芝加哥商業交易所 (CME) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Chicago Mercantile Exchange Second Quarter 2005 Earnings Release Call. Just a reminder, today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

Thank you for joining us this morning. Craig Donohue and Jamie Parisi will spend a few minutes outlining the highlights of the second quarter and then we will open up the call for your questions. Terry Duffy, Phupinder Gill, Rick Redding are also here this morning and will participate in the Q&A session.

Please note that all references we make during this call, the trading volume and rate per contract, exclude our low-price TRAKRS products. Before they begin, I’ll read the safe harbor language. Statements made on this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking 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 web site. Also, we are referring this call to our cash earnings, a non-GAAP number. The reconciliation to net income can be found on our web site under “Investor Relations Quarterly Releases.” In addition, we have posted slides associated with this earnings call on the IR portion of the site.

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

Thank you for joining us this morning. We’re pleased to report record second-quarter results. I’ll start by providing the highlights of the quarter, as well as an update on several growth initiatives. Let’s begin with the key financial results for Q2.

During the quarter, net revenue grew to $239 million, up 28% from the same quarter a year ago. Income before taxes grew 41% to $136 million and operating margin increased to 57%, representing our highest quarterly operating margin ever. Our diluted EPS increased 42% to $2.36, and most importantly, we generated significant cash flow during the second quarter with $73 million of cash earnings.

In terms of contracts traded, our average daily volume was up 33%, reaching almost 4.4 million contracts per day, compared to 3.3 million during the same quarter last year. All three of our financial product lines, interest rates, equities, and foreign exchange had record quarterly volumes and revenues. Overall, CME Globex average daily volume was significantly up to 3.1 million contracts, 82% higher than the same period a year ago. In the second quarter, the percentage of volume on CME Globex increased to 71% from 66% in the first quarter.

Now, let’s look at the average daily volume by product line in Q2 compared with the same period a year ago. Interest rate volume was up 36% to 2.6 million contracts per day, driven by growth of CME Eurodollar futures on Globex, which averaged more than 1.5 million contracts per day. We also achieved record Eurodollar options volume, primarily traded in the pit, which exceeded 740,000 contracts per day.

Foreign exchange volume was 89% to 332,000 contracts per day, driven by EFX growth, which was 138% higher than last year’s levels. E-mini volume was up 21% to more than 1.3 million contracts despite continued low volatility in the equity market. And commodity volume was up 15% to 47,000 contracts per day.

Next, I’ll comment on the progress of several of our growth initiatives. First, as we have discussed, we are very focused on electronic options growth. During the second quarter, electronic options volume rose to 43,000 contracts per day from 22,000 in the first quarter of 2005 and 12,000 in the same quarter a year ago.

During the second quarter, we averaged 23,000 CME Eurodollar options contracts on our electronic options system being piloted to approximately 125 users. We plan to integrate our Eurodollar options functionality into CME Globex in August, providing global distribution for this product. We will have up to 12 market makers responding to quotes during U.S. hours, with 8 of those hard quoting executable prices. During London hours, we will have 8 market makers responding, of which 6 will stream hard quotes. There will be 3 market makers responding and streaming transactable quotes during Asian hours.

In addition, during the fourth quarter, we plan to add mass quoting capability to our CME Globex platform, which will enable market makers to become more active in electronic CME equity and FX options. Prior to the rollout of this important upgrade, we have seen our E-mini S&P options on CME Globex successfully grow from 9,000 contracts per day in Q1 to 12,000 in Q2 and up to 17,000 so far in July.

Moving on to FX, as I mentioned earlier, we saw tremendous growth in our FX business during the second quarter. We continue to gain market share relative to the spot and total FX market. In June, we averaged 45 billion per day of underlying value in our FX business. We estimate this is approximately 2% of the overall FX market and 6.5% of the spot market. Our FX product team is aggressively marketing the positive attributes of our FX market, which include significantly expanded liquidity, transparent FX prices, anonymity, our central counter party clearing model, and high-speed execution on our CME Globex platform.

Next, I will briefly comment on a few new products which have generated strong interest. Earlier this year, several customers expressed interest in having the flexibility of trading Eurodollar options that would expire weekly, supplementing our normal quarterly expiration cycle. So, in late April, we launched CME weekly mid-curb options, which are already trading approximately 17,000 contracts per day.

Another area that has shown impressive early growth is our suite of weather products. We have developed a strong niche position as the marketplace of choice for those interested in trading these products. Users include utility and energy companies, reinsurance firms, hedge funds, and participants in the agricultural community. Average daily volume is approaching 4,000 contracts per day and the open interest has rise above 200,000 contracts. So far this year, we have already traded 3 times the volume we traded during all of 2004. In June, we launched weather derivatives on 7 additional cities located in the U.S. and Europe. And we currently list weather futures and options on future’s contracts based on temperatures for 22 cities, including 15 in the U.S., 5 in Europe, and 2 in Japan.

Other products we have recently announced include futures on ETF, including Spiders, Queues, and Russell 2000 I-shares. Additionally, we have established a new partnership with Goldman Sachs to offer customers the opportunity to either hedge or take market risk directly associated with the release of leading economic indicators.

Lastly, I want to provide you an update on our global expansion efforts. We will continue to attract interest from trading firms in Europe and Asia. Our Globex platform is currently distributed to users in 36 countries. During the second quarter, we added 9 new countries, including Belgium, Hungary, India, Malaysia, and Taiwan. Our European incentive plan, which was designed to attract business from proprietary trading firms, rose to 100,000 contracts per day in Q2 from 65,000 per day in Q1. At the same time, our Asian incentive plan jumped from 19,000 per day in Q2 from 11,000 contracts per day in Q1.

Given the importance of Asia, I want to mention that a few weeks ago we became the first overseas derivative exchange to open an Asian telecommunications hub, with our new site launched in Singapore. It improves access and reduces connectivity costs for current and potential CME market users in this vital region.

In summary, we had another strong quarter in all of our major product lines. We remain focused on expanding the distribution of our existing products, creating new products and product extensions, and adding new options functionality to CME Globex. We have built our CME Globex system into a world-class futures platform and we are excited about the opportunity to transform it into a leading electronic options platform as well.

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

Thank you, Craig. We had another strong quarter with record financial results across the board. Our total revenue of $239 million was up over $52 million, or 28%, compared to the same quarter last year, and up 12%, or $25 million, sequentially, driven by record trading volumes. At the same time, expenses grew 13% compared with the same quarter a year ago.

In the second quarter, clearing and transaction fees were up 28% to $183 million versus $143 million in Q2 of last year. Average daily volume was up 33%, while the average rate per contract was down 5%. In terms of revenue growth versus the same period a year ago, FX led the way, up 49%; interest rates were up 29%; equities, 20%; and commodities were 8% higher. Our average rate per contract, excluding TRAKRS, was $0.65.1, down from $0.66.8 in Q1, and $0.68.8 during the same quarter last year. Let me remind you that the important factors to keep in mind when looking at the rates are venue mix, product mix, member and nonmember special programs mix, and volume tier pricing. I’m going to touch on the sequential change in each of these.

First, in the second quarter, we traded 71% of the overall volume on CME Globex, up from 66% in Q1 of ’05. This had a favorable impact on our rate per contract. The main drivers were the increases in the electronic trading of interest rates, which grew from 51 to 60% electronics and foreign exchange, which grew from 76 to 80% electronic. Of the 503,000 electronic contracts increased sequentially, interest rate products contributed approximately 400,000 contracts per day.

Next, product mix shifts caused a decrease in the rate per contract. In the second quarter of 2005, our lowest price interest rate products made up 59% of total volume, compared with 57% in Q1 of ’05. Third, with regard to member, nonmember special programs mix, average daily volumes from all user types trended higher in Q2. When we compare ADV for the second quarter of 2005 with the first quarter of 2005, member volume increased 11%, nonmember volume was 3% higher, and our special programs were up 41%.

Finally, keep in mind that in each major product line we have volume discount tiers or caps. Looking at the big picture, from Q1 to Q2, clearing and transaction fees were up $22 million. Of this increase, $26.5 million was due to increased volume and there was a $4.7 million decrease due to the lower rate. Tier discounts and incentives accounted for 76% of the total rate decline.

Moving on to the clearing and transaction services line, the Chicago Board of Trade reported volume of 2.9 million contracts per day, up 15% from the same period last year. This volume generated $17.3 million of CME processing revenue for the quarter. In addition, we generated more than $1 million of revenue through the Globex service agreement with NYMEX.

Quotation data fees were $17.8 million for the quarter, up 20% from $14.8 million in Q2 of ’04. This was due primarily to the $5.00 per institutional screen price increase that we put in place at the beginning of the year. Our institutional subscriber screen count at the end of June was unchanged from the prior quarter at 151,000 screens.

I’ll now take a few minutes to review expenses. Total expenses for Q2 were $103 million, up 13% versus $91 million for Q2 last year, and up from $96 million last quarter. Highlighting a few of the main expense categories, first, compensation and benefits totaled $45 million for the quarter, up $1 million compared to Q1. Breaking down the 3 components of this expense, salaries and benefits totaled $34.6 million, down approximately $300,000 from the first quarter. Second, in Q2 of this year, we recorded $7.7 million for the incentive bonus, down versus the second quarter of 2004 and up $1 million sequentially. The final component of the comp and benefit line is stock-based compensation, which totaled $2.7 million in the second quarter, up approximately $400,000 from Q1. Stock-based compensation expense is expected to be approximately $4 million in each of the next 2 quarters, due to our annual stock option grant, which took place in mid-June. At the end of June, headcount stood at 1,292, basically flat compared with a total at the end of March.

Non-comp expenses totaled $58 million in the second quarter, compared to $52 million in Q1. This is due to increases in a depreciation, communications and software maintenance, and professional fees line and is primarily attributable to technology-related costs. In addition, we saw an increase in marketing costs due to product-related marketing and advertising, along with European-focused efforts.

Last quarter, we provided guidance that operating expenses were anticipated to rise 11 to 13% for the full-year 2005, in line with historical expense growth rates. The increase is primarily due to spending for technology and expanding communications bandwidth to accommodate additional volume growth. We now expect to come in at the high end of that range for 2005.

Moving on to income before taxes, our pre-tax income was over $136 million in the second quarter, up 41% from $96 million in the second quarter last year, and up 15% sequentially. Our pre-tax operating margin was 57%, the highest margin quarter in our history. Net income for the quarter was $82 million and diluted EPS was $2.36. Both of these are up more than 42% compared to the same quarter a year ago and up 16% sequentially.

Moving on to the balance sheet. At the end of the quarter, we had $762 million in cash, cash equivalents, and marketable securities, up more than $50 million during the quarter, and working capital is $808 million. CapEx totaled $27 million in the second quarter. The majority of the quarter’s CapEx were related to technology and the continued build-out of our new data center. For the full year, we expect to come in at the high end of our previous guidance, which was a range of $80 to $90 million. Cash earnings totaled $73 million for the second quarter, our best cash earnings quarter ever, up from $49 million in the second quarter last year and $71 million in Q1.

Now, let me summarize third-quarter volume to date. So far in July, we are averaging 3.9 million contracts per day; interest rate volume is averaging 2.3 million contracts per day; E-mini equities are averaging 1.15 million contracts per day; equity standard contracts, 94,000; foreign exchange is off to a strong start with more than 325,000; and commodity products, 54,000 contracts per day. And at the Chicago Board of Trade, volume is averaging approximately 2.4 million contracts per day so far in July.

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

Thank you, sir. The Q&A session will be conducted electronically today. [CALLER INSTRUCTIONS]. And we’ll go first to William Tanona with JP Morgan.

Jamie, you mentioned that the tier discount kind of represented 76% of I think the decline quarter-over-quarter for the rate per contract. Could you give us a sense, I know you guys are changing your tiering, but how that might have looked when you implemented new tiering structure in August?

I can’t give you an exact number on that, Bill, but I’d say, obviously, it’s going to bring that down a bit because the tiers are increased going forward and so that will have that sort of impact there.

Okay. And then, as it relates -- I mean you guys, obviously, put up some pretty strong currency numbers again. Are you guys prepared to share the successes you guys might be having with CME FX? And I’m assuming that the decline in the rate per contract on the currency side is largely due to the shift to electronics from, say, a higher percentage being privately negotiated.

Bill, it’s Craig. On the first part, we said that once the partnership with Reuters has matured, we’ll begin to provide some insight, as we’ve done with other of our initiatives, so that people can see that. But I would emphasize for the time being, given that this is still relatively new, having only launched in March, the growth that you’re seeing is mostly very much outside of the CME/Reuters partnership.

On the second part, I’ll let Jamie answer that. But that’s correct, and we continue to see very strong growth in electronically-traded volumes, relative to the contribution, if you want to think about it that way, from EMPs (ph).

Bill, as far as the rate per contract going from $1.48 to $1.36, sequentially, the member volume increased significantly more than customer volume in special programs, although all of the categories increased. So that brought down the average rate per contract. Also, we saw that typical decrease as the (private) (ph) were negotiated provided relatively less impact as the total volumes increased. And then we did see volume discount tiering impacting the rate per contract as well. And it’s important to point out that the rate per contract on the electronic side for the currency is still in excess of $1.00.

Okay. Great. And then if you look at kind of the clearing and transaction service fee line, I think that was up pretty significantly relative to what I would have expected. Was there anything additional in that line other than just the CBOT volumes?

There was $1 million from the NYMEX agreement.

And is that higher than it typically has been historically?

Yes, that’s running higher than it has historically.

Okay. And then I guess lastly, Craig, I, obviously, saw a commentary earlier today in terms of you mentioning that you think exchange consolidation is going to continue. Just wanted to see if you wanted to add any commentaries as it relates to your own firm?

You are always so kind to make that invitation, but I think I’ve said enough.

Okay. Fair enough. Thanks.

And moving on, we’ll go next today to Rich Repetto with Sandler O’Neill.

First question, if I got you right, Jamie, on the cost and bens, all other things being equal then, you’d see a $1.3 million sequential increase? Just because I think it was stock or -- is that correct?

The sequential increase in the cost and benefits of about $1 million was due to bonus accrual.

But, okay, you said the stock was $2.7 million of it and then you got $4 million in each of the next 2 quarters. So all other things --

Going forward, yes.

Okay. And then also, Jamie, the professional fees went up about $1.3 million quarter-to-quarter. Could that be an indication of legal or sort of mergered acquisition expenses, related expenses?

Professional fees increased to $1.3; about half of that was related to technology consulting. Another portion of that, about a quarter of that, maybe, is related to our revenue sharing and special incentive programs for new products. And then there is a small portion related to legal fees.

Okay. And then, as far as model, I don’t know whether you are going to give us any numbers. You know we put out numbers on what we think the price increase and how that will impact numbers. But at least, I guess subjectively, I’m sure -- could you just give us a feel for the discussions and sort of negotiations with the members and the feedback you get once you announce the price increase.

Well, I think --

Just to get a feel for whether it will stick.

It’s certainly going to have -- it’s obviously a positive impact, particularly in the interest rates and E-mini section. And I’ll let Craig address the second part of that question.

Yes, Rich, I think the overall reaction was pretty much as we expected. You know it’s certainly never easy to increase prices. But I think most of our customers saw in it really what we were doing, which is -- the vast majority of what we did was to increase the tiers and I think people recognized that first of all we’ve been doing that sort of regularly since we first implemented tiered pricing 36 months ago. It’s had very substantial volume appreciation in those product areas where we capture pricing and, obviously, we want it to continue to work as an incentive to induce people to trade more. So I think people understood that. The reaction was largely as we expected it to be and I would say we should have no issues with the sustainability of those changes.

Okay. And the very last thing is there is a company, a very big customer of yours, Revco, they’re starting, or they’ve planned to start, the IPO process of a road show later this week. I was just trying to get comments on what you see the role of the broker/dealer or futures broker/dealer, what do you think of Revco in -- is that role, do you see that changing significantly in the years to come would be a growth of electronics?

You know I don’t have a lot of comments on that. I mean, obviously, you know Revco is a very valued distribution channel partner of ours, also a very valued client. We wish them a lot of success. I don’t know that I understand the particulars of your question in terms of what’s likely to change, but we do expect that Revco and other firms like Revco will continue to be a very important part of our business and a very important partner to us.

I guess the point of the question was just as -- I guess you’re trying to judge the impact, as more and more goes electronic, does that at all, disintermediate, or is Revco, the move to electronics, are they just as important to the process as prior?

Yes, I would say they are just important as they were. We’re not big believers in the kind of disintermediation of the traditional brokers. They provide a range of services to clients, which is very important, and we don’t expect that to change.

Our next question today is from Daniel Goldberg, Bear Stearns.

Can you just talk a little about -- obviously, pre-tax margins grew again in the quarter to roughly 57%. How should we think about that going forward; and maybe at what point does that level off, and any reaction from customers in terms of 57% of their fees going right to the bottom line basically?

You know, Daniel, we continue to exhibit the strong operating leverage and we don’t really provide any targets publicly. Most of our focus is on generating free cash flow rather than driving toward a specific target. But we are seeing success with many of the new initiatives that Craig has outlined. And, as you know, we’re pushing towards the electronification of the options market and then growth in the FX area. So I think we have a lot of positive tailwinds. We’ve seen the good secular growths in the volumes. So I think there are a lot of good tailwinds there on our margins.

Daniel, just to add, I mean I think in terms of customers, first of all, I think everyone understands that we’ve been very active and aggressive in adopting new pricing incentives, special programs with very attractive lower pricing, tiered pricing schemes, and also, even though I did mention it just briefly, it’s been 5 years since we’ve really taken any kind of price increase with respect to our member customers. So I think most people look at what we’re achieving as a function of the scalability of our infrastructure and our platforms in the inherent leverage. It’s not like we’re continuing to go back to our customers with significant and consistent price increases.

Okay. So you would expect though, as volume continues to move to Globex, and with the new pricing schedule as of August, that 57% should continue to go in the same direction, upwards?

Well, I think we’re not going to give any sort of forecast for that.

Okay. In terms of the other revenue number, jumped about 12% quarter-over-quarter. Anything there that we should be aware of?

I’m sorry. There were just some one-time items in there. There was some recovery of -- there was a credit in there in the first quarter related to bad debt expense. That’s obviously not -- that was in the first quarter. It didn’t occur again in the second quarter. And then we’ve had additional expenses related to customer events in London and in (Polka) (ph).

Okay. So nothing significant. Just must be one-time type of thing?

Yes.

And then on the pricing, the equity rate per contract was up quarter-over-quarter, both the mini and the standard. Anything there that drove that?

That was driven primarily by growth, faster growth, in our special program and nonmember volumes than we saw in the members. That was a favorable of membership. And as well, in the mini’s, we saw less volume hitting the tiers, a lower percentage of volume hitting the tiers than we had in the prior quarter.

Okay. Great. And then just lastly, on the (inaudible) announcement, I think it was yesterday, just how we should think about that and if there is any impact to the financials.

It’s simply an extension of the various collateral management programs that we have offered to our firms. In terms of top-line impact to the CME’s financial results, we don’t expect it to be material.

We’ll take our next question today from Scott Patrick with Morgan Stanley.

First question, just on the planned Eurex move into FX, any anticipated competitive response? I mean I know their plan is to come in and waive all fees on that trading initially. Clearly, there was very limited success on the (inaudible) into treasury future trading. I just wanted to see how you look at it on the FX side.

Let me start, and then I’ll ask Ricky to comment as well. I mean we obviously have a very fast growing product in foreign exchange. Our volumes are increasing quite substantially. And so our key advantages are obviously the increasing depth of liquidity that we provide in the major foreign currencies, the fact that we have globally distributed 23.5 hour-a-day platform that is regarded I think as sort of the most functional and fastest platform for FX execution, and then, obviously, the strength of having developed this client base over the last 33 years. So we have a very strong sort of starting position for competing with Eurex. They obviously haven’t had this client base and this product line before. But I’ll let Rick expand on that.

Scott, this is Rick Redding. The issue we really continue to focus on is where our position is relative to the OTC or spot market. Exchanges will try to come at us all the time in certain products and they will meet with limited success, we think. But our real focus is on making sure our FX products are properly placed, properly priced, properly positioned against, for example, traders going in as prime brokerage or trading in the cash FX space. And I think you’ve seen over the last few months, we’ve done several things to put some incentive programs in and some things we’ve done on the technology side that have really bolstered where we think we are better positioned to grow against vis-à-vis the cash market. And I think the numbers Craig gave you earlier that we’re now about 6.5% of the spot FX market is showing that we are gaining traction on that segment.

Okay. Great. That’s very helpful. Next question. Just on the enhanced option system, the integration into Globex, is that something that you anticipate having a very immediate result in terms of the volume impact or is that something where you expect kind of a learning and adoption lag among kind of the new users coming onto the system?

Yeah, Scott, I think, as is almost always the case, I mean it’s a process. I mean, obviously, a key event will be the integration of the enhanced options system into Globex, but there is also a lot of other work and education and marketing that needs to be done. We need to continue to work with independent software vendors to provide access to that market for market users. We need to work with proprietary market making firms also to be able to interface with that system. And then we also need to bring people along the learning curb in terms of not only the functionality that we’re offering but also just how to adapt to what will be I think a different kind of market structure and market model than we’re currently offering in terms of our floor traded business or privately negotiated business. So you can definitely think of it as something where there’s a series of things that we have to work on over a multi-month period in order to really increase the level of participation.

And, Scott, this is Jamie. Just one thing to keep in mind, as those volumes do go electronic, on the member side, we collect an extra $0.25 a side, and on the nonmember side, an extra $0.55 a side for the electronic fee.

Okay. And just one more -- sorry.

It’s Rick Redding. One other thing that we would want you to consider, too, is we will continue to evolve that system over time. While we’ll put it out in the third quarter of this year, I can tell you from the product side, we have other ideas about how to expand the offerings that we put on there. And you will see, over the next several months, comments from us on how the system will evolve over time. So I wouldn’t look at it as a one-time event.

Okay. And just one final question here. You talked about the $1 million of revenue in the clearing transaction services line from NYMEX. Just as a point of clarification, does that agreement go away going forward?

We have indicated that we’ve terminated that arrangement with the NYMEX, but we’ve also been extending that. It was set to expire actually in June. We’ve been working collaboratively with them to continue to provide globe access, a solution for them, as they think about sort of their long-term strategy for how they want to see those products traded. So, as of the moment, we have terminated that agreement until we say something different.

And we’ll take our next question today from Joel Gomberg with William Blair.

So are we going to assume -- on the NYMEX deal, the revenues are still being booked there is what you’re saying.

Yes. I mean, obviously, we’re continuing to provide them services. They’ve requested that we be flexible with them and we’ve been doing that. So we’ll continue to obviously book those revenues as we continue to provide them services. But, again, we’ve terminated the agreement and right now we’re just extending that agreement as a sort of an accommodation to NYMEX.

So the jump in revenues is more from a termination fee they had to pay?

No. It was from increased volumes that we’ve been seeing in the E-mini energy products that are being traded by NYMEX on our Globex platform. So it’s volume driven, Joel.

Okay. And then stock-based comp is the accrual for the second half. Was that the same as last year’s? You had a -- you accrued more in the third and fourth quarter?

Yes, you are always going to see an increase typically in the third and fourth quarter because we have the grant that occurs in June typically.

All right. Okay. And then in terms of the back-end months on the Eurodollar products, how are you doing on the migration over to the electronics?

Joel, it’s Rick. We’re doing quite well. I mean what you’re seeing over time is the front year and the second year has dramatically gone electronic. And now what we’re seeing in the third year, what we call “the greens,” again to migrate electronically as well, which is encouraging to us because the key to getting even the further out months is to get the greens to go electronic. And a lot of that has been precipitated by some things we did a few months ago in trying to bring in more and more what we call pack and bundle market makers, which are trading strategies that are essentially strips of Eurodollar products, particularly attractive to the swap community. But as we move further out the Eurodollar curve, it opens up all sorts of new trading strategies for people like hedge funds to trade electronically. It also helps in people doing strategies against the CBOT treasury complex as well against our Eurodollars.

Our next question today is from Lauren Smith with KDW.

It’s Richard Herr. Just to start off, can you give us maybe an update on anything from Trading Technologies? I have seen in the news that some of their customers were now paying some fees for trading. Has there been any follow-up from a few months ago about any approaches to the derivative exchanges and any reactions?

Yeah, Rich, it’s Craig Donohue. There’s been, obviously, some announced settlements in various litigations between T.T. and other parties. I don’t know whether that has resulted in the actual payment of any money to T.T. in terms of those licenses.

As far as the exchange goes, I don’t think there’s really any issue there. As we said before, we’re neither a provider of, nor a user of, front-end software interfaces at the exchange level. So there’s really not any kind of issue between Trading Technologies and the CME in that regard. They continue to be a very valued independent software vendor, among a lot of others, for us, and those issues are really between Trading Technologies and its own clients or Trading Technologies and its competitors.

Okay. And just secondly, your next lives (ph), your dollar volumes seem to be drying up. Eurex has retrenched to some degree in the U.S. treasury trading products. What do you think this means for your opportunity, vis-à-vis Europe, where you are seeing some management shakeups? They’ve had some failures over here. Where do you see your opportunity in Europe going given some of the displacement on their efforts in the U.S.?

Well, just again, we’ve had a very different strategy over the last several years in the European exchanges. Our focus has been on expanding the business, not only for CME, but within the industry, through developing new product, product extensions, expanding the range of functionality that we provide, building out our global distribution network, and ultimately expanding the kind of range of customers who use our products. And so, as a consequence of that, we’ve increased our market share among the sort of big four exchanges very significantly and our growth has significantly outpaced that of our competitors. So we pretty much plan on continuing to do just what I describe, which is developing new client segments out of global bases.

And we’ll move next today to Charlotte Chamberlain with Jeffries & Company.

My questions are primarily for Mr. Gill. The first one is the charts in your presentation are very tantalizing in the sense that it looks like there is a huge amount of opportunity on options. And I was wondering could you share with us -- it sounds as if options are going to go live on August 1st. So the first question would be is that true? Second question would be what are your expectations for volumes of options on Globex? Should we expect to see a rather dramatic ramp-up in options that are so tantalizing show on the left side of these graphs under “Future?”

Let me answer the first question. It is true. Beginning in the middle of August, we are, from a technology perspective, going to rollout functionality is going to continue through the end of October. And this is what Rick referred to a short while ago, it’s not just a one-time implementation; they are going to begin with the mass (course) (ph) on the so-called (EOS) (ph) in August. And by October, we will have the capability to have mass (course) (ph) in the (inaudible) and then they’ll be called ego, where currency and equity options will trade with some enhanced functionality.

We’ll also add on some of what we call market maker functionality that they have asked for, like the price standing spread, like pricing market maker protection and things of the same nature. With respect to the growth and the expectation from a systems perspective, we are prepared to see the full migration of options onto the screen. Now, it’s a different world, as you might imagine, with respect to quote traffic, so one of the initiatives that we have, and (optimum value to loan) (ph) through the next couple of months is with respect to market data compression, market data functionality that is selected by user. All of these things, in addition to the so-called Ethernet rollout that we are in the process of doing, we will see market data latencies being compressed by at least 50 to 75%. So in preparing for the growth of options on the electronic screens, we are guided by what Rick and his folks tell us. But we are prepared for the full migration together with co-traffic onto the box. The charts don’t look as tantalizing to this red and yellow line.

Oh, I see. So what you’re talking about is that what we could expect would be the open outcries, the yellow bands, to go on top of what you’ve already got on options, on electronic options.

You would expect initially at least some portion of the very large quantity of options that trade on our floor to begin going onto the box.

Okay. Well, then there’s one little follow on. Could you remind us again of what the profitability increment is of going from floor base to Globex screen base for an option? What the pickup is?

Yes. I’m going to ask --

Yeah, right.

Sure. Going from the floor base to the electronic for member and build it up $0.25 is the electronics portion of the fee. And then for a nonmember it’s $0.55.

Okay. And then the final thing, I know you don’t want to talk about anything having to do with CBOT credit. Again, a question, if, just totally hypothetically, okay? If CME and CBOT were both on Globex, as opposed to them being on the Eurex Life System, they were both on Globex, is there additional -- would it be easier to do, save, spread page or maturity trades between treasury and Eurodollars than it is now or would that not happen? Just hypothetically, if they were both on Globex.

Yes, Charlotte, I think that’s kind of a difficult question to answer. I mean, obviously, people have front-end software interfaces, which essentially make it very easy for them to trade between markets from a single terminal and execute multi-market strategies rather efficiently. If what you’re talking about is some kind of expansion or extension of that where you might actually, for example, automate spreads between treasuries and Eurodollars or something like that, we’re just not prepared to comment on that. There are a lot of complexities involved in trying to do something like that.

But presumably, even though you’re clearing for -- one other thing, this is entirely hypothetical. If the exchanges were together, right now if I were a customer or a member of both, I would have to keep separate margin balances, one for CME and one for CBOT. Would that, hypothetically, be eliminated?

No. By virtue of the common clearing agreement that we have with the Board of Trade, we’ve already provided for all those kinds of efficiencies. So it’s a single pool. We do (inaudible) space margining across the entire portfolio of CME and CBOT products presently. So that already exists.

And moving on, we’ll take our next question from Tom Marsico with Marsico Capital.

Thank you. My question has already been answered.

And moving next, we’ll go to David Chamberlain with PIMCO.

Most of my questions have been answered. Just do you guys change at all the CapEx outlook for 2005? Because now you wanted expenses to be on the high end.

We indicated that the CapEx outlook for ’05, we would be at the high end of our $80 to $90 million range that we had previously provided.

And we’ll go back to Rich Repetto with a follow-up question.

Just one question on the FX program, Craig. Do you still have the same sort of structural barrier on clearing? I’m just trying to learn more on the FX side. In other words, other products in other industries are fungible, but you can’t clear your dollar away from you. You can’t net it out. But what about on FX, do you have that same barrier to entry?

Yes. I mean we do, I suppose. Realize that we’re the only exchange trade, essentially cleared, FX marketplace, which is a very unique competitive advantage that we have, firstly, in that we provide that central counter party clearing service for people who want to trade foreign exchange products. And no one else really does that. It doesn’t exist in the inter-bank market or the dealer-to-client market. And so not only do we provide that in a way that most other competitors can’t really easily replicate, but it would also be the case, as you’ve described it, that it would have the same sort of barrier to entry, obviously, as our other products in that there isn’t fungibility. So even as we see new entrants like Eurex, for example, there isn’t that capability to fungibly offset.

And we’ll go back to Lauren Smith.

Just a quick question on the 30-year, I guess August 3rd is approaching and I guess that’s when we’re going to get the official confirmation, but I would just love to get your thoughts on what you think the impact in the market could be with the return of the 30-year.

Yes, Lauren, I think, in general terms, we don’t like to prognosticate about those kinds of things. We’re going to have to wait and see. I think we would encourage you, obviously, if you want to better understand the likely outcome there you could talk to the folks at the Board of Trade. I think they’re in the best position to provide you with some information on that, but we just have to wait and see.

Okay. And then just lastly, just maybe it’s only been a month or so now with respect to the partnering with Goldman and using the longitude technology, we’d just love to get your thoughts there, whether that has sort of a longer tail on it with respect to how it might impact volumes or revenues or just some thoughts there on what we should be looking for.

Right. Well, first of all, even though we’ve announced that partnership, the partnership is still in development from an operational perspective and won’t launch until later this year, so you shouldn’t expect very much of an impact, either from a revenue or an expense standpoint in 2005. 2006, as we get that established, then we’ll be working with Goldman to identify which economic indicator option market we’re going to first facilitate. So this will be a gradual sort of building process.

There are no further questions at this time. Mr. Donohue, I’ll turn things back over to you, sir.

Well, just thank you, everybody, for joining us today and thank you for your continued interest in CME. We look forward to talking to you again next quarter.

And that does conclude today’s conference. I would like to thank everyone for joining us. Have a good day.