芝加哥商業交易所 (CME) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Chicago Mercantile Exchange second-quarter 2006 earnings release. Just as a reminder, this call is being recorded. At this time, for opening remarks and introductions I would now like to turn the conference 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 second quarter and then we will open up the call for your questions. Terry Duffy, our Chairman, Phupinder Gill, our President, and Mr. Rick Redding, our Head of Products and Services, are also here this morning and will participate in the Q&A session. Please note that all references we make during this call to trading volume and rate per contract exclude our low-priced TRAKRS products and our economic auctions products.

Before they begin, I will 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 website.

Also we refer in 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 site.

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

Thank you for joining us this morning. We had another outstanding quarter as we delivered record results and announced several important new growth initiatives to supplement our core business. I will start by providing highlights of the quarter, followed by an update on our new initiatives. Our average daily volume was up 31% to a record 5.7 million contracts per day. Every productline posted all-time record quarterly trading volumes and each grew by more than 25%. In June we had a monthly volume record of 6.4 million contracts traded per day.

A significant driver of our second-quarter results was our equity business. E-mini volume was up 34% to a record 1.7 million contracts per day. The E-mini S&P 500 product was up 40%, while our E-mini Russell 2000 product grew 58%.

In early June, we migrated our equity futures products over to our new HP Itanium trade matching platform, which enables faster trade processing and significantly increased capacity to handle higher order volumes. During the second quarter, we continued to build momentum and equity options which grew 127% and are now 36% electronic. We saw increased equity volatility in Q2, as measured by the VIX, which rose to 14.5 from 12 in Q1. Despite the increase, equity volatility remains historically low as the long-term average of the VIX since 1990 is 19.

Our interest rate productline had 26% growth during the quarter, driven by Eurodollar options. Total Eurodollar options volume was up 65% to 1.2 million contracts per day. Eurodollar options volume on CME Globex rose from 52,000 contracts per day in Q1 to 89,000 per day in Q2. In June, we had 11 trading days above 100,000 options contracts on Globex compared to size in April and May combined and two days during the first quarter.

In mid July, we rolled out new functionality to replicate a trading strategy popular in Open Outcry. This covered functionality enables electronic trading of spreads that incorporate Eurodollar options and futures in the same trade. In the next major upgrade of this system, we plan to add more user-defined spread functionality for options in the first quarter of 2007. User-defined spreads provide our participants with a high degree of flexibility as they create unique spread combinations.

Finally, during the quarter overall foreign exchange volume was up 42% to a record 471,000 contracts per day. Much of that growth was attributable to electronic FX trading, which was up 55%. For the quarter, we averaged $59 billion of daily turnover in notional terms, up from $48 billion in Q1. We continue to see new market participants utilize CME FX futures because our worldwide CME Globex platform provides a transparent, central limit orderbook, speed, anonymity, and central counterparty clearing benefits.

Next I'm going to update you on several new growth initiatives that we believe will be important contributors to our future success. These include our FXMarketSpace joint venture, our trade matching agreement with NYMEX, and our recently announced acquisition of Swapstream, a leading provider of electronic matching services in the interest rate swap market.

First in early May, we announced our joint venture with Reuters to create FXMarketSpace which we believe will change the way currencies trade in the $2 trillion per day over-the-counter market. When launched in early 2007, FXMarketSpace will be the world's first centrally cleared electronic trading platform for the cash FX market. The joint venture will provide credit efficient access to the OTC FX market, orderbook transparency, and total anonymity to market participants. The FXMarketSpace platform is targeted to meet the needs of banks, other financial institutions, and nonbank, nonfinancial corporations. Last week we announced an early adopter program which includes the first group of financial institutions to confirm their participation in the development of FXMarketSpace.

We are off to a great start. We have a number of top 20 banks including six of the seven largest global FX banks along with investment managers, hedge funds, and proprietary trading firms. These firms will be involved in the platforms development, providing critical input and resources during the beta testing and prelaunch phases.

In addition, we announced that FXMarketSpace has received all necessary antitrust clearance and last week Reuters received shareholder approval. Certain of FXMarketSpace's activities will be subject to regulatory approval of the UK Financial Services Authority, which is expected in early 2007.

In early April, we announced our partnership with NYMEX to list their energy contracts on CME Globex, which was successfully launched on June 12. For CME, the addition of energy contracts to the CME Globex platform further diversifies our product offering. In June we averaged 79,000 energy contracts per day and average daily volume for July to date is 104,000 contracts excluding July 3.

We are working closely with NYMEX to enhance this offering and have released several upgrades over the last few weeks. These include deploying CME's implied spread functionality; extending the number of months E-mini crude oil and natural gas trade from three months to five years; and launching Brent futures contracts. In less than two weeks we are scheduled to migrate NYMEX access products to CME Globex. NYMEX access products are physically delivered products that trade during non floor hours. During June, NYMEX averaged more than 40,000 access contracts per day.

By December, NYMEX plans to utilize CME Globex to trade the physically delivered products virtually 24 hours a day, which will enable side-by-side trading with the NYMEX trading floor. With 82% of WTI open interest, these products are where the majority of existing WTI liquidity resides. We have heard favorable feedback from both commercial and financial energy market participants confirming the importance of marrying these liquidity pools.

Finally in early July, we were pleased to announce the agreement to acquire Swapstream, a neutral [interdealer] platform that offers advanced functionality for the medium- and long-term European denominated interest rate swap market. The overall interest rate swap market is large with approximately $180 trillion of notional value outstanding and an estimated daily turnover of between $550 billion and $600 billion. This market is at the early stages of electronic trading. The initial entry point is long dated European swaps. However, we intend to expand the offering within the next six to nine months. Our ownership of Swapstream will deepen CME's relationships with large European banks and buy-side institutions.

In summary, we had another impressive quarter with volume records across all of our product lines. In particular our technology team made significant upgrades to our overall CME Globex platform including improving the trade matching speeds and significantly increasing our capacity to handle orders. After implementing new trade matching engines in FX equities and the NYMEX products during Q2, our average round-trip response time dropped from 41 milliseconds in Q1 to 27 milliseconds during our record volume month of June.

Our team also successfully added the NYMEX product to CME Globex, enhanced the electronic Eurodollar option functionality, and they are now turning their attention to building the technology and clearing [backbone] for FXMarketSpace. Ultimately it is our ongoing drive to innovate on multiple fronts that has propelled us to where we are now and to where we expect to go in the future.

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

Thanks Craig. We posted another strong quarter driven by record volume. Our net revenue of $295 million for the second quarter was up $56 million or 23% compared with the same quarter last year. Average daily volume was up 31%. Clearing and transaction fees were up 25% to $229 million versus $183 million in Q2 of last year. Volume growth in every productline was significant. Commodities grew 53% versus Q2 of '05. FX rose 42%. Equities overall were up 35% and although interest rates had the lowest growth rate, they were up a solid 26% in Q2.

Our average rate per contract excluding trackers was $0.632 in Q2, down from $0.652 in Q1 and $0.651 during the same quarter last year. At higher trading volumes, CME's pricing strategy provides higher volume discounts. In addition we saw higher sequential volume growth rate for members who received lower pricing. While member volume grew 16% versus Q1, nonmember volumes grew at 12%.

E-mini volumes jumped significantly, with all user groups dramatically increasing their participation. During the second quarter, member volume in our E-minis grew sequentially by 25% while nonmember volume increased by 19%. In FX, we saw a decrease in the rate as privately negotiated trades decreased to 6.5% in Q2 from 9.1% of total FX contracts in Q1. Privately negotiated or block trades, which are priced substantially higher than trades executed on CME Globex, have decreased both on a relative and absolute basis, reflecting the deepening liquidity on Globex where larger trades are now being executed.

Moving onto the processing services line, the Chicago Board of Trade reported volume of 3.3 million contracts per day, which generated $19.6 million of CME processing revenue for the quarter. We began trading NYMEX energy products on CME Globex on June 12 and traded nearly 1.2 million total contracts during the quarter with revenue approaching $600,000. The volume to date is in line with our expectations and we look forward to adding access volume on August 7 and the remaining physically delivered products by year-end.

Quotation data fees were $21 million for the quarter, up 16% from $18 million in Q2 of '05, reflecting a January 2006 price increase and a slight increase to 152,000 screens for the full CME data package.

I'll now take a few minutes to review expenses. Total expenses for Q2 were $115 million, up 12% versus $103 million for Q2 last year and up from $113 million last quarter. Highlighting a few of the main expense categories, first, compensation and benefits totaled $48.1 million for the quarter, down $1.8 million sequentially. There are three components of this expense, salaries and benefits, bonus, and stock based compensation. First, salaries and benefits totaled $36 million, down $3.8 million. The reduction was primarily due to higher capitalization of software development, the loss on deferred compensation balances, and lower employment taxes. At the end of the quarter, headcount stood a 1380, up 25 compared to the end of the first quarter. This increase was primarily within our technology group. Second, in Q2 of this year we recorded $8.4 million for the incentive bonus, up $1.7 million from Q1, driven by increased cash earnings.

The final component of the comp and benefits line, stock-based compensation, totaled $3.6 million in the second quarter, up $300,000 from Q1 due to our annual stock option and restricted share grants in mid-June. We expect stock-based compensation to increase to approximately $4.5 million per quarter for the remainder of this year as a result of the recent annual grant.

Noncomp expenses totaled $67.3 million in the first quarter, up $4.3 million from Q1. The primary increases were in professional fees, license fees, and marketing expense. Strategic initiative activity and other legal activities accounted for much of the increase in professional fees.

Next, license fees are driven primarily by equity futures volume and our equity products ADV increased 22% sequentially, resulting in a 17% increase in license fees. Finally we have begun a broad product and brand marketing campaign which led to increased marketing expenses in Q2 and we expect higher marketing costs in Q3 and Q4. The acquisition of Swapstream will add approximately $3 million to our expenses for the remainder of the year. As a result, we expect to come in at the higher end of our previously stated annual expense growth range of 12% to 13%.

Moving onto income before taxes, our pretax income was $180 million in the second quarter, up 32% from $136 million in the second quarter last year. This resulted in a record pretax operating margin of 61%, compared to 57% in Q2 of last year. The revenue increase versus the prior year was $56 million, of which $44 million dropped to the operating income line, representing an incremental operating margin of 78%.

Our effective tax rate for the year so far is 39.2%, down from 39.6% for the full year of '05. Net income for the quarter was a record $110 million and diluted EPS was $3.12. Both of these are up more than 32% compared to the same quarter a year ago.

Moving onto the balance sheet, at the end of the quarter we had more than $1 billion in cash and marketable securities and working capital stood at $1.1 billion. Capital expenditures totaled $23 million in the second quarter. For 2006, we continue to expect CapEx to range from $90 million to $100 million based on our current plans. This includes the recent conversion of our trade matching platform to the HP Itaniums, resulting not only in the speed and capacity improvements Craig mentioned but also in a lower expense per transaction.

Cash earnings totaled a record $106 million for the second quarter, up 46% compared to Q2 of 2005.

Now I will summarize third quarter volume to date. We are averaging 5.3 million contracts per day so far in July, up 45% versus last year. Interest rate volume is averaging 3 million contracts per day. E-mini equities are averaging 1.7 million contracts per day; equity standard contracts, 140,000; foreign exchange, 378,000; and commodity contracts are averaging 86,000 contracts per day.

Related to our clearing processing agreement with the Chicago Board of Trade, their volume is averaging 2.9 million contracts per day so far in July. Lastly our average daily volume of NYMEX products so far in July is 97,000.

In summary, we had another solid quarter performance driven by broad-based volume growth displaying the operating leverage inherent in CME's business model. As Craig mentioned, we have recently completed several important transactions that we strongly believe will create value for our shareholders.

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

(OPERATOR INSTRUCTIONS) Rich Repetto, Sandler O'Neill.

Congrats guys on a great quarter. I guess first question is on the expense side. It looks like you are guiding with Swapstream and higher marketing and if you do the 13%, it comes out a little bit higher on an average for the back half. So I guess the question, do you expect margins to contract given the normal seasonality in the back half of the year?

Rich, as you know, it's going to depend on how the volumes come through for the rest of the year. There is still quite a bit of uncertainty in the interest rate markets, so that could play into it. And July has been very strong to date.

Then I guess the bigger question is it's hard to get a better feel for what -- I know no one can predict volumes -- but the seasonality because if you look at last year's third quarter you had Katrina. If you go back prior, your growth just sort of probably overwhelmed any seasonality, but, Craig, any feel for just general seasonal trends that you'd normally experience?

No, other than I think Jamie pointed out that typically July is slower for us. We've had very active trading in all of our product categories and obviously there's a lot going on in the world right now. So it's not possible to predict that.

Okay. One of my particular areas I've been following is the Eurodollar options going electronic, so you see a nice around 0.5% or more per month going electronic. Just an update there, do you think -- I believe there's more functionality coming even with the Eurodollar options this summer or later this summer, right? Just more color. Did the pricing, the revised pricing make any from your perspective have any impact?

Again, just to confirm, we did mention that we're going to be implementing user-defined spreads which will further broaden the functionality available to Eurodollar options traders. So we will have a series of functionality enhancements over time. I think the big focus for us was really the implementation of the covered functionality, which I believe is probably only about two weeks old. We had a very successful launch of that. So I think, Rich, what we are looking for now is a number of things to come together, the functionality enhancements that we've already implemented, the pricing which we've had in place, and the distribution capabilities that we're now achieved with bank systems and ISVs.

Okay. The very last question is now that you have launched the energy partnership with NYMEX, Craig, any view on how -- is this a winner take all market or is this a market where both have certain products that you could foresee dominating in the future with sort of small clearing barrier to entry between the two or any views there on what you've learned so far on the energy side?

A couple of things. First of all I would just say that we have very much look at this relationship and opportunity as a long-term opportunity. I think this is definitely something that should be thought of as a marathon and not a sprint. I've said before and we believe that while it is sometimes the case that you can have a temporary bifurcation of liquidity, over the longer run that generally has not been sustainable in the futures markets and we don't expect that that will be the case here as NYMEX continues to grow its share of electronic trading in the key energy products.

Okay, thank you.

Daniel Goldberg, Bear Stearns.

It's actually [Joel Jeffries] sitting in for Daniel. Your 61% pretax margins, is this a good run rate for us to consider going forward? If not, how much higher can it actually get outside of a rate for contract increase?

We don't really provide guidance on the margin percentage per se, but it's going to depend heavily what your expectations for volumes are and keep in mind that our incremental margin was 78% in the quarter, so each dollar of new revenue coming in, $0.78 of it fell down to the operating line. So when you consider that and the fact that we have these growth initiatives underway and we saw positive secular trends, there is a potential for growth in the margins.

Okay, great. On the recent CFTC hearing, were you guys happy with the outcome of that and how do you see any changes to the near-term regulatory environment or the potential long-term environment?

You know, Joel, are you referring to the Foreign Board of Trade roundtable?

Yes.

You know, I think that in general most people shared our view that we would like to ensure a level playing field on a global basis. We also think it is important that we not encounter regulatory resistance when we try to grow globally and distribute our products in foreign jurisdictions. So what we tried to urge the CFTC to do is to maintain its course of keeping barriers to competition low, not putting in place redundant or duplicative regulatory requirements for foreign exchanges during business in the U.S. for fear obviously that that could have a negative impact on our global growth prospects.

I think the industry that testified largely supported that view and while it is not our position to conclude what the commission's ultimate view on that topic is going to be, I think the testimony was representative of our view and I think we're confident the CFTC won't take steps to make global competition more difficult.

Okay. And just lastly, can you give us an indication of what percentage of your Globex volumes are generated outside the U.S.?

We don't give that data and break that down in part because we have both direct connections and indirect connections, so we can't always know where the ultimate origin of orders is, but we believe that we have a very significant flow of business from outside the U.S. in both Europe and in Asia.

Craig is right. We don't necessarily have sight lines all the way down to all of the origin of our volumes, but one area that we do have the sight line into is the volumes coming through our hug, our hub infrastructure, and that is probably in the neighborhood of 7% of our electronic volumes.

Okay, great. Thanks so much.

Mike Vinciquerra, Raymond James.

The one rate contract that jumped at me that had dropped noticeably the last several quarters was the foreign exchange. You're obviously growing it very nicely. But can you talk about the dynamics of the volume discounts in that particular product category, just so I can kind of look ahead?

This is Jamie. The main driver there really was the relative contribution of the privately negotiated trades. They are very high fee trades and they've actually tapered down in terms of relative contribution and absolute contribution to the FX volumes over time as the liquidity in the electronic market has improved and players go there to transact their business. So that was a key driver of the decrease in rates and another key driver was that the member volumes are just growing more recently a little faster than the nonmember volumes. So that is another key driver there.

Keep in mind too that those members tend to be algorithmic traders and when we he increased the speed of the systems through the implementation of those HP Itaniums, it tends to attract the algorithmic players and allow them to trade even more.

Those privately negotiated transactions tend to be focused more in the 4F than the other categories?

Absolutely.

Thank you. And could you also just clarify, Jamie, you mentioned in the salary line drop, something about a loss on deferred comp. What exactly were you referring to with that?

There is a line in both our interest income side on the revenue side that directly offsets a component of our salary expense. There's the deferred compensation balances that are held at the exchange for senior management and they are invested at the direction of senior management in certain funds and those -- to the extent those funds experience losses, you are going to see a decrease in the interest income, and a similar decrease in the compensation expense. It generally moves with the equity markets.

Okay, thank you. Then just finally, strategically just wondering if you could comment on any implications from the possible NYBOT ICE deal that has been talked about in the press recently in terms of just competitive positioning for you guys and ICE potentially getting a clearing platform, that type of thing?

Mike, I don't think we have any particular comments on that.

Fair enough. Thanks, guys.

Roger Freeman, Lehman Brothers.

With respect to the covered option functionality that you rolled out, I was hoping you could give us a sense of just the significance of that. For example any statistics on how much of the floor base volume today consists of covered option strategies?

Roger, this is Rick Redding. We don't have precise figures on what percentage the floor trades are involved in covered strategies. What we do know is on the floor in Eurodollars about 85% of all the Eurodollar options trades are involved in some sort of spread strategy. So when you take the covered functionality and the user-defined spreads that we intend to roll out in the first quarter of next year, that is why we are moving in that direction. We need that functionality to replicate the type of trades that currently go on on our pit today.

Okay, so would you say that on a relative basis, are covered options more important or less than the defined, the user-defined spreads? How do I look at that sort of next stage in terms of significance?

It is difficult to give you an absolute answer there, because right now in the floor environment or in the floor and electronic environment, the options trade may be done in the pit. The futures trade may be done electronically or in the pit, so we can't marry those two together to say those two trades exactly went together. So it's very difficult to answer that question.

Right, but in general I guess today most of the option would generally be done in a pit and given that 90% of the futures is on Globex, that other piece is probably being done electronically. Is that fair to say?

Right and that is why that is important to get that on the same platform because we think obviously it takes out the execution risk and we think that will just open up the market even further.

Right. With respect to the rollout or the conversion migration onto the Itanium servers, can you talk about what stage you're at? I know you talked about I guess it was interest rates and -- or equity I guess and I think also NYMEX is running across it. Is everything migrated on there at this point?

Yes, all the major product lines are on there now.

Audi -- I know that has been just a very recent development, but do you see an immediate impact from your algorithmic customers in terms of stepped-up volumes?

Roger, we have seen increased volumes from those algorithmic guys. As Jamie was saying earlier, as we speed up the response time both of the match and getting market data to them, it just gives them more signals to base their trading off of.

Okay. Thanks. Then lastly on the international front, you have talked a lot about your increasing international access points. I was just wondering if you could review what you think some of your biggest international product opportunities are as you grow globally? Do you view it as more in the commodities area? Are there financial products that you're looking at? How do we think about it from a product standpoint?

Currently you see a lot of our international volumes come in both the form of our interest rate complex and also FX. The one thing that you may want to think about is we have the only truly 24-hour global market of all the futures exchanges in that we have a very solid foreign exchange franchise. As we have opened up hubs and we have gained traction globally, you have seen us do things to bring product to the market that is more global in nature and more regionally focused, things like the IFA contract for example that we launched this year. We have been very successful in the equity area with products like Nikkei historically and you see those products now growing dramatically. A lot of that has to do with the increased distribution of this hub infrastructure and customer acquisition overseas.

Okay. That's helpful. Thanks.

Richard Herr, KBW.

First question is just on the Bank of Japan has started to raise interest rates for the first time in many years and I know that you guys look at the euro/yen futures. I know you also have a mutual offset arrangement with a Singapore exchange and it looks like the lion's share of euro/yen trading goes on on the Tokyo Financial Exchange. Is there anything -- are there opportunities there that you foresee that you can possibly capitalize on the coming volume in terms of hedging with euro/yen futures as a result of the Bank of Japan moving rates?

You're right. We do trade that product and we have had some success, as Rick pointed out maybe by comparison in the Nikkei market even though in a sense, we're sort of the third market in that example with the primary liquidity at Osaka and the secondary but very substantial market at Singapore. The inclusion of the Nikkei contracts in mutual offset has been somewhat helpful in that regard. So we are happy to work with Singapore if we can on the euro/yen contract.

Okay. This morning it looked like Creditex announced they are merging with CreditTrade and also this may be kind of in connection in terms of the CME, the CFTC and the SEC, it looks like they have come out with kind of a decision on debt indices. Do any of these developments in the credit default swap market make you more interested in entering there? I mean you do have $1 billion of cash or so and if Creditex was up on obviously upon the block, maybe you can or cannot comment, but was that something that you had looked at and there were other properties out there that might help you get into the credit default swap market?

Just at a high level, we do view the joint rulemaking as very positive in terms of permitting trading the futures on debt indexes and debt securities, so we are looking at that as something that can be helpful to us. We are very interested in credit related products generally, so we view this as a positive enabler for that.

Okay, thank you.

Howard Chen, Credit Suisse.

Congrats on the quarter. I just had a few questions on my end. One, with regard to the new initiatives that you spoke to, Craig, I would have thought that there would be more in the way of onetime startup costs and some [contour] revenues this quarter. Are we feeling the full impact of the NYMEX and the FX market base startup costs this quarter, or should there be an incremental step-up in those startup expenses in the out quarters?

We have said before and I will let Jamie elaborate that we have actually been working on FX market space for the better part of a year and we are anticipating entering the energy market in some fashion as well for that same timeframe. So much of this had been planned for and incorporated into what we expected would be our expense levels for this year.

Howard, Jamie. As I noted earlier too, you will see some impact from Swapstream in the second half of the year, about $3 million of additional expense for us, and I think what you're getting a5 though, is a good point is that it demonstrates the scalability of our systems. We are able to take on a lot of these new initiatives and do it at the margin, so --

Okay, that's helpful. Back to the covered costs trading strategy, I know you've launched the functionality in Globex but can you update us on how the process of deploying that strategy and the new trading strategies on the ISVs is progressing?

Ask the question again. You are broken up a little bit.

I'm sorry. I was asking about -- I know that the functionality of the covered call is out on Globex, but can you update us on how the deployment to the ISVs is progressing? I guess asked another way, how penetrated are the new trading strategies into the customer base?

That's a great point. As you've seen the volumes increase from essentially the very end of April, what we've seen there is really the ISVs beginning to roll these platforms out and what you're seeing now is these platforms are being rolled out into customers. They are going through the customer's QA cycles and you're starting to see these really hit customer’s desktops now in a very convenient form. So as we continue that with the ISVs, you'll see -- we think you'll see a lot more people onto the system and a lot more eyes watching the marketplace to see how good the markets really are on [EOs]. A lot of the banks too are rolling these products out on their proprietary systems, so I think you'll continue to see over the remaining summer months more and more of the bank systems come on board.

Okay. And do you have a sense or if you are willing to share it or not about like how penetrated you are in terms of the new strategies?

That is a very difficult question to answer in that a lot of this has to do with client's systems. The ISVs have rolled them out and for a lot of good reasons firms are continuing to QA their systems, so a lot of this is in the firm's QA cycle.

Thanks, Rick. One more for me. I guess this is following up on a prior question, but your E-mini and the equity volumes have grown significantly faster than your peer products, and that growth has widened in your favor recently. I know this is a really difficult question to answer, but maybe you can take a stab at it, Rick. Do you have any thoughts on how much the shift to the faster Itanium servers and that lower latency, trading latency time is contributing to the results? Are there any metrics that you look at internally to help gauge the contribution of the lower latency costs and times?

There are some metrics but I think there is a lot going on in the equity markets right now. What you saw in the June timeframe, late May/June timeframe was an increase in volatility. Still at very historically low levels, but it is the first real pickup in volatility since the first quarter of 2002. What I think it does show is though our customer base has been broadening from the algorithmic side. The Itaniums have helped increase their velocity, so I think you have a bunch of factors working together and even in July, where you are seeing volatility coming back down a little bit, you're still seeing very strong volumes. Some of that volume is coming in the form of our options initiatives. You actually you look in July, our floor options volume is higher than our pit futures volume. You are also seeing extremely good growth on the options side of our E-mini products.

Okay. I haven't looked, but if we look at the equity complex alone, is open interest higher now than it was at the end of the second quarter?

Yes.

Thanks again for taking the questions and congrats on the quarter.

Don Fandetti, Citigroup.

One quick question, Craig or Rick, I was wondering if you could comment on the timetable for profitability of SwapStream and how big of an opportunity this could be given that it is pretty modest investment in a big market.

In terms of the profitability, we believe that it will hit a breakeven point sometime in 2008 and I think it is probably a little early to -- we don't give guidance on where we think is going to head, but it certainly is a significant market and there's a large addressable market there.

Okay, thank you.

Chris Allen, Banc of America Securities.

Good quarter. Just following up on Don's question on Swapstream, the $3 million in expenses in the second half, is that a run rate or is it more integration costs?

I would say it is more along the lines of a run rate.

So I guess right now taking that into account, the breakeven 2008 is running at a loss right now, Swapstream?

Yes.

Can you give us any thoughts in terms of what their market share is, like how much of the daily volume they do?

We don't -- I'm sorry. The total turnover for the U.S. and Europe based on our estimates and industry source is about $550 billion a day and $300 billion is European denominated; about $250 billion is U.S. denominated. Then so within the European denominated, short data is about $200 billion, medium to long is about $100 billion. We are -- it is in the very early stages of going electronic, so it is kind of hard to give an estimate there.

I think that's the key to this really is that we are expecting more interest rate swaps transactions to migrate toward electronic trading over time, so this is really to position us to take advantage of what we think will be a long-term trend in that regard.

Gotcha. You are just starting in the medium- to long-term European markets, the $100 billion is kind of what you're focusing on now.

Right.

Chris, if I could add one thing, what is happening in the interest rate swap space these days is they are becoming a very commoditized products and what you're seeing is a lot of the desks are moving these to what they call their liquid trading desk, things that trade likes sovereign debt things. So what you're really beginning to see is the emergence of a market that has moved from a very tailored specific bilateral market to something that has become commoditized which we think are the beginning steps of a market that electronic trading is going to be a natural for. Much of the way as futures have been historically. Now as those products get commoditized, we believe that we are in the very early stages of an electronic marketplace for swaps and we have chosen to enter that space by doing the European markets, where the European banks seem to be more apt at this point to begin trading electronically.

Got you. Thanks. Just on NYMEX, they recently announced some fee waivers for the WTI Brent spread contracts and also possibly related to the [RBOT] contracts, the transition there. Is there going to be some relief that you guys are going to offer them? Otherwise they would be taking this at a loss.

We're not going to comment on our specific agreements with NYMEX, however we are still very comfortable with our $0.35 to $0.50 guidance that we'd given overall in terms of round turn rate for trade.

Okay. Then just lastly have you guys made any -- been disclosing at all what your pricing is going to be in FXMarketSpace?

We have not done that yet. Right now I mentioned that we've announced our early adopter program and one of the things that we are working on and consulting with both the sell side banks as well as the leveraged funds is what the appropriate pricing strategy and pricing structure will be. So we have made a lot of progress on that. We have had a lot of good feedback from the user community, but we have not made that public yet.

Got you. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS) Scott Appleby, Deutsche Bank.

Nice quarter. A couple of things. I did want to ask if you could add some color to the mix of new participants, if you're seeing any sign of any increase in algorithmic traders that are fueling the growth? Is there one new participant, two? Are there additional events or there new reasons to be begin using futures?

I think -- this is Rick -- I think there's several things going on in the marketplace. One is where we're seeing new participants come in for is some of our international initiatives. We are seeing more participants in Europe and we are seeing Asia become a more important piece of our business. We think the international markets as time goes on, as customers get familiar with our products, as more get educated in using derivative products, you'll see those volumes increase from outside of the North America time zone. Domestically we continue to see new players. I think you'll continue to see on our website additional and active clearing firms coming on from kind of the proprietary space and the hedge fund space, so there's a lot going on in the new customer acquisition piece. I hope you saw the announcement that we created a hedge fund team to specifically cross-sell to the hedge funds out there.

Yes, I saw that, Rick.

Scott, was there a question on the hedge fund?

Can you hear me? I think you lost me.

Actually we can hear both of you. I'm not sure why either one of you can't hear the other.

Scott, Rick was finished in answering your question unless you had a follow-up.

The follow-up is on from NYMEX, do you think you will have an opportunity to bring your Comex products on Globex?

Well we certainly hope so. The agreement that we have signed with NYMEX does call for us to be the exclusive provider of trade matching services for the Comex metals products. Right now NYMEX and Comex are working to resolve the way in which that will happen because currently NYMEX provides a closed access system for Comex members to trade electronically. Globex is obviously a globally distributed open access platform and while we can accommodate their closed access model, obviously the strong preference is for an open access model that would be more broadly distributed.

So that is the issue that NYMEX is working to resolve with Comex right now, but there is no question that the metals products ultimately will trade in some fashion on the CME Globex platform and our contract provides for that to happen by a certain time.

Okay. Thanks, Craig.

A follow-up from Richard Herr.

Just quickly on your commodities product set, CBOT is moving forward with side-by-side electronic trading of ags and you guys have already offered electronic trading of your commodities on Globex. But it doesn't look like just looking at the mix, it looks like it never really has taken off at CME. I was wondering if you could discuss -- do you see this as an opportunity with CBOT kind of leading the charge here to bring the algorithm trading community to trade ags electronically? Do you see there is an opportunity here to transition some commodities volume to electronic trading?

Richard, it's Rick Redding. As the markets become more electronic and as the agricultural markets and commodity markets, as those become more electronic, I think at all the exchanges it does good for all the other products at the other exchanges because one of the hurdles has been in the commodities and agricultural world has been getting those terminals in front of the traders that are very used to calling a broker. So as exchanges penetrate the electronic world in the case of the Board of Trade, we think that will help the CME and the other commodities exchanges as well.

Just to point out maybe the obvious, but we had the highest growth rate actually in our commodity productline at 53% year-over-year, notwithstanding the fact that most of that is done by an Open Outcry, but also in our case and to be distinguished from the Board of Trade, this is still only 1% of our overall business. So that is not to say that we don't view that as positive or the opportunity as worthwhile. We certainly do. But it is growing rapidly. It is a very small part of our business.

Thanks, guys.

It does appear that no one else has any questions. Mr. Donahue, I'll turn the conference back over to you for any closing comments.

Thank you for joining us today and we appreciate your continued interest in CME and we will look forward to talking with you again next quarter.

Thank you. That does conclude today's teleconference and thank you all for your participation. At this time, everyone may disconnect.