芝加哥商業交易所 (CME) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the CME Group fourth quarter earnings conference call. As a reminder today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the conference to John Peschier. Please go ahead, sir.

Thank you and thank you all for joining us today. Craig Donohue, our CEO, and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the fourth quarter and then we will open up the call for your questions. Also joining us for participation in the Q&A session are Rich Redding, our Head of Production and Services, and Phupinder Gill, our President. Terry Duffy, our Executive Chairman, is unably to join us today as he is in Washington, DC testifying before Congress. Before they begin, I will read the Safe Harbor language. Statements made on this call and in the accompany 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 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 can be found in our filings with the SEC, including our most recent Form 10-K and forms 10-Q, which are available in the Investor Relations section of our website. During this call we will 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 a GAAP and pro forma basis. Now I would like to turn the call over to Craig.

Good morning and thank you for joining us this morning. 2008 was a year marked by unprecedented dislocations in financial markets. Against this challenging backdrop, CME Group continued to effectively operate our core businesses, execute on our growth strategy, and deliver a solid financial performance. I am pleased to tell you that on a pro forma basis 2008 revenues increased 11% to $3.1 billion and operating income increased 20% to $2 billion compared to 2007. Additionally, operating margins grew to 65% compared with 60% for 2007. These resulted in earnings per share of $16.17 for 2008, representing growth of 16% from 2007. Jamie will discuss our financial performance in greater detail in just a moment. In terms of volume, 2008 was a year of immense challenges and CME Group was able to achieve annual volume growth of 4% despite these challenges. Getting into individual products, we saw outstanding performance in our E-mini products, which achieved 37% annualized growth.

Within E-minis we are really excited about the growth we have seen in our E-mini Dow product. For the first eight months of 2008 Dow Jones average daily volume of 192,000 was 74% of Russell average daily volume. For the last quarter of 2008, Dow average daily volume of 264,000 contracts is now 144% of Russell ADV. The Dow has become established as the number three product in the US equity futures market and we believe that this speaks to the strength of CME Group's overall equity franchise, including the benefits of our extensive Globex distribution network and our deep liquidity across multiple benchmark equity index products. CME ClearPort saw annual growth of 43%, with particular strength during the third and fourth quarters. CME ClearPort has been a promising addition to our capabilities and I would like to spend a few minutes discussing what we see happening there. The key strength of CME ClearPort is its flexibility, which allows new products to be listed very efficiently.

To that end, we listed a total of 141 new products on CME ClearPort in 2008, with 97 added in the four months following the completion of the NYMEX acquisition. We also listed ethanol swaps on January 26th, the first non-NYMEX product to be available on CME ClearPort. We have a strong product pipeline and will continue to build on this success by introducing new products rapidly throughout 2009. Getting into specific products, in the energy products we have seen some very positive open interest trends in the Brent contract. The Brent market share as opened -- as measured by open interest was 27% at year-end 2008, up from only 11% at the end of 2007. Our Brent market share continued to grow in January and is now at 38%. We believe this growth is driven by the benefits of the security and flexibility of CME ClearPort, coupled with CME's robust exchange traded energy platform. Our PJM power contracts, which just recently launched on December 8th, grew to average daily volume of 88,000 in January, which is a tremendous success for a new product launch.

Another noteworthy trend on CME ClearPort has been increased interest from our global non-US customer base. We saw over 400% growth in Q4 in European and Asian specific petroleum products and we are now clearing approximately 8,000 contracts per day. CME Group energy products grew 19%. Here again, we saw favorable open interest trends, this time in the WTI complex, where open increase -- open interest increased 13% from year-end 2007 to year-end 2008, and from 3.2 million contracts to 3.7 million contracts. CME Group metals products had an outstanding year with annual volume growth of 40%. The percentage of metals contracts electronically traded grew to 86% in December, up from 79% in January. We see this growth in electronic trading as an indication of significant growth opportunities ahead. To give you some additional insight into our volumes, I want to provide some detail about trends within our major customer segments.

Currently we can segment information for combined legacy CME and CBOT products. We can track our member activity fairly closely, which we categorize into four segments -- Bank proprietary trading; large hedge funds, which includes approximately the top 25 hedge fund participants; buy side proprietary trading firms; and finally, our smaller member firms and active individual traders. In addition, we have a fifth segment, the nonmember customer category, which is composed of buy side customers. On an overall basis our volume from Q3 '08 to Q4 '08 was down 21%. All five customer segments had a reduction in their trading activity, which we believe was driven by the continuing credit crisis, extreme volatility in key products, and the normal seasonal slowdown. Of the segments identified above, the group that dropped the least was our nonmember buy side customer segment, where volumes fell by 13% from Q3 to Q4.

The nonmember volume as a percentage of total increased from 18% to 20% from the third quarter to the fourth quarter, contributing to a higher fourth quarter rate per contract. The buy side proprietary trading segments volume contributions represented approximately 34% of our volume, down 1% from unusually active third quarter levels of 35%. Overall, the group has increased its percentage by the total of 2% from the first half of the year to the second half. The bank proprietary trading and small member firm active individual trader categories had sequential volume reductions in-line with the 21% overall drop in volume. This means their relative size remained unchanged from the prior quarter. Bank proprietary trading contributed 16% of volume and small member firm active individual trader members contributed 22% of volumes. Lastly, the large hedge fund group reduced overall trading volume by 32%. They now contribute between 8% and 9% of overall volume.

We have heard feedback that this segmentation is useful to understanding our business and we intend to continue to update you on these customer trends, as we are committed to providing you with as much transparency as we reasonably can. Moving on to review some strategic accomplishments from 2008 and to discuss our strategy going forward, 2008 saw CME Group execute on multiple strategic fronts. We are very pleased to have completed the NYMEX acquisition and to be focusing on integration. We have said that NYMEX was an important strategic asset for us and we have moved rapidly to leverage the opportunities it offers. This includes implementing strategic cross-selling efforts to make sure that legacy NYMEX, CME, and CBOT customers have extensive information about the powerful suite of products now available at CME Group. In addition to making good progress on the NYMEX integration, the fourth quarter also saw the completion of CBOT integration milestones.

A key benefit of these mergers has been our strengthened ability to globalize our business and we are seeing significant results from our global efforts. For 2008, our non-US trading hours volume was 17%, up from 14% for the full year 2007. Additionally, we continue to make progress with initiatives in Brazil, Korea, and Dubai. Entry into each of these markets and other global markets certainly has many challenges. However, we see these as long-term efforts that position us both to help grow our partners' businesses and to create strong relationships that will ultimately facilitate global growth for CME Group product. We also implemented technology upgrades that reduced average futures response times by 71% from year-end 2007 to year-end 2008. In addition to these speed enhancements, these ongoing technology investments increased the reliable and flexibility of our Globex platform.

They allow us to create new functionality that increases liquidity for existing products and makes viable new trading strategies, while continuing to increase speed. Moving on from our accomplishments to some of our growth plans, I mentioned at the beginning of the call that 2008 was a year of challenges. Clearly we see negative impacts from the credit crisis into 2009. However, balance sheet constraints and counter party credit risks remain major concerns of all market participants and we believe that these trends, and expected trends in future regulation, trend toward the central counter party clearing model. In this environment, the value of the safety and soundness of CME Group's central counter party clearing capabilities continues to be highlighted. We see many opportunities stemming from these trends. The key concern for us in thinking about how to help customers address their counter party credit risk concerns is to meet customers' needs.

For some customers that may mean using our core futures markets with integrated execution and clearing services. For other customers, their needs may be better met with clearing only services and some customers may seek a combination of these two models. What we are very aware of is that preferences and needs are specific to each asset class, so we introduced new clearing services. As we do that, we will have differentiated offerings for various product. Getting into the specifics of how we can use our proven clearing expertise to address customer needs, there is, of course, our exchange traded business model. We are actively working to educate nontraditional customers as to the compelling reasons to use our markets for their hedging needs and this will be a significant effort for us throughout 2009. We also offer standalone OTC clearing services via CME ClearPort.

We believe the recent market turmoil has really driven business to this offering and we are working very closely with customers to develop additional product that address their needs using CME ClearPort. In addition to the OTC clearing services we provide through ClearPort, we are moving forward with several other key initiatives in this area. We achieved key milestones with CMDX, our credit default swaps platform, receiving approvals from the Fed, the CFTC, and our own internal risk committee during the fourth quarter. We are in the advanced stages of review with the S.E.C. and continue to make progress there. We continue to work actively with market participants to demonstrate the advantages of our offering and have begun to work with those participants on operational readiness. We are also continuing to refine and improve our cleared interest rate swap offering and are receiving positive feedback from market participants.

Beyond these initiatives, when we look at 2009, there are many unknowns related to the macroeconomic environment. We have recently been encouraged by data indicating some improvements in the underlying credit markets, but these trends have not been in place long enough to drive trading volume. There are obviously many questions and concerns about what happens to volume going forward and we regularly get asked what indicators would point to a recovery in our interest rate volumes. At CME Group we think it's clear that futures markets don't operate in a vacuum. They are critical parts of the capital markets as a whole. In general, like many firms, we believe that stability in the underlying markets will be a key factor that will allow our volumes to return to historical growth levels. At the same time, recognition of the benefits of the exchange central counter party clearing model has never been stronger.

Immediate concerns may be creating a negative volume environment, but the longer term trends are very favorable for CME Group. We are cognizant of the need to prioritize opportunities and invest wisely in this climate. While we are aware of the challenges facing us, we also believe firmly that our long-term growth prospects are very strong. We will continue to execute our strategy and seek to capitalize on those opportunities. With that, let me turn the call over to Jamie.

Thank you, Craig. CME Group turned in a solid financial performance in the fourth quarter, especially considering the overall economic environment we are operating in. Today I will go through the details of Q4 on a pro forma basis as if we owned NYMEX and CBOT for all periods considered. The pro formas also exclude the impairment of the BM&F Bovespa investment, for which I will provide further details. Let me start with the pro forma results for the fourth quarter. On a pro forma basis we generated $692 million in revenue, $433 million of operating income, and earnings per share of $3.58. Average daily volumes were down 14% compared to the same quarter a year ago, driven mainly by decreased activity in our interest rate product line. However, a strong rate per contract and disciplined expense management helped offset the cyclical volume decline. The overall rate per contract for all CME Group volume was $0.858.

Changes to this rate are more easily understood if we break it out between our legacy CME Group rate and the NYMEX rate. The rate per contract for the legacy CME business was $0.713, up 8% sequentially and up 10% versus Q4 '07. The primary mix drivers of the increase were a lower percentage of interest rate products and a higher proportion of nonmember activity, particularly in the E-mini and interest rate product areas. On the NYMEX side, the average gross rate was $1.67, up 7% sequentially and 14% year-over-year driven primarily by a large -- by a larger percentage of trades cleared through ClearPort and higher post trade activity, as well as slightly higher percentage of nonmember volume in the NYMEX products overall. Quotation data fees totaled $87 million for the quarter, up 17% from Q4 of '07 but down 5% sequentially. Last quarter we had a onetime $4 million benefit from a market data audit assessment, that we mentioned on our last earnings call.

At the end of the fourth quarter, we had approximately 433,000 users who subscribed for the base devices across CME, CBOT, and NYMEX products, down 4,000 sequentially. As you look to model 2009, please keep in mind that we have not implemented a price increase, as we have in prior years, and we are beginning to see a reduction in screens due to reduced headcount on the street. I will now take a few minutes to review expenses. Total pro forma operating expenses were $258 million for Q4, down 4% sequentially and down 3% versus Q4 last year. Our largest expense, compensation and benefits, was down $7 million sequentially, to $83 million. The primary drivers were synergy related headcount reduction, a lower bonus accrual, and unused vacation that did not carry over to 2009. Our combined headcount at the end of 2008 stood at 2300 people, down approximately 120 on a pro forma basis, including CME, NYMEX, and CMA during the year.

We reduced the workforce by 230 positions related to the CBOT merger and NYMEX acquisition and added approximately 110 positions primarily in our technology area and our global sales and business development areas. For 2008 our total employee bonus was $45 million including NYMEX, down 34% compared to the prior year. Looking ahead to 2009, our target employee bonus would be $47 million, based on reaching our internal 2009 cash earnings target. If our cash earnings target for the year is 20% above our cash earnings target -- if our cash earnings for the year is 20% above our cash earnings target, employee bonuses would be approximately $69 million. If we are more than 20% below our target, the bonus would be a minimal amount for nonexempt employees. We expect compensation expense to jump to $90 million to $95 million for the first quarter.

This is a larger than normal sequential increase due primarily to the following. In Q4 we had a reduction in compensation expense of about $3.7 million based on negative equity market returns related to deferred compensation. In addition, the bonus accrual in the fourth quarter was lower than normal and we had a lower vacation accrual than expected. Noncompensation expenses were down about $3 million sequentially and down slightly versus Q4 last year. During the quarter we expensed approximately $1.4 million related to our CDF initiative. We realized NYMEX related expense synergies of $4 million, with about $3 million of that from headcount reduction. In terms of the CBOT integration, we have basically reached our target with one lone item outstanding, which is the continued operation of our data center based in New Jersey which supports NYSE's metals business. These operations are scheduled to be handed over to NYSE at the beginning of Q2.

Q4 pro forma operating income was $433 million, up 3% from the same quarter last year despite the volume reduction. Compared to a year ago revenues rose 1%, while expenses were down 3%. Our Q4 operating margin was 63% compared to 61% in Q4 of '07. Within the fourth quarter non-operating expense category, interest expense and borrowing costs were $35 million and drove the non-operating expense of $30 million. The yield on our cash and marketable securities balance is now below 1% driven by reduced short-term interest rates and our conservative investment policy, leading to a decrease in investment income. In terms of securities lending, we had net securities lending income of about $5.2 million driven by longer dated and higher yielding NYMEX securities investments compared with CME's traditional overnight investments.

In the near-term, we intend to be very selective in our ongoing securities lending business and we expect minimal net securities lending income this year as we wind down the NYMEX portfolio. Pro forma net income was $239 million and diluted EPS was $3.58. For the quarter, our pro forma effective tax rate was 40.7%. Looking at 2009, we expect an effective tax rate of approximately 41%. Turning to the GAAP income statement, as you saw in press release we impaired our investment in BM&F Bovespa. Please turn to slide 16 in the presentation, which details the value of the investment over time. As many of you know, we entered into an equity swap with BVMF whereby we exchanged 2.2% of our shares in return for ultimately 5% of BVMF. Our investment was valued at $631 million when we closed the transaction in February, 2008.

Between then and the end of '08 the value of our investment dropped to $263 million due to the change in the value of BVMF's shares and adverse foreign exchange rate movement. The decline in BVMF share price is in-line with the performance of the exchange sector overall. At the end of 2008, the value of our investment represented a premium of about 6% compared to the value of the CME Group shares that BVMF received in the equity swap. However, GAAP does not allow us to take this into consideration and requires us to consider whether the decline in the value of BVMF will be recoverable in a reasonably short period of time, which we consider to be approximately six months from the end of 2008. We concluded that the decline in value is not likely to be fully recoverable prior to June, so an impairment had to be recorded.

The portion of the loss attributable to currency moves is recorded through the balance sheet, while the loss related to the value of the shares runs through the non-operating income section of the income statement. The after tax impact of the write-down was $167 million or $2.49 of reduced EPS on a GAAP basis. We believe BVMF's stock price reflects current cyclical factors in the public company exchange sector and continues to present attractive long-term financial and strategic opportunities for CME Group. The last comparison on the chart illustrates the fact that since the beginning of the year BVMF has recovered faster than CME and the current value of $282 million is actually a 41% premium to the CME Group shares held by BVMF. Moving on to the balance sheet, as of December 31st we had $600 million of cash and marketable securities and total debt of $3.2 billion, resulting in a net debt position of approximately $2.6 billion.

With regard to our debt, in addition to our $1.7 billion of term debt, we currently have approximately $1.5 billion in commercial paper outstanding, which is backstopped by a $945 million three-year revolver and a temporary $1.3 billion bridge facility. As we mentioned last quarter, there are quarterly continuation fees associated with the bridge loan and the next one is scheduled to be $6 million on February 18th. In the fourth quarter we expensed a similar continuation fee of $2 million. If we replace the bridge prior to February 18th, the continuation fee would be eliminated but we would have an acceleration of the up-front fees and expenses related to the origination of the bridge financing to Q1, which would be $5 million. As I have said before, we are focused on reducing our debt to EBITDA ratio to below one times. Therefore at this point in time we intend to prioritize debt paydown. That brings me to our $1.1 billion share buyback authorization.

Since our last earnings call we purchased 638,000 shares of stock with an aggregate value of a little more than $150 million, representing approximately 1% of our basic shares. In total, since the beginning of the program late in Q3, we have spent $250 million and repurchased the shares at an average price of $272. Like many companies, the uncertainty in the financial markets has altered our thinking a bit about capital management since June when this program was announced. As I mentioned, our main priority is to make progress in reducing our debt levels. So while our authorization remains in place, we have stopped purchasing shares for now to devote our excess free cash flow to debt reduction. Capital expenditures, net of leasehold improvement allowances, totaled $81 million in the fourth quarter, driven primarily by $63 million spent on technology, including the continued build-out of our data center, with the remainder spent on office space buildout.

During Q4 we spent approximately $2 million of capital related to our CDF initiative. For the full year our pro forma capital expenditures totaled $205 million. We anticipate between $200 million and $225 million of capital expenditures in 2009 driven by technology-related projects and the completion of our construction in Chicago and New York. During the year, we will continually monitor the capital spend based on market conditions. And finally, I will now turn to expense guidance for 2009 for CME Group. Traditionally we have seen 8% to 10% annual growth in expenses during the period from 2001 to 2007. In 2008, pro forma expenses actually decreased by 2%. The realization of cost synergies more than offset normal expense growth, which is typically driven by technology and new initiative spending. Looking to 2009, volume is more difficult to predict than usual for both you and us. Currently the consensus ADV is 11.2 million contracts with consensus expense of $1.05 billion.

We do not provide guidance related to volume, but I wanted to give you some sense of where expenses would be under two different scenarios based on our current plans. If volume is similar to 2008, around 13 million contracts per day, we would expect pro forma operating expenses to be up approximately 2% compared to 2008. At the consensus volume level of 11.2 million contracts, we would expect 2009 pro forma operating expenses down from 1% to 2% versus 2008. Looking to next quarter, we expect expenses to increase from Q4 to Q1, as expenses in Q4 '08 would have been closer to $265 million without the compensation related benefits I mentioned earlier, which positively impacted this quarter. One final note, we are doing everything we can to reduce discretionary spending throughout the Company and it is a focus area for every employee. At the same time, we have significant long-term opportunities and we will continue to spend on areas that we think will bear fruit.

In January we averaged 9.5 million contracts per day and we have seen a slight improvement in the second half of January to about 10.1 million contracts per day relative to December at 8.2 million and the first half of January at 8.9 million. In summary, despite the macroeconomic challenges impacting financial markets and our customers, we continue to be well positioned moving forward Taking a look back at 2008 we made tremendous progress building out our offering for the long-term, as Craig mentioned from. From a financial perspective, our pro forma revenue for the year was up 11% to more than $3 billion, while operating expenses dropped 2%. We delivered 16% growth in both net income and diluted EPS. I believe we are well positioned to navigate through and ultimately benefit from the current economic environment. With that we would now like to open up the call for your questions.

(Operator Instructions) Our first question will come from Rich Repetto with Sandler O'Neill.

Good morning, guys. I guess the first question is for Jamie on the expenses. I just -- I just wanted to see if you take even your adjusted 4Q run rate, 265, and that would get you to 1.06 billion. So I guess on the lower end, if volume was at 11.2, that looks like what you are predicting, or right around there. And I'm just trying to see, where are the NYMEX synergies and how you phase them in and the CBOT, the data center in 2Q. That's what I'm not seeing come out of the run rate here.

Right. Rich, just to be clear I'm not predicting where volumes will be in terms of the NYMEX synergies. We said that we would get $60 million out of the NYMEX transaction in terms of cost synergies. I believe that we'll get somewhere between $30 million to $40 million of that in the coming year. And, of course, do all we can over time within the year to be very diligent with respect to expenses.

Okay. And maybe just one follow on to there. If volume was lower than, say, the 11.2, it just seem -- I ran the math. It just looks like there's an incremental margin in there of like 10%, like the expenses only vary by about 10% of the potential revenue impact. So if volume was down below that, is this thing sort of linear on a percentage basis, or what?

Well, think about it. The things that move the most with volume are going to be the license fees and the bonus, right, and the bonus drops off at a certain point, once we get down to 20% below our target the bonus goes down to almost zero. And so you've got to keep that in mind. So it's not quite linear.

Understood. Okay. And last question, I guess, Craig and Jamie, when you looked at the buyback and given where the stock price is now, I know the target is to get down the debt to EBITDA ratio below one, but I'm just trying to see how you weigh the different factors putting that, putting the reduction in debt ahead of what looks like a pretty depressed stock price.

Sure, sure. Well, first realize that when we put the authorization in place, that was back in June and that was a bit of a different world for everybody, right? But the things that we're looking at are the -- that bring the debt down, our debt to EBITDA level, as we said, of one time. And then two, our debt as a percentage of our overall capital structure has increased significantly over the last several months because of the decrease in our equity value. So those things weigh on the decision as well. So it's bringing all those into consideration, along with where the stock price is as well.

Okay. Thanks, guys.

Our next question will come from Roger Freeman with Barclays Capital.

Hi, good morning. I guess, first question, on the interest rate volume outlook, I know always a tough question to talk about, but as you think about some of the key drivers that could move volumes higher, mortgage ReFi's picking up, Treasury issuance to finance the bail-out, and LIBOR spreads normalizing, how do you think about maybe what has the biggest potential impact? LIBOR spreads about really normalized and doesn't seem to be any impact from that, but maybe the other two.

Roger, I think there's several ways to look at this and on the short end of the curve, looking at the kind of Fed Funds/LIBOR spread, it's starting to stabilize, but that's only been in the last 10 days. Clearly, as Craig mentioned, one of the things as the capital markets start to have to heal themselves before futures volumes are going to normalize, and kind of 10 days is not going to be enough time to measure any kind of meaningful futures growth. The other thing that you did mentioned that we've spent a lot of time analyzing is looking at coupon bearing Treasury issuance. If you look at that historically, that's had a pretty positive correlation, very strong positive correlation to Treasury futures volume. So those are two of the things that we look at internally, but again, it's the overall capital markets have to heal themselves to get back to kind of that normalized run rate that we've seen in the past.

That's helpful. I guess, second question, your hedge fund participation, so it's down to 8%, is there anything, other than really de-levering, to think about that drove that? And then secondly, as you look at activity now, actually looks like January was a pretty good month for the industry HBARX was up, so the Dow just posted up 5.5% for January. Are you seeing any increased activity in the futures space on the part of your hedge funds in January?

Several of the hedge funds, again, Roger, this is Rick, several of the hedge funds that we deal with in that large category, what we've seen is just in general them reduce their exposure, but it really wasn't a phenomenon that a lot of people thought of just in the fourth quarter. We actually saw those percentages actually come down throughout 2008. A lot of that was money was put on the sidelines by a lot of those funds as they raised cash it didn't necessarily have to do with any redemption. If you start to analyze that by product segment, you actually come to some different terms. It's really been the interest rate products where we've seen their participation drop significantly. When you think about the energy markets or the equity markets, some of those markets we've actually seen the number of hedge funds increase and some of their volumes increase in those markets. So it's really been the interest rate products where we saw the significant drop in hedge fund participation.

On CDS, it's interesting for all the pressure the government has put on everybody to get large, it seems like the industry has been ready and they're dragging their feet but my question is, as this delay continues how do you see your chances here? Because we're hearing pretty good feedback from the marketing presentations that the CMEs are making to the broker dealers, so I assume delays are actually favorable for you.

I guess I would say that I think this is a really complex area. There's been a lot of work done, not just by CME Group but certain other competitors as well, to work through a lot of the very complex regulatory issues. I think we're in great shape. We've cleared the vast majority of the hurdles in terms of gaining clearance from the New York Fed and approval from the CFTC. The SEC has been working very well with us, actually, on the requested exemption order that will allow us to commence services and that has given us more time to work with the community of people who are active in the CDS market, and I would say, based on the reports that we've been getting very recently, I'm very encouraged by the reception we're getting from both the buy side and the sell side. So we're making good progress and I think, hopefully, we'll get through the regulatory process very near-term here and be able to implement our services.

Okay. Thank you.

Our next question will come from Niamh Alexander with KBW.

Good morning, thanks for taking my questions. You talked about credit derivatives clearing, but I think interest rate derivatives clearing might be even bigger for CME. I'm just trying to understand how is the soft clear initiative, have you been able to get clients' attention to focus on that? How should we think about the next move there because there seems to be a lot of regulatory driven pressure to shift a lot of these OTC on to the central clearing mechanism.

I think that's a very good observation, because one of the things, as Craig mentioned, on the CDS side, it's also true on the interest rate swap side that the both buy and sell side are starting to seriously set down and come to some conclusions about how to move forward in this space. It really is getting at the issue of how to reduce firms' balance sheets and getting these into a centrally cleared facility has even become more important over time. Not just to get rid of counter party risk, but to bring the overall leverage down at a lot of these firms. So we think, as time has gone on and people are really understanding what we're trying to do that in space, and, we've come -- we've learned some things and we've come a fair way in that space and now we're looking at it more as a clearing opportunity for people to be able to put their positions in, clear them at the CME, and be less focused on the execution side.

Okay, that's helpful, Rick. Just on the clearing opportunity, should I think about maybe structuring something to incentivize the dealers to get involved similar to maybe what ICE is doing in the credit space?

We've looked at a number of different proposals and we're actively working with both buy and sell side firms to get them engaged and involved in the process, because one of the things that we think is crucial in this solution is bringing both sides to the table.

Okay, that's helpful. And then just lastly, LCH Clearnet, they are currently clearing some swaps, is that correct, from interest rate swaps?

That's correct.

Fair enough, that's helpful. And then if I could just clarify something, with regards to the CBOE because you still own some stock, I understand there was a vote over the CBOE -- beg your pardon, you still own the position from the former CBOT guys. Is there still a bit of an overhang there or do current shareholders of CME, are they kind of holding on to stock pending a potential IPO of CBOE or once that vote has passed now are we kind of past that?

Niamh, it's Craig. You might remember that what we had done actually was we had acquired various ERPs in the merger process with the Chicago Board of Trade where we offered various of the CBOT full members the opportunity to actually transfer their ERP to us in exchange for a lump sum payment. We are planning to participate in the settlement that has been agreed and which is now pending before the court. There's an appeal that we expect to happen based on the judgment of the court, but ultimately we're confident that the settlement will be reached, approved by the court, and we will be participating in that.

Okay. That's helpful, Craig. So for the -- that's for what CME owns, but for the former CBOT shareholders who are still holding CME stock, just so I understand the timeline, technically do they have to kind of wait for the settlement or do they still need to hold the stock up until any particular IPO?

That timeframe has expired now and so the eligibility for participating in the settlement in terms of the requirement of owning the stock is no longer applicable.

Okay, that's great. That's awesome. Thanks. And then just lastly, real quick, if I could for Jamie, the licensing fee, I got it wrong, I thought it would drop a little bit more with now with the expiry of the Russell contract, can you -- was there like a price increase with some other contracts that you renegotiated. I think it was a NASDAQ contract you renegotiated.

Actually there's a small, some small increases. Last year we did some renegotiations, but keep in mind, it's not just license fees it's also the fees associated with ClearPort, so it's not -- you can't just look at equity volumes when you are looking at that line.

Okay. So when you say fees associated is that rebates for, say, some of the IDBs at ClearPort or would that come out of the net revenue?

That's rebates.

It is rebates. Okay, great, thanks. I'll get back in line.

Our next question will come from Howard Chen with Credit Suisse.

Good morning, everyone. Just a few follow-ups on the expense and capital management commentary. Jamie, on the expense guidance in that no volume growth scenario and 2% expense growth, can you split out that 2% expense growth between incremental NYMEX synergy realization versus core investment spending and where is that incremental investment spending going?

If you look at it, the NYMEX synergies savings should be in the neighborhood of $30 million to $40 million in the coming year.

Incrementally.

Good point. So we realize about $4 million of that in 2008. Then the place where the line items where you will see the most significant impact is, I would say, on the compensation line.

Okay. And then the scenarios are helpful, but any thoughts on what kind of expense outlook would be if we stay at, for say, current volume levels, something closer to 9.5 million for the course of the year?

Yes, I've said all I'm going to say on the expense guidance, but you can rest assured that we're going to keep a very close eye on expenses and we'll be monitoring them throughout the year looking for opportunities to save.

Okay. And then given the amount of free cash that the business model generates, even at the current volume levels, it seems like, to me at least, you can both de-lever and repurchase stock. I guess, in your assumptions, how much cash flow are you holding back when you think about de-levering the balance sheet here?

I can't give you a forecast on that, but with regard to the debt, remember we kind of -- we levered up and with the expectation that we were going to be bringing that down in rather short order, and I've made that point all along, rather short order down to one time. So that is where our focus is. We are -- a piece of the financing is bridge this financing. It's a 364-day facility that was put in place at the time of the NYMEX close. So at some point we are going to -- we need to refinance that and we'll potentially bring that down somewhat as well. So we're very focused on managing the debt position at the moment.

Okay. And then I think I know the answer to this, but I guess previously, the guidance had been that you would exhaust your $1 billion buyback program by year-end 2009. Now is that -- are you still committing to that or is that now currently off the table because of the environment?

I wouldn't say it's off the table, but it's less likely. We're just going to continue to monitor the environment and see how it plays out.

Okay. And then finally on this, and not to beat to the death, but is there a level of the equity to where the tune kind of changes versus debt paydown? Or is it simply just wanting to get your debt to cap, debt to EBITDA ratios down and then then knock some of this stuff out?

I'm not going to peg a level for you. We're just going to continue to monitor the situation and make the best decision that we can.

Okay. Thanks so much for answering the questions.

Thanks, Howard.

Our next question will come from the line of Michael Vinciquerra at BMO Capital Markets.

Good morning. Clearly one of the places of strength has been at ClearPort. I was just wondering if you guys could share with us where the strength has been in terms of the volume. I've heard it's in the OTC oil, but maybe you can provide us with a little bit more detail on that.

Yes, Mike, as you say, ClearPort has been extremely strong for us going -- kind of Q3, Q4 and also in Q1 so far. Where we've seen a lot of activity in ClearPort has actually been on the oil and petroleum side. We've also seen, as Craig mentioned in his remarks, the start of power and that's been very, very successful for us, which started in December. So it's been the oil side and now the power side is moving pretty dramatically. We've seen, as Craig, I think, mentioned in his comments, very dramatic increases in the Brent contract on ClearPort. Craig gave the numbers early on. And in what we've seen is customers moving quickly to that product, much faster than we even anticipated.

Now, as you add new products to ClearPort, are there any issues with the way it's structured in terms of the default fund or any, as you add more products does it increase or decrease risk to any of the current participants at all?

Hi, Mike, this is Gill. The default fund will scale according to the risk that is taken onto the books of the firm that is going to clear each and every one of these things, all these things. So the dynamic nature of the default fund is such that as the risk exposure of a firm goes up, so does the amount that the firm has to put into the guarantee fund.

Okay. Very good. Thank you. And then just finally, back on the debt, Jamie, what are the current rates in the two different pieces of the debt and which one then would you be more likely to be paying down over the next year?

Overall, currently, I would say the overall face rate is somewhere in the neighborhood of 4% and as we look forward we've got a maturity this year, a one-year maturity for $250 million and then we also have flexibility obviously on the commercial paper side. Then we've got three-year and five-year maturities as well.

Okay, thanks very much.

We'll go next to Mike Carrier with UBS.

Thanks, guys. Just one question on the rate per contract. The mix shift in the products that's relatively straightforward, but in terms of the customers, what's driving the increase in the nonmembers? Is it certain products? Then what customer group is, or is it more of a decline in the members?

We've been seeing an increase on the customer side of the business. Whether it's from people concerned about counter party risk moving into the exchange, or, as importantly, in these times people go to where liquidity is and people tend to go to the more standardized products because that's where liquidity is. So we've seen people move both for kind of credit concern reasons and also just for straight-out liquidity.

Okay. And then just away from, say, like ClearPort, if you look at your other growth opportunities in terms of international clients, markets, then also on the over-the-counter side, whether it's on the clearing or the transaction side, when you look over the next like two years, which one do you think has the greater opportunity from where you stand today?

I think it's hard to sort of pick one over the other. Obviously, as we mentioned earlier, I think the time is right for us to be increasingly successful with OTC clearing services. You can see how successful we're being in ClearPort generally, and I should mention that we're now getting into an array of products on ClearPort that gets us very much outside of oil and gas swaps and power and whatnot. So credit default swaps, interest rate swaps, I think these are all areas we have plans for, agricultural commodity swaps and for foreign exchange products as well, and I think that that will be significant for us over the coming two-year time horizon that you are asking us about. At the same time, I think that the initiatives that we have in Brazil and Korea and Dubai are significant. We've got infrastructure that we're putting in place. We have licensing arrangements. We have joint product development opportunities in all of those three cases that I think can be valuable for us so those, for the next two-year time horizon that you are asking about, I think will be valuable to us.

Thanks, guys.

We'll go next to Ken Worthington with JPMorgan.

Hi, good morning. Thank you for taking may question. I wanted to talk a little bit about the success you're having in the Brent OTC contract. You indicated that the market share is going up. Now, given market conditions, I would expect that generally speaking over the next couple years we would see a migration from the OTC business to on-exchange, but it seems like in this product you are seeing the reverse happen. And I know it's cleared, but why is the interest moving kind of away from the on-exchange to the over-the-counter product?

I think it has to do with kind of the changing nature of the customer base. A lot of that is coming from what I will call more commercial type users that are not as focused on turning over volumes on a rapid basis as opposed to, say, a hedge fund or a proprietary trading group. A lot of it, in this case, is an issue over credit and they want to put it on to the exchange and hold those positions in that way. They are not as concerned about the execution of the trade.

Okay. Is there any read through to, I guess, the other products that you kind of hope will go from a bilateral to OTC cleared and maybe eventually on-exchange? Or is it just really kind of unique to ag and energy products here where the customer mix is different?

I think there's consistencies across the over-the-counter market. Because when you think about the over-the-counter markets, they're all bilaterally negotiated. It's not the front end of it is really been on any kind of platform to begin with, because a lot of that is voice brokered. Some is on some electronic systems, but it's the clearing that, when you think about it, has been a huge value add the exchange can provide to the people used to dealing in the over-the-counter market.

Thank you. Then I guess flushing out ClearPort a little bit more, you've got ethanol up and running. What is the outlook for the expansion beyond the energy products and are there particular classes that are going to be easier to move into ClearPort than others?

Ken, you saw the ethanol swaps move in last Monday. I think it's safe to say that an area that we're particularly focused on there is in the agricultural area. I think we've signaled that we've filed several positions with the CFTC to allow agricultural products to move on there. A lot of the same type of corporates use agriculture products in the same way that they use energy products, so that's an area we'll move as soon as we can get regulatory clearance on.

Okay, great. And then just lastly, on the interest rate swaps side LCH.Clearnet has a product, I don't know if you can share, but can you contrast what you would like to do in clearing of interest rate swaps with what LCH is currently doing?

We should probably let LCH speak to what their offering is. If I can just speak to what we think about, have to be a little less candid, because we haven't made some of these announcements yet, but a lot of that marketplace, when you look at it, revolves around IMM dated futures positions, specifically in the euro dollar area. There's also products that are not to those dates. So we hope to build some flexibility in our systems to provide kind of a pretty robust solution into that market.

Okay. Fair enough. Thank you.

We'll go next to Dan Fannon with Jefferies & Company.

Good morning and thanks for taking my questions. Wanted to just clarify, following the S.E.C. approval for your CDS platform, will you guys be able to -- is there a next step or you be able to be up and running there after?

Once we have -- the S.E.C. will be the final regulatory approval that we're waiting for, so after that we'll be ready to begin offering services. Obviously one of the things that we have to do is work with the user community to gain, not just our own operational readiness which we've been working very hard on and is complete, but we have to be able to interface with the community of users that will be active with us. So that will be the next step, but regulatory approval-wise, that will be, the SEC will be the final piece.

Okay. Then shifting to your customer base and kind of the breakdown, wondering if any of the sub-sectors have shown any difference in activity or improvements thus far in January. Obviously we know that some of the volumes are still down in January, but are any of the sub-sectors acting differently than the way you described for the fourth quarter. And also as you kind of look out, which one of these segments do you think should start to see the most, or an improvement first or who will kind of lead to an increase in volumes?

Dan, I think it's -- I think it's hard to predict how 2009 will unfold, but I think what you typically see in December numbers is kind of your proprietary trading group segment slow down for kind of seasonal reasons. So I think if you look at 2008 that the fourth quarter trading from the prop groups is typically down a little bit and you will probably see that come back in January. But I want to caution that with a little bit of -- a lot of the customers, the nonmember folks that we've seen come in in the fourth quarter, continue to be pretty robust users. And that is what is important. As they have come for the liquidity or for the credit intermediation, those type of customers tend to stay around and trade for awhile.

Okay. Thank you.

We mentioned earlier in the call that the proprietary trading segment volume was up 2%.

Our next question will come from Rob Rutschow with Deutsche Bank.

Hi, good morning. Thanks for taking my question. First question was on ClearPort. Can you give us a little bit more detail on what drove the increase in rate per contract? And I'm wondering if, with additional product being launched, if we should expect possibly some pricing pressure on the RPCs going forward.

I think on ClearPort you did see some post trade activity that had a higher rate per trade on it that helped with that rate. I think that's a key driver on the ClearPort RPC.

One thing I would add is it really is a product mix issue in that because some of the products that we've launched recently are kind of lower RPC products because the products themselves are smaller. So I think it's difficult to just make some general statement about where RPC will go. I think it really depends on what the product mix looks like. In ClearPort, unlike the futures business where products are all priced similarly within an asset class, there's a really high variance in ClearPort between certain products. For example, some get a few cents and some actually get $15. So it depends on the size and the product.

Okay. If I can shift gears a little bit, we've talked about expenses quite a bit, but what I am wondering is, exactly what have you guys budgeted in 2009 for speed improvements and for capacity expansion? And if we were to face sort of a worst-case scenario, say like maybe Japanese rate contracts in the 90s or something, where your volumes went down, would you be able to redistribute horsepower internally to places where it is needed without spending as much overall on capacity expansion? And is this really -- is it really a needle mover at all?

I think the capacity expansion is really more reflected in our CapEx spend and then to a lesser degree in the expense side. On the CapEx, we gave a range of $200 million to $225 million for the coming year and included in that is a significant build-out of our data center that we've been working on now and so if order volumes were to pull back dramatically, because remember it's orders that come through this system not the volume, not the actual contract volumes but order volumes that drive capacity, if that was -- if orders were to fall off dramatically you could imagine that we might adjust our buildout of the data center. We'll continue to monitor and we're going to be very cautious on it and keep in mind the data center, we're building out the infrastructure for it and then internally all the computer systems and all that are very modular. We'll build out the computer systems as we need them.

Okay. One other question on -- I see that you excluded the intangible amortization from your core number. Was there any impairment testing there done on CBOT or NYMEX and is that possible in the future, or likely?

In terms -- I'm sorry, the last part of the question was impairment on CBOT or NYMEX?

Right.

You can imagine that we review that on a regular basis, as we did for the end of the fourth quarter, and we did not reach the conclusion that those were impaired, and -- what was your question on the amortization?

Well, really, I guess, so that's not indicative -- excluding the amortization isn't indicative that goodwill impairment is possible or likely?

That's correct.

Is there a level where, a level of revenues or earnings where we would start to think about that?

Yes, I'm not going to get into that sort of forecasting, but I think when you are talking about excluding the amortization, are you talking about the 5 million adjustment pro forma?

Right.

That adjustment was -- there's some very short-lived intangible assets that are amortized and to make things comparable across all periods, that's what was removed. It wasn't a write-off or anything like that. It was a pro forma adjustment.

Okay. Can you also just give us a little bit more detail on CMA, if that had any sort of impact this quarter from a revenue perspective or earnings?

I'd say it was in-line with prior quarters generally on a net basis. Their business is steady. They're generating cash and income.

Okay. Thank you.

We'll go next to Don Fandetti with Citi.

Hi, good morning. Craig, just wanted to see if you are generally comfortable with what you see shaping up on the regulatory front and do you see any major changes?

Well, obviously, that's an area where there's a lot of activity and a lot of discussion and we're very actively involved in not only understanding what people are talking about and looking at, but also very actively involved in helping make sure that people understand how well our industry and our exchange and central counter party clearing house have functioned during this time of economic crisis. I think, generally speaking, as we are looking at a wide array of initiatives and studies, some by the government and some by the private sector, that it is fair to say that the vast majority of the focus right now on legislation and regulation is on the problems in the housing market, the mortgage finance process, the securitization arena, the problems with the rating agencies and I think some of the sort of systemic risk issues that have been posed by these very, very large financial institutions that are either, in some respects, unregulated or lightly regulated.

And the good news in that, if there is any, is that most of that really doesn't relate to what we do or many of the sort of problems that we encountered weren't really in the area of the Commodity Exchange Act, the Commodity Future Trading Commissioner, the futures industry. You have to be vigilant on these things, as we are, but I think that there's broad recognition and understanding that our markets are not really involved in most of those things that I was just talking about and I think, to the contrary, I think people actually recognize that we've been one of the best functioning parts of global financial markets during the course of the last year and the economic crisis.

Okay, thank you.

We will go next to Brian Bedell with Banc of America.

Great, thank you very much. Good morning. Question for Rick. Can you talk about how, to what degree new products created in the fourth quarter influenced volumes. And then if you can sort of detail what your outlook in the first quarter of '09 would be, not so much predicting volumes, but just talking about the products that are coming on line in the first quarter, including January, that you are particularly excited about?

A lot of the new product development and a lot of the products we rolled out in the fourth quarter, we had a pretty heavy emphasis in the second half of the year on ClearPort. I think you will see that continue in 2009. A lot of those ClearPort contracts are driven by our customers or our channel partners in the IDB space and those products tend to get acceptance earlier and faster than trying to build a benchmark futures product. As we've always said, building a benchmark futures product takes two or three years before you really know whether you will have an ongoing success.

So that's why one of the things that we mentioned earlier, the PJM contracts that we launched were extremely successful right off the bat, which was very encouraging to us to see what we can do with the, not only in the oil space, the natural gas space, but also in the power space. We have launched some products to try to address some of the issues on the interest rate side. Again, we launched OIS futures and OIS options. We continue to think about how the interest rate game is changing. Also focused on Treasury issuance and what may be coming there and thinking about the products along those lines.

And how successful have the OIS futures and options been so far?

They've been trading fairly well, but again, look at any new product. It's difficult to move the bottom-line for quite some time on any new product. So put that in perspective.

And to what degree do you think lower volatility will impact. I know you mentioned in the past that the extreme volatility kept traders away, particularly in the early parts of the fourth quarter. Are you seeing sort of any relief on that front yet?

What you tend to see is and you almost have to go market by market, because some of the markets still have pretty extreme volatilities in them. What happens at those extreme volatility levels, market makers are less comfortable providing a lot of size there, so they have to reduce the amount they put in the book. So what you see in those extreme times is the book actually gets smaller, driving less kind of volumes. We do and we do see some of the markets the volatility is reducing. You are starting to see the books rebuild and we think over the longer term that becomes positive for volume. So we'd almost have to talk product by product on each one to what we see right now.

Just on one product, are you seeing any improvement sort of underlying in interest rates yet?

Yes, it's a very different -- as you go out the curve, the volatility and the Euro dollar [comprex] is still extremely high by any kind of historical measure and there's -- so there's still a lot of uncertainty around that market. Volatilities, actually, in the Treasury markets are not that high. What you are seeing in almost every one of the Treasury markets is kind of mid-teens to upper teens and a lot of those, so those aren't ones that are really affected by the high volatilities. I think there's a lot of other factors in the Treasury market that we need to work through. Obviously issuance is going to be an issue throughout the year. I think some of the issues you saw in the fourth quarter in the repo market and Treasury fails, the Treasuries put a position paper out on that are making changes to the way fails happen in the cash Treasuries, which should help a lot of the participants in the market, because a lot of the participants in the Treasury market, at the end of the day, are relative value traders. In that situation, it's pretty hard to trade cash and futures strategies and hit any of those kind of spread levels that you have seen in the past historically.

It's a -- if the fail situation improves that should help?

Absolutely. It will bring a lot of those relationships back into normalcy, which should allow people to trade both cash treasuries and futures a lot more easily.

Okay. And a question for, I guess, either Craig or yourself, Rick, just on thinking about timing for the CDS platforms and the interest rate effort. Clearly you have got to get the approval on the CDS and then connect to the broker dealers. Should we be thinking of that in our models as really something all in, you kind of starting in the second quarter, assuming the SEC does come around and approve this in the next two, three weeks or so, and then should we be thinking of this also as CDI rather than single names?

I think that there's not much more that we can say on that in terms of giving you a guide post. We are not going to be doing this until we have cleared the regulatory process and that is not for us to determine. I'll just reiterate what I've said before, which is that we have been working very well with the SEC. They have been very collaborative with us. I do believe that we're at the advanced and final stages of the process with them. Ultimately it's their determination when to grant the exemption order that we're requesting. On the operational readiness side, again, this is a very big priority for us, so we have been able to advance those efforts and you might remember even from late last year, we believe that we are operationally prepared, but we will have a lot so work to do.

As you can imagine, many of the participants in the CDS market, this isn't true just for CME Group, this will be true for I.C.E. Trust and other competitors as well. You are dealing with a large number of institutions that have tremendous stresses in the organization right now, including the stresses in the operations area of the firms. That remains to be determined. I wish could I give you a better answer to that, but it is going to be highly dependent on the firms themselves. So we'll have to see.

I was trying to get a sense on that very specific part of it, it would be several weeks or several months, but I guess, it is like you said, you really can't predict it given the stresses at your main customers. Right?

Right, exactly.

And then on the interest rate platform, interest rate swap clearing effort, that is more not as advanced, correct, and so should we be thinking of that as like a second half?

I think a lot of the stresses that are on those same participants and market are going to be there for them to do their systems on the interest rate side as well.

Right. And then just on expenses, on the second scenario there where you have got the 11.2 million contracts, what are you assuming in the employee bonus on that and if you can't be specific, should we think of that as something that's more like in the middle of the range or is the 11.2 million volume scenario at the sort of 20% below the target area?

At 11.2 we would certainly be below target.

You would be below target. Okay. That's helpful. Then just -- I guess on just the expense philosophy a little bit, we talked a lot about this, this is asked quite a few times, but if volumes are extremely weak, what is your philosophy in general about the growth initiatives that you have? Because obviously that will help a great deal if you are building connectivity and penetrating accounts globally and so you have to make a decision, do we go ahead and spend ahead of the revenue here in hopes of building revenue to sort of counter the macro backdrop or do you pull back and say, okay, we were trying to meet EPS numbers and we'd rather have lower expenses, which camp would you tend be in, in 2009 answer to (inaudible)?

The focus is really on the long run. So I'd say that we would be focused on the growth initiatives.

Okay, that's very helpful. Lastly, on the subscribers, you mentioned that you were starting to see a down-tick in January. Any kind of indication of how significant that is in terms of the number of terminals that your clients have?

We were actually referring to the fourth quarter. So we have not provided any info on January at this point.

Great. Thanks so much, guys.

All right. Thank you, everybody, for joining us today and we look forward to speaking with you next quarter.

Thank you. This does conclude our call. We would like to thank everyone for their participation. Have a great day.