芝加哥商業交易所 (CME) 2005 Q4 法說會逐字稿

Good day, and welcome to the Chicago Mercantile Exchange fourth quarter and year-end 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 us.

Craig Donohue, our CEO, and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the fourth quarter and full year, and then we will open up the call for your questions. Terry Duffy, our Chairman; Phupinder Gill, our President; and Rich Redding, our head of Products and Services, are also here this morning and will participate in the Q and A session.

Please note that all references we make during this call to trading volume and rate per contract exclude our low-price TRAKRS products and our Economic Options 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 10Q, which is available on our website.

Also, we refer on this call to our cash earnings, a non-GAAP number. The reconciliation to net income can be found on our website under Investor Relations: Earnings Releases. In addition, we have posted slides associated with this earnings call on the IR portion of the website.

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

Thanks, John, and thank you for joining us this morning.

We're pleased to report strong fourth quarter and full-year results. I will start by providing the highlights of the year, as well as an update on several growth initiatives.

Let's begin with the key financial results for 2005. During the year, net revenue grew 25% to 921 million. Of that, 508 million dropped to the operating income line, resulting in an operating margin of 55%, up from 50% in 2004. Our diluted EPS for the full year totaled $8.81. And most important, we generated significant cash flow during 2005, achieving more than $290 million of cash earnings.

In terms of contracts traded, our average daily volume was up 34%, reaching 4.2 million contracts per day. Every product line had all-time record annual trading volumes, with each group up more than 20% in 2005. During the fourth quarter, the equity and FX product lines had record quarterly volume. CME GLOBEX average daily volume grew by 62% and approached 3 million contracts per day. And during 2005, 70% of our volume was traded electronically, compared with 57% last year.

Moving on to average daily volume by product line in 2005, interest rate volume was up 40% to 2.4 million contracts per day. CME Eurodollar Futures, which were 81% electronic, grew by 38% during the year to 1.6 million contracts per day. And Eurodollar Options, which were 96% open-outcry based, grew by 45% to 750,000 contracts per day. Eurodollar Options currently represent approximately 60% of all CME contracts traded in the pit.

Overall foreign exchange volume was up 65% to 334,000 contracts per day. Much of that growth can be attributed to electronic FX trading, which was up more than 100%. As a comparison, a recent study of the over-the-counter FX market conducted by the Bank of England showed that during the last 6 months, London daily spot FX turnover has grown by 12% and U.S. spot FX turnover has grown by 8%.

In December, CME had the highest FX volume month in our history, averaging 428,000 contracts per day, which represents approximately $50 billion of average daily notional value. CME has the largest electronic FX market outside of the inter-bank market. We have been able to grow at a faster rate than the spot market because our worldwide CME GLOBEX platform provides a transparent central limit order book, speed, anonymity, and central counterparty clearing benefits.

Moving on, E-mini volume was up 21% to 1.3 million contracts per day, despite continued low volatility in the equity market. On a quarterly basis, the VIX has steadily declined since mid-2002 and remains at historically low levels. E-mini Russell 2000 futures volume grew 69% during the year and E-mini S&P midcap 400 futures grew by 49%. E-mini options on CME GLOBEX are picking up momentum, with Q4 volume above 32,000 contracts per day, compared with 17,000 in Q3 and 5,000 in the fourth quarter.

And our commodities volumes were up 23% to 50,000 contracts per day. So far in January, commodities volume has jumped to more than 80,000 contracts per day. We continue to execute our strategy of growing our customer base and providing side by side access to our commodity markets. More significantly, the changing perception of commodities as an asset class has attracted unprecedented flows of capital into these markets as commodity returns have outperformed equities since 1998.

Next I would like to comment on several of our growth initiatives. First, we are very focused on electronic options growth. In 2005, we made several important enhancements to our GLOBEX platform to facilitate growth in electronic trading of options. This included the incorporation of CME Eurodollar options functionality into CME GLOBEX in mid-August and the launch of our mass quoting capability for trading equity and FX options, which we added in October. As a result, we saw 2005 average daily overall options volume on CME GLOBEX quadruple to 46,000 contracts and last Friday we posted a record CME Eurodollar options day with over 183,000 contracts traded.

On the Eurodollar options front, we are focused on two primary initiatives in 2006. First, we will roll out additional CME GLOBEX functionality to drive electronic growth. In Q1 we will add automated cross-trading capability. This request for "algorithm" will give brokers the opportunity to provide price improvement through a centralized and transparent order book. Also, we will enhance the ability for users to modify orders within the system. Further, in this release we will provide additional market-maker protections which will enable our market-makers to create deeper and tighter markets and, "a broader array of strategies simultaneously."

During the summer we intend to incorporate covered options functionality into our electronic CME Eurodollar options platform. This represents a significant enhancement and will allow traders to execute electronic trades with futures and options combined in a single trade. This functionality will allow users to create delta-neutral or pure volatility trades. Covered trades currently represent a significant portion of existing CME Eurodollar options volume on the trading floor.

The other ongoing effort in 2006 relates to expanding our electronic options reach, with a focused effort to work with customer-facing technology providers. For example, we recently announced that Barclays was the first bank to incorporate the CME options functionality into their proprietary and customer-facing platforms. In addition, our team is working closely with other proprietary systems and independent software vendors who are at various stages of development.

Moving on to FX, I mentioned earlier that we continue to see significant adoption of our FX futures products, particularly from the buy side, including hedge funds and CTAs. We have established various volume discount programs to attract new users and increase volume from existing users. These programs are gaining traction as we have seen some lower volume players in our markets become medium sized CME FX users, and larger customers continuing to increase their activity with us.

We are also focused on expanding our reach in FX more aggressively outside the U.S., as London is the center of spot FX trading, with about $260 billion per day of spot FX turnover, compared to $210 billion per day in the U.S. In the fourth quarter we saw an increase in our CME FX volume coming through our telecommunications hub in London.

Next, on the international front, we continued to bolster our position during 2005 and intend to further drive non-U.S. volume growth in 2006. Our strategy over the last few years has included building telecommunications hubs in Europe and in Singapore, offering targeted incentive programs to spur trading, launching compelling new products in foreign geographies, and deepening our employee base outside the U.S.

We announced we will launch the Morgan Stanley Capital International EFA index contract in the first quarter of '06, and we are receiving very positive customer feedback. We will also launch our S&P Asia 50 futures contracts in February, and our electronic Nikkei, yen, and dollar denominated products had a strong 2005, with 10,000 contracts traded per day. So far in 2006, that has jumped to more than 19,000 contracts per day.

In addition to driving growth within our existing diverse product offering, we are also looking at other sectors with compelling growth prospects. One of the areas we have mentioned is the energy sector. As many of you know, average daily volume in electronically traded crude oil and natural gas contracts on CME GLOBEX grew from 9,000 contracts per day in the first quarter to 44,000 contracts per day in Q4, when our agreement with NYMEX ended. In addition to that growth, we believe that electronic trading will expand volumes in the global energy market products traded on regulated exchanges, which during 2005 traded approximately 900,000 contracts per day. We are presently working on finalizing CME's energy market strategy and the various alternatives available to us, and we are carefully evaluating how to best meet our customers' needs in this rapidly growing area.

Finally, with the dynamic transformation occurring within the global exchange sector, we continue to work to strengthen the CME leadership team. It is our view that over the long run, the talent and expertise of our people will be a critical factor in our ability to execute and differentiate CME from our competition. Our current team has a considerable amount of industry expertise and many of our existing leaders are CME veterans.

In addition, we have continued to invest in developing our team, and I wanted to mention two recent hires. Earlier this month we were very pleased to announce that we hired John Davidson, who joins us from Morgan Stanley. John, who has more than 25 years experience in the financial services industry, will oversee our corporate development team with oversight of strategic planning, business development, and corporate project management. He also will be responsible for corporate research, thereby facilitating coordinated business and product development efforts and faster time to market for CME innovations.

In December, we hired CF Wong to run our Asian operations. CF also has spent more than 25 years in international futures and options markets, including experience with numerous major global financial institutions. He will now be leading our Asian sales and business development function. Our experienced Asian sales force, based in Australia, Singapore, and Hong Kong, is focused on expansion throughout the entire Asia-Pacific region.

In summary, we had another impressive quarter and year, in all of our product lines. Our sixth consecutive year of record volumes in 2005, with a five-year volume CAGR of 35%, indicates we are successfully executing our strategy. During 2005, the six largest futures exchanges grew a combined average daily volume by 2.3 million contracts compared to the prior year. CME average daily volume growth accounted for over 1 million contracts, representing 45% of the incremental volume in this sector.

While 2005 was a remarkable year for CME in many regards, our team is intently focused on continuing to build on CME's existing strengths and capitalizing on the significant growth opportunities we see in the future. We intend to remain the global exchange leader in product and technology innovation and to deliver our capabilities to a larger number of worldwide users.

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

Thank you, Craig.

We finished another record year with a strong fourth quarter, driven by volume growth and a rising overall rate per contract relative to the third quarter. Our total revenue of $233 million for the fourth quarter was up 45 million or 24% compared with the same quarter last year.

In the fourth quarter, average daily volume was up 33%, and clearing and transaction fees were up 27% to $176 million, versus 139 million in Q4 of last year.

Comparing the transaction fees to the prior quarter, revenue was up slightly, driven by a higher overall rate per contract, despite lower sequential volume and one less trading day.

Our average rate per contract, excluding TRAKRS, was $0.678 in Q4, up fro $0.659 in Q3 and down from $0.703 during the same quarter last year. The primary driver of the overall rate per contract increase from Q3 to Q4 was the product mix, with 54% of the fourth quarter volume coming from interest rate products compared with 60% in the third quarter.

Venue mix was also a positive, as the percentage of the business that was electronic in Q4 approached 72% compared with 69% in Q3. This quarter, the member/non-member mix was relatively unchanged from the prior quarter and the overall volume discounts we provided were slightly higher in Q4, driven by record quarterly equity and FX volumes.

The Q4 rate per contract had a $0.021 increase from the rolling three-month average through November. In this comparison, the December volume replaces the September volume. The biggest driver again was product mix, as interest rate volume in December was relatively low, at 51% versus 62% in September.

Volumes were seasonally lower in December versus September, leading to lower volume discounts. Additionally, lower rate options accounted for a smaller percentage of the overall interest rate volume. All of these factors contributed to a higher rater per contract of $0.509 versus $0.50.

Moving on to the processing services line, the Chicago Board of Trade reported volume of 2.4 million contracts per day, generating $14.4 million of CME processing revenue for the quarter and $64.2 million for the year.

Quotation data fees were $17.4 million for the quarter, up 10% from 15.7 million in Q4 of '04.

At the end of Q4, the screen count was 152,000 screens for the full CME data package. For 2006, CME increased the price on the full data package from $35 to $40 per month.

I'll now take a few minutes to review expenses. Total expenses for Q4 were $107 million, up 14% versus $94 million for Q4 last year and up slightly from $106 million last quarter. For all of 2005, total expenses were up 12.6%, in line with the guidance we had previously given.

For 2006 we expect expenses to grow between 11 and 13%, in line with recent expense growth rates.

Highlighting a few of the main expense categories, first, compensation and benefits totaled $45.5 million for the quarter, up slightly compared with the prior quarter. There are three components of this expense: salaries and benefits; bonus; and stock-based compensation.

First, salaries and benefits totaled $34.1 million. At the end of the year, head count stood at 1,321. During the year we added 38 employees, which were primarily IT related.

Second, in Q4 of this year we recorded $7.5 million for the incentive bonus, driven by the final cash earnings results. For the full year, the bonus expense was $29.4 million, slightly below the 29.6 million for 2004. Looking ahead to 2006, we have again raised the cash earnings target well above the $292 million we generated this year. If we hit that target we will pay out bonuses totaling $24 million. If we are 20% above that elevated target, we will pay a maximum of $37 million.

The final component of the comp and benefits line, stock-based compensation, totaled $3.8 million in the fourth quarter. Non-comp expenses totaled 62 million in the fourth quarter, compared with $61 million in Q3.

Moving on to income before taxes, our pre-tax income was $126 million in the fourth quarter, up 34% from 94 million in the fourth quarter last year. This resulted in a pre-tax operating margin of 54%. For the full year, the operating margin was 55%, up from 50% in 2004.

Net income for the quarter was $76 million and diluted EPS was $2.18. Both of these are up more than 30% compared to the same quarter a year ago.

Moving on to the balance sheet, at the end of the quarter we had 904 million in cash and marketable securities, up 244 million during the year. Working capital at 12/31 was $953 million.

Capital expenditures totaled $25 million in the fourth quarter. For the year, CapEx totaled $88 million, within the range we previously gave. More than 90% of the annual capital expenditures were related to technology and the continued build-out of our data centers. For 2006 we expect CapEx to range from 90 to $100 million, based on our current plans.

Cash earnings totaled $70 million for the fourth quarter. For 2005, our cash earnings approached $292 million.

Now I will summarize first quarter volume to date. We are averaging 4.7 million contracts per day, which is up 27% from January 2005. Interest rate volume is averaging 2.7 million contracts per day; E-mini equities are averaging 1.5 million contracts per day; equity standard contracts, 126,000; foreign exchange, 387,000; and commodity contracts are averaging 82,000 contracts per day. And at the Chicago Board of Trade volume is averaging approximately 2.7 million contracts per day so far in January.

In summary, CME's 2005 financial results speak for themselves. Our primary focus is on generating cash flow and we delivered in 2005, with 39% growth in cash earnings. In addition, we continue to invest in our technology platform, which resulted in significant improvements in speed, functionality, and reliability. We believe we are well positioned to handle the next wave of growth.

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

Thank you. [OPERATOR INSTRUCTIONS] And our first question, we're hear from Rich Repetto with Sandler O'Neill.

Good morning, guys. Great quarter.

Hi, Rich. Thanks.

Craig, first question, you took this one right head-on, but on the energy side, you have talked before-- at least what I -- I think I have absorbed is that you didn't want to start a new contract from scratch, where you had to bill liquidity, plus you've also talked about not wanting to migrate volume electronically since you have gone through that process. I'm just trying to see what is the latest guidance you could give in that regards.

Well I think, Rich, we've said as much as we're going to say on that. We have a variety of different strategic alternatives, all of which we are considering. I think the important thing is that we fundamentally believe that there is a lot of growth opportunity in the energy market, particularly associated with electronic trading of energy products, and we're looking very carefully at that and hope to provide that kind of opportunity to our client base, globally.

Craig, would it be safe to say that no matter what alternative you choose, whether it's build, buy, or whatever, but you'll have a product in that category by -- I don't know -- first quarter-- or first half?

Well, again, I won't comment on the timing of what we will choose to do, but I do think that you should expect that we will continue to further diversify our already diverse product line, and again, we do view energy as an area of growth for the CME. We have customers who have been trading energy products on GLOBEX very successfully and we would like to ensure that we can meet that demand going forward.

Okay. And then, I guess, the last question, would you -- not to stay focused on this one subject t--

This is like death by a thousand cuts. [Laughter].

I'm persistent.

I know you are.

But would you rate that as the number one priority, other than -- you know, you have outlined some very strong organic growth opportunities in FX, in the Eurodollar options, but would you consider that a significant -- one of the top priorities to -- other than the organic growth opportunities you have been talking about for the past year?

I think it's an important strategy. We have a lot of different growth initiatives that we have a lot of confidence in, but we're certainly looking at this as a serious and significant opportunity for CME.

Okay. Thank you very much. And great quarter.

Thank you very much.

Next we'll move on to Daniel Goldberg with Bear Stearns.

Good morning.

Hi, Daniel.

You put up 54% pre-tax margin, which is obviously very strong, but it's the second straight quarter of a little bit of compression there. Can you just comment on that, how we should think about that going forward?

Yes, in terms of the margin, Daniel, you're going to see it fluctuate from quarter to quarter as we build out functionality in our various systems and that rolls through the expense line and we're anticipating increases in volumes associated with that functionality, it's going fluctuate from quarter to quarter. So as the volume fluctuates that margin is going to fluctuate as well. So it does move quite a bit with the volumes.

Okay. But you would expect it to stay somewhere in that mid-50% range, based on your 11 to 13% growth in expenses expected in '06?

Well, we don't give out guidance, as you know, on our margins and where we think it's going to go. But we do have a lot of growth prospects, as Craig outlined, in the options, in the FX, in our worldwide distribution, and potentially into energy. So, you can model it from there.

Okay. And the clearing and transaction service revenues down about 12% in the quarter sequentially, looks like it was the lowest in about 4 quarters. Any thoughts there? And also I think during the quarter we heard some speculation of CBOT looking at self-clearing, if you could just comment on that.

Well, part of the reason that it was down was that, as you know, NYMEX, the NYMEX agreement ended in the quarter. And so you won't see that into 2006. So it will be driven primarily by the Chicago Board of Trade volumes.

Daniel, on the second part of your question, again, certainly we're not going to comment on rumor and speculation out there on the marketplace, but I think we and the Board of Trade leadership have been very, very clear that we feel that the common clearing link partnership that we have has been very important to increasing the efficiency of our markets for users of both the Board of Trade and the CME products. That value is something that they attach a great deal of significance to and I think that you have heard from both of us that we are very committed to making sure that we are the most efficient marketplaces for users of the global futures and options markets.

Okay. And then just lastly, it looks like the investment income line was up about 16% quarter-over-quarter to about 10.3 million. What was driving that?

The key driver there, Daniel, is the increase in the average rate that we earn. As interest rates are increasing, you see an increase in our average rate and along with that an increase in our average investable balances as we continue to generate cash.

Okay. Great. Thank you.

Thank you.

And Joel Gomberg will William Blair will have our next question.

Good morning.

Hi, Joel.

Couple of questions. First off, in terms of the pricing, are there any -- you put some fee waivers on during the year to generate some volume and -- any of those fee waivers ending in '05? And then, in terms of your FX growth, I'm trying to get a sense of how much is coming from these new fee arrangements with these larger hedge funds and CTAs, where you are giving some price concessions to drive volume.

I can take the second part of that question there, Joel. As you look at our FX volumes over the past quarter, a significant portion of the growth did come from the member base. So that did drive the volumes in Q4. Rick Redding, would you like to comment on the fee waivers?

You know, Joel, we have been using our fee programs to drive volumes, especially on the FX side, when we put in the hedge fund program, and we have seen good results from that program so far and we will continue to market to that segment because if you look in the FX space that is the faster growing segment of the FX trading community and the couple of assets we have there that are very attractive to them, obviously, is the speed of our GLOBEX platform and also the centralized clearing model. So, we view our growth in FX to be much superior to where the cash market's growing at this point, and if you've looked at the Bank of England survey that came out, we're growing at about five times the rate that the cash market is, based on their estimates.

I guess back to Jamie's comment, the growth from the members, I guess I'm trying to get a sense -- a lot of it is driven by what you call the algorithmic traders. Are those members? You consider those members, right? That incremental volume from those type of traders?

Yes. The larger ones are members, yes.

Okay. And then the other question I had, in terms of the growth. Could you talk about your opportunity to leverage the clearing into the OTC market, what you see opportunities there, and I might have read that you got some type of regulatory approval on that end. Could you talk about that area?

Yes, Joel, it's Craig. You know, in general terms we have certainly been looking at ways in which we can broaden the range of clearing services that we provide to customers who are also active in the over-the-counter interest rate markets and other market sectors as well. We are in the process of finalizing that offering, and you are correct that we have been making regulatory applications to the CFTC with respect to the services that we intend to offer, but we have not generally announced yet the specifics of our product offering. So you'll have to wait for that, but that will be coming out here over the course of the next quarter.

Great. Thank you.

And we'll move on to Don Vendetti with Citigroup.

Good morning. Quick question. You have had some good success with your inactive clearing initiative. You touched on that a little bit earlier. Can you talk about the pipeline of firms, in terms of is that pipeline growing as we sit here today?

We don't comment on that pipeline, but you know, it -- the hedge fund space has been -- and the proprietary trading groups have been the ones most interested in that inactive category. I think you'll see us continue to work with those type of firms to continue to grow our business. You know, I think in '05 you saw us increase that number by about five firms, so you know, clearly the larger firms are the ones that are being attracted to it. A lot of the global macro players are the ones that you have seen join. That is a function of -- they trade across all the asset classes, and fortunately we have all those asset classes they are interested in.

Okay. Thank you.

And next we'll move on to Chris Allen with Banc of America.

Hey, guys. Good morning.

Hey, Chris.

I was just wondering if you could comment on any impact from the Reuters agreement on the FX volumes this quarter? I know you guys are still working through some back office issues last quarter. I was just wondering if that has started to make a material impact yet.

Chris, this is Rick Redding. The Reuters agreement, it's still not a material part of our FX business. We are waiting for an applet -- the new applet to come out in the first quarter, which has some of the straight-through processing functionality that a lot of the banks have been needing to integrate this into their cash business. So once that applet comes out, we're a lot more encouraging about the growth rate in that initiative. But we have seen some increased volumes coming through that platform over the last couple of quarters.

Okay. And is that applet being developed by you guys? Or --

It's -- a lot of the functionality that we need is actually being developed by Reuters --

Okay, so you're waiting on them?

Yes, because a lot of the changes have to do with what the actual GUI looks like, and also what the straight-through processing looks like, which is a Reuters functionality.

Okay. Can you also possibly comment on some of the stuff that's going on in the FX market, with Knight buying Hotspot and then the ICAP possibly making a bid for EBS? I mean, where do you guys -- how do you guys see the market changing and how do you -- impacting you guys?

Yes, Chris it's Craig. A couple of comments on that. You know, obviously we're very big believers in the so-called exchange model. We think that one of the reasons why we are growing disproportionately to the actual spot market is because of the speed and availability of our technology and also the fact that we have a very unique, distinctive advantage, which is our central counterparty clearing system for foreign exchange.

And so while we're certainly attentive to developments in the foreign exchange market, including the acquisition of Hotspot and the rumors about ICAP and EBS, we feel we're very well positioned for continued growth on the strength of our technology, our market model, and our central counterparty clearing capabilities, which we think are quite distinctive.

Fair enough. On the record Eurodollar option volumes on GLOBEX, obviously -- did the BARX agreement with you guys trading -- offering the functionality over BARX, help in terms of those volumes, or you really haven't seen the volume impact from that yet?

Yes, I think what we're seeing on the Eurodollar option side are firms rolling out their proprietary systems to customers. Barclays was one that was announced recently. Our team is working with a number of ISVs and a number of proprietary systems at the firms to make sure that all that functionality is in the system that we think is needed for the customers to fully participate in this marketplace.

Clearly, Friday's volume at 183,000, roughly, was very encouraging to us. What was important that we saw was the strategies involved in those trades were fairly complex. This was the exact reason we thought the technology we were rolling out would be beneficial to them, where the request for a cross that Craig talked about in his comments clearly will be coming out in the first quarter, and he also mentioned the Cover's that will coming out this summer.

We continue to roll out functionality. We continue to work with the ISVs in these proprietary firms systems to make sure that all the functionality's in the system and that customers can get to this marketplace as easily as possible.

Great. And one last question, just on the clearing and transaction services: can you give us a number in terms of what NYMEX contributed? I know they did 1.8 million through that line last quarter. I would expect it to be down this quarter. And just also if you could give us the contribution from 1 Chicago at all?

The contribution from NYMEX was in the neighborhood of $1.2 million for the fourth quarter. And 1 Chicago, in terms of an overall net impact to CME's, financials was about 40,000 losses.

Great. Thanks a lot.

Thanks, Chris.

[OPERATOR INSTRUCTIONS] Next we'll move on to Richard Herr with KBW.

Hi. Good morning.

Hi, Rich.

Congratulations on a great quarter. Just starting off on the comp: every Q4 in the last couple of years, it looks like your salaries and benefits have gone a little bit higher in the last quarter of the year. I was just curious if you could give us any kind of color as to why it was kind of flat relative to third quarter levels?

It's likely -- you know, there's some variability in the bonus recognition in the fourth quarter. It's -- a part of it -- the bonus gets recognized by the amount of income in the quarter, so that's going to throw some of the variance into that.

Okay. I guess even on the salaries itself it looks like last year Q3 salaries were about 30.4 million and jumped up to about 33.9. This year it looked like it was kind of flat at 34. Should we just -- is that kind of a good number to be thinking about going forward, is a $34 million level there for salaries?

Well, you've got -- we're going to continue to see modest growth in our head count, we're going to see increases from merit and promotion throughout -- for the next year, and you are going to see health costs in general trending higher. So you will see -- tend to see some growth in that number.

If you look at your comp ratios to revenues, they have been falling over the past 3 years from about 26% in '03 to 22% in '04 to a little under 20% in '05 and I would expect that trend to-- to-- to continue.

Okay. And touching on the CBOT, NYBOT agreement, is there any benefit to CME in terms of clearing there?

No.

No. Rich, the agreement that has been announced is strictly between the Board of Trade and NYBOT with respect to electronic trade matching.

Okay. Thank you very much.

Thank you, Rich.

You're welcome.

And Howard Chen with Credit Suisse will have our next question.

Hi, good morning. Craig, you mentioned a key goal in '06 is to continue to diversity the CME product set outside of commodities. Could you provide us with an update on your thoughts on the credit derivative space and where CME may fit in?

Well, we're still looking at that, and I don't think there's a lot new to report on that. You know, we continue to work with market users on trying to gain some consensus about product design. I also think there are some -- still threshold issues about different perceptions of the value of a credit default swap index product. So we're active in evaluating that and looking at that and talking to market users, but I don't think we have any sort of material change in what we have said before on that.

Got it. Thanks. And then, following up on the investment income growth this quarter, if the Fed raises rates another 25 bips, say, today, what is the benefit of that to investment income? Maybe on a full-year basis, Jamie.

Well, you know a significant portion of the investments are in short-term moneys, so you would expect to see that sort of flow right through. We had about 3.6% return in the fourth quarter versus 3.2% the quarter before that. There was a couple of Fed increases in there.

Okay. And then -- sorry if I missed this in the prepared remarks, Jamie, but the tax rates seem to have ticked down as we progressed through the year in '05. Is 40% still a good rate to kind of plug in going forward? Or is there something structurally that would suggest that that's lower going forward?

Yes, I think we're comfortable with the rate that we showed in '05 as probably a decent level.

On a full-year basis, so that's 39.5, call it.

Yes, the 39.6.

Okay. Great. Thank you.

We'll move on to Cory Gilchrist with Marisco Capital.

Hi, guys. The question I have is, given the opportunity in electronic for Eurodollar options and what we've seen for other products as they have launched, should we expect to see an uptick in the growth rate of the interest rate futures on the back of the Eurodollar option platform?

I think, Cory, again, it's very difficult for us to forecast that, and we generally don't do that. But we have said before that it's been a kind of common experience for us that as we bring electronic liquidity to our existing products, we've normally seen growth associated with that, just because we can make that product available, more broadly, 24 hours a day, and we do think it creates efficiencies and also a way of trading that a larger group of customers will be interested in.

So in general terms, yes, but we can't give you anything specific.

Great. And then the second question I had was on --

Cory this is Rick Redding. One thing to also remember here is that what Craig mentioned in his prepared remarks about the covered functionality that we're bringing out this summer, you know, typically we see volumes increase as we provide more efficiencies to -- in the execution of orders in the marketplace, and that's one of the reasons why we are moving down that road and developing that technology. Because you can marry the options execution and the futures execution, which so many people do in that marketplace. Just in general those kind of efficiencies do lead to growth.

That leads me right to my next question. In FX, what functionality improvements are coming for user adoption of FX, coming to allow us to grow into that 400 billion-plus notional FX spot market during the next, let's say, 18 months. Are there incremental efficiencies or critical mass that you get to in a product class that brings that volume over?

Yes, there are a couple of things there that are worth talking about. One is in the technology side. As you have seen over the years, our match rate -- or match time gets much faster, which leads these algorithmic traders to get more signals to also increase their velocity of their trade. So as we continue to improve, and we've seen dramatic improvement over the last 18 months in that area, I think that's a key thing. And the other is as our technology improves, and as the marketplace becomes more algorithmic in its trading, we are seeing more people come over to the CME because of those efficiencies.

If you look at a lot of those multibank portals, some of our growth in the fourth quarter came about from firms that were no longer able to access those markets because it was very inefficient for them to execute on those portals. So you'll see -- we believe you'll see more and more people adopt kind of this algorithmic trading model. And quite frankly, we are well positioned to be the ones to take advantage of it because of our technology.

Most of the things on the FX side on technology, a lot of the functionality we already have in our system. It's a matter of just improving the speed in which our system generates trades.

Great. And great quarter, guys.

Thanks.

Thank you.

Thanks.

We'll take a follow-up question from Howard Chen with Credit Suisse.

Sorry. I missed one thing, guys. In the fourth quarter, the ADB for the equity standard products was up 18% and outpaced that of the E-mini. Is there still an opportunity here for you to kind of migrate the equity standard customers or the customers who use the equity standard over to the E-mini products and have them trade an equal amount of the mini-sized contracts and get that pricing improvement in the tighter market?

Yes, Howard, this is Rick Redding. There -- you know, customers ultimately choose where they want to trade. A lot of that increase came in the fourth quarter as a result of some pretty heavy roll-type activity, which we think was people squaring up positions at the end of the year to roll their positions forward. So we did see higher volumes in the equity standard product, but again, we're providing the -- both venues out there to see where people want to trade.

But one of the things I think I would caution you on is not just look at that as all futures-to-futures, because we had very strong option growth in the pits as well in the equity products.

One thing to note, and this is very similar to how we saw the marketplace in 1997 when we first took the markets electronic with the E-minis, is we see this dramatic growth in electronic options volume and in the equities. We also saw an increase in the pit traded contracts, very much like we saw on the future side in 1997.

So right now we have a situation where the options product on the floor in the equity quadrant are actually fueling a lot of that growth.

Okay. Thanks. That's helpful.

Howard, note also that we do include other products, including the Nikkei products and our weather products in that category.

Right. Got it.

And there are no further questions. At this time I will turn the call back over to the speakers for any additional or closing remarks.

Thank you very much for joining us and thank you for your continued interest in CME. We will look forward to talking with you again next quarter.

That will conclude today's conference. We thank you for your participation.