芝加哥商業交易所 (CME) 2003 Q4 法說會逐字稿

Good day, everyone. Welcome to the Chicago mar keen tile fourth quarter financial update. This conference is being recorded. I would like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

Thank you for joining us. Craig Donohue, our CEO and Dave Gomach, our CFO will spend a few minutes outlining the highlights of the fourth quarter and then we will open the call for your questions. Terry Duffy, our Chairman and our President, --Gill are also here this morning and will participate in the Q&A session. Please not that all references we make during the call to trading volume and rate per contract exclude our low price trackers products.

Before they begin, I'll read the Safe Harbor language. Statements made in 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. With that, I would like to turn the call over to Craig.

Good morning. Thank you for joining us for our year-end earnings conference call. We completed another record-breaking year at CME. That by itself is not unusual, however what made this year unique was that it was our first as a publicly traded company.

During 2003 we made progress on multiple fronts. First and foremost we experienced growth in each of our benchmark products with most of the growth coming from electronic trading on our GLOBEX platform. During the year, we enhanced the GLOBEX distribution of our products with new channel partners. We continued to add new functionality to our GLOBEX system, highlighted by our Eagle release early in the year. Most importantly we implemented our common clearing link with the Chicago board of trade which is now fully operational.

Before I update you on recent business, I'd like to provide several financial and product volume results for the year. Following my remarks, David Gomach will elaborate in more detail about the fourth quarter.

Starting with the key financial results in 2003 compared to 2002 during the year we increased net revenue by 18% to 536 million. Income before taxes grew 34%, to 206 million, and operating margin improved from 34% to 38.5%. Our net income was up 30%, and diluted EPS was up 15% to $3.60, with the addition of 3 million shares. And, lastly, we generated over $100 million of free cash flow.

In terms of contracts traded, our overall volume was up 13% to over 620 million contracts or 2.5 million contracts per day. Taking a look at the product areas for 2003, compared to the prior year, equity E-mini volume was up 37%, foreign exchange volume was up 40%, our interest rate volume was up 1%, despite low expectations of near term fed activity. Commodities volume was up 18%.

Overall, electronic volume surged 39% during the year, and for the full year, this represented 42% of our total volume, compared to 34% in the total during 2002. Electronic interest rate volume was up 45% for the year, and during Q4, was up 123% compared to the same period a year ago electronic foreign exchange volume was up 100% for the year, and in Q4 was up 126% versus the prior year.

Turning to recent product trends within our interest rate product line, we continued to see strong volume growth on GLOBEX. During the fourth quarter, electronic interest rate volume averaged over 61,000 contracts per day, representing 5.3% of the total interest rate volume. That is up significantly from 44,000 contracts per day, or 3.5% of the interest rate volume during the third quarter of '03. Through the end of January, we are averaging 104,000 GLOBEX interest rate contracts per day, and on January 28, we traded a record 240,000 Euro dollar contracts on GLOBEX, demonstrating the solid performance and reliability of our Eagle functionality. The pricing reduction we implemented in September and our now successful market maker program have enabled us to increase the momentum of our Euro dollar electronic trading growth.

The GLOBEX volume during nonU.S. Hours has grown from 32,000 per day in the first quarter of this year to 44,000 per day in the fourth quarter, and was up to 62,000 per day in January. While that growth has been impressive, the most rapid growth has occurred during the hours that our trading pits are open. During this time period, electronic Euro dollar volume has grown from 2,000 per day in the first quarter to 17,000 per day in the fourth quarter, and averaged 42,000 per day during the month of January.

During 2004 we expect to release two very important technology enhancements to GLOBEX for interest rate product trading. First, our Eagle 2.0 rollout, which is planned to be released during the early part of the third quarter of '04 will provide additional functionality for Euro dollar futures trading. This new version will replicate some of the complex strategies employed on our trading floor and will help bolster the liquidity on our electronic platform. The new features will include additional Euro dollar spreads and the application of implied prices to a much wider range of calendar spreads.

The second major technology enhancement planned for 2004 is the functionality to trade Euro dollar options on GLOBEX. As many of you know, we completed the acquisition of the assets of liquidity direct technology in January. The company has developed an innovative, patent pending technology that combines committed market making, indicative quoting, user defined combinations, and electronic requests for quote functions. The integrated technology will complement our GLOBEX platform and is expected to begin during the second half of 2004. Most importantly, this new platform will preserve and enhance transparency and competition among market makers in electronic options markets. This innovative new platform and market model will create efficiencies and lower transaction costs for market users. As we did following the release of Eagle, we will establish a market maker program with this rollout.

Turning to our equity products, during the fourth quarter, E-mini volume was up 4% from the same period last year during a time when the Vix index fell from 31 to 17. With the exception of the 1987, 1988 time period, this rapid decline in volatility was the most dramatic change in volatility since the great depression. As was the case last quarter, CME’s S&P 500 and NASDAQ 100 E mini contracts outperformed ETS this quarter compared to the prior year. The spider ETFs were down 26% and the QQQs were down 1% from the fourth quarter of 2002 to the fourth quarter of 2003. The reason for our success has been our ability to attract new customers who demand the speed, liquidity, transparency, and low cost that our E-mini products provide.

In addition to the S&P 500 and NASDAQ 100 products, we saw strong growth in our Russell 2000 product. During Q4, the E-mini Russell 2000 averaged 25,000, up from 16,500 during the third quarter, despite the year-end holiday period. Through the end of January, we are averaging more than 42,000 E-mini Russell 2000 contracts per day, and we hit an all-time daily record last week above 65,000 contracts. The increased liquidity is attracting considerable attention from institutions that are benchmarked against the small cap index. This rapidly growing product is further diversifying our equity product line volume, and we expect the Russell 2000 to continue to grow as a percentage of our other equity products.

The most impressive growth we saw during 2003 was in our FX product line and the momentum has continued into 2004. These products grew over 50% during the fourth quarter of 2003, compared to the prior year. Driven primarily by strong volume on GLOBEX. We are seeing increased demand for our electronic offering from hedge funds and funds managers as well as inter-bank dealers.

December was the strongest month of the year, despite the holiday slowdown as the dollar remained relatively volatile. January volume remains robust. We averaged over 105,000 electronic FX contracts per day. On January 20, we set an all-time electronic FX daily record of 163,000 contracts.

Moving on to several recent initiatives, first, I am pleased to report that phase two of our transaction processing initiative with the Chicago board of trade was successfully implemented on January 2. This was an important milestone, making the CME clearinghouse the world's largest futures clearing organization and highlighting our ability to successfully execute on major initiatives on time and without disruption to our customers. Based on 2003 volume, the CME clearing house will clear over 1 billion contracts, and we are providing real capital and performance bond reductions of $1.6 billion to market users. Signing this agreement and bringing it to market effectively was a major accomplishment in 2003, and will have a significant positive impact on CME's results in 2004. David will provide some additional information about the financial results in Q4, as well as some detail, which should help you model the impact in 2004.

During 2003, we also expanded our global distribution through multiple agreements with new distribution channel partners. Last quarter, we discussed some of these distribution initiatives with Bloomberg, Schwab and E*Trade. Our volume from Schwab has grown From a few hundred contracts per day to about 4,000 contracts per day. In the fourth quarter we announced an aggressive new European incentive program designed to attract entirely new customer segments to CME. We have aggressively set the pricing for all CME GLOBEX related products for proprietary trading firms. Our new pricing is attractive compared to our European competitors who have products with smaller notional values and lower trading volumes in several cases. The European exchanges have had succes targeting these particular trading firms, since we see little or no volume coming from these customers presently, any volume or revenue will be incremental. We expect to see a positive impact in 2004 as these customers establish connections and begin trading CME products. In fact, this week we have established connectivity with one of the largest proprietary trading firms in London which has more than 150 traders. We are in the final stages of connecting another of approximately the same size.

In addition, in Europe during 2004 we will be opening six additional telecom hubs, which make it less expensive to establish a connection to CME. Those hubs will be located in Frankfurt, Dublin, Gibraltar, Amsterdam, Paris and Milan. Presently, most of our London hub connections are with users based in the UK. Due to the high cost to connect inter-country in Europe, we presently have low participation from users outside of the UK. We believe these new hubs will help us Add new users from additional countries with modest incremental cost.

Beyond Europe, we have been active in Asia and Australia. In January, we received final regulatory approval from the Australian government to provide Australian traders direct access to our markets via GLOBEX. This makes us the only overseas exchange to receive an Australian market license and to now offer direct access. In addition, just last week we announced we will launch Japanese yen denominated Nekay stock index 225 futures contracts on our GLOBEX platform. The Nekay 225 index is the most widely followed and frequently quoted Japanese stock index. With the addition of the yen-based contract and increased accessibility via GLOBEX, market participants will be better able to manage movements in the Japanese equities markets.

Moving on, I would like to update you on a number of recent developments with regard to our management. You may have seen our announcement that CME has appointed Rick Redding as acting head of products and services follow the departure of [inaudible]. Rick has been with the CME for 16 years, most recently as managing director of equities and is deeply knowledgeable about CME products and customers. Rick has been instrumental in marketing and promoting our highly successful E-mini contracts throughout the last seven years. Rick has also exceptionally strong relationships with CME's customer base.

Additionally, we announced yesterday that Scott Robinson is joining CME as managing director of corporate development. Scott, who joins us from McKenzie and company where he was a partner, will oversee our strategic planning, business development and mergers and acquisitions areas. Scott joins CME with 19 years of experience in financial services and strategic planning.

Further more, we are in the final stages of recruiting a chief marketing officer who will lead our newly integrated marketing function.

Finally, within this area, we announced last month the appointment of David Prosperry as director of public relations. David has 23 years of public and private sector communications experience and is a valuable addition to our team.

To summarize, we had another strong year from a product and financial perspective. We executed on several growth areas we outlined during our IPO road show back in 2002. We have successfully executed on our important transaction processing agreement with the Chicago board of trade. We continue to focus on technology innovation. We enhanced distribution through various providers and across multiple continents, and we completed a key acquisition of the assets of liquidity direct. We look forward to continuing to build on our growth strategy in 2004.

Now, I would like to turn the call over to David Gomach who will provide more detail on the financial results.

Thank you, Craig. Today, I will focus primarily on the fourth quarter. I will also make a few points regarding 2003 and provide some information about 2004.

Let's start with revenue. During the fourth quarter, clearing and transaction fees were up 8% to 103 million versus 95 million in Q4 of last year. Average daily volume was 2.33 million, up 9% compared to the same period a year ago. Q4 volume for our three largest product groups was strong compared to the prior year. Interest rate volume was up 13% to 1.2 million per day. Foreign exchange average daily volume of 141,000 was up 51%, and E mini products were up 4%, averaging 880,000 contracts per day.

During the month of December, we averaged 2.2 million contracts per day, which was up more than 30% compared to December of 2002. As I mentioned on our last earnings call, we typically see a seasonal volume slowdown around the Thanksgiving and year-end holidays, excluding the last seven days of December and the day before and after Thanksgiving, the fourth quarter average daily volume was 2.55 million contracts per day. Our aggregate rate per contract was 68.8 cents, down six-tenths of a cent from 69.4 cents last year but up 1.4 cents from the third quarter of this year. The rate per contract for interest rates was up from 49 cents in Q3 to 50 cents per contract this quarter.

We saw a higher percentage of electronic Euro dollar contracts which had a positive impact on the rate and we had less volume above the 10,000 contract tier which also had a positive impact on the rate. The end of the fourth quarter brought to conclusion the back month incentive program which was in place from March through December. We saw back month Euro dollar volume increase from 64,000 contracts per day during the first two months to 91,000 per day during the last ten months when the program was in effect. To enhance back month liquidity going forward we have implemented a new tier for high volume euro dollar trader. The base clearing and transaction fee which falls from 8 to 4 cents per futures contract above the 10,000 contracts per day will now be reduced to 2 cents creating a third tier for all trades above 20,000 contracts per day. The change in tiering is expected to affect the same liquidity providers and have less of an impact on the Euro dollar rate per contract than the prior program.

The E-mini rate per contract was 68.5 cents in Q4, approximately two cents higher than Q3. We saw less volume above the cap of 200 contracts per day, and the rate was approximately a penny higher than normal due to fewer adjustments in the fourth quarter.

Finally, the rate per contract for FX was $1.79. Down 9 cents from the third quarter. In Q4 we saw privately negotiated FX volume drop to 24,000 contracts per day from 32,000 contracts per day during the prior three quarters. Since the average rate for a privately negotiated contract is around $4, this decrease more than offset the mix shift from open outcry to GLOBEX where the rate per contract is higher.

Moving on to the additional revenue items, we have a new revenue line item called clearing and transaction services. This line contains one primary item. Processing revenue from the CBOT related to the common clearing services agreement which Craig discussed. It also includes a small revenue Stream from Nimex. To quantify this for you, the Nimex portion accounted for 180,000 during the fourth quarter. More importantly, processing for the CBOT during the fourth quarter resulted in 1 million of revenue.

As you may have seen in our December volume release, the number of matched CBOT contracts cleared from November 24 to year end was 9.5 million or 19 million sites. These are the number of contracts you would see on the CBOT website, measured the same way CME measures volume. For modeling future transaction processing revenue from the CBOT it is important to understand that we receive payment for transactions above the reported contract volume. The additional revenue results from processing post trade transactions and includes give-ups, position transfers and deliveries. We expect the post trade volume to average between 15 and 20% above the reported CBOT volume going forward. In Q4 we came in at the high end of that range, primarily due to product mix, venue mix and year-end related activity. In addition, you should be aware that our pricing agreement with the CBOT has a sliding scale. In other words, the rate we charge per contract goes down as we hit quarterly volume threshold. In Q4, all the volume was at the highest rate due to the fact that we were not clearing all their volume. Quotation data fees were 14.2 million for the quarter, up 600,000 sequentially and up 2 million compared to the prior year. Our screen count at the end of December was 32,000 first locations, 114,000 additional devices, and we had 28,000 lower priced nonprofessional subscribers.

Investment income reached 3.6 million in the fourth quarter, up from 2.4 million in the prior quarter. Included in this quarter was income of 800,000 related to our interest earnings facilities and 800,000 for deferred compensation. Those two categories were up 600,000 from the prior quarter. The IEF revenue is offset in other expenses and the deferred compensation income offset in the compensation and benefits line.

I'll now take a few minutes to review expenses. Total expenses for Q4 were 82.5 million, or 85.1 million, excluding the CEO stock option forfeiture. This was up from 76.4 million last year when, excluding the patent litigation, and up from 82.1 million last quarter. During Q4, we had approximately 1.8 million of expense related to the transaction processing initiative. Primarily in comp and benefits and professional fees. So for the year we had net expense of approximately 3 million for the common clearing link project, which fell within the start-up expense guidance of 2 to 4 million that we gave back in April. In addition, we completed a secondary offering of 2.4 million shares in November, which added approximately 500,000 of expense.

Highlighting a few of the main expense categories. First, compensation and benefits. During the fourth quarter we recorded 5.8 million for the incentive bonus, which brought us to 25.3 million for the year, 2 million below the planned maximum of 27.3 million. This incentive bonus is tied directly to the level of cash earnings the company generated.

As mentioned earlier, the stock based compensation portion of comp and benefits had a 2.6 million credit related to the CEO stock option forfeiture. Without the credit, stock based compensation expense would have been 1.2 million for the quarter.

At the end of December, headcounts stood at 1221 compared to 1207 at the end of Q3. During calendar year 2003 we added a total of 69 employees driven primarily by the CBOT clearing project, our European expansion initiative, technology projects to enhance our GLOBEX system and add functionality for trading options. We expect hiring to slow in 2004 as we are well positioned to execute our strategy with existing resources.

Noncomp expenses totaled 49.4 million in the fourth quarter, versus 46.1 million excluding patent litigation during the same period last year and 45.5 million last quarter. We projected last quarter marketing and PR expense. As we projected, came in higher than recent quarters at just under 3 million for the fourth quarter. The increase in marketing expense was for product advertising related to the equity and FX product lines. Promotion of electronic trading and the beginning of a concerted effort in Europe.

For the year, marketing and PR expense totaled 11.9 million, which included 6.2 million for branding. While we do not have a branding campaign planned for 2004, we expect our expense to be approximately the same as we plan to expand our product advertising to target new users. Lastly, other expense was 6.7 million in Q4. 1.7 million over Q4 of last year and up 1.4 million from Q3. The increase versus last year was driven by three expense areas. One, the consolidation of the first IEF added 600,000. Two, travel was up almost 500,000 related to product promotion, clearing firm and large customer relationship efforts, and our European and Asian initiative. Three, insurance expense accounted for 400,000 of the increase. The increase from Q3 came from numerous areas, but no specific area increased more than 200,000. Expenses were up sequentially due to increases in bank fees and our fees related to our new line of credit agreement. Also, staff training, supplies, expenses related to our November secondary offering, the CBOT clearing project and an increase in IEF expenses also contributed to the increase in other expense.

Moving on to income. Income before taxes was 47.5 million in the fourth quarter. Excluding the 2.6 million stock based compensation credit. Compared to 43 million for the same quarter last year, when excluding the patent litigation settlement. Without these two items, our operating margin would have been 35.8% versus 36% in the fourth quarter last year. For the year, 38% versus 35.4% in 2002. Net income for the quarter was 29.6 million and diluted EPS was 87 cents. Annual 2003 net income was 122 million with diluted EPS of $3.60 compared to 94 million of net income and EPS of $3.13 last year.

Moving on to the balance sheet. At the end of the quarter our balance sheet shows 442 million in cash. Cash equivalents and marketable securities, an increase of 103 million for the year. With respect to capital expenditures, capex and capitalized software development costs totaled 63 million for the year and was backend loaded with 24.9 million in the fourth quarter. The Q4 amount includes approximately 16 million for technology related projects and 8 million for our new secure building entrance, the reconfiguration of office space and expenditures for our remote data center.

In 2004 we expect capex to remain in the 60 to 70 million range. Cash earnings which provides the basis for our dividend payment and incentive bonus plan total 17 million for the fourth quarter and amounted to 113 million for the year, up 28% from 88 million in 2002. Speaking of dividends, CME made its fourth quarter dividend payment of 21 cents in December, up from 14 cents during the prior three quarters. The increase followed our announcement increasing the dividend payout percentage from 20 to 30% of prior year cash earnings. We paid out dividends of 63 cents per common share in 2003, which reduced cash by 20.7 million. Our 2004 quarterly dividend will be based on 2003 cash earnings of 113 million.

Now, let me summarize January volume. In total, we averaged 2.9 million contracts per day. Interest rates averaged 1.55 million contracts per day. E-mini equities 1.01 million. Equity standard contracts, 90,000. Foreign exchange, 173,000 and commodity products 39,000 contracts per day. Many of you are probably interested in CBOT volumes, which, for the month of January, averaged approximately 2.1 million contracts per day, excluding the post matched transactions which add 15 to 20% of additional transaction fee revenue under the clearing agreement.

Looking forward to the balance of 2004, there are several positive trends that we expect will impact our financials. First, CBOT clearing volume of 2.1 million contracts per day through January is tracking ahead of our original estimate. Second, we implemented a price increase for quotation data fees on January 1, which we expect to add over 1 million per quarter. Third, migration from open outcry to GLOBEX is well under way in foreign exchange and is accelerating in interest rates.

Finally, our underlying volume in January was strong despite very low equity volatility and low expectations for near-term interest rate changes.

With that, we would like to open the call for your questions.

Thank you. If you would like to ask a question, press the star key followed by the digit one on your touch tone telephone. If you are using a speaker phone please be sure your mute function is turned off to reach our equipment. Press star one to ask a question. We'll take our first question from Daniel Goldberg with Bear, Stearns.

Good morning, guys.

Good morning, Daniel.

Just a couple questions. First of all, in looking at the pretax margin numbers, they were down quarter-over-quarter. Historically, looking back it is a seasonal change. Is there anything that we should take away from some margin compression during the quarter?

Daniel, I would say 36% for Q4. There is some seasonality, as we indicated in the fourth quarter. That will probably always be a factor in the fourth quarter. Our margins going forward will certainly benefit from the common clearing project and other initiatives we invested in 2003.

Okay. Great. You mentioned the common clearing. If you go through the numbers, it was, basically, a net loss of 800,000. If I ran the numbers correctly. What you're expecting, just kind of review what you're expecting going forward in terms of the impact to the common link in '04 and '05.

For 2003, we had never expected any revenue initially. We moved up the project date, if you’ll remember from January to November. We did get $1 million in revenue. We had expenses of 3 million which we always expect if we had to make that investment. The real benefit will come in 2004. Our original guidance was from 10 to 15 million of net income based on CBOT volume of approx. 1.6 million contracts per day. With the volume increasing to now to 2.1 million contracts per day, the expectation is that number will certainly rise. We're not providing any specific guidance anywhere beyond that point.

Okay. Now that it seems as if Eurex approval seems to be imminent, has that impacted how you are thinking about the potential impact from the CBOT clearing link?

Daniel, it's Craig. That is not impacting our expectations. Obviously, when we entered into the transaction processing agreement with the board of trades, we fully expected that Eurex would be competing with the board of trade and we certainly expected that they would achieve regulatory approval. It will not have a bearing on our expectations in terms of performance.

Can you give us an update on your OneChicago business?

Sure. Let me start. OneChicago trading volumes and open interests have continued to build average daily volumes of approximately 7500 contracts per day, up about 1,000 from the prior quarter. We're also at this point exceeding and very effectively with MQLX on a ten to one basis. Average daily trading basis within QLX have been about 1,000 a day. We're still working hard to educate users about the advantages of these products. We're faring very well. We are seek increases in trading volumes and open interest.

Thank you.

You're welcome.

Our next question is from Scott Patrick with Morgan Stanley.

Hi. Good morning. First on the common clearing link. You indicated 1.8 million of expenses. Just wanted to understand how it breaks down between really what you traditionally think of as the startup expenses versus ongoing operating expenses with that initiative.

Hi, Scott. It's Dave. We had expenses or start-up expenses in 2003 of approximately 3 million. That was net of the 2 million we received from the board of trade. Our expenses going forward, we haven't provided any detail on that. That will be embedded in our P&L. We did add approx. 16 people, which, thanks to the head of our clearing house, we were able to put in place with less expense maybe than we originally anticipated.

So the 1.8 in the fourth quarter does include the operating expenses since November 24?

Yes.

Okay. I guess a second question is, given the heightened volumes we're seeing on both CME and CBOT, are you comfortable with the level of total clearing capacity that you have in place? How do you think about how much excess capacity you want to have to handle days with spikes?

Scott, I'm going to ask our President, Phupinder Gill to address that question. Gill has been the leader internally of our common clearing link initiative.

Hi. In terms of the total number of transactions, we're seeing between the board of trade business and the Merx business, looking, on average, about a million trade transactions a day. We typically plan for. That would be about the norm. We would typically plan about anywhere from two to three times the average. We have the ability at this point to handle up to 5 million transactions a day. That is to clear 5 million trade transactions a day.

Okay. Great.

Just to add to that, last week after the fed changed its language regarding near-term interest rate changes, we did actually clear 10 million contracts in one day, which I think is a good testament to the capacity of the system.

Great. I guess the other thing, in terms of the migration that we're seeing of interest rate volumes on to GLOBEX, fairly significant traction in 4Q it carried through in the first quarter. Is that still dominated by member volumes, or is there any customer volume starting to come on to GLOBEX there?

Scott, it's Craig. It is definitely a mix of both. We continue to see very heavy trading activity on GLOBEX from members which are not just for-based members but include our clearing member firms and their affiliates as well as what we call our inactive clearing member firms, which are large electronic proprietary trading groups. We see continued growth on the customer side as well. A larger percentage of trading activity both by open outcry and on GLOBEX is member concentrated because of our membership rules and fee structures where we advantage customers who become members of the exchange.

Okay. Finally, on the incentive accrual side, sorry if I missed that. Can you tell us what the incentive accrual was in the fourth quarter and also any color on -- are the stipulations of the plan the same for '04? 27.3 million cap?

For the annual bonus? The bonus plan last year had a midpoint of 17.5 million if we hit the cash earnings target. The target for 2004 will increase slightly from the 17.5 million. The increase will be less than 2 million at the target. More importantly, the cash earnings increase required to hit that target will be up significantly. Up significantly from the 113 million we posted in 2003.

What would be the cap level?

The cap on the bonus is usually approximately 50% above the new bonus target of, say, around 19, 19.5 million. It will be 50% above that. Of course, there's a floor of 15% below that where we don't hit cash earnings number at that point. There would be very little bonus paid, maybe approximately a million below that level.

All right. Great. Thanks a lot, guys.

Thank you.

Next, we'll go next to Charlotte Chamberlain at Jeffries and Company. Please go ahead.

Good morning. I was wondering, you said that the introduction of Eurex which is imminent, you imply that's not going to impact CBOT volume. I was wondering if you could tell us your reasoning of why. Then, also, for the interest rate contracts, as I understand it, the quote‘s that are there still derive quotes as opposed to reflecting the live quotes on the floor. I was wondering if any of the technology innovations that you described, in fact, would get live quotes as opposed to derived quotes on GLOBEX. Thanks.

Good morning. It is Craig Donohue. Let me tackle your first question and then ask David to respond to your second question. You know, firstly, I wouldn't make any predictions about Eurex's possibilities of success about with the board of trade. What I was saying earlier is we expected that Euree would be competing with board of trade and we’re confident obviously that the board of trade in a strong position to compete. It is one of the motivations for us to enter into that agreement. The board of trade has had a very successful year, they’ve had seamless and flawless conversions of both of their primary platforms. They've adopted successfully the live connects platform which is the good technology. That migration has gone well. The common clearing link was implemented successfully. Pursuant to that as you know we'll be providing 1.6 billion dollars in performance bond in capital savings to our end users. Which will be very difficult for Eurex to replicate.

Additionally, the board of trade has implemented already a number of different changes and other incentives and rule changes designed to enhance its competitive position. It will be returning to market users at least $60 million. They are in the process of bringing to market further initiatives which will continue to make them increasingly competitive. So we're confident that the board of trade is well prepared to compete. We're very confident that the common clearing link especially is an important ingredient in their overall proposition.

Okay. Basically, your forecast is Eurex will not divert any volumes from CBOT?

We don't expect for the competition of Eurex to materially change our guidance in terms of the transaction fees. We expect to generate under the agreement, which would imply that the board of trade will continue to have a very large percentage of market share, if not the complete market share that they have today.

One other thing on the CBOT. Apparently they had to raise $9 million from their members. Is that anything that -- the 60 million they gave back because of -- I guess they closed one of their businesses. The raising of 9 billion from their members, is that any indication that they need capital or anything like that?

No, I don't think so. I think they're acting prudentially I would not speak for them. My understanding is they made a distribution to the partners of the partnerships that had been created a number of years ago to facilitate electronic trading at the board of trade. For those of you who are familiar with the similar structure that we had at the CME we always had a partnership vehicle through which we could distribute profits from electronic trading at the time of our demutualization, we wound that up and consolidated that into CME. The board of trade had a similar structure. The distribution of profits was called for under that partnership agreement. Many of the same people who are going to be called upon to pay larger or higher dues to the board of trade are the same people who are receiving the benefit of that distribution, what they call their series limited partnership. I don't expect they will have difficulty doing that. I think the board of trade is doing everything to put themselves in a strong position to compete. They do have a relatively strong capital position to begin with.

The question about live quotes on GLOBEX versus --

This is Gil. Those quotes you are seeing on GLOBEX are actually live quotes. What you're seeing is implied quotes. The live quotes are provided for the [inaudible] and what is being implied are these spreads So, at the moment, any trader put [ inaudible ] any one of these individual months. What GLOBEX does as a feature is to imply what the calendar spreads are being listed as. The way the market trades, it trades both outright and spreads. So, basically, you are looking at a continually live market of both the outrights and the spreads. These are not quotes that are transferred from the floor. They are live quote that are on the box.

Okay. Thank you very much.

Just a reminder, if you do have a question, press star one on your phone at this time. Our next question comes from Collin Clark at Merrill Lynch.

Good morning. Can you give us a sense of how much the CME’s Euro dollar volume comes from European customers? I guess you indicated primarily UK customers. On top of that question, do you feel comfortable that the existing price structure in Euro dollars both globally and in the U.S. can protect CME's volume from competitors?

Collin, thank you for that question. First of all, let me say that the large majority of trading activity and trading interest comes out of the U.S., primarily New York, and people who are managing U.S. Dollar interest rates, swap exposures, although we have customer interest in trading activity out of London and Asia. We are in a very strong position we feel, to compete with this particular product. As you know, it is a very complex instrument that goes out over a ten-year yield curve. Much of the market is actually a call market. So there's actually sort of a manual for activity in that market. We have a distinct cost advantage for more than 80% of the users of this market by transaction volume. They’re charged if they trade on GLOBEX anywhere from 14 cents to 18 cents a side for a contract that has a million dollar notional face value, which makes us extraordinarily competitive, vis-a-vis any of our European counterparts who typically charge much higher fees for customers. Say, for example, the 46 cents a side approximately that is charged by Euro next life for traders in their [inaudible] contract. A contract is also much larger in terms of the amount of trading activity and the notional value of trading. We have been enormously successful with our Eagle functionality. If you have been watching the development there recently, we really had an uptake in electronic trading that's been quite remarkable, particularly in the last two months. We're up 45% year-over-year, 2003 against 2002. For the fourth quarter of '03 Versus 4Q '02 we're actually up 123%. The percentage of electronic trading of Euro dollars on GLOBEX and January has been running at about 7% and we're seeing a really rapid uptake just in the last couple of days with the increased fed activity. We had a couple days where we traded 220 and 240,000 contracts a day electronically in Eurodollars on GLOBEX. We're beginning to see a real change occurring rapidly. All of those things taken together really position us effectively to compete successfully with any competitors.

Okay. Just a couple follow-ups to that. How does your nonmember pricing stack up to the competition, in your view? Secondly, is there any way to give us a sense of roughly how much volume is coming from the UK customers in Euro dollars? 20%? Less? More? Any general sense.

I'll answer the second question first. I think it is probably substantially less than that. Most of the people who use this market are what we call members of the exchange. They happen to be the world's largest. global banks and their affiliates, including the Swap trading activity affiliates. The fees that I was giving you, 14 to 18 cents a side apply to more than 80% of the volume by transaction volume.

On the pure customer side, first of all, we're probably somewhat more expensive there but probably less than 20% of the total market. They also are more focused on the total cost of liquidity. On the basis of the spread and very little impact or slippage costs, they are not that price sensitive to the exchange fees. They tend to be low volume traders because if they were high volume traders, they would become members or clearing member firms of the exchange and thereby avail themselves to the lower rate. They tend to be less price sensitive.

One last question. With regard to the Euro dollar options, electronic trading initiatives, what's the pricing on that particular product? Any thoughts on how that could be going forward as you roll that out?

Let me -- before we go to that, let me add one more thing about your question related to trading interest out of Europe. One of the things that I would emphasize is our European incentive plan. We have put in place what we think is a very aggressive pricing structure of 44 cents a side for nonmembers. These would be the large proprietary electronic trading groups and trading arcade members who might be interested in trading various of our electronically traded products but also including our Euro dollar contracts. It is an example of potential high volume, high velocity traders who would trade our Eurodollar contract where, as I indicated, we're at 44 cents aside, versus the 46 cents charged for by [inaudible] contracts. Even for that nonmember customer segment we have a very attractive proposition in place. The introduction of the telecommunication hubs which will reduce cost for those market users will, in tandem with those price levels, make this very attractive. We expect to be able compete attractively with European-based customers.

Let me ask you a question. On the question about the Euro dollar options, are you talking about the current pricing that we charge for Euro dollar options, or were you referring to the pricing scheme that we would implement in connection with our launch of the liquidity direct platform?

Both if you give us a sense of where you're at now and how that could change.

Our option pricing is the same for the futures, for CME products. We have not released our liquidity direct pricing at this point in time.

Okay. Is it reasonable to assume that you would make -- earn a higher rate per trade on electronic Euro dollar options? I'm not talking how much the customer is being charged, but the fees to the exchange versus pit trading of Euro dollar options, similar to the futures contracts.

Absolutely. It is the same price fog Euro dollar options on GLOBEX as it is for Eurodollar futures. We don't differentiate between options and futures pricing.

Thank you.

Due to time constraints, this concludes today's question-and-answer session. I would like to turn the call back over to the speakers for closing or additional remarks.

If there aren't any other questions, I’d like to thank everybody for joining us today and thank you for your continued interest in CME and we look forward to talking with you again next quarter and reporting on our progress as we continue to execute our growth strategy. Thank you very much.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.