芝加哥商業交易所 (CME) 2005 Q1 法說會逐字稿

Good day and welcome to the Chicago Mercantile Exchange first quarter 2005 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 for joining this this morning. Craig Donohue and Jamie Parisi will spend a few minutes outlining the highlights of the first quarter and then we will open up the call for your questions. Terry Duffy, Phupinder Gill and Rick Redding are also here this morning and will participate in the Q&A section. Please note that all references we make during this call to trading volume and rate per contract exclude our low-priced TRAKRS (tm) products.

Before they begin, I'll read the Safe Harbor language. Statements made on this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may different materially from what is expressed or implied in any forward-looking statements. For detailed information about factors that may effect our performance may be found in our filings with the SEC, including our most recent annual report on 10-K which is available on our website. Also, we refer in this call to cash earnings, a non-GAAP number. The reconciliation 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. Will that, I would like to turn the call over to Craig.

Thank you for joining us this morning. We are pleased to report record first quarter results. I'll start by providing the highlights of the quarter as well as an update on several initiatives. Let me begin with the key financial results for Q1. During the quarter net revenue grew to 214 million, up 29% or 48 million from the same quarter a year ago. Income before taxes grew 53% to 118 million and operating margin improved from 47% in Q1 last year to 55% this quarter which represents our highest quarterly margin. Our diluted EPS increased 51% to $2.04. And, most importantly, we generated significant cash flow during the first quarter with more than $71 million of cash earnings. In terms of contracts traded, our overall volume was up 39% with more than 3.9 million contracts per day compared to 2.8 million during the same quarter last year. All three of our financial product lines had record quarterly volumes and revenues and our commodity record line had the highest quarterly volume in the last two decades.

Overall, CME Globex volume was up significantly, 95% higher than the same period a year ago. In the first quarter, the percentage of volume on CME Globex dipped slightly to 66%. However, so far during the second quarter the percentage of volume on CME Globex has increased to 69%. Taking a look at the product areas in Q1 compared to the same period a year ago, interest rate volume was up 58% driven by growth by CME Eurodollar futures on CME Globex which averaged more than 1.1 million contracts per day and record C -- Eurodollar options volume primarily traded in the pit which approached 740,000 contracts per day. Foreign exchange volume was up 56% to 294,000 contracts per day driven by EFX growth which doubled from last years levels. E-mini volume was up 16% to more than 1.2 million contracts per day despite continued low volatility in the equity market and commodity volumes were up 37% to more than 50,000 contracts per day.

We continue to see success with our special incentive programs which include our European incentive plan, Asian incentive plan and electronic corporate membership program. The volume from these programs increased from 93,000 per day in Q4 of 2004 to 147,000 contracts per day in Q1. The vast majority of this business is from new users of CME products. Ultimately our main objective at CME is to drive increased transactions over a leveragable infrastructure to generate incremental operating process and cash flow.

Next, I want to comment about several of our new growth initiatives. These include the expansion of our options business on CME Globex and the recent successful launch on CME FX on Reuters. We are at the early stages of seeing tangible results from both of these initiatives and our exceptional performance in Q1 was driven primarily by our existing benchmark futures products. First, we have a focus on increasing electronic options volume over the next few years. According to the bank for international settlements the number of options positions has grown 98% since 2002 reflecting the expanding over-the-counter options market. Several of the OTC options markets are quite large. For example the FX options market is a $117 billion per day business. We have recently added electronic options capability for CME Eurodollars. E-mini equity and FX products. So far in April we are averaging more than 50,000 electronic options per day which represents 5% of our total options volume. In April, 2004, we only traded 10,000 options per day on CME Globex.

We are actively promoting our electronic options products. First, our stock index options, which include the S&P 500, NASDAQ 100 and Russell products have had impressive early results. Early this month we launched Euro and yen FX options on CME Globex and those products are already trading approximately 1,000 contracts per day. We are working with 10 independent software vendors who focus primarily on options products to integrate our options products into their software. We believe these distribution channel partners will help us grow our electronic options volume.

In the second half of this year, we will be significantly enhancing our options functionality on CME Globex. We will add mass quoting capability to our CME Globex platform which will enable market makers to become more active in these products. In addition, we will be fully incorporating our enhanced option system for trading Eurodollar options on CME Globex. We have piloted a closed system with this functionality to 100 users. Of the 34,000 total electronic Eurodollar options currently trading, these participants are trading approximately 25,000 contracts per day. When the functionality is fully incorporated into our CME Globex platform later this year our electronic Eurodollar options will be available to our entire client base around the world. We have had strong early results with electronic options. All these products migrate -- as these products migrate from the floor to the screen, we capture more revenue per trade. And if history is any guide we expect to see the overall options volumes grow as well.

Moving on to the CME FX on Reuters partnership we successfully launched the initiative six weeks ago after working closely will Reuters and our seven Beta and front-end software partners. Overall, we have received great feedback from the FX community. One original bank partner said they were pleased with how things have gone thus far and liquidity has been deep, straight through processing has been smooth and efficient and the technology stable. One of our newer partners says that the CME FX and Reuters partnership brings together best of breed by combining CME's mature currency futures offering with Reuters industry leading financial information services.

Lastly, another commented, we continually seek to provide clients with the best options to implement their trading strategies. This service fully compliments our strategy of providing multiple access points for our global client base. Last week we announced the next phase of the CME FX on Reuters initiative. We announced that four significant FX participants, who are large CME clearing firms, will begin utilizing and marketing the CME FX on Reuter's platform. The new participants are J.P. Morgan, Lehman, Revco and Calyon. They supplement seven large FX banks that joined us with the Beta testing and initial rollout in March.

We continue to attract interest from the interbank market participants as we execute on this phased in approach. Thus far we are pleased with the transaction volumes and they are consistent with our internal expectations. We expect the volume to continue to accelerate and build on CME's significant base of existing FX business.

In summary, our results in the first quarter were strong. Our overall volume significantly outpaced the volume at our direct, derivatives exchange competitors. So far in Q2 we are approaching 5 million contracts per day. Making us the most active derivatives exchange in the world. During the first quarter, CME's volume was up 39%. CBOT was up 29%, comparable products traded at Eurex were up 16% while Euro Next Life was down 7%. We are continuing to benefit from secular growth trends including increased investor sophistication and more active investment strategies that are driving a shift toward exchange traded derivatives. Furthermore, with the rise in economic uncertainty in April due to factors such as fluctuating interest rates and energy costs along with weakened consumer confidence, more market users are turning to CME.

Finally, we will continue expanding our worldwide customer base and broadening our electronic product offerings. We are very excited about our significant growth opportunities with electronic options and within our FX product line. With that, let me turn the call over to Jamie to go through the financials.

Thank you, Craig. We had another strong quarter with record financial results across the board. Our total revenue of $214 million was up over 48 million or 29% compared to the same quarter last year and up 14%, or 26 million sequentially, driven by record trading volumes. At the same time expenses grew 8% compared to the same quarter a year ago. Looking at the transaction fees by product line, Q1 05 is the highest revenue quarter in every product line since our IPO and in the quarter we had only 61 trading days. In addition, we had 70% revenue growth on CME Globex in the first quarter versus the prior year with revenues totaling more than $112 million. In the first quarter, clearing and transaction fees were up 31 percent to 161 million versus $123 million in Q1 of last year and up from $139 million in Q4 of 2004. Average daily volume was 3.9 million contracts in Q1, up 39% compared to the same period a year ago. Our average rate per contract, excluding TRAKRS, was 66.8 cents, down from recent quarters.

Let me remind you that the important factors to keep in mind when looking at the rates are venue mix, member customer special programs mix, product mix and volume tier pricing. I'm going to touch on each of these.

First, in the first quarter we traded 66.4% of the volume on CME Globex, down slightly from 67.3% in Q4 of '04. This was driven by a 32% sequential increase in open outcry volume as a result of Eurodollar options growth which offset the 26% sequential growth rate of our CME Globex volume. Secondly, with regard to members, customers, special programs mix, the percentage of business from members and special programs trended higher in Q1. At the same time it is important to note that Q1 had the highest quarterly customer ADV in our history and March had the highest monthly customer average daily volume. Put another way, when we compare average daily volume for the first quarter of 2005 with the first quarter of 2004 member volume increased 38%, customer volume was 22% higher and our special programs were up from 0 in Q1 last year to almost 150,000 contracts per day this quarter. Sequentially, member ADV was up 29%, customers were up 18% and special programs were up 60%.

Next, with regard to product mix, in the first quarter of 2005, our lower price interest rate products made up almost 50 per -- 57% of the total volume compared to 50% in Q1 last year and 54% in the fourth quarter of 2004. Finally, keep in mind that in all of our major products we have volume discount tiers. For example, in the Eurodollars options pit, members pay $0.08 for the first 10,000 sides per day, $0.04 for for the next 10,000 and $0.02 for sides above 20,000. Frankly, we want more of these tiers to be hit as we generate higher revenue and cash flow due to our operating leverage despite lower rates for some of the incremental volume.

I will now provide some rate per contract detail by product line. The rate per contract for interest rate products was 52.1 cents in the first quarter compared to 53.4 cents in Q4 of '04. The reason for the decrease in this product line was the growth in our Eurodollar options. Note that our Eurodollar options had the lowest average rate of our major products since they are 97% pit based and have a high percentage of member trading. In Q1, we saw strong Eurodollar options volume which averaged 739,000 contracts representing 33% of the interest rate volume. In Q4 of '04, Eurodollar options were 28% of the volume with 466,000 contracts per day. Transaction fees from interest rate products totaled $71 million, up more than 58% from 45 million in the first quarter last year and up from 14 million -- and up 14 million sequentially.

The E-mini rate per contract was 66.3 cents in Q1, down from 67.9 cents in Q4 '04. We saw a relatively low rate per contract in Q1 as a larger amount of the volume growth came from members and the electronic corporate membership program.

Finally, the rate per contracts for FX was $1.48, down from $1.58 in the fourth quarter. This drop from Q4 was primarily due to the fact that a majority of the FX growth came on CME Globex which has a lower rate than the privately negotiated volume. In addition, we had a higher percentage of trading volume above the FX volume tiers.

Moving on to the clearing and transaction services line, the Chicago Board of Trade reported volume of 2.84 million contracts per day, or 346 million sides, up 29% from the same period last year. This volume generated approximately $16.6 million of CME processing revenue for the quarter. Quotation data fees were $17.8 million for the quarter, up 15% from 15.5 million in Q1 of '04. The increase was primarily due to the $5.00 per institutional screen price increase that we put in place at the beginning of the year. Our screen count at the end of March increased to 151,000 institutional subscribers from 149,000 which re -- we reported last quarter.

I'll now take a few minutes to review expenses. Total expenses for Q1 were $96 million, up 8% versus $89 million for Q1 last year and up 2% from 94 million last quarter.

Highlighting a few of the main expense categories. First, compensation and benefits totalled 44 million for the quarter, up slightly compared to Q4. Breaking down the three components of this expense: salaries and benefits totalled 34.9 million, up about 1 million compared to the fourth quarter, primarily due to normal annual salary increases. Second, in the first quarter of this year, we recorded 6.7 million for the incentive bonus, down compared to the average quarterly incentive accrual of 7.4 million last year. Remember, the bonus accrual is based upon a cash earnings target which for 2005 has been set well above the 210 million of cash earnings generated in 2004. The final component of the comp and benefits line is stock based compensation as we do expense our stock option and grant program which totaled $2.4 million in the the first quarter, down slightly sequentially. At the end of March head count stood at 1,293, an increase of 10 people from the end of 2004. Non-comp expenses totaled 52 million in the first quarter compared to 51 million in Q4. This is due primarily to increases in the depreciation in communications and software maintenance lines.

Full year total operating expenses are anticipated to rise 11 to 13% for 2005 in line with historical expense growth rates. The increase is primarily due to spending for technology and expanded communications bandwidth to accommodate additional volume growth. For example, in our communications line, we have begun to implement a general bandwidth increase so customers can handle increased message traffic in order flow. We are rolling out MAN, or metropolitan area network technology, which has greater bandwidth capacity than traditional T1connection and will likely increase this expense line. Some of the costs will be passed through to users and captured in our access fee revenue.

Moving on to income before taxes. Our pre-tax income was over $118 million in the first quarter, up 53% from $77 million in the first quarter last year and up 26% sequentially. Our pre-tax operating margin was 55.2%, the highest margin quarter in our history.

Next, net income for the quarter was 71 million, [COUGH] excuse me, and diluted EPS was $2.04. Both of these are up more than 50% compared to the same quarter a year ago.

Moving on to the balance sheet. At the end of the quarter we had $711 million in cash, cash equivalents and marketable securities and we have no debt. Working capital is $739 million. Capital expenditures totaled $16 million in the first quarter. The majority of the quarters capital expenditures were related to technology and the buildout of our new data center.

So far in 2005 we have seen volume and message traffic that has exceeded our own projections. In order to stay comfortably above our recent trading piece we will be increasing our trade matching and clearing capacity. As a result we are increasing our 2005 CapEx guidance range from between 80 and $90 million.

Cash earnings totaled more than $71 million for the first quarter, up from $50 million in the first quarter last year. As Craig mentioned, this is a primary financial metric that we focus on.

Now, let me summarize second quarter volume to date. So far in April we are averaging 5 million contracts per day. We have had six out of our eight all-time busiest trading days in April. Interest rate volume is averaging 3 million contracts per day. E-mini equities are approaching 1.5 million contracts a day. Equity standard contracts, 110,000. Foreign exchange is off to a strong start with more than 300,000 and commodity projects 40,000 contract per day and at the Chicago Board of Trade, volume is averaging approximately 2.9 million contracts per day so far in April.

Overall, our record financial results this quarter continue to highlight the impressive growth opportunities in our business in the inherent operating leverage of our financial model. Clearly, our Q1 results were driven by our existing benchmark products and we are excited about the future growth drivers that Craig outlined. With that, we would now like to open the line for your questions.

Thank you, the question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll go now to William Tanona with J.P. Morgan.

Hey, good morning, guys.

Hi, Bill.

Hi, Bill.

Hey Jamie, last quarter you provided some helpful information in terms of the sequential decline in the rate per contract and I was wondering if you could provide that to us again in terms of what the increase might have been or decrease as a result of lower Globex because of the member shift in the product mix and things of the like?

Sure, Bill. In terms of the rate per trade it went from 70.3 cents at the end of the fourth to 68.8 cents at the end of the first quarter. Some of the key drivers there were the increase in the pit trading relative to the electronics trading and privately negotiated volume, roughly about 0.8 cents. Member, non-member shift mix about 0.6 cents and a shift in the product mix to the interest rate of about 1.5 cents and then there was some others that relate to post trade sort of activity.

Great. That's very helpful. And then in terms of the volume discounts. Obviously with volumes surging the way they are, I would imagine that there are many more members who are hitting those type of volume trigger discounts and can you give us an update as to when the last time you kind of adjusted the tiering for volume discounts and what your intention would be going forward considering how volumes have surged in the last couple of years?

Bill, it's Craig. It's been a little while since we've -- we've actually implemented our current tier pricing structure. As you know, we consistently and continually look at pricing and we'll continue to do that. I won't make any predictions now on kind of what we'll do but we continue to look at that. And I do think we obviously have the ability if we want to given interest rate changes to make those changes in those tiers.

Okay. But in terms of the timing, has it been years or is it -- I -- I just don't remember the last time you guys had adjusted tiering for products?

It's been about eight months.

Okay. And then in terms of, you know, obviously, you guys building out on the technology front, you guys also experienced some glitches particularly with the -- the -- the interest rate contracts on Globex and I was wondering whether or not you could elaborate as to what those glitches were and whether or not that was volume or traffic driven?

Yes, I mean I'll just comment very generally on that. We had a minor incident related to some third party software which was quite insignificant and was taken care of. Then we had some market data interruptions and slow downs as well that didn't actually impede trading activity.

Okay. Thank you.

You're welcome.

Thank you. We'll take our next question from Scott Patrick of Morgan Stanley.

Hi, good morning. First question is just, in terms of where we are in -- in kind of the customer member shift. I mean, last quarter we talked about there being some seasonal component to that. That seems to have persisted. There -- there's -- and there's not, but there may be more of a structural component to this. Can you comment on that?

Hi, Scott, this is Jamie. In terms of seasonability, if you look at the volumes of -- of member and non-member trading, you dill -- you do still see a drop-off in the fourth quarter as you look back historically. What happened is that the member volume has now grown faster than the non-member volume in the last quarter and in this quarter. But keep in mind that while the non-member volume -- or I'm sorry, the member volume grew about 38% versus the prior year and 29% sequentially. The non-member volume has increased 18% sequentially and 22% versus the prior year. So we're seeing strong growth in all the member types. And as you look across all the different product groups you see significant increases in our average daily volumes with some small, much smaller decreases in the rate per contract. For example, overall, our average daily volume is up 39% versus the prior year and the rate per trade is down only 4% versus the sequential -- sequential last quarter, ADV is up 28% and the rate per contract is down 5%.

Is -- is there anything in particular that you can point to that's driving outsides growth on the member side versus customer, is it just cyclical factors that we're in a heightened period and that brings in more member business or is it something with membership structure? Anything in particular you can point to?

Yes, Scott, it's Craig. You know, I think it's very hard for us to sort of give a lot of guidance on that and be very specific about it. There's a lot of different things that tend to impact the mix of member versus customer automated trading systems and algorithmic trading just shifts in trading patterns and other factors. So it's very difficult for us to provide very much guidance or analysis on that.

Okay. And then just one other question, there's -- there's clearly been a lot of change in the exchange competitive landscape over the past week or so and -- and clearly not directly in your backyard, but, can you comment on any thoughts of consolidation going forward and -- and how you think that might look?

I think we'll be pretty limited in our comments on that. Obviously, what we've done has become a -- I think a model for others to emulate. And it's not at all unexpected that other financial marketplaces in the U.S. are going to begin doing what we started five or six years ago in terms of -- demutal -- demutualization moving into a public company kind of structure and moving toward if not a hybrid model with electronic and fore-base trading, major investments in technology to help facilitate the growth of electronic trading. So, it's not surprising to us. We've been asked and we've answered a number of times recently since the announcements last week that we're stick -- staying with our strategy. We've got a very well thought out carefully executed strategy and we're going to continue to pursue that.

All right. Great. Thank you.

You're welcome.

Thank you. We'll take our next question from Daniel Goldberg of Bear Stearns.

Good morning.

Hi, Daniel.

Morning, Daniel.

Just a follow on to -- to Scott's last question. Just -- does the -0- the recently announcements change the competitive landscape in -- in any way, shape or form in your opinion?

I don't know how to answer that question. I mean, if you mean the competitive landscape for -- fore CME in particular, I don't think so. You know, obviously, we're going to continue to watch carefully what's happening there. But, I don't see any implications in it necessarily for CME.

You don't see the combined Arca and YFC as a potential competitor down the road as a larger entity with greater resources behind it?

You know, I think until -- until we have a clearer sense of what their ultimate strategy is, I don't see what the point is of speculating on that. I would say generally given the success we have enjoyed we expect everybody should would want to compete with us.

Okay. When I think about your pre-tax margins reaching a new high, 55%, approximately, how should we think about that going forward? How much further can that continue to expand?

We've been asked that question before and as you know, we don't provide forward-looking guidance on those kinds of things including further expansion of our operating margins. But, what we have said is that the strategy and the way that we manage the business is really with a view towards obviously taking advantage of our highly scalable infrastructure and the inherent leverage in our business model. I think this quarter's results are great evidence that that strategy is working and there's obviously a tremendous amount of leverage as we do grow volumes relative to our fixed costs.

Okay. So, I know you don't give guidance, but you -- you would expect if the trends continue, that number to continue to expand?

We're doing everything we can to continue to increase free cash flow as much as possible and I think in what you've seen from us over the last several years, we've been able to really grow our volumes with a pretty stable sort of fixed cost environment.

Okay. And then on pricing, looks like sequentially open outcry rate per contract fell about 15%. Was there something there that drove that?

Mostly we've had tremendous growth in Eurodollar options which at this point are still trading primarily on the floor. Although I would point out we've had really great growth recently in our electronically traded Eurodollar options but we've been growing very rapidly there. The majority of that business is still floor based and so that obviously has had that impact.

And -- and additionally don't forget as we grow that -- as that options volume grow on the floor, it does hit the tier discount so you do see some impact on the rate there. But the thing to keep in mind is that it's a ver -- is very low expense volume for the Eurodollar options. There's no license fees or anything like that involved and the incremental cost of a trade on the floor is extremely low.

Okay. Great. Thank you.

Thank you.

Thank you, we'll take our next question from Joel Gomberg of William Blair.

Thanks. On the electronic rate per trade you've seen compression over the last few quarters and that stabilized to slightly increased. So I'm trying to get a hold -- given the volume discounts, what are you seeing on that product and is it partially due to the European incentive program?

Yes, I'd say that -- that you hit it on the head there. The European incentive program's certainly has improved on the electric rate particularly on the Eurodollar area. The average rate for the EIP program is $0.88 versus the average for the Eurodollar is overall at $0.51.

Okay. And then on the CBOT arrangement is there any -- in terms of the pricing and clearing fee or post-match what was that during the quarter?

We don't give out all that information. But if you look at the revenue of 16.6 million and -- and divide that out over their volumes -- their stated volumes of 2.8 million, you get to nine and a half cents per contract all in and we have given guidance in the past that the -- the post-match trade percentages are in the 15 to 20% range.

Okay. And then last question, Craig, could you talk about your thoughts on the energy sector? I know you rolled out an ethanol contract. What are your thoughts in that area? Should we look for more contracts rolling out organically or what are you looking on on the other side in terms of non-organic growth?

Yes. I'll be happy to provide some very general comments on that. You know, Terry Duffy and others have mentioned that we are very interested in growing and expanding and further diversifying our product line. Ethanol is sort of one step in that direction. We don't comment very extensively about other kind of new product development plans that we have until we're prepared to actually launch those, but we are very interested in the energy sector. We do see that as a growing area and area of opportunity in terms of new product development. So, unfortunately, you have to wait until we have more to say on that. But we are looking at a variety of different kind of organic ways in which we can begin to diversify into the energy sector.

Okay. Thanks.

Thank you. We'll take our next question from Rich Repetto of Sandler O'Neill.

Yes. Hi guys.

Hi, Rich.

How you doing? First question is on the 11 to 13% growth in expenses year-over-year, so, if you hit all your -- the cash earnings targets and well above which looks like from a run rate, you're -- you're doing a nice job here now, you still would be in the 11 to 13% range?

That's our current -- that's the current guidance, 11 to 13%. It's based on our best estimates of now and it is based on that historical rates that we've seen over the past four years, it's been about 12% gager (ph) in our expenses. And keep in mind that it is technology based as our volumes have grown. That is -- that has contributed to some of that growth there in the expense.

O -- okay. Because -- well. Okay. Next question is you know, Craig, I've -- I've asked before and I guess the question is, you know, you experience significant growth not only in the, well, this quarter, and in April as well, and I'm just trying to get what -- if you had to try to dissect that between what is secular and as you see in new customers, versus just volatility of the market and interest rate volatility, et cetera, if you had a feel for that just to try to get -- so investors have a feel for the underlying growth away from just market volumes?

Yes, Rich as much as I'm tempted to want to try to answer that question it's just that it's nearly impossible to do that. You know, I've tried to accentuate over the last couple of years that I think -- a lot of the growth that we're experiencing is because of the organic growth initiatives, the expanding distribution and a lot of marketing efforts that we have globally. Growth in our product lines whether that's the FX product line or as you're seeing more recently the early stages of real traction in some our electronically traded options product. But clearly as well, there's -- there is increased secular demand. We're also, I think, benefiting right now from some cyclical factors which I mentioned at the start of the call. But I -- I'm just not able to sort of weight that for you in any way that's reliable on that. I wish I could, but it's -- wouldn't -- wouldn't be the right thing to do.

Okay. And -- and then the last question is on the -- the rate per contract, it -- I -- I'd heard the four factors that you give. It just seems like is very complex on how to model and it seems like each quarter a different factor plays -- moves up on the priority list. Is there a reason why we go on the three month lag? Or is there is there any way we just get monthly rates even if it was an one month lag?

Yes, let me -- let me address that and I'll let Jamie add to it if -- if he wishes to. First of all, we've chosen to do this on a three-month rolling basis because we want to be sure to include a what we call a roll month so that we can capture that dynamic in the rate per contract and we think that that's important so that we don't have sort of selected, isolated data. So that's -- that's number 1. Number 2 is with respect to doing it on a kind of rolling three-month average basis, we do have some variability in the number associated with post-trade adjustments that can be made into our exchange fee system by our clearing number firm. So we think this is the most reliable and sort of prudent way in which we can provide further transparency into aspects of the models that are helpful for you. Jamie, do you want to add anything?

I just to clari -- to add to the last comment there, a lot of the adjustments come through for a particular month after the month has closed -- shortly after the month has closed. So we are not able to know what the rate per trade is for any given month until the following month. So that -- that's why the one-month lag.

Okay. And just looking at that 11, just one last time on the 11 to 13%. That -- that 2% range looks at about 7 million, a little over $7 million in expenses and -- and I guess we're not taking into account any other volatility in the expense line. So, I'm trying to get a feel for how much that incentive in employee comp can vary with the cash earnings.

Well, it does vary with cash earnings. It was set originally at the -- tied to a cash earnings target that was set well above 2005 -- I'm sorry, 2004 actual. So if we hit cash earnings target that -- that expense will be $21 million. If we hit 20% above the target it's going to be $33.5 million of expense. So it is going to fluctuate with volumes. But at -- but in that case we're going to have significantly greater revenue as well. And don;t forger it is capped at that 33.5 --at the $33.5 million.

Okay. Thank -- thank you very much.

Sure.

Thank you. We'll take our next question from Lauren Smith of KBW.

Hi. Good morning.

Hi, Lauren.

Hi, Lauren.

Couple of questions. One, looking at your options growth, whether it's Eurodollars or E-mini, foreign exchange, it's all rather impressive, and I just -- if you could give us a feel for what's really driving that. I know it 's the earlier stages, but is it really more function of an enhanced systems and technology or then I guess secondly looking at the various constituencies that would be driving that growth are we seeing like an an overwhelming say growth coming from either say the hedge fund community or the pop traders? Just want to get a better feel for what's really driving that.

This is Rick, Lauren.

Hi, Rick.

How are you?

Good, how are you?

Want to talk about several things on the option side and clearly it's something we set out late last year early with here explaining that this was a growth opportunity. In the interest rate side you're seeing several things going on. One is actually a secular increase where we're actually seeing a lot of new participation and increased participation out of Europe. It's an area, and we said several months ago that we thought had a lot of promise. And that is in fact is paying off. Obviously there is a cyclical factor there probably more so in April than what we saw in Q1 thanks to the volatility of interest rates. But, historically Q1, the interest rates markets were not all that volatile, so clearly there's a big secular component to the marketplace.

In the E-mini side, what we're seeing is -- it's interesting because of the up-tick in volume on the electronic sides also blowing back on to our pit volumes as well. What we're seeing is people taking advantage of the arbitrage (ph) between the markets and between our market and the other index options products on the cash side of the marketplace. Clearly on the -- on the E-min equity side it's the electronification of the market that's starting to show some growth and really I think is what drove a lot of the volume in Q1. Again, in Q2, what we're seeing in April is -- is some what of a secular increase and what we find positive in that is it's actually -- these increased volumes are attracting more liquidity and more players into the marketplace.

Okay.

Lauren, to add to what Rick said, because you mentioned -- mentioned technology. We do have, just to remind you a -- a number of very key initiatives on the technology front for the balance of 2005 across all of our electronically traded financial options products which I think are going to be helpful to further accelerating the growth of those products and we mentioned earlier the integration of our electronic options system to divert all our options into Globex so that it'll be acceptable to all customers rather than a fairly narrow range of customers and then we've also talked before about the introduction of our mass quoting capabilities and other kind of expanded functionalities that's very useful to options market makers. So that will be very helpful to us to really kind of continue the growth that we've already experienced without those things.

And then -- and when you look at the, whether it's hedge funds or pop traders or money managers -- money managers or the like are you seeing any, would you say it's sort of like evenly distributed in terms of growth or is there an overwhelming proportion in one or the other? Or is it just pretty broad based at this juncture?

It's pretty broad based in the options growth. One thing we -- we have noticed is the member/non-member mix is actually -- there's a higher non-member in in the options products in the -- in the equities especially compared to the futures.

Okay. That's very helpful. And then looking at as clearly the addition of J P Morgan, Revco, Lehman, Calyon, are pretty -- pretty significant additions. Could you just maybe update us there? Certainly we're in the earlier stages, but, do you have plans to add more and -- and just kind of give us a feel for directionally what's going on there?

Yes, I mean, we're -- we're obviously taking a -- a phased in approach here. There is work that each of these banks needs to do in order to be connected and eligible to participate and seeing the FX on Reuters. So, we're -- we're about to enter into what we view as sort of the second phase of our overall launch plans. Following that, we'll continue to look to expand involvement in the market among our other clearing member firms as well as other bank traders who increasingly, I think, would be attracted to accessing CME futures, foreign exchange products through the Reuters system.

Okay. And then just -- just lastly, when some of your your European and Asian initiatives are -- are -- are newer and -- and certainly have less mature and good growth prospects, but if we were to think about the overall contribution to volumes and/or revenues is that still pretty small? So is the growth potential there still pretty vast in comparison.?

Yes, I think -- I think the growth potential is - is quite significant. As we have stressed before, first of all, this is very new business for us and I think we've done a great job of going from essentially 0 to about 150,000 contracts a day through these different special programs, nearly all of that representing new business. But to your question, that's still only about 3.7% of our total average daily volumes and in the past one of the things we've stressed is that the European exchanges by comparison or by contrast have indicated that 15 to 20% of their average daily turnover in the blend (ph) contract and the arrive (ph) work comes from North American customers many of them these electronic prop groups and customers that we are targret -- targeting with these three special programs. So I think we have continued growth opportunity there as we continue to expand the number of people that are participating in that, help them trade more of our products.

Terrific, thanks very much.

Your welcome. Thanks, Lauren.

Thank you. We'll now take our next question from Charlotte Chamberlain of Jefferies & Company

Good morning.

Hi, Charlotte.

As -- as you say you do the three-month average to include the roll month and I was wondering, since it is the 26th of April and we won't get your detailed data, is it possible to give us a sense of where -- where those prices are on for -- what that three-month average for March is by the different product categories?

The three-months average for March is what's re -- reflected in the press release. So, you've got the --

We -- we can give you that, if you like.

It's on the last page the press release.

Oh, it is? For -- on the pricing for the month of March?

No the average as of March.

Oh, okay. I'm sorry. I didn't see it. And you're saying that 3% of the average daily volume at this point is European?

Yes, let me be clear about that. Our participants from -- from Europe are -- are considerably larger than that. And that's always been true. What I'm saying is that the customers that we're targeting in Europe with these special programs, which is a narrow customer base of electronic proprietary trading groups and trading arcades, are currently comprising roughly 3% along with some of the hedge funds and Asian electronic prop groups. So it's a fairly narrow set of customers that are comprising that and that's on top of other global participants that we have in our markets.

And where -- where was that last year this time?

Well, it was probably around 1%, I would say. Non-exist saying.

Okay. All right.

How far you want to go back?

Okay. And -- and looking towards the end of the year, when -- right now most of your interest rate options are -- are in the pits and you have that special products form where some of it is and let me make sure that I understand it, you're expecting by say the fourth quarter of this year to move all of the stuff that's on the special pers -- purchase -- come on, Charlotte -- special purpose electronic platform onto Globex plus push the stuff that's in the pits onto Globex?

Yes. What we've -- what we've said is that during the remainder of 2005 we will fully integrate what we call the electronic options system, which currently is a sort of closed access system to a limited number of participants currently around 100, into CME Globex so that it will be a totally open system like Globex is and it will be accessible globally to our entire client base. So, that would be a very, very significant change from a technological perspective in terms of the accessibility of the product.

Okay. Well then the two specific questions is for modeling purposes when should we assume that that gets done? Should we assume, say it's gradual that 20% is done in the September quarter and the remainder in December and the other issue is what increment price improvement can we expect, well, let -- let me put it this way, if -- if everything works -- if all the options were on Globex now, how much would pricing change?

Yes. Let me -- let me take the first part of that, Charlotte, and then I'll let -- let Jamie give you the potential positive financial impact of migration on Eurodollar options. All of the integration that I talked about will happen at one time and it's expected take place in the third quarter. We haven't announced a specific date within the third quarter. But that integration will -- will happen so that's one part of it. The other part of it is, I mentioned earlier, that even without that integration we've seen extraordinary growth very recently in our electronically traded Eurodollar options. We've gone from 10,000 contracts a day being traded electronically to 25,000 a day more recently in -- in March and April. So we're seeing very strong growth there. I'll let Jamie provide you with some of the financial implications of migration.

Excuse me, Lauren.

No, it's Charlotte.

Charlotte, I'm sorry. With regard to the member trading as -- as member trades migrate over to the electronic platform, the extra fee that's collected in terms of the Globex fee is $0.10. So as they go from the pit to the platform it 'll be $0.10. There's not going to be any -- as far as the trades that already exist on the enhanced in the closed system, moving over to Globex, there isn't -- isn't a -- an incremental pick up there but the -- the bulk of the volume is [INAUDIBLE] right now and this is per side that I'm talking.

Oh, two -- $0.10. per side.

For -- for members and $0.55 per side on the Globex fee for customer trades.

Okay. And what right now is the breakdown between customers and -- and member on -- on these options.

Well, I can give it to you overall for the interest rate quadrant. Futures and options. The members are 81 or 81.5% and the non-members are about 14.1% and the remainder is with the special programs.

And -- and what are special programs? This is the black box trading?

No, that's, sorry Charlotte, that is the European and Asian incentive plans and electronic corporate membership.

Okay.

One additional clarification which I think you -- you understand well, is we're not -- we're not predicting or giving guidance on what that sort of growth of migration will be. That will be up to the customer base to decide our goal is to just make sure we're offering our electronically traded options electronically on a broad based --

Right. But -- but I -- but I assume as you did, oh I can't remember if it was -- when it was. But there was an -- but there was a point at which you said unless 25% of the Eurodollar trading by itself goes to the screens we're going to force it and you took a vote of the membership, presumably you can do the same thing with the options, right? If -- if you're not seeing -- if this stuff doesn't move to the screen, in -- in the-- in -- at the speed that -- that you want presumably you can do the same thing, no?

Yes, I don't think anything like that is necessary here. We've had extraordinary growth in electronic trading Eurodollar futures well beyond what we had sought out to do at the start of 2004. I think that we've been really successful in the early stages of growing our electronically traded options volume. Again, without the full benefit of broad distribution for the product and some of the range of functionality which we'll be bringing to market later this year. So, I think that our focus is on achieving that sort of organic growth with the technology based initiatives that we have rather than referendum.

Well, Mr. Gill certainly has a -- a big challenge in front of him but that certainly sounds like a -- a big potential revenue booster for later in the year. Thanks very much.

Yes, you're welcome. Thank you.

Thanks, Charlotte.

He's never -- never not met a challenge we've given him by the way. So --

Good morning, Charlotte.

Hi, Gill.

Thank you. We'll go now to -- back to William Tanona of J.P. Morgan.

Hey, just one follow-up in terms of the -- the tiering. I know if you look at interest rates for the first 10 it's 8, the next 10 it's 4, but is that kind of -- on the additional 10 it's 4 and on the first 10 it's 8 or is that once you hit the -- the10 to 20 range, you get $0.04 on all of the interest rate contracts?

You had it right the first time, Bill.

So it's -- it's $0.08 for the first 10 and then $0.04 for the additional 10 and anything over 20 it would be 2.

Right. Right.

Excellent.

It's an incremental tier system.

Okay. Perfect. Thank you.

Thanks.

Bye.

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

Well, thank you for joining us today and certainly thank you for your continued interest in CME. We will look forward to talking with you next quarter.

Thank you.

Thank you. That does conclude today's conference. We appreciate your participation. You may disconnect at this time.