芝加哥商業交易所 (CME) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the CME Group second quarter 2010 earnings conference call. As a reminder, this conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

Thank you, and thank you all for joining us this morning. Craig Donohue, our CEO and Jamie Parisi, our CFO will spend a few minutes outlining the highlights of the second quarter and then we will open up the call for your questions. Terry Duffy, our Executive Chairman, is here as well. Before they begin, I will read the Safe Harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements.

These statements are not guarantees of future performance and involve risks, uncertainties, and 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 10K and 10Q which are available on the investor relations portion of our website.

During this call, we will refer to a few non-GAAP figures. Reconciliation of both the non-GAAP EPS and non-GAAP effective tax rate to the respective GAAP figures is available in our press release at the end of the financial statements. Now, I would like to turn the call over to Craig.

Good morning and thank you for joining us. CME Group showed strong performance in the second quarter of 2010 with net income of $271 million, up 13% sequentially, on revenues of $814 million, up 17% sequentially. This strong performance, our best ever on a GAAP basis, was driven by positive volume trends across all asset classes with overall average daily volume of $13.5 million contracts, up 31% from Q2 2009 and up 17% from Q1 2010.

We had record revenue quarters in energy, foreign exchange, and agricultural products. Additionally, interest rate revenues were up 29% from the second quarter last year and up 19% sequentially. And equity and metals volume in revenue were also strong for the quarter. As we moved into July, we have experienced normal seasonal patterns, although it is worth pointing out that July average daily volume of 10.7 million contracts is up 11% versus July of last year and is 400,000 contracts per day higher than any quarterly ADV last year. Finally, volume across our six product areas is up for July compared to the same month last year.

Looking at drivers of our performance, sovereign debt issues in Europe were obviously a catalyst for the second quarter volumes. The stabilization we have seen since the peak of the crisis as indicated by the plateauing of the LIBOR OIS spread since May 25 among other factors, reflects favorably on the market's ability to absorb shock in the short term and on the ability of local industry participants and central banks to recognize an attempt to resolve critical issues.

Partially related to the European crisis, the market shifted its Fed rate hike expectations. We have seen an associated shift in Euro dollar volumes with those Euro dollar futures expiring 12 to 18 months from now, contributing approximately 13% of overall Euro dollar futures volumes in July, up 10% from the total in the first and second quarters. We've highlighted before that Euro dollar products tend to be most heavily traded during periods with varying market expectations for rate changes.

For the next several months, we expect Euro dollar volumes to reflect the current policy environment and it is worth pointing out the transaction data positively reflects and certain key measures such as depth of book and BITA spreads compared to last year. Family group energy products had an exceptional quarter with record revenue and volumes. With volatility increasing due to ongoing forecast for strong crude oil demand, coupled with European instability, are WTI product suite was a strong driver of this performance, posting record volumes of 977,000 contracts per day, up 52% from Q2 '09 and up 25% from a robust first quarter. Refined products, including heating oil and gasoline, also had record volumes for the quarter.

Energy volumes in July have shown a typical seasonal slowdown, but we believe that our products in this area will continue to perform very well over the long term.

I mentioned before we had record revenues in our FX product line as well and that was, of course, somewhat related to the European crisis. While cyclical factors may have impacted the second quarter volumes, we strongly believe there are many longer-running structural trends in those markets that have and will continue to be very positive for CME Group FX products. Based on the available data, one of these trends is an ongoing shift from OTC markets to CME's exchange traded and centrally cleared FX products. Our team has worked diligently to position CME Group to take advantage of such structural shifts in the FX marketplace and the volume trends over the past year show our success.

CME's April volume was up 87% compared to the prior year, while in the OTC market, as measured by preliminary regional data submitted to BIS, FX trade in the UK was up 31% for the same period, activity in Japan was up 16% and activity in the US was up 43%, clearly demonstrating that we are picking up share as we outpace the growth of the overall markets.

As a side note, we're referencing April statistics there because that is most recent data that is available on those markets but CME FX's had strong growth since then as well with July up 37% from the prior July. We believe our FX team has built an exceptional platform for future growth opportunities.

With that, I'd like to switch gears and talk a little bit about one of those opportunities in FX, and this is a new product we work with our colleagues at Dow Jones Indexes to launch. As planned, we continued the Dow Jones indexing capability with the derivatives expertise and deep customer connections at CME Group. One of the early results of these efforts is our FX dollar index futures. A contract that will provide a tool for trading the relative value of the US dollar against a basket of major currencies, weighted based on current Fed data.

The weighting methodology is unique to CME and we believe it creates a strong, competitive differentiator for this product. It also provides our customers with an efficient means for using the deeply-liquid component currency futures to dynamically hedge FX dollar index futures and with our Globex distribution to FX market participants will enable us to attract a broad international audience. The product launched on Monday and we are actively working to promote this to our customers. Additionally, our teams work together to bring the Dow Jones long-term inflation index to market on July 15, which uses the CME ultralong treasury futures as an underlining component along with long-term treasury inflation-protected securities. Like many of our product ideas, this product was developed based on significant customer input and given the strong uptake and success of the ultra-long treasury futures. We know that market interest and longer duration products is very high.

We continue to explore other joint product development and global expansion opportunities and we look forward to updating you on our progress in the future. We did a fairly deep dive last quarter on our international growth strategy and we feel very positive about the work we're currently doing to build the path for future success.

As you can see in our slide, in our core business, Globex volumes during non US hours saw strong growth with volumes during European hours up 78% and volumes during Asian hours up 76% from Q2 2009. Volumes from international telecommunications hubs grew 68% compared to the same quarter a year ago and represented 13% of overall Globex volume, up from 11% a year ago.

I also want to take some time today to discuss our views on capital structure. Over the last few years, we've received valuable input from our shareholders on this important topic. We recently completed an internal assessment of our five- year strategy. We've successfully integrated the CBOT and NYMEX acquisitions and with those assets in place, we believe we have a solid foundation to drive continued organic growth. In the near term, we do not foresee the need for additional large-scale M&A transactions to drive growth.

Based on our projections, we anticipate being very well positioned to return excess cash to shareholders as early as next year. In the past, we returned cash to our shareholders through regular quarterly dividends, special dividends, and share buybacks, all of which we will thoroughly analyze as options for future return of cash. One of the results from our plan has been the establishment of capital structure guiding principles, which you can see on the next slide.

First, we intend to maintain a target level of cash to meet working capital requirements and our clearing house commitment. We anticipate a minimum cash level of approximately $500 million, and success in our OTC initiatives would cause this amount to scale. Second, as we've stated in the past, our intention is to target a high investment-grade credit rating to demonstrate our solid financial position as a leader in the exchange and clearing industry. Third, we intend to pay a stable to growing dividend and our Board will assess that on an ongoing basis. Fourth, we have taken on debt primarily related to the NYMEX transaction, but we intend to maintain a permanent prudent level of debt. Lastly, we intend to return excess capital in the form of dividend and share repurchases as I mentioned early.

Finally, I would like to share a few thoughts with you on the regulatory environment. We know a key focus of investors has been the ongoing developments in financial regulation and we are fully supportive of the efforts made by all to bolster the soundness of the financial system. The passage of the Dodd Frank Act reinforces the critical underpinings of CME Group's markets, transparency and security. We spent a lot of time in Washington over the years highlighting the value of our markets and we will continue our efforts with government officials, regulators and market participants as the rule making process ensues. Throughout that process and in the timeframe following the adoption of new rules, we will be focusing very intensely on ensuring smooth implementation and providing maximum support to our customers.

In regards to direct quantifiable impacts on CME Group, we believe the new legislation is directionally positive. We look forward to engaging with our customers and regulators during this process and in the long term, returning to what we do best - providing safe and secure liquid and transparent markets for market participants.

In conclusion, CME Group had strong results in the second quarter and more importantly, we have continued to build a very strong base for future growth of our business. We have gotten where we are because of our focus on serving our customers, whether during times of high-market volatility or times of sweeping change. As global financial markets evolve in the future, we are well positioned to offer critical risk management products for our customers. Thank you, and with that, I will turn the call over to Jamie.

Thank you, Craig. Before I dive into the financials, I just wanted to note that the comments and comparisons I will be making today will exclude the impact of the credit markets analysis, otherwise known as CMA, impairment discussed in the press release. CME Group turned in a strong second quarter financial performance with average daily volume of 13.5 million contracts per day, up 31% from Q2 last year, and revenue of $814 million, up 26% from last year. From a GAAP perspective, this is the highest level of quarterly revenue we have delivered and only $3 million below Q1 2008, assuming we had owned NYMEX business at that point.

We delivered $536 million of operating income and diluted earnings per share of $4.43, excluding CMA. From Q1 to Q2, our revenue grew $121 million while our expenses grew only $10 million, excluding the one-time Dow Jones transaction expense incurred in Q1.

The overall average rate per contract for all CME Group decreased 4% to $0.79 compared with $0.823 in the second quarter 2009. So average daily volume was up 31% while the average rate was down 4%. The main driver of the year-over-year rate decrease was our member, non-member mix. Our lower fee member volume grew 35%, while non-member volume grew at 19%.

Sequentially, the rate per contract also dropped 4%, primarily driven by a large increase in interest rate volumes, our lowest rate product from 5.1 million contracts per day in Q1 to 6.1 million contracts per day in Q2. Market data revenue of $102 million for the quarter was up 17% compared to Q1. This increase is due to the inclusion of a full quarter of CME Group index services revenue. At the end of the second quarter, users of CME, CBOT, and NYMEX data subscribed to 385,000 based devices. This count was down only 1,000 screens from the prior quarter, representing some stabilization relative to the trend we have seen since the credit crisis.

I'll now take a few minutes to review expenses, drilling into Q2. Compensation and benefits was $103 million, up $4 million from the prior quarter. This increase was attributable to an increase in our bonus accrual due to strong cash earnings performance. Our combined head count at the end of Q2 stood at 2,460, an increase of 50 people during the second quarter. We reiterate our full-year expense guidance of $1.13 billion to $1.14 billion, excluding the CMA impairment, which implies second half expense of $573 million to $583 million.

Q2 operating income was $536 million, the high water mark since Q1 of 2008. For the second quarter, our operating margin was 66%. In the nonoperating income and expense category, on the investment income line, we recorded $5.5 million in dividends, down $4 million versus Q1. Also, interest expense increased due to the full quarter impact of the $613 million of additional debt we incurred for the Dow Jones transaction.

In the second quarter, we paid down $300 million of commercial paper, bringing our total debt to $2.8 billion. We will be paying down our next maturity in August, bringing our debt down to $2.5 billion and our debt to EBITDA ratio to approximately 1.3 times. A detailed illustration of our debt structure is included in our earnings slides.

In the second quarter we repurchased 46,000 CME Group shares. In addition, in the month of July, we repurchased more than 1 million shares of CME Group stock, totaling $279 million, at an average price of $272 per share. As part of our announced transaction with BM&F Bovespa, we issued 2.2 million CME Group shares on July 16 and received $607 million. So we have nearly offset the delusion associated with the share issuance. As Craig mentioned earlier, longer term we plan to return excess capital to shareholders in an efficient way beginning as early as next year.

For the quarter, our effective tax rates was 41.7%, excluding the CMA impairment. For the full year 2010, we expect an effective rate of between 41% and 42% on a GAAP basis. Capital expenditures net of leasehold improvement allowances totaled $28 million in the second quarter, driven by primarily by hardware and software attributed to migration of trading systems to our new data center as well as continued build out in our office facilities. Our full-year guidance remains at $180 million to $200 million with data center and facility build out continuing in the second half of the year.

In summary, the second quarter was tremendous. We excelled on a top-line and delivered virtually all the incremental revenue to the bottom line. We look forward to leveraging our platform like this in the future and delivering profitable growth. We will now open up the call for your questions. In order to get to everyone, we are limiting all of you to one question and one follow up and then please feel free to get back into the que if time permits.

(Operator Instructions) We'll have our first question from Rich Repetto with Sandler O'Neill.

Good morning, guys.

Hey, Rich.

The first question is more on the expense guidance, Jamie. That's a jump up from this quarter's run rate, if you multiplied it times two for the back half. And I'm trying to see whether Dow Jones is impacting and how much that's contributing to the expense pickup in the second half.

Yes, certainly, Dow is impacting it somewhat. And then also as we continue through the year, we'll continue to see expenditures in our growth initiatives on the OTC front as well as other fronts. So, that's driving a good part of it. And we are hiring more. You heard we added 50 people this past quarter tied to the growth of the company and growth of the top line and we're going to continue to invest there and that's going to drive those expenses as well.

Okay. And -- I can follow-up but we can do it offline. My follow-up question I guess would be to Terry and Craig on financial reform. And Terry and Craig, you've seen some more activity now. You're seeing this swap plat swep as well as you got Goldman coming out with agency clearing services. So, I guess the question is, with this financial reform package your role -- you talked about just being the clearer for now but you can see it fast developing around as people try to get ahead of the one-year implementation. So, the question is, from what you seen, are you going to stick with the clearing role, or are there any plans to get more active in potentially the trading side as well?

Rich, it's Craig. You know, I think we've made a very strong commitment to our partners in the over-the-counter trading and clearing space to really support them with posttrade clearing services, and we really have been working hard to work towards the adoption of the open access clearing model. So, what we envision is partnering with not only the sell side but the buy side to support their activities with swap clearing but also to support market participants who may be developing swap execution facilities but who value the clearing capabilities of CME Group. So, that's really our focus. It's not to say that there's no areas within which we might develop products that might ultimately trade on a swap execution facility but I think it's important to stress our primary commitment is really to support our customers with clearing services.

Okay, thank you very much. That helps.

We'll go next to Michael Carrier, Deutsche Bank.

Thanks, guys. Just on the rate per contract, you gave the color on the customer mix, which is helpful and we can get the product mix. Just given the level of volumes, was that there much of an impact just in terms of the rate per contract, giving any tiering for the different customers statement?

Yes, certainly as we saw higher levels of volume, there was some impact from the tiering. It wasn't the largest of the contributors to that decrease in the rate, though.

Okay. And then just on the over the counter side, just any update you guys can give in terms of your thoughts -- you mentioned just on the clearing and working with the market participants regulation that's going to take some time but more from CME's platform particularly on the rate side, just any update on timing what you're hearing from customers in terms of liking your platform any adjustments or tweaks that you're making? You know, just any update there. Thanks a lot.

Mike, it's Craig. You know, I think there's not a lot new to say. Clearly, there's tremendous demand for clearing services on the customer side. And I think it's fair to say that there's a very high level of engagement by the entire industry, certainly including the swap dealer community, given the legislation and given the customer interest in central counter party clearing services so we're continuing to do what we have been doing, which is we're involved in a very active set of negotiations with market participants and we have a lot of different work streams that we are working through right now. Obviously, there's a strong movement by the GSE's to central counterparty clearing for rate swaps and we're doing everything possible to be ready to support all of our customers and all of our swap dealer partners in accomplishing that.

Okay, thanks, guys.

We'll go next to Howard Chen, Credit Suisse.

Hi. Good morning, everyone.

Hi, Howard.

Craig, just on regulatory reform. I know it's challenging to quantify the impact right now but was just hoping you could give us a feel for what's provisions and what specifics you and the team are looking for in this process, so how do we gauge how big of a potential winner this can be for you and the industry.

Yes, thank you, Howard. I have to say, I think that for the time being, I think that's very difficult in terms of making it quantifiable versus a more qualitative assessment in part because, as you're likely aware, there are 267 rule makings that will come from this new legislation and so -- and very broad enabling authority to the financial market regulators to make a lot of decisions, frankly, about ultimately the market structure and the regulatory requirements. S,o we'll have more to say on that as we start to see some of the rules that are coming forward but at least as we have looked at the Dodd-Frank Act preliminarily, there's a lot of activity currently done by swap dealers and major swap participants in our markets which we think won't really be affected very much, at least by the legislation, when you look at what is still a permissible bank activity and you look at the degree to which banks and swap dealers will continue to be able to hedge net swap book risks without any major structural changes at least in they way that they're organized. We spent a lot of time on that, but I think we're going to have to withhold any quantification of things until we have a better assessment of the rules.

Okay, thanks, looking forward to hearing more about it. And on my follow-up, just with all that happened during the second quarter, could you just give us the over if there are any meaningful shifts in the customer segmentation or breakdown that you sometimes provide? Thanks.

Hi, Howard, Jamie. Basically we saw very consistent participation across the customer sets, very similar to what we saw in prior quarters.

Okay, thanks very much.

We'll go next to Alex Graham, UBS.

Hey, good morning.

Hi, Alex.

Just want to come back to Rich's question earlier on the interest rates swap side, in particular as it relates to the ARIS thing. Can you actually outline what exactly you're doing there and your involvement in how that came together and then, related to that, obviously, in the past your relationship with the dealers has at some point been challenging and some of our discussion has been that they're not too happy initially with what's going on there so just wanted to see any feedback from discussions or clarify that you're still very much focused on the dealer relationship and clear and going forward.

Thanks, Alex. I appreciate that question because I think it's very important to say very strongly that this doesn't change what I said earlier in terms of really our commitment being focused on providing posttrade clearing services. But at the same time, as I think we mentioned the legislation does require open nondiscriminatory access. We had even well prior to the legislation articulated that our business model would be an open architecture model of supporting market participants with clearing services. We have no relationship with ARIS other than obviously we're a provider of clearing services and we'll be doing that pursuant to a service level agreement but that does not represent an effort on our part to get involved in the execution component of the market but we do expect that we'll have a wide array of potential customers that will look to us for clearing services in the interest rates swap clearing area. But what ARIS is planning on doing is really trading swap futures contracts so variance of traditional swap contracts and interest rates.

Okay, good. And then, I think the focus here continuing on OTC has been mostly on the interest rate side lately, but I think you're still moving forward CDS so can you give us any update there, in particular as you look at the Act, the Dodd-Frank Act, it sounds like they're really pushing for a SDN model, which your main competitor is not really operating under, so just wondering if you think that could be a little tail wind for you and if there's been any renewed interest, I guess, from both sell side and buy side? Thanks

Thank you for that question also. So obviously the requirements of the Dodd Frank Act are probably very complementary to the structure we had adopted, given that, as you described, that it really was an FCM centric model. So in that sense it's positive, although I would imagine, like us our competitors will also be structuring to be in compliance with the new requirements. In that sense, we're already there but we're also working with market participants to refine the overall structure of our offering and those discussions are ongoing.

Very good, thanks.

We'll go next to Mike Vinciquerra , BMO Capital

Good morning.

Good morning, Mike.

Your new product here, the FX product, makes a lot of sense given the complimentary nature versus your current products but can you talk a little bit more about the next area potentially for the Dow expansion where you're looking and where are the opportunities?

Well, I think what you can see from what we described -- I mean, those are couple of the products that, in a very short time since we've entered into the joint venture with Dow Jones, we have been able to bring to market. But in fact, we do have a very broad range of new product development ideas that we're pursuing essentially across all of the different assets classes where we have a significant franchise either in terms of futures markets or in terms of the Dow Jones indexes area. So, we'll have more to say as we bring new products to market but I think the goal of sharing that with you was really to highlight that we really believe in the complimentarities of these different businesses and it's already beginning to generate new innovation opportunities for us.

Great. Okay. And then we talked a lot about the global expansion of your client base and obviously you've got several international agreements in place already. But, talk more specifically about you mentioned that your costs are going to go up from global marketing efforts going forward. Can you talk more specifically about what that exactly means, what you guys pursuing and how you go about developing new participants in outside the US?

Sure, I can start and then Craig can jump in. In terms of the marketing spend, obviously, we're going to look to market more globally to more global participants in our markets and that will increase our expenses on the other expense line. That's one of the areas where Rich had asked earlier, one of the areas where we'll see additional expenses coming through in the second half. And then we're also putting some significant focus on our energy sales force. Going forward and trying to continue to globalize that product as well, given the global nature of the products themselves.

Yes. I just would add that I don't think you should expect major step function increases in human capital to support that but we are obviously taking a strategic view of where we think the growth is, where we think the customer acquisition opportunities are, and we do want to make sure that we have the sales resources in Europe and Asia and emerging markets that can help us really tap that growth. But I would describe it as incremental.

All right. Fair enough. Thank you, guys.

We'll go next to Roger Freeman, Barclays Capital.

Hi, good morning. Just wanted to come back to OTC. Can you just clarify that with respect to the trading opportunity that -- is your commitment to the clearing side upfront here more a function of not wanting to walk that that fine line with competing with the customer or because you think the market as it exists today isn't really tuned to trade on an exchange model as we think about it? Because of absolute volumes or average sizes trades, being more block oriented?

You know, I think my best answer to that is really that first of all, the law is already providing for swap execution facilities so standardized swap contracts that are subject to the mandatory clearing and mandatory trading requirements can be done on either a traditional exchange, DCM, if you will, or a swap execution facility. And the swap execution facility hasn't really yet been defined with a great deal of specificity. That's one of the things that the SEC and CFTC will be doing. And I think that itself is going to be important for assessing how certain swap contracts will trade effectively. And so it's very difficult to answer that question right now, but I would say from where we stand right now and looking at what the swap execution facility definition is in the legislation we're expecting that it will be possible for swap dealers and interdealer brokers to structure their own swap execution facilities to continue the business model and market structure, which they've historically had. There will be some changes to that but it may not be, in fact, very revolutionary or transformational and I think we have to respect the fact that they're going to want to continue doing business in the way they have been and I'll just say, again that in the last two years of very heavy engagement with market participants in the over-the-counter markets the message they got and we're trying to be very responsive to our customers is, we really think you guys have a great value proposition in clearing so that's our focus.

Yes. That makes a lot of sense. Okay. And then my second question is, just, the guarantee pull. How do you feel about managing guarantee pull that's actually going to be -- could easily be over $1 trillion? You know, versus $100 billion or so today? I mean do you think from a risk management perspective, you're going to have to invest a lot around this or can you just scale that up? And how will your capital contributions grow if that pool grows multiples of what it is today? Thinking about that from the standpoint of your returning excess capital shareholders.

All right, so I'm going to say I think it's preliminary to try to answer that question. That is very much at the heart of some of the negotiations and discussions we're having with the market participants and obviously we're very comfortable moving in to the over-the-counter clearing area. You know, we recognize and appreciate and have made our own assessments of what the margin and guarantee fund dynamics are going to look like depending on what level of swaps are ultimately cleared. So we're comfortable with that and we're comfortable with the risk management aspects. But the capitalization of the clearing facility and the guarantee fund and our contribution to that are really things that have to be held in reserve until we have completed that negotiation process.

Fair enough. Thanks.

We'll go next to Ken Worthington, JPMorgan.

Hi, morning. Turning to the core business, you gave a detailed look at the drivers of the FX volume and potential growth there. Can you provide the same detailed look as what you see as the key drivers of both your interest rate and your energy futures volume businesses over, say, the next 12 to 18 months?

Well, I think we touched very briefly on that. Obviously, the interest rate products perform best in an environment where we either have directional shifts and changes in interest rate policy or federal monetary policy and I think it's fairly clear that at least for the very near term we're going to be in a more static environment absent something unusual happening but clearly if you look at market sentiment and expectations about Fed rate hikes we're probably looking at the second quarter of 2011. That should obviously be a positive catalyst for volumes to the extent that is realized. And in the energy areas there continues to be strong growth in demand for energy as well as volatility in energy prices and of course whether other dynamics are affecting those supply and demand issues so that's been a strong catalyst for growth.

Okay. And then second question, did you receive or book any revenue from the BM&F technology relationship or were there meaningful expenses as that relationship ramps up in the second quarter?

Yes, Ken, this is Jamie. As far as the -- we will be incurring expenses we're hiring consultants and actually deploying staff towards that development effort. However, there are some payments from BM&F in the current year back to us to help cover some of that so it's a very small impact overall on our income statement.

But anything in the second quarter or not or is that pushed forward in the second half of the year?

There's a little bit in the second quarter, probably in the neighborhood of a couple million dollars and then ramping up slightly from there.

And that was a couple million dollars of expenses or the revenues?

That would be on the expense side.

Okay, thank you very much.

You're welcome.

We'll go next to Celeste Brown with Morgan Stanley.

Hi, guys, good morning.

Hi, Celeste.

I know you're excited the US is behind us, at least the first step of the regulations or the legislation. But I wanted to focus a little bit on Europe. And concerns or whether or not you're excited about that market. There seems to be some issues potentially with protectionism with various countries as clearing and if that's the case, how would you address it? Thanks.

Celeste, I'm not sure I got the full gist of your question, what were you referring to?

Sorry, so Europe is following the US in terms of putting in place clearing requirements and things like that for the OTC market. But it seems like there's a lot of questions about which country or how different countries are going to deal with were clearing houses reside.

Okay. Yes. Thank you. Well, I think you might -- I think you're aware that we've had underway for quite some time a application to establish a registered clearing house in the UK. We're continuing to make, I think, very good progress on the completion of our application there and hopefully expecting approval very shortly. That will be an enabler for us on a couple of different fronts. We're envisioning that being an opportunity for us to offer more clearing choice to our customers in our core business so, for example, our application includes a large number of energy contracts that we believe there's demand from European customers to clear locally there and then also we do envision it will support our efforts to be a broad-based provider, across asset classes and across geographies of over-the-counter swaps clearing services. So we're not feeling any protectionism in that regard. We're going through a professional process and believe we are being treated very fairly by the local authorities there.

Sorry, I didn't mean protectionism in term of excluding US companies but I guess more various countries wanting the clearing house to be in one place versus another place. Does it end up being too fragmented to have an efficient marketplace from a clearing perspective and investment perspective?

You know, I don't think so. I mean obviously there are some reported tensions between the European union and the United Kingdom, for example, if that's what you're referring to. But ultimately as we have today, we have a large number of major central counterparties that exist in different locations, all of which have significant utility and critical mass in terms of meeting market participants' needs. So I don't consider it to be significantly fragmented. But there certainly is a multiplicity of central counterparties out there and I think that will continue to be the case.

Great. And just as a follow-up, somebody asked the question a bit before about Dow Jones but was the timing of the deal closing -- does that impact the licensing fee expenses in the quarter and how should we think about their run rate going forward? Or is it just a question -- more of a question of mix in the quarter than anything? They were a bit lower in the quarter than they've been historically.

Certainly when we close the Dow and consolidate, we no longer have the license fee expenses associated with that so we have the full quarter effect of the Dow in the second quarter so that should be a good indication going forward.

We'll have our next question from Niamh Alexander with KBW.

Thank you. Good morning. If I could go back to the US legislation, and generally we're talking about this, there was some small language in there that, I think it protects the vertical model and I think -- but it's primarily related to OTC but I would appreciate your interpretation of it. So essentially saying that a clearing house is not required to take a position from another clearing house. So is that just from the OTC markets or could we say apply that logic to the ELX situation and maybe a New York competitor situation in the futures market as well?

Let me try to provide a little clarity about that. There are different provisions of the Dodd-Frank Act that apply to swaps clearing and then the provision that I believe you're referring to is a provision that is intend to reduce the systemic risk potential of credit relationships between and among clearing houses in the listed derivatives markets, maybe to begin with. So on the over-the-counter product side, there is the, what we call, the nondiscriminatory open access provisions and generally speaking, I mean, those -- I think there's a lot of confusion about those in the first instance in that they absolutely do not provide for interofferability and fundability per se. It's probably a little bit too arcane to get into in this call. But that's the one side of it and then the provision you're referring to is limited to the listed derivative markets and it really is intended to ensure that there isn't a systemic risk domino effect by forcing linkages between clearing houses and then maybe the third part is just that I don't think it really has any bearing on the EFF issues, which are not clearing house transfers of positions between clearing houses with credit relationships so hopefully that's helpful. We could spend more time outside the call if you want to.

Sure. That does help on the EFF issues as well, thanks. And then if I could, just to stick with legislation again, if I may position in the futures markets -- I guess the common sides are in and the EFT's obviously got a lot to do right now. But what are the biggest risks to your business from and proposed position in the futures market we should be thinking about there?

Yes, thank you for that. You know, first of all, we're very pleased with the final provisions of the Dodd-Frank Act. You'll probably remember since the inception of the discussions about position limits and energy and metals markets we've always maintained the view that it would not make sense to impose position limits on already regulated, reportable and surveyed markets if you didn't also impose those limits on foreign markets or OTC market participants and I think one of the useful things in the Dodd-Frank Act it does clearly establish that parody. So, first of all, the level playing field concerns, I think, have been largely eliminated. Secondly, in looking at least the initial proposal from the CFTC I think based on the feedback they got from not only ourselves but other industry participants, I think they tried to develop a regime and set those limits at a level where they're not going to grossly encumber market participants' use of our markets so I think a lot of those concerns have gone away. Obviously we still are of the view that position limits in terms of being mandated are not really that useful and certainly not warranted by the evidence that exists not only to CFTC's own studies but our own studies to what drove pricing dynamics including oil and commodity markets during that summer. So, but I think in general it's come out better in terms of addressing some of our concerns.

Okay, fair enough. Thanks, Craig.

We'll go next to Daniel Harris with Goldman Sachs.

Thanks, guys.

Hi, Daniel.

I wanted to follow up a little bit on the relationship on CBOE on the Vicks, and Craig, you mentioned volatility a couple of times discussing some of the drivers of your products. You know, what should we look for over the next few quarters from index releases and launch of futures and have you guys thought about what the opportunity is in that relationship?

Well of course we're very pleased with that relationship, the CBOE has, I think, done a very good job in the development of the Vicks index and Vicks future contracts as well. And so what we're excited about is the opportunity to work together to develop volatility-based products based on other asset classes. Our focus is really not in the equity area since CBOE is already doing a lot of innovation in that area themselves. But we have the opportunity to basically use the Vicks' methodology and jointly develop new volatility index with CBOE collaboratively in products like energy and commodities and foreign exchange and so that's a fertile area and something we're owning on. Until we actually announce new products I can't say anything more than that. But we think it's a really nice, new product development area for both of us.

Okay, thanks, Craig. And then, on market data, if we look back over the last five or six quarters, the screen count has continued to slide here post NYMEX acquisition. Obviously we've had some rough times in the financial markets but at what point do you think we hit somewhat of a stability in the screen count and is there any thought that could go higher over time?

As you look at it, if you look back at the last recession, significant recession around 2001, device counts fell between 10% and 13%, currently we're down about 14% versus our peak. I think -- you saw it in this quarter where the number of screens falling off, has really -- that number itself has declined only a thousand screens fell off this quarter so I think you're starting to see us reach that, hopefully reach that bottom and as Wall Street starts to spend more and hire more, we should that start to see that pick up.

Okay, thank you.

We'll go next to Christopher Allen with Ticonderoga.

Good morning, guys.

Hey, Chris.

Chris.

I just wanted to ask about the capital structure guiding principles and how we should think about the growth opportunities in reconciling the two moving forward.

I think, Chris, Craig said it on there, you know that in the near term we don't see any significant M&A so we're going to, of course, keep an eye out but in light of that, we're going to monitor our capital structure, monitor the excess cash we got and make sure we've got enough on our balance sheet to cover things like our requirements for our current core business operations, our core clearing operations, potentially the new clearing operations as it relates to OTC and then some for small bolt-on capability extending acquisition along the way. So I do think when you look at how much cash flow we generate each year, roughly $1 billion and as we grow, that will grow given the nice leverage in the model there will be certainly an opportunity to return capital as early as next year.

Is it --

Chris, let me jump in and add that I think it's fortunate say -- we have a very bullish view of our growth opportunity organically in our core businesses. I mean, we just -- you know, spent a couple of years finishing what I would consider to be the first phase of integration, which is really the operational integrations and a question of cost energy of putting the CME in the Chicago Board of Trade and NYMEX and HOMEX business portfolios together but the second step of that is really begin to harness the growth and synergy and complimentary that we have around this business portfolios around the world. So, I wouldn't want the capital structure guidelines and what we describe to be confused with our growth outlook.

And is it fair to say that most of the over-the-counter growth opportunities basically rely on CME utilizing its current operating infrastructure so the investment necessary will be minimal?

There's certainly investment seen with it. That's why you've seen some of the increase in terms of head count and some of that increase in the expense versus prior years so there is some investment baked into our thoughts. If we do get to leverage some of our existing platforms. But there is that additional investment but it's not overly excessive and something we can manage easily.

Great. Thanks a lot, guys.

And we'll have our final question from Mark Blain, William Blair and Company.

Okay. Thanks. So just to clarify, Jamie, on the expenses -- so your original guidance at the beginning of the year was $1.1 billion and now it's $1.13 billion to $1.14 billion. So what is the specific impact from Dow Jones in the change?

Dow Jones for the year, I want to say, if I'm remembering correctly, was roughly in the neighborhood of about $30 million or so, if I'm remembering properly, for a full year. So, I can get you more details on that also.

So there's not really a change in the overall guidance, maybe a slight, tiny amount of pressure?

Right.

Okay. And then on the rule making process for the legislation, so how do you see this process playing out? Are there areas that you expect to get better defined first? Major areas and what might those be? Or how do you see this playing out?

Well, Mark, it's very difficult to answer that because each agency has its own agenda. I mean, I can tell you Terry and I having met with the chairman of the CFTC and the FCC as well as the other commissioners and senior staff they have laid out a very aggressive and comprehensive plan for how they will meet the requirements of the act in terms of the development and promulgation of those rules. We don't have complete transparency into underneath that what is the order priority, but we certainly would expect that position limits is something they will probably take up early, given that that was already an area of significant work flow for the commission but we're going to have to wait to really see that .

So you would you expect some announcement to say by a timetable to be laid out or you just don't have any idea yet?

Well, there are various requirements within the future. They vary depending on the provisions of the act but I would say just rough ballpark on a nonheld basis I think by November or December of this year we will see a substantial amount of new rule making coming out for comment.

Okay, great, thank you.

That concludes the question and answer session. I'll turn the conference back over to Mr. John Peschier for additional or closing remarks.

Thank you all for joining us. Feel free to call us if you have follow-up questions. And we look forward to talking to you next quarter.

Thank you.

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