芝加哥商業交易所 (CME) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NYMEX Holdings, Inc. 2007 Q2 Financial Results Conference Call. My name is [Shiquana], and I will be your operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A period.

It is now my pleasure to turn the floor over to Mr. Keil Decker, VP of Corporate Communications and Investor Relations. Please proceed, sir.

Thank you, Operator. Good morning, and welcome to the NYMEX Holdings 2007 Q2 Earnings Conference Call. To obtain a copy of our earnings release issued this morning, please visit our website at nymex.com.

Before we begin formal remarks this morning, you should be aware that 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 Annual Report on Form 10-K and 10-Q, which is available on our website.

With us this morning to discuss the highlights of the second quarter are NYMEX Chairman Richard Schaeffer, President and CEO James Newsome, and CFO Ken Shifrin. At the conclusion of their formal remarks, we'll open up the call for your questions.

Now, I'll turn the call over to our Chairman, Rich Schaeffer.

Thank you, Keil. Good morning, ladies and gentlemen. Thank you for joining us today. We're excited to speak with you about our strong operating results and how we continue to execute on our strategic goals to increase our trading current volume, expand distribution globally, continue to innovate and launch new products, and reduce and manage our expenses. In a moment, I will turn it over to Jim Newsome and Ken Shifrin, who will discuss additional operational and financial details of this quarter.

First of all, as you've seen in our Press Release, we've taken a conservative approach regarding the valuation of our investment in energy derivates broker Optionable by taking a one-time pretax charge of $26 million, or $0.16 per share, this quarter. We are taking this charge based upon our analysis of the appropriate accounting treatment for this investment at this time. the manner, however, is still under active review by our lawyers, and we have not yet determined what, if any, legal remedies we may pursue in this regard. We continue to believe that our strategy of pursuing opportunities to further improve our position in the options and futures is the right one, and we will continue to examine those opportunities as they may arise.

With that said, we had a very solid second quarter, very solid second quarter operating results. Our operating revenue increased 34% to $163.6 million over last year's second quarter. for the first half, our operating revenues rose 40% to a record $327.8 million. Our net income was up 9% to $41.7 million, including the one-time charge. Excluding the charge, net income was up 48% to $56.4 million, and diluted EPS were $0.60 for the second quarter.

Our average daily volume in the second quarter was approximately 1.4 million contracts, which is 23% above last year's second quarter average, even within what we believe was a period of relatively low volatility. At the same time, NYMEX electronic volume on CME Globex was up 443%, and COMEX electronic volume on CME Globex rose 494%. Our volume strength has continued and, recently, we've set exchange-wide volume, CME Globex traded volume and options volume records, as well as records for volume and open interests in a number of our benchmark energy and metals contracts.

In terms of market share of our benchmark energy and metals contracts, we believe we have taken back significant volume in open interests, as we said we will, and we will continue to do so. Our long-term strategic initiative in Dubai will [forward] significantly with the launch of the Dubai Mercantile Exchange, representing an important achievement in offering another benchmark to global risk managers and users of sour crude. It demonstrates our expertise in launching products and developing new marketplaces globally.

We continue to make progress with our Canadian resources exchange joint venture by bringing on talented managers, as well as developing an operational and business plan. Jim will give you more details on these topics in a moment. NYMEX also continues to respond to the marketplace by offering innovative new products to our customers, including a last-day Brent cash setup contract, which just begun this past Sunday, had a terrific launch, with more than 3,000 contracts on the first day. We're excited by the interest and progress we're making in our Brent [complex] volume. As a matter of fact, the open interest recently surpassed 100,000 contracts, and we look forward to substantial new growth in that area.

Also, yesterday, the first catastrophic risk contract traded. We believe we now have the community well educated, and we anticipate that to be a robust contract. While it takes time for a contract like that to be adopted by a new industry, we believe there is great potential, and it's a great contract for risk management.

We continue to be aggressive in our fee structure. Our initial NYMEX fee increase went into effect May 1 and strengthened our position, while also maintaining our competitiveness. On July 11, we announced an additional proposed increase to NYMEX and COMEX fees of $0.10 a side, or $0.20 a round turn, which will level the member, non-member, electronic and floor rates, and we'll still be in a very aggressive place to trade energy. Our rates are still extremely competitive in the marketplace. We expect this increase to go into effect tomorrow, on August 1.

We also continued to focus on efficiencies and eliminating excess cost to improve our profitability while maintaining and improving our talent and resources. As you see from our Press Release this morning, excluding direct transaction costs, total expenses were down 8% compared with last year, with non-compensation expenses down 19%. We've made substantial cuts over the past six months, as we said we would, and we will continue to do so. We will continue our efforts to implement our growth initiatives to expand distribution globally, as well as to realize improvements in profitability. We are excited about opportunities in every component of our business, energy, metals, and clearing.

Jim Newsome, my partner, will now update you on the progress we've made in several of these key core business areas.

Thank you, Mr. Chairman.

Richard covered some of our strong volumes in growth, so I'd like to discuss some of the other areas of the business. As Rich said, we continue to execute on our strategic goals.

Let me begin by updating you on our international initiative. The launch of the Dubai Mercantile Exchange represents a significant achievement in offering a benchmark to global risk managers and users of sour crude. We're gratified by the consistent progress our Dubai Mercantile Exchange venture has achieved through launch, and continued growth in volume and open interest which, as of Friday, stood at more than 5,600 contracts, far surpassing the competitive offering. We continue to believe our Oman Crude contract will become the benchmark sour crude contact of choice for global risk managers.

While we believe that the DME Oman contract will become the global sour crude benchmark, we just launched yesterday a new last-day Brent contract, which we believe will provide additional hedging benefits to users and risk managers on NYMEX. As Rich commented, we've seen steady growth in our Brent complex, and believe that our new contract, with the cross-margining benefits we can offer to users and risk managers, will continue to bring increased interest in trading Brent on the NYMEX.

We continue to make progress in developing our CAREX venture with the Montreal Exchange, and have hired talented managers, including Rob Laird as Vice President of the natural gas business line, to help build the venture. He comes from Prebon Energy Canada, where he was a senior energy broker. We are moving rapidly, and expect CAREX to be in full operation by early next year, trading key Canadian contracts and starting to generate sustained revenue streams. We expect to make announcements in the coming months, giving you updates on this progress.

We signed a memorandum of understanding on June 8th to form a working group to establish a commodity exchange in St. Petersburg, Russia. The agreement was signed by NYMEX, along with the Russian Federation Economic Development and Trade Minister, and the governor of St. Petersburg. As you know, we have worked diligently on a Russian delivery contract for sour crude, and this effort seeks to build on that, to create a new marketplace concentrating on Russian products, something that does not currently exist.

In terms of our core business, as Rich said earlier, we are very proud of the tremendous growth we have seen, and continue to see, in our overall volumes, and in particularly our electronic volumes. We have set numerous records recently in each category, and believe that increased volatility in the energy market and metals market will contribute to continued growth across our products and venues. One such venue is NYMEX ClearPort, the industry's leading off-exchange electronic clearing platform, and a key NYMEX revenue generator. ClearPort showed an increase in average daily volume to 309,000 contracts, a gain of 12% over the second quarter of last year, in what we believe was a relatively low period of volatility.

Our pricing information continues to grow in value and, as such, our market data business is very strong. Market data has shown growth of 47% over the second quarter of 2006 to $23.4 million in the second quarter of 2007 for $15.9 in revenues the year prior period. We also continued to develop new value-added market data services, such as NYMEX Direct Analytics, in partnership with energy consultancy Oil Analytics, that will enable energy professionals access to analysis of key supply and demand data that drives global energy pricing.

Options continue to be a strength and driver of volume growth. For the second quarter of 2007, total options volume grew 16% over the same period in 2006 to more than 19.5 million contracts from 16.8 million last year. We continue to set records in options volume, with total NYMEX and COMEX volume hitting 1.5 million contracts on July 26th, shattering the previous record of 540,000 contracts traded on May 15th.

As part of our focus on options and strategy to provide multiple venues for users and risk managers to trade and clear, we have launched options on the CME Globex electronic trading platform and on our NYMEX ClearPort electronic clearing platform, and have seen consistent volume growth. We believe screen-based options will need some time for users to be able to execute the most complex strategies. However, we're excited about this advancement. We recently surpassed 5,600 options contracts traded on CME Globex, and we expect this venue will see steady growth.

We continue to execute on our strategy to expand our product mix. As the energy and metals industry leader and innovator, we remain focused on satisfying evolving customer demand by bringing to market new contracts, including the last-day Brent future and electronic options, which I previously mentioned, but also three new gasoline and diesel contracts traded on both the floor and CME Globex, two ethanol swap futures, and 21 new petroleum product swap contracts on NYMEX ClearPort and, more recently, our announced steel futures contract, based on the World Steel Dynamics steel benchmark index. We worked closely with the steel industry for several years to develop a contract that meets the needs of producers and consumers, and are pleased to be the first exchange to offer a steel futures contract to the North American marketplace.

In addition to offering new contracts, NYMEX continues to focus on being the energy industry innovator by providing industry-leading tools and information to the energy trading community, such as our tentative agreement to support the ConfirmHub technology standard, letting energy traders in back offices receive their NYMEX brokered and bilateral OTC cleared trades, as well as futures trades, on a single confirmation platform.

As Rich said a moment ago, we continue to focus on improving the strength of our talent to bolster the business, and we have done that by hiring Bill Purpura as Senior Vice President of COMEX. Bill joins the NYMEX staff after a long career in futures trading. Bill has already traveled extensively and made positive contributions to both the NYMEX and COMEX business.

In terms of expenses, we continue to focus on efficiencies and eliminating excess cost. Our initiatives are ongoing on a cost reduction front, and we've made great progress over the past six months. Overall, we've delivered strong operating results for the second quarter of 2007, primarily as a result of increased volume in electronic trading and clearing, coupled with cost reductions. NYMEX continues to seek new revenue streams while identifying cost efficiencies in our existing infrastructure in the quarters to come.

I'll now turn it over to Ken Shifrin, who will discuss how these results have translated into strong financial performance. Ken?

Thank you, Jim. My remarks this morning will cover significant portions of our income statement, then I'll touch on some key points about our balance sheet. Though our policy is not to provide revenue or earnings guidance, I'd like to mention that we post our daily volumes on our website, nymex.com. In addition, at the beginning of each month, we release a summary of the previous month's average daily volumes and rate per contract, as well as a three-month rolling average.

Let me turn to our second quarter results. We had another solid quarter, driven by daily volumes and overall rate per contract, and reduced operating expenses net of transaction costs. As Rich mentioned, total operating revenues for the second quarter were up 34% to $163.6 million as compared to $122.5 million for the same period last year. Our net income for the second quarter was up 9% to $41.7 million, or $0.44 per diluted share, compared with $38.1 million, or $0.44 per diluted share for the same quarter in 2006, based on 94.8 million and 81.6 million shares outstanding, respectively.

As Rich discussed, this includes a one-time pretax charge of $26 million, or $0.16 per share, related to an impairment of the NYMEX investment in energy derivatives broker Optionable. Excluding the one-time charge, net income was up 48% to $56.4 million, and diluted EPS was $0.60 for the second quarter.

Clearing and transaction fees rose 33% to $137.4 million as compared to $103.3 million for the second quarter 2006. Average daily volume rose 23% to approximately 1.4 million contracts as compared to 1.1 million contracts in the second quarter of 2006. This growth continued to be driven by an increase in NYMEX's electronic volume on CME Globex, which was 608,000 contracts per day and represented a 443% increase over second quarter 2006 electronic volume. COMEX electronic volume on CME Globex averaged 101,000 contracts per day, an increase of 494% over second quarter 2006 electronic volume.

Average daily volume on NYMEX ClearPort increased 12% in the second quarter of 2007 to 309,000 contracts per day from 276,000 contracts per day in the comparable period of 2006. In terms of rate per contract for the second quarter, you'll recall that, on May1, a new NYMEX member fee schedule went into effect. We've seen two months of that effect in our results. For the second quarter 2007, gross average rate per contract across all venues was $1.56, while the net rate per contract, which strips out transaction cost, was $1.29 as compared to an average rate per contract of $1.45 and net rate per contract of $1.33 for the second quarter of 2006. The increase in the gross rate per contract was driven by ClearPort clearing and volume mix. Direct transaction costs were $24.3 million for the second quarter 2007 versus $8.1 million for the second quarter of 2006.

Market data revenues were $23.4 million for the second quarter of 2007 as compared to $15.9 million for the same period last year, an increase of 47%. This increase was primarily driven by an increase in number of units and revenue per unit, 133,000 OE2 and $50 respectively during the second quarter of 2007 as compared to 117,000 O35 and $40 respectively during the second quarter of 2006.

Total operating expenses, excluding direct transaction costs, were down 8% to $41.8 million, and that included $840,000 of severance cost for the second quarter of 2007, and $45.3 million in the second quarter of 2006. This was driven primarily by the company's cost-cutting initiatives. Compensation expenses were a total of $20.5 million for the second quarter of 2007 as compared to $19.2 million for the second quarter of 2006. Non-compensation expenses, excluding direct transaction costs, were $21.3 million for the second quarter of 2007, down 19% from $21.6 million for the second quarter of 2006.

Let's move on to non-operating income and expenses. Investment income was $6.1 million for the second quarter of 2007 as compared to $1.4 million for the second quarter of 2006. Losses from unconsolidated subsidiaries were $28.9 million, which includes the $26 million impairment charge related to our investment in Optionable. The remainder relates to our Dubai and CAREX ventures.

Pretax income was $74 million as compared to $69.3 million in the second quarter of 2006. Excluding the one-time charge, pretax income was $100 million. Pretax margin, defined as income before provision for income taxes divided by operating revenue, investment income, interest income from securities and lending net of interest expenses, and (inaudible), and securities, lending and direct transaction costs, was 51% in the second quarter of 2007 compared with 59% in the second quarter of 2006. Excluding the one-time charge, the pretax margin was 68%. The effective tax rate for the second quarter was 43.6% as compared to 45% in the second quarter of 2006.

Let me briefly hit on the record results for the first half. For the six months ended June 30, 2007, NYMEX recorded total operating revenues of $327.8 million, a 40% increase from $234.2 million for the first half of 2006. Net income rose 37% to $98 million versus 71.8 million in the first half of 2006. Diluted EPS increased to $1.03 from $0.88 per diluted share for the 2006 period based on 94.8 million and 78.4 million shares outstanding respectively. Excluding the one-time charge, net income increased 57% to $112.6 million, and diluted EPS was $1.19 for the six-month period.

Now I'll touch on a couple of items on our balance sheet. At the end of the second quarter we had approximately $473 million in cash and marketable securities. Our working capital was $502 million. Capital expenditures were $3.6 million for the second quarter of 2007 as compared to $6.2 million for the second quarter of 2006.

With that, I'd like to return the call back to Rich.

Thank you very much. At this point, we'll address questions.

(OPERATOR INSTRUCTIONS.)

Ken Worthington with JP Morgan.

Hi. Good morning, and thank you for taking my questions.

First question for Jim, can you talk about the recent Senate testimony? What were your conclusions, and what, if any, changes do you expect for energy trading in the U.S.?

Thank you, Ken. That's certainly a topic on everyone's mind now, and we do expect Congress to take action on this topic when they return from the August recess.

I think it became very clear during the Senate investigation and hearings that they wanted to address transparency within the ECM marketplace, [most] specifically ICE. I think that certainly was the target. It's our viewpoint, and the opinions that we've given to both the Senate and the House and to regulators since the hearing is that, when you have an ECM marketplace that operates like an exchange-type market, it's listed as a traditional type exchange product, it's very closely linked to a traditional exchange product, and that it serves the same effective purpose, that that should trigger basically three things.

One, it should increase transparency within that marketplace predominantly through the large trader reports submitted to the CFTC. Second, that it should kick in some type of position [accountability] or position limits, and thirdly, that that entity should have to serve some type of self-regulatory oversight so that it does have the authority to police people that are operating within their marketplace.

So, in a nutshell, that's what we're expecting. We think that a majority of the Congress agrees with that approach. We actually think a majority of the regulators agree with that approach, as well, and expect that to be put in place this fall, Ken.

OK, great. Thank you.

Second question, NYMEX is in part a cost-cutting story. As you look at improving operating efficiency, what are the next steps that we should expect? And maybe if you can give us a little bit of a sense of timing, that'd be helpful.

It's hard to come up with [exact] sense of timing. And the story we've always told, a lot of our cost-cutting initiatives have to do with the floor. You can see by our results what we've done at this point. We've been very successful in cutting our operating expenses. One thing that did come through in this quarter for the first time was the member benefits savings, which approached about $1.4 million. We did have additional RIFFs of 25 additional people this quarter, which was about $850,000 in severance costs. So, over a period of time, on a 12-month run rate, we saved about $9.5 million in our cost efficiencies.

We continue to look up and down the P&L and, wherever we can in all areas, we look to be [most efficient].

This is Rich Schaeffer again. Jim and I are in the process of developing a substantial cost cutting program. You ask when, although we can't specifically tell you when, I will tell you that, this quarter, we will make significant reductions. Can't tell you the areas right now, but Jim and I are in the process, along with Ken, with making this quarter a significant reduction in our costs.

OK, thank you very much.

Maybe lastly, raised prices this quarter. If you'll answer it, what are your intentions for the future? And if you won't, maybe you'll talk about how you think about balancing the near-term earnings that come from additional price increases with the -- balancing that with the long-term growth that could come from keeping prices artificially low.

There are a couple issues there. Number one, we are still extremely competitive with our competitor. The majority of our business, which is member firm, is priced substantially lower than our competitor's prices still. We had a May 1 increase. We did not get -- we had virtually no negative impact from that. Couple phone calls, and that was it, to Jim. We turned around again and raised all of our non-electronic volume $0.10 a side. Again, other than a few phone calls, we had very little pushback.

We think we're in an extremely powerful position with the pricing ability that we have. Although we will not state when we might look to increase it again, it is surely a tool that's available to us as long as we deem that it won't have a negative effect, which it hasn't, and we don't anticipate it having going forward.

OK, great. Thank you very much.

Patrick Pinschmidt with Merrill Lynch.

Thanks. Good morning.

Rich, pulling up on your comments on Optionable, in terms of how that played out, does that in any way maybe dampen your interest in looking to partner with other brokers in the future?

No, it doesn't. We went into a venture. We did substantial due diligence. We hired [Scad and Arks] and a number of other entities to do due diligence. Nobody came up with the -- we probably missed some of the correct due diligence to our own misgivings. If it changes anything, it changes the way that we look at deals in the future in terms of scrutinizing down to dotting the last I in any contract. It does not scare us away, yet it teaches us a lesson and makes us more careful in going forward.

So, certainly there's still opportunities then to partner with other brokers as a way to kind of grow out -- grow your business.

Absolutely. We are still very positive about the [voice] broker community. We are still committed to them. There are a number -- most of them, if not all of them out there, or most of them, are strong companies that we feel very comfortable. They're our partners now by virtue of sharing revenue with us. But, we continue to look at other long-term strategies with the broker-dealer community.

We have established a partnership called ConfirmHub, as you've read about recently, which is a group of broker-dealers, including ICAP and others, ICAP, GFI, and that's a very positive step. We will continue to forge relationships. We think that area is a great area of growth, and we'll continue along that path.

Great. Great. Thanks.

And then, just picking up briefly on ClearPort, obviously very nice trend here in the rising sort of net rate per contract. Can you maybe give us a sense for the changing composition of the product and the geographic mix during the quarter? I know in the past, as you've moved outside of the core natural gas business and into Europe, that's helped with the rate. Is that kind of a continuation of what we're seeing now?

Absolutely. You'll continue to see growth in Europe. Originally, it was predominantly, it's not -- 90%, 95% a natural gas product. It is now venturing out to others, moving into European, moving into crude oil. We have plans, although we won't talk about them now, to broaden our base of products beyond just metals and energy in the ClearPort area, which are all part of this year's projections for Jim and I and our technology person, [Sam Gere], to move on with.

So, you will see non-energy, non-metals, come into the fray this year for sure.

Excellent. Thank you very much.

Chris Allen with Banc of America.

Hey, guys, how you doing?

(Inaudible.) Hey, Chris, how you doing?

Good. Just following up on ClearPort, can you discuss plans to roll out ClearPort products on Globex? I know you talked about it a little bit in the past. Where are you in terms of rolling those products for full electronic trading on Globex?

I'm sorry. Can you please repeat that, Chris?

Sure. Just in terms of rolling out ClearPort products onto Globex, you guys have talked about that in the past. Where do you stand in terms of rolling those products out into Globex?

Can't comment on that.

OK.

And just on the expense base, can you give us any color ...

Just to correct that a little bit, you said rolling out ClearPort products on Globex. We have not talked previously about rolling out ClearPort products on Globex. Just to be clear, ClearPort is not a Globex product. It's a cleared and traded entity that exists solely on NYMEX, and we haven't discussed or even entertained rolling out ClearPort on Globex.

OK. That must have -- misunderstood.

No problem.

Just in terms of the expense base these days, can you give us any color in terms of how it breaks out between the floor and non-floor expenses?

No. I'm sorry. At this point, I can't. as I said, we're in the process of making a very concerted effort to reducing our costs in this quarter, and we're in phase two cost cutting now, which is the beginning of a significant one, but we cannot identify at this time the specific cuts.

OK. Thanks a lot, guys.

Howard Chen with Credit Suisse.

Good morning, everyone. I just wanted to start with a bigger picture question. Since we were here three months ago, we've had the DoJ approval of the CME and CBOC merger, and the closing of that deal. I guess with that as a backdrop, I wanted to get current thoughts on the competitive environment and industry consolidation now that that deal is now finally behind us.

Our thoughts are we follow it closely. We look at all opportunities. We weigh our opportunities. We are aware, very cognizant of the fact that the industry is getting smaller by consolidating, and we're looking at all of our opportunities.

And competitively, as CME is obviously a great partner of yours, any kind of updates there?

CME is absolutely a great partner. We have great relations. As Jim said earlier, we've set records of almost 1 million contracts in a day in a period of very low volatility, which is a pretty good sign for things to come. And we're very comfortable with our competitive nature, and we're very comfortable with CME as our partner.

OK. And then, second question, on the continued success of the electronic migration of the products, I know you've given out some statistics in the past. Is there any way to parse out whether it's existing customers trading more actively, or is it new customers driving the incremental growth?

It's clearly a combination of both. There continues to be a very large influx of money into the fund area into energies and metals in the fund area. We see it. It's very clear to us. it increases by billions of dollars at least every quarter. And we see it as both new participants and current people trading more, as well as the proprietary trading shops. The prop shops and the black boxes are getting more sophisticated, coming in more. (Inaudible) Globex only since really September of this past year. They have tens and tens of thousands of users. Each week that goes by, more and more of those users are calling and setting up to participate in trading energies and metals.

So, I think it's pretty broad-based in terms of the new volume and the new growth.

That's helpful. Thanks.

And then, Ken, I had a quick question on the numbers. I know you mentioned the severance figure on the call. But, can you walk us through some of the moving parts of the compensation line this quarter versus last quarter, the impact of the severance, incentive comp, insurance comp? I know you've been helpful in kind of parsing out those things in the past.

Well, in this quarter we had about, like I said, $850,000 worth of severance cost, and last quarter we were roughly around about $1 million or so as well. So, that obviously increased our salary line. And I would say, just everybody note for the next quarter, I'd probably put a placemarker in there, the severance costs around the same area, 800 or so.

We definitely had an effect of our decrease in our salaries from quarter to quarter based on our run rate for our risks that we've had that have also decreased our salaries spent, as well. We did have this quarter also, we had some capitalized payroll, relatively small, in relation to SOP98 of about $140,000.

But, the two moving components for our compensation line, basically, is (1) obviously our management equity costs, which have increased slightly as well, and I'd probably put about a $200,000 placemarker a quarter for the third and fourth quarter going forward. And that's based on some promotions that we had, some additional hires that we had, as well. Continue to see going forward those run rate savings from our RIFFs.

In addition to that -- it's Rich Schaeffer again -- it's reasonable to assume that you will see our costs for the redundancy costs continue to increase. Ken says to effect about the same. It's very possible that those numbers will increase dramatically as the potential of staff reductions are there, and we're looking at it very closely.

Thanks.

And then, Ken, apologies if I missed this in the prepared remarks, but the other other expenses, what's going on there with the significant reduction quarter over quarter?

That's the member benefits.

Oh, got it. OK.

And then, final question for you, can you just give us an update on the litigation with ICE as it stands now?

Yes. Did you say the -- I'm sorry, repeat that -- was that the litigation with ICE?

Correct.

Yes. We had an appeal go on in November of last year. I think it was about November 15th. And the appeal was [in] consideration for what we claim are our proprietary rights for the settlement process that ICE uses and mirrors. Although we can't say what will happen in ICE still, we don't count it as part of our expectations for the future. We think it's actually pretty interesting that they've taken this long to do it. We've hired some independent lawyers that went and reviewed the case as it was transpiring, and we believe that our chances of winning on appeal are very reasonable, although we don't count them as part of our expectations for the future.

Thanks so much for taking the questions.

Rich Repetto with Sandler O'Neill.

Yes, good morning, guys. Solid (inaudible).

The first question is, on the -- you're migrating a whole bunch of volume to electronics. And if you look at -- overall volume's now more than half. And even if you remove ClearPort, you're up to 70% in the NYMEX and the COMEX.

So, I guess the question is -- and not talking about expenses, Rich -- but, when does that 80% rule kick in, or when could you foresee that happening? And what would be the steps that you would take?

Well, first of all, it's 90%, Rich, not 80%. It's when it hits 90% that that event actually triggers. Even when it does hit 90%, 90-10, the Board has to determine what they would take place, or what event would trigger that happening. In other words, the Board would have to address whether it has to stay at less than 10% for -- just for example, six months or whatever the time frame may be. But, it's up to the Board to determine that. So, just because it hit 90-10 or under 10 for the open outcry does not mean that that would go into effect. It's still a Board decision to see at what point and time in the future that event would be triggered.

Understood. I mean, just from an outsider looking in, the only way to really reduce expenses is going -- seeing that you've done -- you're at 6, 70% margins now, there's only one or two -- one place to go, I guess. But, anyway, that ...

Well, yes. Rich, there's significant opportunity, even at the current rate, to change the way we do business in terms of the size of the floor operation, in general the location of the floor operation, although the newspaper had me selling the building as a hotel. It's not true. It is not a hotel, and Jim does not have the top floor.

But, we are looking strongly -- without regard to the 90-10 situation -- with regard to that open outcry has diminished substantially to what areas of reduction, including changes of the way that the floor currently works, size of the floor [inside]. So, again, these are things that I believe you will see in the very near-term, or in the near-term future, Rich. These aren't things that are going to be put off for six months or waiting until we hit 90-10. That's things that we're addressing here and now.

Understood. That's very helpful.

And I know the lawyers are there, and I know they keep a tight rein on you, Richie.

Rich, they're sitting on my lap.

I think there's probably five of them there. But, I guess the question is, in regards to industry and consolidation, after the major transaction in this space, namely the CME-CBOT, at least from -- again, not -- without talking specifics about the NYMEX, but industry consolidation is a lot more intensified rumors at least being reported by the press. I asked the same question to the CME.

But, the question is, is there an elevated level of discussions, you believe, across the industry on consolidation now that that transaction's done?

Jim and I talk about it every day. Can't comment any further.

OK. Thanks, guys. Good quarter.

Jonathan Casteleyn with Wachovia Securities.

Hi, good morning. Hi, how you doing?

Just curious where the Optionable charge leaves us. Is that a full charge on that investment, or is there a remaining residual left?

No. We have a residual of about $3.2 million, Jon.

But, in addition, I just want to mention that we are looking at our legal remedies here, and there are potentials to potentially recoup some of that money.

So, anything remaining would be -- I mean, if there were another charge, it would be $3.2 million pretax?

That's the most that it could be.

The most it could be.

Got it. OK, thanks.

And then, just wondering, if we're looking -- if we're talking a year from now, I'm just wondering if you could rank and file your current growth initiatives. I mean, what exactly is the best venture, and what do you think will accrete or produce the best results of the things you have in the fire?

Well, I think if you look at exchanges across the board, there remains to be siege opportunities with regard to organic growth. And the Brent contract that we just listed, we talked about, we did 3,000 contracts the first days. We think with the margining opportunities, we have an opportunity to grow that business substantially. The Dubai contract with Oman, the Canadian joint venture, we think there's a lot of opportunity for organic growth. But, probably internally, the potential growth for ClearPort remains a huge opportunity for us. It was asked earlier about growing outside the natural gas arena. We're very aggressively listing new contracts, both in the energy and metals area, and outside the energy and metals area.

So, we think as time goes on, as more and more companies recognize that they can shift the risk from their books to the NYMEX clearinghouse, that that creates tremendous opportunity. We're very focused on the European business at this point. We know that there are tremendous opportunities there. We're just trying to make decisions about how best to take advantage of those opportunities.

So, how does that process start? I mean, is it marketing or is it new product introduction, I mean, if you're really going to re-leverage ClearPort or continue to try and leverage the platform?

Rich Schaeffer again. There are really a number of different ways. Yes, marketing is one, new product development, research is one. But, one of the biggest areas of growth, both within the United States and in Europe, is partnerships or acquisitions. Not saying we're looking to make any major acquisition, but partnerships and partnering up with the right people, like we did with the Montreal exchange in Canada. We're also looking at a number of ventures that are in mostly very similar areas to us, but non-similar areas, as well. So, partnering up with the right people. We don't believe that copying someone's contract and just put in (inaudible) is the way to grow the business. We believe partnering with the right people in that area of the world is the way to build and keep business for a long period of time.

OK, great. Understood.

And then, I'm just wondering, is there any way to do a volume break-even analysis on the DME? I mean, when does that venture turn profitable? I mean, it looks like it was about $2.6 million, $2.7 million in loss this quarter. I'm just wondering how does that -- when does that break even?

We can't -- you know, again, it's open to how the volume grows. We're happy with the growth. I really think we're still a ways away from break-even there, and we still have some work to do, although I think it's a great thing, coming out with a new sour crude contract. It's going to take a while for people to get comfortable with the new contract, although they've done very well, and it's meeting our expectations. I can't put a date on it. It wouldn't -- my lawyer would actually be very displeased if I did. But, we anticipate continued growth there and, within a reasonable amount of time, we believe we can make it profitable.

Got it.

And then, just lastly, I know it's not your issue, but the CME outage last week, can you provide some color exactly as to how that unfolded and what was the remedy, if any?

Well, it's funny. The day they had their outage, we actually had a record volume day. So, I don't think we're going to ask them to have an outage every day, but it's an aberration. Very, very, very seldom do we have a problem with the CME. Where we do have a problem with it, they address it very, very quickly and are extremely cooperative and in touch with me, Sam Gere, our Executive Vice President, and Jim immediately, and we address it. And again, if we've had just a couple since we've been open, that's an astronomically small number of outages for a very, very, very vibrant system.

So, we're extremely comfortable with the robustness of that system. If you were to look at other systems out there, you would see that they have had a number of breakdowns over time. So, we're very, very pleased with the small number of breakdowns and the immediate attention to them.

Right. Do we know exactly what went wrong, though? Was it just information overflow?

We do know what went wrong, and it was a minor thing that needed to be addressed. And we don't like to put out specifically what it was, but it was nothing that impacts the system on a long-term basis, nothing that jeopardizes the system, or nothing that the CME can't handle in very short -- handled in very short order.

Got it. I appreciate your time. Thank you.

Mike Vinciquerra with BMO Capital Markets.

Thank you. Good morning.

One thing, on the option side, as you guys have moved over to Globex on the options, do you guys have currently any incentives out? I know the CME has incentives on their option contracts to try to drive adoption. You guys doing anything in that regard?

I'm sorry, can you repeat the last [sentence]? Do we have any intent to what?

Do you have any incentives right now on the options that you're allowing to trade on Globex? You've moved over to that platform for the option side. I'm just curious if you've got incentives, because I know the CME currently has some incentives to drive ...

We have a market-maker program that has about a dozen people that participate, incentive-wise, in getting involved. We've actually seen tremendous early growth on days doing over 20% of our volume in options electronically. And for just under a month old, that's a pretty solid number. Our partners -- and our partners being the market makers -- are very comfortable with the way it's going, and we see the growth continuing. Right now it's probably 5% in crude of our total volume, and 20% in natural gas, which is very solid numbers for this early on.

Great. Thank you, Rich.

And then, just want to ask, you mentioned ...

There is -- I'm sorry, but we continue to set overall record in options monthly.

Very good. OK.

You mentioned Russia, and I'm just curious how that fits in with the DME contract. You mentioned it's a sour crude that you're looking at in Russia. Is there going to be a complementary product, or are they going to be completely separate altogether?

I just want to caution that our efforts in Russia, or Jim's efforts in Russia, are part of a long-term overall strategy. We do not expect any significant income coming from it in the near point. However, we are cooperative with governments in forging and educating them in trading and how to grow it. We're currently investigating what would be the best situation there, although I will say we don't intend to spend significant dollars to do it. It will be more through education, staff swapping, sharing. It won't be something that's going to take an extraordinary amount of time, employees or efforts. It's more of a mutual joint effort to develop a program in that area of the world. So, I'll turn it over to Jim, but I just wanted to mention.

Yes. Rich is exactly right. We're in the very early stages of working with the Russian government on their commodity exchange. This is a long-term project. But, with regard to your specific question, we would view a Russian contract as a complement to the Oman contract, not as a competitor. As a physical delivery exchange, and you look at where the physical flow of the Russian versus the Middle Eastern oil flows, obviously the Oman oil flows more toward the Asian community. The Russian oil flows more toward Eastern Europe, so we think they could be very good complementary contracts.

Great. Thank you, guys.

Niahm Alexander with CIBC World Markets.

Good morning. Thanks for taking my question. Most asked and answered.

But, [can I lead] back to ClearPort? I guess ICE made it clear that some of their customers prefer to be clearing under a U.K. regulator. And knowing there's more opportunities for ClearPort abroad, is that something that you're looking at, you're visiting, or how should we think about your proceeding with that opportunity?

Yes. Let me address the first part of that. I think when you look at -- you talked about regulated in the U.K. with regard to OTC contracts. But, when you look at the Inter-Continental Exchange, their futures component is regulated by the U.K. Their OTC component is not regulated either in the U.K., nor in the United States. So, certainly, there have been some people that have preferred to operate in the non-transparent marketplace, but we think the efforts of the U.S. Congress that will take place this fall will create more of a level playing field to create transparency, position accountability and regulatory oversight virtually the same between the ICE over-the-counter market and ClearPort.

In addition to that, yes, we expect to continue to grow out ClearPort overseas in [energies], metals and other things to come in the near future.

OK, thank you. That's helpful.

And then, if I can move back over to Montreal, can you just give us an update on the progress there? I know it's early days yet, or maybe in terms of your capital spend so far relative to commitment, and then hiring or new products.

We made a commitment for a couple million dollars to get started, both us and our partners in Montreal. We are very pleased with our partners in Montreal. We continue to work aggressively. We've retained a very good small staff, but good staff, from very, very key areas in the industry. We are operationally just about set to get going. We're already building the Permian Basin Natural Gas contract with them. And by Q4, we will be rolling substantially with a whole business running very -- we anticipate very smoothly.

Thank you. That was Q4 this year?

Yes.

Thanks.

And then, just to get back to the clearing and the Senate, so I understand it clearly, where you expect right now to come out would be -- you said a leveling of the playing field. What could that mean for NYMEX's OTC business?

Jim, would you take that, please, leveling of the playing field in the regulatory?

Yes. We think we're well on the way to leveling the playing field. As I commented with Ken's first question, the hearings in both the House and the Senate a couple of weeks ago we thought were very productive. It highlighted not just an unlevel regulatory playing field but, more importantly, it highlighted some systemic risk within the marketplace. And the [AMRA] scenario just highlighted that systemic risk. The Congress and the regulators realize it. So, we think in terms of large trader reports, position limits and accountability and self-regulatory oversight, that the playing field will be leveled as early as this fall.

OK, that's helpful. I'll be back after. Thanks so much.

Don Fandetti with Citigroup.

Hi, a quick question on the Oman sour crude, Rich or Jim. Just trying to get a sense on what specifically needs to be done to sort of ramp that volume up. Is it going to be a slow migration up, or is there something that happens that it gets you to a tipping point?

Well, I think with the introduction of any new benchmark contract, and if you look back at WTI, Brent, you know, all the benchmarks, it takes a bit of time to build volume and open interest. People are trading the contract daily. They're developing a comfort with it. we've gone through an exploration. We're going through the first delivery process, and people just want to get a comfort with that process. We think as we develop and utilize the implieds, it's going to create more liquidity. But, at this point, it's an education process. A tremendous number of market users are hooked up to the system. They're just developing a comfort with the contract and the delivery mechanism. And we expect that we're going to see substantial growth in the Oman contract.

OK, thanks.

Rich Repetto with Sandler O'Neil.

Yes. Hi, guys. Can you hear me?

Yes, Rich. Actually, we'll take your question then one more, and then we're going to close it up.

Yes. This will be very short. You talked about the ClearPort volumes, and we've talked a lot about options. And this natural gas volatility right now is off the charts in the journal. And I guess, Rich, you've been in this business much longer than any of the analysts. Is this the best environment that -- for natural gas right now, trading? Or what type of -- how would you compare it to other periods, like the beginning of the year?

Well, it's hard to compare it to other years. Whenever we go into the hurricane season, anticipation and the reality of events that happen clearly drive the volume. And the number of players in the natural gas market continues to increase, from the prop traders to the funds. Even though we've lost some of the larger funds, they've quickly been replaced. The traders that were in all those funds somehow seem to appear in other funds, and are trading quite substantially.

So, this is normally a time of year where we see and anticipate increased volume and volatility. And I think if you look at the last few weeks and how we've had these periods of extreme trading and days over 2 million and such, in time the average goes to what the high-water marks are, although I won't pick what that time will be. I think the volatility increase that's here and coming, the high crude prices, the hurricane season, are all going to lead to weather-driven markets as well as geopolitical markets. And I think we're coming into a period of high volatility.

Super. Thanks, Rich.

Thank you, Rich.

One more question.

At this time, there are no further questions.

Thank you very much.

Great. Thanks very much, everybody.

This now concludes the presentation. You may now disconnect. Have a good day.