands that. If there's refinements to make to ensure there's better reporting and oversight and disclosure on certain parties at certain levels, that will just make the industry more transparent. If that improves the integrity of pricing, that's good; and if it helps to mutualise risk because of centralised clearing, that's great.