芝加哥商業交易所 (CME) 2004 Q4 法說會逐字稿

Good day, and welcome to the Chicago Mercantile Exchange fourth-quarter earnings release. As a reminder, 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. Good morning, everyone. Craig Donohue, our CEO and Jamie Parisi, our CFO, will spend a few minutes outlining the fourth-quarter and full-year results and then we'll open up the call for your questions. Terry Duffy, our Chairman, Phupinder Gill, our President, and Rick Redding, who heads up products and services, are also here this morning, and they 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.

Statements made on this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance, and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent quarterly report on Form 10-Q, which is available on our website.

Also, we refer in this call to our cash earnings, a non-GAAP number. The reconciliations to net income can be found on our website under "Investor Relations Quarterly Financial Information." In addition, we have posted slides associated with this earnings call on the IR portion of the site. So with that, I'd like to turn the call over to Craig.

Thank you, John, and good morning. Thank you for joining us. Let me start by providing the highlights of 2004, which was a very strong year for CME. Jamie Parisi will then elaborate more on our fourth-quarter financial results.

Taking a look at 2004, we continued leveraging our leadership position in the derivatives exchange space and we will continue to do so in 2005. During 2004, we saw double-digit growth across all of our product lines, setting annual volume records in interest rates, foreign exchange, and equities. We also gained significant new business from our emerging European client base. During the year, we successfully implemented our third-party clearing processing business, which generated $55 million of revenue.

We successfully expanded volume on CME GLOBEX from 48 percent of our total volume during the first quarter to 67 percent in the fourth quarter. During 2004, CME GLOBEX volume increased 71 percent compared to 2003. Electronic growth was driven primarily by CME Eurodollar futures, which expanded from 10 percent in January to more than 70 percent in December. All of our success in 2004 occurred in the face of an increasingly competitive environment in the global futures and options industry.

Reviewing the key financial results for the year, net revenue grew 37 percent to 734 million, up almost 200 million from 2003. Income before taxes grew 78 percent to 368 million, and operating margin exceeded 50 percent for the year. Diluted EPS increased 77 percent to $6.38 for the year. And last, we generated significant cash flow during 2004 with more than $210 million of cash earnings. As a result, we have announced a 77 percent increase in our quarterly dividend to 46 cents per share.

In terms of contracts traded, our overall volume approached 800 million contracts, which represented more than 3.1 million contracts per day, up 26 percent compared to 2.5 million per day last year.

Looking at the annual performance by product line, overall interest rate volumes were up 38 percent, driven by growth in CME Eurodollar futures on GLOBEX, which reached more than 850,000 contracts per day in Q4. CME foreign exchange volumes were up 50 percent, driven by EFX growth of 127 percent. CME E-mini equity volumes were up 13 percent despite continued low volatility in the equity market. And CME commodity volumes were up 13 percent. A few weeks ago, we had our highest volume they ever with almost 100,000 contracts traded.

We continue achieving success with our efforts in Europe. During the fourth quarter, despite the typical seasonal slowdown, our European incentive plan, which targets proprietary electronic trading firms, averaged 55,000 contracts per day, up from 40,000 per day during the third quarter. In January, volume from Europe continues to rise.

Before turning the call over to Jamie, I will update you on recent initiatives within CME's major product lines. With regard to CME FX, we have seen a surge in our volume to 300,000 contracts per day in recent months, up from under 150,000 per day during the last few months of 2003. First, we continue to see volume growth from our traditional buy-type participants, that include hedge funds and CTA's. Recently, we have seen meaningful volume increases from proprietary trading groups participating in foreign exchange. Our sales and marketing teams are effectively cross selling CME FX products to traders who are also active users of our E-mini and interest rate products.

In addition, we have had an increase in volume from large banks who utilize automated trading systems to continually provide liquidity to CME. We implemented a tiered pricing plan in mid 2004 to incent these participants to trade at higher volumes levels, and they have.

Finally, the recent increased volatility in the currency markets has provided a positive influence. The significant growth that we have seen does not yet include our CME FX on Reuters initiative, which is scheduled to launch in the first quarter of this year. This important distribution partnership is intended to increase our activity from the interbank market.

We recently held our first annual global FX summit at our headquarters in Chicago. We had over 250 attendees from many areas within the foreign exchange market. During the first two months of 2005, our FX products team will participate at 14 trade shows and client events in 12 cities around the world as we continue to build on the momentum within the FX product line.

Lastly, we plan to roll out FX options on CME GLOBEX in the second quarter beginning with the euro and yen currencies, and we will provide more detail on our plans over the next few months. We are enthusiastic about the potential opportunities we have in front of us in further developing our foreign exchange business.

Moving on to interest rates, our major efforts in 2005 will be to further enhance the liquidity on CME GLOBEX farther back on the yield curve. The front 8 Eurodollar futures contracts, which totaled 1.1 million contracts per day in Q4, were 78 percent electronic, while the back 32 contracts, which totaled 95,000 contracts per day in Q4, were 11 percent electronic. That leaves 327,000 Eurodollar futures per day that traded in the pit, which actually increased to 350,000 futures in January due to the return of normalized volume levels.

Our rollout of butterfly functionality on CME GLOBEX in the fourth quarter has helped increase electronic volume. And we saw the electronic percentage of our third-year contracts in quarters 9 through 12 increase to 10 percent from 5 percent in the prior quarter.

In addition, in the next few weeks, we will add several electronic market makers to trade strips of sequential Eurodollar futures contracts as a single trade. By facilitating this common, open outcry trading method on CME GLOBEX, we expect to enhance our electronic volume farther up the yield curve and to provide unique trading opportunities for users who want to adjust their exposures and make relative value trades along the yield curve. These trades also can be used to arbitrage differences between the electronic Eurodollar strips and treasury instruments, as one example.

Finally, Eurodollar options represent the largest portion of our business that continues to trade primarily in the pit. So far in 2005, we are averaging more than 630,000 contracts per day in total. In January, we averaged 12,000 Eurodollar options per day on CME GLOBEX, up from 8,000 per day in the fourth quarter of 2004. We continue to add users to our enhanced options trading system, and we will be providing screens to several large European users over the next few months. Finally, our plans are to integrate our enhanced Eurodollar options functionality into our CME GLOBEX system during the second half of 2005.

With respect to equities, we are pleased with CME E-mini product volumes so far in 2005, as January was a record month. On the futures side, we are seeing strong volumes across the entire product line, approaching 1.3 million contracts per day. We have announced three equity options products on CME GLOBEX thus far, with our E-mini S&P 500, NASDAQ 100, and Russell 2000 options products.

In January, the E-mini S&P 500 options traded 7,100 contracts per day, and we now have six active market makers. The E-mini NASDAQ 100 options are trading 500 contracts per day and growing. And the Russell 2000 options will begin trading on February 13th.

Our highly liquid E-mini Russell 2000 futures product has grown significantly to over 110,000 contracts per day in January compared to 40,000 per day in January 2004. CME trades 93 percent of all U.S. equity futures volumes and we clear 99 percent when including the Dow futures contracts that trade at the Chicago Board of Trade. The efficiency and capital savings associated with the positions in the CME clearinghouse represent an important consideration for market users. Over the last decade, we have established distribution to a well-developed base of market users, including pension funds, mutual funds, insurance companies, and hedge funds.

Our newer Russell 1000 product volume has steadily grown to 1,000 contracts per day since announcing a market-maker program in June 2004. As you can see, CME has several key advantages in equity index products as two new entrants to the U.S. market, intent to lift Russell futures and options products.

Reflecting on the direct entrance from our foreign competitors in early 2004, we saw Eurex U.S. average daily volume reach a peak of only 3 percent of the CBOT treasury business in 2004 before dropping to 1 percent in January following their decision to begin charging fees. Similarly, Euronext.liffe has averaged between 2.5 to 3 percent of CME's Eurodollar futures volume over the last three months. And we continue to believe the majority of that activity is generated by subsidized market makers. As we have discussed in the past, the key driver in trading decisions in our market is the existence of deep and sustainable liquidity capable of allowing large notional value trades with very low frictional costs.

Lastly, in our commodities product line, beginning in January, we put electronic market makers in place to trade our live stock products. The average daily volume on CME GLOBEX during the month of January was over 500 contracts, and our product team plans to aggressively market this program. So far, we are off to an impressive start in 2005. January was a record month with more than 3.7 million contracts traded per day, exceeding our prior record in September of last year.

In summary, during 2004, we grew substantially in comparison with our non-U.S. competition while increasing our strong operating margins. During the year, CME grew derivatives volume by 26 percent from 2003 while Eurex and Euronext.liffe grew their equivalent business by 2 and 6 percent, respectively. As a result, our market share among the four largest derivatives exchanges increased by 2 percent. Overall, we are developing the financial strength and critical mass necessary for executing our long-range strategy of expanding our core business, broadening our product range, providing third-party transaction processing services, and exploring new business opportunities that will benefit our shareholders.

Lastly, we generated a significant amount of free cash flow in 2004, and Q4 was no exception. Leveraging our business and generating cash flow is what we are primarily focused on for the long-term.

With that, let me turn the call over to Jamie.

Thank you, Craig. CME volume remained strong in the fourth quarter, with average daily volume approaching 3.1 million contracts despite the normal slowdown we see during the holiday season. We averaged more than 3.7 million contracts per day during the first 13 days of December. During the last two weeks, we averaged 1.5 million contracts per day, which impacted the quarterly ADV.

During the quarter, we saw a decrease in the rate per contract, which was driven by a shift in member versus nonmember volumes, which I will discuss in a minute.

Overall volume was up 42 percent compared to Q4 of 2003 while expenses increased 14 percent during the same period. Excluding stock-based compensation, which reflected a large credit in Q4 '03 due to the forfeiture of a portion of the former CEO's option, the total quarterly expenses increased by 9 percent.

In Q4, our net income was up 92 percent compared to Q4 of last year. Operating margins were 50 percent, and we generated a significant amount of cash flow as our cash and marketable securities grew by $75 million during the quarter.

During Q4, clearing and transaction fees were up 35 percent to $139 million versus 103 million in Q4 of last year, and down from 148 million in Q3 of this year. 6 million of the 9 million sequential decrease was due to lower volumes while 3 million was due to a lower rate per contract.

Turning to the rate per contract, our aggregate rate, excluding TRAKRS, was 70.3 cents, up 2 percent from 68.8 cents in the fourth quarter of 2003, but down 2 percent from 71.7 cents in Q3 2004, which was the highest quarterly rate per contract level in recent years.

As we've mentioned before, there are three primary determinants of our rates. First is the venue mix. We generate a higher rate from CME GLOBEX trades than those via open outcry. While privately-negotiated transactions generate the highest rate. As we have seen in the last few quarters, there was an overall increase in electronic trading in Q4 which had a positive impact on the rate per contract.

Secondly, the product mix is important. Our interest rate product's average price is below that of CME E-mini and FX products. Changes in the proportion of the product lines affect the overall rate as well. This quarter, we saw a higher share of FX and E-mini volume, which when isolated, positively impact the rate per contract.

The last driver is the member/nonmember mix, which can have a significant impact on the rate per contract and can be difficult to predict. Due to the pricing differential between member and customer, a small shift can have a noticeable impact.

In each of the major product lines, we saw a lower customer percentage this quarter compared to the prior quarter. In addition, there is an intermediate category for our special programs that includes our European incentive plan, Asian incentive plan, and electronic corporate membership program with base rates of 44 cents per side or 88 cents per contract. In total this quarter, we saw a 1.3 percent decrease in the customer percent of total to 20 percent, a 1 percent increase in our special program, and a 0.3 of a percent increase in our member volumes. Historically, we have experienced a reduction in customer volumes in the fourth quarter compared to the third quarter.

I will spend more time than we normally do on these calls going through the drivers of the average rate by product line and will provide some additional data points that may be helpful. The rate per contract for CME interest rate products was 53.3 cents in the fourth quarter, up 3.6 cents compared to Q4 '03, but down 5.5 cents from Q3 when we experienced our highest quarterly rate per trade ever in this product line. During the last few quarters, we have seen an increase in this rate due primarily to a shift from open outcry to electronics. This quarter, while more CME GLOBEX volume had a positive sequential impact, the customer percentage of total interest rate volume decreased by 2.4 percent.

This is important, as our base rate for trading CME Eurodollar futures on GLOBEX for members is 18 cents while the customer base rate is $1.19. Anecdotally, we have heard some customers were less active during the last two weeks of Q4 as they closed out activity for their year. We saw a similar pattern at the end of 2003.

Moving on, the E-mini rate per contract was 68.2 cents in Q4, down from 70 cents last quarter, but relatively flat compared to 68.5 cents in Q4 of last year. The reason for the sequential drop was there was a 1 percent reduction in customer participation.

Finally, in the FX product line, there was a $4.7 million sequential revenue increase for the overall product line to more than $25 million for the quarter. That represents 18 percent of our transaction fee revenue, up from 16 percent during Q4 of last year. During the quarter, we saw a sequential reduction in our rate per contract from $1.68 to $1.58. Approximately 4 cents of the reduction was due to the mix shift, with a lower percentage of privately negotiated volume due primarily to the surge in the electronic volume. The customer percentage was 2 percent lower in Q4 versus Q3, which accounted for about 3 cents of the sequential rate reduction. Finally, the tiered pricing plan which Craig mentioned was established in mid 2004 and led to an increase in the participation of several firms who trade at a higher volume level in Q4 and came in at lower rates. That tiering accounted for a sequential 2-cent decline. As Craig mentioned, in order to continue to generate significant growth and cash flow, we are very focused on expanding the number of participants in our markets and establishing long-term relationships for those users to deepen the liquidity base.

Moving onto the additional revenue items, first, the clearing and transaction processing services line -- the Chicago Board of Trade reported volume of almost 2.4 million contracts per day or 307 million sides, generating $14.6 million of processing revenue for the quarter. Quotation data fees were $15.7 million for the quarter, up from 14.2 million during Q4 of '03 and up from 14.9 million in the prior quarter.

Our screen counts at the end of December was 149,000 for professional subscribers, unchanged from what we reported last quarter, and we had 31,000 lower-priced, non-professional subscribers, up from 30,000 last quarter. Effective January 2005, CME has increased the price for professional screens from $30 to $35 per month.

Investment income was 5.4 million compared to 3.6 million during Q4 '03 and up from 3.2 million in the prior quarter. In addition to higher cash balances and rates, CME had higher earnings from deferred compensation balances of about 900,000 compared to Q3 '04. There is an equal and offsetting expense both in the comp and benefit expense line associated with this line item, which resulted from an overall rise in the stock market during Q4.

I'll now take a few minutes to review expenses. Total expenses for Q4 were $93.9 million versus 82.5 million for Q4 last year and 92.5 million in Q3 of '04. Excluding stock-based compensation, which had a onetime, $1.4 million credit in Q4 '03, expenses were 9 percent compared to the same quarter a year ago.

I'll now highlight a few of the main expense categories. First, compensation and benefits totaled $42.7 million for the quarter. Breaking down the three components of this expense, salaries and benefits totaled $33.9 million, up relative to prior quarter due to higher deferred compensation earnings and higher payroll taxes associated with options exercises. Second, in the fourth quarter of this year, we recorded $6.3 million for the incentive bonus, and for the year, we will pay out $30 million. The final component of the comp and benefits line is stock-based compensation, which totaled $2.5 million during the fourth quarter of 2004.

At the end of December, head count stood at 1,244, an increase of 14 from the end of Q3. During the year, CME added 23 people, down from the 69 we added in 2003. Looking at compensation as a percentage of revenue, in 2004, CME's total comps to revenue ratio was 22 percent, down from 26 percent in 2003. Non-comp expenses totaled $51.2 million during the fourth quarter compared to 49.4 million during the same quarter a year ago, and 51.6 million in Q3.

Moving on to income before taxes, our pretax income was $94 million in the fourth quarter, up 88 percent from the fourth quarter last year. In Q4, our pretax operating margin was 50 percent and we finished the year at 50.1 percent. Net income for the quarter was $57 million, and diluted EPS was $1.64. Both of these are up more than 88 percent compared to the same quarter a year ago. The quarterly tax rate was 39.6 percent as a result of the resolution of tax audits and the overall full-year tax rate was 40.3 percent.

Looking forward to 2005, we expect the tax rate to come in between 40 percent and 40.3 percent.

Moving on to the balance sheet, at the end of the quarter, we had approximately $660 million in cash, cash equivalents, and marketable securities and we have no debt. That compares to $585 million at the end of Q3 and $442 million at the end of 2003.

As of the end of December, working capital was above $669 million. Capital expenditures totaled 18.5 million for the fourth quarter, which brought the full-year CapEx to $67.5 million. The majority of the quarter's capital expenditures were related to adding capacity and continuing to build out our third data center.

In 2005, we expect CapEx to range from 70 to 80 million and we expect depreciation and amortization to exceed $60 million. As we continue to invest in capacity, we also expect to see an increase in our communication, computer, and software maintenance line.

Cash earnings totaled $54 million for the fourth quarter, bringing total cash earnings to $210 million for the full year compared to $113 million in 2003. We announced we have increased our Q1 2005 quarterly dividend to 46 cents, up 77 percent. This increase is driven by the growth in cash earnings as we target a 30 percent pay-out of the prior-year cash earnings. In addition, we tie our employee bonus to cash earnings in what is truly a pay-per-performance plan. We have raised the 2005 cash earnings target for the incentive plan well above our 2004 actual results, and if that target is met, the Company will pay out $21 million compared to the 30 million of 2004. If CME exceeds the target by more than 20 percent, we would pay out a maximum of $33 million.

Now, let me summarize first-quarter volume to date. January was a record month with more than 3.7 million contracts traded on average per day. Interest rate volumes averaged more than 2 million contracts per day. E-mini equity is 1.3 million contracts per day. Equity standard contracts, $98,000 contracts. Foreign exchange is off to a great start at 290,000. And commodity products, 55,000 contracts per day. And at the Chicago Board of Trade, volume averaged 2.3 million contracts per day in January.

That concludes our prepared remarks for the fourth quarter. Now we would be happy to address any questions you may have.

Thank you. (Operator Instructions). Daniel Goldberg with Bear Stearns.

Good morning. Can you just -- thank you very much for giving a lot of detail in terms of the pricing. Obviously, that was I think the biggest surprise to many. But can you just maybe give us a sense for what potentially that could imply? I mean in terms of higher percentage coming from members versus nonmembers? Is there anything else we can read into that? Or do you think that's truly a kind of seasonal, cyclical pattern?

Yes, Daniel, it's Craig Donohue. First of all, thank you for that question. I think primarily, our insight into this is that it's seasonal in that if you look at each of the last fourth quarters that we've had over recent years, we've tended to see a decrease in the level of customer participation, which obviously does affect the customer member mix and therefore the average rate per contract. I would not at this point read anything farther into that in terms of any kind of longer-term or significant trend. I think it's mostly a seasonal impact.

And have you seen that kind of reverse itself or go back to more normalized so far through January?

We haven't yet got sufficient data to look at that, but obviously, the volumes have been very, very high. We're continuing to see growth in both customer volumes as well as member volumes. So we'll have more to say on that, obviously, as we get farther into the quarter.

Daniel, this is Jamie. Just to add to Craig's comments, if you look at past fourth quarters, in 2003, the absolute nonmember volumes fell 8 percent versus the prior quarter. In 2002, they fell 8 percent versus the prior quarter. And in '04 in Q4, we saw absolute nonmember volumes fall 9 percent. So that does lend to that seasonality. And in addition, we did see members stronger in the fourth quarter of '04 than we had in those prior fourth quarters.

Okay. That's helpful. Can you give us an update on the whole trading technologies discussion? I mean we've heard that kind of creep back up; and I know there's been some advertisements in some trade journals. What's the latest there?

Just for those who are less familiar than perhaps Daniel, Daniel's referring to an independent software vendor which is one of approximately 22 or 23 independent software vendors that interface with the CME GLOBEX system and their claim of a patent on certain functionality for putting trades into our GLOBEX system as well as all of the other major exchanges. We have been I think very clear, Daniel, in indicating that we neither use that particular technology and functionality, nor do we infringe their patent to the extent that that patent is valid and enforceable. I think more importantly, it's very important to remember that we maintain open access and a level playing field for all market participants in our products. We have more than 250 connections to CME i-Link (ph), which is our open application programming interface. And we have a broad array of entities that are connected to GLOBEX.

As I mentioned, we have approximately 23 independent software vendors apart from trading technologies. We also have each of our 58 active futures commission merchant clearing member firms that are connected to GLOBEX, as well as each of our 24 inactive clearing members. So I think we're in a very strong position. We're not using that technology. We don't infringe and we have a variety of different distribution channels into CME GLOBEX.

Okay. That's also helpful. Next question, just in terms of the Spider is recently starting to trade on some of the option exchanges. Can you just there? There was a lot of speculation regarding that being maybe a substitute product for some of the products that you trade, and might be somewhat of a competitive threat to the CME volumes. What is your comment there?

Yes, I wouldn't agree with that comment. First of all, what we have seen over many years is a complementarity, both between the ETF market and the related stock index futures market, our market is obviously much larger. But as the ETF market has grown, so has the use of our E-mini stock index futures contract for hedging and laying off the risk of dealing activity in the ETF market. Similarly, we would expect that the complementarities that have also existed between the equity index options on the cash indices, say for example the S&P 500 or the NASDAQ 100, and our own futures contracts, where again we have options market makers that are laying off and hedging exposures in their options-related activity and our E-mini contracts to continue. So as we see the introduction and success of these new equity index options based on ETF's themselves, we expect that to have a positive impact on the use of our products.

Okay. And then just lastly, any comment on if you look back at your capital bases continue to build since basically you went public in December of '02. Any comments there?

Just I guess a broad answer and then I'll invite Jamie to add if he would like to. As you know, we are, I think, in some respects, about two to three years behind the European marketplace in terms of consolidation. And I think if you were to look at the way in which the European market has evolved, that is clearly the path that we are on. We're seeing intense pressure on smaller players in the market from both customers and intermediaries. And so we're in a very strong position giving the size and scale advantages that we have. The scalability of our infrastructure and platforms as well as the leverage inherent in our business model to participate as a consolidator in the market. The market, we believe, is ripening very quickly for that kind of activity. And so I think we're very comfortable with the working capital level that we have. It's certainly very consistent and commensurate with what was true of the European marketplace over the last several years.

Okay great. Thank you.

Colin Clark with Merrill Lynch.

Good morning. I just wanted to touch on the pricing again on the -- how does your average customer rate compare to Euronext.liffe and Eurodollars? Is that having an impact at all? And can you also just touch on the impact of your own pricing incentives from market makers and expansion into Europe, and how those factors may have impacted the average price this quarter or going forward.

Let me start by first indicating that I mentioned that throughout the course of the last year, during this time when Euronext.liffe has been competing with us in the Eurodollar futures market, that we've maintained a 97 percent market share. Again, we believe that the very modest volumes that they have are primarily through payments to market makers, where they are neither charging for the transactions, but actually they're actually paying for those transactions in a number of cases. So the customer fee differential is -- which Jamie can give you in a moment -- is almost irrelevant in the sense that there's very little customer participation that we're aware of in their market.

Secondly, as you probably know, the vast majority of participants in the Eurodollar futures market tend to be banks and swap dealers and their affiliates, as well as more recently, electronics proprietary trading groups, which tend to be equity members of the exchange. And so we have a very, very low fee that we charge, which is frankly lower than the Euronext.liffe charges for those kinds of players. And that represents approximately 80 percent of average daily volume. So we're charging anywhere from 7 to 14 cents a side for a Eurodollars futures contract.

Then in terms of the European program, our average rate or our face rate out of there is 88 cents a round term. And it's mostly right now on the interest rate products, where the average rate is 53 cents. So it's accretive to the rate -- it's basically new customers coming on; it's not existing customers going into that rate.

And then just as far as the customer rate overall, one of the things that's driving it is that there's a drop-off in the customer rate, which is normal, in the fourth quarter. The issue is that we're getting more member volume coming on in the fourth quarter. I think it's a good signal for our electronic trading platform in particular, that the members are migrating over there.

Okay, great. That was helpful. In terms of the volume that's for January, can you just give us a breakout of the electronic portion by product as well?

Colin, this is John Peschier. Looking at interest rates first, the total there was about 1.1 million contracts, so represented more than 50 percent of the volume. The electronic FX business was 228,000 a day, which was actually higher than the December electronic FX volume, which was impressive considering December was a roll month. And then E-mini's as we talked about, was also a record month in January. 1.27 million contracts electronically.

And in terms of the volume trends for January, I think you got off to a very strong start in the first half, and it might have trended a little slower in the second half. Is that accurate? Or is there anything kind of noticeable that was going on in January?

I'll answer that. I think if you look at the equity market, we're continuing to see very low volatility without any kind of significant impacts or changes. Obviously in the FX area, we see a little bit more volatility with the continued weakness of the dollar. And we are also looking forward to the conclusion of the two-day meeting on monetary policy and short-term interest rate. But beyond that, I mean there's nothing notable. So we're off to a very good start, I think not particularly driven by any new trends in volatility.

Great. And the opportunity in the FX options side, can you comment on that opportunity and the potential size of the market, who some of your competitors are in that area?

Colin, let me ask Rick Redding, who heads our products and services group, to address that question.

The FX options area is particularly attractive to us. One, like the futures market, we don't see competition from the other futures exchanges in there. Right now, we trade FX options in the open outcry platform. And we think that we can move a lot of that business and actually increase the overall market as we have on the futures side. The primary competition right now comes from the over-the-counter market. But also that over-the-counter market is a group that will provide us flow as well. Because just as you were talking about the Spiders earlier, it's a very complementary nature of the business from the over-the-counter side of the world, both in the interest rates and in the FX markets. Well we plan to roll out the euro and the yen first. Obviously, these are the majors. And we will roll others out as the year goes on.

And my final question, just on your thinking about your comp ratio with the new cash earnings targets, obviously, it depends on the top line. But can you give us any insight on the -- what the comp ratio might -- what type of range would be good to consider, considering the accrual -- the bonus, or the incentives for '05? Thanks.

Yes, we can't provide that or we don't provide that forward-looking guidance. But in terms of some generalities on the salaries and benefits, obviously, there will be increases from ongoing modest staff additions as we grow the business organically and from annual merit and promotion increases, as well as the potential for a trend in higher health-care costs. And so you've got all that working towards pushing that expense a bit higher. But as you noted, the target for the bonus next year is set at a higher level than the actual cash earnings target, cash earnings came in for 2004. So there's that offsetting impact.

Great. Thank you.

Bill Tanona with J.P. Morgan Securities.

Good morning, guys. Just going back to the rate per trade, I know you guys just talked about it a lot, but I want to focus specifically on the interest rate side. I think it would be helpful if you could tell us percentage-wise -- say what percentage is member versus nonmember in the fourth quarter and how that compared to say the third quarter as opposed to kind of absolute increases in volumes in those areas.

Sure. In the fourth quarter, the member percentage of the mix was about 81 percent and about 15 or 16 percent on the nonmember side, the remainder being in special programs. There was a 2.4 percent decrease on nonmember quarters versus Q3 of '04. Now, if you look at absolute volumes, we were down 10 percent -- I'm sorry -- 23 percent on nonmember versus the prior quarter. And looking back at prior years in Q4 '03, we were down 10 percent versus Q3 '03. And in Q4, we were down 21 percent versus Q3 '02. So it's not an unusual -- it's not unusual for us to see that decrease in absolute nonmember volumes in the fourth quarter. The thing to keep in mind is that nonmember volumes did increase 30 percent versus Q4 of last year and overall interest rate volumes were up 42 percent.

And so how did that 81 percent member compare to the third quarter on the interest rate side?

The 81 percent of member compared to 80 percent in Q3 of '04.

Okay. So that 1 percent shift there obviously had a pretty significant impact considering that I would suspect that as you moved to GLOBEX, you saw the rate per trade actually move higher.

Right.

Net-net. Okay. And then in terms of FX, obviously, as you guys continue to launch your e-FX product, I would suspect that you continue to see the pressure on the rate per trade there in terms of a higher percentage of volume being electronic. Just want to get a sense as to where you think that may bottom out, particularly as it pertains to your agreement with Reuters. I know you guys, I think, have some type of revenue share there, and how that might differ in terms of what we've seen in times past, as we've seen on the electronic side.

Bill, it's Craig. Let me tackle that question. I think first of all, as you know, we don't give any sort of forward-looking guidance on that. And I would say I think that's relatively difficult to predict anyway, given that we've got a lot of dynamic growth in our FX product line coming from a multitude of different sources. We do expect that as we continue to grow that product line, that the rate per trade is going to continue to change, simply because the EFP contribution on a relative basis is going to diminish relative to the growth of the electronic market. But in all of our products, as you know, we're very focused on long-term growth and revenue growth and generating free cash flow. And as you see, we had a nearly $5 million sequential revenue increase for the overall product line in FX, notwithstanding the fact that the rate per contract is declining. So that's how we can take advantage of the inherent leverage and scalability, both in the business model and in our infrastructure and platforms. And that's really what we're focused on.

Okay. And actually, Jamie, I forgot to ask you, in terms of what January looks like in terms of the percentage. Do you guys have -- is it back up to the 81 percent? Or is it somewhere in between the 80 to 81?

That data is not yet available.

Okay. And then lastly, Craig, obviously, you guys have talked about being on the acquisition hunt post IPO. And it seems like that timetable keeps getting pushed out. Can you just give us a sense as to what's going on in the environment and your updated thoughts on acquisitions going forward?

I'd be happy to. Obviously, in this area, as we always are, we'll be quite limited in our remarks. I think the first and foremost comment that I have is that I think timing is less critical than carefulness in terms of the types of things that we would seek to do. I think I can't emphasize enough that we've had I think a very disciplined approach for thinking about non-organic growth. I would say that there are a number of valuable opportunities for us that we're looking at trying to achieve. I don't want to emphasize the time line in relationship to that because as you well know, it's not always when the acquirer is ready; it's when the target is ready.

But very clearly, we're continuing to see signs of, as I mentioned earlier, pressure by both intermediaries and end users of our markets for greater consolidation and greater capital and operational and technological efficiencies. And so we continue to be in a very strong position in terms of our ability to effectuate that. And beyond that, I think everyone is probably acutely aware of what's happening in the marketplace in terms of some of the other exchanges, moving toward restructurings, completing perhaps initial public offerings, and otherwise thinking of their long-term strategy. So we're very attendant to that and very hopeful that we can do something valuable. But it will have to be based on shareholder value concepts rather than strategic positioning or gain theory.

Scott Patrick with Morgan Stanley.

Hi, good morning. Just not to be different here. I just wanted to start out with one more question on the rate, specifically as it relates to interest rate product. And I guess what will be helpful and what I'm trying to get at is, would it be possible to break down, if you look at kind of the sequential change, break it down in terms of the sense -- the change in a sense basis -- going from what came from GLOBEX, what resulted from the change in the customer mix. And just kind of going forward, we were at 59 cents in the third quarter down to 53. I mean is the 50 -- do we continue to grow off the 59 cents pretty handily going forward, do you think? Or are there other things going on behind the scenes that are going to kind of really slow the growth materially in terms of where that rate is going?

Scott, this is Jamie. Let me give you that reconciliation of the rate per trade from Q3 '04 to fourth-quarter rate per trade. So we started with 59 percent in the third quarter. There was a 1 cent favorable impact from the electronification of the market. There was a 5-cent unfavorable due to the member/nonmember mix. There was a 1 cent unfavorable due to lower, privately negotiated proportion of the trade. And there was 1 cent from other items -- some post-trade things like give-ups and brokerage. Bringing it to the 53 cents for Q4.

And Scott, this is John Peschier. We did mention the privately negotiated -- we did see strong interest rate volume in Q3. And actually in January, we're seeing similar levels at about 18,000 contracts that we saw in Q3. So that piece actually dropped down in Q4. That specifically is back in January -- that piece of it.

Okay, great; that's helpful. Second question -- just in terms of the delay in transitioning over to European (technical difficulty) expiration on the options front. Is that a delay that you see being worked out sometime in the near-term? Or is that something that may not be resolved? And how much does that kind of increase the challenge in terms of growing the equity options business?

Let me, Scott, respond to that. I mean first of all, the issue there is a complex one having to do with regulatory jurisdiction over options on futures with European-style exercise really between the SEC and the CFTC. And I really don't know at what point that issue will be resolved. So we have made it clear that we're proceeding with our strategy to develop the electronic options market. And in our equity products, that will remain American style exercise. And we don't view that as a substantial impediment to continuing to grow our E-mini options products. And as we both touched on in our remarks briefly, we're off to a very good start there. We've seen some very good growth in the E-mini S&P 500 option, and we expect to also see continued growth in the NASDAQ 100 and a good start as well to the launch of our Russell options product.

So I don't think this will be a big impediment. We actually traded 13,000 E-mini S&P 500 options contracts yesterday and our average daily volume in January in those products has been approximately 7,000 contracts. So I think the strategy is already succeeding, even though it's very early in the game.

Now, just let me emphasize as well that in the foreign exchange area, which Rick addressed very briefly, those are not -- the underlying instruments there are not securities. So we will be launching those as European-style exercises. It doesn't raise the same regulatory issues that pertain to the options on the stock index futures products.

Okay, great. And just one final question. Any early traction that you can point to on the new plasma membership for hedge funds?

Nothing to report yet. We have been, as I think you know, successful in our efforts to attract both hedge funds as well as electronic proprietary trading groups as what we call inactive clearing members of the exchange. I would emphasize the strategic aspect of that, which is that one of the reasons why we have become so successful is because we have really tried to make sure that the people who generate the majority of the liquidity in our products -- that we are the low-cost provider for them. So we would expect that we will have some firms that will take advantage of those new rules, but it's too early to report as we've just essentially implemented it.

One place to look is continue to look at our website at the inactive clearing firms, you will see that a couple of new large hedge funds became in active in the Q4. And one within the last ten days has joined this year as one of the largest hedge funds in the world.

Alright. Thanks, guys.

Rich Repetto with Sandler O'Neill.

Hi, guys. Most of the questions have already -- that I had have already been asked. But one, just to change to the clearing of the CBOT clearing arrangement, it looks like the rate per contract there on the clearing business went up a little bit. Is that purely mix? Or is -- could you just give a little color on that?

Yes, this is Jamie. The reason for that, there was a slight increase, was that the fourth quarter was the first quarter where we were under the normalized pricing. There had been an introductory pricing level in place that had overlapped slightly into the third quarter. And when we hit the fourth quarter, it was fully at normalized levels. So that's what's driving that.

Okay. Then just one review here also. On the incentive bonus, it's the -- could you just go through the numbers what you paid -- was it 21 million this year and then 33 million at the max targeted for next year? I didn't get that all.

The target for this year is 21 million. But keep in mind that we pay that if we hit targeted cash earnings. However, the cash earnings target for 2005 has been set above -- well above -- the actual cash earnings results for 2004. And then the maximum under the program, if we do more than -- if we exceed the target -- the cash earnings target -- by 20 percent, the maximum bonus payout will be $33 million.

Could you go through what you paid in '04 under this?

In '04, we paid about $30 million. And that was at a maximum level.

Okay, okay. And then the very last question is on One Chicago, I know it's negligible to impact on earnings, but I understand this year that you can actually break away from that. Is the single stock futures -- is that -- do you see that as a potential growth area?

Yes, Rich, let me answer that. We have been very hopeful that security futures products and single stock futures in particular could be successful and could be developed into a successful market. Obviously, we've been disappointed with the results to date. And we've got the CFTC reauthorization process coming up. It may be that we can achieve some improvement in the regulatory aspects of these products, which in some cases, we believe have sort of negatively impacted the success of the product overall. So we're certainly going to try to take that up. But I think we've been clear as well that we're looking very carefully at the expenses associated with maintaining that investment in One Chicago. We have tried to both restructure that Company and to reduce the ongoing expenses associated with it, as well as to more narrowly focus our marketing and strategic efforts to really build liquidity.

We've seen some improvement. We're up from I think 7,000 contracts a day a year ago to approximately 9,000 contracts a day in the fourth quarter '04. That is not yet sufficient in terms of the growth. And so we're looking at that very carefully and we'll be involved in discussions with our other co-owners of One Chicago in the next two months on that topic.

And Rich, this is Jamie. The impact on our financial statements for the fourth quarter was about $200,000, which is consistent with what we've seen over the past two or three quarters.

Okay. Very last -- one more follow-up on the incentive bonus. Is it still targeted at the same percentage rate as cash earnings in '04?

No, Rich, we've set the bar much higher for '05 than '04. Our compensation committee and Board of Directors requires that we set the bar pretty high for achieving the same target pay-out for next year. So the target is considerably well above that for 2004. But we don't disclose what that is.

Understood. Thank you.

Glenn Schorr with UBS Financial.

Hey, guys. This is Chris Costanza. You guys have pretty much completely covered the interest rate pricing question. I guess the only remaining thing I have is in previous years, if I look at 4Q and I hear you on the mix, it doesn't appear that pricing was affected to the degree that it was affected this year in 4Q. Is there any sort of difference in the driver? Or has there been a change in just your overall pricing strategy over the last year that would cause the impact this year?

Well, I think what we saw in the fourth quarter of this year was that the members continued to come in strong -- stronger than they have in other fourth quarters. So that's what drove that mix differential in Q4 of '04 versus prior -- the fourth quarter of '03.

Okay. And --

And also, Chris, remember as well that we had probably our highest rate per contract in the third quarter preceding the fourth quarter. So that obviously had an impact as well.

Sure. So would it be fair to say that I might model 4Q '04 and just generally speaking, fourth quarter is down a little bit? Is there anything in your customer mix that might level out in the future? Or --?

Yes, we're not of the view that there's any kind of fundamental shift that's happening. I think we've tried as best we can to explain and put it in a historical context, if you look at the changing mix of customer participation in the fourth quarter of each year. So we're really trying to emphasize that seasonal, for lack of a better way of describing it, impact, rather than any kind of important shift or change in the customer mix relative to the equity member mix.

Okay. And then just a question on new users, since that's a very important part of volume growth. What are the trends that you're seeing, both locally and abroad? And then also, are you seeing any success in cross marketing your product mix to European customers?

Yes, thank you for that question. I think we've been quite successful in attracting new users to our products with our enhanced marketing capabilities, as well as some of our special programs in both Europe and in Asia. I think as you're well aware, we went from having very little to no business from the electronic proprietary trading groups, primarily based in London and Gibraltar and other parts of Europe, to approximately 55,000 contracts a day being traded from those customers. And similarly, although to a lesser extent, we've seen pretty strong growth in both the Asia incentive plan where I think we're somewhere around 9 to 10,000 contracts a day.

And then our electronic corporate membership program, which has been quite successful as well. Most of that is very clearly new business that we didn't have before. And that is 44 cents a side business, so it's actually a very favorable contribution to us. We're also doing a lot on the cross -- call it cross-selling front. We've become increasingly oriented toward trying to get at least those customer segments that are able to trade a broad array of products to do so. A lot of the dynamic growth that we're seeing right now in the foreign exchange product line -- and again, this is pre-launch of CME FX on Reuters -- it coming from the electronic proprietary trading groups that have been very active and continue to be very active customers and participants in our E-mini equity product. So we're beginning to see that cross-over effect.

And what's very positive about that is, they're doing more business with us. They're not moving away from the equity E-mini into the FX; they're actually adding to their business and thereby, adding to our business. So we've been very successful with that.

One of the major initiatives that we have in 2005 is to really leverage the European incentive plan to grow our FX volumes. The vast majority of the business that we see in the European incentive plan is really in our Eurodollar futures contract. Probably 3/4 of the activity is interest rate product-related. And the balance of that is really our E-mini contracts. We think that our FX product line should be very appealing and attractive to that client base. And we're going to be working on really bringing them into that market throughout the course of 2005. And we'll obviously be doing the same thing in Asia.

And a final question related to the launch of options on FX. Have you had advanced-level conversations with the liquidity provider banks on whether they're interested and committed to streaming liquidity for that product as well?

Yes, we are planning to have market natures for the FX options when they launch. We have not announced the firms yet. But we have commitments from several participants to be market makers. We'll be providing more information as we get closer to the launch.

And I don't have the data in front of me, but do you guys have some information as to looking at the OTC market, how it breaks down between a standard spot and options or forwards? Just to get a sense of market opportunity?

You're just talking about cash spot and forwards?

Yes.

You know, of the 1.9 trillion a day -- and I'm going to give you very general numbers -- but obviously CIS is a better, more precise indication of the numbers. But I would say probably 5 to 600 million of that is a forward market with the balance of that being the spot market. And CME foreign exchange futures are approximately 5 percent of that total 1.9 trillion, in rough terms.

Great. Thank you very much, guys.

Charlotte Chamberlain with Jefferies & Co.

Good morning. A couple of kind of housekeeping questions. Can you remind us again the clearing contracts that you have with the CBOT, when does that come up for renewal and renegotiation?

Hi, Charlotte. It's Craig Donohue. The agreement has a five-year agreement and we've just completed our first year of the agreement. So it will come up for expiration in 2009.

Okay, great. And then also, the interest expense line seemed to go up disproportionately. Is that because you had a lot more options? Or was that just because interest rates went up?

Interest expense, Charlotte?

Yes. It went up pretty significantly in the quarter.

Are you talking about the securities lending interest?

Yes, that, that.

The revenue went up as well as driven by forces in the securities lending market. And you can see that the revenue and the expense both increased in the fourth quarter.

Okay. And then could you give us -- for the interest rate contract, right now, do you have any market makers on the interest rate contract?

We do have a number of market makers. Let me just say at the outset that we tend not to make, in general terms anyway, stipends or payments to market makers. But we do include various kinds of fee incentives or fee waivers for people who are making markets for us. In general terms, that tends to be sort of farther out the yield curve, where we're looking to simulate electronic liquidity on GLOBEX. But for the most part, we don't have designated market makers in the vast majority of our GLOBEX traded Eurodollar futures contracts.

Okay. Was there any measurable difference in the percentage of volumes that was done by market makers on the interest rate contracts in the fourth quarter versus the third quarter?

I'm sorry; could you repeat the question?

If you look at the fourth quarter of 2004 versus the third quarter of 2004, was there any meaningful change in the percentage of contracts that were done by the market makers in one quarter versus the other? In other words, were they 50 percent of the -- I know it's small, but were they 50 percent of the volume in the fourth quarter versus 30 percent in the third quarter? Or was it really not very much of a change?

There was not much of a change and it's not really a major impact on our rate per contract.

Okay. And then the final thing, in answer to Colin's question, could you go over that again in terms of what percentage of your volumes in the fourth quarter versus the third came from these trading arcades generally in Europe?

Well, yes, let me go through that again. We're still at I think roughly 1.6 or 1.7 percent of total average daily volumes being done through our European incentive plan. And as I mentioned, in the fourth quarter of '04, we were at about 55,000 contracts per day, which is in the fourth quarter, 1.8 percent of total CME average daily volumes. So it's still quite negligible, but growing.

Okay. Alright, great. Thank you.

And that concludes the question-and-answer session. At this time, I'd like to turn the call back over to Mr. Peschier for any additional or closing remarks.

It's Craig Donohue. Just a couple of closing comments. Again, I want to emphasize the very strong growth that we've had starting in January of this year with our 3.7 million contracts of average daily volume. In January as well, as we indicated, we've seen an all-time E-mini record of 1.27 million contracts a day. We've also had in January our second-highest interest rate average daily volume of 2 million contracts a day with 1 million of that occurring on our CME GLOBEX platform.

We've also had our highest non-roll FX average daily volume month in January of 288,000 contracts per day. And we've also, as Jamie indicated, had our highest ever commodities average daily volume of 54,000 contracts a day. So we're off to a very strong start, and we thank you for being with us today.

And that will conclude today's conference call. Thank you for your participation.