芝加哥商業交易所 (CME) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the CME Group first quarter 2009 earnings conference call. As a reminder, this call is being recorded.

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

Thank you and thank you all for joining us. Craig Donohue our CEO and Jamie Parisi our CFO will spend a few minutes outlining the highlights of the first quarter and then we will open up the call for your questions. Also joining us for participation in the Q&A session are Sir Richard Redding, our Head of Products and Services, Phupinder Gill, our President and Terry Duffy, our Executive Chairman.

Before they begin, I'll 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 assumptions that are difficult to predict. Therefore actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC including our most recent Form 10-K which is available in the investor relation section of the 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. With that I would like to turn the call over to Craig.

Thank you, John. And thank you for joining us this morning. I'm going to spend some time addressing our first quarter highlights and then turn the call over to Jamie for more detailed discussion of first quarter financial results.

Against ongoing macro-economic challenges I'm pleased to report another highly profitable quarter. On a pro forma basis we achieved revenues of $647 million and operating income of $395 million. Earnings per share were $3.20 for the first quarter, and operating margin of 61% reflects the strong leverage inherent in our business model. A tight focus on expense management allowed us to keep pro forma operating expenses to $252 million, a reduction of 9% from the first quarter of 2008 and 2% from the fourth quarter.

Since the beginning of the financial crisis, our message has been that while we can't control the macro-economic environment, we are well positioned to leverage opportunities highlighted by current market conditions. We believe that first quarter results re-enforced the diversity and resiliency of the CME Group business model which continues to generate significant cash flow throughout a variety of economic conditions. Currently overall market conditions remain tentative and uncertain but we do see indications of improvement which I would like to discuss.

On a macro-economic level, we have seen improvements in investment grade corporate debt issuance from the $73 billion in the fourth quarter of 2008 to $200 billion in the first quarter 2009. Approximately equal to first quarter last year. Fixed mortgage rates are near historic lows and are expected to drive increased mortgage origination and refinancing activity. The LIBOR OIS spread was largely constant over the first quarter indicating increasing stability in credit and lending markets. All of these factors are positive indicators of the capital market's return to more normal functioning. As general markets stabilize and holders of capital seek to deploy it in the corporate and mortgage debt markets, their need to manage interest rate and foreign exchange risks drive potential usage of CME Group products.

Another positive factor for CME Group volumes is the increased treasury issuance. It's difficult to predict volumes based on any single factor but with 2009 issuance projected to be $2 trillion, we expect to see increased demand for CME Group's treasury futures and options contracts as tools for hedging treasury holdings. The longer term duration of treasuries also means that risk related to treasury holdings needs to be managed over the life of the instrument and thus creates multiplier effects driving demand for CME Group products.

Moving into the specifics of our first quarter performance, as I mentioned previously, while there are no indications of improvement in the overall market, we can't predict the timing or impact on our volumes. The volume environment remains challenging. First quarter volume was down 33% versus a very difficult comparable of record high volume in the first quarter 2008. However, with the diversity of our asset classes we did have some areas of strong performance in the first quarter.

CME ClearPort achieved a record in both average cleared volume per day and in average revenue per day. Average daily volume for the quarter was 629,000 contracts, up 33% from last year and average revenue per day was $1.1 million up 24%. Crude and petroleum products continue to show robust growth with crude revenue increasing 55% year-over-year to $16 million for the quarter and petroleum more than tripling to $10 million for the quarter. These growth trends are a continuation of what we saw over the past several quarters and indicate the increased traction of central counter-party clearing in the over the counter markets. The E-mini complex also performed well. Normalized to exclude Russell volume, E-minis were up 2% year-over-year with the E-mini S&P 500 futures contract up 8%. This solid performance highlights the value of CME Group's deep liquidity during times of high volatility.

Interest rate volume continues to be impacted by the challenging economy. However, within interest rates there are some trends that are worth highlighting that underscored larger trends in the markets. Volume in the back month Eurodollar contracts and the 10- Year Treasury notes is rebounding at a faster rate than front month contracts indicating that uncertainty further out on the yield curve is driving activity as would be expected given current fed monetary policy. Forecasts expect the threat of inflation to steepen the yield curve which potentially has positive implications for short-term interest rate volumes.

We are also pleased with the growth in our 5-Year Swap futures contracts which have doubled in volume to over 5000 contracts per day since the first quarter of last year. These contracts provide users with an exchange trade of product that references OTC swap rates and are one of many innovative products that we are developing to meet the growing needs of market participants for the safety and security of central counter-party clearing in conjunction with products that retain key characteristics of OTC markets.

Finally in March approximately 8000 contracts per day were traded using the recently launched Inter-Commodity Spread functionality, up 31% from January volume. We have gotten excellent feedback from customers on this functionality and it is a key part of our mission to continually explore ways to extend our products and technology to enhance our customer's ability to effectively trade. As we have been doing for the past few quarters, I would like to now provide customer segment data. Please keep in mind that segment information provided is for combined legacy CME and CBOT products.

Bank proprietary trading activity was largely in line with 2008 percentages. Hedge fund activity was down from 8% in the fourth quarter to 6% in the first quarter. Offsetting this decline, however, was a significant increase in buy-side proprietary trading firm activity which increased from 34% in the fourth quarter to 39% of the total. Nonmember activity was 18% for the first quarter, in line with historical trends, but down from 20% in an unusually high fourth quarter. The remainder of the activity falls into the other member category which is largely composed of smaller member firms and individual traders.

We continue to believe based on volume trends detailed here, ongoing discussions with broad segments of our customer base and historical precedent that the current environment reflects a cyclical downturn and not a secular shift in the markets needs for our products. If anything, the value of the centrally cleared exchange model in managing risk has been strongly underscored and this has opened new opportunities for us on multiple fronts. We continue to pursue these opportunities actively. In general we seek to meet our customer's needs for innovative products in three different ways.

Through innovation and extension of our traditional exchange traded derivatives. Through hybrid products that combine aspects of traditional CME products and OTC products. And through clearing only services for pure OTC transactions. We also seek to increase our global customer base by introducing geographically relevant products and fostering strategic partnerships in key markets.

In terms of exchange traded products we are gaining traction with multiple new products including our 3-Year treasury note futures contract and E-mini FX contracts. These contracts were launched in March and have respectively achieved average daily volume of 2900 contracts and 5300 contracts since launch. Additionally in our equity complex the E-mini MSCI EAFE nearly doubled in volume to 2800 contracts per day from first quarter 2008 and the E-mini MSCI Emerging markets contract nearly tripled to 1100 contracts per day during that time frame.

On the partnership front we are pleased with progress made on our BM&F BOVESPA Order Routing relationship which showed March average daily volume of approximately 5000 contracts per day for north to south order routing. We were currently awaiting regulatory approval for north to south trading of the Ibovespa index contract which we believe has strong interest from the US trading community.

We continue to work very aggressively and make progress in discussions with participants for our cleared CDS platform, CMDX and our Cleared Interest Rate Swap offering. We expect to have more detailed announcements on these and other OTC initiatives later in the quarter.

In summary we at CME remain focused on managing our business with the flexibility to meet the challenges posed by the current operating environment while continuing to move forward to seize many opportunities that we see in the marketplace. We are very realistic about the many factors that need to improve in the capital markets before the crisis can be determined to be over. At the same time we are confident that today's conditions represent a cyclical downturn and that CME is poised to benefit from the ensuing upturn.

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

Thanks Craig. CME Group turned in a solid first quarter financial performance despite the ongoing challenges of the current economic environment. Our GAAP results are summarized in the press release and today I'm going to focus on the details of Q1 on a pro forma basis as if we own NYMEX for all periods considered. The pro formas also exclude approximately $13 million of CBOT in NYMEX merger related items on an after tax basis.

During Q1 we generated $647 million in revenue, $395 million of operating income, and earnings per share of $3.20. Average daily volumes were down 33% compared to our record 2008 first quarter but in line with average daily volume in Q4. However, continued discipline expense management helps offset this volume decline. The overall pro forma rate for contract for all of CME Group increased 12% to $0.833 compared to $0.743 in the first quarter of 2008 due primarily to a positive mix shift. The rate per contract decreased 3% from $0.858 cents in Q4 2008 due mainly a higher proportion of lower price member volume in the first quarter and to a lesser extent a product mix shift. Last quarter we mentioned that higher paying nonmembers increased from 18% of total in the third quarter to 20% in the fourth quarter. In Q1 the nonmember total reverted back to 18%.

If you zero in on interest rates you will see our average rate of $0.53 in Q1 is down from $0.57 in Q4 but up from $0.52 in Q3 and the E-mini rate in Q3 is the same in the third quarter. As Craig alluded to, the algorithmic traders who appeared to pause in the fourth quarter played a more significant role in the volume during the first quarter. In addition, the CME ClearPort rate dropped from $2.10 in Q4 to $1.75 in Q1 due to increased volume in the new lower rate PGM products which represented approximately 19% of volume in Q1 up from 3% in Q4. In an attempt to provide excellent transparency into our OTC business we provided an update in our last few volume releases on these low price contracts which average approximately $0.10 per round term. Total revenue from CME ClearPort increased to an average $1.1 million per day in the first quarter which was the best quarter in its history. Slide nine shows the break down of our growth by product area within CME ClearPort.

Quotation data fees totaled $86 million up 3% from Q1 of 2008, but down 2% sequentially. At the end of the first quarter users subscribed to 425,000 base devices across CME, CBOT and NYMEX. This device count is down 8000 since the beginning of the year.

I will now take a few minutes to review expenses. Total pro forma operating expenses were $252 million for Q1, down 2% sequentially and down 9% versus Q1 last year. We made a significant effort to reduce discretionary expenses and you can see the results in the numbers today. Our reductions include lower travel, training and trade show costs, along with negotiated decreases in rates charged by several vendors and consultants. On the compensation side we have delayed our normal salary increases and we are only hiring in critical areas. Our largest expense, compensation and benefits, was up $3 million sequentially to $87 million below the guidance we provided last quarter.

Our combined head count at the end of Q1 stood at approximately 2,275 people down approximately 25 since year end. We had reductions of 35 transitional employees related to our NYMEX and CBOT transactions. We did supplement our team with several key new hires during the quarter within sales, product development and business development areas in support of our long-term strategic initiatives and expanding global reach. These positions are primarily geared toward revenue generation.

Also within comp and benefits expense we incurred an expense reduction of $1.3 million due to losses on deferred compensation balances. This item is driven by quarterly equity returns and in Q1 the S&P 500 was down 12%. Keep in mind that there is no impact on our bottom line as there is an offsetting entry made in investment income. In Q4, there was a higher deferred comp reduction in salaries and benefits of $3.7 million as the S&P had dropped about 22% during that quarter. So as I said earlier, total compensation expense increased $3 million from Q4 to Q1 of which $2.4 million is related to deferred compensation. If the equity markets post a gain in Q2, we would expect to see an increase in deferred compensation from Q1 to Q2.

Our first quarter bonus expense was $9.7million which is down from our quarterly average run rate in 2008. We are currently running below our aggressive cash earnings target set at the beginning of the year. Stock base compensation was $8.7 million in the first quarter consistent with Q4 of last year. Keep in mind our normal annual stock option grant comes in the month of June so we would expect this expense to trend up a few million dollars through the end of the year.

Noncompensation expenses were down $20 million versus Q1 last year and down $10 million sequentially. Depreciation was down $3.4 million sequentially due to equipment that was decommissioned during the CBOT integration, other assets becoming fully depreciated and fairly low CapEx during Q1. Marketing and other expense was down compared to Q4 primarily due to currency fluctuations, legal settlements and lower travel, training and other employee related expenses.

We continue to spend judiciously on potential growth initiatives. For example, during the first quarter we had CDS related expense of $2.2 million in professional fees, up from $1 million in Q4 '08. We realized NYMEX related expense synergies of $7.4 million in Q1 are approximately $30 million annualized -- about halfway to the annual expense synergies we had identified. On the CBOT side our integration work is complete and exceeded the $150 million expense synergy target. In terms of our expectation for full year expenses based on volumes near current levels, we were updating our guidance and we would expect pro forma expenses to be down 2% to 4% for 2009 compared to the full year 2008 expenses of $1.08 billion.

Q1 pro forma operating income was $395 million, down 27% from the record first quarter last year. Although revenues decreased, our focused efforts to reduce expenses helped the company maintain the solid pro forma operating margin of 61% compared to a record 66% in Q1 last year. In the nonoperating expense category, interest expense and borrowing costs were $39 million and drove total nonoperating expense of $36 million. As I guided to last quarter, we recognized additional one time expense of $5 million related to the replacement of our bridge loan in February. This one time expense reduced earnings per share by $0.04 this quarter.

On February 9, we completed a public debt offering of $750 million of 5.75% fix rate notes due in 2014 and terminated our bridge facility. During the quarter, we paid down approximately $115 million in debt. We currently have $3.1 billion of debt in $588 million of cash and marketable securities. We had planned to pay the debt as it comes due which means we will be paying the lower coupon debt first. For modeling purposes, we would expect the blended interest rate to trend from 4.5% to 5% during the next few quarters and to approximate 5% for 2010. So as time progresses overall interest expense should decrease while our average rate paid will increase.

Pro forma net income for Q1 was $213 million and diluted EPS was $3.20. For the quarter, our pro forma effective tax rate was 40.9% in line with our expectations of approximately 41% throughout the year. Capital expenditures, net of leasehold improvement allowances, totaled $35 million in the first quarter driven primarily by data centers, software, equipment and facilities costs. We have completed a thorough review of our 2009 plans for CapEx and we expect to spend between $160 million and $180 million this year. The reduction from our previous guidance is driven by a planned delay of Phase 2 of our data center construction and a temporarily deferrals construction for employee space.

Now, turning to recent volumes. Much has been written about the decrease in volume in April compared to Q1 or to March. Right now April ADV is down 14% versus the first quarter of '09. Last year the April full month ADV was down 23% to compared to Q1 '08. And April of 2007, ADV was down 22%. Historically the second half of April has trended higher than the first half of April.

In the first half of '09 -- of April '09 -- we averaged 8.6 million contracts per day. So far in the second half we are at 9.5 million contracts. While we were far from being in a normal economic environment, it is fair to say that April 2009 volume to date is not highly unusual on a relative basis from our perspective.

In summary, despite the macro-economic challenges impacting financial markets and our customers, our strong financial results allow us to continue our focus on growing both the business as well as shareholder value for the long term while keeping a sharp eye on expenses. Before we open up the call for questions, I just wanted to note that last quarter we averaged over four questions per analyst. This quarter we will like to limit everyone to one question and one follow and then feel free to get in the queue for an additional question if time permits. With this in mind, we will open up the call for your questions.

(Operator Instructions) We will take our first question from Roger Freeman with Barclays Capital.

Hi, good morning. Okay, I guess question number one, as everybody likes to talk about CDS, I will ask mine.

What do you think about an opportunity to create an E-mini version of a CDX index product? A smaller notion. Because the problem with CDX is the average rate size is $15 million to $20 million. It doesn't apply to a lot of smaller institutions or professional traders or retail and that's something you could do that will take advantage of your trading platform, wouldn't require dealer support since you don't have any.

What do you think about that?

You know, Roger, I think -- it's Craig. My thought on that is that you have credit default swaps primarily at the moment as a largely institutional market. And what we are trying to do is try to work with the institutional customers and the dealers in that market to essentially facilitate central counter-party steering of contracts as they are currently structured to some degree of standardization but not with a view toward trying to transform that market into a market that would have a broader base of participants, at least not for the moment.

Okay. That's helpful, thanks. Then my second question around the interest rate volumes, some interesting stats you throw out around April. I guess one -- so you've talked in the past about there being a correlation between issuance, volume and trading -- hedging volume and the interest rate futures and we know that mortgage refis are picking up. Treasury issue is picking up. One thing we are hearing is maybe it's some traders are sitting out on the treasury side because of concerns about the government, about the fed actually buying $300 billion worth of that issuance back in and how that might impact markets and basically wherever government is interfering in private market as we are seeing in many aspect sitting out.

Do you think there is an impact there?

Roger, I think if you look at the open interest in the 10-Year Treasury notes, you can see some of the impacts we think at least talking to some banks and some customers of the refi business. I think you are spot on there looking at that activity. I think any market where the rules of the game change people do tend to take a step back and figure out what the new equilibrium is. With that said I think if you look at what's been happening in the fixed income market in the last couple of days is regardless of what some of the policies are, the market is going to take a view point of where rates are. And that's actually going to be pretty constructive for our volumes going forward. Because really what drives trading in the interest rate complex are people's changing expectation to where rates are going. That's going to be the real catalyst to bring that market back and growing back to normal base.

Okay. Thanks.

Next we will go to Rich Repetto of with Sandler O'Neill.

Good morning guys. A follow-up on the volume question and Craig and Rick, you talked about a lot of the positive things. April's off to a slow start. And if you look at open interest, you are about the same as where you were at the first quarter. And so it says to me it might be the algorithmic trade of the turnover being less and you talked about the pause in the fourth quarter and how they came back. Have we seen a pause with them again here in early April?

You know, Rich, a lot of -- looking at that open interest trend, what you are seeing from the increased participation in the algorithmic guys is again, those guys don't put on a lot of open interest in general. As the market starts to move now, I think that will actually encourage them to come in in a bigger way. So it's not unlikely that you don't see the volumes increase before you see open interest increase.

One thing to be careful on, too, is looking at open interest in the interest rate quadrant is make sure that you are looking at futures and options separately because there is a lot going on underneath the surface there.

That's a fair point. I looked at the open interest as a good thing that you still -- there hasn't been a deterioration. You're still at the same levels as early 1Q. But the volumes, again the turnover had lagged. Anyway, that's what I was asking about.

The next thing, I'm not sure what this is asking. I had to jump off quickly. On the OTC market, I did hear Roger's question. And it seems like as we go into possibly the bigger opportunity being interest rate swaps, it's a little bit similar in that the dealers have concentration in it and they have an offering that they are at least using right now. And I guess, Craig, just to go over the strategy and what you see as your potential to crack that or is it as strong, the dealer sort of consortium and swap clear.

I think it's fair to say that in all of these OTC markets, the dealer community is a very substantial part of the trading activity that happens there. I would point out a couple of things.

First of all, we already have the largest and fastest growing OTC clearing business which is ClearPort. That's a $250 million a year business that's growing at 70%. And it's rapidly diversifying in terms of the breadth of products that we are facilitating through ClearPort.

Secondly, I have to remind everybody, this is very early early stages in what I think will be a long term secular shift in the way that business is done in the over the counter markets. I do think that central counter-party clearing services will be very complementary to the business models and profit drivers for the dealer community. And, you can't get too carried away with the idea that the dealers are already participating in a particular service. While I think I should be commended for the progress that they've made, you have to remember that only three-tenth of 1% of the total growth outstanding in the CDS market has been migrated to ICE Trust. There is a long marathon in front of us in terms of that.

I think CME Clearing is exceptionally well positioned to be a participant in that given the strength of ClearPort and given the strength of CME Clearing generally.

Understood. And then last just a quick question on the balance sheet and I may have missed this last quarter. But your -- Jamie, the cash and performance bonds they spiked up at the end of the year and then came back to $9.8 billion in the first quarter, the explanation there? I may have missed it last quarter.

Just, Rich, in the fourth quarter last year as we are going through the economic crisis it was an indication that participants in the clearing house were comfortable putting cash up with the clearing house. They are looking someplace to put that cash safe and sound. They chose CME Clearing House. As markets start to calm down you will see that will begin to change and they will start to invest more in treasuries and whatnot and post those with the clearing house.

And, there's relatively no impact on your economic because interest is paid to them on those deposits, right?

We are an interest on the cash deposits. But, the interest that we earn is very minimal.

Okay. Thanks, guys. Thanks for taking my questions.

Thanks, Rich.

Following question comes from Niamh Alexander with KBW Financial.

Hi, thanks for taking my questions. Good morning. I wondered on ClearPort please -- the volume there has been so so strong and April has come off a little bit and then I want to ask Rick about the new products you rolled out more recently. Is it too early to get a read on some activity there?

The ClearPort volumes as you point out have been extremely strong. What you are seeing in the marketplace on ClearPort is also what you are seeing in the market for the listed products as well as the first couple weeks of April with Passover and Easter have been slow pretty much anywhere you look.

I think the ClearPort volumes where the biggest decline has happened in the first couple of weeks has been in natural gas primarily driven by two factors. One is the market has been stuck in a range a little bit here. And the options volume as well. As we transition out of kind of the shoulder months now and into the summer season, you typically tend to see a pick up in natural gas. Some of that has to do with the price action in that market as well.

Okay, thanks Rick. And I guess I'm just -- on the ClearPort as well. Can you expand a little bit on some of the opportunities in the electricity market. I think there is regulatory change happening. How might CME benefit there?

Thanks for pointing that out. We've clearly been very successful with the PJM contracts that we have launched and has given us a really exciting platform to move into some of the other regulated areas. Obviously some announcements that came out late last week about the California ISO is going to start using some of our prices has been hugely popular.

One of the announcements we've recently put out is that we will put the PJM products on Globex as well which is pretty exciting news for us to try to help mature that market. So we do see a lot of opportunity. We also -- there is a number of regulatory things going on throughout the country. Texas is trying to figure out what they are going to do as well. This is a field that is pretty open and we look forward to coming out with new products.

Thanks. And if it could help me maybe just size it. That is the lower fee contract. Just in terms of ClearPort's total and business mix, maybe where is it now and where are you thinking it might get to.

The PJM contracts are the lowest priced contracts we do have on ClearPort. A lot of the pricing is really around the size of the contract. So not every one of the contracts is necessarily going to be that size when we put them out. A lot of it has to do with how that market trades and if you look back historically, Legacy, NYMEX and [Price], PJM in the past, the contracts spec was a little large. What we have been able to do is cut down on the size of it and it has been phenomenally successful.

Niamh, this is Jamie. If you look on slide nine, there is a break down of some of the ClearPort revenues you can see on there. PJM was 122,000 ADV in the quarter of the total 629 for ClearPort.

That's helpful. Thanks Jamie. And then if I could, stick to volume but move over to the futures contracts, the equity futures contracts which have been so strong where the rates contract has come off quite a lot -- we are seeing that slow and maybe arguably unusually slow recently and I'm just wondering if you are seeing any trends if it's maybe related to volatility easing a little bit or is it something that is mix shift in customers?

Some of it has to do with what is going on in the underlying market as some people are very focused on single name risk right this second. I think to be careful on how you look at the equity market going forward because liquidity is still key.

Something we look at as depth of book. What we have seen rebound from December as we've seen the depth of book increase more than 2.5 times. What we are starting to see is people are starting take a little more risk there. Obviously depth of book doesn't get us volume, but it does give you some general indication that people are returning to the market and willing to commit risk.

And one of the things that has been troubling to us and we've constantly said is volatility has been so high in some of these markets. We are actually encouraged to see it coming down because you will see the depth of the market and people taking a little more risk increase. You will also start to see people coming back to the options.

People are talking about volatility in that market but there are extremely high levels from historical perspectives. People got excited when [Vicks] got into the mid-30s the other day and then spiked right back up so putting it in some historical perspective is important.

That's fair enough. Thanks, Rick. Then lastly if I may, the balance sheet, thanks for the color Jamie on repaying the debt. But you still have quite a lot of cash. Your stocks -- it's relatively stable. Should we take as the priority use of cash as repaying debt or repaying debt ahead of schedule or is there any room there for share repurchase in the next six to nine months?

I would say for now our focus is definitely on debt reduction.

Okay, that's great. Thanks for taking my questions.

Next we will go to Mike Vinciquerra with BMO Capital Markets.

Thanks very much. One more question for Sir Richard if I may. At this time the interest rate site guide, just curious Rick, why you guys have never really had a mortgage product? It seemed like a natural add on. I used to cover the mortgage companies and they all hedge a lot of their production and even their servicing portfolios using treasury futures and it just seemed like a natural product for you guys given your customer base. Could you talk about that little bit?

Believe it or not we started in the interest rate business with a Jenny Mae contract going back a long -- Years ago. In the early '80s actually.

Yes, the problem on the mortgage side has always been what the underlying is and some issues about deliverable supply. Most people as you point out, Mike, have used treasuries to hedge that exposure. In normal times that's been a pretty good hedge.

I think toward the end of '08, obviously people had some issues there. In a more normal functioning market it's been a pretty tight correlation and it's been a pretty good hedge for folks.

At this point you don't think there is a need? Or do you think the current market conditions are creating that sense for people there is a need for a better corelated product?

It's an area we look at all the time. That's one from a regulated futures contract that is a pretty difficult one to structure the product to make sure that it doesn't have some issues when it comes to settlements.

Okay, very good. And then one question for Jamie. You mentioned the data screen's down about 8000 from the end of the year. Has that been accelerating at all? Or should we continue to expect some moderation in the numbers of subscribers?

You know, it's tough to say. I think you will continue to see somewhat some moderation as the crisis plays out over time and the layoffs that are occurring flow through. I think we are -- it hasn't been as dramatic a dropoff as I would have anticipated at the beginning of the crisis.

All right. Thank you, guys.

I will move on to Ken Worthington with JPMorgan.

Hi, good morning. On page six of the slide deck you show there is a high correlation between treasury issuance and futures trading volume and it seems like there is a big opportunity. But when I dig into it treasury issuance doubled in November '08 and ramped again if February, bringing the treasury issuance run rate to what JPMorgan economists think what will be maintained for the rest of '09. We haven't seen either open interest or volume increase and it's been six months and actually if my data is correct both are down materially since the issuance started to ramp.

I was hoping you could flush out that slide a little more because it seems like there is a big opportunity. I can't get things to line up. Was wondering if you could offer some help.

I think you need to be a little careful on how you look at that. It's not the fact that issuance is out there that really generates the volume. It's the fact that the people hold that exposure and as rates move people have to adjust that exposure. I think what you are seeing now is a lot of issuance and people not expecting a whole lot of changes in rates.

So I think as we -- if you look at that from a historical perspective, it's really that second piece of it that drives volumes. The good part of that is once that exposure gets out there, if you get back to a rate environment that moves or yield curve that moves around a bit, that's probably pretty positive for us and that's why that correlation is so high.

So should I think about it as issuance is sort of the opportunity, but expectation for rate changes is the catalyst. So the fact that issuance has gone up is a really good thing. We need that follow through with the rates and then we start to see a pick up in volume. Is that it?

Correct. Because it really is a timing issue of when you see those volumes kick in. And as you get the multiyear exposures of the treasuries put out there. You give us a lot of opportunity for people to change their mind or people's views on inflation to change. That gives us a lot of opportunity for volume.

And then based on history, is there a common lag like six month lag, nine month lag, 12 month lag. Anything that you noticed as you analyzed the data?

That is a lot more variable than one would expect. lot of it has to do with -- again changes in rates or anticipated rates of change. The other issue on this is we've just never seen issuance at this level before so we are a little bit in unchartered territory.

Thank you. And then on ClearPort, great success here. Launched a lot of new products. Does that pace continue in 2Q and 3Q? That's it. Thank you.

We have a pretty full plate right now of what we think we can launch. The environment has created our customers, the banks, the inter-dealer brokers are giving us all sorts of ideas what people want to trade. Especially in the energy area and the commodity area. This has been a place where it's the way to keep those markets functioning. Keep those markets trading. Really to be perfectly candid, it's more of an issue of which products do we get out given the market opportunity because we have -- there are just ideas coming in every day.

Great. Thank you.

Next we will go to Howard Chen with Credit Suisse.

Good morning, everyone.

Hi, Howard.

First I wanted to touch on the OTC market from a different angle. New administration and congress have made some pretty broad statements about reducing systemic risk and more highly regulating derivatives market. Craig or Terry, from your perspective could you discuss how you envision progress along the Washington, DC front and how that timing potentially plays out in your mind and the positives and negatives.

I think there is not a lot to say. You said it right which is that certainly Secretary Geithner and others have indicated that they want to see more central counter-party clearing applied to over the counter derivatives transactions. There has also been some congressional proposals -- legislative proposals to mandatorily require central counter-party clearing for OTC transactions. We are opposed to that. We actually think that there is a range of products that probably are not suitable for central counter-party clearing.

More importantly we think that the role for government if there is one is to provide essentially incentives for the private sector to increasingly adopt central counter-party clearing services where it makes sense to do so which again is not in all cases. I think that's probably where we will find ourselves. I do think that there will be likely changes in regulatory capital requirements and other regulatory policies that will help sort of encourage the sell side as well as the buy side to increasingly rely on central party clearing.

Just to follow-up on that, Craig. I think as you work out -- and the management team work out -- the strategy on the OTC front, is it imperative, important that you have new legislation in place? Or do you work under the assumption that you can win share from the OTC market without any change from the DC stand.

I think it's absolutely the case that we can and will be successful over time in providing over the counter clearing services. Again, I accentuated already the success we are having with ClearPort and the broadening of the product range that's being facilitated through ClearPort. I think if you just fundamentally look at the decreased leverage in the market, the stresses on the banks in terms of their balance sheets, the interference with the normal functioning of the over the counter market, I think it's clear that we provide a lot of complementarities to the existing business model and profitability of the dealer community.

I think it's important just to say that our goal isn't to take share from the OTC market, but really to just work with the market participants in a complementary way where we can add value to their business, enhance their business model, enhance their profitability. It's not a competitive context. It's a collaborative context.

Thanks for that clarification Craig. And Jamie, on the revised expense guidance, wanted to drill in on your commentary that if ADV holds near current levels that pro forma operating expenses should be down roughly 2% to 4% from last year's core. The way I run the numbers the mid-point would be down 30 million or so which in my mind is just the incremental NYMEX synergies.

Would you agree with that and if so where is the core expense growth of the franchise coming from?

Well, first of all, when you look at the expense based overall there's always going to be some level of growth all the same -- just from price increases, inflation that sort of thing. I wouldn't say it's all just NYMEX synergy that you are seeing. We do think that there is going to be expense growth across some of the key categories including (inaudible) comps for example. We've got the June grants coming up. I mentioned those earlier.

The potential for a deferred comp, the increase as the markets potentially rebound. That was a $1.3 million reduction in expense in Q1. And if the markets turnaround that could actually add to expense going forward. Clearly from all of the questions that we talked about on the call today we are very engaged in working on our OTC initiatives so there will be professional fees and other costs associated with that. So you will see some of the expenses from that.

And then on the other expense line, some of the benefit we saw there was one time in nature in that it was FX fluctuation or some legal settlement impacts. Just going forward, we will continue to -- not just on the OTC side but other strategic initiatives. We are engaged with the Korean exchange. We have the Green Exchange that we are working on. These things do take some additional expense and I think it will be some of the drivers.

Okay. Thanks so much for taking my questions.

Thanks, Howard.

Now we'll go to Chris Allen with Pali Capital.

Hey, guys, how you doing?

Hey, Chris.

Just one quick question. The emissions market is exploding in terms of volumes right now and obviously there is a lot chatter around cap and trade implementation. Can you just give us some quick thoughts on that market and what you are doing to pursue that market over the longer term.

I will start and turn it over to Rick. This is an area that we are excited about and very focused on as part of our acquisition of NYMEX you might recall that they had begun putting together the Green Exchange initiative which is a consortium initiative involving not just CME Group but a wide range of leading market participants with an interest in emissions and biofuels trading. We have been working very, very hard over the last six months to bring that consortium and offering to market.

I think it's fair to say that we are encouraged by the committment of the administration and with the legislation that we are seeing thus far in terms of cap and trade and facilitating essentially a market for trading and emissions credits. We are making very good progress on that. Rick, I don't know if there is anything you want to add in particular.

Yes, Chris, just one additional thing. I think Craig covered it well. The European market obviously is much further along and more developed than the US market. There is still things that the administration and congress need to establish and create some regulation around before I think you will see the robust trading in the United States. That's a pretty big opportunity for carbon credits and emissions here in the US.

Thanks a lot, guys.

And we will move on with Don Fandetti with Citi.

Good morning. I know the pricing environment has been pretty quiet. I was curious -- as you look out over the horizon are there any areas in your business or products where you might be raising or lowering prices?

Don, I think it's difficult to comment on questions like that. We do tend to look at pricing on a very regular basis. I think you've heard us say before that overall the financial market conditions have been such that we have been taking a pause from that -- just recognizing the impact that has occurred to our customers from the overall market conditions. We do continue to look at pricing on a regular basis.

That's all have. Thank you.

And we will take a follow-up question from Roger Freeman.

Hi. Just have a few follow-ups here. You know, Craig, you were talking about the collaborative efforts that you approached the OTC market with. Not to put you on the spot or be disrespectful. When you talk to a lot of dealers in private there seems to be some distrust of the CME organization. I think they view you as a monopoly to some extent with a lot of pricing power and it doesn't feel like they want to work with you.

My question is, what do you think you need to do to get that message from your point of view better out to the dealer community and are you doing anything differently than you have done in the past?

No. I think that's a good and fair question. I mean, first of all we have a lot of areas where we are working very well with the dealer community. I think ClearPort is an excellent example of that by the way. Where we had tremendous support from both the dealer community as well as the inner dealer broker community.

I think one of the things that we have been trying to do is to really be much more collaborative with the dealer community again in a noncompetitive way but in a way that reflects a spirit of partnership and collaboration. We are trying to give greater emphasis to how -- and complement their business and profitability through our central counter-party clearing. And being less oriented in our approach toward execution services or radically changing the existing market structure. So we are trying to bring our capabilities into the way the market functions best for them and for the other market participants.

We are doing a lot of outreach right now to communicate that approach by CME Group with the leadership of the folks in the dealer community, the investment banking community, if you will. So I do think we have modified our approach considerably and I think that that actually is resonating with a lot of the top people at the firms. That's something that takes time. I think they feel that basis of trust and really accomplished a lot. Obviously from a reputation perspective, I think they recognize the seller strengths of the CME Clearing capabilities. And I think they also recognize the strong position that we have in terms of capital performance, bond efficiencies and the rigger of our risk management system.

So, we have a lot to build on. We are modifying our approach to extend the olive branch and build those bridges.

Okay. That's helpful. And then on new products there are a few questions about that. Are you looking at products to help manage just more broadly basis risk. Things like CDS versus cash basis and corporate bonds. CMBX versus CMBS.

If you look at a lot of the losses the financial and institutions sustained late last year it was the basis risk diversion so it seems like there could be demand for some help in that area.

I think it's a great point Roger and to think about where we can go with some of our ClearPort thoughts and thinking about how do we clear some of that to help people.

Are there some substitive efforts under way on that front?

We have not announced anything at this point. But, obviously those are areas that customers have been pointing out to us as well and clearly is a need in the marketplace.

Okay. And then on terminals, one more question on that. They were down a couple of percentage points. Think about layoffs across Wall Street were at least 10% if not more.

How do you think of the flow through effect of that over time? How long does it typically take for actual subscriptions to get turned off?

As we look historically we have seen a more significant drop off in terminals but what we have going for us now is since the last time there was a major layoff on the street the firms have gotten much more efficient in their allocation of their terminals and they've also gone to some different enterprise-wide agreements with some of the key contributors which mitigate some of that risk. I don't if know you can necessarily look to history to exactly foretell what's going to happen.

Roger, one other thing to point out all those terminals aside. Wall Street is just part -- the sell side banks are just a part of that customer base. You've actually seen some strengthening in people especially around the commodity and energy areas of wanting access in the market data. That has helped balance it out.

Okay. That's helpful. Couple quickies here. Is the increase in algo users a percentage this past quarter? Do you -- you say they dropped off in the fourth quarter -- do you view them as more back online on a normalized basis? Or is it still building?

That's one of those hard questions that you never know. A lot has to do with market opportunity because a lot of those algorithms are based on relationships between markets and price and price movements within the market. That's hard to know.

And very last question. One more macro. Look at your business in aggregate. And you are for the most part the future's market barring one other competitor in the US.

As you look at your growth rate going forward longer term, what are the things that you think most move the needle? It sounds -- we've been talking a lot about the OTC opportunity. Is that really what we should look to other than [MA]?

I would say continued secular trends generally speaking. I think people have lost sight of that in light of the overall global economic issues and financial markets dislocation of the last six to nine months. But I think the long-term growth rate for this industry will continue to be very commensurate with the last 20, 25 years. I would add globalization as the key part of the growth driver for the future of the Company. I always like to remind people that in the early 1980s we and the Chicago Board of Trade -- when CME and the Board of Trade were separate -- were 90%-plus of the global market for listed futures and options contracts. And a decade to 15 years later we were in the mid-40% on a global basis. Yet during that same time we had roughly a compounded annual growth rate of 18% to 20%.

We clearly have tremendous growth still occurring and emerging markets. And we have a very broad product base with global appeal. We have I think the best distribution in customer relationships globally. And we can leverage that to our advantage as well as with the strategic investments and partnerships that we either have had or intend to put in place.

All right. Thanks a lot.

And, we'll take our final question from Edward Ditmire with Fox-Pitt Kelton.

Thank you. My question is, are new products particularly OTC products doomed to be lower margin of [ferris] versus Legacy Futures business. Not just the CME but on a industry-wide basis. It seems like on CDS's standard operating procedure for launching a platform includes generous equity sharing, forever discounts and the best ClearPort launch is the power contracts or low cost contracts. I'm wondering if years from now we see the OTC opportunity as something that's both low volume and low margin?

Actually, the pricing of all those contracts are all over the place. If you look at some of the things on ClearPort we actually get higher RPC for just clearing than we do for products that are listed and cleared.

It just happens in your example at PJM is intentionally was a very small product. Because we thought it would help trade better and generate more cleared opportunities for people.

I don't agree with the premise that they will be lower RBC contracts. In contrast we actually see -- in a number of places we actually capture more just for the clearing piece of it. And I think people are also valuing clearing so much more than they probably historically have looked at because of the crisis.

And this is Jamie. Don't forget our ClearPort RBC is around $1.75 versus overall of $0.833 cents. I think that highlights that there is opportunity there on the OTC side.

It just seems to me particularly with the ICE experience that the dealers are showing the ability to influence the pricing discussion to a pretty large extent. More so than probably that they have been able to influence the Legacy Futures business.

I don't know that we can come on what ICE's pricing is.

Thanks a lot, guys.

Thanks Ed.

And we have no further questions at this time. I would now like to turn the call back over to our speakers for additional or closing remark.

Thank you for joining us this morning. We look forward to talking with you again next quarter.

This concludes today conference call. Thank you for joining us and have a wonderful day.