芝加哥商業交易所 (CME) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the CME second-quarter earnings release conference call. Today's conference 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 Donohue our CEO and Dave Gomach our CEO will spend a few minutes outlining the highlights of the second quarter and then we'll open up the call for your questions. Terry Duffy, our Chairman and our President and COO, Phupinder Gill are also hear with us this morning and will participate in the Q&A session.

Please note that all references we make during this call to trading volume, and rate per contract, exclude our low-priced TRAKRS products. Before they begin, I will read the Safe Harbor language. Statements made on this could that are not historical facts are forward-looking statements. These statements are not guarantee of future performance and involve risks and uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes in the results may differ materially from what is expressed or implied in these forward-looking statements. More detailed become information about factors that may affect our performance may be found in our filings with the SEC including our most recent quarterly report on Form 10-Q, which is available on a website.

Also, we refer in this call to our cash earnings, a GAAP number, the reconciliation to net income can be found on a website under investor relations quarterly financial information. In addition, we have posted slides associated with this call on the IR portion of the site.

Now I would like to turn the call over to Craig.

Thank you and good morning. We are pleased to report another record quarter in terms of volume, revenue, and net income following our record first quarter in 2004. I will start by providing an overview of the second quarter results. In addition, I will elaborate on a few key areas driving current results and update you on the initiatives that we will be rolling out in the second half of 2004.

Let's begin with the key financial results for Q2. During the quarter, net revenue grew to 187 million, up 31 percent or 45 million from the same quarter a year ago. Income before taxes grew 62 percent, to 96 million, and operating margin improved from 42 percent in Q2 last year, to 51 percent this quarter.

Our diluted EPS increased 61 percent, to $1.66 bringing us to $3.02 so far for the year. And last, we generated approximately 49 million in cash earnings in the second quarter, building on the 50 million generated in the first quarter.

In terms of contracts traded, our overall volume was up 25 percent to almost 3.3 million contracts per day, compared to the same quarter last year. Average daily volume was 460 contracts higher than our previous all-time record quarter, during Q1 2004.

Taking a look at the product areas in Q2 compared to the same quarter a year ago, interest rate volume was up 36 percent, driven by growth of Eurodollars on GLOBEX which averaged more than 520,000 contracts per day, versus 42,000 daily.

Foreign exchange volume was up 29 percent, driven by eFX growth of 99 percent. E-mini volume was up 15 percent, despite continued low volatility in the equity market and our commodity volumes were up 20 percent.

Overall, GLOBEX volume was up significantly. 65 percent higher than the same period a year-ago. Electronic trading volume represented more than 50 percent of the total CME volume for the first quarter in our history.

CBOT volume which generated approximately $14 million in revenues for the quarter through our clearing services agreement, was also strong during Q2. They averaged 2.5 million contracts per day, up 37 percent compared to the same quarter a year-ago.

A primary highlight of this quarter was the tremendous growth we experienced in Eurodollar futures on GLOBEX. As we have mentioned before, liquidity begets more liquidity and our Eurodollar volume on GLOBEX grew from approximately 100,000 contracts per day in January, to 650,000 contracts per day in June. We sell increases from all user segments.

First, the electronic volume of our members on the trading floor who trade with hand-held devices has grown from 8000 contracts per day in January, to 80,000 contracts per day in June. There are now 210 hand-held devices on the floor with an additional 45 in the queue. So the nucleus of this growth has come from CME members on the floor and other members and market makers who are trading Eurodollars on GLOBEX.

As our liquidity has grown, so has our customer base, with those customers who may have utilized our open out outcry venue or other competing interest rate products coming to GLOBEX. And, we have seen growth from electronic proprietary trading groups and trading arcades which are nontraditional users of our Eurodollar contract.

Our customer volume on GLOBEX grew from 24,000 contracts per day in January, to 130,000 contracts per day in June.

Finally, European proprietary trading firms are contributing volume of approximately 25,000 Eurodollar contracts per day in June, compared to zero in January. As you can see, our multi-pronged plan is working. We are pleased to have this electronic capability at our disposal as the Federal Reserve Bank has made its initial rate hike at the end of June.

Furthermore, while CME increased overall Eurodollar volume by more than 500,000 contracts per day during the quarter, Euronext.liffe lifted their own Eurodollar contract in March and averaged 13,090 contracts per day during the second quarter which represented about 1 percent of our Eurodollar futures volume. Though they remain a relatively small participant, we remain vigilant in are focused to enhance our technology and aggressively market our electronic GLOBEX liquidity to our customers.

We've recently seen our fifth through eighth quarterly Eurodollar futures contracts increase to above 50 percent electronically traded, the highest level we have seen the date.

Updating you on our European incentive plan, we are seeing very good early results and have seen steady growth to approximately 32,000 contracts per day from traders at 27 proprietary firms. While the growth has been strong and accretive to our Q2 results, the initiative is in its infancy stage and we expect it to accelerate during 2004 and 2005.

As a reminder, our European competitors generate 15 to 25 percent of their volume from the United States, and our volume from the specific initiative is presently about 1 percent of our overall volume. The European exchanges started their distribution efforts of European denominated products into the U.S. market 3 to 4 years ago and our targeted effort in Europe began only in March of this year.

We have announced several upcoming initiatives that will be released during the second half of this year, and have previously been discussed in length so I won't go into great detail on this call. These include enhanced functionality per trading Eurodollar options and futures which should enhance look the liquidity I mentioned earlier along the interest rate yield curve. In addition, in May, we announced an innovative agreement with Reuters which will enable us to bring CME's EFX futures market liquidity directly to the professional interbank FX market by offering CME foreign exchange products on Reuters' FX terminals, beginning in Q4.

Reuters' customers include 3500 institutions located in 123 countries. The response to this announcement has been extremely positive as users realize the integration of futures and interbank FX business will be positive for the industry.

Most recently, we launched our Eurodollar FRA switch contract with Tullett Liberty. These contracts are designed to enable swap dealers to manage their positions and counterparty exposures more efficiently through weekly matches of daily Eurodollar contracts. These upcoming projects illustrate our strategy of leveraging our existing technology and clearing assets to attract new customer segments and drive continued growth. Like all of our initiatives and products, we expect modest initial volume, but normally with successful projects we see inflection points where volume accelerates. We saw this with our E-mini equity contracts beginning in 2000, we began to see it with our electronic FX contracts last year, and we're certainly experiencing it now with our Eurodollars on GLOBEX.

Before we elaborate on the financial results in more detail, I want to talk about our announcement regarding David's upcoming departure in November. Many of you have spoken to David and understand his personal decision to join his family in Wisconsin. While the family theme is often overused in executive departure announcements, in this case, the personal reason made up 100 percent of David's decision. The fundamentals of our business were not the basis for David's decision, and our future opportunities have not been altered and in fact remain very strong.

I want to take a step back and provide my thoughts and observations about the talent and depth of our management. We currently have 22 managing directors who have average tenure in our business of 16 years each. Below them, we have 63 directors, with considerable experience as well. We take succession planning very seriously, due to the fact that our industry is extremely dynamic and rapidly evolving, and we continually add to our bench strength. I believe our leadership team is the strongest and most cohesive I have seen during my tenure with the organization, with the addition of several new people, along with internal development, and promotions.

In March, we added John Roberts, from Barclays Global Investors as our Chief Marketing Officer. And Scott Robinson, our Managing Director of Corporate Development who joined us from McKinsey & Co. Both have helped us upgrade our abilities in those areas. Rick Redding, who heads up our products and services group has 16 years of experience with CME, and has been front and center with our clients and an integral part of driving growth in our E-mini and GLOBEX products. Rick has already added key additional contributors to both our interest rate and our FX productline.

Next, we have promoted Jim Krause who has been with us since 1985 and has a tremendous amount of experience with electronic trading, having launched our first GLOBEX system in 1987, and our second GLOBEX system in 1997. We combined our technology and operations teams and we are running these groups more effectively than we did in the past.

Most recently, we announced that we are moving Armand Philsoffe (ph), one of our managing directors who has been a key contributor to the overall growth of our GLOBEX platform and distribution network to London where she will oversee our European and Asian marketing efforts. With regard to David's departure, we have a very talented and experienced finance and accounting theme made up of seasoned employees who have been with us for quite some time and who know the business extremely well. Additionally, we have made several strong hires in this group over the last three years.

In terms of a new CFO, we have 2 strong internal candidates under consideration, and are also conducting an external search through Russell Reynolds for this key position.

In closing, I would like to thank David for his 17 years of experience with CME. I have thoroughly enjoyed working with him as we all have, on a professional and a personal basis, and we wish him the very best with his family. And with that I would like to turn it over to David.

Thank you, Craig. We had another strong quarter with record volume leading to record financial results. The operating leverage in our business model was very obvious in Q2. This time, due to the rapid growth and interest rate volume coming through GLOBEX, which had a positive impact on our revenue. At the same time, our expenses were relatively stable.

During the second quarter, clearing and transaction fees were up 23 percent to 143 million versus 116 million in Q2 of last year, which was our strongest quarter of 2003.

Average daily volume was 3.29 million contracts in Q2, up 25 percent compared to the same period a year ago. Our aggregate rate per contract was 68.8 cents, down slightly from 69.9 cents in the first quarter. This was primarily mix related as the lower-priced interest rate contracts made up 57 percent of volume in Q2 compared to 50 percent in Q1. However, if you focus on the product rates, you'll see some positive trends. The rate per contract for interest rate products was 54.5 cents in the second quarter, compared to 51 cents in the first quarter.

The percentage of GLOBEX interest rate volume grew from 11 percent in Q1 to 28 percent in Q2. As you know, we generate more revenue from electronically traded contracts than those traded via open outcry. In addition, we saw relatively strong nonmember volume in Q2, specifically in June and most likely related to the Fed announcement. With volume up and an increase in the average rate per contract, transaction fees from interest rate products totaled nearly 65 million, up significantly from 47 million during the second quarter last year.

The E-mini rate per contract was 70 cents in Q2. Up 7/10 of a percent from Q1. The main driver of this sequential increase was at a 1 percent shift in volume next from member to customer. Some of this mix shift was due to migration from the equity standard contract which has a higher customer percentage.

Finally, the rate per contract for FX was $1.74 cents, down from $1.78 during the first quarter. This drop from Q1 was due to a volume mix shift between GLOBEX privately negotiated and open outcry.

Moving on to the additional revenue item. First, the clearing and transaction services line. The Chicago Board of Trade reported volume of over 2.5 million contracts per day or 317 million sites, generating approximately 14 million of processing revenue for the quarter. In addition to the CBOT processing, this revenue line includes 180,000 per quarter from NYMEX which utilizes CME's GLOBEX system to trade E-mini energy contracts.

Quotation data fees were 14.8 million for the quarter, up from 13.6 million during Q2 of '03 nut down from 15.5 million in the prior quarter. We stated last quarter that there was an additional 750,000 of income associated with 2 audit assessments booked in the first quarter. Our screen count (ph) at the end of June was 148,000 for professional subscribers, up from 142,000 which we reported that last quarter and we had 31,000 lower priced nonprofessional subscribers compared to 32,000 last quarter.

I will now take a few minutes to review expenses. Total expenses for Q2 were 90.7 million versus approximately 83 million for Q2 last year, and up from 89 million last quarter.

Highlighting a few of the main expense categories. First, compensation and benefits totaled 40.6 million for the quarter, basically flat with Q1. Breaking down the 3 components of this expense; first, salaries and benefits totaled approximately 31 million, down 1 million from the first quarter, due primarily to lower FICA taxes and a lower vacation accrual.

Second, during the first quarter of this year, we reported 7.4 million for the incentive bonus and that increased to 8 million in the second quarter. The incentive bonus is tied directly to the level of cash earnings the company generates.

The final component of the comp and benefits line is stock based compensation, which totaled approximately 1.6 million during the second quarter, up 500,000 sequentially. The increase was primarily due to CME's annual stock option grant for employees which occurred in June and had a partial impact on the second quarter. The full impact of this will be to increase stock based comps to approximately 2.6 million per quarter.

At the end of June, headcounts stood at 1246, an increase of only 8 from the end of Q1. 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 50 (ph) million during the second quarter, compared to 48.4 million in Q1. This is due primarily to an increase in professional fees and increases in communications and depreciation associated with investments in our European hubs and our data center expansion project.

Focusing for a minute on professional fees. As many of you know, for 20 years, we have had a mutual offset arrangement with the Singapore exchange, SGX under which Eurodollars are traded it SGX during the overnight hours and users are permitted to move positions established at FGX to CME for clearing and vice versa. The mutual offset arrangement has been a valuable strategic asset for us, because it allowed for 24-hour trading of Eurodollar contracts long before electronic trading systems were developed.

Last year, we extended this arrangement through 2007 for competitive reasons. In recent years, the agreement has included revenue sharing for Eurodollars that are traded on GLOBEX during SGX hours. Due to GLOBEX's increase in market share during these hours, from about 24 percent in Q1, to 51 percent in Q2, our payment to SGX has increased. Our first-quarter payment related to this agreement was 170,000 and in Q2 it totaled 760,000 and was reflected as an expense in the professional fees category. The payment is capped at 900,000 per quarter.

Moving on to income before taxes. Are pretax income was 96 million in the quarter up 62 percent from 59 million in the second quarter last year, and up 24 percent sequentially. Our pretax operating margin was 51.5 percent, the highest margin quarter in our history.

Net income for the quarter was 57 million, and diluted EPS was $1.66. Both of these are up more than 60 percent compared to the same quarter a year ago.

The effective tax rate during the quarter was 40.5 percent. Our diluted share count increased by approximately 400,000 shares to 34.4 million, primarily as a result of the increase in our stock price during the second quarter.

Moving on to the balance sheet. At the end of the quarter, we had approximately 490 million in cash, cash equivalents and marketable securities. We have no debt. Working capital is about 550 million.

Capital expenditures totaled 22.8 million during the second quarter, which brought year-to-date CapEx to 31.8 million.

During the quarter, we began the build out of a third data center which will enhance the capacity and redundancy ever our system. Those items were included in our original 60 to 70 million guidance for 2004. Cash earnings totaled approximate 49 million for the second quarter, bringing total cash earnings above 99 million for the first half of 2004, compared to 64 million in the first half of 2003.

Now, let me summarize the third quarter volume. So far in July, we are averaging approximately 3.2 million contracts per day, higher than our June role month volume. Interest rate volume is averaging approximately 1.8 million per day; E-mini equities are almost 1.1 million contracts per day; equity standard contracts, 87,000; foreign exchange, 164,000; and commodity products, 43,000 contracts per day. At the Chicago Board of Trade, volume is averaging approximately 2 million contracts per day, so far in July.

For those of you who follow other exchanges and trading related companies, you should realize we have faired extremely well during the so-called summer doldrums compared to our peers. It is not unusual to see decreased activity and volatility around the summer holiday season in equities and interest rates.

Comparing our volume so far in the month of July, we are 35 percent higher than the 2.3 million we averaged at this point in July last year. We are frequently asked how volatility affects our volume. Well, it is certainly a factor. If you plot our Eurodollar volume relative to Eurodollar applied volatility, you will see volume does not always move in tandem with volatility. We have included several charts related to this in the earnings slides which are available on a website. The volatility of interest rates has dropped significantly from Q1 to July and in the meantime, we had the largest sequential Eurodollar increase in our history from Q1 to Q2. We believe this is a positive indication that our diverse product mix, our growing user base, growth in electronic trading and other secular trends remain the key drivers in our business.

Before we open the call to questions, I would like to briefly address my upcoming departure from the CME. I've had a great 17 years at the CME, and have enjoyed getting to know many of you since we have went public. We have worked hard over the last few years building a strong finance and accounting team and instilling public company discipline and controls throughout the entire organization. Given the depth within the financial organization and the overall strength of our business model, I'm comfortable leaving the CME at this time. I will be here until November to help identify my successor and assist with the transition.

After two decades with the Company, I look forward to watching CME continue to enhance its leadership position from my new home north of the border. With that, we would like to open the call for your questions.

(OPERATOR INSTRUCTIONS) Bill Tanona of J.P. Morgan.

Good morning. Just a couple of quick ones here. I know the RPT on the interest rate side moved up. I would venture to think that that was the result of the shift towards GLOBEX? But when you look it versus a year ago we also saw 54 cents. And I just want to make sure that I'm reading into that correctly and if you could give us a sense as to what happened in the year ago quarter to refresh our memories?

A year ago there was an assessment, the actual rate and its footnoted in the earnings release, it would have been 51.2 cents so it was inflated by 2.7 cents in that quarter.

Okay. Then, I guess I am assuming that the 54 cents this quarter was all the result of shifting to electronic?

Predominantly, that is definitely the case, about 4 cents of that was related to the transition to electronic. There was some movement to more customer volume, that was provided about a penny and then because of just the overall strong growth in Eurodollar volume, some of the volume hit the tiers which brought the rate down a little bit.

Okay. And I know you guys have a bunch of incentive programs out there, whether it is in Europe or with the hand-helds for the traders on the floor, can you give us a sense as to when you think those incentive programs might expire or when you might rethink whether or not those things will become permanent?

I think it is too early for us to comment on that. I will tell you that as far as we are concerned, I think the success that we have had with Eurodollars (ph) and GLOBEX has been a very good achievement for us. This is working extremely well. I think you can see the positive financial contribution as well as strategic benefit of what we're doing and so we will continue to be evaluate it as time goes by but it's working extraordinarily well for us. It is producing all the results that we wanted to achieve, and I wouldn't expect that we are going to discontinue that anytime soon.

Okay. Lastly in terms of the new initiatives coming in the second half of this year, whether it's the agreement with Reuters or Tullett Liberty, I would assume that the Reuters agreement would just be the increased contracts on the currency side but the Tullett Liberty would be kind of falling in the line with the CBOT and the NYMEX. If you could just kind of give us a sense as to what type of impact we might expect or if it is non material, just at this point, give us a sense? Thanks.

Thanks for that question. I think it is mostly nonmaterial in the early stages as we commented in the presentation that we just made. Normally these things begin slowly. We certainly do expect that we will see growth in our FX futures products once the Reuters connectivity and distribution is available in the fourth quarter of this year. Tullett Liberty, you correctly characterized as more akin to our transaction processing agreements, and again, we think that it will take time for business to build there.

Okay. Thank you.

Daniel Goldberg, Bear Stearns.

Good morning. In terms of your capital, it grew roughly about 15 percent in the quarter, obviously on solid earnings. Can you just talk a little bit about what your thoughts are in terms of capital usage? I know you have talked in the past about looking at potential acquisitions, potentially paying a special dividend. Could you just give us an update there as capital continues to grow?

Sure. Hi Daniel. Our capital, working capital has grown to almost 550 million. As we have stated before, we are continuing to invest of course in our infrastructure to support the growth organically of our products, and we continue to be very opportunistic in terms of potential acquisitions. And we have been focused on that this year, and Craig, I'm sure you have something to add.

I think we have addressed this question a number of times over the last several months. There is no question that we are in an extremely strong position as a Company to seek out nonorganic growth opportunities, maybe even within the U.S. in a dominant position. Having said all that, we're focused on both the nonorganic growth strategies as well as ways in which we can really create value for shareholders through growing our core business through Reuters, FX deal and many of the other things we've addressed during our presentation are great examples of that. So we are continuing to focus on both avenues for growth in the Company, and I wouldn't speculate any further on our plans in terms of mergers and acquisitions activity or other considerations with respect to capital structure at the moment.

Okay. Somewhat of a related question, but in terms of the stock price being -- getting up there, can you talk a little bit about potential for a stock split?

Again, I think I won't comment very extensively on that. We have -- I have said, been asked frequently about whether we are considering a stock split, and certainly that is something that we will address with our Board, but I would give no indication as to whether we think that that is a valuable or a necessary step for us to take right now.

Okay. In terms of the compensation in the quarter, and what we should think about going forward, comp ratio was down pretty significantly. Is that a good run rate going forward?

As we said, we have only added 8 people in the second quarter. It was down slightly primarily because of vacation accrual, and a reduction in the FICA, but our bonus plan as you know is a key driver. The bonus maxes out at 32 million. To date, we have booked just over 15 -- around 15.4 million through the first 6 months and we have given you some indication that the third component stock based compensation is going to be closer to around 2.6 million for the balance of the third and fourth quarters.

Just finally, is there any -- do you have any sense for the percent of your volume traded since the June 4th lockup expired that were from member versus institutions that priorly were able to trade the stock really I'm just trying to get a sense for how much the volume lately has been from the IPO lockup expiration?

You know, we don't have a sense for that, and we cannot track members selling activity and I think as you well know and I think as most people expect, we have gone through I think a very orderly process to distribute the shares into the marketplace. I think consistent with everything we have said before, we continue to find that our member shareholders are very bullish on the Company, but we cannot predict that with any kind of accuracy. We certainly would expect over time that people will begin to diversify their holdings in CME, but we have nothing further to comment on that.

Okay. Thank you.

Collin Clarke with Merrill Lynch.

Good morning. Your dollar lines have been very strong and it seems like a number of factors might be or are driving that growth -- the interest rate volatility, electronic trading, new customers. I think we are all trying to get a sense of what are the key factors driving that growth? Is the biggest driver more trading per customer with the electronic migration?

Yes, thank you for the question. I think it's a confluence of all of the things that you just mentioned. First of all, we have had, as you know extraordinary growth in the overall market. We traded average daily volume for Eurodollars on GLOBEX was 700,000 contracts in July. And in part, its because there are new customers coming into the market primarily these electronic groups and trading arcades as well as hedge funds, but it's also a function of what you mentioned which is the arbitrage opportunities that exists where we have locals in the pit, as I know you know, who not only or trading in the pits, but they're also arbitraging the price differences between the pit and GLOBEX and that is we believe increasing the overall amount of trading activity in the market. But clearly we are bringing new customers in and we also think that the advantages of electronic trading as we have seen with our other products like our E-mini and our foreign exchange product is causing the overall market to grow.

We expect that that will continue, by the way, given the efforts that we are making in Europe to really expand our distribution channels, reduce costs of connectivity for users, and potentially provide incentives for new customers to begin using these products electronically.

Okay. Great. Where does the rollout of the electronic trading of Eurodollar option stand in terms of the timing? Do you have any plans to offer additional pricing incentives in that particular area to accelerate the migration to electronic?

We are in the process of testing right now for that, and our expected launch date is August 2nd, and we remain very much on track in terms of launching that facility on time. We are in the process right now of working with the lead market makers and what we call responding market makers that we have actually been able to enlist to support the provision of liquidity on the system. We will begin with 4 lead market makers and 10 what we call responding market makers and another 30 members and member firms have signed up to participate on the system. And as I mentioned, we're really right now involved in customer testing and training.

I should mention that we expect to have a sort of limited rollout of the system and later we will open that up to more direct access for market users, but this is very sophisticated new trading capability that we are offering to the market, and so we have chosen to do this in a couple of different phases. But we are on track for a strong August 2 launch.

In terms of your existing pricing, are you comfortable with where pricing is in Eurodollar options? Or some of the price moves you have made, I'm assuming also apply to that product as well?

Well, actually just in the process and we have not yet publicly announced the pricing for the new enhanced option system functionality. We will be doing that very, very shortly, but we have priced it to be aggressive and competitive and to make sure that we can support the growth of electronic trading of our Eurodollar options contracts.

Okay. My last question, it seems that with every day that passes that CME is moving toward becoming a fully electronic exchange. Could you give us any sense of if and or when you could begin to reduce floor-based cost? Over time, over the long-term, can you give us any sense of how much in floor based cost you could potentially eliminate over the long-term?

Let me begin by addressing that and I will David address sort of the ultimate question of if and when we get to that point. What the likely expense reductions are. I think as we have explained a number of times, we don't expect to achieve much benefit from sort of an incremental scaling down of the trading floor operations given the nature of the trading floors and how they operate. So, I would not expect to see anything in the short run that would be material or significant, but obviously we are seeing a very, very rapid transition for electronic trading.

We have gone from being 40 percent electronic a year ago for the second quarter to being 52 percent electronic for the second quarter of this year. I think all of us have been impressed with the very rapid rate of growth in electronic Eurodollars on futures, so it is moving very, very quickly. You know that we cannot predict with any degree of accuracy what the continued timeline looks like for open outcry trading and I think David, if you want to provide some insight into ultimately if we were to see an evolution toward 90 plus percent electronic trading, what that might meet in terms of expense reduction?

We have been making certainly some reductions in our support and costs related to floor in terms of using technology instead of market reporters and there are also revenues associated with the floor. At the end of the day, the net reduction in total expenses will probably be net around $30 million, but that is primarily going to be related to market data, market reporters, technology costs supporting the floor and like Craig said, you don't get rid of a lot of that until you actually close the whole facility and then you also the facility related savings.

The cost for example, we'd certainly examine. Could we move pits to one floor and close one floor -- that ends up costing you more than you would get in terms of savings. So, we certainly analyzed it and we know the day will come, we can't predict when.

So the 30 million does not include potential savings from facility?

This includes everything.

That includes everything and that is an annual kind of number?

Yes.

Thank you.

Scott Patrick at Morgan Stanley.

Good morning. It terms of GLOBEX interest rate on GLOBEX, you had a considerable increase so far in the third quarter over what in terms of the share versus what you saw in the second quarter. I think it is running 38 to 39 percent this quarter. Is there -- can it continue at this space in terms of the migration or are their kind of natural ceilings where at a certain point, you need to kind of get a new piece of functionality in place and then you can take the next up and so on?

I think we do expect it to continue to increase at a rapid rate as we have already been seeing, but it is also true that it has sort of a step type function. You might know that we are about to introduce expanded functionality for additional implied spread capabilities including butterflies which are a very common trading strategy in the Eurodollar market. By providing that additional functionality, we do expect to continue to accelerate growth in electronic trading throughout the entire product complex. That is expected to be launched in early September.

So, I think the timing of not only the growth that we have had to date, but the timing of the launch of the new functionality will be very consistent with continued sustained growth in overall electronic volumes.

Okay. Great. I guess the section second question is historically price competition hasn't really been an effective means of moving volumes in the futures markets. Yet, you guys have certainly implemented a number of fee waivers and price cuts and the Board of Trade is offering free trading in some cases at this point. Is there something different about the competition that you're seeing out there right now that is making you think that pricing is a much more important function of controlling liquidity?

No. We are not really of a different view on that then we have been. We think it is still not a very successful sustainable kind of competitive differentiator across different markets. We, I think, emphasize the fact that we have strategically a very good pricing structure in that we are the low-cost provider for the largest, most active users of the market and I won't go through the details, but I think you're familiar with the fact that if you looked at our interest rate product pricing or equity product pricing and even with recent changes that we have made, with our FX productline, we actually if you were to compare the cost that we charge the most active users of the market who contribute the greatest amount of liquidity were far cheaper than most of our competitors in the marketplace.

I guess in terms of the CBOT extending its price reductions, do you anticipate seeing any pressure in terms of your arrangement to clear for them in terms of the rate?

In terms of the revenue benefit that we received under the agreement?

Yes.

No I don't. I think first of all I would say the Board of trade is in an extraordinarily strong position having made a lot of changes in the technology, certainly their clearing arrangements as well as I think a very aggressive position with respect to their fees. They are continuing to perform very strongly. Eurox, U.S. is still not seeing into really capture what we would consider to be any fundamentally real customer business, and we don't expect that the Board of Trade is really going to negatively impact us in terms of the rate that we charge or receive under the agreement.

Okay. Great. One final question. I was just wondering if you can give us a sense of how much post trade matches increased the cleared volume versus the reported level in the second quarter?

As we said before, we expect to be 15 to 20 percent. It was certainly on the higher side, but going forward, we're not going to release that information. If you take the reported revenue, less the reported volume that the Board of trade puts out, you could see our rate was 8.8 cents and that is how we will report it going forward.

Okay. Great. Thanks a lot.

Charlotte Chamberlain at Jefferies & Co.

Good morning. Your slide on page 17, the volume versus volatility; first of all, what is the measure of volatility that is on that chart? Second, eyeballing it, it would like there's no relationship between volume and volatility over that time which brings me back to Collin's question which we all have, do you have any better sense of what are the fundamental drivers of the volume? Certainly, whatever the drivers are, on top of that, you've made huge progress in terms of increasing the volumes because you've migrated it to go back and all that. But, still, it would be helpful if you have any better insight in terms of what is it that is driving this, both for the Eurodollar contract and also for the S&P? Thanks.

Charlotte, let me address that. First of all, the measure is the implied volatility around the different options strikes in the Eurodollar market. We're not trying to say that we don't obviously benefit from the volatility, but I think the point of that slide is to extenuate that it doesn't always move directly in tandem with volatility and much of the benefit that we are seeing in growth in the market we believe is coming from a lot of the business changes that we have made in how we are delivering the product, the pricing, the electronic interface and the various incentives that we have provided in our ability to really tap into new customer segments or expand the range of trading activities -- say for example, arbitrage opportunities, that exist in the market.

I wish I had a very scientific sort of component breakdown of the contribution of volatility versus each of those things that I just described. But, I just don't, and I think it is a confluence of all of those things. I think certainly you can see in that charge that there are obviously benefits that we're receiving from these initiatives versus just macroeconomic activity.

Okay.

Charlotte, definitely as Craig indicated, volatility benefits us. For example if you looked at the S&P chart there you almost have a negative correlation versus the fix, but yesterday when we had strong volatility in the options market, we had almost record equity, and many volume. We had very strong volume yesterday so we definitely benefit but its all those other factors that kind of make the correlation not seem as strong as it is.

Well, okay. Even if you think that it is volatility, which I guess generally people considered to be fear, as far as the markets are concerned, in terms of our looking at it, are you basically saying that you have organic growth? Or are you saying that there are underlying fundamental drivers, we just don't know what they are?

No, I think very clearly we are saying that much of the growth that we are seeing is organic growth and it is coming from the electronic interface, the ability of traders in the pit to take advantage of arbitrage opportunities. The introduction of expanded distribution throughout Europe, the edition of new customer segments like these electronic proprietary trading groups and trading arcades, and the fact that we see customers coming in that are electronic trading customers that normally would not have used the Eurodollar market because it was principally a market for hedging and risk management activity dominated by swap dealers and money market desks and banks.

Now we're seeing the introduction of what you might consider more speculative trading interest from these electronic trading groups. So just to be clear, there are very strong contribution in our opinion, coming from organic growth as well as we are being benefited by expectations in the marketplace of movement in short-term interest rates, and adjustments in monetary policy associated with the obvious strength of the economy, and the positive indications that we are seeing across a lot of the different major economic indicators.

If it is organic growth, then what are your expectations in terms of the persistency of that rate into next year? Your contacts are up -- what 25 percent this year is that -- how long at the current run rate is that going to persist?

We obviously, as you know, don't give any sort of forward-looking guidance on what we expect. I would answer that question by saying and repeating again that we are in the early stages of really expanding the customer base for this product. I mentioned that Eurex and Euronext.liffe have achieved a 15 to 25 percent share of average daily volume in their core European product coming out of Chicago and U.S. North American based electronic prop groups and trading arcades. Right now, we're at about 1 percent in terms of contribution from those same types of customers in Europe who are now beginning increasingly to trade our Eurodollar futures contracts. So fundamentally, we expect to see strong growth coming from that as we further develop our marketing capabilities connectivity and work with customers to allow them to access our Eurodollars on GLOBEX. So, we will continue to build that out, but I would not offer any specific sort of guidance or forecast of what and by when we will achieve it.

Similarly, everyone obviously has their own opinion but we certainly do expect that consistent with past behavior, we might see a sort of consistent level of sequential rate increases coming out of the Federal Reserve as they adjust the monetary policy, and we obviously expect that we would be the beneficiary of that as that occurs.

Okay. Great. Thanks.

Glenn Schorr, UBS.

Good morning guys. So, beating down this whole competitive thing, I realize that this is a modest splash, but if life is making a modest, modest -- underline modest-- splash in Europe, with its Eurodollar listing, lets just go on the hypothetical -- if they bring their business to the U.S. and they are able to aggregate some liquidity, are there competitive weapons you can consider outside of the price issue? Or do you think it's a mute point and they are not going to succeed?

Let me address that. I would never say it is a mute point. We obviously take competition very, very seriously and I think that is born out by many of the things that you have seen our Board and management team initiate over the last 6 months which has contributed to such a powerful growth story in not only topline growth of the Eurodollar market, but also Eurodollars on GLOBEX.

Let me just point out that on almost every day, we see more volume coming in from our new European customers under our European Incentive Plan from these Eurodollars electronic traders than represents the total amount of electronic Eurodollar futures being traded at Euronext.liffe. If you were to look at just this very small developing new customer segment, 70 percent of all of the contracts that are being traded through the EIP, the European Incentive Plan, are Eurodollar contracts. So I don't even expect that they are going to succeed in cultivating a niche market in Europe among European speculative traders because we are already sort of out competing them on that front.

In terms of, if they were to be successful in further aggregating liquidity and volume, I think there is a number of other things that we obviously can to do make our products increasingly attractive vis-à-vis Euronext.liffe; certainly we have done a lot of that already. The clearing (ph) efficiencies and capital efficiencies that we provide by combining the Eurodollars and Treasury Note and Bond contracts in the clearinghouse provides for in our opinion greater cost-effectiveness than would be true if you were trying to maximize clearing efficiencies between Eurodollars and say for example your LIBOR in the London clearinghouse. I won't comment on other plans that we may have, but I can assure you that we're very vigilant in making sure that we maintain and defend our franchise and that we grow this market very successfully.

Fair enough. On the FX side, it is weird not to see a CME volume chart going straight up to the moon. But I will chalk it up to a blip. Price income came in a little bit and it's been kind of a steady trend -- I am not sure if you can comment on that. If you could just give us the level of confidence of penetrating the clients such as the traditional banks, the broker-dealer, the smaller banks, insurance companies, things like that with this kind of contract?

Let me address the first part of about volume and expanding the market and then I will let David talk about the pricing issues. First of all, we obviously have seen a different environment in terms of foreign exchange market volatility, but the fundamentals of this business are incredibly strong, for those of you who might follow the FX markets, what we have done with Reuters has achieve a very, very significant level of attention and enthusiasm from the global FX trading community.

Many people view what we have done as the bellwether for what is beginning to happen in terms of structural change in the global FX market with FX market players increasingly focused on exchange like trading mechanisms like what we offer what our GLOBEX system as well as capital and clearing efficiencies that can only be provided with a central counterparty clearing mechanism like what we have in the CME clearinghouse.

We do have very high hopes for the contribution we expect to receive once we begin rolling out the Reuters FX deal. We have been actively marketing that in North America and Europe. The reception has been extremely positive. We are also looking at other ways in which we can expand the FX market including what we would consider to be the more retail oriented component. We have a lot of the large electronic proprietary trading groups that are very active users of our equity E-mini contracts are increasingly beginning to use our foreign exchange contract, and we also have increasingly asset managers and funds managers that are using our currency products for currency overlays, trading strategies. So we do expect to see very strong fundamental growth in this product over the next couple of years associated with those and other drivers of growth.

Glenn, for the month of July, FX was off to a very strong start. We're at 164,000 contracts per day which is strong for one of the first months of a quarter because the third month of every quarter in FX is always significantly stronger. With respect to the first question on the rate decline, you are going to continue to see a rate decline as long as the X pit (ph) percentage of the FX volume begins to shrink, so as electronic trading grows, the X pit component comes in a little over 4 dollars a contract and from Q1 to Q2, we also did see a slight drop in that x pit volume from 29,000 contracts per day to 26. So that is really the driver of that small decrease in average rate per trade.

Fair enough. Thanks for the responses.

Lauren Smith at KBW.

Good morning. It's Rich Herr. A couple questions, one on the comp, with the stock based comp going up, are you going to decrease cash based salary or is it just going to go up as an overall number?

That is additive to our annual incentive or bonus plan I described.

Okay. Second question is, Craig, if you could just address the debate going on right now about wash trades between the CME and your European competition? If you could expand a little bit. I know it's been reported in the media, that CFTC is looking into the issue?

I would be happy to do that. First of all, let me just for those people on the call who may not be familiar. We had a block trade that was done that was essentially a transfer of a small amount of open interest in Eurodollar futures from CME to the Euronext.liffe, and we -- because of that event, clarified that you cannot engage in wash trading activity in the manner in which we think happened there in terms of negating true market risk.

That is a position that is entirely consistent with the Commodity Exchange Act, and as I think everyone on the call appreciates, first and foremost, we have to insure market integrity and the proper behavior of market users and therefore that additional clarification was necessary in order for us to fulfill our regulatory responsibilities, which are of obvious paramount importance to us. We have made that clarification and filed that with the CFTC. There has been some controversy associated with it, and others have attempted to depict that as a sort of competitive or perhaps even anti-competitive kind of decision on our part.

I would say 3 things on that. One is that we absolutely must insure market integrity, and no criticism should deter us from being an effective and strong regulator in all of our markets. Secondly, we sought and were advised by outside legal counsel that this was an appropriate clarification for us to make as the chief regulator in our product and consistent with our statutory and regulatory responsibilities that are delegated to us by the CFTC.

Lastly, for those of you might remember, we implemented a new Board level committee which we call our market regulation oversight committee, which is comprised entirely of nonindustry directors who sit on our Board. This measure was reviewed and approved by them and they were advised by outside legal counsel on that topic prior to our adoption of the interpretation and our filing of it with the CFTC.

We are very, very comfortable with the actions that we have taken and we think they are very, very consistent with our obligation to be a strong and effective leading regulator in the marketplace.

Hi, this is Lauren; I'm actually on the line as well. I just have 1 or 2 quick questions and more bigger picture issues. But 1, with respect to technology, when we look back over the past 4 years, and certainly you have made meaningful investments and upgrades if you will in your technological platforms and then we subsequently also had seen pretty meaningful increase in GLOBEX average daily volume. Is there anything that is near on the near-term, intermediate-term time horizon that might be deemed -- one of these inflection points as something you're doing to the technology?

Well we have 2 very significant changes that we're introducing in terms of GLOBEX functionality, both of which I have mentioned briefly. We are, as I mentioned on August 2, introducing the electronic options functionality, and will be launching our Eurodollar options product electronically. And then also, I mentioned that we are rolling out enhanced implied spread functionality, which further expands the range of spreads that could be traded electronically including butterfly spreads which I mentioned are very common trading strategy in the Eurodollar market.

I would say that in terms of inflection points, I don't think the enhanced option system because it is new is going to see any kind of early inflection point because we've got to develop that market. It's a very different kind of market model and market structure and technology interface and it's going to take us time to really build liquidity in the electronically traded Eurodollar options contract.

In terms of inflection points, further inflection points in Eurodollar futures, I do think that the introduction of this enhanced implied spread functionality and butterfly functionality will constitute something of an inflection point. I cannot predict accurately exactly what the impact of that is going to be, but we do think based on our knowledge of the market and how people trade in that market that it will be an important introduction of new functionality.

Great. Just lastly, Craig, if you could touch on your view or where we are perhaps in moving forward with the Basle 2 Accord and in your view, how meaningful of an impact could this be if capital requirement for banks -- probably more so in Europe than here and how that could affect your business?

Yes, I would be happy to do that Lauren. I also have Phupinder Gill with me who as you know has a vast amount of experience in clearing and banking capital requirements. In general terms, we continue to view not only the existing Basel Accord, but also Basel 2 as extremely positive for further promoting the secular trend toward greater utilization of exchange traded derivatives with a central counterparty clearing mechanism because the way that we construct our central counterparty clearing service is very attractive and does help reduce both operational risk as well as bilateral counterparty credit risk.

So, with the introduction of Basel 2, and the additional component of being assessed for operational risks, we expect that to be beneficial to us over the longer run and I'm going to ask Gill if he might like to comment further on the timing of the introduction of Basel 2?

I would never comment on the timing of Basel 2. But, I think just to what Craig said, it is going to definitely be a continuation of what we have seen to be a positive trend that I think with the signing of the Board, the Board of Trade link, we started seeing in some aspects a lot of volume that has been spread once it's been done at both the exchanges and with Basel 2 and the implications for capital savings for exchange traded products will make this a very positive development once it goes into effect.

Thank you very much. That's very helpful.

There are no further questions at this time. I'd like to turn the conference back to Mr. Donahue for any additional or closing comments.

Just to thank you all for joining us today and thank you for your continued interest in CME. We certainly look forward to talking with you again next order.

Thanks very much.

That will conclude today's conference. Thank you for joining us. You may now disconnect.