Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

** **
| **x**                                             | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                              |                                                                                                     |
| **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2009** |
|                                              |                                                                                                     |
| **OR**                                            |
|                                              |                                                                                                     |
| **o**                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**FOR THE TRANSITIONPERIOD FROM                TO                 **

** **

**CommissionFile No: 000-51103**

** **

**GFI GROUP INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                              | ** ** | **80-0006224**      |
|-------------------------------------------|------------|---------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or  organization)           |       | Identification No.) |
| ** **                                | ** ** | ** **          |
| **55  Water Street, New York, NY**        | ** ** | **10041**           |
| (Address of principal  executive offices) |       | (Zip Code)          |

 

Registrant’s telephonenumber, including area code: **(212) 968-4100**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.  YES x NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  YES o NO o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  x                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES o NO x

 

Thenumber of shares of registrant’s common stock outstanding on July 31, 2009was 117,923,372.

 

 

 

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**Table of Contents**

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**Tableof Contents**

 
| **Part I—Financial  Information** |
|---------------------------------------------|
|                                        |   |   |
| Item 1.                                     | Financial  Statements | 4 |
|                                        | Condensed  Consolidated Statements of Financial Condition as of June 30, 2009  (unaudited) and December 31, 2008 | 4 |
|                                        | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2009 (unaudited) and June 30,  2008 (unaudited) | 5 |
|                                        | Condensed Consolidated Statements of Comprehensive  Income for the three and six months ended June 30, 2009 (unaudited) and  June 30, 2008 (unaudited) | 6 |
|                                        | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2009 (unaudited) and June 30, 2008  (unaudited) | 7 |
|                                        | Notes to Condensed Consolidated Financial Statements  (unaudited) | 8 |
| Item 2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 28 |
| Item 3.                                     | Quantitative  and Qualitative Disclosures About Market Risk | 49 |
| Item 4.                                     | Controls and  Procedures | 50 |
| **Part II—Other  Information**    |
|                                        |   |   |
| Item 1.                                     | Legal Proceedings | 50 |
| Item  1A.                                   | Risk Factors | 51 |
| Item 2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds | 52 |
| Item 4.                                     | Submission  of Matters to a Vote of Security Holders | 52 |
| Item  6.                                    | Exhibits | 54 |

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**AvailableInformation**

** **

OurInternet website address is *www.gfigroup.com*.Through our Internet website, we make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing themwith, or furnishing them to, the Securities and Exchange Commission (the “SEC”):our annual reports on Form 10-K; our proxy statements for our annual andspecial stockholder meetings; our quarterly reports on Form 10-Q; ourcurrent reports on Form 8-K; Forms 3, 4 and 5 filed on behalf ofdirectors and executive officers; and amendments to those reports filed orfurnished pursuant to Section 13(a) of the Securities Exchange Act of1934, as amended (the ‘‘Exchange Act’’).

 

Informationrelating to the corporate governance of the Company is also available on ourwebsite, including information concerning our directors, board committees,including committee charters, our code of business conduct and ethics for allemployees and for senior financial officers and our compliance procedures foraccounting and auditing matters.  Inaddition, the Investor Relations page of our website includes certainsupplemental financial information that we make available from time to time.

 

OurInternet website and the information contained therein or connected thereto arenot incorporated into this Quarterly Report on Form 10-Q.

** **

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**PART I—FINANCIALINFORMATION**

** **

**ITEM1.**                    FINANCIALSTATEMENTS

** **

**GFI GROUP INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

**(In thousands, exceptshare and per share amounts)**

 
| ** **                                                                                                                                                                    | ** ** | **June 30,********2009** | ** **      | **December 31,********2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|-----------------|-----------------------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **(Unaudited)**               | ** **      | ** **                        | ** ** |
| **ASSETS**                                                                                                                                                                    |       |                          |            |                              |       |
| Cash  and cash equivalents                                                                                                                                                    |       | $                             |  334,836   |                              | $          |  342,375 |   |
| Deposits  with clearing organizations                                                                                                                                         |       | 8,211                         |            | 8,492                             |       |
| Accrued  commissions receivable, net of allowance for doubtful accounts of $4,224 and  $3,854 at June 30, 2009 and December 31, 2008, respectively                  |       | 102,190                       |            | 111,923                           |       |
| Receivables  from brokers, dealers and clearing organizations                                                                                                                 |       | 367,134                       |            | 149,661                           |       |
| Property,  equipment and leasehold improvements, net of depreciation and amortization of  $98,330 and $87,924 at June 30, 2009 and December 31, 2008,  respectively |       | 69,104                        |            | 73,161                            |       |
| Goodwill                                                                                                                                                                      |       | 209,507                       |            | 209,507                           |       |
| Intangible  assets, net                                                                                                                                                       |       | 41,710                        |            | 44,439                            |       |
| Other  assets                                                                                                                                                                 |       | 138,743                       |            | 146,353                           |       |
| TOTAL  ASSETS                                                                                                                                                                 |       | $                             |  1,271,435 |                              | $          |  1,085,911 |   |
|                                                                                                                                                                          |       |                          |            |                              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |                          |            |                              |       |
| LIABILITIES                                                                                                                                                                   |       |                          |            |                              |       |
| Accrued  compensation                                                                                                                                                         |       | $                             |  130,684   |                              | $          |  135,861 |   |
| Accounts  payable and accrued expenses                                                                                                                                        |       | 49,661                        |            | 51,497                            |       |
| Payables  to brokers, dealers and clearing organizations                                                                                                                      |       | 321,317                       |            | 104,840                           |       |
| Short-term  borrowings, net                                                                                                                                                   |       | 134,831                       |            | 164,328                           |       |
| Long-term  obligations, net                                                                                                                                                   |       | 59,557                        |            | 59,495                            |       |
| Other  liabilities                                                                                                                                                            |       | 74,633                        |            | 92,927                            |       |
| Total  Liabilities                                                                                                                                                            |       | $                             |  770,683   |                              | $          |  608,948 |   |
| Commitments  and contingencies                                                                                                                                                |       |                          |            |                              |       |
|                                                                                                                                                                          |       |                          |            |                              |       |
| STOCKHOLDERS’  EQUITY                                                                                                                                                    |       |                          |            |                              |       |
| Preferred  stock, $0.01 par value; 5,000,000 shares authorized, none outstanding at  June 30, 2009 and December 31, 2008                                            |       | —                        |            | —                            |       |
| Common  stock, $0.01 par value; 400,000,000 shares authorized; 120,084,804 and  119,517,720 shares issued at June 30, 2009 and December 31, 2008,  respectively     |       | 1,201                         |            | 1,195                             |       |
| Additional  paid in capital                                                                                                                                                   |       | 288,960                       |            | 279,656                           |       |
| Retained  earnings                                                                                                                                                            |       | 235,536                       |            | 219,354                           |       |
| Treasury  stock, 2,112,158 and 996,236 common shares at cost, at June 30, 2009 and  December 31, 2008, respectively                                                 |       | (21,447                       | )               | (18,476                           | )          |
| Accumulated  other comprehensive loss                                                                                                                                         |       | (3,498                        | )               | (4,766                            | )          |
| Total  Stockholders’ Equity                                                                                                                                              |       | 500,752                       |            | 476,963                           |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                              |       | $                             |  1,271,435 |                              | $          |  1,085,911 |   |

 

Seenotes to condensed consolidated financial statements

 

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**GFI GROUP INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME (UNAUDITED)**

**(In thousands, exceptshare and per share amounts)**

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| REVENUES:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Brokerage  revenues:                      |       |                                                |       |                                              |       |   |   |   |   |
| Agency  commissions                       |       | $                                                   | 121,488    |                                              | $          | 192,074 |   | $ | 246,887 |   | $ | 431,163 |   |
| Principal  transactions                   |       | 79,566                                              |       | 53,532                                            |       | 151,781 |   | 112,626 |   |
| Total brokerage  revenues                 |       | 201,054                                             |       | 245,606                                           |       | 398,668 |   | 543,789 |   |
| Software,  analytics and market data      |       | 13,019                                              |       | 13,157                                            |       | 26,071 |   | 24,416 |   |
| Interest income                           |       | 226                                                 |       | 2,078                                             |       | 723 |   | 4,761 |   |
| Other income                              |       | 10,367                                              |       | 688                                               |       | 15,439 |   | 3,163 |   |
| Total revenues                            |       | 224,666                                             |       | 261,529                                           |       | 440,901 |   | 576,129 |   |
| EXPENSES:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and  employee benefits       |       | 146,575                                             |       | 158,730                                           |       | 292,123 |   | 351,928 |   |
| Communications  and market data           |       | 11,240                                              |       | 11,744                                            |       | 22,738 |   | 22,925 |   |
| Travel and  promotion                     |       | 8,550                                               |       | 13,291                                            |       | 16,030 |   | 25,014 |   |
| Rent and  occupancy                       |       | 5,297                                               |       | 6,759                                             |       | 10,447 |   | 13,373 |   |
| Depreciation and  amortization            |       | 8,015                                               |       | 8,449                                             |       | 15,854 |   | 16,371 |   |
| Professional  fees                        |       | 4,129                                               |       | 7,351                                             |       | 9,220 |   | 12,363 |   |
| Clearing fees                             |       | 8,106                                               |       | 10,486                                            |       | 16,213 |   | 21,688 |   |
| Interest                                  |       | 2,657                                               |       | 3,748                                             |       | 5,126 |   | 6,833 |   |
| Other expenses                            |       | 3,847                                               |       | 4,636                                             |       | 8,775 |   | 11,728 |   |
| Total expenses                            |       | 198,416                                             |       | 225,194                                           |       | 396,526 |   | 482,223 |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 26,250                                              |       | 36,335                                            |       | 44,375 |   | 93,906 |   |
| PROVISION FOR  INCOME TAXES               |       | 9,894                                               |       | 12,687                                            |       | 16,419 |   | 34,276 |   |
| NET INCOME                                |       | $                                                   | 16,356     |                                              | $          | 23,648 |   | $ | 27,956 |   | $ | 59,630 |   |
| EARNINGS PER  SHARE                       |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                     |       | $                                                   | 0.14       |                                              | $          | 0.20 |   | $ | 0.24 |   | $ | 0.51 |   |
| Diluted                                   |       | $                                                   | 0.13       |                                              | $          | 0.20 |   | $ | 0.23 |   | $ | 0.50 |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING      |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                     |       | 117,928,484                                         |       | 117,737,558                                       |       | 118,145,154 |   | 117,736,900 |   |
| Diluted                                   |       | 121,169,884                                         |       | 119,352,389                                       |       | 120,787,335 |   | 119,663,704 |   |

 

Seenotes to condensed consolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (UNAUDITED)**

**(Inthousands)**

 
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| NET INCOME                                                    |       | $                                               | 16,356     |                                          | $          | 23,648 |   | $ | 27,956 |   | $ | 59,630 |   |
| OTHER  COMPREHENSIVE INCOME (LOSS):                           |       |                                            |       |                                          |       |   |   |   |   |
| Foreign  currency translation adjustment, net of tax          |       | 1,590                                           |       | 279                                           |       | 1,123 |   | (171 | ) |
| Unrealized  gain on available for sale securities, net of tax |       | 547                                             |       | 415                                           |       | 145 |   | 1,006 |   |
| COMPREHENSIVE  INCOME                                         |       | $                                               | 18,493     |                                          | $          | 24,342 |   | $ | 29,224 |   | $ | 60,465 |   |

 

Seenotes to condensed consolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

**(Inthousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 27,956     |   | $ | 59,630 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 15,854                                            |       | 16,371 |   |
| Amortization of loan fees                                                          |       | 312                                               |       | 199 |   |
| Provision for doubtful accounts                                                    |       | 1,775                                             |       | (545 | ) |
| Deferred compensation                                                              |       | 12,225                                            |       | 13,028 |   |
| Provision for deferred taxes                                                       |       | 5,308                                             |       | 8,030 |   |
| (Gains) losses on foreign exchange derivative contracts                            |       | (9,963                                            | )          | 9,860 |   |
| (Gains) losses from equity method investments                                      |       | (1,147                                            | )          | (107 | ) |
| Tax expense (benefit) related to share-based compensation                          |       | 1,862                                             |       | (1,009 | ) |
| Other non-cash charges, net                                                        |       | (605                                              | )          | 273 |   |
| (Increase) decrease in operating assets:                                           |       |                                              |       |   |   |
| Deposits with clearing organizations                                               |       | 281                                               |       | (434 | ) |
| Accrued commissions receivable                                                     |       | 8,084                                             |       | 1,937 |   |
| Receivables from brokers, dealers and clearing organizations                       |       | (217,473                                          | )          | (267,670 | ) |
| Other assets                                                                       |       | 27,131                                            |       | (32,627 | ) |
| (Decrease) increase in operating liabilities:                                      |       |                                              |       |   |   |
| Accrued compensation                                                               |       | (5,178                                            | )          | 3,474 |   |
| Accounts payable and accrued expenses                                              |       | (1,960                                            | )          | 4,670 |   |
| Payables to brokers, dealers and clearing organizations                            |       | 216,477                                           |       | 254,153 |   |
| Other liabilities                                                                  |       | (26,055                                           | )          | 3,704 |   |
| Net cash provided by operating activities                                          |       | 54,884                                            |       | 72,937 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                              |       |   |   |
| Net cash used for business acquisitions                                            |       | —                                            |       | (149,479 | ) |
| Proceeds from (purchases of) other investments, net                                |       | 1,399                                             |       | (2,928 | ) |
| Purchase of property, equipment and leasehold improvements                         |       | (6,473                                            | )          | (26,264 | ) |
| Net payments on foreign exchange derivative contracts                              |       | (11,331                                           | )          | (10,649 | ) |
| Net cash used in investing activities                                              |       | (16,405                                           | )          | (189,320 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                              |       |   |   |
| Repayment of short-term borrowings                                                 |       | (29,000                                           | )          | (157,500 | ) |
| Proceeds from short-term borrowings                                                |       | —                                            |       | 256,500 |   |
| Proceeds from issuance of long-term obligations                                    |       | —                                            |       | 60,000 |   |
| Repurchases of common stock                                                        |       | (2,970                                            | )          | (11,401 | ) |
| Cash dividends paid                                                                |       | (11,774                                           | )          | (18,223 | ) |
| Payment of loan fees                                                               |       | (747                                              | )          | (883 | ) |
| Proceeds from exercise of stock options                                            |       | 37                                                |       | 536 |   |
| Cash paid for taxes on vested restricted stock units                               |       | (1,090                                            | )          | (3,939 | ) |
| Tax (expense) benefit related to share-based compensation                          |       | (1,862                                            | )          | 1,009 |   |
| Net cash (used in)/provided by financing activities                                |       | (47,406                                           | )          | 126,099 |   |
| Effects of exchange rate changes on cash and cash equivalents                      |       | 1,388                                             |       | (171 | ) |
| (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS                                   |       | (7,539                                            | )          | 9,545 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 342,375                                           |       | 240,393 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                                 | 334,836    |   | $ | 249,938 |   |
| SUPPLEMENTAL DISCLOSURE:                                                           |       |                                              |       |   |   |
| Interest paid                                                                      |       | $                                                 | 4,951      |   | $ | 4,948 |   |
| Income taxes paid, net of refunds                                                  |       | $                                                 | 7,477      |   | $ | 21,889 |   |

 

Seenotes to condensed consolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

**1.     ORGANIZATION ANDBUSINESS**

 

Thecondensed consolidated financial statements include the accounts of GFIGroup Inc. and its subsidiaries (collectively the “Company”). The Company,through its subsidiaries, provides brokerage services, trading system softwareand market data and analytical software products to institutional clients inmarkets for a range of credit, financial, equity and commodity instruments. TheCompany complements its brokerage capabilities with value-added services, suchas market data, software systems and analytical products, which it licensesprimarily to companies in the financial services industry. The Company’sprincipal operating subsidiaries include: GFI Securities LLC, GFI Brokers LLC,GFI Group LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK) SecuritiesLLC, GFI (HK) Brokers Ltd., GFI Group PTE Ltd., GFI Korea Money BrokerageLimited, Amerex Brokers LLC, Fenics Limited (“Fenics”) and Trayport Limited (“Trayport”).As of June 30, 2009, Jersey Partners, Inc. (“JPI”) owns approximately43% of the Company’s outstanding shares of common stock. The Company’s chiefexecutive officer, Michael Gooch, is the controlling shareholder of JPI.

 

**2.     SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation****—*The Company’s condensed consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require management tomake estimates and assumptions that affect the reported amounts of assets and liabilities,revenues and expenses, and the disclosure of contingencies in the consolidatedfinancial statements. Management believes that the estimates utilized in thepreparation of the consolidated financial statements are reasonable andprudent. Actual results could differ materially from these estimates.

 

All intercompanytransactions and balances have been eliminated.

 

Thecondensed consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2008 (the “2008 Form 10-K”). The condensed consolidated financialstatements reflect all adjustments that are, in the opinion of management,necessary for the fair statement of the results for the interim period. Theresults of operations for interim periods are not necessarily indicative ofresults for the entire year.

 

***Brokerage Transactions****—*The Company provides brokerage servicesto its clients in the form of either agency or principal transactions.

 

***Agency Commissions****—*In agency transactions, the Companycharges commissions for executing transactions between buyers and sellers.Agency commissions revenues and related expenses are recognized on a trade datebasis.

 

***Principal Transactions****—*  Principal transactions revenue isprimarily derived from matched principal transactions.  Principal transactions revenues and relatedexpenses are recognized on a trade date basis. The Company earns revenue from principal transactions on the spreadbetween the buy and sell price of the security that is brokered.  Inmatched principal transactions, the Company simultaneously agrees to buyinstruments from one customer and sell them to another customer. A limitednumber of brokerage desks are permitted to enter into unmatched principaltransactions in the ordinary course of business while brokering in illiquidmarkets and for the purpose of facilitating clients’ execution needs fortransactions initiated by such clients. These unmatched positions are intendedto be held short term.

 

However, from time to time, in the circumstances described above, or ifa transaction fails to settle on a timely basis or if a customer defaults onits obligations, the Company may hold securities positions overnight or untilsuch transaction is settled.  Thesepositions are marked to market on a daily basis.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

***Software, Analyticsand Market Data****—*Software revenue consists primarily of fees charged for Trayport electronictrading software.  Software revenue isrecognized on a straight-line basis over the term of the subscription period,which ranges from one to five years.  Analytics revenue consists primarily offees for licenses of software products, including Fenics pricing tools.  Analytics revenue is recognized on astraight-line basis over the term of the subscription period, which isgenerally over three years.  Market datarevenue primarily consists of subscription fees and fees from customizedone-time sales. Market data subscription fees are recognized on a straight-linebasis over the term of the subscription period, which ranges from one to twoyears. Market data revenue from customized one-time sales is recognized upondelivery of the data.

 

TheCompany markets its software, analytics and market data through its directsales force and, in some cases, indirectly through resellers. In general, theCompany’s license agreements for its analytics and data products do not providefor a right of return.

 

***Goodwill and Intangible Assets****—*Goodwill represents the excess of thepurchase price allocation over the fair value of tangible and identifiableintangible net assets acquired. In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142,*Goodwill and Intangible Assets*, goodwill and intangible assets withindefinite lives are no longer amortized, but instead are tested for impairmentannually or more frequently if circumstances indicating impairment may haveoccurred. In the event the Company determines that the value of goodwill hasbecome impaired, it will incur a charge for the amount of impairment during thefiscal quarter in which such determination is made. The Company has selected January 1st as the date toperform the annual impairment test. Intangible assets with definite lives areamortized on a straight-line basis over their estimated useful lives.

 

***Fair Value of Financial Instruments****—* In accordance with SFAS No.157, *FairValue Measurement* (“SFAS 157”), the Company estimates fair values offinancial instruments using relevant market information and otherassumptions.  Fair value estimatesinvolve uncertainties and matters of significant judgment in interpretingmarket data and accordingly, changes in assumptions or in market conditionscould adversely affect the estimates. The Company also discloses the fair value of its financial instrumentsin accordance with the fair value hierarchy as set forth by SFAS 157.

 

In addition, the Company uses foreign exchange derivativecontracts to reduce the effects of fluctuations in certain receivables andpayables denominated in foreign currencies. Derivative contracts that are notdesignated as foreign currency cash flow hedges are recorded at fair value andall realized and unrealized gains and losses are included in other income inthe Condensed Consolidated Statements of Income.

 

***Income Taxes—***In accordance with SFAS No. 109,*Accounting for Income Taxes*, the Companyprovides for income taxes using the asset and liability method under whichdeferred income taxes are recognized for the estimated future tax effectsattributable to temporary differences and carry-forwards that result fromevents that have been recognized either in the financial statements or theincome tax returns, but not both. The measurement of current and deferredincome tax liabilities and assets is based on provisions of enacted tax laws.Valuation allowances are recognized if, based on the weight of availableevidence, it is more likely than not that some portion of the deferred taxassets will not be realized.  Effective January 1,2007, the Company adopted FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, *an interpretation of SFAS No. 109*(“FIN 48”).  It is the Company’spolicy to provide for uncertain tax positions and the related interest andpenalties based upon management’s assessment of whether a tax benefit is morelikely than not to be sustained upon examination by tax authorities.

 

***Foreign Currency Translation Adjustmentsand Transactions****—*Assets and liabilities of foreign subsidiaries havingnon-U.S. dollar functional currencies are translated at the period end rates ofexchange, and revenue and expenses are translated at the average rates ofexchange for the period. Gains or losses resulting from translating foreigncurrency financial statements are reflected in foreign currency translationadjustments and are reported as a separate component of comprehensive incomeand included in accumulated other comprehensive loss in stockholders’ equity.Gains or losses resulting from foreign currency transactions are included inother income in the Condensed Consolidated Statements of Income.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

***Share-Based Compensation****—****The***Company’sshare-based compensation consists of restricted stock units (“RSUs”) and stockoptions. The Company follows SFAS No. 123(R), *Share-Based Payment*(“SFAS 123(R)”), to account for itsstock-based compensation. SFAS 123(R) revised the fair value-basedmethod of accounting for share-based payment liabilities, forfeitures andmodifications of stock-based awards and clarified guidance in several areas,including measuring fair value, classifying an award as equity or as aliability and attributing compensation cost to service periods. Additionally,under SFAS 123(R), actual tax benefits recognized in excess of tax benefitspreviously established upon grant are reported as a financing cash flow, asopposed to operating cash flows.   Inrecent periods, the only share-based compensation issued by the Company hasbeen RSUs.  The Company records the fairvalue of the RSUs at the date of grant as deferred compensation and amortizesit to compensation expense over the vesting period of the grants.

 

***Other Income—***Other income on the Company’s Condensed Consolidated Statements ofIncome primarily includes net realized/unrealized gain/(loss) from foreigncurrency derivative contracts, and foreign currency remeasurment gains and losses on certain foreign currencydenominated items.

 

***Recent Accounting Pronouncements***

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements — an amendment of ARB No. 51* (“SFAS 160”).  SFAS 160 requires reporting entities topresent noncontrolling (minority) interests as equity (as opposed to as aliability or mezzanine equity) and provides guidance on the accounting fortransactions between an entity and noncontrolling interests.  SFAS 160 is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and was adoptedby the Company on January 1, 2009. The adoption of SFAS 160 did not have a material impact on itsconsolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations (revised 2007)* (“SFAS141(R)”).  SFAS 141(R) requires theacquiring entity in a business combination to recognize the full fair value ofassets acquired and liabilities assumed in the transaction (whether a full orpartial acquisition); establishes the acquisition-date fair value as themeasurement objective for all assets acquired and liabilities assumed; requiresthe expensing of most transaction and restructuring costs; and requires theacquirer to disclose to investors and other users all of the information neededto evaluate and understand the nature and financial effect of the businesscombination.  SFAS 141(R) applies toall transactions or other events in which the Company obtains control of one ormore businesses, including those sometimes referred to as “true-mergers” or “mergersof equals” and combinations achieved without the transfer of consideration, forexample, by contract alone or through the lapse of minority veto rights.  SFAS 141(R) is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andwas adopted by the Company on January 1, 2009.  The adoption of SFAS 141(R) did not havea material impact on its consolidated financial statements.

 

In February 2008, the FASB issued FASB Staff Position No. FAS157-2 (“FSP 157-2”), which delayed the effective date of SFAS 157 for allnonfinancial assets and liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually) to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years for items within the scope of FSP157-2.  The Company adopted SFAS 157 forthose nonfinancial assets and liabilities noted in FSP 157-2 on January 1,2009.  The adoption of SFAS 157 fornonfinancial assets and liabilities did not have a material impact on itsconsolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133* (“SFAS 161”).  SFAS 161 amends and expands thedisclosure requirements of SFAS No. 133 and requires entities to provideenhanced qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair values and amounts of gainsand losses on derivative contracts, and disclosures about credit-risk relatedcontingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15,2008 and was adopted by the Company on January 1, 2009.  See Note 11 for disclosures on DerivativeFinancial Instruments.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

InApril 2008, the FASB issued FSP 142-3, *Determining the UsefulLife of Intangible Assets* (“FSP 142-3”). FSP 142-3 amends the factorsto be considered in determining the useful life of intangible assets. Itsintent is to improve the consistency between the useful life of an intangibleasset and the period of expected cash flows used to measure such asset’s fairvalue. FSP 142-3 is effective for fiscal years beginning after December 15,2008 and was adopted by the Company on January 1, 2009. The adoption ofFSP 142-3 did not have a material impact on its consolidated financialstatements.

 

InJune 2008, the FASB issued FSP EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities* (“FSP EITF 03-6-1”).  FSP EITF 03-6-1 addresses whether instrumentsgranted in share-based payment transactions are participating securities priorto vesting and, therefore, need to be included in computing earnings per shareunder the two-class method described in SFAS No. 128, *Earnings PerShare*. FSP EITF 03-6-1 iseffective for fiscal years beginning after December 15, 2008 and wasadopted by the Company on January 1, 2009.  The adoption of FSP EITF 03-6-1 did not havea material impact on its consolidatedfinancial statements.

 

In April 2009, the FASB issued FSP FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies* (“FSP141(R)-1”).  FSP 141(R)-1 addressesthe criteria and disclosures for recognition of an acquired asset or liabilityassumed in a business combination that arises from a contingency.  FSP 141(R)-1 is effective for fiscalyears beginning after December 15, 2008 and was adopted by the Company on January 1,2009. The adoption of FSP 141(R)-1 did not have a material impact on itsconsolidated financial statements.

 

InApril 2009, the FASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*(“FSP 107-1 and APB 28-1”).  FSP 107-1and APB 28-1 requires disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Thesedisclosures are also required in summarized financial information at interimreporting periods.  FSP 107-1 and APB 28-1 is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  FSP 107-1 and APB 28-1 was adopted by theCompany on April 1, 2009.  See Note11 for disclosures on Financial Instruments.

 

InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(“FSP FAS 115-2 and FAS 124-2”).  FSP FAS115-2 and FAS 124-2 amends the other-than-temporary impairment guidance inU.S. generally accepted accounting principles for debt securities to make theguidance more operational and to improve the presentation and disclosure ofother-than-temporary impairments on debt and equity securities in the financialstatements.  FSP FAS 115-2 and FAS 124-2 is effective for interimand annual reporting periods ending after June 15, 2009, with earlyadoption permitted for periods ending after March 15, 2009.  FSP FAS 115-2 and FAS 124-2 was adopted bythe Company on April 1, 2009 and the adoption did not have a materialimpact on its consolidated financial statements.

 

InApril 2009, the FASB issued FSP FAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*(“FSP FAS 157-4”).  FSP FAS 157-4provides additional guidance for estimating fair value in accordance with SFAS157, when the volume and level of activity for the asset or liability havesignificantly decreased and also includes guidance on identifying circumstancesthat indicate a transaction is not orderly. FSP FAS 157-4is effective for interim and annual reporting periods ending after June 15,2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15,2009.  FSP FAS 157-4 was adopted by theCompany on April 1, 2009 and the adoption did not have a material impacton its consolidated financial statements.

 

InMay 2009, the FASB issued SFAS No. 165, *SubsequentEvents*(“SFAS 165”).  SFAS 165provides guidance for accounting for and disclosure of subsequent events thatare not addressed in other applicable generally accepted accountingprinciples.  SFAS 165 is effective for interim and annual reportingperiods ending after June 15, 2009, and shall be applied prospectively.See Note 15 for disclosures on Subsequent Events.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

InJune 2009, the FASB issued SFAS No. 166, *Accountingfor Transfers of Financial Assets-an amendment of FASB Statement No. 140*(“SFAS166”).  SFAS 166 amends FASB Statement No. 140to improve the information that a reporting entity provides in its financialstatements about a transfer of financial assets; the effects of a transfer onits financial position, financial performance, and cash flows; and a transferor’scontinuing involvement in transferred financial assets.  SFAS 166 is effective as of the beginning of the firstannual reporting period that begins after November 15, 2009, for interimperiods within the first annual reporting period and for interim and annualreporting periods thereafter.  TheCompany does not expect the adoption of SFAS 166 to have a material impact onits consolidated financial statements.

 

InJune 2009, the FASB issued SFAS No. 167, *Amendmentsto FASB Interpretation No. 46(R) *(“SFAS 167”).  SFAS 167 amends certain requirements of FASBInterpretation No. 46(R), *Consolidation of VariableInterest Entities*, to improve financial reporting by enterprisesinvolved with variable interest entities and to provide more relevant andreliable information to users of financial statements. SFAS 167 requires anenterprise to perform an analysis to determine whether the enterprise’svariable interest or interests provide a controlling financial interest in avariable interest entity.  Thedetermination is based on, among other things, the other entity’s purpose anddesign and the reporting entity’s ability to direct the activities of avariable interest entity that most significantly impact the entity’s economicperformance.  SFAS 167 is effective as of the beginning of the firstannual reporting period that begins after November 15, 2009, for interimperiods within the first annual reporting period and for interim and annualreporting periods thereafter.  TheCompany does not expect the adoption of SFAS 167 to have a material impact onits consolidated financial statements.

 

InJune 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles*(“SFAS 168”). SFAS 168 establishes the codification as the source of authoritativegenerally accepted accounting principles recognized by the FASB to be appliedby nongovernmental entities and all guidance contained in the codificationcarries an equal level of authority.  SFAS 168 is effective for interim andannual reporting periods ending after September 15, 2009.  References to generally accepted accountingprinciples contained in the Company’s financial statements will be updated toreflect the new codification references as required.

 

**3.    RECEIVABLES FROM AND PAYABLES TO BROKERS,DEALERS AND CLEARING ORGANIZATIONS**

 
| ** **                                                     | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Receivables from brokers, dealers and clearing  organizations: |       |                    |       |                        |       |
| Fails to deliver                                               |       | $                       | 344,925    |                        | $          | 105,732 |   |
| Receivable from clearing organizations                         |       | 22,209                  |       | 43,929                      |       |
| Total                                                          |       | $                       | 367,134    |                        | $          | 149,661 |   |
| Payables to brokers, dealers and clearing  organizations:      |       |                    |       |                        |       |
| Fails to receive                                               |       | $                       | 319,398    |                        | $          | 101,052 |   |
| Payable to financial institutions                              |       | 1,919                   |       | 3,447                       |       |
| Payable to clearing organizations                              |       | —                  |       | 341                         |       |
| Total                                                          |       | $                       | 321,317    |                        | $          | 104,840 |   |

 

Substantially all fail todeliver and fail to receive balances at June 30, 2009 and December 31,2008 have subsequently settled at the contracted amounts.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

**4.    GOODWILL AND INTANGIBLE ASSETS**

 

**On January 31, 2008, the Company completed theacquisition of Trayport, a leading provider of real-time electronic tradingsoftware for brokers, exchanges and traders in the commodities, fixed income,currencies and equities markets, for approximately £85,428 (or approximately$169,780), including cash acquired of £7,622 (or approximately $15,150) andincurred £1,387 (or approximately $2,745) of direct transaction costs relatedto the acquisition. Additionally, £2,524 (or approximately $5,016) of thepurchase price was paid in short-term loan notes, payable within one year.  At December 31, 2008, these notes werepaid in full.  Included as part of thepurchase price is £7,287 (or approximately $12,052) that was deposited into anescrow account with a third-party escrow agent as collateral for theindemnification obligations of certain of the former Trayport shareholders.  Any amounts remaining in the escrow accountthat are not subject to pending claims will be distributed to the formerTrayport shareholders.  The Companyfinanced the transaction with proceeds of the private placement of its SeniorNotes and amounts drawn under its Credit Agreement, as defined in Note 5.  See Note 5 below for further discussion ofthe Senior Notes and the Company’s Credit Agreement.**

** **

**This acquisition was accounted for as a purchase businesscombination.  Assets acquired wererecorded at their fair value as of January 31, 2008.  The results of the acquired company have beenincluded in the consolidated financial statements since the acquisition.  Management determined the fair value of theidentifiable intangible assets acquired based upon an independent valuationmodel. The purchase price allocation, as presented below, was translated intoU.S. dollars based on the foreign exchange rate on January 31, 2008:**

 
| ** **                                  | ** ** | ** ** | ** ** | **Useful Life** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------|------------|
| *Assets:*                                   |       |       |       |                 |       |
| Cash                                        |       | $          | 15,150     |                 |       |   |
| Accounts  receivable                        |       | 8,704      |       |                 |       |
| Property  and equipment                     |       | 469        |       |                 |       |
| Software  inventory                         |       | 6,587      |       |                 |       |
| Intangible  assets subject to amortization- |       |       |       |                 |       |
| Trade  name                                 |       | 3,657      |       | 10 Years             |       |
| Customer  relationships                     |       | 33,243     |       | 15 Years             |       |
| Non  compete agreement                      |       | 839        |       | 4 Years              |       |
| Other  assets                               |       | 481        |       |                 |       |
| Goodwill                                    |       | 115,798    |       |                 |       |
| Total  assets acquired                      |       | $          | 184,928    |                 |       |   |
|                                        |       |       |       |                 |       |
| Total  liabilities assumed                  |       | 15,148     |       |                 |       |
|                                        |       |       |       |                 |       |
| Net  Assets Acquired                        |       | $          | 169,780    |                 |       |   |

 

Total intangible assetsacquired in the Trayport transaction that are subject to amortization totaled$37,739 and have a weighted-average useful life of approximately 14 years.

 

Changes in the carrying amount of the Company’s goodwill for the sixmonths ended June 30, 2009 were as follows:

 
| ** **                            | ** ** | **Americas  Brokerage** | ** ** | **EMEA  Brokerage** | ** ** | **All Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|---------------------|------------|---------------|------------|-----------|------------|
| Balance  as of December 31, 2008 |       | $                       | 78,998     |                | $          | 1,818         |       | $         | 128,691    |   | $ | 209,507 |   |
| Goodwill  acquired during the period  |       | —                  |       | —              |       | —        |       | —    |       |
| Balance  as of June 30, 2009     |       | $                       | 78,998     |                | $          | 1,818         |       | $         | 128,691    |   | $ | 209,507 |   |

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Based on the results of its annual impairment tests that are requiredby SFAS 142, the Company determined that no impairment of goodwill existed asof January 1, 2009. SFAS 142 prescribes a two step process for impairmenttesting whereby management first compares the fair value of each reporting unitwith recorded goodwill to that reporting unit’s book value.  If management determines, as a result of thisfirst step, that the fair value of the reporting unit is less than its carryingvalue, a second step in the impairment test process would require that therecorded goodwill at that business unit be written down to the value implied bythe reporting unit’s recent valuation.  The Company will continue to evaluate goodwill on an annual basis as ofthe beginning of each new fiscal year, and whenever events and changes incircumstances indicate that there may be a potential impairment.  Subsequent to January 1, 2009, no eventsor changes in circumstances occurred which would indicate any goodwillimpairment.

 

Intangible assets consisted of the following:

 
| ** **                     | ** ** | **June 30,** | ** **   | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|--------------|-----------------------|------------|
| ** **                     | ** ** | **2009**          | ** **   | **2008**              | ** ** |
| Gross  intangible assets       |       |              |         |                  |       |
| Customer  base/relationships   |       | $                 |  46,282 |                  | $          |  46,282 |   |
| Trade  name                    |       | 7,771             |         | 7,771                 |       |
| Core  technology               |       | 3,230             |         | 3,230                 |       |
| Covenants  not to compete      |       | 3,184             |         | 3,184                 |       |
| Favorable  lease agreements    |       | 620               |         | 620                   |       |
| Proprietary  knowledge         |       | 110               |         | 110                   |       |
| Patent                         |       | 31                |         | 31                    |       |
| Total  gross intangible assets |       | 61,228            |         | 61,228                |       |
| Accumulated  amortization      |       | (19,518           | )            | (16,789               | )          |
| Net  intangible assets         |       | $                 |  41,710 |                  | $          |  44,439 |   |

 

 Amortizationexpense for the three months ended June 30, 2009 and 2008 was $1,356 and$1,368, respectively, and $2,729 and $2,531 for the six months ended June 30,2009 and 2008, respectively.

 

At June 30, 2009,expected amortization expense for the definite lived intangible assets is asfollows:

 
| 2009  (remaining six months) |   | $     | 2,702        |   |
|------------------------------|--------|-------|--------------|--------|
| 2010                         |   | 5,381 |         |
| 2011                         |   | 5,175 |         |
| 2012                         |   | 4,015 |         |
| 2013                         |   | 2,679 |         |
| Total                        |   | $     |  19,952 |   |

** **

**5.    SHORT-TERM BORROWINGS AND LONG-TERMOBLIGATIONS**

 

In January 2008,pursuant to a note purchase agreement with certain institutional investors (the“2008 Note Purchase Agreement”), the Company issued $60,000 in aggregateprincipal amount of senior secured notes due in January 2013 (the “SeniorNotes”) in a private placement.  TheSenior Notes currently bear interest at 8.17%, including a premium of 100 basispoints due to a change in the risk based capital factor attributed to theSenior Notes by one of the purchasers of the Senior Notes pursuant to generallyapplicable insurance regulations for U.S. insurance companies. The premiuminterest will cease to accrue if the risk based capital factor attributed tothe Senior Notes is subsequently reduced. Interest is payable semi-annually in arrears on the 30th of January andJuly.  The Company’s obligations under theSenior Notes are secured by substantially all of the assets of the Company andcertain assets of the Company’s subsidiaries. At June 30, 2009, the Senior Notes were recorded net of deferredfinancing costs of $443.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

The 2008 Note PurchaseAgreement includes operational and financial covenants with which the Companyis required to comply, including among others, maintenance of certain financialratios and restrictions on additional indebtedness, liens anddispositions.  The Company was incompliance with all applicable covenants at June 30, 2009 and December 31,2008.

 

In April 2009, the Company amended the terms of its creditagreement with Bank of America, N.A. and certain other lenders (the “Credit Agreement”).  The Credit Agreement, as amended, reduced themaximum borrowings from $265,000 to $175,000, which includes up to $50,000 forletters of credit, and has an expiration date of February 24, 2011.  Revolving loans may be either base rate loansor currency rate loans. Currency rate loans and the letters of credit bearinterest at the annual rate of LIBOR plus the applicable margin in effect forthat interest period. Base rate loans bear interest at a rate per annum equalto a base rate plus the applicable margin in effect for that interest period.As long as no default has occurred under the Credit Agreement, the applicablemargin for both the base rate and currency rate loans is based on a matrix thatvaries with a ratio of outstanding debt to EBITDA, as defined in the CreditAgreement.  At June 30, 2009, theapplicable margin was 2.5% and the one-month LIBOR was 0.3%. Amountsoutstanding under the Credit Agreement are secured by substantially all theassets of the Company and certain assets of the Company’s subsidiaries.  TheCredit Agreement provides for the Senior Notes to rank pari passu with thecommitments under the Credit Agreement, in relation to the security provided.

 

The Company hadoutstanding borrowings under its Credit Agreement as of June 30, 2009 and December 31,2008 as follows:

 
| ** **                     | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                     | ** ** | **2009**          | ** **    | **2008**              | ** ** |
| Loans  Outstanding             |       | $                 |  136,000 |                  | $          |  165,000 |   |
| Letters  of Credit Outstanding |       | $                 |  7,172   |                  | $          |  7,172 |   |

 

The Company’s commitmentsfor outstanding letters of credit relate to potential collateral requirementsassociated with the matched principal business. Since commitments associated with these outstanding letters of creditmay expire unused, the amounts shown above do not necessarily reflect actualfuture cash funding requirements.

 

The weighted averageinterest rate of the outstanding loans was 2.82% and 2.93% at June 30,2009 and December 31, 2008, respectively. At June 30, 2009 and December 31, 2008, short-term borrowingsunder the Credit Agreement were recorded net of unamortized loan fees of $1,169and $672, respectively.

 

The Credit Agreementcontains certain financial and other covenants. The Company was in compliancewith all applicable covenants at June 30, 2009 and December 31, 2008,respectively.

 

In certain previousperiods’ financial statements, the Company referred to short-term borrowingsunder the Credit Agreement as Notes Payable on the Condensed ConsolidatedStatements of Financial Condition and Condensed Consolidated Statements of CashFlows.  To better distinguish obligationsdue under the Credit Agreement from long-term obligations due under the SeniorNotes, the Company now refers to borrowings under the Credit Agreement as “Short-termborrowings” in the Condensed Consolidated Statements of Financial Condition andCondensed Consolidated Statements of Cash Flows included in these financialstatements.

 

**6.    STOCKHOLDERS’ EQUITY**

** **

On January 11,2008, at a special meeting of stockholders, the stockholders of the Companyapproved an amendment to the Company’s Second Amended and Restated Certificateof Incorporation to increase theamount of Authorized Common Stock from 100,000,000 shares to 400,000,000shares.

 

On March 31, 2008, the Company effected a four-for-one split ofthe Company’s common stock.  Accordingly,all historical share and per share data have been retroactively restated in theaccompanying condensed consolidated financial statements.  Additionally, the par value of the additionalshares resulting from the split were reclassified from additional paid incapital to common stock.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

In August 2007, the Company’s Board of Directors authorized theCompany to implement a stock repurchase program to repurchase a limited numberof shares of the Company’s common stock. Under the repurchase plan, the Boardof Directors authorized the Company to repurchase shares of the Company’scommon stock on the open market in such amounts as determined by the Company’smanagement, provided, however, such amounts are not to exceed, during anycalendar year, the number of shares issued upon the exercise of stock optionsplus the number of shares underlying grants of RSUs that are granted or whichmanagement reasonably anticipates will be granted in such calendar year. During the three months ended June 30, 2009, the Companyrepurchased 109,300 shares of its common stock on the open market at an averageprice of $3.55 per share for a total cost of $388, including salescommissions.  During the three monthsended June 30, 2008, the Company did not repurchase any shares of itscommon stock.  During the six monthsended June 30, 2009, the Company repurchased 1,115,922 shares of itscommon stock on the open market at an average price of $2.66 per share and fora total cost of $2,970, including sales commissions.  During the six months ended June 30,2008, the Company repurchased 596,236 shares of its common stock on the openmarket at an average price of $19.11 per share and for a total cost of $11,401,including sales commissions.  Theserepurchased shares were recorded at cost as treasury stock in the CondensedConsolidated Statements of Financial Condition.

 

On March 31 and May 30, 2009, the Company paid a cashdividend of $0.05 per share, which, based upon the number of shares outstandingon the record date for such dividend, totaled $5,883 and $5,891,respectively.  On March 31, 2008,the Company paid a special cash dividendof $0.125 per share, which, based on the number of shares outstanding on therecord date for such dividend, totaled $14,693. On May 15, 2008, the Company paid a quarterly cash dividend of$0.03 per share, which based upon the number of shares outstanding on therecord date for such dividend, totaled $3,530. The dividends were reflected as reductions of retained earnings in theCondensed Consolidated Statements of Financial Condition.

 

**7.   EARNINGS PER SHARE**

 

Basic and diluted earnings per share for the three and six months ended June 30,2009 and 2008 were as follows:

 
| ** **                                                        | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                                    | ** ** | **2008**                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Basic earnings per share**                                      | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                       |       | $                                                           | 16,356     |                                                      | $          |  23,648 |   | $ | 27,956 |   | $ |  59,630 |   |
| Weighted  average common shares outstanding                       |       | 117,928,484                                                 |       | 117,737,558                                               |       | 118,145,154 |   | 117,736,900 |   |
| Basic  earnings per share                                         |       | $                                                           | 0.14       |                                                      | $          |  0.20 |   | $ | 0.24 |   | $ |  0.51 |   |
| ** **                                                        | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted earnings per share**                                    | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income applicable to stockholders                            |       | $                                                           | 16,356     |                                                      | $          |  23,648 |   | $ | 27,956 |   | $ |  59,630 |   |
| Weighted  average common shares outstanding                       |       | 117,928,484                                                 |       | 117,737,558                                               |       | 118,145,154 |   | 117,736,900 |   |
| Effect  of dilutive shares:                                       |       |                                                        |       |                                                      |       |   |   |   |   |
| Options  and RSU’s                                           |       | 3,241,400                                                   |       | 1,614,831                                                 |       | 2,642,181 |   | 1,926,804 |   |
| Weighted  average shares outstanding and common stock equivalents |       | 121,169,884                                                 |       | 119,352,389                                               |       | 120,787,335 |   | 119,663,704 |   |
| Diluted  earnings per share                                       |       | $                                                           | 0.13       |                                                      | $          |  0.20 |   | $ | 0.23 |   | $ |  0.50 |   |

 

Excludedfrom the computation of diluted earnings per share because their effect wouldbe anti-dilutive were the following: 1,840,858 RSUs and 15,256 stock options for the three months ended June 30,2009; 1,917,794 RSUs for the three months ended June 30, 2008;  2,609,564 RSUs and 111,503 stock options forthe six months ended June 30, 2009; and 1,355,433 RSUs for the six monthsended June 30, 2008.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

**8.   SHARE-BASED COMPENSATION**

 

The Company issues RSUs to its employeesunder the GFI Group Inc. 2008 Equity Incentive Plan (the “2008 Equity IncentivePlan”), which was approved by the Company’s stockholders on June 11,2008.  Prior to June 11, 2008, theCompany issued RSUs under the GFI Group Inc. 2004 Equity Incentive Plan (the “2004Equity Incentive Plan”).

 

The 2008 Equity Incentive Plan permits the grant of non-qualified stockoptions, stock appreciation rights, shares of restricted stock, restrictedstock units and performance units to employees, non-employee directors orconsultants. The Company issues shares from authorized but unissued shares,which are reserved for issuance upon the vesting of RSUs granted pursuant tothe 2008 Equity Incentive Plan.  At the2009 Annual Meeting of Stockholders, which was held on June 11, 2009, thestockholders of the Company approved an amendment to the 2008 Equity IncentivePlan to (a) increase the number of shares available for grant as awardsunder the 2008 Plan by 6,650,000 shares and (b) increase the maximumnumber of shares that may be granted as awards subject to performance goalsunder the 2008 Plan to any person in any one year by 1,000,000 shares.  As of June 30, 2009, there were7,833,978 shares of common stock available for future grants of awards underthis plan, which amount, pursuant to the terms of the 2008 Equity IncentivePlan, may be increased by the number of shares subject to awards under the 2004Equity Incentive Plan that are ultimately not delivered to employees. The fairvalue of RSUs is based on the closing price of the Company’s common stock onthe date of grant and is recorded as deferred compensation and amortized tocompensation expense over the vesting period of the grants, which is generallythree years.

 

Modified RSUs are reflected as cancellations andgrants in the summary of RSUs below.

 

The following is a summary of RSUtransactions under both the 2008 Equity Incentive Plan and the 2004 EquityIncentive Plan during the six months ended June 30, 2009:

 
| ** **                                   | ** ** | **RSUs**  | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** **  |
|----------------------------------------------|------------|-----------|------------|----------------------------------------------------------|-------------|
| Outstanding December 31, 2008 |       | 3,961,310 |       | $                                                        |  12.95 |   |
| Granted                                      |       | 6,938,662 |       | 3.57                                                     |        |
| Vested                                       |       | (789,070  | )          | 15.37                                                    |        |
| Cancelled                                    |       | (140,734  | )          | 14.32                                                    |        |
| Outstanding  June 30, 2009              |       | 9,970,168 |       | $                                                        | 6.21        |   |

 

Theweighted average grant-date fair value of RSUs granted for the six months endedJune 30, 2009 was $3.57 per unit, compared with $15.58 per unit for thesame period in the prior year. Total compensation expense and relatedincome tax benefits recognized in relation to RSUs are as follows:

 
| ** **            | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                                    | ** ** | **2008**                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Compensation  expense |       | $                                                           | 6,468      |                                                      | $          | 5,825 |   | $ | 12,220 |   | $ | 13,028 |   |
| Income  tax benefits  |       | 2,438                                                       |       | 2,627                                                     |       | 4,521 |   | 5,310 |   |
|                       |            |                                                             |            |                                                           |            |  |  |  |  |  |  |  |  |

 

AtJune 30, 2009, total unrecognized compensation cost related to the RSUsprior to the consideration of expected forfeitures was approximately $47,749and is expected to be recognized over a weighted-average period of 1.45 years.The total fair value of RSUs vested during the six months ended June 30,2009 and 2008 was $12,128 and $11,732, respectively.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Asof June 30, 2009, the Company had stock options outstanding under the GFIGroup Inc. 2002 Stock Option Plan (the “GFI Group 2002 Plan”) and the GFInetinc. 2000 Stock Option Plan (the “GFInet 2000 Plan”). No additional grants willbe made under these plans. For stock options previously granted or modified,the fair value was estimated on the date of grant or modification using theBlack-Scholes option pricing model.

 

Thefollowing is a summary of stock option transactions during the six months endedJune 30, 2009:

 
| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  December 31, 2008 |       | 651,648                                |       | $                                          | 3.32       |   | 324,408 |   | $ | 3.17 |   |
| Exercised                           |       | 6,000                                  |       | 5.25                                       |       | 2,104 |   | 2.38 |   |
| Outstanding  June 30, 2009     |       | 645,648                                |       | $                                          | 3.30       |   | 322,304 |   | $ | 3.17 |   |

 

**9.    COMMITMENTS AND CONTINGENCIES**

 

**PurchaseObligations—**The Company has various unconditional purchaseobligations. These obligations are for the purchase of market data from anumber of information service providers during the normal course of business.As of June 30, 2009, the Company had total purchase commitments for marketdata of approximately $18,383, with $15,550 due within the next twelve monthsand $2,833 due between one to three years. Additionally, the Company haspurchase commitments for capital expenditures of $1,778, primarily related tonetwork implementations in the U.K, and $164 related to hosting and softwarelicense agreements. Purchase commitments for capital expenditures ofapproximately $817 and hosting and software licensing agreements ofapproximately $164 are due within the next twelve months.

 

**Contingencies—*****In*the normal course of business, theCompany and certain subsidiaries included in the consolidated financialstatements are, and have been in the past, named as defendants in variouslawsuits and proceedings and are, and have been in the past, involved incertain regulatory examinations. Additional actions, investigations orproceedings may be brought from time to time in the future. The Company issubject to the possibility of losses from these various contingencies.Considerable judgment is necessary to estimate the probability and amount ofany loss from such contingencies. An accrual is made when it is probable that aliability has been incurred or an asset has been impaired and the amount ofloss can be reasonably estimated. The Company accrues a liability for theestimated costs of adjudication or settlement of asserted and unasserted claimsexisting as of the reporting period.

 

The Company is subject toregular examinations by various tax authorities in jurisdictions in which theCompany has significant business operations. The Company regularly assesses the likelihood of additional taxassessments that may result from these examinations in each of the taxjurisdictions.  A tax accrual has beenestablished, which the Company believes to be adequate in relation to thepotential for additional tax assessments. Once established, the accrual may be adjusted based on new informationor events.  The imposition of additionaltax assessments, penalties or fines by a tax authority could have a materialimpact on the Company’s effective tax rate.

 

Additionally, the Companyhas recorded reserves for certain contingencies to which it may have exposure,such as reserves for contingencies related to the employer portion of NationalInsurance Contributions in the U.K.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

The staff of the Market Regulation Department of FINRA (the “Staff”)has been conducting an inquiry into the activities of interdealer brokeragefirms in connection with the determination of the commission rates paid to themby certain dealers for brokering transactions in credit default swaps.  GFI Securities LLC has been cooperating withthe Staff in this inquiry by responding to requests for documents, testimonyand other information.  In January 2009,the Staff advised GFI Securities LLC that it has made a preliminarydetermination to recommend disciplinary action in connection with allegedlyimproper communications, between certain of GFI Securities LLC’s brokers andthose at other interdealer brokers, purportedly inconsistent with just andequitable principles of trade and certain antifraud and supervisoryrequirements under FINRA rules and the federal securities laws.  All but one of these brokers who made theallegedly improper communications resigned in April 2008 to becomeemployed by affiliates of Compagnie Financiere Tradition.  GFI Securities LLC intends to vigorouslycontest any such disciplinary action which, if brought and/or settled, couldresult in a censure, fine or other sanction. Based on currently available information, the outcome of this matter isnot expected to have a material adverse impact on the Company’s financialposition.  However, the outcome of thismatter may be material to the Company’s results of operations or cash flows ina given period.  It is not presentlypossible to determine the Company’s ultimate exposure in this matter and thereis no assurance that the resolution of this matter will not significantlyexceed any reserves accrued by the Company.

 

***Risks and Uncertainties—***The Company primarily generates its revenuesby executing and facilitating transactions for third parties. Revenues forthese services are transaction based. As a result, the Company’s revenues couldvary based upon the volume of transactions in various securities, commodities,foreign exchange and derivative markets in which the Company provides services.

 

***Guarantees—****The*Company, through its subsidiaries, is amember of certain exchanges and clearing houses. Under the membershipagreements, members are generally required to guarantee certainobligations.  To mitigate the performancerisks of its members, the exchanges and clearing houses may, from time to time,require members to post collateral, as well as meet certain minimum financialstandards. The Company’s maximum potential liability under these arrangementscannot be quantified. However, management believes that the potential for theCompany to be required to make payments under these arrangements is not likely.Accordingly, no contingent liability is recorded in the Condensed ConsolidatedStatements of Financial Condition for these arrangements.

 

**10.   FINANCIAL INSTRUMENTS WITH MARKET AND CREDIT RISKS**

 

Disclosureregarding the Company’s financial instruments with off-balance sheet risk isdescribed in “Note 16—Financial Instruments with Market and Credit Risks”of the Notes to the Consolidated Financial Statements contained in the Company’s2008 Form 10-K. There have been no material changes to the Company’soff-balance sheet risk during the six months ended June 30, 2009.

 

**11.    FINANCIAL INSTRUMENTS**

 

TheCompany is exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to the Company’s riskmanagement policy as described in “Note 17—Financial Instruments” of theNotes to the Consolidated Financial Statements contained in the Company’s 2008 Form 10-K.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Substantially all of the Company’s assets and liabilities are carriedat fair value or contracted amounts that approximate fair value. Assets andliabilities that are recorded at contracted amounts approximating fair valueconsist primarily of receivables from and payables to brokers, dealers andclearing organizations. These receivables and payables are short term in natureand have subsequently substantially all settled at the contracted amounts.  The Company’s marketable equity securitiesare recorded at fair value based on their quoted market price.  The Company’s investments accounted for underthe cost and equity methods are in companies that are not publicly traded andfor which no established market for their securities exists.  The fair value of these investments is notestimated if there are no identified events or changes in circumstances thatmay have a significant adverse effect on the fair value of the investment.  The Company’s debt obligations are carried athistorical amounts. The fair value of the Company’s Senior Notes was estimatedusing market rates of interest available to the Company for debt obligations ofsimilar types and was approximately $55.6 million at June 30, 2009.  The fair value of the Company’s short termborrowings outstanding under the Credit Agreement approximated the carryingvalue at June 30, 2009 and December 31, 2008.

 

TheCompany’s financial assets and liabilities recorded at fair value have beencategorized based upon a fair value hierarchy in accordance with SFAS 157.  In accordance with SFAS 157, the Company hascategorized its financial assets and liabilities, based on the priority of theinputs to the valuation technique, into a three-level fair value hierarchy asset forth below.

 

*Level 1 —* Financialassets and liabilities whose values are based on unadjusted quoted prices foridentifiable assets or liabilities in an active market that the company has theability to access at the measurement date (examples include activeexchange-traded equity securities, listed derivatives, and most U.S. Governmentand agency securities).

 

*Level 2 —* Financialassets and liabilities whose values are based on quoted prices in markets wheretrading occurs infrequently or whose values are based on quoted prices ofinstruments with similar attributes in active markets.  Level 2 inputs include the following:

 

·                  Quotedprices for identifiable or similar assets or liabilities in non-active markets(examples include corporate and municipal bonds which trade infrequently);

 

·                  Inputs otherthan quoted prices that are observable for substantially the full term of theasset or liability (examples include interest rate and currency swaps), and

 

*Level 3* — Financialassets and liabilities whose values are based on prices or valuation techniquesthat require inputs that are both unobservable and significant to the overallfair value measurement.  These inputsreflect management’s own assumptions about the assumptions a market participantwould use in pricing the asset or liability. As of and for the six months ended June 30, 2009 and for the yearended December 31, 2008, the Company did not have any Level 3 financialassets or liabilities.

 

**Valuation Techniques**

** **

**The Company uses the following valuation techniques invaluing the financial instruments at June 30, 2009 and December 31,2008:**

** **

**The Company evaluates its marketable securities inaccordance with SFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*, and has determinedcertain of its investments in marketable securities should be classified astrading securities or available-for-sale securities and reported at fair valueat June 30, 2009 and December 31, 2008.  To the extent that the Company’s trading andavailable-for-sale marketable securities are based on quoted market prices,these securities were categorized as Level 1.**

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

**Fair value of the Company’s foreign exchange derivativecontracts is based on the indicative prices obtained from the banks that arecounter-parties to these foreign exchange derivative contracts and management’sown calculations and analyses.  At June 30,2009 and December 31, 2008, the Company’s foreign exchange derivativecontracts have been categorized in Level 2 of the SFAS 157 fair value hierarchy.**

** **

**The fair value of trading securities owned as a result ofmatched principal transactions is estimated using recently executedtransactions and market price quotations. At June 30, 2009 and December 31, 2008, the Company heldcorporate equities that were categorized in Level 1 and corporate bonds thatwere categorized in Level 2 of the SFAS 157 fair value hierarchy.**

** **

Financial Assets and Liabilities Measuredat Fair Value on a recurring basis as of June 30, 2009 and December 31,2008:

 
| ** **                             | ** ** | **Quoted Prices in**                          | ** ** | **Significant Other** | ** ** | ** **                         | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **Active Markets for  Identical Assets** | ** ** | **Observable  Inputs**     | ** ** | **Balance at  June 30,** | ** ** |
| ** **                             | ** ** | **(Level 1)**                                      | ** ** | **(Level 2)**         | ** ** | **2009**                           | ** ** |
| Included within  Other assets:         |       |                                                    |       |                       |       |                               |       |
| Equity  securities                     |       | $                                                       | 4,907      |                       | $          | —                             |       | $ | 4,907 |   |
| Corporate bonds                        |       | —                                                  |       | 2,688                      |       | 2,688                              |       |
| Foreign exchange  derivative contracts |       | —                                                  |       | 5,537                      |       | 5,537                              |       |
|                                   |       |                                                    |       |                       |       |                               |       |
| Included within  Other liabilities:    |       |                                                    |       |                       |       |                               |       |
| Equity  securities                     |       | $                                                       | 12         |                       | $          | —                             |       | $ | 12 |   |
| Foreign exchange  derivative contracts |       | —                                                  |       | 3,829                      |       | 3,829                              |       |

** **
| ** **                             | ** ** | **Quoted Prices in**                          | ** ** | **Significant Other** | ** ** | ** **                             | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **Active Markets for  Identical Assets** | ** ** | **Observable  Inputs**     | ** ** | **Balance at  December 31,** | ** ** |
| ** **                             | ** ** | **(Level 1)**                                      | ** ** | **(Level 2)**         | ** ** | **2008**                               | ** ** |
| Included within  Other assets:         |       |                                                    |       |                       |       |                                   |       |
| Equity  securities                     |       | $                                                       | 5,440      |                       | $          | —                                 |       | $ | 5,440 |   |
| Corporate bonds                        |       | —                                                  |       | 1,576                      |       | 1,576                                  |       |
| Foreign exchange  derivative contracts |       | —                                                  |       | 102                        |       | 102                                    |       |
|                                   |       |                                                    |       |                       |       |                                   |       |
| Included within  Other liabilities:    |       |                                                    |       |                       |       |                                   |       |
| Equity  securities                     |       | $                                                       | 296        |                       | $          | —                                 |       | $ | 296 |   |
| Foreign exchange  derivative contracts |       | —                                                  |       | 19,687                     |       | 19,687                                 |       |

** **

**DerivativeFinancial Instruments**

** **

The Company uses foreign exchange derivativecontracts, including forward contracts and foreign currency swaps, to reducethe effects of fluctuations in certain assets and liabilities denominated inforeign currencies. The Company also hedges a portion of its foreign currencyexposures on anticipated foreign currency denominated revenues and expenses byentering into forward foreign exchange contracts.  For the six months ended June 30, 2009and the year ended December 31, 2008, none of these contracts weredesignated as foreign currency cash flow hedges under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended (“SFAS No. 133”). These contractsare recorded at fair value and all realized and unrealized gains and losses areincluded in other income in the Condensed Consolidated Statements ofIncome.  The Company does not hold orissue derivative financial instruments for trading or speculative purposes.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

**Fair values of foreign exchange derivative contracts on agross basis as of June 30, 2009 are as follows:**

** **
| ** **                                                                 | ** ** | **June 30,  2009**      | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                 | ** ** | **Balance  Sheet  Location** | ** ** | **Fair  Value** | ** ** | **Balance  Sheet  Location** | ** ** | **Fair  Value** | ** ** |
| **Derivatives  not designated as hedging instruments under Statement 133** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                       |       |                         |       |   |   |   |   |   |   |
| Forward Foreign  Exchange Contracts                                        |       | Other Assets                 |       | $ | 5,537 |   | Other Liabilities |   | $ | 3,829 |   |
|                                                                            |            |                              |            |  |  |  |  |  |  |  |  |

** **

**As of June 30, 2009, the Company had outstandingforward foreign exchange contracts with a combined notional value ofapproximately $199.0 million. Approximately $77.0 million of these forward foreign exchange contractsrepresents a hedge of euro-denominated balance sheet positions at June 30,2009.  The remaining contracts are hedgesof anticipated future cash flows.**

** **

**The following is a summary of the effect of foreignexchange derivative contracts on the Condensed Consolidated Statements ofIncome for the three and six months ended June 30, 2009:**

** **
| ** **                                                                 | ** ** | ** **                                         | ** ** | **Amount  of Gain or (Loss)  Recognized in Income on  Derivatives** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **Location  of Gain (Loss)  Recognized in Income** | ** ** | **For the Three  Months Ended  June 30,**                      | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
| ** **                                                                 | ** ** | **on Derivatives**                                 | ** ** | **2009**                                                            | ** ** | **2009** | ** ** |
| **Derivatives  not designated as hedging instruments under Statement 133** | ** ** | ** **                                         | ** ** | ** **                                                          | ** ** | ** ** | ** ** |
|                                                                       |       |                                               |       |                                                                |       |   |   |
| Forward Foreign  Exchange Contracts                                        |       | Other income                                       |       | $                                                                   | 1,296      |   | 9,963 |   |
|                                                                            |            |                                                    |            |                                                                     |            |  |  |  |

** **

**12.    REGULATORY REQUIREMENTS**

 

GFISecurities LLC is a registered broker-dealer with the SEC and the FinancialIndustry Regulatory Authority (FINRA). GFI Securities LLC is also a registeredintroducing broker with the National Futures Association and the CommodityFutures Trading Commission. Accordingly, GFI Securities LLC is subject to thenet capital rules under the Exchange Act and the Commodity ExchangeAct.  Under these rules, GFI SecuritiesLLC is required to maintain minimum Net Capital, as defined, of not less thanthe greater of $250 or 2% of aggregate debits, as defined.

 

GFIBrokers Limited and GFI Securities Limited are subject to the capitalrequirements of the Financial Services Authority in the United Kingdom (“FSA”).

 

GFI(HK) Securities LLC is subject to the capital requirements of the Securitiesand Futures Commission in Hong Kong (the “SFC”), which require that GFI (HK)Securities LLC maintain minimum capital, as defined, of approximately $387.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Thefollowing table sets forth information about the net capital that certain ofthe Company’s subsidiaries were required to maintain as of June 30, 2009:

 
| ** **                    | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers  Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net  Capital                  |       | $                            | 34,400     |                          | $          | 106,549                          |       | $                                      | 46,872     |   | $ | 1,511 |   |
| Minimum  Net Capital required |       | 250                          |       | 16,186                        |       | 26,824                           |       | 387                                    |       |
| Excess  Net Capital           |       | $                            | 34,150     |                          | $          | 90,363                           |       | $                                      | 20,048     |   | $ | 1,124 |   |

 

Inaddition to the minimum net capital requirements outlined above, certain of theCompany’s subsidiaries are subject to additional regulatory requirements.

 

GFISecurities Limited’s Japanese branch is subject to certain licensingrequirements established by the Financial Instruments and Exchange Law (the “FIEL”)in Japan. As part of the licensing requirements, GFI Securities Limited’s Japanesebranch is required to maintain minimum “brought-in” capital and stockholders’equity of 50,000 Japanese Yen each (approximately $519), as defined under theFIEL.  In addition, GFI SecuritiesLimited’s Japanese branch is also subject to the net capital rule promulgatedby the FIEL, which requires that net worth, including “brought-in” capital,exceed a ratio of 120.0% of the risk equivalent amount including relevantexpenditure.  At June 30, 2009,GFI Securities Limited’s Japanese branch was in compliance with thesecapital requirements.

 

GFISecurities Limited’s Dubai branch is registered with the Dubai FinancialInternational Centre and is authorized by the Dubai Financial ServicesAuthority (“DFSA”) to provide financial service activities. The branch issubject to the conduct of business rules of the DFSA and has been granteda waiver from prudential regulation by the DFSA.

 

GFISecurities Limited’s Paris branch was established through the exercise of itspassport right to open a branch in a European Economic Area state. Theestablishment of the branch was approved by FSA and acknowledged by Banque deFrance in France. The branch is subject to the conduct of business rules ofthe Autorite Des Marches Financiers when dealing with resident customers ofFrance and is regulated, in part, by the FSA.

 

GFI SecuritiesLimited’s Dublin branch was established through the exercise of its passportright to open a branch within a European Economic Area state. The establishmentof the branch was approved by FSA and acknowledged by the Irish FinancialServices Regulatory Authority (“IFSRA”) in Ireland. The branch is subject toall of the conduct of business rules of the IFSRA and is regulated, inpart, by the FSA.

 

GFISecurities Limited’s Tel Aviv branch is registered as a foreign corporation inIsrael and is conditionally exempt from the requirement to hold a SecuritiesLicense in accordance with the Israeli Securities law. The branch is thereforenot subject to any capital requirements.

 

GFI Brokers Limited’s Sydney branch isregistered as a foreign corporation in Australia and is conditionally exemptfrom the requirement to hold an Australian financial services license under theAustralian Securities and Investments Commission Corporations Act of 2001 inrespect of the financial services it provides in Australia. This exemptionapplies to foreign companies regulated by the FSA in accordance with U.K.regulatory standards.

 

GFI(HK) Brokers Ltd. is registered with and regulated by the Hong Kong MonetaryAuthority. As part of this registration, GFI (HK) Brokers Ltd. is required tomaintain stockholders’ equity of 5,000 Hong Kong dollars (or approximately$645). At June 30, 2009, GFI (HK) Brokers Ltd. had stockholders’ equity of12,893 Hong Kong dollars (or approximately $1,663), which exceeded the minimumrequirement by 7,893 Hong Kong dollars (or approximately $1,018).

 

GFI Group PTE Ltd issubject to the compliance requirements of the Monetary Authority of Singapore (“MAS”),which requires that GFI Group PTE Ltd, among other things, maintainstockholders’ equity of 3,000 Singapore dollars (or approximately $2,068),measured annually.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

****GFI KoreaMoney Brokerage Limited is licensed****and****regulated by the Ministry of Finance and Economy to engage in foreignexchange brokerage business, and is subject to certain regulatory requirementsunder the Foreign Exchange Transaction Act and regulations thereunder.  Asa licensed foreign exchange brokerage company, GFI Korea Money BrokerageLimited is required to maintain minimum paid-in capital of 5,000,000 Korean Won****(or approximately $3,922)****.****AtJune 30, 2009, ****GFI Korea Money Brokerage Limited**** met theminimum requirement for paid-in-capital of 5,000,000 Korean Won.

 

Theseregulatory rules may restrict the Company’s ability to withdraw capitalfrom its regulated subsidiaries. The Company’s regulated subsidiaries were incompliance with all minimum net capital requirements as of June 30, 2009.

 

**13.    SEGMENT AND GEOGRAPHIC INFORMATION**

 

TheCompany has three operating segments: Americas Brokerage, Europe, Middle Eastand Africa (“EMEA”) Brokerage and Asia Brokerage.  Additionally, the Company presents itsoperating segments as four reportable segments: Americas Brokerage, EMEABrokerage, Asia Brokerage and All Other. The All Other segment captures costs that are not directly assignable toone of the operating business segments, primarily consisting of the Company’scorporate business activities and operations from software, analytics andmarket data.   In prior periods, AsiaBrokerage was included within the All Other segment as it did not meet thequantitative threshold for separate disclosure under SFAS No. 131 *Disclosures about Segments of an Enterprise and Related Information*(“SFASNo. 131”).  However, as a result ofthe growth experienced in Asia and the changes in the economic characteristicsof the Americas and the EMEA brokerage operations, for the year ended December 31,2008, the Company changed its reportable segments.  Prior period results have been adjusted toreflect these changes in the reporting structure.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Selected financialinformation for the Company’s reportable segments is presented below forperiods indicated:

 
| ** **                                           | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                                    | ** ** | **2008**                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue**                                          | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                   |       | $                                                           | 89,083     |                                                      | $          | 91,443 |   | $ | 178,995 |   | $ | 211,292 |   |
| EMEA Brokerage                                       |       | 95,904                                                      |       | 130,309                                                   |       | 189,211 |   | 279,868 |   |
| Asia Brokerage                                       |       | 16,640                                                      |       | 24,238                                                    |       | 31,423 |   | 53,418 |   |
| All Other                                            |       | 23,039                                                      |       | 15,539                                                    |       | 41,272 |   | 31,551 |   |
| Total Consolidated Revenue                           |       | $                                                           | 224,666    |                                                      | $          | 261,529 |   | $ | 440,901 |   | $ | 576,129 |   |
| ** **                                           | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Income:**                                 | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                   |       | $                                                           | —     |                                                      | $          | 6 |   | $ | — |   | $ | 11 |   |
| EMEA Brokerage                                       |       | 1                                                           |       | 5                                                         |       | 1 |   | 13 |   |
| Asia Brokerage                                       |       | —                                                      |       | —                                                    |       | — |   | — |   |
| All Other                                            |       | 225                                                         |       | 2,067                                                     |       | 722 |   | 4,737 |   |
| Total Consolidated Interest Income                   |       | $                                                           | 226        |                                                      | $          | 2,078 |   | $ | 723 |   | $ | 4,761 |   |
| ** **                                           | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Expense:**                                | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                   |       | $                                                           | 3          |                                                      | $          | 6 |   | $ | 12 |   | $ | 21 |   |
| EMEA Brokerage                                       |       | 105                                                         |       | 661                                                       |       | 271 |   | 1,124 |   |
| Asia Brokerage                                       |       | 2                                                           |       | 12                                                        |       | 4 |   | 12 |   |
| All Other                                            |       | 2,547                                                       |       | 3,069                                                     |       | 4,839 |   | 5,676 |   |
| Total Consolidated Interest Expense                  |       | $                                                           | 2,657      |                                                      | $          | 3,748 |   | $ | 5,126 |   | $ | 6,833 |   |
|                                                 |       |                                                        |       |                                                      |       |   |   |   |   |
| **Depreciation and Amortization:**                   | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                   |       | $                                                           | —     |                                                      | $          | — |   | $ | — |   | $ | — |   |
| EMEA Brokerage                                       |       | —                                                      |       | —                                                    |       | — |   | — |   |
| Asia Brokerage                                       |       | —                                                      |       | —                                                    |       | — |   | — |   |
| All Other                                            |       | 8,015                                                       |       | 8,449                                                     |       | 15,854 |   | 16,371 |   |
| Total Consolidated Depreciation and Amortization     |       | $                                                           | 8,015      |                                                      | $          | 8,449 |   | $ | 15,854 |   | $ | 16,371 |   |
|                                                 |       |                                                        |       |                                                      |       |   |   |   |   |
| **Income (Loss) before Income Taxes:**               | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                   |       | $                                                           | 20,514     |                                                      | $          | 30,236 |   | $ | 41,636 |   | $ | 69,047 |   |
| EMEA Brokerage                                       |       | 31,582                                                      |       | 40,988                                                    |       | 61,695 |   | 94,498 |   |
| Asia Brokerage                                       |       | 1,774                                                       |       | 6,048                                                     |       | (112 | ) | 14,777 |   |
| All Other                                            |       | (27,620                                                     | )          | (40,937                                                   | )          | (58,844 | ) | (84,416 | ) |
| Total Consolidated Income/(Loss) before Income Taxes |       | $                                                           | 26,250     |                                                      | $          | 36,335 |   | $ | 44,375 |   | $ | 93,906 |   |

 

In addition, with the exception of goodwill, theCompany does not identify or allocate assets by operating segment, nor does itschief operating decision maker evaluate operating segments using discrete assetinformation.  See Note 4 for goodwill byreportable segment.

 

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**GFIGROUP INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Information regarding revenues for the three and sixmonths ended June 30, 2009 and 2008, respectively, and informationregarding long-lived assets (defined as property, equipment, leaseholdimprovements and software inventory) in geographic areas as of June 30,2009 and December 31, 2008, respectively, are as follows:

 
| ** **      | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|-----------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                                    | ** ** | **2008**                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:       |       |                                                        |       |                                                      |       |   |   |   |   |
| United  States  |       | $                                                           | 89,567     |                                                      | $          | 91,341 |   | $ | 180,108 |   | $ | 210,758 |   |
| United  Kingdom |       | 96,747                                                      |       | 118,826                                                   |       | 184,136 |   | 252,029 |   |
| Other           |       | 38,352                                                      |       | 51,362                                                    |       | 76,657 |   | 113,342 |   |
| Total           |       | $                                                           | 224,666    |                                                      | $          | 261,529 |   | $ | 440,901 |   | $ | 576,129 |   |

 
| ** **                      | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Long-lived  Assets, as defined: |       |                    |       |                        |       |
| United  States                  |       | $                       | 59,904     |                        | $          | 61,648 |   |
| United  Kingdom                 |       | 16,061                  |       | 17,824                      |       |
| Other                           |       | 4,889                   |       | 5,709                       |       |
| Total                           |       | $                       | 80,854     |                        | $          | 85,181 |   |

 

Revenuesare attributed to geographic areas based on the location of the relevant legalentities.

 

**14.****              ****OTHER COMPREHENSIVE INCOME (LOSS)**

** **
| ** **                                           | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                                    | ** ** | **2008**                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Unrealized gain on available for sale securities** | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before  Tax Amount                                   |       | $                                                           | 759        |                                                      | $          | 580 |   | $ | 200 |   | $ | 1,425 |   |
| Tax  Benefit                                         |       | (212                                                        | )          | (165                                                      | )          | (55 | ) | (419 | ) |
| After  Tax Amount                                    |       | $                                                           | 547        |                                                      | $          | 415 |   | $ | 145 |   | $ | 1,006 |   |
| **Foreign currency translation adjustment**          | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before  Tax Amount                                   |       | $                                                           | 2,807      |                                                      | $          | 493 |   | $ | 1,985 |   | $ | (305 | ) |
| Tax  Expense                                         |       | (1,217                                                      | )          | (214                                                      | )          | (862 | ) | 134 |   |
| After  Tax Amount                                    |       | $                                                           | 1,590      |                                                      | $          | 279 |   | $ | 1,123 |   | $ | (171 | ) |

 

**15.    SUBSEQUENT EVENTS**

 

In July 2009, the Board of Directors declared aquarterly cash dividend of $0.05 per share payable on August 28, 2009 toshareholders of record on August 14, 2009.

 

Subsequent events have been evaluated for disclosurein the notes to the Condensed Consolidated Financial Statements through August 10,2009, the filing date of this Form 10-Q.

 

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders of

GFI Group Inc.

New York, New York

 

We have reviewed the accompanying condensed consolidated statement offinancial condition of GFI Group Inc. and subsidiaries (the “Company”) as of June 30,2009, and the related condensed consolidated statements of income andcomprehensive income for the three-month and six-month periods ended June 30,2009 and 2008, and the condensed consolidated statements of cash flows for thesix-month periods ended June 30, 2009 and 2008.  These interim financial statements are theresponsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters.  It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the objective of which is the expression of an opinion regardingthe financial statements taken as a whole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to such condensed consolidated interim financial statementsfor them to be in conformity with accounting principles generally accepted inthe United States of America.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedstatement of financial condition of the Company as of December 31, 2008,and the related consolidated statements of income, comprehensive income, cashflows and changes in stockholders’ equity for the year then ended (notpresented herein); and in our report dated February 27, 2009, we expressedan unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated statement of financial condition as of December 31,2008 is fairly stated, in all material respects, in relation to theconsolidated statement of financial condition from which it has been derived.

 

 

/s/ Deloitte & Touche LLP

 

 

New York, New YorkAugust 10, 2009

 

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**ITEM2.****                        ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

ThisQuarterly Report on Form 10-Q (this “Form 10-Q”) contains ‘‘forward-lookingstatements’’ within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include, without limitation, any statementthat may predict, forecast, indicate or imply future results, performance orachievements, and may contain the words ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’‘‘estimate,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘will be,’’ ‘‘will likely continue,’’ ‘‘willlikely result,’’ or words or phrases of similar meaning. These forward-lookingstatements are based largely on the expectations of management and are subjectto a number of risks and uncertainties including, but not limited to, thefollowing:

 

·       the risksand other factors described under the heading “Risk Factors” and elsewhere inour 2008 Form 10-K;

 

·       economic,political and market factors affecting trading volumes, securities prices ordemand for our brokerage services;

 

·       changes inlaws and regulations governing our business and operations or permissibleactivities and our ability to comply with such laws and regulations;

 

·       financialdifficulties experienced by our customers or key participants in the markets inwhich we focus our brokerage services;

 

·       the growthof our operations generally or of specific products or services;

 

·       our abilityto attract and retain key personnel, including highly qualified brokeragepersonnel;

 

·       our entranceinto new brokerage markets, including investments in establishing new brokeragedesks;

 

·       competitionfrom current and new competitors;

 

·       our abilityto keep up with rapid technological change and to continue to develop andsupport our electronic brokerage systems in a cost effective manner;

 

·       future resultsof operations and financial condition;

 

·       the successof our business strategies;

 

·       risksassociated with potential acquisitions by us of businesses or technologies;

 

·       the maturityof key markets and any resulting contraction of commissions;

 

·       our abilityto manage our international operations;

 

·       uncertaintiesassociated with currency fluctuations;

 

·       our failureto protect or enforce our intellectual property rights;

 

·       uncertaintiesrelating to litigation; and

 

·       changes inthe availability of capital.

 

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The foregoing risks anduncertainties, as well as those risks discussed under the headings ‘‘Item2—Management’s Discussion and Analysis of Financial Condition and Results ofOperations’’ and ‘‘Item 3—Quantitative and Qualitative Disclosures About MarketRisk’’ and elsewhere in this Quarterly Report, may cause actual results todiffer materially from the forward-looking statements. The information includedherein is given as of the filing date of this Form 10-Q with the SEC andfuture events or circumstances could differ significantly from theseforward-looking statements. The Company does not undertake to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**Business Environment**

 

As an inter-dealerbroker, our results of operations are impacted by a number of market factors,including market volatility, the organic growth or contraction of thederivative and cash markets in which we provide our brokerage services, theparticular mix of transactional activity in our various products, thecompetitive and regulatory environment in which we operate and the financialcondition of the dealers, hedge funds and other market participants to whom weprovide our services.  Outlined below are management’s observations ofthese external market factors during our most recent fiscal quarter. The factorsoutlined below are not exclusive and additional factors may impact, or havedifferent degrees of impact, on our results of operations in future periods.

 

*MarketVolatility*

 

As a general rule, ourbusiness typically benefits from volatility in the markets that we serve, asperiods of increased volatility often coincide with more robust trading by ourclients and a higher volume of transactions.  However, extended periods ofextreme volatility may result in significant market dislocations that can resultin reduced trading volumes.

 

Market volatility isdriven by a range of external factors, some of which are market specific andsome of which are correlated to general macro-economic conditions.  Duringthe second quarter of 2009, many of the markets in which we operate experiencedlower volatility than the second quarter of 2008 as the global recessionaryenvironment continued and governments in the U.S. and Europe sought to regulateand possibly limit trading activity in certain OTC markets, including certaincredit and energy derivatives.  Thesefactors led certain dealers and hedge funds to commit less capital in certainmarkets and geographical regions or to cease trading altogether, which resultedin generally lower trading activity in many of our markets in the secondquarter of 2009 as compared to the second quarter of 2008.

 

*Growthin Underlying Markets and New Product Offerings*

 

Our business hashistorically benefited from growth in the OTC derivatives and related cashmarkets due to either the expansion of existing markets, including increasednotional amounts outstanding or increased transaction volumes, or thedevelopment of new products or classes of products.  The level of growthin these markets is difficult to measure on a quarterly basis as there are onlya few independent, objective measures of growth in outstanding notional amountof OTC derivatives, all of which are published retrospectively and do notmeasure transactional volumes.  Therefore, to help gauge growth in anyparticular quarter, management also looks to the published results of large OTCderivatives dealers and certain futures exchanges as potential indicators oftransactional activity in the related OTC derivative markets.

 

The Bank of InternationalSettlements (“BIS”) released its Year-End 2008 Market Survey in May 2009detailing growth in global notional amounts outstanding in variousover-the-counter markets. Notional amounts outstanding include new transactionsand those from previous periods.  The BISstatistics indicated that there was a decline in the notional outstanding formost derivative categories over the previous Year-End and Mid-Year results,including credit default swaps, which were down 28% year over year and 27%sequentially.  BIS attributes thesedeclines to credit market turmoil and the multilateral netting ofcontracts.  Interest rate derivativesgrew 6.5% year over year and declined 8.6% sequentially, while foreignexchange, commodity and equity-linked derivatives declined 12%, 48% and 23%year over year and 21%, 67% and 36% sequentially, respectively.

 

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Many OTC derivativesproducts have trended toward lower trading volumes as market participantsdeploy less trading capital due to investor redemptions and reduced borrowingcapacity.  Evidence of this trend can beseen in the reduced transaction volumes of certain products traded on futuresexchanges. For several years, exchange traded derivatives have exhibitedsimilar growth rates to those of the related OTC derivative markets. In thesecond quarter of 2009, the CME Group, Inc. (“CME”), excluding its NewYork Mercantile Exchange (“NYMEX”) operations, reported a 21% decline inaverage daily volumes, NYMEX reported an 8% drop in average daily volumes, andIntercontinentalExchange, Inc. (“ICE”) reported a decline in average dailycommissions of its OTC energy products businesses of 8%, each as compared tothe second quarter of 2008.

 

In addition, our business has historically benefitedfrom the introduction of newer products and our expansion into growing marketsand new geographical areas. For example, in recent years we have been a leadingbroker in developing product areas such as shipping and property derivatives,and our currency and interest rate derivatives brokerage businesses havebenefited from the growth, until recently, of emerging markets in EasternEurope, Asia and Latin America.

 

*Competitiveand Regulatory Environment*

 

Another major external market factor affecting ourbusiness and results of operations is competition, which may take the form ofcompetitive pressure on the commissions we charge for our brokerage services orcompetition for brokerage personnel with extensive experience in thespecialized markets we serve. Competition for the services of productivebrokers remained intense in the second quarter of 2009.  In addition, in April of 2008, almosttwo dozen of our credit division personnel in New York defected to acompetitor, notwithstanding that many of them did so in breach of contractualobligations.  This event has resulted inincreased competition, legal expenses and costs related to restaffing our NorthAmerican credit operations.  The consolidationand personnel layoffs by dealers, hedge funds and other market participantsduring 2008 and the first half of 2009 has also led to increased competition toprovide brokerage services to a smaller number of market participants in thenear term.

 

Efforts to regulate credit derivatives and to create acentral clearinghouse for credit derivatives carried into 2009 from the secondhalf of 2008 as the credit crisis and failure of Lehman Brothers led to callsfor greater transparency of counterparty risk exposure. This has resulted inincreased competition from exchanges and other market participants as thecredit markets in the U.S. and Europe emphasize central clearing, automationand increased transparency.   In March of2009, ICE completed its purchase of The Clearing Corporation and formed ICETrust, a provider of clearing services for the credit derivative markets.  We maintain an economic interest in ICETrust, which became the first clearing house to process credit default swapsduring the first quarter.

 

In addition to the efforts to regulate creditderivatives, there has been an ongoing move to regulate other OTC derivativesmarkets.  We believe that the recentappeals for increased transparency, position limits and increased collateral orcapital requirements by regulators has caused uncertainty in these markets asmarket participants await any final regulations.  There have even been calls from some in theU.S. Congress for restrictions on trading in “naked” credit default swaps whichhas added to market uncertainty.  Thisincreased uncertainty in the markets has led investors and banks to commit lesscapital to many OTC markets.  Nevertheless, we are optimistic that the regulatory solutions that arelikely to emerge, including centralized clearing and greater electronicexecution, will be generally beneficial to the long-term health of the broaderfinancial markets and we believe that our expertise, technology and scale makesus well-positioned to capture newly created opportunities in these markets.

 

**Financial Overview**

 

As more fully discussed below, our results of operations aresignificantly impacted by our revenue growth and the amount of compensation andbenefits we provide to our employees. The following factors had a significant impact on our revenues andemployee costs during the three month period ended June 30, 2009:

 

Our revenues havedecreased 14.1% from $261.5 million for the three months ended June 30,2008 to $224.7 million for the three months ended June 30, 2009. The mainfactors contributing to a decrease in our revenues compared to the three monthsended June 30, 2008 were:

 

·                  Dealer and hedge fund deleveragingleading to less capital being deployed in certain markets;

·                  The departure of almost two dozen of ourNew York credit brokers to a competitor in April 2008;

·                  Reduced trading volumes in certainstructured derivative and emerging markets in which we have a leading position,including our dry freight business in Europe and Asia;

 

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·                  The global recessionary environmentcontinuing to depress share, index and asset values globally impacting revenues,particularly in Europe where certain product commissions are based on notionalvalues;

·                  The strengthening of the U.S. Dollaradversely impacted our foreign currency revenues, particularly in Europe; and

·                  Regulatory uncertainty as it relates tomarket structure and operations in OTC derivative markets.

 

Partiallyoffsetting this decrease were several factors benefiting our brokerage and otherrevenues, including:

 

·                  Substantial growth in our global cashfixed income business due, in large part, to our recent investments in thisarea; and

·                  Realized and unrealized gains of $9.4million on foreign currency transactions and foreign currency hedges.

 

The most significant component of our coststructure is employee compensation and benefits, which includes salaries,sign-on bonuses, incentive compensation and related employee benefits andtaxes.  Our employee compensation andbenefits decreased from $158.7 million for the three months ended June 30,2008 to $146.6 million for the three months ended June 30, 2009.  The main factors contributing to the declinein employee compensation and benefits were a decrease in performance bonusesfor brokerage personnel, as well as the restructuring initiatives implementedin the second half of 2008 and the first half of 2009.

 

Our compensation and employee benefits for allemployees have both a fixed and variable component.  Base salaries and benefit costs arerelatively fixed for all employees while bonuses constitute the variableportion of our compensation and employee benefits.  Within this overall compensation and employeebenefits, employment costs of our brokerage personnel are the primarycomponent.  Bonuses for brokeragepersonnel are primarily based on the operating results of their relatedbrokerage desk as well as their individual performance.  For many of our brokerage employees, theirbonus constitutes a significant component of their overall compensation.  Broker performance bonuses decreased from$79.3 million for the three months ended June 30, 2008 to $68.5 millionfor the three months ended June 30, 2009. A portion of our bonus expense is subject to contractual guarantees thatmay require us to make bonus payments to brokers regardless of theirperformance in any particular period.

 

Further, we grant sign-on bonuses for certainnewly-hired brokers or for certain of our existing brokers who agree tolong-term employment agreements. Expenses relating to sign-on bonuses increased from $9.1 million for thethree months ended June 30, 2008 to $10.8 million for the three monthsended June 30, 2009.  These sign-onbonuses may be paid in the form of cash, restricted stock units (“RSUs”) orforgivable loans and are typically amortized over the term of the relatedemployment agreement, which is generally two to four years.  These employment agreements typically containrepayment or forfeiture provisions for unvested RSUs or all or a portion of thesign-on bonus and forgivable loan should the employee voluntarily terminate hisor her employment or if the employee’s employment is terminated for causeduring the initial term of the agreement.

 

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**Resultsof Consolidated Operations**

 

Thefollowing table sets forth our condensed consolidated results of operations forthe periods indicated:

 
| ** **                                | ** ** | **Three  Months Ended**     | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**           | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2009**                    | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(dollars  in thousands)** | ** ** |
| REVENUES:                                 |       |                        |       |                           |       |   |   |   |   |
| Brokerage  revenues:                      |       |                        |       |                           |       |   |   |   |   |
| Agency  commissions                       |       | $                           | 121,488    |                           | $          | 192,074 |   | $ | 246,887 |   | $ | 431,163 |   |
| Principal  transactions                   |       | 79,566                      |       | 53,532                         |       | 151,781 |   | 112,626 |   |
| Total  brokerage revenues                 |       | 201,054                     |       | 245,606                        |       | 398,668 |   | 543,789 |   |
| Software,  analytics and market data      |       | 13,019                      |       | 13,157                         |       | 26,071 |   | 24,416 |   |
| Interest  income                          |       | 226                         |       | 2,078                          |       | 723 |   | 4,761 |   |
| Other  income                             |       | 10,367                      |       | 688                            |       | 15,439 |   | 3,163 |   |
| Total  revenues                           |       | 224,666                     |       | 261,529                        |       | 440,901 |   | 576,129 |   |
| EXPENSES:                                 |       |                        |       |                           |       |   |   |   |   |
| Compensation  and employee benefits       |       | 146,575                     |       | 158,730                        |       | 292,123 |   | 351,928 |   |
| Communications  and market data           |       | 11,240                      |       | 11,744                         |       | 22,738 |   | 22,925 |   |
| Travel  and promotion                     |       | 8,550                       |       | 13,291                         |       | 16,030 |   | 25,014 |   |
| Rent  and occupancy                       |       | 5,297                       |       | 6,759                          |       | 10,447 |   | 13,373 |   |
| Depreciation  and amortization            |       | 8,015                       |       | 8,449                          |       | 15,854 |   | 16,371 |   |
| Professional  fees                        |       | 4,129                       |       | 7,351                          |       | 9,220 |   | 12,363 |   |
| Clearing  fees                            |       | 8,106                       |       | 10,486                         |       | 16,213 |   | 21,688 |   |
| Interest                                  |       | 2,657                       |       | 3,748                          |       | 5,126 |   | 6,833 |   |
| Other  expenses                           |       | 3,847                       |       | 4,636                          |       | 8,775 |   | 11,728 |   |
| Total  expenses                           |       | 198,416                     |       | 225,194                        |       | 396,526 |   | 482,223 |   |
| Income  before provision for income taxes |       | 26,250                      |       | 36,335                         |       | 44,375 |   | 93,906 |   |
| Provision  for income taxes               |       | 9,894                       |       | 12,687                         |       | 16,419 |   | 34,276 |   |
| Net  income                               |       | $                           | 16,356     |                           | $          | 23,648 |   | $ | 27,956 |   | $ | 59,630 |   |

 

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Thefollowing table sets forth our condensed consolidated results of income as apercentage of our total revenues for the periods indicated:

 
| ** **                                | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**          | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2009**                   | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| REVENUES:                                 |       |                       |       |                           |       |   |   |   |   |
| Brokerage  revenues:                      |       |                       |       |                           |       |   |   |   |   |
| Agency  commissions                       |       | 54.1                       | %          | 73.4                           | %          | 56.0 | % | 74.8 | % |
| Principal  transactions                   |       | 35.4                       |       | 20.5                           |       | 34.4 |   | 19.6 |   |
| Total  brokerage revenues                 |       | 89.5                       |       | 93.9                           |       | 90.4 |   | 94.4 |   |
| Software,  analytics and market data      |       | 5.8                        |       | 5.0                            |       | 5.9 |   | 4.2 |   |
| Interest  income                          |       | 0.1                        |       | 0.8                            |       | 0.2 |   | 0.8 |   |
| Other  income                             |       | 4.6                        |       | 0.3                            |       | 3.5 |   | 0.6 |   |
| Total  revenues                           |       | 100.0                      | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| EXPENSES:                                 |       |                       |       |                           |       |   |   |   |   |
| Compensation  and employee benefits       |       | 65.2                       |       | 60.7                           |       | 66.3 |   | 61.1 |   |
| Communications  and market data           |       | 5.0                        |       | 4.5                            |       | 5.2 |   | 4.0 |   |
| Travel  and promotion                     |       | 3.8                        |       | 5.1                            |       | 3.6 |   | 4.4 |   |
| Rent  and occupancy                       |       | 2.4                        |       | 2.6                            |       | 2.4 |   | 2.3 |   |
| Depreciation  and amortization            |       | 3.6                        |       | 3.2                            |       | 3.6 |   | 2.8 |   |
| Professional  fees                        |       | 1.8                        |       | 2.8                            |       | 2.1 |   | 2.1 |   |
| Clearing  fees                            |       | 3.6                        |       | 4.0                            |       | 3.7 |   | 3.8 |   |
| Interest                                  |       | 1.2                        |       | 1.4                            |       | 1.2 |   | 1.2 |   |
| Other  expenses                           |       | 1.7                        |       | 1.8                            |       | 2.0 |   | 2.0 |   |
| Total  expenses                           |       | 88.3                       | %          | 86.1                           | %          | 89.9 | % | 83.7 | % |
| Income  before provision for income taxes |       | 11.7                       |       | 13.9                           |       | 10.1 |   | 16.3 |   |
| Provision  for income taxes               |       | 4.4                        |       | 4.9                            |       | 3.7 |   | 5.9 |   |
| Net  income                               |       | 7.3                        | %          | 9.0                            | %          | 6.3 | % | 10.4 | % |

 

**ThreeMonths Ended June 30, 2009 Compared to the Three Months Ended June 30,2008**

 

Net income for the threemonths ended June 30, 2009 was $16.4 million as compared to net income of$23.6 million for the three months ended June 30, 2008, a decrease of$7.2 million or approximately 30.5%. Total revenues decreased by $36.9 million,or 14.1%, to $224.7 million for the three months ended June 30, 2009 from$261.5 million for the prior year. Our decreased revenues were primarily due tolower brokerage revenues in our financial, equity and commodity productcategories. Total expenses decreased by $26.8 million, or 11.9%, to $198.4million for the three months ended June 30, 2009 from $225.2 millionfor the prior year. Expenses decreased primarily because of decreasedcompensation expense for the quarter ended June 30, 2009, which wasattributable to a decrease in performance-based bonus expense as a result oflower brokerage revenues, as well as due to lower travel and promotion costs.

 

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Thefollowing table sets forth the changes in revenues for the three months ended June 30,2009 as compared to the same period in 2008 (dollars in thousands, exceptpercentage data):

 
| ** **               | ** ** | **For the Three Months Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **               | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2009**                                                              | ** ** | **%*** | ** ** | **2008** | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues:      |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Credit                   |       | $                                                                     | 81,088     |   | 36.1 | % | $ | 76,275 |   | 29.2 | % | $ | 4,813 |   | 6.3 | % |
| Equity                   |       | 48,853                                                                |       | 21.7 |   | 69,636 |   | 26.6 |   | (20,783 | ) | (29.8 | ) |
| Financial                |       | 33,405                                                                |       | 14.9 |   | 46,322 |   | 17.7 |   | (12,917 | ) | (27.9 | ) |
| Commodity                |       | 37,708                                                                |       | 16.8 |   | 53,373 |   | 20.4 |   | (15,665 | ) | (29.4 | ) |
| Total brokerage revenues |       | 201,054                                                               |       | 89.5 |   | 245,606 |   | 93.9 |   | (44,552 | ) | (18.1 | ) |
| Other revenues           |       | 23,612                                                                |       | 10.5 |   | 15,923 |   | 6.1 |   | 7,689 |   | 48.3 |   |
| Total Revenues           |       | $                                                                     | 224,666    |   | 100.0 | % | $ | 261,529 |   | 100.0 | % | $ | (36,863 | ) | (14.1 | )% |

 

----

*            Denotes % of total revenues

**     Denotes % change in the three monthsended June 30, 2009 as compared to the three months ended June 30,2008

 

·                  **Brokerage Revenues** — We offer ourbrokerage services in four broad product categories: credit, equity, financialand commodity.  Below is a discussion onour brokerage revenues by product category.

 

·                  Broker productivity (defined as total brokerage revenuesduring the period divided by average monthly brokerage personnel headcount forthe period) decreased by approximately 17.8% for the second quarter of 2009compared to the comparable period in 2008.

 

·                  The increase in credit product brokerage revenues of$4.8 million in 2009 was due to growth in our cash fixed income productrevenues in North America and Europe offsetting a substantial decline in globalcredit derivative product revenues compared to the second quarter of last year.  Our credit product brokerage personnelheadcount increased by 29 to 287 employees at June 30, 2009 from 258employees at June 30, 2008.

 

·                  The decrease in equity product brokerage revenues of$20.8 million in 2009 was primarily due to lower revenues in Europe, which wasimpacted by depressed share values in Europe where certain cash equity andequity derivative commissions are based on notional values, as well as lessfavorable foreign currency translation as compared to the same period in2008.  The equity markets alsoexperienced decreased volatility in the second quarter of 2009 as compared tothe previous year. Our equity product brokerage personnel headcount decreasedby 9 to 237 employees at June 30, 2009 from 246 employees at June 30,2008.

 

·                  The decrease in financial product brokerage revenuesof $12.9 million in 2009 was primarily attributable to dealers reducing theirtrading operations in emerging markets and Asia and the restructuring that weimplemented in the second half of 2008. Our financial product headcount declined to 264 employees at June 30,2009 from 269 employees the previous year.

 

·                  The decrease in commodity product brokerage revenuesof $15.7 million in 2009 was primarily attributable to the continued weaknessin our dry freight business in Europe and Asia, which has yet to recover fromthe significant drop in the Baltic Dry Freight Index in the fourth quarter of2008. The Baltic Dry Freight Index is used by traders to price forward freightagreements.  In addition, the globalrecessionary environment and market participants’ focus on risk reduction alsocontributed to the decrease in commodity revenue as market participants tradedmore actively in short-dated, exchange-traded products.  Our commodity product brokerage personnelheadcount decreased by 11 to 281 employees at June 30, 2009 from 292employees at June 30, 2008.

 

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·                  **Other Revenues**

 

Otherrevenues is comprised of the following:

 
| ** **                                                   | ** ** | **For the Three Months Ended  June 30,  2009** | ** ** | **For the Three Months Ended  June 30,  2008** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                         |       |                                                |       |                                                |       |
| Software, analytics and market data                          |       | $                                                   | 13,019     |                                                | $          | 13,157 |   |
| Remeasurement of foreign currency transactions and  balances |       | 8,138                                               |       | (1,618                                              | )          |
| Net realized/unrealized gain from foreign currency  hedges   |       | 1,296                                               |       | 987                                                 |       |
| Interest income                                              |       | 226                                                 |       | 2,078                                               |       |
| Other                                                        |       | 933                                                 |       | 1,319                                               |       |
| Total other revenues                                         |       | $                                                   | 23,612     |                                                | $          | 15,923 |   |

 

Theincrease in other revenues in the three months ended June 30, 2009 to$23.6 million from $15.9 million in the same period in 2008 was primarilyrelated to a $9.8 million increase in net realized and unrealized gainsresulting from the remeasurement of foreign currency transactions and balances.  Foreign currency remeasurement gains andlosses result from the remeasurement of asset and liability balances that aredenominated in currencies other than the functional currency of the businessunit undertaking such transactions.  This$9.8 million increase was offset by a $1.9 million decrease in interest incomeresulting from lower interest rates earned on cash balances, as well as loweraverage daily cash balances during the period.

 

**Expenses**

 

The following table setsforth the changes in expenses for the three months ended June 30, 2009 ascompared to the same period in 2008 (dollars in thousands, except percentagedata):

 
| ** **                          | ** ** | **For the Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **June 30,**                                  | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2009**                                           | ** ** | **%***       | ** ** | **2008**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                        |       |                                               |       |         |       |       |       |   |   |   |   |   |   |
| Compensation  and employee benefits |       | $                                                  | 146,575    |         | 65.2%      |       | $          | 158,730 |   | 60.7% |   | $ | (12,155 | ) | (7.7 | )% |
| Communications  and market data     |       | 11,240                                             |       | 5.0          |       | 11,744     |       | 4.5 |   | (504 | ) | (4.3 | ) |
| Travel  and promotion               |       | 8,550                                              |       | 3.8          |       | 13,291     |       | 5.1 |   | (4,741 | ) | (35.7 | ) |
| Rent  and occupancy                 |       | 5,297                                              |       | 2.4          |       | 6,759      |       | 2.6 |   | (1,462 | ) | (21.6 | ) |
| Depreciation  and amortization      |       | 8,015                                              |       | 3.6          |       | 8,449      |       | 3.2 |   | (434 | ) | (5.1 | ) |
| Professional  fees                  |       | 4,129                                              |       | 1.8          |       | 7,351      |       | 2.8 |   | (3,222 | ) | (43.8 | ) |
| Clearing  fees                      |       | 8,106                                              |       | 3.6          |       | 10,486     |       | 4.0 |   | (2,380 | ) | (22.7 | ) |
| Interest                            |       | 2,657                                              |       | 1.2          |       | 3,748      |       | 1.4 |   | (1,091 | ) | (29.1 | ) |
| Other  expenses                     |       | 3,847                                              |       | 1.7          |       | 4,636      |       | 1.8 |   | (789 | ) | (17.0 | ) |
| **Total Expenses**                  |       | $                                                  | 198,416    |         | 88.3%      |       | $          | 225,194 |   | 86.1% |   | $ | (26,778 | ) | (11.9 | )% |

 

----

*            Denotes % of total revenues

**     Denotes % change in the three months ended June 30,2009 as compared to the three months ended June 30, 2008

 

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·          **Compensationand Employee Benefits**

 

·                  Thedecrease in compensation and employee benefits expenses of $12.2 million in thesecond quarter of 2009 was primarily attributable to a decrease in brokeragerevenues and corresponding performance bonuses as well as the restructuringinitiatives implemented in the second half of 2008 and the first half of 2009.

 

·                  Total compensationand employee benefits as a percentage of total revenues increased to 65.2% forthe three months ended June 30, 2009 as compared to 60.7% for the sameperiod in the prior year. Our significantly lower broker productivity andhigher fixed compensation costs as a percentage of revenue both led to highercompensation expense as a percentage of revenue as compared to the same periodin 2008.  The increase was due to theongoing restructuring of our product focus as we adjust to rapidly changingmarket dynamics, lower revenues in certain historically higher marginderivative markets and amortization of previously paid sign-on bonuses.  In addition, in April 2008, almost twodozen of our credit division personnel in New York defected to a competitor,notwithstanding that many of them did so in breach of contractualobligations.  The departure of theseemployees resulted in an increase in our compensation and employee benefitsexpense as a percentage of total revenues for the three months ended June 30,2009 compared to the three months ended June 30, 2008 as the unexpecteddepartures led to increased hiring, retention and bonus compensation expensesfor the remainder of 2008 and the first half of 2009.

 

·                  Bonus expense represented 52.9% and 53.1% of totalcompensation and employee benefits expense for the three months ended June 30,2009 and 2008, respectively. A portion of our bonus expense is subject tocontractual guarantees that may require us to make bonus payments to brokersregardless of their performance in any particular period. Additionally, sign-onbonus expense represented 7.8% and 6.0% of total compensation and employeebenefits for the three months ended June 30, 2009 and 2008, respectively.This increase in sign-on expense is primarily due to a large increase insign-on and retention bonuses paid in 2008 in connection with the restaffing ofour North American credit division.

 

·          **All Other Expenses**

 

·                  The decrease in travel and promotion was primarilyattributable to lower broker entertainment expenses.  Travel and promotion, as a percentage of ourtotal brokerage revenues for the three months ended June 30, 2009,decreased to 4.3% from 5.4% for the same period from the prior year.

 

·                  The decrease in rent and occupancy of $1.5 million wasprimarily due to a reduction of redundant office space in the second quarter of2009.  In the second quarter of 2008, wewere incurring rent on both the 55 Water Street and 100 Wall Street locations,as well as related moving expenses.  Wecompleted our move to our current New York headquarters in September of2008.

 

·                  The decrease in professional fees of $3.2 million wasprimarily due to a $2.0 million decrease in litigation expenses as compared tothe second quarter of 2008.  Theremaining decrease related to strategic and other consulting fees.

 

·                  The decrease in clearing fees was primarily due to thedecline in our cash equities business in Europe.  Clearing fees, as a percentage of our totalrevenues from principal transactions decreased to 10.2% for the three monthsended June 30, 2009, from 19.6% for the same period from the prioryear.  This decrease was primarily due tothe change in product mix as our cash fixed income business increased relativeto our cash equities business.  Principaltransactions are generally settled through third party clearing organizationsthat charge us a fee for their services. We also use the services of stock exchanges and floor brokers, to assistin the execution of transactions.  Feespaid to floor brokers and execution fees paid to exchanges in thesecircumstances are included in clearing fees. In addition, clearing fees also include fees incurred in certain equitytransactions executed on an agency basis.

 

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·                  The decrease in interest expense was due to lowerprevailing interest rates on our Credit Agreement and a decrease in the averageborrowings outstanding under our Credit Agreement in the three months ended June 30,2009 as compared to the same period in 2008, partially offset by an increase inthe applicable interest rate on our Senior Notes.

 

·                  The decrease in other expenses was primarily due to adecrease in spending on office equipment and supplies, dues and subscriptions,third party licensing fees, franchise, value added and other non-income taxesand a reduction in certain investment losses compared to the same period in2008 partially offset by an increase in net litigation settlements and awardsand certain software and systems charges.

 

·                  Our effective tax rate was 37.7% for thethree months ended June 30, 2009 as compared to 34.9% for the same periodin the prior year. The increase in the effective tax rate was primarily due toa proportional increase in non-deductible expenses compared to global income.

 

**SixMonths Ended June 30, 2009 Compared to the Six Months Ended June 30,2008**

 

Net income for the sixmonths ended June 30, 2009 was $28.0 million as compared to net income of$59.6 million for the six months ended June 30, 2008, a decrease of $31.6million or approximately 53.1%.  Total revenues decreased by $135.2million, or 23.5%, to $440.9 million for the six months ended June 30,2009 from $576.1 million for the same period from the prior year. Our decreasedrevenues were primarily due to decreased brokerage revenues across all productcategories. Our total brokerage personnel headcount increased by 4 to a totalof 1,069 employees at June 30, 2009 from 1,065 employees at June 30,2008. Total expenses decreased by $85.7 million, or 17.8%, to $396.5 millionfor the six months ended June 30, 2009 from $482.2 million for thesame period from the prior year. Expenses decreased primarily because ofdecreased compensation expense for the six months ended June 30, 2009,which was attributable to a decrease in performance-based bonus expense as aresult of lower brokerage revenues, as well as due to lower travel andpromotion costs.

 

The following table setsforth the changes in revenues for the six months ended June 30, 2009 ascompared to the same period in 2008 (dollars in thousands, except percentagedata):

 
| ** **               | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------|------------|---------------------------------------------------------------------|------------|
| ** **               | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2009**                                                            | ** ** | **%*** | ** ** | **2008** | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**             |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues:      |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Credit                   |       | $                                                                   | 155,492    |   | 35.3 | % | $ | 186,971 |   | 32.5 | % | $ | (31,479 | ) | (16.8 | )% |
| Equity                   |       | 102,247                                                             |       | 23.2 |   | 148,352 |   | 25.7 |   | (46,105 | ) | (31.1 | ) |
| Financial                |       | 64,496                                                              |       | 14.6 |   | 98,342 |   | 17.1 |   | (33,846 | ) | (34.4 | ) |
| Commodity                |       | 76,433                                                              |       | 17.3 |   | 110,124 |   | 19.1 |   | (33,691 | ) | (30.6 | ) |
| Total brokerage revenues |       | 398,668                                                             |       | 90.4 |   | 543,789 |   | 94.4 |   | (145,121 | ) | (26.7 | ) |
| Other revenues           |       | 42,233                                                              |       | 9.6 |   | 32,340 |   | 5.6 |   | 9,893 |   | 30.6 |   |
| Total Revenues           |       | $                                                                   | 440,901    |   | 100.0 | % | $ | 576,129 |   | 100.0 | % | $ | (135,228 | ) | (23.5 | )% |

 

----

*            Denotes % of total revenues

**     Denotes % change in the six months ended June 30,2009 as compared to the six months ended June 30, 2008

 

·                  **Brokerage Revenues** — We offer our brokerage services in fourbroad product categories: credit, equity, financial, and commodity.

 

·                  Broker productivity (defined as totalbrokerage revenues during the period divided by average monthly brokeragepersonnel headcount for the period) decreased by approximately 26.4% for thesix months ended June 30, 2009, as compared to the same period from theprior year.

 

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·                  The decrease in credit product brokeragerevenues of $31.5 million for the six months ended June 30,  2009 was due to a number of factors,including dealer and hedge fund deleveraging during the second half of 2008,the defection of almost two dozen North American credit brokers to a competitorin April 2008 and uncertainty about the changing market structure and theimpact of proposed government and regulatory actions in the U.S. andEurope.  Growth in fixed income productrevenues in Europe and North America partially offset a substantial decline inglobal credit derivative product revenues compared to the first half of lastyear.  Our credit product brokeragepersonnel headcount increased by 29 to 287 employees at June 30, 2009 from258 employees at June 30, 2008.

 

·                  The decrease in equity product brokerage revenues of$46.1 million for the six months ended June 30, 2009 compared to the sameperiod in 2008 was primarily due to depressed share values in Europe where ourcash equity and equity derivative commissions are often based on notionalvalues, as well as less favorable foreign currency translation.  The equity markets also experienced decreasedvolatility in the first six months of 2009 as compared to the previous year.Our equity product brokerage personnel headcount decreased by 9 to 237employees at June 30, 2009 from 246 employees at June 30, 2008.

 

·                  The decrease in financial product brokerage revenuesof $33.8 million for the six months ended June 30, 2009 compared to thesame period in 2008 was primarily attributable to dealers scaling back tradingoperations in emerging markets and Asia during the second half of 2008, thetransfer of our global U.S. dollar interest rate swap business to a third partyin March of 2008, and the restructuring that we implemented in the secondhalf of 2008.  Our financial productheadcount declined to 264 employees at June 30, 2009 from 269 employeesfrom previous year.

 

·                  The decrease in commodity product brokerage revenuesof $33.7 million for the six months ended June 30, 2009 was primarilyattributable to weakness in our dry freight business in Europe and Asia, whichhas yet to recover from the significant drop in the Baltic Dry Freight Index inthe fourth quarter of 2008.  In addition,the global recessionary environment and market participants’ focus on riskreduction also contributed to the decrease in commodity revenue as marketparticipants traded more actively in short-dated, exchange-tradedproducts.  Our commodity productbrokerage personnel headcount decreased by 11 to 281 employees at June 30,2009 from 292 employees at June 30, 2008.

 

·                  **OtherRevenues**

 

Other revenues is comprised of the following:

 
| ** **                                                        | ** ** | **For the Six  Months Ended  June 30,  2009** | ** ** | **For the Six  Months Ended  June 30,  2008** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
|                                                              |       |                                               |       |                                               |       |
| Software, analytics and market data                               |       | $                                                  | 26,071     |                                               | $          | 24,416 |   |
| Remeasurement of foreign currency transactions and  balances      |       | 2,913                                              |       | 11,090                                             |       |
| Net realized/unrealized gain (loss) from foreign  currency hedges |       | 9,963                                              |       | (9,860                                             | )          |
| Interest income                                                   |       | 723                                                |       | 4,761                                              |       |
| Other                                                             |       | 2,563                                              |       | 1,933                                              |       |
| Total other revenues                                              |       | $                                                  | 42,233     |                                               | $          | 32,340 |   |

 

Theincrease in other revenues for the six months ended June 30, 2009 to $42.2million from $32.3 million for the same period in 2008 was primarily related toa $19.8 million improvement in the value of our foreign currency derivativehedges due primarily to the strengthening of the British Pound Sterling and theEuro during this period.  We also saw a$1.6 million increase in software, analytics and market data revenue.  Offsetting this was an $8.2 million decreaseresulting from the remeasurement of foreign currency transactions andbalances.  Foreign currency remeasurementgains and losses result from the remeasurement of asset and liability balancesthat are denominated in currencies other than the functional currency of thebusiness unit undertaking such transactions.  In addition, we experienced a $4.0 million decrease in interest incomeresulting from lower interest rates earned on cash balances, as well as loweraverage daily cash balances during the period.

 

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***Expenses***

 

Thefollowing table sets forth the changes in expenses for the six months ended June 30,2009 as compared to the same period in 2008 (dollars in thousands, exceptpercentage data):

 
| ** **                          | ** ** | **For the Six Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **June 30,**                                | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2009**                                         | ** ** | **%***       | ** ** | **2008**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                        |       |                                             |       |         |       |       |       |   |   |   |   |   |   |
| Compensation  and employee benefits |       | $                                                | 292,123    |         | 66.3       | %          | $          | 351,928 |   | 61.1 | % | $ | (59,805 | ) | (17.0 | )% |
| Communications  and market data     |       | 22,738                                           |       | 5.2          |       | 22,925     |       | 4.0 |   | (187 | ) | (0.8 | ) |
| Travel  and promotion               |       | 16,030                                           |       | 3.6          |       | 25,014     |       | 4.3 |   | (8,984 | ) | (35.9 | ) |
| Rent  and occupancy                 |       | 10,447                                           |       | 2.4          |       | 13,373     |       | 2.3 |   | (2,926 | ) | (21.9 | ) |
| Depreciation  and amortization      |       | 15,854                                           |       | 3.6          |       | 16,371     |       | 2.8 |   | (517 | ) | (3.2 | ) |
| Professional  fees                  |       | 9,220                                            |       | 2.1          |       | 12,363     |       | 2.1 |   | (3,143 | ) | (25.4 | ) |
| Clearing  fees                      |       | 16,213                                           |       | 3.7          |       | 21,688     |       | 3.8 |   | (5,475 | ) | (25.2 | ) |
| Interest                            |       | 5,126                                            |       | 1.2          |       | 6,833      |       | 1.2 |   | (1,707 | ) | (25.0 | ) |
| Other  expenses                     |       | 8,775                                            |       | 2.0          |       | 11,728     |       | 2.0 |   | (2,953 | ) | (25.2 | ) |
| **Total Expenses**                  |       | $                                                | 396,526    |         | 89.9       | %          | $          | 482,223 |   | 83.7 | % | $ | (85,697 | ) | (17.8 | )% |

 

----

*            Denotes % of total revenues

**     Denotes % change in the six months ended June 30,2009 as compared to the six months ended June 30, 2008

 

·          **Compensationand Employee Benefits**

 

·                  The decrease in compensation and employee benefitsexpenses of $59.8 million in the first six months of 2009 was primarilyattributable to a decrease in brokerage revenues and corresponding performancebonuses.

 

·                  Totalcompensation and employee benefits as a percentage of total revenues increasedto 66.3% for the six months ended June 30, 2009 as compared to 61.1% forthe same period in the prior year. Our significantly lower broker productivity,higher fixed compensation costs as a percentage of revenue, and the severancecosts related to a back office restructuring in the first quarter of 2009, allled to higher compensation expense as a percentage of revenue as compared tothe same period in 2008.  The increasewas due to the ongoing restructuring of our product focus as we adjust torapidly changing market dynamics, lower revenues in certain historically highermargin derivative markets and amortization of previously paid sign-onbonuses.  Inaddition, in April 2008, almost two dozen of our credit division personnelin New York defected to a competitor, notwithstanding that many of them did soin breach of contractual obligations. The departure of these employees resulted in an increase in ourcompensation and employee benefits expense as a percentage of total revenues forthe six months ended June 30, 2009 compared to the same period in 2008 asthe unexpected departures led to increased hiring, retention and bonuscompensation expenses for the remainder of 2008 and the first half of 2009.

 

·                  Bonus expense represented 51.9% and 58.8% of totalcompensation and employee benefits expense for the six months ended June 30,2009 and 2008, respectively. A portion of our bonus expense is subject tocontractual guarantees that may require us to make bonus payments to brokersregardless of their performance in any particular period. Additionally, sign-onbonus expense represented 7.7% and 4.8% of total compensation and employeebenefits for the six months ended June 30, 2009 and 2008, respectively.This increase in sign-on expense is primarily due to a large increase insign-on and retention bonuses paid in 2008 in connection with the restaffing ofour North American credit division.

 

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·          **All Other Expenses**

 

·                  The decrease in travel and promotion was primarilyattributable to lower broker entertainment expenses.  Travel and promotion, as a percentage of ourtotal brokerage revenues for the six months ended June 30, 2009, decreasedto 4.0% from 4.6% for the same period from the prior year.

 

·                  The decrease in rent and occupancy of $2.9 million wasprimarily due to a reduction of redundant office space in 2009.  In the first half of 2008, we were incurringrent on both the 55 Water Street and 100 Wall Street locations, as well asrelated moving expenses.  We completedour move to our current New York headquarters in September of 2008.

 

·                  The decrease in professional fees of $3.1 million wasprimarily due to a $1.3 million decrease in litigation expenses as compared tothe first six months of 2008.  Theremaining decrease related to a reduction in strategic and other consultingfees.

 

·                  The decrease in clearing fees was primarily due to thedecline in our cash equities business in Europe.  Clearing fees, as a percentage of our totalrevenues from principal transactions decreased to 10.7% for the six monthsended June 30, 2009, from 19.3% for the same period from the prioryear.  This decrease was primarily due tothe change in product mix as our cash fixed income business increased relativeto our cash equities business.  Principaltransactions are generally settled through third party clearing organizationsthat charge us a fee for their services. We also use the services of stock exchanges and floor brokers, to assistin the execution of transactions.  Feespaid to floor brokers and execution fees paid to exchanges in thesecircumstances are included in clearing fees. In addition, clearing fees also include fees incurred in certain equitytransactions executed on an agency basis.

 

·                  The decrease in interest expense in the first sixmonths of 2009 compared to the same period in 2008 was primarily due to lowerprevailing interest rates on our Credit Agreement and a decrease in averageborrowings outstanding under our Credit Agreement that was partially offset byan increase in the applicable interest rate on our Senior Notes.

 

·                  The decrease in other expenses was primarily due to adecrease in net litigation settlements and awards, license fees paid to thirdparties, dues and subscriptions, spending on office supplies and equipment,franchise, value added and other non-income taxes, and a reduction in certaininvestment losses offset by an increase in restructuring costs and certainsoftware and systems charges.

 

·                  Our effective tax rate was 37.0% for thesix months ended June 30, 2009 as compared to 36.5% for the same period inthe prior year. The increase in the effective tax rate was primarily due to aproportional increase in non-deductible expenses compared to global income forthe six months ended June 30, 2009 as compared to the same period in 2008.

 

**Resultsof Segment Operations**

 

TheCompany has three operating segments: Americas Brokerage, Europe, Middle Eastand Africa (“EMEA”) Brokerage and Asia Brokerage.  Additionally, the Company presents itsoperating segments as four reportable segments: Americas Brokerage, EMEABrokerage, Asia Brokerage and All Other. The All Other segment captures costs that are not directly assignable toone of the operating business segments, primarily consisting of the Company’scorporate business activities and its software, analytics and market dataoperations.   In prior periods, AsiaBrokerage was included within the All Other segment as it did not meet thequantitative threshold for separate disclosure under SFAS No. 131*Disclosures about Segments of an Enterprise and Related Information*.  However, as a result of the growthexperienced in Asia and the changes in the economic characteristics of theAmericas and the EMEA brokerage operations, for the year ended December 31,2008, the Company changed its reportable segments.  Prior period results have been adjusted toreflect the changes in the reporting structure.

 

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The following tablessummarize our revenues, expenses and pre-tax income by segment:

 
| ** **                   | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                              | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenues:**                | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas  Brokerage          |       | $                                                     | 89,083     |                                                | $          | 91,443 |   | $ | 178,995 |   | $ | 211,292 |   |
| EMEA  Brokerage              |       | 95,904                                                |       | 130,309                                             |       | 189,211 |   | 279,868 |   |
| Asia  Brokerage              |       | 16,640                                                |       | 24,238                                              |       | 31,423 |   | 53,418 |   |
| All  Other                   |       | 23,039                                                |       | 15,539                                              |       | 41,272 |   | 31,551 |   |
| Total  Consolidated Revenue  |       | $                                                     | 224,666    |                                                | $          | 261,529 |   | $ | 440,901 |   | $ | 576,129 |   |
| ** **                   | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Expenses:**                | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas  Brokerage          |       | $                                                     | 68,569     |                                                | $          | 61,207 |   | $ | 137,359 |   | $ | 142,245 |   |
| EMEA  Brokerage              |       | 64,322                                                |       | 89,321                                              |       | 127,516 |   | 185,370 |   |
| Asia  Brokerage              |       | 14,866                                                |       | 18,190                                              |       | 31,535 |   | 38,641 |   |
| All  Other                   |       | 50,659                                                |       | 56,476                                              |       | 100,116 |   | 115,967 |   |
| Total  Consolidated Expenses |       | $                                                     | 198,416    |                                                | $          | 225,194 |   | $ | 396,526 |   | $ | 482,223 |   |
| ** **                   | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Pre-tax Income/(Loss):**   | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas  Brokerage          |       | $                                                     | 20,514     |                                                | $          | 30,236 |   | $ | 41,636 |   | $ | 69,047 |   |
| EMEA  Brokerage              |       | 31,582                                                |       | 40,988                                              |       | 61,695 |   | 94,498 |   |
| Asia  Brokerage              |       | 1,774                                                 |       | 6,048                                               |       | (112 | ) | 14,777 |   |
| All  Other                   |       | (27,620                                               | )          | (40,937                                             | )          | (58,844 | ) | (84,416 | ) |
| Total  Pre-tax income/(loss) |       | $                                                     | 26,250     |                                                | $          | 36,335 |   | $ | 44,375 |   | $ | 93,906 |   |

 

**SegmentResults for the Three Months Ended June 30, 2009 Compared to the ThreeMonths Ended June 30, 2008**

 

·                  **Revenues**

 

·                  Revenues for Americas Brokerage decreased $2.3million, or 2.6%, to $89.1 million for the three months ended June 30,2009 from $91.4 million for the three months ended June 30, 2008.   Revenues for EMEA Brokerage decreased $34.4million, or 26.4%, to $95.9 million for the three months ended June 30,2009 from $130.3 million for the three months ended June 30, 2008.Revenues for Asia Brokerage decreased $7.6 million, or 31.3%, to $16.6 millionfor the three months ended June 30, 2009 from $24.2 million for the threemonths ended June 30, 2008.  Totalrevenues for our three brokerage segments decreased by $44.4 million, or 18.0%,to $201.6 million for the three months ended June 30, 2009 from $246.0million for the three months ended June 30, 2008. The decline in revenueswas primarily due to decreased brokerage revenues in three of the four productareas and all geographical regions resulting from the factors described aboveunder “Three Months Ended June 30, 2009 Compared to Three Months Ended June 30,2008”.

 

·                  Revenues for All Other primarily consisted of revenues generated fromsales of software, analytics and market data.  Total revenues from AllOther increased by $7.5 million, or 48.3%, to $23.0 million for the threemonths ended June 30, 2009 from $15.5 million for the three months ended June 30,2008.  This increase was primarily related to the increase in net realizedand unrealized gains of $10.1 million on foreign currency hedges andtransactions as compared to the same period in 2008.  These increases were partially offset by a$1.9 million decrease in interest income resulting from lower interest rates oncash balances.

 

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·                  **Expenses**

 

·                  Expenses for Americas Brokerage increased $7.4million, or 12.0%, to $68.6 million for the three months ended June 30,2009 from $61.2 million for the three months ended June 30, 2008.  Expenses for EMEA Brokerage decreased $25.0million, or 28.0%, to $64.3 million for the three months ended June 30,2009 from $89.3 million for the three months ended June 30, 2008.  Expenses for Asia Brokerage decreased $3.3million, or 18.3%, to $14.9 million for the three months ended June 30, 2009from $18.2 million for the three months ended June 30, 2008. Totalexpenses for our three brokerage segments decreased by $20.9 million, or 12.4%,to $147.8 million for the three months ended June 30, 2009 from $168.7million for the three months ended June 30, 2008.   The decrease was primarily due to a decreasein compensation and employee benefits, travel and promotion and clearing fees,as well as other factors described above under “Three Months Ended June 30,2009 Compared to Three Months Ended June 30, 2008”.

 

The Company recordscertain direct expenses other than compensation and employee benefits to theoperating segments; however, the Company does not allocate certain expenses toits operating segments that are managed separately at the corporate level.  The unallocated costs including rent andoccupancy, depreciation and amortization, professional fees, interest and otherexpenses are included in the expenses for All Other described below.  Management does not believe that allocatingthese costs to our brokerage segments is optimal for evaluating the performanceof its brokerage segments.

 

·                  Total expenses for All Other decreased by $5.8million, or 10.3%, to $50.7 million for the three months ended June 30,2009 from $56.5 million for the three months ended June 30, 2008.  The decrease was primarily due to a decreasein professional fees, rent and occupancy, depreciation and amortization,interest and other expenses.

 

**SegmentResults for the Six Months Ended June 30, 2009 Compared to the Six MonthsEnded June 30, 2008**

 

·                  **Revenues**

 

·                  Revenues for Americas Brokerage decreased $32.3million, or 15.3%, to $179.0 million for the six months ended June 30,2009 from $211.3 million for the six months ended June 30, 2008.   Revenues for EMEA Brokerage decreased $90.7million, or 32.4%, to $189.2 million for the six months ended June 30,2009 from $279.9 million for the six months ended June 30, 2008. Revenuesfor Asia Brokerage decreased $22.0 million, or 41.2%, to $31.4 million for thesix months ended June 30, 2009 from $53.4 million for the six months endedJune 30, 2008.  Total revenues forour three brokerage segments decreased by $145.0 million, or 26.6%, to $399.6million for the six months ended June 30, 2009 from $544.6 million for thesix months ended June 30, 2008. The decline in revenues was primarily dueto decreased brokerage revenues in all products and geographical regionsresulting from the factors described above under “Six Months Ended June 30,2009 Compared to Six Months Ended June 30, 2008”.

 

·                  Revenues for All Other primarily consisted of revenues generated fromsales of software, analytics and market data.  Total revenues from AllOther increased by $9.7 million, or 30.8%, to $41.3 million for the six monthsended June 30, 2009 from $31.6 million for the three months ended June 30,2008.  This increase was primarily related to an increase in net realizedand unrealized gains of $11.6 million on foreign currency hedges andtransactions and a $0.7 million gain related to our investment in The ClearingCorporation as compared to the same period in 2008.  This increase was partially offset by a $4.0million decrease in interest income resulting from lower interest rates on cashbalances.

 

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·                  **Expenses**

 

·                  Expenses for Americas Brokerage decreased $4.9 million, or 3.4%, to$137.4 million for the six months ended June 30, 2009 from $142.2 millionfor the six months ended June 30, 2008. Expenses for EMEA Brokerage decreased $57.9 million, or 31.2%, to $127.5million for the six months ended June 30, 2009 from $185.4 million for thesix months ended June 30, 2008. Expenses for Asia Brokerage decreased $7.1 million, or 18.4%, to $31.5million for the six months ended June 30, 2009 from $38.6 million for thesix months ended June 30, 2008. Total expenses for our three brokeragesegments decreased by $69.9 million, or 19.1%, to $296.4 million for the sixmonths ended June 30, 2009 from $366.3 million for the six months ended June 30,2008.   The decrease was primarily due toa decrease in compensation and employee benefits, travel and promotion andclearing fees, as well as other factors described above under “Six Months EndedJune 30, 2009 Compared to Six Months Ended June 30, 2008”.

 

The Company records certaindirect expenses other than compensation and employee benefits to the operatingsegments; however, the Company does not allocate certain expenses to itsoperating segments that are managed separately at the corporate level.  The unallocated costs including rent andoccupancy, depreciation and amortization, professional fees, interest and otherexpenses are included in the expenses for All Other described below.  Management does not believe that allocatingthese costs to our brokerage segments is optimal for evaluating the performanceof its brokerage segments.

 

·                  Total expenses for All Other decreased by $15.9 million, or 13.7%, to$100.1 million for the six months ended June 30, 2009 from $116.0 millionfor the six months ended June 30, 2008. The decrease was primarily due to a decrease in compensation andemployee benefits, travel and promotion, rent and occupancy, depreciation andamortization, professional fees, interest and other expenses.

 

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**QuarterlyResults of Operations**

 

The followingtable sets forth, by quarter, our unaudited statement of operations data forthe period from July 1, 2007 to June 30, 2009. Results of any periodare not necessarily indicative of results for a full year and may, in certainperiods, be affected by seasonal fluctuations in our business.

 
| ** **                                 | ** ** | **Quarter  Ended**            | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **June 30,********2009** | ** ** | **March 31,  2009** | ** ** | **December 31,********2008** | ** ** | **September 30,********2008** | ** ** | **June 30,********2008** | ** ** | **March 31,  2008** | ** ** | **December  31, 2007** | ** ** | **September  30, 2007** | ** ** |
| ** **                                 | ** ** | **(dollars  in thousands)**   | ** ** |
|                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                        |       | $                             | 121,488    |   | $ | 125,399 |   | $ | 143,556 |   | $ | 182,591 |   | $ | 192,074 |   | $ | 239,089 |   | $ | 186,827 |   | $ | 198,405 |   |
| Principal  transactions                    |       | 79,566                        |       | 72,215 |   | 50,272 |   | 43,771 |   | 53,532 |   | 59,094 |   | 51,366 |   | 46,467 |   |
| Total brokerage revenues                   |       | 201,054                       |       | 197,614 |   | 193,828 |   | 226,362 |   | 245,606 |   | 298,183 |   | 238,193 |   | 244,872 |   |
| Software,  analytics and market data  |       | 13,019                        |       | 13,052 |   | 12,800 |   | 14,034 |   | 13,157 |   | 11,259 |   | 4,850 |   | 4,855 |   |
| Contract revenue                           |       | 97                            |       | 5 |   | 28 |   | — |   | 45 |   | 13 |   | — |   | 11 |   |
| Interest income                            |       | 226                           |       | 497 |   | 1,669 |   | 2,187 |   | 2,078 |   | 2,683 |   | 2,726 |   | 2,589 |   |
| Other income  (loss)                       |       | 10,270                        |       | 5,067 |   | (12,089 | ) | 555 |   | 643 |   | 2,462 |   | 1,590 |   | 2,416 |   |
| Total revenues                             |       | 224,666                       |       | 216,235 |   | 196,236 |   | 243,138 |   | 261,529 |   | 314,600 |   | 247,359 |   | 254,743 |   |
| **Expenses**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits        |       | 146,575                       |       | 145,548 |   | 137,583 |   | 176,462 |   | 158,730 |   | 193,198 |   | 151,020 |   | 158,845 |   |
| Communications and  market data            |       | 11,240                        |       | 11,498 |   | 12,245 |   | 12,640 |   | 11,744 |   | 11,181 |   | 11,538 |   | 11,329 |   |
| Travel and  promotion                      |       | 8,550                         |       | 7,480 |   | 8,897 |   | 11,845 |   | 13,291 |   | 11,723 |   | 13,057 |   | 9,929 |   |
| Rent and  occupancy                        |       | 5,297                         |       | 5,150 |   | 5,363 |   | 14,969 |   | 6,759 |   | 6,614 |   | 6,132 |   | 6,439 |   |
| Depreciation and amortization              |       | 8,015                         |       | 7,839 |   | 7,827 |   | 7,192 |   | 8,449 |   | 7,922 |   | 6,992 |   | 6,747 |   |
| Professional fees                          |       | 4,129                         |       | 5,091 |   | 6,081 |   | 7,756 |   | 7,351 |   | 5,012 |   | 5,539 |   | 4,459 |   |
| Clearing fees                              |       | 8,106                         |       | 8,107 |   | 9,706 |   | 12,026 |   | 10,486 |   | 11,202 |   | 10,200 |   | 8,063 |   |
| Interest                                   |       | 2,657                         |       | 2,469 |   | 3,993 |   | 3,508 |   | 3,748 |   | 3,085 |   | 1,522 |   | 1,703 |   |
| Other expenses                             |       | 3,845                         |       | 4,928 |   | 4,847 |   | 7,317 |   | 4,620 |   | 7,086 |   | 6,023 |   | 4,574 |   |
| Contract costs                             |       | 2                             |       | — |   | 46 |   | — |   | 16 |   | 6 |   | — |   | 6 |   |
| Total expenses                             |       | 198,416                       |       | 198,110 |   | 196,588 |   | 253,715 |   | 225,194 |   | 257,029 |   | 212,023 |   | 212,094 |   |
| Income (loss) before  income taxes         |       | 26,250                        |       | 18,125 |   | (352 | ) | (10,577 | ) | 36,335 |   | 57,571 |   | 35,336 |   | 42,649 |   |
| Provision for  (benefit from) income taxes |       | 9,894                         |       | 6,525 |   | (544 | ) | (3,861 | ) | 12,687 |   | 21,589 |   | 10,128 |   | 16,746 |   |
| Net income (loss)                          |       | $                             | 16,356     |   | $ | 11,600 |   | $ | 192 |   | $ | (6,716 | ) | $ | 23,648 |   | $ | 35,982 |   | $ | 25,208 |   | $ | 25,903 |   |

 

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The followingtable sets forth our quarterly results of operations as a percentage of ourtotal revenues for the indicated periods:

 
| ** **                                 | ** ** | **Quarter  Ended**            | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **June 30,********2009** | ** ** | **March 31,  2009** | ** ** | **December 31,********2008** | ** ** | **September 30,********2008** | ** ** | **June 30,********2008** | ** ** | **March 31,  2008** | ** ** | **December  31, 2007** | ** ** | **September  30, 2007** | ** ** |
|                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                        |       | 54.1                          | %          | 58.0 | % | 73.2 | % | 75.1 | % | 73.4 | % | 76.0 | % | 75.5 | % | 77.9 | % |
| Principal  transactions                    |       | 35.4                          |       | 33.4 |   | 25.6 |   | 18.0 |   | 20.5 |   | 18.8 |   | 20.8 |   | 18.2 |   |
| Total  brokerage revenues                  |       | 89.5                          |       | 91.4 |   | 98.8 |   | 93.1 |   | 93.9 |   | 94.8 |   | 96.3 |   | 96.1 |   |
| Software,  analytics and market data       |       | 5.8                           |       | 6.0 |   | 6.5 |   | 5.8 |   | 5.0 |   | 3.6 |   | 2.0 |   | 1.9 |   |
| Contract  revenue                          |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest  income                           |       | 0.1                           |       | 0.2 |   | 0.9 |   | 0.9 |   | 0.8 |   | 0.9 |   | 1.1 |   | 1.0 |   |
| Other  income (loss)                       |       | 4.6                           |       | 2.4 |   | (6.1 | ) | 0.2 |   | 0.3 |   | 0.8 |   | 0.6 |   | 0.9 |   |
| Total  revenues                            |       | 100.0                    | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| **Expenses**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation  and employee benefits        |       | 65.2                          | %          | 67.3 | % | 70.1 | % | 72.6 | % | 60.7 | % | 61.4 | % | 61.1 | % | 62.4 | % |
| Communications  and market data            |       | 5.0                           |       | 5.3 |   | 6.2 |   | 5.2 |   | 4.5 |   | 3.6 |   | 4.7 |   | 4.4 |   |
| Travel  and promotion                      |       | 3.8                           |       | 3.5 |   | 4.5 |   | 4.9 |   | 5.1 |   | 3.7 |   | 5.3 |   | 3.9 |   |
| Rent  and occupancy                        |       | 2.4                           |       | 2.4 |   | 2.7 |   | 6.2 |   | 2.6 |   | 2.1 |   | 2.5 |   | 2.5 |   |
| Depreciation  and amortization             |       | 3.6                           |       | 3.6 |   | 4.0 |   | 3.0 |   | 3.2 |   | 2.5 |   | 2.8 |   | 2.6 |   |
| Professional  fees                         |       | 1.8                           |       | 2.4 |   | 3.1 |   | 3.2 |   | 2.8 |   | 1.6 |   | 2.2 |   | 1.8 |   |
| Clearing  fees                             |       | 3.6                           |       | 3.7 |   | 4.9 |   | 4.9 |   | 4.0 |   | 3.6 |   | 4.1 |   | 3.2 |   |
| Interest                                   |       | 1.2                           |       | 1.1 |   | 2.0 |   | 1.4 |   | 1.4 |   | 1.0 |   | 0.6 |   | 0.7 |   |
| Other  expenses                            |       | 1.7                           |       | 2.3 |   | 2.5 |   | 3.0 |   | 1.8 |   | 2.3 |   | 2.4 |   | 1.8 |   |
| Contract  costs                            |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total  expenses                            |       | 88.3                          | %          | 91.6 | % | 100.2 | % | 104.4 | % | 86.1 | % | 81.7 | % | 85.7 | % | 83.3 | % |
| Income  (loss) before income taxes         |       | 11.7                          |       | 8.4 |   | (0.2 | ) | (4.4 | ) | 13.9 |   | 18.3 |   | 14.3 |   | 16.7 |   |
| Provision  for (benefit from) income taxes |       | 4.4                           |       | 3.0 |   | (0.3 | ) | (1.6 | ) | 4.9 |   | 6.9 |   | 4.1 |   | 6.5 |   |
| Net  (loss) income                         |       | 7.3                           | %          | 5.4 | % | 0.1 | % | (2.8 | )% | 9.0 | % | 11.4 | % | 10.2 | % | 10.2 | % |

 

**Liquidity and CapitalResources**

 

Net cash provided by operating activities was $54.9 million for the sixmonths ended June 30, 2009, compared with $72.9 million provided byoperating activities for the six months ended June 30, 2008, a decrease of$18.0 million.  This decrease is, inlarge part, attributable to the $31.6 million decline in our net income to$28.0 million for the six months ended June 30, 2009, from $59.6 millionfor the six months ended June 30, 2008. Items which reconcile net income to net cash provided by operatingactivities such as depreciation, amortization of deferred compensation,unrealized foreign currency gains and losses, and other items decreased by$20.5 million as compared to the six months ended June 30, 2008.  Additionally, working capital employed in thebusiness decreased by $34.1 million in the first six months of 2009 relative tothe same period in 2008.   The decrease inworking capital used in the business is primarily related to a $12.5 milliondecrease in the change in net receivables from brokers, dealers and clearingorganizations, a $6.1 million decrease in the change in commissions receivable,a $59.8 million decrease in the change in other assets and was offset by a netdecrease in other liabilities of $29.8 million and a decrease in accruedcompensation and accounts payable and accrued expenses of $15.3 million.

 

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Net cash used in investing activities forthe six months ended June 30, 2009 was $16.4 million compared to $189.3million used in the six months ended June 30, 2008. The decrease in cashused for investing activities was primarily attributable to $149.5 million innet cash used for the acquisition of substantially all of the outstandingshares of Trayport Ltd. in January 2008. See Note 4 to the Condensed Consolidated Financial Statements forfurther details of the Trayport acquisition. Additionally, the decrease in cash used in investing activities was dueto a decrease in capital expenditures related to the relocation of ourcorporate offices which we completed in September 2008.

 

Netcash used in financing activities for the six months ended June 30, 2009was $47.4 million, compared to $126.1 million provided by financing activitiesfor the six months ended June 30, 2008. The cash used in financingactivities primarily consisted of repayments of borrowings of $29.0 millionunder our Credit Agreement, payments for cash dividends of $11.8 million and$3.0 million in repurchases of common stock in the six months ended June 30,2009.  In April 2009, we amended ourCredit Agreement to reduce the maximum permitted borrowings to $175.0 million,increase the applicable margin and amend certain definitions and financialcovenants.  See Note 5 to the CondensedConsolidated Financial Statements for further discussion of our short-term borrowingsand long-term obligations.

 

Ourliquidity and available cash resources are in part restricted by the regulatoryrequirements of our operating subsidiaries, including GFI Securities LLC, GFISecurities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK)Brokers Ltd., GFI Group Pte Ltd and GFI Korea Money Brokerage Limited. Thesesubsidiaries are subject to the regulatory capital and compliance requirementsdescribed in Note 12 to the Condensed Consolidated Financial Statements.  At June 30, 2009, all of our regulatedsubsidiaries were in compliance with their respective regulatory capitalrequirements.   See Note 12 to theCondensed Consolidated Financial Statements for a further discussion of theseregulatory requirements.  In addition,our liquidity may be impacted by the amount of capital that we maintain inclearing accounts and with exchanges to support our matched principal brokeragebusiness.

 

Itis our expectation that from time to time we may purchase additional shares ofour common stock on the open market in accordance with a stock repurchaseprogram authorized by the Board.  SeeNote 6 to our Condensed Consolidated Financial Statements for furtherdiscussion of the stock repurchase program.

 

Webelieve that, based on current levels of operations and anticipated growth, ourcash from operations, together with cash currently available and the availableborrowings under our Credit Agreement, will be sufficient to fund ouroperations for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipatedacquisitions or unanticipated strategic investments could give rise toadditional financing requirements sooner than we expect. There can be noassurance that equity or debt financing will be available when needed or, ifavailable, that the financing will be on terms satisfactory to us and notdilutive to our then-current stockholders.

 

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**ContractualObligations and Commitments**

 

The following table summarizes certain of ourcontractual obligations as of June 30, 2009:

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                         | ** ** | **(in thousands)**                   | ** ** |
| **Contractual  Obligations**       | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases                   |       | $                                         | 121,674    |   | $ | 12,131 |   | $ | 21,791 |   | $ | 18,266 |   | $ | 69,486 |   |
| Short-term  borrowings (1)         |       | 136,000                                   |       | 136,000 |   | — |   | — |   | — |   |
| Interest on  Long-term obligations |       | 17,157                                    |       | 4,902 |   | 9,804 |   | 2,451 |   | — |   |
| Long-term  obligations             |       | 60,000                                    |       | — |   | — |   | 60,000 |   | — |   |
| Purchase  obligations(2)           |       | 20,325                                    |       | 16,531 |   | 3,794 |   | — |   | — |   |
| **Total**                          |       | $                                         | 355,156    |   | $ | 169,564 |   | $ | 35,389 |   | $ | 80,717 |   | $ | 69,486 |   |

 

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(1)           Amountslisted under Short-term borrowings represent outstanding borrowings under ourCredit Agreement and vary from the Short-term borrowings reflected in ourfinancial statements because our financial statements reflect the total debtnet of unamortized loan fees.   See Note5 to the Condensed Consolidated Financial Statements for further information.

 

(2)           Amountslisted under Purchase Obligations include agreements for quotes with variousinformation service providers. Additionally, such amounts include purchasecommitments for capital expenditures for the implementation of a redundant dataand software application facility and other purchase commitments for capitalexpenditures, hosting and software licensing agreements.  See Note 9 to our Condensed ConsolidatedFinancial Statements for further discussion of these obligations.

 

Due to the uncertainty ofthe amounts to be ultimately paid as well as the timing of such payments, allFIN 48 liabilities of approximately $7.2 million are excluded from theContractual Obligations and Commitments table.

 

**Off-Balance SheetArrangements**

 

TheCompany did not have any off-balance sheet arrangements at June 30, 2009.

 

**Critical AccountingPolicies and Estimates**

 

Wehave disclosed in Note 2 to our Condensed Consolidated FinancialStatements and in “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in our 2008 Form 10-Kthose accounting policies that we consider to be significant in determining ourresults of operations and financial condition. There have been no materialchanges to those policies that we consider to be significant since our 2008 Form 10-K.The accounting principles utilized by us in preparing our CondensedConsolidated Financial Statements conform in all material respects to generallyaccepted accounting principles in the United States of America.

 

***Recent Accounting Pronouncements***

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements — an amendment of ARB No. 51* (“SFAS 160”).  SFAS 160 requires reporting entities topresent noncontrolling (minority) interests as equity (as opposed to as aliability or mezzanine equity) and provides guidance on the accounting fortransactions between an entity and noncontrolling interests.  SFAS 160 is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andwas adopted by the Company on January 1, 2009.  The adoption of SFAS 160 did not have amaterial impact on our consolidated financial statements.

 

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In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations (revised 2007)* (“SFAS141(R)”).  SFAS 141(R) requires theacquiring entity in a business combination to recognize the full fair value ofassets acquired and liabilities assumed in the transaction (whether a full orpartial acquisition); establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; requires theexpensing of most transaction and restructuring costs; and requires theacquirer to disclose to investors and other users all of the information neededto evaluate and understand the nature and financial effect of the businesscombination.  SFAS 141(R) applies toall transactions or other events in which the Company obtains control of one ormore businesses, including those sometimes referred to as “true-mergers” or “mergersof equals” and combinations achieved without the transfer of consideration, forexample, by contract alone or through the lapse of minority veto rights.  SFAS 141(R) is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andwas adopted by the Company on January 1, 2009.  The adoption of SFAS 141(R) did not havea material impact on our consolidated financial statements.

 

In February 2008, the FASB issued FASB Staff Position No. FAS157-2 (“FSP 157-2”), which delayed the effective date of SFAS 157 for allnonfinancial assets and liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually) to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years for items within the scope of FSP157-2.  The Company adopted SFAS 157 forthose nonfinancial assets and liabilities noted in FSP 157-2 on January 1,2009.  The adoption of SFAS 157 fornonfinancial assets and liabilities did not have a material impact on ourconsolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133* (“SFAS 161”).  SFAS 161 amends and expands thedisclosure requirements of SFAS No. 133 and requires entities to provideenhanced qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair values and amounts of gainsand losses on derivative contracts, and disclosures about credit-risk relatedcontingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15,2008 and was adopted by the Company on January 1, 2009.  See Note 11 to the Condensed ConsolidatedFinancial Statements for disclosures on Derivative Financial Instruments.

 

InApril 2008, the FASB issued FSP 142-3, *Determining the UsefulLife of Intangible Assets* (“FSP 142-3”).  FSP 142-3 amends the factors to be consideredin determining the useful life of intangible assets. Its intent is to improvethe consistency between the useful life of an intangible asset and the periodof expected cash flows used to measure such asset’s fair value. FSP 142-3 iseffective for fiscal years beginning after December 15, 2008 and wasadopted by the Company on January 1, 2009. The adoption of FSP 142-3 didnot have a material impact on our consolidated financial statements.

 

InJune 2008, the FASB issued FSP EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities* (“FSP EITF 03-6-1”).  FSP EITF 03-6-1 addresses whether  instruments granted in share-based  payment transactions are participating securities prior to vesting and, therefore, need to be included incomputing earnings per share under the two-class method described in SFAS No. 128,*Earnings Per Share*. FSP EITF 03-6-1 is effective for fiscal years beginningafter December 15, 2008 and was adopted by the Company on January 1,2009.  The adoption of FSP EITF03-6-1 did not have a material impact onour consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies* (“FSP141(R)-1”).  FSP 141(R)-1 addressesthe criteria and disclosures for recognition of an acquired asset or liabilityassumed in a business combination that arises from a contingency.  FSP 141(R)-1 is effective for fiscalyears beginning after December 15, 2008 and was adopted by the Company on January 1,2009. The adoption of FSP 141(R)-1 did not have a material impact on ourconsolidated financial statements.

 

InApril 2009, the FASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*(“FSP 107-1 and APB 28-1”).  FSP 107-1and APB 28-1 requires disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Thesedisclosures are also required in summarized financial information at interimreporting periods.  FSP 107-1 and APB 28-1 is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  FSP 107-1 and APB 28-1 was adopted by theCompany on April 1, 2009.  See Note11 for disclosures on Financial Instruments.

 

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InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(“FSP FAS 115-2 and FAS 124-2”).  FSP FAS115-2 and FAS 124-2 amends the other-than-temporary impairment guidance inU.S. GAAP for debt securities to make the guidance more operational and toimprove the presentation and disclosure of other-than-temporary impairments ondebt and equity securities in the financial statements.  FSP FAS 115-2 and FAS 124-2 is effective for interimand annual reporting periods ending after June 15, 2009, with earlyadoption permitted for periods ending after March 15, 2009.  FSP FAS 115-2 and FAS 124-2 was adopted bythe Company on April 1, 2009 and the adoption did not have a materialimpact on our consolidated financial statements.

 

InApril 2009, the FASB issued FSP FAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*(“FSP FAS 157-4”).  FSP FAS 157-4provides additional guidance for estimating fair value in accordance with SFAS157 when the volume and level of activity for the asset or liability havesignificantly decreased and also includes guidance on identifying circumstancesthat indicate a transaction is not orderly. FSP FAS 157-4is effective for interim and annual reporting periods ending after June 15,2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15,2009.  FSP FAS 157-4 was adopted by theCompany on April 1, 2009 and the adoption did not have a material impacton our consolidated financial statements.

 

InMay 2009, the FASB issued SFAS No. 165, *SubsequentEvents*(“SFAS 165”).  SFAS 165provides guidance for accounting for and disclosure of subsequent events thatare not addressed in other applicable generally accepted accountingprinciples.  SFAS 165 is effective for interim and annual reportingperiods ending after June 15, 2009, and shall be appliedprospectively.  See Note 15 fordisclosures on Subsequent Events.

 

InJune 2009, the FASB issued SFAS No. 166, *Accountingfor Transfers of Financial Assets-an amendment of FASB Statement No. 140*(“SFAS166”).  SFAS 166 amends FASB Statement No. 140to improve the information that a reporting entity provides in its financialstatements about transfers of financial assets; the effects of a transfer onits financial position, financial performance, and cash flows; and a transferor’scontinuing involvement in transferred financial assets.  SFAS 166 is effective as of the beginning of the firstannual reporting period that begins after November 15, 2009, for interimperiods within the first annual reporting period and for interim and annual reportingperiods thereafter.  The Company does notexpect the adoption of SFAS 166 to have a material impact on the consolidatedfinancial statements.

 

InJune 2009, the FASB issued SFAS No. 167, *Amendmentsto FASB Interpretation No. 46(R) *(“SFAS 167”).  SFAS 167 amends certain requirements of FASBInterpretation No. 46(R) to improve financial reporting byenterprises involved with variable interest entities and to provide morerelevant and reliable information to users of financial statements.  SFAS 167 requires an enterprise to perform ananalysis to determine whether the enterprise’s variable interest or interestsprovide a controlling financial interest in a variable interest entity.  The determination is based on, among otherthings, the other entity’s purpose and design and the reporting entity’sability to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance.   SFAS 167 is effective as of the beginning of the firstannual reporting period that begins after November 15, 2009, for interimperiods within the first annual reporting period and for interim and annualreporting periods thereafter.  TheCompany does not expect the adoption of SFAS 167 to have a material impact onthe consolidated financial statements.

 

InJune 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles*(“SFAS 168”). SFAS 168 establishes the codification as the source of authoritativegenerally accepted accounting principles recognized by the FASB to be appliedby nongovernmental entities and all guidance contained in the codificationcarries an equal level of authority.  SFAS 168 is effective for interim andannual reporting periods ending after September 15, 2009.  References to generally accepted accountingprinciples contained in the Company’s financial statements will be updated toreflect the new codification references as required.

 

**ITEM3.**                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Ourquantitative and qualitative disclosures about market risk are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitativeand Qualitative Disclosures about Market Risk” contained in the 2008 Form 10-K.Except as described below in this Form 10-Q, there have been no materialchanges to those market risks during the six months ended June 30, 2009.

 

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**Foreign CurrencyExposure Risk**

 

Weare exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to our risk managementpolicy during the six months ended June 30, 2009.

 

While our international results ofoperations, as measured in U.S. dollars, are subject to foreign exchange ratefluctuations, we do not consider the related risk to be material to our resultsof operations. If the Euro strengthened by 10% against the U.S. Dollar and theBritish Pound Sterling weakened by 10% against the U.S Dollar, the net impactto our net income would have been a reduction of approximately $8.4 million.

 

**ITEM4.**                    CONTROLS ANDPROCEDURES

 

Asof the end of the period covered by this report, the Company’s managementcarried out an evaluation, under the supervision and with the participation ofour Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures. Based on the foregoing, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures (asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) were effective as of the end of the periodcovered by this report.

 

Inaddition, the Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the Company’s internalcontrols over financial reporting (as defined in Rule 13a-15(f) ofthe Exchange Act) and determined that there have been no changes in ourinternal controls over financial reporting during the most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

**PART II—OTHERINFORMATION**

 

**ITEM1.**                    LEGALPROCEEDINGS

 

In the normal course ofbusiness, we are and have been party to, or otherwise involved in, litigations,claims and arbitrations that involve claims for substantial amounts. Theseproceedings have generally involved either proceedings against our competitorsin connection with employee hires, or claims from former employees inconnection with the termination of their employment from us. There is alsopotential for client claims alleging the occurrence of errors in the executionof brokerage transactions. We are also currently and will, in the future, beinvolved, in examinations, investigations or proceedings by government agenciesand self-regulatory organizations. These examinations or investigations couldresult in substantial fines or administrative proceedings that could result incensure, the issuance of cease and desist orders, the suspension or expulsionof a broker dealer and its affiliated persons, officers or employees or othersimilar consequences.

 

In April 2008,Donald P. Fewer, formerly the head of our North American credit divisionresigned. Following Mr. Fewer’s resignation, 22 of our credit brokeragestaff resigned and defected to a competitor, notwithstanding variouscontractual obligations and fiduciary duties. In connection with these actions,GFI Securities LLC has commenced an arbitration proceeding before the FinancialIndustry Regulatory Authority (“FINRA”) Dispute Resolution against twosubsidiaries of Compagnie Financiere Tradition and certain of the departingemployees asserting a number of claims, including tortious interference withcontract, breach of fiduciary duty, unfair competition, misappropriation ofconfidential and proprietary information and the violation of certain FINRA rules ofconduct and breach of contract. Certain former employees who are parties to theproceedings have also filed counterclaims against GFI Securities LLC and theCompany seeking monetary damages for, inter alia, the alleged breach of theiremployment agreements.  In the SupremeCourt of the State of New York, Mr. Fewer has filed a lawsuit alleging theCompany breached obligations to him, in which the Company has assertedcounterclaims based upon his breach of contract and fiduciary duties.  In connection with these various proceedings,the Company or its affiliates are seeking monetary damages in an amount to bedetermined in the course of such proceedings. The Company and its affiliates will vigorously defend itself against theclaims brought by these former employees.

 

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The staff of the Market Regulation Department of FINRA (the “Staff”)has been conducting an inquiry into the activities of interdealer brokeragefirms in connection with the determination of the commission rates paid to themby certain dealers for brokering transactions in credit default swaps.  GFI Securities LLC has been cooperating withthe Staff in this inquiry by responding to requests for documents, testimonyand other information.  In January 2009,the Staff advised GFI Securities LLC that it has made a preliminarydetermination to recommend disciplinary action in connection with allegedlyimproper communications between certain of GFI Securities LLC’s brokers andthose at other interdealer brokers, purportedly inconsistent with just andequitable principles of trade and certain antifraud and supervisory requirementsunder FINRA rules and the federal securities laws.  All but one of these brokers who made theallegedly improper communications resigned in April 2008 to becomeemployed by affiliates of Compagnie Financiere Tradition, as describedabove.  We intend to vigorously contestany such disciplinary action which, if brought and/or settled, could result ina censure, fine or other sanction.

 

Based on currentlyavailable information, the outcome of these matters are not expected to have amaterial adverse impact on the Company’s financial position.  However, the outcome of these matters may bematerial to the Company’s results of operations or cash flows in a givenperiod.  It is not presently possible todetermine the Company’s ultimate exposure to these matters and there is noassurance that the resolution of these matters will not significantly exceedany reserves accrued by the Company.

 

**ITEM1A.**           RISK FACTORS

 

Therehave been no material changes in our risk factors from those disclosed in the2008 Form 10-K. For a discussion of the risk factors affecting theCompany, see “Risk Factors” in Part I, Item 1A of our 2008 Form 10-K.

 

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**ITEM 2.  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The table below sets forth the information withrespect to purchases made by the Company of its common stock during the threemonth period ended June 30, 2009.

 

**IssuerPurchases of Equity Securities**

 
| **Period**                    | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased  As Part of Publicly  Announced Plans  or Programs** | ** ** | **Approximate  Number of Shares  that May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| **April**                     |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| Stock Repurchase  Program (a) |       | 100,000                                 |       | $                                       | 3.44       |                                                                                                         | 100,000    |                                                                                                  | 4,901,093  |   |
| Employee  Transactions (b)    |       | 38,878                                  |       | $                                       | 3.83       |                                                                                                         | N/A        |                                                                                                  | N/A        |   |
|                          |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| **May**                       |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| Stock Repurchase  Program (a) |       | 9,300                                   |       | $                                       | 4.42       |                                                                                                         | 9,300      |                                                                                                  | 5,561,252  |   |
| Employee  Transactions (b)    |       | 9,772                                   |       | $                                       | 5.43       |                                                                                                         | N/A        |                                                                                                  | N/A        |   |
|                          |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| **June**                      |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| Stock Repurchase  Program (a) |       | —                                  |       | $                                       | —     |                                                                                                         | —     |                                                                                                  | 5,830,844  |   |
| Employee  Transactions (b)    |       | 14,056                                  |       | $                                       | 6.67       |                                                                                                         | N/A        |                                                                                                  | N/A        |   |
|                          |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| **Total**                     |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                  |       |
| Stock Repurchase  Program (a) |       | 109,300                                 |       | $                                       | 3.52       |                                                                                                         | 109,300    |                                                                                                  | 5,830,844  |   |
| Employee  Transactions (b)    |       | 62,706                                  |       | $                                       | 4.72       |                                                                                                         | N/A        |                                                                                                  | N/A        |   |

 

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(a) In August 2007, the Board ofDirectors authorized the Company to implement a stock repurchase program torepurchase a limited number of sharesof the Company’s common stock on the open market. Under the repurchase plan,the Board of Directors authorized the Company to repurchase shares of theCompany’s common stock on the open market in such amounts as determined by theCompany’s management, provided, however, such amounts are not to exceed, duringany calendar year, the number of shares issued upon the exercise of stockoptions plus the number of shares underlying grants of RSUs that are granted orwhich management reasonably anticipates will be granted in such calendar year.Any repurchases are also subject to compliance with certain covenants andlimits under the Company’s Credit Agreement.

 

(b) Under our 2004 and 2008 Equity IncentivePlans, we allow employees to elect to have us withhold shares of common stockto satisfy minimum statutory tax withholding obligations arising on thevesting and settlement of restricted stock units. When we withhold theseshares, we are required to remit to the appropriate taxing authorities themarket price of the shares withheld, which could be deemed a purchase of theshares of our common stock by us on the date of withholding.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

At the 2009 Annual Meeting of Stockholders, which was held onJune 11, 2009 (the “Annual Meeting”), the stockholders of the Companyelected two directors to serve until the 2012 Annual Meeting of Stockholders oruntil successors are duly elected and qualified.

 

The affirmative vote of a plurality of the votes cast byholders of shares of common stock was required to elect the directors.

 

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The following table sets forth the number of votes cast forand withheld with respect to each nominee.

 
| 1. | To elect two Class I directors to serve for a  three year term until the 2012 annual meeting of stockholders or until their  successors are elected and qualified. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **       | ** ** | **Number  of Shares** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **For**               | ** ** | **Against** | ** ** | **Abstain** | ** ** |
| Geoffrey  Kalish |       | 110,661,702           |       | 980,685 |   | 88,573 |   |
|             |       |                  |       |   |   |   |   |
| Frank  Fanzilli  |       | 110,903,199           |       | 739,189 |   | 88,572 |   |

 

The following is a list of the Company’s directors whose termof office continued after the 2009 Annual Meeting:

 

MichaelGooch

 

JohnWard

 

ColinHeffron

 

MarisaCassoni

 

In addition to the above,at the Annual Meeting stockholders were asked to consider and vote on thefollowing matters, each of which was passed by the Company’s stockholders atthe annual meeting with the following votes:

 
| 2. | To ratify selection of Deloitte & Touche  LLP as the Company’s independent auditor for fiscal year 2009. |
|----|------------------------------------------------------------------------------------------------------------------------|

 
| For     |   | 111,509,713 |   |
|---------|--------|-------------|--------|
|    |   |        |   |
| Against |   | 176,285     |   |
|    |   |        |   |
| Abstain |   | 44,962      |   |

 
| 3. | To approve the amendment to the GFI Group Inc. 2008  Equity Incentive Plan (the “2008 Plan”) to (a) increase the number of  shares available for the grant as awards under the 2008 Plan by 6,650,000  shares and (b) increase the maximum number of shares that may be granted  as awards subject to performance goals under the 2008 Plan to any person in  any one year by 1,000,000 shares. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| For     |   | 67,431,845 |   |
|---------|--------|------------|--------|
|    |   |       |   |
| Against |   | 29,185,140 |   |
|    |   |       |   |
| Abstain |   | 635,118    |   |

 

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**ITEM6.**                    EXHIBITS

 

Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                              |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | First Amendment to the GFI Group Inc. 2008 Equity  Incentive Plan                                                                            |
| 15                   |       | Letter re: Unaudited Interim Financial Information.                                                                                          |
| 31.1                 |       | Certification of Principal Executive Officer.                                                                                                |
| 31.2                 |       | Certification of Principal Financial Officer.                                                                                                |
| 32.1                 |       | Written Statement of Chief Executive Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350). |
| 32.2                 |       | Written Statement of Chief Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350). |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter ended June 30,2009 to be signed on its behalf by the undersigned, thereunto duly authorized,on the 10th day of August, 2009.

 

 
|   | GFI GROUP INC. |
|--------|----------------|
|   |           |
|   |           |
|   | By:            |   | /s/ JAMES A. PEERS |
|   |           | Name: | James A. Peers |
|   |           | Title: | *Chief Financial Officer* |
|   |           | * * | *(principal  financial and accounting officer)* |

 

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