芝加哥商業交易所 (CME) 2004 Q1 法說會逐字稿

This is Premier Conferencing, please stand by, we're about to begin. Good day and welcome to the CME First Quarter Financial Update. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. John Peschier, please go ahead, sir.

Thank you for joining us. Craig Donahue, our CEO, and Dave Gomach, our CFO, will spend a few minutes outlining the highlights of the first quarter, and then we will open up the call for your questions. Terry Duffy, our Chairman, and our President, Phupinder Gill are also here this morning, and will participate in the Q&A session.

Please note that all references we make during this call to trading volume, and rafer (ph) contract exclude our low price trackers products. Before they begin, I'll 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 statement.

More detailed information about factors that may effect our performance, can be found in our filings with the SEC, including our most recent annual report on Form 10-K which is available on our Web site. Also we refer in this call to our tax earnings, a non-GAAP number. The reconciliation to net income can be found on our Web site under investor relations, under quarterly financial information.

In addition, we have posted slides associated with this earnings call on the IR portion of this site.

With that, I would like to turn the call over to Craig.

Thank you, John. And thank you for joining us for our first quarter 2004 earnings call. It was an impressive quarter on many fronts as CME generated strong profits by leveraging record CME product volume over a stable expense base.

In addition, we completed our first full quarter of providing clearing processing services to the Chicago Board of Trade, which added an important new revenue stream to the CME.

I will start with the key financial results. During the quarter net revenue grew to $166 million, up 32% or $40 million from the same quarter a year ago. Income before taxes grew 77% to $77 million, and operating margin improved from 34.7% in Q1 of '03, to 46.5% during this quarter. Our diluted EPS was up 75% to $1.35, compared to 77 cents during the same quarter a year ago.

And last, we generated over $50 million of cash earnings in the first quarter, which, as you know, is the basis for our dividend payout.

In terms of contracts traded, our overall volume was up 19% at 2.8 million contracts per day. That is 200,000 contracts per day higher than our previous all time record quarter during Q2 2003. Taking a look at the product areas in Q1 compared to the same quarter a year ago, interest rate volume was up 26%, driven by growth of Eurodollars on GLOBEX of more than 350%.

Foreign exchange volume was up 49%, driven by EFX growth of 152%. E-mini volume was up 12% despite continued low volatility in the equity market, and commodity volumes were up eight percent. Overall electronic volume was up 29% compared to the same period a year ago. And significantly, for the first month ever, March GLOBEX volume was over 50% of the total.

The Chicago Board of Trade also had a strong quarter. They averaged 2.2 million contracts per day, up 41% compared to the same quarter a year ago.

And so far, in April, the Chicago Board of Trade is averaging approximately 2.6 million contracts per day. During the first quarter, we announced several programs to increase trading of Eurodollar futures on GLOBEX.

We expanded our Market Maker program, which now includes 16 Market Makers during both regular and extended trading hours.

We offered a hand held incentive program to increase GLOBEX trading volume from floor traders, and we received a positive endorsement from class B shareholders who voted 82% in favor of a referendum allowing trading of the front two Eurodollar month exclusively on GLOBEX if volume were to fall below certain thresholds.

Last, we reduced the customer rate for the GLOBEX portion of our fees from 80 cents to 55 cents. After averaging about 61,000 Eurodollars per day on GLOBEX in Q4 of last year, we grew to 104,000 per day in January, to 134,000 per day in February, 220,000 per day in March, and more than 390,000 contracts per day in April, including one day last week with more than 800,000 Eurodollar contracts traded electronically.

Over the next few quarters, we intend to add new functionality to our interest rate offering on GLOBEX. Later in 2004, we will roll out additional calendar spreads and butterfly combinations, which will provide enhanced functionality for trading futures on our GLOBEX platform.

We had previously announced we would incorporate these new spread combinations beginning in May. In light of recent record volume increases of Eurodollars on GLOBEX, we have changed the prioritization of our technology enhancement.

Performance upgrades to maintain appropriate response times at these higher volume levels originally scheduled for later in 2004 will be accelerated and implemented at the end of Q2. The new spread combinations that will provide the unique functionality not included on any other futures platform is scheduled to be implemented in the third quarter. In addition, later this year, we will add GLOBEX options trading functionality, which enables more sophisticated electronic trading of option products.

This new capability, building on our acquisition in January of the technology assets of liquidity direct technology will preserve and enhance transparency and competition among market makers in electronic options markets. I want to make a few comments about two recent CME pricing initiatives designed to attract new users. First, we are making good progress expanding our European customer base, with our European incentive plan, and the installation of six new European telecommunications hubs.

We are beginning to see increased activity from high volume proprietary trading groups. Four of the hubs, in Dublin, Amsterdam, Gibraltar, and Frankfurt, are now fully operations, with Paris and Milan expected to begin later this year. Terry Duffy and I recently met with key target customers in Dublin and London, and they expressed strong interest in CME's product offering.

Over the last several months, we have established the initial connectivity with these firms, and we are already working to train and educate their traders about Eurodollars on GLOBEX, our e-mini stock index futures, and our EFX product. In April, we announced three foreign exchange pricing initiatives, targeted to EFX customer segments that are presently under penetrated by CME. We are attempting to increase non-automated trading for large volume proprietary traders, many of whom are significant E-mini traders.

The other initiative targets hedge funds and non-members who utilize automated trading systems. Our intent is to continue to broaden our customer base and add to our EFX liquidity, with the goal to grow our market share relative to the spot and forward FX market, where we are currently only a small percentage of the total market. On the new product front, we remain active.

First, we continue to focus on global products, and introduce yen and dollar based Nikkei products via GLOBEX in late February. In March, we averaged approximately 3,000 contracts per day combined with these new products. Next, we announced we would be partnering with Tullett Liberty, a major OTC inter dealer broker to offer the first seamless, integrated trading and clearing of exchange listed products with forward rate agreements and the over the counter interest rate market.

Finally, we have offered the first futures product based on an economic indicator with the launch of our new consumer price index futures contract. Moving on to provide an update on our single stock futures joint venture, during the first quarter, One Chicago averaged 9,900 contracts per day, which was the highest level since inception. That compares to 7,600 during the fourth quarter 2003, and 4,700 during Q1 of '03.

We are working closely with the leadership of One Chicago to identify areas for potential growth. We also recently adopted an extremely focused marketing strategy to attract equity options market makers, which we expect will increase average daily volumes in these products. We will also continue to carefully monitor One Chicago's performance as they execute on their new focus growth strategy.

Let me shift gears, and provide some detail regarding the early result of the two European entrants who have listed comparable U.S. product. As many of you know, Eurex U.S. entered the market in February, and began trading Treasury note and bond futures. This is the third time a new entrant has targeted the Chicago Board of Trade's business, following previously unsuccessful attempts by Cantor and Brokertec.

While it is still early, the results to this point have been somewhat lackluster concerning our belief that it is extremely difficult to coach a successful liquid futures product from an established market. Here are the facts. After starting with about 18,000 treasury contracts per day in February, Eurex U.S. dropped to 7,400 contracts per day in March, and they are averaging 4,900 contracts per day in April.

Four tenths of one percent of the Chicago Board of Trade's Treasury Futures Volume. During the month, the Chicago Board of Trade has averaged more than 1.3 million contracts per day. Also, Euronext Life began trading the Eurodollar contract on March 18. In April, they are averaging 8,300 contracts per day, or seven tenths of one percent of CME's Eurodollar futures volume.

This is the same percentage of CME volume that they averaged in March. At the same time, we have seen extremely strong growth in Eurodollars on GLOBEX, which I discussed earlier. To summarize, while we are pleased with our recent success, there are several drives to our future volume, revenue and profitability growth. First, we have considerable opportunity with electronic trading of Eurodollar and EFX products.

The first layer is the additional revenue we receive from an electronic trade compared to an Open Outcry trade. This quarter, on an overall basis, we averaged 79 cents per GLOBEX contract, 49% higher than the 53 cents per contract collected for an Open Outcry trade. In addition, history has shown that electronic trading capability increases trading volumes.

We have seen it in our E-mini product, we began seeing it last year with our EFX product, and we are just beginning to see what is possible with euro dollars on GLOBEX this quarter. Our GLOBEX platform offers global distribution, open access, immediacy of execution and equal access to the Book of Prices.

Secondly, we are in the very early stages of seeing volume from our targeted customers in Europe, both Deutsche Borza (ph) and Euronex Life have been successful at distributing their existing European products in North America with between 15 to 25% of their volume originating from the United States. We believe our benchmark products will be compelling to European users and we believe we can achieve strong growth from our European expansion plans.

Third, we continue to add functionality to our GLOBEX system and we plan to continuously roll out new products onto our platform.

Fourth, we have shown that we can and will leverage our existing assets as we have accomplished with the Chicago Board of Trade, the New York Mercantile Exchange and One Chicago. Due to the critical mass we have developed with products and clearing and the evidence of our ability to execute, we have become the partner of choice. One recent example is Tellet Liberty's (ph) choice to partner with us to utilize our GLOBEX system and our clearinghouse, which offers capital reduction opportunities for forward rate agreement and euro dollar users.

Fifth, we believe we are best positioned in North America to expand our business through consolidation. We will continue to work hard over the next 12 to 18 months to examine various alternatives.

Sixth, the secular shift from the over-the-counter markets to exchange traded derivatives is continuing as the derivatives exchanges have grown faster than the OTC market during the last three years.

And finally, we are starting to see heightened anticipation around potential Fed activity as evidenced by our recent euro dollar volume. We are seeing reactions following the release of economic data such as labor and consumer price index numbers and following public statements made by Alan Greenspan.

Once the Fed does raise rates, users will adjust their positions and exposures and we are extremely well positioned with record euro dollar open interest levels and our expanded electronic trading capability to maximize trading volumes. Once the Fed makes the first move, there will likely be continued volatility and anticipation of the timing and size of additional moves. Historically in this environment, CME has performed extremely well.

All of these factors in tandem present good opportunities for the Chicago Mercantile Exchange in the near term. At this point, I would like to turn the call over to David Gomach, our CFO, who will provide more detail about our first quarter financial results. Thank you.

Thank you, Craig. I will go through the financial aspects of this record quarter. The key takeaway continues to be the leverage in our business model, as Craig mentioned. You can clearly see the leverage by comparing the first quarter of '04 with first quarter of last year.

Revenues increased by over 40 million and expenses increased only 7 million. The 33 million of additional operating income represents incremental margin above 80%. I will walk you through our business drivers, financial results, and then we will address your questions.

During the first quarter, clearing and transaction fees were up 20% to 123 million versus 102 million in Q1 of last year. Average daily volume was 2.83 million contracts in Q1, up 19% compared to the same period a year ago. We saw broad based strength in our three primary product groups, all of which hit record quarterly volume levels.

Our aggregate rate per contract was 69.9 cents, down a half-cent from the 70.4 cents during the same quarter last year, but up 1.1 cent from the fourth quarter of last year. The rate per contract for interest rates was 51 cents compared to 50 cents in Q4.

The percentage of interest rate volume traded on GLOBEX grew from 5% in Q4 to 11% this quarter. A positive impact of the higher rate per trade for electronic trading was partially offset by an increase in tier discounts, resulting from record interest rate volume.

To accelerate the growth of euro dollars on GLOBEX, we initiated a number of incentives in March, which Craig mentioned, that reduced the average rate for euro dollars on GLOBEX. However, it is important to note the incremental GLOBEX volume is very accretive and the average rate for trading euro dollars on GLOBEX remains 60 to 70% higher than trading the same product on our trading floor. The Emini rate per contract was 69.3 cents in Q1, down approximately 2 cents from the same period last year, but up 1 cent compared to Q4 of '03. The main driver of this sequential increase was the fact that we saw a 1% shift in volume mix from number to customer.

Finally, the rate per contract for FX was $1.78, down from $1.89 during the same quarter a year ago and down a penny from the fourth quarter. This minor drop from Q4 was due to a volume mix shift between GLOBEX, privately negotiated, and open outcry (ph).

Total revenue from FX is up 43% to approximately 21 million this quarter, up from 14.5 million during Q1 of '03.

Moving on to additional revenue items. First, the clearing and transaction services line. We provided clearing services to the Chicago Board of Trade for the full quarter for which they reported volume of over 2.2 million contracts per day, or 273.1 million sites. This volume, plus the post matched trades we mentioned last quarter, generated revenue of approximately 12.3 million for the quarter.

In addition to CBOT processing, this revenue line includes approximately 180 thousand per quarter from Nynex to utilize CME's GLOBEX system to trade eMini energy contracts.

Quotation data fees were 15.5 million for the quarter, up from 11.8 million during Q1 of '03, and 14.2 million in the prior quarter. We went to a flat rate price of $30 per screen beginning in January from a two-tiered pricing scheme. Our screen count at the end of March was 142 thousand for professional subscribers and we had 32 thousand lower priced non-professional subscribers.

In addition, we had two audit assessments that added approximately 750 thousand of revenue this quarter. Without the assessment, quotation fees would have been under 15 million.

I'll now take a few minutes to review expenses. Total expenses for Q1 were 89 million versus approximately 82.3 million for Q1 last year, and up from 85.1 million in Q4 of '03, excluding the former CEO stock option forfeiture which positively impacted expenses.

I will now highlight a few of the main expense categories. First, compensation and benefits totaled 40.6 million for the quarter and was up approximately 7.3 million compared to the same quarter a year ago. To further explain that, salaries and benefits totaled approximately 32.1 million, up 4 million from last year, due primarily to salary increase and headcount added in 2003.

Second, during the first quarter of this year we recorded 7.4 million for the incentive bonus as compared to 4.4 million in Q1 '03. This incentive bonus is tied directly to the level of cash earnings the company generates. This year our target bonus payout is 20 million if the company reaches its target cash earnings level. This compares to 25.3 million paid last year for a considerably lower cash earnings level of 113 million.

The bonus would max out at approximately 32 million for the year if we exceed the cash earnings target by 20 percent or more, the final component of the comp line and stock based compensation, which totaled approximately 1.1 million during the first quarter.

At the end of March, headcount stood at 1,238 compared to 1,221 at year-end. As we said on our last call, we expect hiring to slow in 2004 as we are well positioned to execute our strategy with existing resources.

Non-comp expenses totaled 48.4 million during the first quarter compared to 49 million in Q1 last year and 49.4 million during the fourth quarter of last year. This is evidence of expense discipline and most impressively, the first quarter included the full expense impact of transaction processing for the Chicago Board of Trade.

Depreciation came in at 12.8 million, down from 13.2 million during the first quarter of 2003. A number of assets and leasehold improvements became fully depreciated at year-end and our capital expenditures in Q1 came in on the low side at 9 million.

Beginning in the second quarter, we expect to see our cap ex rise due to capacity upgrades and expenditures related to an additional data center. This investment will enable us to transition systems to an additional facility that will provide state-of-the-art infrastructure and a cost - and cost effective options to support future growth. We expect depreciation to tick back to 13.5 million following increased capital spending in Q2. We expect cap ex for the year to remain in the 60 to 70 million range.

Marketing and PR expense was 2.5 million for the quarter and we still expect to spend approximately 12 million for the year, driven primarily by product related advertising to attract new users.

Moving on to income. Our pretax income was 77.4 million in the first quarter, up 77% from 43.8 million in the first quarter last year, and up 55% sequentially. Our pretax operating margin was 46.5%, the highest margin quarter in our history. Net income for the quarter was 46.1 million, and diluted EPS was $1.35. Both of these are up more than 75% compared to the same quarter a year ago. The effective tax rate during the quarter was 40.5%, down slightly from 40.7% during the full year of 2003.

Moving on to the balance sheet. At the end of the quarter we had 460 million in cash, cash equivalents and marketable securities, and we had no debt.

Cash earnings totaled approximately 50 million for the first quarter and was impacted by the timing of capital expenditures. CME made its first quarter dividend payment of 26 cents in March. We have increased the dividend twice during the CME's five quarters as a public company, from 14 cents to 21, and now 26 cents.

Several investors have asked us about the June 4th lock-up expiration, so I want to share the facts with you. Prior to the IPO, members owned approximately 29 million shares. They sold 1.8 million shares at the time of the IPO, 1.1 million shares in the June secondary, and 2.2 million in the November secondary. It is important to know that at each of the three selling events they had the right to tender 100% of their shares.

With 5.1 million shares tendered and sold to date, the number of member-held shares subject to lock-up expiration is just under 24 million.

Of the 24 million, approximately 5.8 million shares are required to be held by our clearing firm as long as they continue to clear at the CME. That brings the number of shares to be released from lock-up to approximately 18 million. We have not made any announcement about guiding a sale for our shareholders. Our Charter does not contain a mechanism to allow the company to guide a sale at this juncture. Given all the facts, we are not convinced that a guided sale would be valuable to our shareholders.

However, I'd like to now move on and summarize April's volume. So far in the second quarter through Friday, we were averaging 3.3 million contracts per day, 460 thousand per day above the first quarter.

Anticipation of the timing and size of potential Fed interest rate changes and the surge in euro dollars on GLOBEX has driven interest rate volume to almost 2 million contracts per day. eMini equities are above 1 million contracts per day, equity standard contracts 86 thousand, foreign exchange 157 thousand, and commodity products 37 thousand contracts per day.

Overall, we are very pleased with the start of 2004 and are encouraged by our prospects for the remainder of the year. Our ability to leverage our platform with the CBOT clearing agreement has produced a significant revenue and cash earnings stream. As Craig discussed, operating leverage continues to be the story this quarter. As always, we will move forward with a sharp focus on expense discipline and cash flow generation.

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

(OPERATOR INSTRUCTIONS)

And we'll take our first question from Scott Patrick (ph) with Morgan Stanley.

Good morning. Great quarter, guys. Just a few questions here. The first is, you commented about the 460 million of cash and marketable securities on the balance sheet. Can you kind of walk us through how much of that is really needed for day to day operations and to support the clearing operation versus how much is really excess?

Sure. Hi, Scott, it's Dave. Approximately 100 million we would want to keep for ongoing working capital. That would be what we need for operations. Beyond that it's available for strategic opportunities.

And that includes any commitment to the clearing house?

Correct.

OK. The second is just on the common clearing link. Board of Trade had about 2.2 million a day. In terms of the post-trade matches, I mean, is 15% a reasonable assumption there?

Scott, it came in a little higher this quarter, it came in around 18%. Again, we think it'll range between 15 and 20%. It's hard to predict. We've only had a couple of quarters of results.

OK. Next question is just that with the big surge in interest rate volumes that you've seen so far in April, any color on if there are any concentrations in terms of the types of end users that are driving that and can you kind of talk about just the debate that's out there between really secular versus cyclical forces in the volumes overall?

Sure. Hi, Scott, it's Craig Donohue. First of all, I don't know that we can break down for you our segments, the flow of transaction volumes from our different customer segments. I mean, in very general terms, the largest amount of participation in the euro dollar market comes from swap dealers who are laying off the net exposures of their interest rate swap books, as well as money market desk managers and other people with mortgage risks in the marketplace. We don't break down those percentages but in general terms, I think all of those market purchase events are contributing to the volume growth in the product.

With respect to the second part of your question, I think that we're continuing to see growth attributable to what we call the secular shift and I think if you look at the Bank for International Settlement statistics you can see that the exchange traded derivative markets have outperformed the OTC interest rate markets pretty substantially over the last three years. So that's certainly continuing, but, as well, we're obviously seeing increased activity as a consequence of the recent numbers releases from the government as well as the Alan Greenspan testimony that has been creating, I think, a different perspective on the timing of future Fed rate changes and a movement away from their accommodation policy, but I can't break it down in terms of numbers.

Right. Not a tough goal. And I guess just one final question. You had mentioned in your comments that Euronext and Deutsche Börse get about 15 to 25 percent of their volumes in the U.S. in their core businesses. Can you give us some idea of where you guys are on that right now and whether you think 15-25 percent is a reasonable range for CME in Europe?

I think first of all we're in the very, very early stages of achieving that level of penetration in the US-excuse me, the European customer base. Where Eurex and Euronext.Liffe has been particularly successful is with the large electronic proprietary trading groups and trading arcades in Chicago, and as a consequence of our new pricing strategy, our telecommunication hub strategy and our overall marketing effort in Europe we do expect that we can grow our average daily volumes very substantially as we cultivate that same customer base located in Europe.

Great, thanks very much.

Our next question will come from Joel Gomberg with William Blair investments.

Morning.

Morning, Joel.

Morning

Craig, maybe you could expand a little bit about the Eurodollar movement toward the electronic platform and maybe you could spell where you stand on the front end Euro dollar contracts, how much is electronic versus the back end and the front end driven by the floor-based traders using their handhelds and what they're telling you down there and is it the key to mimic these more complex trades to get the back end months going?

Sure, I'd be happy to comment on that. First of all, as you know and as I mentioned during my remarks we had established as a board what we felt were minimum thresholds of trading volume in Euro dollars on GLOBEX for the front and second contract months and we set those percentages respectively at 25 percent and 20 percent of total trading volumes.

I'm very pleased to report that we're actually far exceeding that percentage, we've been in rough approximate terms about 49 or 50 percent electronic in the front month contract, roughly 35 to 37 percent in the second contract month, and actually, in almost an equal percentage in the third contract month, where we didn't even set a percentage, and so we've been very pleased with the results of that particular proposal and also the results of all the various technology and pricing initiatives we've made to fuel the growth of Euro dollars on GLOBEX.

A great deal of the activity is coming from local traders on our floor who are standing in the pit. We have enabled them to trade on GLOBEX using handheld trading devices and also telephonic headsets so that what they're able to do is actual arbitrize the price differences between Eurodollars traded electronically on GLOBEX and the Eurodollar open out (ph) pry (ph) market. In February we had 65 people who were using those technologies.

In April we actually have 155 people who are using those technologies and we have 70 more applicants in the queue who will be using that technology as soon as we can get them registered and trained and able to use this technology, so it's been a very critical part of our overall success and I think the most important thing to note is that the members of the exchange are not only embracing technology and electronic trading but they are really the primary driver of growth in our electronic offering.

What do you think the key is to get the backend months?

Well, as you know the backend is a much more complex market, it tends to trade in more of what we would call a "call-market" structure and so we're bringing forward the various functional enhancements to GLOBEX that can accommodate very sophisticated and complex spread and combination trading, but I think it'll be a question of the maturation of the market electronically and the adaption rate as increasingly we get locals to use GLOBEX to use more and more.

Thanks Craig.

Your welcome.

Moving on to Charlotte Chamberlain with Jefferies and Company.

Hi and congratulations on a fine quarter. In trying to model going forward, should we be using roughly $18 million for cap ex as an assumption for the second, third and fourth quarter?

Second, should we assume that the total-that the 18 million in shares that are going to be available for trading, that's out of a base of 34? And then finally, again, for modeling, you've changed the pricing on your interest rate contracts. Should we be assuming a different revenue capture in the second quarter than we've seen in the first quarter? Thank you.

Hi Charlotte. It's Dave. On the cap ex. Yes, we spent $9 million in the first quarter as we said. We expect the balance to be-for the year total to be between 60 and 70 so it'll ramp up certainly in the second quarter. Spreading over the three quarters sounds appropriate. With respect to the shares that are outstanding and ready to come off of lockup, those are part of our 34 million diluted shares so-And I think the last question had to do with pricing on Eurodollars.

Right.

As we said, if we look at our old pricing for Eurodollars, all in was around 50 cents. The capture will certainly be additional as it goes more electronic. I think we said it would be 60 to 70 percent greater electronically, so if you just took 50 cents times 1.6 you'd get somewhere around the rate we expect to capture electronically.

Even though you've got more volume discounts here starting in March?

March we had the effect of that and we feel comfortable with the numbers we've given.

OK. Thank you.

Anything further Miss Chamberlain?

Yes, how did you decide on Tullett Liberty? I mean, they're not noted for having a huge electronic platform compared to, say, Itech (ph). How did you chose Tullett Liberty?

Charlotte, it's Craig. Let me answer that and begin by saying first of all our partnership with Tullett Liberty is not an exclusive partnership and we're very focused on ways in which we can expand our business by working more closely in a variety of different ways with interdealer brokers.

So we felt that Tullett had a very strong capability to work with us on the initiative which we've announced, which is the forward grade agreement switch electronic match and clearance facility to have a strong business in that particular area. We'll actually be using our own electronic platform, GLOBEX, and our clearing house for that partnership so the technology capability of Tullett was not a consideration in our electing to work with them.

I understand that but the point is that your customers aren't used to electronic trading either.

Yes, but our customers are and we think that we're going to offer them a lot of efficiencies. The RFA switch market is operationally burdensome and this is going to be, we think, attractive to them. Gill, did you want to add something?

It's-into actually properties that they also bring to the table, not to mention that their client base itself even though they don't trade electronically predominantly with them by no means not used to electronic trading and this is the information that we get from going out and talking to the clients, because these clients are the ones that are going to basically-they already trade the Eurodollar curve that we have here. We're providing existing clients of CME with what the so-called stub risk protection by introducing this product with collards (ph).

So it sounds as if the voice brokers are going to use it electronically and do it voice for their clients. That's interesting. Thank you.

Our next question will come from Colin Clark with Merrill Lynch.

Good morning. I'm sorry to have you repeat this. Could I just get the interest rate and Emini volumes for April?

Sure. Just over a million for our E-mini contracts and our interest rate contracts were about 1.3 for April.

1.3 for April? For the interest rate?

Interest rate for Eurodollars are almost 2 million in April. And the Eminis are just above a million.

OK, and of that 2 million approximately like 380,000 per day is electronic?

383.

And what's your dividend rate? I believe you mentioned that.

We paid 26 cents per share in the first quarter.

And finally on just-you touched on the single stock futures initiative-just wondering if you could provide any more insight on the opportunity in that product, just in terms of what you're seeing. Would you define it as a long term opportunity and maybe traction could be a little tougher to come by in the near term? Or what do you see in that particular product?

Let me - Colin, let me address that, it's Craig. One Chicago we had definitely viewed as a long term opportunity, it's a very complex product and we had a number of challenges in bringing that product to market from a regulatory operational and technology perspective.

Having said that we're seeing very nice growth in that market. I think I reported that we're up to 9900 contracts per day from 7600 contracts in the fourth quarter and about 4500 contracts in the first quarter of '03. So we're definitely seeing an increase in the activity level there.

On the other hand, we do continue to look at this very, very carefully relative to the existing investments in the ongoing expenses associated with maintaining OneChicago.

We have worked with OneChicago management to adopt what I would call a more intense and focused marketing strategy to see if we can grow those trading volumes much more quickly with a more concentrated user base. That seems to be working pretty well, but we've also set forth some internal objectives for what we've like to see in terms of average daily trading volume and growth and we're going to be looking at those metrics very carefully as we decide how to continue with OneChicago.

OK, is that product operating at break even or a small loss and the other thing is where does the competition stand on-I believe it's only Life that is also going after that market. Any sense on where they stand?

Yes, let me address the latter part of this and I'll let David address your break even question. NQAlex's (ph) position in the market has deteriorated significantly. They're averaging about 1,400 contracts per day in the fourth quarter.

OK.

In terms of the financials, for the fourth quarter our next effect to our P&L was around a $700,000 loss and that was the result of basically $1.4 million loss offset by some revenues of about $700,000. In Q1 that loss was narrowed from $708 to $348,000 so they have picked up some traction and volume but it's still a considerable ways for them to go before we break even.

OK, thank you.

Our next question will come from Daniel Goldberg with Bear Stearns.

Morning guys, great quarter.

Thank you, Daniel.

Could you just talk a little bit about-we've heard a lot about your potential for acquisitions or partnering. Talk a little bit about what you'd consider before entering into a potential deal or what you look for in a potential partner.

Sure, I'll be happy to address that. I think obviously there are limitations on how descriptive we can be without I think disclosing some of our strategy and potentially different targets that we're looking at.

First off all we're very interested in further leveraging our infrastructure and our platform, so to the extent that we can look at target opportunities that have business systems that are very similar to our own, we're very attracted to that.

I think the board of trade clearing processing agreements is a type of example of how we think about how to grow the business inorganically through mergers and acquisitions in that it really played to the leveragability of our business model, with very limited capital expenditures and ongoing expense increases we are able to generate very substantial revenues and net income from that and so the way that we think about mergers and acquisitions we're very oriented that way more towards infrastructure cost-savings opportunities than perhaps growth synergies in the market place.

Second and third I think we're very focused on electronic trading platforms because of the integration benefits rather than floor-based systems and because of our unique position being a publicly-traded exchange and operated on a shareholder value discipline basis we would tend to look at other enterprises that are similarly organized so that we're not trying to rationalize another enterprise, in the way that we've already done with CME over the last four to five years.

OK, that's helpful. In terms of regulatory. Can you give us an update on anything that might be potentially on the horizon? Obviously a much different situation on the equities market, but can you give us an update there on anything new on transactions, taxes or anything else?

Hey it's Terry Duffy. Just to give you an update, I think there is no update. We're always vigilant, I spend a lot of time in Washington and transaction taxes, repeals of 60-40 or things of that nature have not reared their ugly heads recently, as you know, last May it did, I spent four days out there and we got that taken out of the President's budget, so again, we're always vigilant on regulatory issues but right now, thankfully, we have nothing on the horizon.

OK, and then just finally maybe a question for Dave in terms of pre-tax margins. Can you give us a sense for-you brought in 46.5 percent pre-tax margins, how sustainable, or how should we think about that when we're modeling out for future quarters or future years?

We continue to invest in the future so our expenses so our expenses will continue to move up somewhat but we believe certainly with the migration to electronic trading that will be accretive as long as the board of trade continues to put up volume or increase volume that will be accretive.

Also, the growth we're seeing in Europe from some of our hubs already we know that that's going to be accretive, that cost structure is built into our model, and then any new products or if we get volatility in the equity markets again, we again have an extremely leverageable platform, so we feel very comfortable where we are and where we're going.

Alright, great, thanks guys.

Thanks, Daniel.

Moving on to Glen Schorr with UBS.

Hey guys, how are you? This is actually Chris Costanza calling for Glen. A couple of quick housekeeping questions. First of all could you give us a sense of your non-U.S. hours GLOBEX volumes in the first quarter and in April? Off hours volume.

Chris, it's Craig, we don't report and break down our volumes that way, so I don't have that number for you.

OK, second question, and on a housekeeping basis. Is there anything special behind the up-tick in trackers pricing in Q1?

Hi, Chris. There were a couple of issues. One is the most significant, it was about $150,000 increase that 100 of that was related to an audit assessment, so that's non-recurring.

And then about 50,000 of it was related to our new goal tracker. There was some fees in there so that's a higher rate for contract products and any of the other trackers we have. But that added about 50,000 this quarter.

OK. Speaking more qualitatively, beyond technology enhancements, can you talk to the challenge of getting the roughly 30 percent of Eurodollar volume that's traded in options on GLOBEX and how you might stand that transition in '04 and '05?

I'm sorry, can you ask me that again?

Your asking about Eurodollar options?

Right, so we know you've got technology enhancements coming in '04. Can you talk about the challenges of bringing that over and how you might incentivize that transition?

I think the way the options markets work currently for the electronic exchanges in Europe, they tend to be for the most part, if not entirely, a call-around marketplace and the lacuzzi (ph) direct transaction that we just engaged in, what it does, it has the potential to change the way the game is played. It takes the efficient market that exists on our floor currently and puts it onto an electronic platform that transparently displaces the entire marketplace what the option prices are.

Currently if you can imagine a world that you want to know what a particular option or series of options are actually doing, somebody hands you, an exchange hands you a series of six phone numbers to call and say to you "Happy shopping!" and you call six of these guys, you choose the best pricing, you do the trade. In the liquidity direct transaction is what we're doing in a very transparent way bringing a professional market onto a screen where everybody who wants to participate at any instant in time will know what a particular market or series of potential options are actually doing.

Based on that and the commitment of certain market makers who tend to be the largest market makers that we see at CME we expect to see the market transition in an orderly fashion from where it is now, which is predominantly the floor into an online environment.

Chris, just to follow-up on what Gill said, I think one of the key points and one of the key challenges is really to have dedicated lead market makers and responding market makers. Last month we announced our first lead market maker which is a very, very large, well-capitalized, well-globalized operation called GRW Holdings that have a bout a 20-25 percent market share in futures options trading globally and we will imminently be making further announcements designating approximately a dozen other market makers who will be both lead market makers and responding market makers and that will help us overcome the biggest challenge, which is creating electronic liquidity.

OK, and are there some price incentives built into that? Net it's better for you right now but...

There are both price incentives for market makers as well as various kinds of preferences that are very customary in options market structures, so we think that we've created a very attractive position for market makers who want to participate electronically in a market.

OK, so the main impediment at this point is just getting the functionality up and running in terms of wrapping that up.

Right, we have the rollout of the new options trading functionality on GLOBEX coming as we talked about and obviously getting all the arrangements in place and working with the market makers who also have work to do from a technological perspective to basically participate in post-visit offers on the screen.

OK, thank you. Final question. The short end of the Eurodollar curve is shifted significantly as you guys know in April, and it taking your volumes off the hook. If the Fed does move as it's now priced into the market, do you still get the big volume tick on the actual fed move or would volume be more muted since the curve is already priced in?

You know, I think it's very difficult for us to predict future events in terms of what the level of activity will be in the event that the Fed on a more accelerated basis than had originally been expected begins adjusting rates. I would say clearly we're seeing some anticipatory activity in the market already and I don't know how to quantify what additional level of activity will be true. You know, I think if you look at our markets historically, normally it's been the case that the market is reacting to signals and hints in shifts in policy and decision-making, and yet when we see actual interest rate adjustments, we've had historically tremendous activity in our market.

So I'm not sure if there's anything unique about the current situation if you were to look at the last 10 years of history in terms of the way the Fed communicates with the marketplace on monetary policy.

(inaudible). Thank you very much.

At this time we will take our final question from Lauren Smith with KBW.

Hi, good morning.

Hi Lauren.

Just a couple of quick questions. First, the last quarter you guided us for CBOT an average rate per contract, I think, of 8 cents. Do you have a number for this quarter comparatively?

Hi Lauren. We didn't provide any guidance. The Board of Trade rate, if you calculate it based on the reported volume we'd come up with 9 cents this quarter.

Alright. And then just to go back to the share lockup, I've got all the math of the prior sales and where we are with the tendered to date and such, so we're left with 18 million that come off lock in June, but you mentioned-it's not in the best interest to do a guided sale, excuse me, when you say guided sale are you referring to an overnight, a block transaction, are you referring to marketed secondary?

Lauren, I think what David addressed in his comments was that, again, just to repeat, we have had three different instances at different and increased stock prices where shareholders were able to tender 20 million shares in the aggregate. We've only had about 5.1 million shares sold.

On the topic of further company-sponsored liquidity events, there's actually no mechanism between the company and shareholders at this point for the company to do what it has done on those three prior occasions, which is essentially elect to guide the sales of shares, so we don't really have that same capability as we had before.

I think the other thing that's worth talking about is as we've stressed many times, and Terry might want to add something here because he knows the membership better than any of us. We have a very unique shareholder base here that has a very low tax basis in their original asset, which was the membership, which became the equity and the trading privileges, and I think there are other unique features to our shareholder base which make them pretty bullish on the company. Obviously, we can't predict what will happen, but Terry, perhaps you want to address briefly how you see it from the member/shareholder perspective.

I think you summed it up very well, Craig. The membership here is a longstanding membership. A lot of them have been around for many many years. This is an asset that's in their portfolio and I would not say it's their only asset. So they believe in the Chicago Mercantile Exchange, and history has shown that they will not participate in the sale, highly tendering 5.1 million shares over the last three offerings, so I think you said it correctly, it's hard to predict what they will do.

OK, thanks. That's helpful. And then just lastly with respect to Eurex and just competition overall, specifically with the Eurex which clearly has resulted in more bark than biting. What do you get a sense-or what's the chatter with respect to their efforts and are they retrenching or is pricing kind of what their next strategy might be in an effort to raise their volume profile?

Lauren, it's Craig Donohue. I'll try to respond to those various questions. Obviously the facts speak for themselves and I'm not sure there's much more I could add there.

Also, I don't think we have any particular insight into the going forward strategy for Eurex US or Euronext Liffe.

I would say that pricing strategy first of all has proven to be reasonably ineffective in the marketplace because the exchange fees are such a small-the minimus component of the total transaction costs for users of these markets. I think that it will not be particularly effective with Eurex US and the Board of Trade, either, because the Board of Trade has been very, very aggressive in taking fee reduction and really packing on further cost benefits and efficiencies to their users.

So, one, I'm not confident that pricing competition will really be a sustainable competitive advantage in the market but even if it were I think the Board of Trade has proven its resiliency and its ability to act decisively and aggressively in meeting that particular challenge. So I wouldn't ascribe a lot of potential to that.

Thank you.

You're welcome.

That concludes the question and answer session today, at this time I'd like to turn the conference back over to Mr. Craig Donohue for any additional or closing remarks.

I'd just like to thank everybody on behalf of my colleagues here for joining us today and also thank you for your strong continued interest in CME.

We will look forward to talking with you again next quarter. Thank you.

That concludes today's conference, thank you for your participation and you may now disconnect your line.