芝加哥商業交易所 (CME) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to the CME Group fourth quarter and full year 2007 earnings call. As a reminder, today's conference is being recorded. As this time for opening remarks, an introductions I would like to turn the call over to Mr. John. [Peesher]. Please go ahead, sir.

Thank you, and thank you, everyone for joining us this morning. Craig Donohue, our CEO and James Parisi, our CFO will spend a few minutes outlining the highlights of 2007 and the fourth quarter and then we will open up the call for your questions. Terrence Duffy our, Executive Chairman, Phupinder Gill, our President and Rick Redding, our Head of Products and Services are also here this morning and will participate in the Q&A session. Before they begin I will read the Safe Harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumption 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 in the investor relation section of the CME group website. During this call we refer to GAAP and non-GAAP pro forma results, a reconciliation is available in our press release and there is an accompanying file on the investor relations portion of our website that provides detailed quarterly information on both the GAAP and pro forma basis. Now I would like to turn the call over to Craig.

Thank you for joining us this morning. In many ways, 2007 was a transformative year for CME group. Not only did we complete our historic merger with the Chicago Board of Trade, but we also delivered tremendous growth and financial results in our core business and positioned our company for future. Total combined trading volume of 2.8 billion contracts grew by more than 29% compared with the prior year with strong performance in every product line. We delivered our 7th consecutive year of volume growth above 20%. Our solid performance reflects our continuing efforts to expand our customer base, improve the speed and functionality of our systems, and develop innovative new products and markets. We certainly proved we could multi-task 2007. In addition to our volume growth, we continued to execute on our growth initiatives. Hosted by our CME GlobeEx electronic trading platform, NYMEX energy and metals product volume more than tripled from 2006 to 2007. Averaging 760,000 contracts per day. Fourth quarter average daily volume rose 130%, representing the sixth consecutive quarter of record volume. We continue to deliver innovative products during 2007 including contracts based on the MSCI emerging markets index, the emini S&P small cap 600 index, and the Lehman Brothers aggregate bond index as well as new commercial real estate and weather contracts. Additionally, we announced plans to launch volatility quoted options in our FX product line beginning in March 2008. Volatility based quoting is the quoting convention most commonly used in the OTCFX market. As a result of our efforts, we delivered outstanding financial results during 2007. For 2006, I was proud to report record stand alone financial results with $1.1 billion of revenue and net income of $407 million. In 2007, on a combined basis, our revenue and net income virtually doubled to $2.1 billion and $817 million, respectively. As we turn to 2008, we have many reasons to be enthusiastic about the opportunity at hand. First, the integration to date of the CME and CBOT has been smooth and our customers and shareholders are now seeing the benefits created by our merger. Just last week, our technology team did a tremendous job of completing the GlobeEx integration for all CBOT agricultural, equity index and interest rate products and we are now fully prepared to complete the combination of our trading floors by mid-May. As promised, we are on track to deliver at least $150 million of run rate synergies by the end of the year. Second, we continue to broaden the distribution of our highly relevant product set around the world. Recent partnerships in Brazil and Korea highlight our global mind set and we intend to continue to expand our reach. Third, we made a recent announcement regarding upcoming significant technology speed improvements. We are focused both on the speed within the walls of our data centers and the speed of orders and market data between us and our customers. Finally, here at CME group, we help our customers manage risk through the use of our products. Since we became a public company in 2002, there has been no greater need for risk management than right now. Fortunately, we provide the broadest set of products and the most robust and reliable technology platform coupled with the safety and soundness of the CME clearing house. Most importantly, we have significant pools of liquidity which our users greatly benefit from with whether they are hedging risks or attempting to speculate on short-term price movements in our various products. Before I turn the call over to Jaime, I will provide a few additional details on some of our recent announcements. First, following unanimous approval by the Brazilian Mercantile and Futures Exchange Board of Directors, we executed our definitive agreement with the M&F which we discussed in detail during the last conference call. We expect this deal to close in Q1, following a vote of the BM&F shareholders on February 26. Our technology and clearing groups will be working very closely with our partners in Brazil. We currently expect to provide order routing in the second half of 2008 when we also bring our telecommunications hub in Sao Paulo on-line. We will work closely in conjunction with BM&F's own technology development plan. We look forward to providing our customers more direct access to BM&F products and to more effectively distribute CME Group's products to traders located in Brazil. Furthermore, we continue to forge ahead with plans to increase volume growth in Asia and in addition to our proposed agreement with the Korea exchange, we are also working to accelerate the distribution of our products into China through our strategy with CFETS and the People's Bank of China. Second, we announced that we will significantly improve the processing speed for all of our electronically traded products. Testing under a replay of peak market conditions indicated that the upgraded CME Globex platform may reduce response times by up to 50%. Our timetable is to deploy the speed enhancement first to all currency products next week and to bring on additional products each week until we are finished with all CME group and NYMEX products by the end of March. If history is any guide, we expect the improved speed for orders and market data to increase our volumes and deepen our liquidity. In addition to speed, reliability is also critically important, especially during peak times like right after an FOMC or nonfarm payroll announcement. Scale is also very important. In January, we handled more than 3.5 billion orders on our Globeex platform and we have the scalability to handle significant growth from here. As a comparison, in January 2007 we processed about 1.2 billion orders. Third, following the close of our merger we reached out to our Treasury product customers for their input on potential enhancements that could make the Treasury products more successful when they transition to Globeex. In listening to our customers and in conjunction with the analysis that we did, we announced several important changes to our Treasury products. We plan to reduce the tick sizes beginning on March 3 for the 30 year U.S. treasury bond futures contract and both the five year U.S. treasury note futures and options contracts. When customers consider the all end cost of trading, these tick size changes make the products even more competitive with their cash treasury counterparts. We have heard very positive feedback from our customer base as these changes bring the prices for futures into parody with the cash Treasury products. We are confident that these adjustments will make our Treasury products increasingly attractive alternatives to the cash treasury market. And finally, we recently began to offer block trades for the first time ever for certain CBOT interest rate products to better facilitate the execution of large transactions by futures and cash market participants and harmonizing the trading rules between CME and CBOT interest rate products. Historically these types of trades were done entirely in the cash treasury market. Once again, customer feedback has indicated that there had are several users interested in the ability to execute block trades in these products. Turning to our OTC initiative and interest rates, yesterday we announced that 33 buy side participants have committed to an early adopter program for CME on swaps on swap stream. The first centrally cleared interest rate swaps available to all OTC market participants. These new products will be centrally cleared through CME. The firms representing a wide spectrum of U.S. and European financial institutions will lead the effort to bring this new and innovative product to the $272 trillion interest rate swaps market. They will be the first financial institutions to benefit from the balance sheet and operational efficiencies through central counter party clearing and straight through processing offered by CME clearing. In conclusion, we had a busy and prosperous year in 2007 and 2008 is off to an even better start from a growth perspective. We remain very confident about our future success driven by our diverse product set, leading technology and clearing capabilities and certainly the considerable talent of our entire employee base. Lastly, I'm sure you have questions about the release that came out last week about our negotiations with NYMEX. We will not have any further comments about these negotiations beyond the information in the release until we either reach a definitive agreement or the discussions are terminated. Now I would like to turn the call over to Jaime to discuss our fourth quarter financial results.

Thank you, Craig. The GAAP results for the fourth quarter were outlined in detail in the press release. In summary, we delivered net income of $201 million or $3.75 per share. Included within these results were $12.5 million of merger related operating expenses and then an $11.3 million reduction of non-operating expense related to the CBOE exercise rights privilege guarantee. The merger related costs included $4.4 million of restructuring expenses driven primarily by head count reductions, $3.7 million for the accelerated depreciation of data centers and $4.4 million for integration and legal expenses. We provided a reconciliation between GAAP and pro forma results in the back of the press release and we have also posted both GAAP and pro forma historical quarterly income statements on our website starting with Q1 of 2006. As I move on to the details of the income statement, please note that the comparisons I reference are based on the pro forma results. Our total pro forma revenue rose 23% to $530 million in the fourth quarter driven primarily by strong CME group volumes. Average daily volume was up 23%, while the average rate per contract was down 1%. Our average rate per contract was $0.648 in Q4 , down from $0.654 in Q4 last year but up from $0.622 in the third quarter of 2007. The primary driver of the sequential increase in the RPC was product mix as interest rate products accounted for 60% of total volume in the quarter compared to 64% in Q3. In addition, we had a positive change in the member and nonmember mix in the fourth quarter. Lastly, we had a favorable venue mix with 81% of the volume in Q4 traded electronically up from 77% in Q3. Quotation data fees were $50 million for the quarter, up 11% from $45 million in Q4 of 2006. At the end of the quarter, we had approximately 293,000 users who subscribed for the base devices, up more than 5,000 compared to the third quarter. In January of 2008, we increased our fee per market data screen from $50 to $55. This increase may be offset somewhat by decreased demand due to the price sensitivity of some customers and the potential impact of staffing reductions on Wall Street. Our fourth quarter processing services revenue was $16.1 million. In Q4 '07, we handled more than $850,000 NYMEX contracts per day. Up from 800,000 contracts in Q3 and 371,000 per day in the fourth quarter of last year. During this quarter, revenue from NYMEX totaled $15.6 million, which averaged $0.29 per contract. I will take a few minutes to review expenses. Total pro forma operating expenses for Q4 were $204 million, up 1% versus $203 million for Q4 last year. Comparing to the third quarter of this year on a combined basis, expenses were down $6 million or 3%. This sequential reduction was driven primarily by lower compensation expense. Total compensation expense decreased from $81 million to $72 million. There are three components. Salaries and benefits, bonus and stock base compensation, bonus and stock base compensation. Salaries and benefits totaled $54 million, down $2 million sequentially. As of December 31, the CME Group head count stood at 1,970, down 20 since the end of the third quarter and down about 180 since the merger. Next, our employee bonus accrual totaled $11 million, down $7 million versus Q3 as we reached the maximum bonus payout for the year. And finally, the stock base portion of compensation was $7 million, which was flat relative to the prior quarter. All other expenses totaled $133 million in the fourth quarter, up $3 million sequentially. Approximately $2 million of the increase was related to our BM&F transaction which primarily impacted professional fees. Operating margin was 61% on a pro forma basis, our second highest quarter ever. Investment income for the quarter totaled $15.3 million, down from prior quarters as we saw the full quarterly impact of lower cash balances following our share and ERP buy-backs. We also had interest expense of $2 million in the fourth quarter, related to commercial paper outstanding. Our pre-tax income was $338 million in Q4. Up 37% from the fourth quarter last year. Net income for the quarter was $202 million and diluted pro forma EPS was $3.77. Moving on to the balance sheet, as of December 31, we have $1.05 billion of cash and marketable securities and short-term debt of $164 million, resulting in a net cash position of $884 million. That is an increase of $151 million in net cash for Q4. Capital expenditures net of leaseholding improvement allowances totaled $74 million in the fourth quarter, driven by continued investment in our technology infrastructure including the purchase of land and a building for a new data center for $14 million. For the full year, pro forma capital expenditures totaled $159 million. I will now turn to guidance for 2008 for CME group. We expect pro forma expenses for the year to range from $835 million to $850 million. That would represent a zero to 2% increase versus 2007 pro forma expense levels driven by normal expense growth rates less merger related expense synergies. Historically, CME expenses have grown between 11% and 13% annually, and in 2008 we expect the benefit from approximately $80 million of incremental expense synergies compared to 2007. By the end of 2008, we expect to achieve run rate expense synergies of at least $150 million. We anticipate between $225 million and $235 million of capital expenditures in 2008 driven by continued technology and real estate related spend. Approximately 75% of our capital spend will be related to technology and we expect the first phase of the build out as new data center to total around $55 million. This 260,000-square-foot building will be -- will handle future volume growth and will be outfitted on a build as we grow basis. Looking ahead to 2008, we have raised the cash earnings target well above where it it came in for 2007. At target, employee bonuses would be $36 million. If we are 20% above the 2008 cash earnings target, employee bonuses would be capped at a maximum of $57 million. In addition, we anticipate the average effective tax rate for 2008 to be approximately 40%. In terms of our share count, we will issue 1.19 million shares of CME stock at the close of the BM&F transaction. We also announced today that we declared a first quarter dividend of $1.15 per share payable March 25, 2008 to shareholders of record as of March 10. This dividend represents a 34% increase from the 2007 quarterly dividend of $0.86 per share. And finally, trading volume so far in 2008 has been exceptional. In January, we averaged 14.3 million contracts per day, up 65% compared to last year. With that, we would now like to open up the call for

(OPERATOR INSTRUCTIONS) We will go to Rich Repetto of Sandler O'Neill.

Good morning, guys.

Good morning Rich.

I guess first question is just a little more clarification, Craig and Jaime, on the expense guidance. So you say 835 to 850 in '08. And then, so you will have 80 million, I guess, of the synergies. Should we look at '09 as having some growth, your normal and then a 70 million deduction from the run rate for '09 to get to the 150 total?

Just a couple things. One, the 80 million that I referenced in synergies in '08 is an incrementam number versus '07. So we're actually in total absolute synergies for '08, a bit over 100 million. And then we will hit the run rate of 150 at the end of '08. So you can expect for '09 that the synergies will be approximately at least $150 million.

And incrementally that's 50? Or is that -- that's what I'm not clear about? In '09, incrementally 150?

Incrementally in '09 over the absolute 100 or so for '08 will be $50 million.

Okay. Okay. Thanks. And then, I guess just on -- we've learned that the speed of the platform certainly impacts volumes. And from what I understand as you -- as you replace and improve speed and you sort of touched on this in the prepared remarks, but it's matching engine for a certain product set or product group. Could you talk a little bit about the schedule of how you replace these -- the matching engines so we might look and try to see the impact on volumes if we ever could versus normal volatility?

Rich, I will take that. I don't think we will provide a huge amount of transparency on that. But we have a significant multitude now of different match engines that we use, as you know, for different products and we recently actually added a significant number associated with the migration of the ECBOT products onto the CME Globex platform. At that time you know that we announced a ready of 50% improvement in response times associated with the work that we've already done. And then what we were referring to in the script was further upgrades that we're implementing that will further reduce response times we think very significantly and we will be doing that in across our different product sets.

Rich, this is Gill. Just to add to what Craig said, we are not actually replacing any matching engines here. We simply over the last few weekends brought on what used to trade as the EC CBOT on to our Globex platform, [inaudible] speed point of view we have seen, for example and only as an example, the average daily volumes of the [inaudible] products that we've got on board in the couple of weeks that they have been here have actually exceeded the average daily volume of the fourth quarter of the [inaudible] products at the Chicago Board of Trade. And in terms of the capacity issue that you brought up, just to put things in perspective, the entire Chicago Board of Trade complex has less trade transactions than the foreign exchange product that CME does here. So, capacity is not at all an issue for us in speed, as Craig pointed, out has improved a lot.

I'm just -- understood. I guess my last thing, Craig, would -- the signing of the BM&F, and I understood the routing agreement, distribution and routing, now, do you have any idea on when they will approve or likely approve the DMA and I guess you said second half for any impact. Any help in quantifying what you think -- your impact on your side from this agreement?

Well, that's decision that obviously belongs to BM&F. We were expecting that they will implement DMA on a phase-in basis within the next couple of years. We don't have anything more specific than that. They are trying to work through not just the process with their own clearing member firms, but also from a regulatory perspective. But we are very confident that they will be successful in doing that. And so, we are going to be building the linkage of our network to their environment and vice versa in anticipation of that decision being made.

Okay. Congrats on a good quarter.

Thank you.

Thanks, Rich.

We will take our next question from Mike Vinciquerra with BMO Capital Markets.

Good morning. I want to ask two questions on the product side. First of all, in the S&P side, just kind of looking at your new contracts and whether your contracts there at open interest has been relatively flat. We show for roughly five, six months and volume having peaked in October has come down a fair amount. Is this one of the situations where until we really see the transition of open interest over to ice we're probably not going to see this contract take off? Or is there -- are you satisfied, I guess is the question, with open interest in volume in these contracts?

Mike, I think you have to look at it across the whole product set because not all the users of the Russell 2000 products are specifically benchmarked into 2000 or using it because it's a small cap product. What we have seen, if you've looked at the open interest of the mid-cap product it's up 20% probably from August. As we see people starting to use that -- utilize that product as they transition out. People that use the Russell 2 because of the volatility and the lower correlation to the S&P, a lot of them have been moving to the Nasdaq product. So, I wouldn't look at it as just a one-to-one comparison. I think you have to look at it from what the customer's needs are. I think, just to your point on the small cap 600, what we are starting to see is more and more volume. We haven't necessarily seen it in the open interest yet. But that will come as more liquidity develops in the product.

That's helpful, Rick. Thank you. And then actually, another question for you. The percent of options trading electronically, we calculated at around 10% I guess in January which has been bobbing up and down between 10% in August dipping and then back to 10% in January. Are you seeing the progress there you would have anticipated? Is there another version of your user defined spreads that may be coming out in the next few months that provide some more functionality?

I don't think it's the functionality from CMEs and, Mike, I think what you see is customers getting it through their systems to put an end to the order management systems, so each time a new bank or firm puts that into their system, we tend to see a little bump in volume. Again, it's difficult to see it kind of on a month-to-month. You need look at it over a longer period of time. What we're more pleased with is actually the growth in those products, both on the floor and electronically. If you look at the absolute number of your dollar options traded electronically so -- so far, looking at January, they are up quite a bit. You are looking at about 150,000 a day. So, it's not where we would like it, but on an absolute level it's doing quite well and we will continue to push that in '08.

Understand. Okay, great, thank you. And then just one question on the tick size for the treasury contracts. How did the market makers react to that and should we from the outside kind of be looking at this as something similar to what's going on with the, not as dramatic, but the pending pilot and equity options where you are simply trying to bring the spreads down and make the products a little bit more tradeable for different types of investors?

Yeah, I will take that, Mike. I think in all these kinds of situations, we have to sort of balance the different interests of all of our customers. And generally speaking, the market makers would, I think it's fair to say, prefer a larger tick size. But on balance, having talked to our customers starting in June and July and from the completion of the merger, we just felt that this was an appropriate change. And we factored in as we mentioned I think during the prepared remarks, that we were looking at transaction costs in the cash treasury market which is the most direct substitute for customers who are using alternatives to our treasury futures products and we felt that on balance this was the best step to take in order to make our products more attractive relative to the cash market. I think the changes will do that.

It might also happen to be someone who is trying to put together a competitive market. But, thanks, Craig, I appreciate your answer.

It serves that purpose as well. No doubt about that.

Thank you, guys.

We will take our next question from Howard Chin with Credit Suisse.

Good morning, everyone.

Hi, Howard.

Congrats on the strong quarter and healthy start to the new year. I have a few questions. I guess, the first one is a follow-up for Craig. We mentioned during the quarter there was an announcement about a consortium of financial institutions creating a new exchange in targeting treasury futures. Curious in any thoughts you have on this competitive threat , how the CME franchise that is maybe different today in facing it than in the past and what lessons management learned since the major -- last major bout of competition from the

Right. Well, I mean, I think in keeping with our past practice, two things at the outset. I mean, one is, it's a serious effort and one that we take very seriously. And we tried to look at all of these competitive situations as opportunities for us to focus on our customers, make sure that we are doing the absolute best job, whether that's the product itself or whether that's the speed and efficiency of the platform or clearing and capital related efficiencies. And I think generally speaking over the last ten years whether it's in reference to CME or CBOT, we've generally embraced competition very much to our advantage. Having, I think, increased our market share relative to our competitors. So it's serious. We are looking at it very carefully.

Mike mentioned obviously that the tick size reductions and the implementation of the block trading facilities, also do help make us more competitive relative to the consortium. We would have done those things anyway based on the customer feedback that we were getting, but if it helps to make us more competitive in the marketplace there is nothing wrong with that either. So, we are taking it very seriously. I do think certain things have changed. Obviously, some of the earlier challenges involved electronic offerings versus the hybrid model we have employed.

At this point, obviously we are very predominantly electronic in the treasury and Euro dollar market. So I don't think it's really about technology. We think that with the efficiency, low cost of trading that we have, the deep liquidity, the technology and platform and clearing advantages, we will be a good competitor in this market.

Thanks, Craig. My next question is for Rick, if he's still there. On the CBOT integration, I know it's really early after the migration of Globex, but qualitatively, can you share with us any interesting early returns you're seeing among any shift in volumes, depth of liquidity in the books and broadening of the user base?

Yeah, Howard, it is early in looking at this, but we have taken some time to look at the quality of the markets and the depth of a number of the products. And what we found is across the board, there is more depth at every price level in these products and we are particularly proud in looking at the commodity-type products that we have done several tests to see how deep those markets are and we clearly see more depth and the market maker is really stepping up now that it's on the Globex platform.

Okay, thanks. And then, final one for me is on the numbers for Jaime. Congrats for finally hitting that bonus cap this year. Nonetheless though, comp was still a lot lower than we'd anticipated. Were there any CBOT cost synergies flowing through the comp line item this quarter? What I'm trying to get at is, how much of the quarter-to-quarter decline in comp expense this quarter should we think is sticky going forward into '08?

If you look at the comp, Howard, on just the comp and benefit itself down about $2 million. So that's excluding the bonus favorable variance. We had a decrease in our average staff of roughly 70 people. So that was a key driver there. And so that did -- that did flow through as a result of the synergies.

Okay. Thanks so much guys.

Thanks, Howard.

We will take our next question from Niamh Alexander with KBW.

Thanks for taking my questions. Good morning. Just on the expense synergies, can you just clarify that 835 to 850, we appreciate getting the number there. But does that include severance and restructuring expenses as well?

No, the 835 to 850 is a pro forma number, so it excludes merger related costs and they're roughly $10 million or so for '08.

Okay. This that's helpful, thanks so much. And then for Craig or or maybe Gill. On the clearing services, I was just wondering, I know we talked about it before, but, have you made any progress or will we hear something more shortly maybe about you levering the clearing business into maybe providing just clearing facilities for other products?

Niamh, we are obviously very focused on offering clearing services separate and apart from execution and trading services or products. And we are working on that right now. So I don't have a lot more to say on that. But we were obviously always looking at new opportunities clear products if we can offer something to the market.

Okay, fair enough, that's fine, thanks. And then just on soft stream and congrats on getting that list out yesterday with quite a lot of names on there. But I guess the large dealer banks who really do participate so much in the swaps market I noticed too many of those on there. Should we expect this to be primarily more of an institutional body side driven venture starting at the outset and help me think about what might be the catalyst if any, to maybe get some of the dealers engaged on it.

Clearly, we are focusing on getting some of the other banks into this program. Some of the larger banks, too, also don't necessarily want to be on a press release announcing their involvement in the fact that they may be making markets on the platform, but it is clearly something that our team is focused on.

Okay. Thanks so much for taking my questions.

Thank you.

We will take our next question from Chris Allen with Banc of America.

Hey, guys, nice quarter.

Thanks, Chris.

Just a quick numbers question. For the 1.9 million increased in share count for BM&F, should we start averaging that in as of the end of February?

It's 1.19 million and the shareholder vote on the BM&F side occurs at the end of February.

February 26.

February 26.

Closing would be shortly thereafter.

Okay, and then just following up on these questions, just on a swap stream, obviously we have seen some the challenges you guys have faced with FX market space, if you could comment in terms what you've learned with the evolution of the FX marketplace and how you intend to make swap stream a success so it would be helpful.

Yes, Chris, I think one of the things that we've recently done in market space was to change the incentive program to get people more aligned providing deeper liquidity. I think what you are seeing in the swap stream proposal is starting some of those incentive programs up front to provide -- get people to provide liquidity to that marketplace. So, I think we will start the kind of incentives the right way from the beginning.

Have the incentive programs in the FX market space had material impact so far?

Yes, they haven't announced results, but from what we are seeing the jump ball, as we call it, the incentive that just started on January 15 is actually showing very good results. So, we probably should have started those a little earlier.

Great.Then just lastly, just in terms on the block trading. If I recall correctly, you have that on the Euro dollar side. Just how big of an impact should we think about that? How big of an impact in terms of the Euro dollar trading?

From -- most of the time you see block trades in the interest rate markets people are trying to move a fairly large size. So you won't necessarily see a lot of transactions but they will tend to be pretty large in nature. And so far since we started them, where we have seen some activity is actually on the treasury options side where people have done a few blocks. But, this is another way, as Craig mentioned earlier, is to be competitive with the cash treasury markets to try to get some of those trades that we probably weren't seeing before.

Great. Thanks a lot, guys.

Check our next question from Jonathan Casteleyn with Wachovia.

Hi, Good morning.

Hi, Jonathan.

Just curious if you've actually met with some of the members from the competing consortium since their announcement in December and just curious if there's a way to understand the percentage of their business in treasuries and I think since the [dabos] conference they have actually announced also Euro dollars -- any way to get an understanding of their percentage of business in those products?

Well, we don't disclose that. But I think it's fair to say that the consortium members represent significant customers of the exchange and treasuries in Euro dollars both in terms of -- at least in terms of the buy side participants, their involvement in the market. And also the order flow providers. Having said that, though, we obviously have a very mature and well developed and diverse customer base in those products. To answer your question more directly, I mean, we have, all of us been out talking to all of our customers and clearing member firms. And I think generally speaking, we can say that we have a very good relationship with all of these customers. It's not unusual for customers to participate in consortia. You've seen that in virtually every segment of the marketplace. Certainly equities, options, energy, European markets, North American markets. So it's not surprising. I think that our job is to continue to make our customers happy with what we do in terms of transaction costs and technology and clearing, and I'm confident that we will do that. But we're very actively involved in talking to our customers on a very regular basis and will continue to do so.

Right. And these things -- these things tend to crop up from time to time. I'm curious with your robust market structure trading speeds and solvency of the clearing house, I mean, what do you think their objective is or has been in the past?

Well, I think it's not for us to really speculate on that. I mean, I think in general terms, there is certainly a mindset that it's helpful to have these kinds of efforts so that we can be very cognizant of their interest in low transaction fees or exchange fees. I don't think that's really necessary given that we've had, I think such a remarkably good history of reducing costs from market users and being the low-cost provider for the largest liquidity providers or largest traders in the market. But nevertheless, if that's what they find to be valuable, then it's hard for us to argue with that. So, I think that's a little bit of the mindset. And obviously, sometimes also you see people who are coming together in these kind of things because they want to offer different kinds of execution mechanisms. I think that our block trade facilities will respond to that as well in the same way that we've successful in implementing that Euro dollar future.

Okay, thanks for that, that makes sense. And just an update for Rick on C-fits you talked about system testing in the spring. Just wondering, do you think this is an '08 event as far as coming on stream as a revenue initiative?

We continue to work through a lot of the issues on the operational side, you're absolutely right Jonathan, that we're moving forward through that. We still have some regulatory hurdles to overcome that we are working through pretty diligently. So I am a little hesitant to say exactly when because of the regulatory issues that we are still working through. But from an operational side, we're making great progress.

Great. And then, this is a combined question for Craig and Jaime, just looking at the ERP guarantee, Jaime, I'm assuming you are booking the optionality of that put option or that guarantee right. Just wondering, so going forward, if you were to take the entire guarantee. You are left with about what, $260 million, $270 million, that is correct?

Yes. The grand total is $333 million, but we have the $159 million that we own, right?

Right, okay. So then do you know if that item is tax deductible as you run it through?

If we had a -- in the end if we have the loss, yes.

It is tax deductible. And I'm just curious, any update on legal situation? I know there was a rendering from the SEC, it sort of put back the Delaware courts. Still pretty nebulous from our end and I don't have a lot of understanding as to what the next step is in timing. Craig, could you give us an update?

There is not much to say. It is as you correctly point out, back in the Delaware court. I think it was relatively clear from the outset that the Delaware judge was going to reserve for himself the determination of the ultimate questions in the case. Which as you know relate to the ownership interest of the CBOT full member ERP holders. So that sense I think the SEC process was largely sort of a distraction from that. So it's back in the court, and we continue to have very positive view of the merits of the case for the full member CBOT ERP holders in terms of those particular issues.

Any idea of timing as to when the next milestone is?

Only the judge can say.

Okay. Thanks for your time.

Thanks Jonathan.

Take your next question from Daniel Harris from Goldman Sachs.

I was wondering, digging down a little bit more into the increased speed and technology that you guys have talked about, can you give us a sense of how many clients is that really important to versus what percent ever the volumes they may control? Then I guess sort of more on that, if you can give me a sense of how you think about increasing speed and to some extent, technology costs versus maybe keeping the speed where it is, given where you are significantly faster than most other exchanges out there but increasing things like marketing or market maker services or even something with the pricing of the product.

Daniel, if we looked historically every time we have been able to find some efficiency on the speed side we have -- we have been fortunate to have our volumes go up because the segment of clients that this really appeals to is the algorhythmic traders. Those are the folks that have really have the need for reduced speed. We said in the past, we think the algorhythmic traders are roughly 35% to 45% of the volumes. So it's a fairly significant piece of our volumes. So clearly to your point, at some point it doesn't pay to increase the speed at all. But I think we are a long way away from that. You know, for example, just to give you an anticdote on speed and how important it is for these algorhythmic traders, when we introduced the [Cole] facility for a client in Chicago, it only saved him about 50 micro seconds and we basically sold that facility out very quickly. So, we still see -- our clients are still demanding reduced speed times to improve their trading.

Just on a cost perspective, think you can see our cost per order processed or evenc ost per trade has been coming down even as we made these improvements.

Right. Thanks. I appreciate that. And Jaime, actually, you talk a little bit about the cash position you guys have and how you are thinking about capital management at this point in additional share repurchases versus keeping cash on hand for either acquisitions or other corporate events?

Sure, Daniel. We have been saying all along that we wanted to maintain the flexibility in our capital structure because we realized that the industry was consolidating and you saw the recent announcement that we are in discussions with Nymex. So there is potential there for significant use of cash.

So did you do any significant repurchases in the fourth quarter?

No. There is no -- the only repurchase that we have done is the tender offer related to the board of trade merger. There is no repurchase reauthorization currently.

Okay, thanks. And then lastly on the BM&F and the CME agreement, which is, as you pointed out, expected to start later on this year. Do you anticipate that there will be more activity from the U.S. clients wanting to trade Brazilian products or more flow coming the other way from new users in Brazil that didn't really have access to the Globex platform before? Thanks a lot.

Sure. I mean -- it's Craig. We are hoping that it will be both and that's part of the overall arrangements that we made. First of all, we obviously have a very kind of well developed and diverse global customer base connected to us electronically. So the Globex distribution network should be we think very helpful for increasing business in the BM&F products. But then similarly, there is also a lot of customers in Brazil and in Latin America who don't necessarily trade through the large global clearing member firms and who might be trading through more regional and Brazilian banks and broker dealers. So having that connectivity between Brazil and us and the telecommunications hub that we refered to should be helpful as well.

And we are looking at Brazilian investment and partnership as really the first start of what we hope will be a larger strategy for Latin America in terms of marketing and sales activity, education and training and so we definitely think that those things should be helpful for generating increased volumes out of Latin America in our products. I can safely say that, Latin America has really not been an area that we focused on yet as a company in terms of marketing and sales activity and this is certainly start in that direction and a low cost way for us to take advantage of that opportunity.

And we will go next to Don with Citigroup.

Rick, obviously there is the volumes have been very strong for whatever reason there seems to be this underlying concern in the marketplace about a potential slowdown. What are you hearing from your clients and what do you think skeptics might be missing in terms of their concerns about moderation following spike.

I think that's a big question with a lot of different pieces to it because I think first thing you have to understand the differences in our customer base. I think we've heard in the past or people have written in the past about delving which clearly we haven't seen in our products and I think the open interest is kind of the best imperical way to look at that. So if there are delving they don't seem to be doing it in the exchange traded products here.

The other thing is another customer segment that people were not looking at fully was the concept of a lot of the what I call electronic market makers, or algorhythmic that are high velocity. The whole concept of deleveraging doesn't mean anything to them because they essentially go home flat every day. So what they are looking at is the opportunity for the incremental trade for the risk that they are taking in it. What we have seen is as the markets have become more volatile, these traders obviously are enjoying probably a lot more opportunities than they have for quite sometime. I mean, I think if you look at it and segment the clients the way we look at them, what we see is very different needs for our products among the segments. And if one segment of the clients is actually changing, another segment is probably picking that trade up.

The other thing to look at is because of the depth of our products is, even if one part of a bank is their business is down, it doesn't necessarily mean the whole bank's business is down. It actually may shift to another [desk] -- for example, we've had instances in the past where people say reifies are not going to happen. But typically what you see is trading moved to other desks within the bank such as the asset liability or funding desk or the short-term desk, so -- or on the credit desk or the treasury desk. So I think it's very difficult for people on the outside to see how these shifts take place in the market. But I think thankfully, because we have a diverse user we have done very, very well and we were pleased with our customer base.

If I could follow up on that. In terms of the algo traders are there any risks that we should monitor there that might lead to that moderation whether it's a saturation in the business or any other factors?

I think at any point in time in the last five years people have always wondered that. And I think what is happening in that business is that's ever evolving business. More people come into algorhythmic trading every day. Almost literally.

And as programs evolve, people run more sophisticative programs. The nature of that business is changed to where it's not who has the fastest machine but people using very quantitative, very sophisticated programs to make more trades. One of the great things of putting the CBOT and Nymex products on the platform has been it gives people more opportunities to trade. It creates trading opportunities that weren't there before. So those are some of the things I think we had a little better look into because we get to see the volumes.

Thank you.

And we will take our last question of the day from Roger Freeman of Lehman Brothers.

Good morning. Wanted to come back to some of the competitive issues. Look -- think about this Four Seasons consortium. Maybe, Craig, could you talk about the types of products that can be most at risk, the competition, ie look at products where open interest are spread serially across the curve versus those that aren't, I think zero dollars are that way, treasury maybe not so much. As I think that's probably the biggest issue here, right, in terms of moving open interest for anyone who would try to compete?

I think that's probably a view-point that many people would share in terms of front month concentrated futures contracts perhaps being somewhat easier. I think that's probably an over simplification at least in the sense that at the end of the day our customers are making trading decisions based on the liquidity that's available. And the low transaction costs. And I don't mean by that just the fact that we are the low cost provider in terms of exchange fees. But I really mean the effective spreads and market impact costs and so regardless of whether you are thinking about a very complex product like Euro dollars with lots of spread trading across the yield curve or across the Euro dollar contracts or whether you are thinking even about a front month concentrated product like treasury futures, I think you are still dealing with the same issue which is that people are looking for the best execution in the market. And obviously we have very deep liquidity. Very, very efficient markets. And that's our greatest competitive advantage ultimately is that every second of every day as people are making trading decisions that's where the most effective market is.

Okay. That's helpful. Thanks. And I guess somewhat connected is that. The -- I think justice just sent a letter last Thursday to the treasury suggesting that the vertically integrated clearing is anti-competitive. And I guess I'm wondering -- I know what your position on that is, but how much waiting do you think their opinion on that matter has in terms of [Paulson] looking for suggestions to make market structure better?

You know, I think that there is obviously a diversity of opinion on clearing structures. And I think there will continue to be a debate about that. The reality is, is that, I've said this many times, the vast, vast, vast majority of futures and options contracts traded globally are clear vertically. And something like more than 70% or 75%.

And furthermore, you see a greater trend toward vertical clearing than you do horizontal clearing. Futures being, I think, a great example of that, of having acquired the New York clearing corporation through its acquisition of NYBOT and the and then it's announced ice clear effort in Europe essentially to take away the clearing that was previously outsourced to LCH clearnet as a horizontal provider. You have you [inaudible] totally vertically integrated. So there is -- this comes down to competition essentially. And you have some of the clearing member firms that if they could, would prefer to have a horizontally controlled low cost clearing utility. And then you have exchanges that obviously have had that for a long time.

I think it's very hard to change the way the market is currently organized. You have got very large organizations that have been very successful with these models. You see increased movement in that direction toward vertical clearing. So it's a kind of a theoretically academic debate more than it is anything. There is always going to be that debate. This is not a new issue. It's been going on for [5 or 30] years.

That it has. Last question, in terms of product that's moving over from BOT to the Globex,, I thinkyou talked about how the ag products are already trading more volume than they were. Is there any -- are there changes in functionality or order types as these electronic products migrate over that help to spur volume other than just the overall better performance of the Globex platform?

Yeah, it's not just the platform, but there are some different functionalities between the ECBOT and Globex. One of the things though is getting them on the same platform is very important for the market makers. Their ability to make markets because it's on the same platform is enhanced. That's what we have seen from the data we looked at so far is the -- we just have more depth in the market now because of the market makers. The other thing is it opens it up to more people. There are people that were more CME centric or CBOT centric. Getting them on to the same platform is actually opening up the market for new opportunities for these market making firms.

Got it. Thanks. That's helpful.

And at this time I would like to turn the call back over to Mr. Donahue for any closing remarks.

Hi, this is Jaime. Thank you for joining us today and thank you for your continued interest in CME. We look forward to talking with you again next quarter. Don't forget to vote and happy Fat Tuesday.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.