芝加哥商業交易所 (CME) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the CME Group third quarter 2009 earnings 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 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 third quarter and then we'll open up the call for your questions. Also joining us here today for the Q&A session are Terry Duffy, our Executive Chairman, Phupinder Gill, our President, Kim Taylor who runs our Clearing House and we have a sick Rick Redding, our Head of Products and Services who also made it in today.

Before they begin, I'll read the Safe Harbor Statement. Statements made on this call and in 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 and 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 forms 10-K and 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 also a file in the investor relations portion of our site that provides detailed quarterly information on both a GAAP and pro forma basis. With that I would like to turn the call over to Craig.

Good morning, and thank you for joining us today.

During the third quarter we saw increasing stability in the macroeconomic climate as evidenced by multiple factors. The LIBOR-OIS spread has further tightened to its lowest level in almost two years indicating a lower risk premium on credit, due to greater economic stability. Long-term fund flows continue to move into mutual funds, primarily fixed income products. Hedge fund assets under management rose for the second quarter and hedge funds net asset flow was positive for the first quarter this year. Finally, after extremely reduced activity in the third and fourth quarters of 2008, mortgage originations have shown sharp up turns in every quarter this year. While many of these metrics are below historical highs, the sustained nature of the trends as well as the indication that market participants are seeking higher risk and return are promising for the overall economy and for CME Group's business.

CME Group's volume also demonstrates areas of stability and improvement. Third quarter overall average daily volume was 10.1 million contracts and exploring the details by product area there are some promising trends. Additionally, October average daily volume of approximately 10.7 million contracts will be the best non-roll month volume of the year. And open interest is currently up 18% from year end 2008 in the combined CME CBOT and NYMEX product lines. The interest rate complex posted its highest quarterly volume since Q3 '08 with average daily volume of 4.4 million contracts. Within rates Euro dollars continue to seek growing activity in contracts in the second and third year of the yield curve. In the third quarter these contracts contributed 53% of overall Euro dollar futures volume versus only 44% for the same quarter a year ago.

Changing expectations around interest rates are a key driver of CME Group's interest rate volumes volumes and this shift in Euro dollar activity indicates that market participants see more likelihood for changing interest rates farther out on the calendar than in the near term which is in line with current Federal Reserve policy and with prevailing economist views on the timing of potential Fed moves. While we certainly are not in the business of trying to predict interest rate moves, we highlight this volume trend as one example of how interest rate expectations affect CME Group's volumes.

Another metric impacting interest rates we closely follow is cash market penetration of Treasury futures. Our Treasury complex has shown growing cash penetration or Treasury futures activity as a part of cash Treasury trading activity over the course of 2009, ending the quarter at 56%, up from 53% at the end of the second quarter and from 46% at the end of December. Increased cash market penetration at a time of heightened Treasury issuance positioned CME Group well to capture hedging activity when interest rate expectations start to shift.

Energy volume in the third quarter was in line with year-to-date average daily volume of 1.5 million contracts. However on a revenue basis the energy complex generated $161 million which is up 11% from the prior quarter and is a record for quarterly revenue. Both crude oil and natural gas revenues were up from recent quarters. FX also had its highest quarterly volume of the year trading 660,000 contracts per day and October volume is also strong at 700,000 contracts per day. The equities complex traded 2.7 million contracts per day in the third quarter down 11% from the prior quarter. This shift is primarily due to cyclical impacts from decreased volatility in this asset class which are affecting other equity index futures and options markets globally.

We are pleased to see ongoing results from our globalization efforts. One measurable example of these efforts is our international incentive program which provides fee incentives for high volume participation by international customers. NYMEX energy products were added to this program in April and since then we have seen average daily volume and energy products traded through this program increase from 9,000 in April to 42,000 contracts in September. This activity highlights the success of our globalization efforts and we look forward to continuing to build on the strong performance to date, especially with the addition of COMEX metals products to the program in the first half of 2010.

Looking beyond product performance to our customer segmentation, we saw numbers in the third quarter largely in line with the August and September detail provided at our recent investor day. Proprietary buy side traders contributed 43% of overall volume, hedge funds accounted for 7% of volume, showing a slight increase in contribution for the second quarter in a row. Bank proprietary trading accounted for 14% of volume. Other member activity was 20%, and nonmember activity at 16%. This segmentation is for legacy CME and CBOT products only. Overall, though volumes continued to be challenged we're pleased with the volume activity in relation to macroeconomic conditions and we believe that the ongoing signs of economic recovery will continue to exert potential positive influences on CME Group volume.

I would like to talk now about CME group's strategic accomplishments in the quarter. NYMEX integration continues to progress on schedule with the full clearing integration completed in early October. Equally important, the cultures, employees and strategic goals of our two firms are meshing well and as a combined Company we are emerging from the integration and building phase with a highly talented, dedicated staff that is able to bring expertise, vision, and scalability to all of our growth initiatives. Beyond the ongoing efforts to promote, expand and cross-sell our core exchange traded business, a key focus for CME Group is our OTC efforts. We continue to make excellent progress on these, with a target date of year end for participants in the CDS buy side pilot program to begin clearing. Efforts in cleared interest rate swaps and FX also continued to advance.

In September we signed an agreement with Bursa Malaysia under which we will provide Globex order routing and matching services for their derivatives business. Additionally, CME Group will receive a license to use their settlement prices for the development of a CME listed crude palm oil futures contract. This partnership with others such as BM&F Bovespa in Brazil helped further CME's strategic goals of increased global distribution and product expansion. Following the CFTC's approval of the Ibovespa index for US-based trading accounts in late August, BM&F Bovespa north to south order routing saw 85,000 contracts sides trade in September and 144,000 contract sides trade in October to date.

On October 27th the volume reached an all time record of 219,000 contracts sized. The percent of BM&F Bovespa's total volume coming from north to south order routing was nearly 3% in September and continues to grow in October. For BM&F Bovespa, this partnership is bringing in completely new incremental volume from a previously unreached customer set which is US based algorithm proprietary traders. Over and above charging for transaction processing, CME Group is the single largest shareholder, benefits from the stock price increases seen year-to-date as BM&F Bovespa grows, the liquidity of their markets through this new arrangement.

In addition to all of this, we have been working diligently on the regulatory front providing input and feedback as legislators and regulators work through various financial reform proposals. There has been a significant amount of recent advancements in these efforts and on the whole we believe these outcomes to date contain net positive impacts for CME Group. First, a key conclusion of the SEC CFTC Harmonization report is that the futures in cash markets are indeed distinct in both product concept and market function and one-size-fits-all regulation is neither desirable nor appropriate. The areas where recommendations were made are largely technical and relatively modest in nature and can be enacted with minimal disruptions to the markets.

Secondly, the bills passed out of the House Agriculture and Finance Committees reflect considerable feedback from market participants and with their focus on using the advantages of central counter party clearing to reduce systemic risk acknowledging the value of CME Group's model in the overall markets. Finally, the discussion of position limits in energy is ongoing and CME Group continues to take an active role here. On this topic, the language in Chairman Peterson's bill that prevents the CFTC from placing hard positioned limits regulated US exchanges until they are simultaneously placed on the OTC market in foreign boards of trade and the call for the CFTC study on the impacts of position limits reinforces the views expressed in our recent White Paper regarding the potential for inappropriate position limits to have unintended consequences.

While we have not seen convincing evidence that factors other than fundamental supply and demand influenced commodity pricing, and while we are not in favor of position limits as a tool to manage price volatility, we are working closely with market participants and the regulators to ensure that any action taken does not negatively affect the liquidity and efficiency of our markets. There are several more steps involved before any regulatory or legislative changes are made to any of the previously described issues and timeframes will remain beyond our control. As we have for many years we will continue to leverage our experience in relationships in Washington to both educate and inform key policy makers on the critical factors affecting our markets.

In summary, during the third quarter CME Group's core business showed stability and strength and improving open interest trends. Financial reform efforts advanced and currently show minimal potential for negative impacts to CME Group and in fact are likely to be positive influences if enacted. Finally, we continue to invest in and see results from our global expansion efforts and our cleared over-the-counter efforts. All of these factors we believe position CME Group well as the economy finds new ground, post credit crisis.

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

Thank you, Craig. CME Group turned in a solid third quarter financial performance despite what is normally a seasonally slower July and August. Our GAAP results are summarized in the press release. Today I am going to focus on the details for Q3 on a pro forma basis as if we [own] NYMEX for all periods considered. On an after tax basis the pro formas also exclude a $19 million impairment related to IMAREX as outlined in the press release, $2 million of CBOT and NYMEX merger related items as well as the impact of earnings on deferred compensation balances.

During Q3 average daily volume was down 23% compared to an extremely active third quarter of 2008 as a result of the credit crisis. Expenses were down 10% compared to the same quarter last year and up slightly from the prior quarter this year. The overall pro forma rate per contract for all CME Group volume increased 6% to $0.834 compared with $0.79 in third quarter 2008, primarily due to our energy and metals increasing from 13% of total a year ago to 17% this quarter.

Sequentially the rate per contract increased $0.011 from $0.823 due mainly to an increase in our ClearPort and energy rates driven by a lower percentage of low priced PJM electricity contracts which accounted for 16% of ClearPort volume, down from 21% the prior quarter. We also saw a slight benefit from the pricing changes implemented during the third quarter which lifted the RPC by $0.003 and from a higher percentage of FX and energy contracts in that product mix. Partially offsetting these positive rate shifts was a 0.6% increase in the member mix.

Market data revenue of $81 million for the quarter decreased 11% versus last year and is down 1% sequentially. At the end of the third quarter, users subscribed to 400,000 base devices across CME, CBOT and NYMEX, down 2% or 7,000 versus Q2 of this year, reflecting the impacts of reduced staffing at the larger banks. During the third quarter one-time vendor audit assessments were about $700,000 higher than Q2 which resulted in revenue dropping only 1% sequentially. We have announced a professional screen fee increase from $55 to $61 per month beginning in January of 2010.

I will now take a few minutes to review expenses. Total pro forma operating expenses were $244 million for Q3, up $1 million sequentially and down 10% versus Q3 last year. We continued our significant efforts to capture the NYMEX synergies and reduced discretionary expenses where possible.

Starting with our largest expense, compensation and benefits was down $1 million sequentially to $84.5 million due primarily to lower stock-based compensation. Our combined head count at the end of Q3 stood at 2,250, basically flat with the prior quarter. Our third quarter bonus expense was $8.8 million virtually flat relative to the second quarter. Stock-based compensation was $6.8 million in the third quarter down $1.4 million from Q2 of this year. We moved our stock option grant date from mid-June to mid-September and the prior year grants rolled off in June resulting in lower Q3 expense. Based on our grant in September we expect stock-based compensation to increase by approximately $3 million to $10 million in the fourth quarter.

Non-compensation expenses of $159 million were down $19 million versus last year and up $2 million sequentially. Comparing to the prior quarter, we had a decrease in our professional fees and outside services expense line which partially offset increases in marketing and other, along with several technology related lines including depreciation which increased following the start up of our new data center during the third quarter. We realized NYMEX related expense synergies of $12.4 million in Q3 or approximately $50 million annualized and we are virtually complete in terms of the $60 million annual run rate expense synergies we identified at the time of the acquisition. We completed major milestones with the clearing integrations for metals in September and energy products in early October. We expect to be done with the NYMEX integration in the next few weeks.

In terms of our expectations for full year expenses, based on volumes near current levels, we expect annual pro forma expenses to come in close to $1 billion which is below the guidance we gave last quarter. Giving some further color on the fourth quarter, we expect compensation expense to jump due to the stock-based compensation increase I already mentioned. On non-comp expenses we expect an increase in technology lines based on the new data center and increase in professional fees primarily due to the intensity of our OTC activity from a legal and consulting basis, and increases in marketing and other with a significant amount of international travel and our ongoing efforts related to activity in Washington, D.C.

Q3 pro forma operating income was $407 million, down 21% from the third quarter last year and slightly higher than Q2. Our revenue was down 17% versus the same quarter a year ago while expenses dropped by 10%. As a result we were able to maintain a very strong pro forma operating margin of 63% down from Q3 of '08 and unchanged compared to last quarter.

In the nonoperating income and expense category on the investment income line we received a $4.8 million dividend from BM&F Bovespa. They have recently updated their dividend policy and going forward we expect them to pay a dividend each quarter with the amount varying based on their performance. During the quarter we paid down $450 million in debt. As of the end of the quarter we had $2.5 billion of debt and $300 million of cash and marketable securities. For the quarter our pro forma effective tax rate was 41.4% bringing us to 41.1% year-to-date.

Capital expenditures, net of leasehold improvement allowances, totaled $28 million in the third quarter and $94 million year-to-date driven primarily by data center, software equipment and facilities costs. We expect full year 2009 CapEx to total approximately $140 million. This reflects a reduction from our previous guidance which is driven by a deferral from data center spend and some office construction as well as lower capacity needs. So far in October we are averaging 10.7 million contracts per day. This is higher than any first month of a quarter so far this year. Also, we expect to have positive growth versus October of last year in all of our commodity product lines along with foreign exchange.

In summary, as you can see from our results we have been focused on expense discipline while continuing to invest in growth opportunities. Given the initiatives we are undertaking and the firming up of the economic environment as highlighted by Craig, I am looking forward to a bright future for CME Group. As we reminded you last quarter, in order to get to everyone we are limiting all of you to one question and one follow up and then feel free to get back into the queue for an additional question if time permits. With this in mind, we will now open up the call for your questions.

Thank you. (Operator Instructions) Our first question comes from Roger Freeman with Barclays Capital.

Hi. Good morning. I guess a few questions here. I guess only two. Maybe on the interest rate swap opportunity -- as you look at how that product has evolved over time, can you help us think about that a bit because I guess my understanding is it started out more as a futures contract has evolved to a clear swaps contract and why that might be significant for users?

Roger, this is Rick. You're absolutely right. As we got into the marketplace and really started talking to both buy and the sell side and tried to figure out what their needs were, one of the things became evident to us is that product needs to be cleared more as an OTC product rather than as a futures contract, and that's -- for a lot of reasons for the risk is very different than what a traditional futures contract is. So a lot of the efforts that we've been undertaking on the cleared side is to really look at these as OTC contracts and we think that's the right way and we think that's the way both the buy and sell side want to clear these products.

Okay. Great. And then I guess my second question would be OTC related. Since your investor day I guess one thing that's popped out in all of the regulatory rhetoric is again for now suggesting that hedge exemptions for dealers should be eliminated for noncommercial swap transactions, and I am just wondering from your perspective how do you think -- if that happens, taking the deterioration of market quality that would likely create, how do you think that would impact volumes to you if financial counter parties like hedge funds and the buy side shops effectively couldn't trade swaps with the street? Do you think that volume would come just directly to you in futures volume?

It is Craig. Let me make a couple of comments on that. I think first of all I think that's not likely to effect the end-user, the end-user would likely distribute its business across a larger number of swap dealers in order to deal with that potential restraint that would be imposed, but I think maybe more fundamentally I think it is important to say that there is no outcome yet on that topic, and I think there is a diversity of views on that topic. I actually believe that the commission is still evaluating the best way to deal with that issue, and I think it has been relatively clear that various of the commissioners I think don't necessarily favor that approach. Even the language in the current bills that have been put through is still in flux in terms of how that will work, so I wouldn't jump to the conclusion that a wholesale elimination of the swap dealer hedge exemption is very likely.

Okay. Great. Thanks.

Your next question comes from Howard Chen of Credit Suisse.

Good morning, everyone.

Hi, Howard.

Hi. There was a meaningful shift in interest rate RPC this quarter. Was curious if you can provide a bit more color there, and I know it is early, but are you seeing any changes in customer behavior with the fee schedule adjustments, i.e. customers stretching for the new tiers?

On the interest rate decrease we saw it go from $0.525 down to about $0.505 quarter-over-quarter and the key drivers there were that nonmember volume mix did drop somewhat quarter over quarter, and then we also saw a decline in some of the [xbit] transactions which are at a higher rate, so the mix of the xbit fell as well, so those are the key drivers there.

Okay. Thanks. And then, Jamie, the debt pay down was a bit faster than anticipated. Is the $450 million outsized in any way or should we assume if you generate a similar amount of cash flow that you could pay a similar amount of debt on a quarterly basis?

You will notice that in the prepared remarks we talked about our cash balance -- cash and investment balance being around $300 million. Typically in the past we have had that around $500 million, so there was some reduction in cash on hand to bring that debt further down. As time goes on and we get more comfortable with the debt and managing it we're able to manage that cash balance down, so it was a little bit outside this quarter.

Your next question comes from Mike Vinciquerra of BMO Capital Markets.

Thank you. Good morning.

Good morning, Mike.

Wanted to ask a question on Brazil. Certainly you have seen a very nice uptick in volumes with your relationship there over the last two months. Wondering if is the momentum continuing as we move through October? Do you think that it is going to be a big impact when you get the Ibovespa product up and running and one follow-up question on this is why do you look at it in terms of single sides rather than round turns like you do in your domestic business?

Mike, I will take the first part of that and ask my colleagues to comment on the latter question. We are continuing to see very strong month over month growth in the north to south order routing. We just set a new record yesterday on that. Right now we have three clients that are particularly active, but we have a large number of other additional clients that are in the pipeline of setting up their capabilities to execute orders in the amount of products through the order routing linkage, so we do see continued opportunity for growth in that.

The Ibovespa index approval was actually received in August and so that actually has contributed to the significant increase month over month between September and October as US-based customers can now also trade through the Ibovespa index through that linkage versus our non-US customers that were doing that before. That has been a very positive growth vehicle for us.

Mike, to your second part about why we're counting it in sides is this is an order routing. We're only seeing the one side of the trade that goes down there. It will be matched with someone trading --

We could be on both sides but we're not always on both sides.

We can't see what the other side of that trade is.

Thanks for that explanation. One separate question. Co-location services have come up a number of times, people questioning the appropriateness of them, maybe it's only in the securities market, but can you talk about whether or not there is going to be any pressure on the way you offer co-location and could there be any changes coming?

Well, you're right that that is a topic that people are expressing a lot of interest in. We ourselves are moving in that same direction, but our policies have always been to have very transparent offerings in terms of pricing and the structure of the services that we provide. We also provide for a level playing field in terms of customers' ability to access those types of facilities, and so I am very confident that we shouldn't have any constraints or restrictions on our ability to do that. We'll work collaboratively with the CFTC to make sure they understand the nature of the services and how we're intending to offer them. I don't view that as being any impediment to our moving forward.

Thanks, guys.

Next we have Rich Repetto of Sandler O'Neill.

Good morning, Terry, Craig, Rick, Jamie. How are you doing?

Good morning. Good, Rich.

You forgot Susan.

Susan and John. Question using your term, Craig -- new ground post credit crisis -- can you give us an update on the FX clearing, just the OTC clearing, and the CDS clearing efforts --we haven't heard anything, any update in regards to the relationships with the dealers?

Right. I am happy to do that. We're really very pleased, and I think excited about the progress that we're making. We have an extremely large level of engagement from not only our buy side founding member firms but a large number of significant dealers who are working across a large number of work streams with us right now, and who are committed to meeting operational and other key project milestones in order for us to be positioned to begin clearing trades by mid-December. That includes a lot of work being done not just on the operations side but also in terms of legal documentation, so we're making very good progress, very sincere engagement and commitment from all market participants and a high degree of collaboration between the buy side and the sell side as they look to get ready to interface with the CME Clearing House on CDS.

We're also continuing to advance the ball with respect to interest rates and FX but I would say at the moment most people's attention is really consumed with the CDS initiative.

The next question is from Chris Allen of Pali Capital.

Good morning, guys.

Hi, Chris.

I just wanted to actually ask outside of earnings on the news that is hitting the tape about the Saudis move ago way from pricing on WTI and how that would potentially impact CME, whether there is any plans for new product launches to offset that and how that would work?

Thanks, Chris, for the question. I think it is very clear what we said in that article that we do actually intend to launch some new products based on this and obviously the Argus Sour Crude Index is something we have been focused on. This is something that was not unexpected in the marketplace, and something we have been anticipating for quite some time.

So I think it is important to understand a little bit of history here and how they use the benchmark. Typically this is for physical oil sales, so what they have been using has been the Platts WTI price that's actually based on a 3:15 price. This actually -- them moving away helps us because it will force us -- force them to move to WTI future settlement price at 2:00 because all of those grades of oil are going to trade at a differential to WTI. So when you think about the Sours in the US, the three main components of the Argus Index are Poseidon, Green Canyon and Mars. All of those right now trade as a differential to WTI. That's not going to change.

So in some aspects this actually helps us get them to use the 2:00 settlement price on our futures contract right now. So we view this actually as a positive and now it also gives us a chance to do some other product development things around it to actually fortify this and this is -- in a weird way I think a benefit from the product.

Got it. Thanks a lot for the color.

Next we have Ken Worthington of JPMorgan.

Hi. Good morning. Just one question. Brazil just implemented an IOF tax of 2% last week, really directed at foreigners. How do you think that impacts the north south volume going forward? I know you just had a record day, but are there any implications for that north south business?

Ken, it is Craig. I think there shouldn't be any impact there. The tax is not actually applicable to derivatives contracts, so we're not expecting any impact. I would say more broadly if you're familiar with tax policies and tax rules in Brazil they tend to change fairly frequently, and I know that the impact of the tax as it relates to the securities products of Bovespa is something that the exchange leadership there is very actively involved in talking with the government about. It is not that unusual, not that I am predicting it -- but it is not that unusual for these taxes to be put in place and then taken back if they're deemed to be counterproductive, and I think my judgment is that the Brazilian government is very oriented right now towards ensuring that [South Palo] is a major financial center and certainly a regional center in Latin America, so I do think they'll be sensitive to those concerns as they see negative impacts on Bovespa but it should have no impact on our north south order routing.

Great. Thank you very much.

Next we have Daniel Harris of Goldman Sachs.

Hi. Good morning, guys.

Hi, Daniel.

Just want to focus maybe a little bit outside of Brazil but on the other international opportunities you have. You mentioned on the international incentive program that's been having a positive impact I think you said -- something like 42,000 contracts today. What kind of penetration rate do you think you have in terms of that international opportunity? How high can that number go whether that is nominal or any other way you want to think about it -- and what products are they trading largely? Is it the rates or the FX products?

Daniel, this is Rick. I think the growth that we talked about this morning shows that in a very quick time that we can grow the business pretty quickly, and that's what a lot of these international incentive programs have been focused on, and you have seen from us in the last couple of months additional programs go out there as we see opportunities.

One of the things that we have been doing in those programs, too, Daniel, is we have started with the CBOT and CME products. We just recently included -- or are including -- the NYMEX energy products, and then in 2010 you will see us include the COMEX products in there as well. So what we're starting to see and it really varies by location of what products they're interested in, so the mix is very different from different countries. But you will continue to see us roll product into those incentive programs because we think there is still a tremendous amount of growth outside of the United States.

Next is Michael Carrier of Deutsche Bank.

Thanks, guys, a question on the over-the-counter opportunities. Seems like by market or by product really just depends in terms of the client mix. So when you look at the whether it is the FX business or the interest rate business, seems like the buy side -- or the non-dealers -- make up a pretty good portion of that market whereas on the CDS side seems like it is still dealer intense. I am trying to understand from your perspective seems like you're going after the buy side as maybe the -- I don't want to say primary because have you the dealers, too -- but that's your niche. Just wondering like how that works versus some of the other platforms out there. And then when you get to the other products whether it is rates or FX equities, it seems like that works, but just wondering the differences between the products.

I will start and maybe my colleagues will contribute. I think that most of the people that are focused on providing central counter party clearing services for the over the counter markets are I think converging in terms of their effort to provide services not just to the dealer community but to the buy side as well. We certainly have a very neutral role in terms of the way that we have tried to structure access to our clearing facilities.

The product and service offerings themselves aren't really different between the different providers with the exception that at least in CDS we're trying to do both single name as well as indexes, but I don't think the approach at this point is really that different. We've had different starting places each of us, but most of us are trying to address the needs of both the buy side and the sell side, and I would say we have a high level of engagement from all market participants on the different offerings that we're working to bring to market. Am I addressing your question?

Yes. That's helpful.

Just one for Jamie. Just on the expenses, the guidance on the fourth quarter is helpful. I guess just when you start looking at 2010, a lot of new initiatives and still trying to squeeze out costs. Anything there? I know it is still early. Just relative to the fourth quarter going forward?

It is a bit early. I think we'll have more to say on our February call.

Okay. Thanks a lot.

Next is Dan Fannon of Jefferies.

Good morning, thank you. When do you guys expect to launch your [lining] clearing house? You talked about this and wanted to see what hurdles are there -- out there from a regulatory perspective that you think might impede that or lack thereof?

This is Gill. Application is in, and we expect to receive approval by the end of the year and begin all operations sometime in the early first quarter of next year.

Great. Thank you.

Next we have Don Fandetti of Citigroup.

Craig, in terms of the OTC as you negotiate with the banks, there is a view that the banks have gotten more confident, and are trying to drive a tougher deal. Are you still confident that the economics are attractive to CME and can you talk a little bit about how that may be progressing?

Yes, sure. I think first of all there is significant demand for central counter party clearing services, certainly from the buy side. But in response to your comment, I think given the state of the legislative efforts that are out there, I think that the sell side in fact is working hard to not only try to satisfy their customers but to also be appropriately positioned in the event that ultimately that Congress determines to require central counter party clearing for standardized swaps. So I don't think this is a situation where the providers of these services have no capability in terms of pricing. We're trying to be partners with the over-the-counter trading community, so we have embraced a model that reflects that partnership approach with the sell side as well as the buy side.

But our view is that there is ample room for profitability for to us do this or we wouldn't be working as hard as we are to provide those kinds of services. It is premature at this point to get into specific pricing structures and methodologies, but I think we have struck a balance between getting fairly compensated for the services that we're going to provide and yet recognizing that in some sense this actually is a partnership between us and the OTC community.

Thank you.

Next we have Jonathan Casteleyn of Susquehanna

Good morning. You alluded to ClearPort capabilities in your press release. Just wondering if you have any specific products in mind or any timing for any launches?

I am not sure what you're commenting on. Obviously we're continuing to add a large number of products to CME ClearPort in our existing core space which is oil, gas and power, and in fact we're seeing significant revenue growth from new products that are being introduced, but beyond that as we have mentioned before, we're also leveraging CME ClearPort into the financial derivatives OTC space in terms of our other offerings and rate swaps and foreign exchange, so that's all the stuff that we have been talking about.

Okay. But mainly you're saying that that core asset class is still energy or can you creep into other asset classes I guess is my question?

We are already offering products in other asset classes, for example, we do use CME ClearPort for fairly significant number of agricultural commodity contracts, but again we're going to be leveraging CME ClearPort into all of the major asset classes including the financial derivatives.

Jonathan, we just recently launched London Gold Forwards, so we have made a significant entry into the metals markets as well.

Okay. My follow-up question is does the harmonization of the CFTC and the SEC -- does that really change or can it change the futures industry M&A perspective? Generally the futures industry tends not to want to look at other exchange properties because potentially you could be subject to different regulatory purview. Does that change at all as harmonization between these two agencies gets closer?

I would make two comments on that. First of all, the regulatory distinctions between the securities and the futures markets have never been for CME Group a barrier. We look at more the fundamental characteristics of those businesses in terms of whether we think they would be a good fit for us, and whether we thought we could be successful as a competitor in those markets

So the fact that the securities markets have a different regulator or a different regulatory regime is not in and of itself a barrier for us, and that's been a position we have consistently taken for a long time. I guess the other comment that I would make is that I think in the end if you look at the harmonization report, as I mentioned during the prepared remarks, the areas of recommendation and convergence are largely I would say technical areas that are not themselves very significant and not likely to actually impact market structure or overall regulatory framework, so I don't think that should make much of a difference is my view.

Thank you.

Next is Rob Rutschow of CLSA.

Hi, good morning. My first question on the OTC rate swap clearing. How are you positioning yourself versus the LCH given their pricing and does it matter where a swap is clear geographically?

Rob, this is Rick. I think it is important to understand what the value proposition to each customer segment is to understand what our offering is versus what LCH. Obviously coming through the Lehman situation a lot of people are viewing the safety and soundness of the US system to be much safer than some of the overseas venues. So I think when you look at it from the customer side of this, that there is a lot of attention on what the safety that we can provide and a clearing solution.

Also out there in the market right now the LCH solution is a D to D solution -- dealer to dealer. We think that as Craig mentioned that we have to get all sides of the trade in to make the this successful. So obviously the buy side is important as well as the sell side. I think have you to look at this across asset classes to see what the value is.

The other thing is in certain products you have to remember that if capital efficiency is what people are after, having the underlying hedge in the futures product is critical. We can offer a lot more capital savings to someone that doesn't have the underlying hedge in their clearing house.

Okay. That's very helpful. Thank you.

Second question was on expenses. And I laid this off until next year, but if we were to have a weaker revenue environment, what would the triggers be for another round of cost cutting and where might we look on the expense base for additional cuts?

Rob, this is Jamie. We're always looking to be as efficient as we can, right, so we're going to continue to take expenses out where possible and just as before we'll focus on areas of discretionary expense and if volumes or revenues were to go down dramatically, we would look in other areas as well, so I think given all of the -- as we said that the growth initiatives in front of us and the firming up of the economic environment, feeling pretty good about the future here.

Okay. Thank you.

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

Hi, guys, I was robbed of my second question here. And a follow-up. Hopefully they'll be brief. Terry and Craig, you have been very good at providing foresight or looking into the future being ahead of the regulatory curve here where things are going. As things move from the House to the Senate, what's the color and what's your interaction been with those legislators? Are they as reasonable and have you had the same interaction that it appears you had with the House?

Rich, it is Terry. I think it is interesting as we're going to move into the Senate starting sometime next year, there is a new chairperson of the Senate Agricultural Committee which I think is very much engaged in our issues, and that's Senator Blanche Lincoln from Arkansas. I think Blanche is going to be an excellent chairman of the committee, so she is good to work with, and we're excited about the opportunities to do so. Right now, the Senate has not taken up any reg reform activity of any consequence yet -- they've been focused on healthcare reform. There has been some bills coming out of Senator Reed of Rhode Island and a few other folks, but to be honest with you I think the language that came out of the House bills will be very much in favor as it works its way towards the Senate. And as Craig said earlier, there was a lot of things that came out of both the Frank and the Peterson bill that CME Group is very happy with, so we're very much engaged in the process, and we look forward to working with Senator Lincoln and Senator Dodd on the banking committee also.

I think this is a great opportunity for to us get some clarity in the regulatory reform because I think that's what the market needs. I think the market needs regulatory clarity, and you look at the harmonization report, Craig already commented on it, but there was a lot of things in that harmonization report that I think were very beneficial such as people commenting about the two different structures of the business and how CME Group's open access approach for OTC is very beneficial. So I am excited about working in Washington over the next several months as we get through this reg reform.

Great. Sounds like you're ahead of the curve there as well. I will omit my second question for the length here but I will just say the expenses, Jamie's conservative guidance, I told you so.

(inaudible)

Next we'll go to [Justin Shaq of Rosenblatt Securities].

Good morning. Thanks for taking my question. Most of my questions have been answered but I am wondering if you can provide a little bit of color on the customer segmentation and particularly on that buy side prop category, it looks like it didn't move much in the quarter but has been growing quite a bit.

Two things there. Is that because the aggregate volumes from that segment have been going up or is it that everybody else has been falling off or perhaps a combination of both and then what do you see in the trend going forward there? Are there new people coming to you from this segment, interesting co-lo, things like that where you think that is going to continue to grow over time?

Justin, this is Rick. No. We have seen a continual growth in the algorithmic proprietary trading segment. Especially on the high velocity side. This has been a trend we have been seeing for five, six, seven years now. We have always believed that that continues to get bigger. What we're seeing now is people coming out of banks, people coming out of hedge funds, starting their own proprietary groups up, so what you continually see is new ones coming into the marketplace, and one of the things that has really come up in the last six months or so -- in the last year maybe -- have been the number of foreign groups that are participating in this -- people from remote parts of the world that have extremely good talent but are beginning to trade algorithmically as well.

I think this is part of a bigger trend that's been going on in the industry for quite some time. Even think of it from buy side firms that is use more algorithms just to do order execution, so we think this continues. We've -- I think for the last several years been telling people that this is an area of growth for CME, and we think that will continue.

Thanks. That's helpful.

Next we have Roger Freeman of Barclays Capital.

Hi. Just a couple quick follow-ups here. I guess since you announced the partnership or the inclusion of a number of large buy side firms for the CDS clearing, what's been the impact in terms of other buy side firms reaching out and how many have joined since then?

I would say generally it has been extremely positive. We had a customer event in New York where we had several hundred people, a large cross sections of buy side as well as sell side participants, and we have seen growth on both sides in terms of their interest in our offering as well as the work that they are now doing to become operationally prepared to interface with us, so it is a broad cross-section of the industry now that is working with us. But we're focused primarily at least for this initial first phase on the core founding group members for the buy side and the sell side. But we are working with and supporting other market participants to be operationally capable of processing trades with us.

Got it. Okay. Then lastly, just on the interest rate complex, so the Fed is essentially finished with the portion of QE that involves buying Treasuries, and so as you think about the incremental buyer and their hedging needs, how do you see that shaping up? Do you see banks as really stepping in here as they build capital and put that into Treasuries rather than lending and will they be incremental sources of volumes there?

One of the things to think about is on quantitative easing, they made some announcements around that, but also keep in mind that there are programs in place to support mortgage backs and a lot of other things, so to say that they have -- the Fed or the Treasury is out of that business I think is a little premature -- especially given the issuance that's coming up over the coming years. So I think they can effect that in several different ways than the 300 billion program they put out there, so.

I think your point is right, there is so much -- what have you seen in this past week is as the supply concerns starting away on people have you seen rates move around quite a bit and our volumes come back quite strong this past week, especially in the longer end of the curve. So I think that's correct directionally as the market finds a new equilibrium where rates should be, it's provided a good tail wind in the last week or so for our volumes.

Great. Thanks.

Next we have Patrick O'Shaughnessy of Raymond James.

Good morning, guys. ELX is trying to get the DTCC to work with them instead of just the exclusive working relationship with NY [year next] as far as cross margining some of the interest rate products. Is that something that you are also trying to work on yourself. So basically are you on the same side as ELX here trying to establish cross margining with the DTCC?

Yes. I will ask maybe Kim Taylor who is with us to comment on that, but I would say that generally speaking we have been a leader in cross margining arrangements with other clearing houses and we're certainly looking at ways in which we could facilitate efficiencies for people who are active in both the cash Treasuries as well as the Treasury futures market. Kim if you're still on, it might be useful for you to comment.

Yes, I would agree with Craig that we are very open to seeking opportunities for efficiencies for users of our markets but I would also want to point out in answer to your question, we already have cross margining arrangement in place with the Fixed Income Clearing Corp portion of DTCC. So if that was your question, if we would pursue something like that, we already have one in place and have had for some years.

Great. Thanks.

That concludes today's question and answer session. At this time I would like to turn the conference back to John Peschier for any additional comments or closings.

I would like to thank everybody for joining us today. We look forward to talking to you next quarter. Thank you.

That concludes today's conference. Thank you for your participation.