芝加哥商業交易所 (CME) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to the CME third-quarter financial update. This conference is being recorded. At this time for opening remarks and introductions I would now like to turn this conference over to Mr. John Peschier. (OPERATOR INSTRUCTIONS) Please go ahead, sir.

Thank you for joining us this morning. Craig Donohue, our incoming CEO and Dave Gomach our CFO will spend a few minutes outlining the highlights for the third-quarter and then we will open up the call for your questions. Terry Duffy, our Chairman of the Board and Jim McNulty our current President and CEO are also here this morning and will participate in the Q&A session.

Before they begin I will read the Safe Harbor language. Statements made on this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC including our most recent annual report on Form 10-K which is available on our website. Now I would like to turn the call over to Craig.

Thank you John and good morning everyone. We had a strong quarter at CME bolstered by healthy volume across the board in all four product groups. Our average daily volume surpassed 2.6 million contracts which represented an 8 percent increase above Q3 of last year. And as you may recall, the third quarter of last year was by far our strongest quarter of 2002. Our overall revenue of 135 million was also up 8 percent compared to the same quarter a year ago. Our operating margin was 39 percent, net income was 31 million and diluted EPS was 93 cents.

On this conference call, I will provide a few highlights about our product volume and then give you an update on recent initiatives. Following my remarks, Dave Gomach will elaborate in more detail on our third-quarter financial results. During the quarter our electronic volume achieved record volumes of approximately 1.2 million contracts per day, which was 29 percent higher than a year ago. For the quarter electronic volume represented 45 percent of total volume. We continue to provide catalyst for migration to the GLOBEX electronic trading platform including technology enhancements, distribution and Com (ph) activity initiatives and pricing incentives for electronic Eurodollar trading.

Within our interest rate product group average daily volume was 1.26 million contracts per day during the quarter, and volume consistently averaged more than 1.2 million contracts per day each month during Q3. Following our record second quarter, interest rate products continued to be very active and we hit record open interest levels during the quarter. As many of you know, these products are most active when interest rate volatility picks up and rates move either up or down. Eurodollars are most heavily used by the large interest rate swap dealers as well as asset and liability managers. We have had strong performance as interest rates have decreased since 2000.

While it is difficult to predict future volume, we are often asked what has happened historically to our volume when interest rates rise. A very good example occurred in 1994 when the three-month LIBOR rate moved from 3.25 percent in January to 6.5 percent by December. The resulting Eurodollar volume in 1994 was up more than 63 percent compared to the prior year when rates were relatively flat. During Q3, our electronic interest rate volume averaged approximately 44,000 per day up 35 percent compared to the same period last year and up 5 percent sequentially. Interest rate volume on GLOBEX represented 3.5 percent of total interest rate volume, up half a percentage point from the previous quarter.

Next steps here include enhancements of our Eagle (ph) functionality for version 1.5 slated for the fourth quarter, and a Eurodollar marketmaker program on GLOBEX. At this point we have selected five marketmakers who will be trading during non U.S. trading hours and that total will likely increase to eight. We expect them to begin trading by mid-November and will give more detail on the initial results of the program next quarter.

Turning to our E-mini equity product, average daily volume of 950,000 contracts was 17 percent higher than in Q3 of last year. In contrast, equity volatility measured by the CBOE's Vix index using their new methodology declined from a recent peak of 36 during the third-quarter last year to 19 in the third-quarter this year. Our E-mini SNT 500 products average daily volume grew 10 percent during that time from 582,000 to 642,000 contracts a day. In comparison, some competing products declined during the same period. Overall trading in spider EPS declined 18 percent from 48 million shares per day in Q3 last year to 39 million shares a day this year. Equity index options on the S&P 500 traded at CBOE were also down 19 percent. We believe it is our enhanced technology including reductions and speed of execution, expanded distribution and user base and our efficient pricing mechanisms which have allowed us to grow. Our equity product team is aggressively marketing to active ETS (ph) users including hedge funds and proprietary trading firms, resulting in growth of this customer base.

The story is similar on our NASDAQ contracts. The CBOE's VIX index which measures NASDAQ related volatility averaged 52 in Q3 of last year, and fell to 29 in the third quarter of this year. Looking at comparable products, the QQQ ETS had fallen 19 percent year-over-year and the CBOE NASDAQ 100 options are down 13 percent. In comparison, CME's E-mini NASDAQ 100 futures volume was up 27 percent from 224,000 per day in the third quarter last year to 286,000 contracts a day in Q3 this year. I will discuss NASDAQ in more detail in a minute.

Our E-mini Russell 2000 and E-mini S&P MidCap are two good examples of successful new product innovations within the equity product group. Each had record quarterly volumes in Q3. The E-mini Russell 2000 contract climbed to 16,500 contracts per day, from 4300 a year ago and the E-mini S&P MidCap increased to 5300 contracts per day versus 1800 a year ago. The E-mini Russell 2000 averaged more than 20,000 contracts during the month of September and has performed well in October also. The Russell 2000 index itself has performed well over the last few years and more institutions are benchmarking to it. Users have told us that this increased level of liquidity has made them more interested in utilizing our futures contract.

This quarter we generated $1.2 million of revenue from these two products. With nominal expenses associated with adding products to our platform, the incremental margin is relatively high. Let me now turn to the strong performance of our foreign exchange product line which remained at high levels in Q3. During the quarter we averaged 136,000 foreign exchange contracts per day, up 46 percent from 93,000 in the third quarter of '02. We continue to see a pickup in electronic FX trading which averaged 62,000 contracts per day during the third quarter, up 85 percent from 34,000 last year and 11 percent from the prior quarter.

Electronic FX volume made up 46 percent of total FX volume during the quarter and increased from 36 percent a year ago. We are seeing growing interest rate from banks, investment banks, commodity trading advisers and hedge funds in our FX product line. Our smallest product group commodities also had a strong quarter. Volume averaged 38,000 contracts per day an increase of 37 percent versus a year ago. The third quarter was our highest volume quarter in commodities since the first quarter of 2001.

Let me also turn to OneChicago our single stock futures joint venture. During Q3 OneChicago averaged approximately 6,950 contracts per day, compared to 6,450 per day in Q2 and 4,700 per day in Q1. As of September 30, open interest had grown to 140,000 contracts, up from 109,000 at the end of June. I would also like to update you on the CME CBOT common clearing link. On November 24, we will begin clearing CBOT's equity and commodity products and some interest rate products representing about one-third of CBOT's total volumes with the remaining CBOT products going live on January 2, 2004. We are moving along the timetable and remain on track to launch the CME CBOT common clearing link on those dates.

Turning to volumes on the Chicago Board of Trade, they averaged 2 million contracts per day during the third quarter. And year-to-date they have averaged 1.8 million per day an increase of 32 percent from 2002 levels. If CBOT were to retain these volume levels in 2004, it would have a positive affect relative to our previous income guidance. As you know, the common clearing link is strategically very valuable to CME and CBOT in this increasingly competitive environment. Based on combining the portfolios of CME and CBOT as of October 3, the total combined performance bond reduction for users would be $1.4 billion, and clearing firms would save $200 million in security deposits. These are real benefits that will be available to market participants upon implementation. We believe these benefits will be very difficult to replicate by our competition.

We believe that CME's proven ability to innovate and execute has allowed us to build important new partnerships including our common clearing link agreement with CBOT and most recently with NASDAQ. Two weeks ago, we announced an important agreement with NASDAQ where we extended the exclusive license benchmark of our NASDAQ 100 futures product from 2006 to 2011. In addition, we will offer a new futures contract based on the NASDAQ composite index, this product will be exquisitely traded at CME subject to obtaining specified performance criteria.

We have had a long-standing relationship with NASDAQ since we first began trading NASDAQ 100 contracts in 1996. It has been a great product for us. Since 1999, we have grown faster than the QQQ's and in the third quarter the notional value of our E-mini version was almost three times the underlying value of all QQQ's traded. Moving on, let me mention a couple of additional new products. First, in 2004, we will introduce a product based on the CTI index. These new contracts will enable market participants to augment their positions in CBI faced (ph) inflation swaps (technical difficulty) replicate inflation indexed securities. Potential users include users of TIPS which are treasury inflation protected securities which make up 6 percent of the treasury market, and OTC inflation derivatives market participants.

At the end of August, CME launched its 5th trackers product, the euro currency trackers in conjunction with Merrill Lynch. This product is designed to track the total return performance of the euro relative to the U.S. dollar. Finally, we recently began trading weather products on five European cities and added monthly contracts for five U.S. cities and seasonal contracts for 7 U.S. cities.

On the distribution front, we continue to extend the reach of our GLOBEX platform to new users. Since last quarter we announced our products will be available on three additional platforms, Bloomberg, Swap, CyberTrader, and E*Trade. Users of Bloomberg terminals around the world who want to utilize futures contracts will not have to worry about connectivity and the time needed to establish a connection to GLOBEX. The important joint announcements with CyberTrader and E*Trade are targeted to the active online traders at these firms. E*Trade has a professional division that has traded equity products and have added functionality to make our EFX products available. We are working actively with both of these firms to educate their customers about the use of CME products.

If you recall, last quarter we discussed new programs to enhance the connectivity alternatives for our users. These new programs reduce connectivity costs and enable customers to obtain GLOBEX connections more quickly. We continued also to make progress executing on our European marketing plan. Since our last earnings call, we have added two additional network connections to our telecom hub in London. This allowed us to reduce trans Atlantic communication costs. Each network connection enables numerous market participants and institutions to access GLOBEX directly. Not only do we have 38 of these network connections in place, we also have the highest pipeline ever of potential new networks to add to the hub. We have nine networks in advanced stages of CME and twelve more at earlier stages.

Before I turn the call over, let me summarize the quarter and provide some perspective on the growth opportunity we see going forward in 2004. During Q3, we saw broad-based strengths in each product group. Electronic volumes were particularly strong this quarter. We had impressive E-mini growth considering lower volatility in the underlying markets, strong FX electronic volume, and the steady increase of the Eurodollar volume onto GLOBEX on both an absolute and percentage basis. In 2004, we expect the CME CBOT common clearing link to be fully implemented and to generate the financial benefits to market participants that I discussed earlier. Continued growth in migration to the electronic platform is positive to our financial model. Whether it occurs in foreign exchange, equities or interest rates, and this is certainly an area of significant focus for us. Moving forward we will continue to innovate new products and roll them out on GLOBEX. This gives us immediate widespread distribution at a nominal incremental cost. In addition, we intend to approach new users and expand our number of distribution channels particularly in Europe and Asia.

Before we move on to the financials and given that this is Jim McNulty's last earnings call prior to his departure at year end, I wanted to thank Jim on behalf of our entire management team and Board for his enormous contributions to our success during his tenure here. I also want to personally thank Jim for his assistance in what has been an extremely smooth transition over the last few months. And with that I would like to turn the call over to David, who will provide more detail on the financial results.

Thank you, Craig. Good morning. As you already have access to our earnings release, and most of you have become quite familiar with the basics of our financial statements, I'm not going to spend much time on each line of the P&L. Instead I will focus on new developments and/or significant factors that impacted the drivers to our financial model. The three primary drivers are, one, trading volumes which many of you monitor on a daily basis. Two, the average rate per contract which is driven by product mix, member versus nonmember mix and venue mix, and last the element we have the most control over, operating expenses. To summarize the third quarter by these components, we saw healthy volumes across all product groups with 2.5 million contracts per day, excluding trackers. The overall rate per contract was 67.4 cents, higher than Q3 last year but lower than we have seen in previous quarters this year. This reduction was driven primarily by a mixed shift within interest rate products, which led to a drop in the rate per contract which I will discuss in a minute.

On the expense side, our third-quarter expenses came in $900,000 below the second quarter of '03 including an incremental 1.2 million of expenses this quarter related to the common clearing link. At this point I am going to turn the focus to our rate per contract which had a fairly significant impact this quarter. Excluding trackers, our aggregate rate per trade was 67.4 cents, down one penny from the prior quarter when you exclude a 2.5 million favorable audit assessment which we discussed last quarter. The rate was up compared to 65 cents in the third quarter of last year. As a reminder, each penny of overall rate per contract equates to approximately 1.6 million of transaction fee revenue. Based on current volumes. As I indicated, the most significant shift in our rate per contract from Q2 of this year to Q3 was in our interest rate product group. Specifically, the average rate fell 4.9 cents from 53.9 cents in Q2 to 49.0 cents in Q3. Including the audit assessment which added 2.7 cents to Q2's average rate, the real variance for interest rate products between the second and third quarter was 2.2 cents.

Based on current volume, this decrease had a negative impact of 1.8 million on transaction fees or more than three cents per share. There were several factors underlying the reduction and the rate per contract for interest rates. First and foremost, there was a decrease in the nonmember percentage. As you know, based on our rate structure members trade at a lower rate than nonmembers. Over the last 12 months the nonmember percentage has increased in the interest rate product group. I will give you the nonmember percentage by quarter beginning in the third quarter of last year. This is important to follow as it is the primary driver. In Q3 '02 nonmembers made up 16 percent. In Q4 that increased to 16.6 percent, Q1 of '03 it increased again to 17.2 percent, and in Q2 it peaked at 18.9 percent. This last quarter, Q3, the nonmember percentage reversed course and decreased to 17.6 percent.

The impact of this reversal on the average rate per contract in interest rates, accounted for 1.6 of the 2.2 cent variance from last quarter. The second factor that put pressure on the overall rate for interest rates relates to our tiered pricing structure. With a higher percentage of member activity this quarter a greater percentage of the volumes hit our volume discount tier, which is priced at 4 cents for those who trade more than 10,000 contracts per day. And lastly, as you know, we recently reduced our GLOBEX fee from 25 to 10 cents to enhance liquidity on GLOBEX. This price change which went into effect September first resulted in a $200,000 reduction in transaction fees, which is relatively minor but had a 2/10 of a cent impact on the rate.

We believe the long-term benefits of Eurodollar's migrating to GLOBEX significantly outweigh the fee reductions. The price change is one of several potential catalysts to begin the process of strengthening the electronic offering. The rates per contract in our other products were more or less in line with the prior quarter so I will not go into any detail. Now moving on to our income statement.

Overall transaction fees were up 9 percent compared to the same quarter last year as volume, excluding trackers, was up approximately 5 percent. On a sequential basis transaction fees were down 7 percent as volume was down 5 percent. Quotation fees were 13.6 million in Q3, this was up 12 percent compared to a year ago due to a price change which went into effect April first, and was up slightly compared to the prior quarter. At the end of the quarter, we had approximately 32,000 1st locations and 116,000 additional screens. Offsetting the reduction in the professional market data prescription was an increase in non pro market data revenue which increased by 240,000 sequentially. In addition, we will go to a flat rate pricing of $30 per screen for the professional market data segment next year. This is expected to increase revenue beginning in January, 2004.

All other revenue categories totaled 13.6 million during the quarter, up from 13 million last quarter but down slightly from 13.8 million last year. There were a few offsetting items when comparing Q3 of this year to last year. We had a 2.5 unfavorable variance due to the sale of marketable securities last year. Which is offset in Q3 this year by 1.1 million of higher deferred compensation revenue, a $600,000 increase in GLOBEX access fee revenue and $600,000 in investment income related to our interest earnings facilities which I will explain in a minute.

I'll now take a few minutes to review expenses. Total operating expenses were 82.1 million during the quarter, down from about 83 million last quarter. As I mentioned, this included expenses related to the common clearing link of approximately 1.2 million in the third quarter. During the third quarter of last year, expenses were 87 million, which included 13.7 million related to a onetime patent litigation settlement. Excluding this, expenses were up 8.8 million or 12 percent. Most of the expense increase from last year was in compensation and benefits. Which came in at 36.7 million up from 28.3 million last year. But down from 38 million last quarter. Included this quarter, was approximately 1.4 million of stock-based compensation expense and our bonus accrual of 6.6 million.

Breaking down the 8.3 million variance compared to last year, 2.9 million is related to a 9 percent increase in headcount and annual pay increases. $2.2 million due to an increase in the bonus accrual which is directly related to cash earnings performance, $1.1 million for deferred compensation, one million for benefits and $800,000 for non cash stock-based comps. At the end of September, headcount stood at 1,207 compared to 1,185 at the end of Q2 '03. And 1,108 at the end of Q3 '02. This increase was primarily in technology and related to the common clearing initiative.

Non-comp expenses totaled 45.5 million during the third quarter versus 45 million during the same period last year and 45.1 million last quarter. Most of the expenses related to common clearing link fell in professional fees and compensation and benefits. We do see an additional credit in our communications expense line in the third quarter of approximately 1 million related to past billings from a telcom vendor. Marketing and PR expense was 1.8 million during the third quarter; we expect an increase in this category during Q4 as we have several marketing and product advertising initiatives underway.

Moving on, operating income or income before taxes was 52.9 million in the third quarter compared to 51.8 million for the same quarter last year, excluding last year's patent litigation settlement. Our operating margin was 39.2 percent versus 41.4 percent in the third quarter of last year and through the first three quarters was 38.7 percent versus 35.2 percent after adjusting for the patent litigation settlement.

Net income for the quarter was 31.4 million and diluted earnings per share was 93 cents. Year-to-date net income was 92.5 million close to the full year net income of 2002 of 94.1 million. Moving on to the balance sheet, at the end of the quarter our balance sheet shows 421 million in cash and cash equivalents and marketable securities, an increase of 28 million since the end of the second quarter. We made a change to our investment policy recently and as a result we now have 30 marketable securities reflected on the balance sheet. Our prior plan was to invest strictly in money-market mutual funds and in short-term securities with durations of less than 30 days. We have begun to ladder (ph) out our portfolio and will continue to do so over the next few months. Securities with maturities ranging from zero to five years will be used to construct the portfolio.

In January of 2003, the FASB issued FIN 46, (ph) titled Consolidation of Variable Interest Entities. As a result CME's first interest earnings facilities referred to as IEF, which are utilized by clearing firms to satisfy performance bond requirements has been determined to be variable interest entities and therefore are included in the consolidated financial statements beginning with the third quarter of 2003. While this consolidation has no incremental effect on net income, investment income in Q3 included 600,000 arising from the IEF, with an offsetting increase in expenses to reflect fees paid for managing the IEF, and the distribution of the earnings to the participants.

In addition, the Company's current assets and current liabilities at September 30, reflect an identical increase of 340 million for the balances which are due the participants. These balances are clearly disclosed on separate lines of the balance sheet. With respect to capital expenditure, CAPEX and capitalized software development costs were 13.1 million in the third quarter and 38.1 million for the first nine months. We expect to see higher CAPEX levels in Q4 related to technology and renovation of our building to provide a secure entrance for our trading community and employees.

Cash earnings which provide the basis for our dividend payment and the incentive bonus plan mentioned earlier totaled 32.5 million for the third quarter and 96 million for the first nine months. We have already exceeded our full-year cash earnings total in 2002 of 88 million. Speaking of dividends, CME made its third quarterly dividend payment of 14 cents in September, also, we recently announced we are raising our dividend payout percentage from 20 to 30 percent of prior year cash earnings.

Now, let me summarize October volume-to-date. Including trading through Monday we are averaging 2.5 million contracts per day, excluding trackers. That volume reflects a partial trading day on Columbus Day when several of our products did not trade. Interest rates are averaging 1.3 million contracts per day, E-mini equities 960,000, equity standard contracts 93,000, foreign exchange 120,000, and commodity products 46,000 contracts per day.

We are often asked about seasonality in our business. While it is extremely difficult to predict it is not unusual to see a slowdown during the summer vacation period typically August which we did see this year. In addition, we have also experienced lower volume levels bordering the Thanksgiving and year end holidays. With respect to the fourth quarter, we recently filed an 8-K related to the accounting treatment for Jim McNulty's stock options. Our policy is to expense stock-based compensation on an accelerated basis. And as a result, from 2000 through the third quarter we expensed 98 percent of the fair value under FAS 123.

Since Jim is leaving the company with 20 percent unvested we will reduce stock-based compensation by 2.6 million. This offsets the guidance we gave last quarter which was for 1.4 million of stock-based comp expense for Q4. Based on the adjustment we expect to see a credit of 1.2 million for this element of compensation and benefits expense.

One final point regarding common clearing. We will be creating a new revenue line on our income statement beginning in Q4, called Clearing and Transaction Processing Services. We will also include the transaction processing revenue we receive from OneChicago and NYMEX. In terms of expenses, all common clearing link expenses fall within the existing expense category.

To summarize, we had a strong third quarter driven by record volume on GLOBEX. We remain disciplined on expenses and despite the lower rate per contracts, we are able to deliver operating margin of 39.2 percent. Our balance sheet remains strong and we continue to generate significant cash flow. With that, we would like to open the call for your questions.

Our question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Scott Patrick (ph) with Morgan Stanley. Mr. Patrick, your line is open. Hearing no response, we'll move on to Dave McNillis (ph) with Morgan Stanley.

It's actually Scott Patrick. Craig, you had indicated early in the presentation that if CBOT volumes continue at current levels, '04 guidance is likely to prove conservative. I'd just be interested in kind of hearing how you think about potentially Eurex competition and how you -- if you still feel that given that event that that guidance might be conservative?

Well, we're not modifying our guidance. What I would say is the common clearing link benefit that will be provided to end-users of the markets, the $1.2 billion in performance bond reduction and the $200 million in capital savings, are very substantial and it would be very difficult to replicate by your ex or any other competitor. The other thing I would point to is I think the board of trade has been very aggressive in responding to competition. They made an announcement yesterday that they would be adopting various tiered pricing programs similar to what we have had in place for quite some time in our Eurodollar and E-mini contracts, which are going to in their estimation save market users approximately $60 million a year.

So I think they are definitely strengthening their own competitive position and the joint benefits that we'll provide under the common clearing link are going to be very attractive.

Thanks. Just on the rates, you gave quite a bit of detail on the variance on the interest rates. Can you give a little bit of color on the decline in the E-mini rate?

The E-mini rate really held versus the second quarter; it was at 67 again. Again, the E-mini volume does increase. We had a little bit of an increase from Q2 to Q3. More of that is coming above the cap, so it does have some downward pressure on the rate. Again, it was pretty well equal to last quarter.

Finally, on the common clearing link, you indicated 1.2 million came through in implementation expenses this quarter. Was that fully reimbursed from CBOT? And I guess in the fourth quarter do you expect that revenue impact from the implementation of the original one-third you expect that will offset any further implementation expense in the quarter?

First, the 1.2 million was above what they reimbursed us so that was a true impact to the P&L and what we did indicate to you was that we would have net expense of 2 to 4 million. We still expect to see some of that hit in the fourth quarter. We will get revenue in Q4. If you look at their volume, the percentage that's probably going to come through in Q4, for maybe the last 24 or 25 days, will be close to maybe just based on current volumes about 600,000 contracts per day. That should certainly help offset any impact to expense in Q4.

Great, thanks.

Charlotte Chamberlain with Jefferies & Company.

Good morning. A couple of questions. First of all you went through the narrative today was exceptionally detailed and I was wondering if there's any possibility of getting the transcript of that on your website? Second, your analysis of the drop in revenue capture on interest rates contracts was very informative. I was wondering if you could tell us if you identified who dropped out and why? And finally, if we could get some kind of sense of the offering that you are going to do? If you got any better idea on timing, and also if the share account, the maximum share account 5.5 million fully reflects what Mr. McNulty might be putting into that offering? Thank you.

Dave is going to respond to your question but on the first point the transcript is available on the website.

Thank you.

The second issue regarding the cause I guess of the drop in the interest rate products, what we saw in the second quarter of this last year was if you remember there was a Fed rate cut towards the end of June. The time leading up to that and immediately following we saw extreme volatility, which led to actually record option volume in our Eurodollar contract. We did about 500,000 contracts per day in options, Eurodollar options in Q2. That dropped down to 370,000 contracts per day in Q3. We saw an increase or surge in customer volume in the second quarter in that options volume. We did 24 percent nonmember on 500,000 contracts per day in Eurodollar options in Q2. The nonmember percentage in Q3 was 21 percent and that was again on 370,000 contracts per day. So again, as we have seen in prior quarters and we have extreme volatility we tend to get the benefits of it. We had that in the second quarter.

Related to the last issue, on the timing we are still in the solicitation period. I really cannot comment on what we expect will come out from our numbers.

No, it was Mr. McNulty specifically, if the 5.5 million includes the maximum that he could put into the offering?

Charlotte, I don't anticipate participating to any large extent, the only thing I might do is to cover taxes on options that I've already exercised.

Great. Thanks so much.

Collin Clark with Merrill Lynch.

Good morning. You mentioned marketing may be up in the fourth quarter. Can you give us any sense of how significant that could be up?

I don't expect it to be in excess of 3 million.

Okay.

It will be more related -- we are doing some product advertising, some product promotion, it will be pretty much strictly in that area.

And heading into next year can we expect that to drop down possibly back down to the 2 million levels?

We are in the middle of our budget process. I cannot provide any guidance at this point on that. It will be, if we can provide more guidance as we get further through the year out, we will try to do that. Nothing at this point.

You had mentioned in the past that the CBOT clearing link to drive around 10 to 15 million in net income next year. Can you refresh our memory on what type of volume assumption you were using with that range, because you mentioned it was up to 2 million per day at the Exchange?

Originally when we gave some idea of how those estimates were arrived at, it was based on looking at their 2002 trading volume levels. And we applied a straight line extrapolation of their ten year CAGR which was about 9 percent. Their 2002 levels were about 1.36 million per day compared to year-to-date where they are running at about 1.8 million. And 2.0 million in the third quarter.

My last question, the foreign exchange volumes, foreign currency volumes, what is driving banks to use the CME to trade those products? Can you touch on that? Thanks.

Let me start and then maybe Jim will want to add. We have a very attractive electronic offering and as you know the spot FX market is increasingly electronic. We have made very substantial improvements in the response times and what is a return to the market of commodity trading advisers and hedge funds, which had been leaving the market prior to the time we began trading foreign exchange electronically and then were only trading it via open (indiscernible). Additionally, we think that it's a very attractive market because of the central counterparty clearing mechanism that we provide, and that given the current focus on credit efficiency and capital efficiency that we are seeing a return of those customers to market. Jim do you want to add?

I would also say that part of our value proposition in foreign exchange which differentiates us from others is that we can execute contracts in foreign exchange in under 2/10 of a second, we do that about 23 and a half hours a day, which is a good thing to be able to do for a global product. I think the third thing which is most important is we are the only place in the foreign exchange world where we allow people to write to our matching engine so that they can execute contracts on an automated basis in a blackbox type of way. So that large banks and investment banks that may be hedging portfolios can do it completely electronically front to back. I think this has helped us grow our volume in foreign exchange to be at 58 percent for example of the total volume in October. And that's up from 46 percent in the third quarter of last year.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Joel Gomberg of William Blair.

My question has been answered, thank you.

We have a follow up question from Dave McNillis' line.

Hi, it is Scott Patrick actually. Just a question on the comp and benefits line. It looks like you've accrued about 15 million so far for bonus accruals so far this year; I just want to make sure does that incorporate kind of your full year view or are you just fully accrued based on performance through the third quarter?

Through the third quarter we have accrued 19.3 million. If you remember, we adopted a very incentive-based plan regarding our bones which is again tied directly to cash earnings. At the target level of cash earnings that was originally set at 17.5 million, which was the same as the last year's bonus. The cap on that, 120 percent is 27.3 million so that would be the maximum. And then at 80 percent it is 9 million and below 80 percent, unlike prior years we would not have a bonus other than about one million for the nonexempt. Its very incentive based, driven by cash earnings and we are at 19.3 and the cap is 27.3.

Can you refresh my memory then Dave; I guess you said it was 6.6 bonus accrual this quarter -- if I remember correct, it was like 8.4 in the second quarter and I thought is was only for --.

4.4 in the first quarter, 8.4 in the second, (multiple speakers) and 6.

6.4. Now I'm on the same page. Thank you.

Mr. Patrick, co you have anything further?

No, I don't. Thanks.

Collin Clark.

Why have commodity volumes picked up just over the last week? I know it's not a lot of history.

Well price levels for cattle and we think concerns regarding volatility patterns in commodity prices are definitely contributing to increases in the volume in that particular product sector. In September live cattle volume was up 43 percent versus September of '02 and lean hog volume was up 27 percent versus the same month a year ago.

My one last question here, you renegotiated your -- extended your contract to NASDAQ on the NASDAQ 100. Can you provide insight as to how that arrangement works and if there was anything that changed when you renegotiated?

Sure. We've extended as I indicated the agreement for the NASDAQ 100 index futures and options contract five years out until 2011. We also expanded the nature of the exclusivity arrangement; we have what we call a new exclusive before where CME had exclusive rights to trade futures and options on the NASDAQ 100 with the exception of NASDAQ itself and affiliates of NASDAQ. That has now been changed to grant a total exclusive to CME only to trade those products. And then additionally as we've indicated we have the right to trade exclusively the composite index futures and options contract subject to the attainment of various performance thresholds which we have not disclosed. We have also renegotiated some of the financial terms of the agreement which we have not disclosed but which will not have a material impact on our performance.

Thank you.

Steve Scinicariello with Essex Investments.

I was looking to get a little more color on the legal issues with Eurex and if you can give us a little more detail on exactly what they are accusing you of and if you think they have major holes in their, application, or are these big things that they are going to be able to address or not? And just give a little more color on what's really going on with that stuff?

Let me take your first question concerning the litigation and start by saying that obviously we are very limited in comments that we would make on any piece of litigation. But what we have said is that we think that their complaint is without any factual or legal foundation. The nature of the complaint is that the Board of Trade and the CME had made financial inducements to the shareholders of the clearing corporation in order to vote against a restructuring which would give Eurex an ownership stake and an option to enchance that ownership stake in the clearing corporation over time. We have not participated in any financial inducements direct or indirect to shareholders of the clearing corporation, and that is the extent of the comments I think we can make on that particular aspect.

With respect to their regulatory process, I would say that first of all, we have for many years regularly commented on published applications that you see by other exchanges, as well as other things the Commission has asked the industry to comment on. It's a very regular and routine process for us to engage in. We have raised a number of substantive issues related to their application, we cannot predict what the outcome of that will be in terms of the timing of the approval of their application. Obviously the rest of the industry will have to comment and the CFTC will have to consider the merits of some of the issues that we've raised.

Thanks a lot.

We do not have any more questions at this time. Mr. Donohue, I will turn the conference back over to you for final and closing remarks.

First of all, let me go back to the question that Charlotte Chamberlain had asked and indicate we expect to have a link to the transcript available sometime later today, hopefully in several hours. With that, I would like to thank you for joining us today and thank you for your continued interest in CME. We look forward to talking with you again next quarter.

That does conclude today's teleconference. At this time you may disconnect from our conference.