芝加哥商業交易所 (CME) 2010 Q3 法說會逐字稿

Good day, everyone. And welcome to the CME Group third-quarter 2010 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.

Thanks, and thank all of you for joining us this morning. Craig Donohue, our CEO, and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the third quarter, and then we will open up the call for your questions. Before they begin, I'll read the Safe Harbor language.

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, 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 IR section of our website. Now I would like to turn the call over to Craig.

Thank you, John. And thank you for joining us this morning. I'll be discussing our performance in the third quarter, and providing updates on a few of our strategic initiatives, before turning things over to Jamie to review the financials.

CME posted solid third-quarter results, with average daily volume up 14% from the same period last year; net income up 21% to $244 million, and earnings per share of $3.66, up 20%. The foundation of our performance lies in our product diversity. Energy and metals contribute 32% of transaction fee revenues, interest rates 27%, equity 21%, and foreign exchange and commodity products contribute the remainder.

The breadth and diversity of our product lines is beneficial when we face macro economic headwinds in particular market segments. Importantly, I'll note that though we've seen volume performance within the individual asset classes vary throughout the year, we have continued to see open interest build from quarter to quarter in every one of our product lines. Open interest currently sits at 92.4 million contracts, up 12% compared to same period last year, and just below the all-time record of 95 million.

To review some of our volume statistics, third-quarter average daily volume was up 14%, versus the same period last year, and was down 15% versus the second quarter of this year, due to extraordinary performance in Q2, and the typical impact of seasonality during July and August.

Turning to interest rates, diminished activity in short-term rates was significantly offset by strong growth in our treasury product, as I will describe in a moment. Average daily Euro/dollar volume was down 7%; however longer-dated Euro/dollar contracts with expirations beyond September 2012, saw record average daily volume of 320,000 contracts, up 32% from the prior year, as there continues to be more volatility at the long end of the curve.

Euro/dollar mid curve options, which are short-dated expirations on longer-dated futures contracts, have also experienced impressive volume growth this quarter, from approximately 6,000 average daily volume last year, to 87,000 this quarter, and with open interest growing from 330,000 contracts to 1.2 million contracts today at quarter end.

Importantly, Euro/dollar open interest across the whole yield curve continues to grow, including in the first two years. While short-term interest rates continue to be affected by monetary policy, it is important to recognize that Euro/dollar products represent only 12% of total transaction fees at CME Group.

As I mentioned, treasury products had a very strong third quarter, with average daily volumes up 38% in futures, and with option volumes up 62%. As we've seen expectations for interest rate increases move out on the curve, products at the longer end of the curve are seeing greater activity.

An additional positive to this strong treasury volume is that the treasury's rate per contract is generally higher than the Euro/dollar RPC. We continue also to successfully innovate new products and product extensions that meet customer needs and enhance our performance in this segment of our business. We've had tremendous success with our ultra-long bond treasury futures, which posted average daily volumes of 33,000 contracts in Q3, and open interest of 222,000 contracts.

Just this week, we also launched our on-the-run treasury futures contracts, which our customers are very excited about. The robust liquidity and diverse customer base in our core treasury products, enables us to effectively develop these product extensions, which in turn, allows us to provide our customers with more trading opportunities at CME Group.

In other product areas, average daily volume in our equity products was up 6% for the quarter, outperforming cash equity market volumes, and reflecting asset allocation preferences and the out flow of funds from equities to fixed income markets throughout 2010.

Average daily volume in our FX products was up 31% over third-quarter last year, and open interest trends remain positive, with current levels at a near record of 1.6 million. Growth in CME FX is coming from diverse sources. We saw 40% volume growth in the Australian and Canadian dollar markets, which historically have been less actively-traded currency pairs at CME.

Additionally, FX activity was up 54% during non-US trading hours, and this asset class continues to be our fastest growing segment during non-US hours. FX options also continued to perform extremely well, with average daily volume up 182% over third-quarter 2009, and open interest growth of 101%, versus the same period a year ago.

Finally, another positive indicator for our FX business came out of the recently-released BIS triennial survey, which showed that the global FX market grew 20%, from April 2007 to April 2010, while CME FX volume grew 94% in that same period, clearly demonstrating the increasing importance of our product to the global FX marketplace. The BIS survey also indicated the global FX option declined 2%, while CME FX option volumes grew 250%.

We believe there are three factors driving this outperformance. First, CME's central counterparty clearing, which enables wider participation by a diverse set of buy-side customers. Second, our significantly expanding liquidity across a broad range of CME currency pairs, as our FX markets have, indeed, become a major source of liquidity in global FX markets. And third, electronic access to both futures and options on our CME Globex electronic trading platform. Together, these factors should continue to drive growth in our FX business.

To round out our other asset classes, our agricultural commodity, energy and metals products, have all shown outstanding growth year to date, and also are on track for a strong fourth quarter. These products tend to earn our highest rates per contract, so growth here is very accretive.

Agricultural commodities had a strong quarter, with volumes up 33% versus last year, led by outstanding growth in corn and wheat volumes of 56% and 72% respectively. Energy was up 12% to 1.7 million contracts per day, our second-highest quarterly volume, and energy open interest remains at near record levels. Finally, metals average daily volume was up 28%.

I'd also like to touch on continued growth in international volumes in our core product lines. During the third quarter, we saw strong growth of 37% in Globex volumes during non-US hours. Volume from our various international hubs also grew 15% compared to the same quarter a year ago, and now represents 15% of overall Globex volumes. We continue to focus on globalization of our core business, as we expect growth in emerging markets to outpace growth in more developed markets.

One example of our commitment to achieving growth from globalization is our recently-announced enhancements to our global client development and sales organization. Our new structure, will better enable us to cross sell all CME Group products and services to our global customers, while also allowing us to better understand, and meet the needs of our largest customer segments, including banks, intermediaries, asset managers, hedge funds, proprietary trading firms, and, of course, commercial participants.

The new structure has been designed to better target cross asset sales across client segments, to drive international growth, specifically in Asia and Europe, and to generate new client participation across all regions. The ultimate goal is to more effectively serve our clients, and enhance our global sales and marketing efforts, for the entire suite of CME Group products.

During the quarter, we hired a new head of global client development and sales, Ali Hackett, former managing director and co-head of global prime finance at Citigroup. Ali joins us and will oversee our worldwide client development and sales efforts.

Moving on to our strategic initiatives, we were very pleased to extend our OTC Clearing Services into interest rates, on October 18th. This offering provides the extensive counterparty risk reduction and transparency of CME Clearing, while preserving the prevailing execution processes, technology platforms, and economic structures used in the bilateral IRS market today. As a clearing-only provider in this space, we are execution agnostic, and offer operational flexibility to our customers, by accepting trades from a variety of venues.

Finally, as we continue to build our OTC offerings in other asset classes, CME Group has a significant lead in providing a comprehensive multi-asset class clearing solution to the market, for the maximum operational ease and capital efficiency that comes with connecting to a single clearinghouse.

To date we've cleared $660 million in interest rate swaps, and have $648 million in open interest, with participation across a wide variety of firms. We see this effort as being in the very early stages, and recognize that many clients are waiting for greater clarity on final rules before moving forward with cleared interest rate swaps.

Currently, we are focused on delivering key additions to the offering, in order to make it possible for more users to access our services. Some of the details we are working towards include receiving approval for a structure to allow cross margining with exchange traded futures and options, and finalizing regulatory approvals allowing certain types of mutual funds, post collateral. We are also working on expanding the product scope to offer more product flexibility and swaps denominated in additional currency.

I'd also like to share an update on the development of our co-location services offering for all CME Group customers. Our offering will allow customers to co-locate their servers in CME Group's new state-of-the-art data center.

Co-location will create the lowest possible latency hosting environment for our customers. The offering is available to all customers, and all customers will be treated equally, with transparent and market-based pricing. Equidistant access points will also ensure fair and equal access.

The uptake during our initial application period has been positive, and we are in the process of allocating space to our customers. Once customer space for this phase is allocated, we will begin to build out the facilities, and are planning for an early 2012 go-live date. Based on current indications of interest from our customers, we expect this service to add approximately $30 million to $40 million in revenue in 2012 and to further scale from there.

Finally, I'd like to offer a brief regulatory update. We are participating actively in the Dodd-Frank rulemaking processes being undertaken by the CFTC and other financial and markets regulators. Our team is working with them and our customers to ensure that new regulations create a fair and level playing field for all market participants, and that US markets are not disadvantaged compared to other global market centers.

The CFTC and other regulators will be issuing rule proposals in many areas over the next few months. Like many of you, we are already engaging in the public comment process and anticipate a robust and healthy dialogue about the many issues that regulators are addressing. We will continue to keep you posted on these critical topics as they develop.

In conclusion, CME Group continues to be successful in managing our core business and executing on our strategy to further globalize our business and expand our capabilities into OTC markets. While the macroeconomic climate has been challenging for everyone, our performance over the past two years has proven that we can leverage our diverse product set to deliver results in a variety of cyclical and economic environments.

With that, I'd like to turn the call over to Jamie.

Thank you, Craig. CME Group posted solid third-quarter financial results, with average daily volume of 11.6 million contracts per day, up 14% versus Q3 of last year, driving a 13% increase in revenue, to $733 million. We delivered $443 million of operating income, a 60% operating margin, diluted earnings per share of $3.66.

The overall rate per contract decreased 3% to $0.81 compared to $0.834 in the third quarter of 2009, due to higher growth for members versus non-members and higher tiered discounts. Sequentially, the rate per contract increased 3% due to favorable mix factors, including a stronger participation from our highest non -- from our highest-paying nonmembers.

Market data revenue of $101 million for the quarter, was down less than 1% compared to Q2, due to a decrease in the Dow Jones index' revenue, attributable primarily to lower equity assets under management.

Subscribers to CME, CBOT and NYMEX data, increased their activity somewhat in Q3, with the total terminal count up slightly, to 385,000. This was the first increase in sequential screen count since Q2 of 2008, signaling some of -- some stabilization relative to the trend we have seen since the credit crisis began.

Lastly, with respect to the other revenue line in Q3, we recognized $5.1 million from BM&F BOVESPA, related to the build out of our multi-asset class trading platform.

I'll now take a few minutes to review expenses. Drilling into Q3 expenses, compensation and benefits was $110 million, up $7 million from the prior quarter. $5.1 million of this increase was based on a sequential change in deferred compensation expense. Remember, there's a one-for-one offset in the investment income line for this item, so there's no bottom-line impact.

In addition, our combined headcount at the end of Q3 stood at 2,520, an increase of 60 people during the third quarter, reflecting our continued investment in growth opportunities. Q3 marketing and other expense, included approximately $4.7 million related to resolving customer losses associated with the CME Globex errant trade issue, which occurred in September, while there was a $2.1 million tax and operating accrual adjustment, which decreased occupancy and building expenses for the quarter.

We now expect our second-half 2010 expenses to come in near the top end of our prior guidance of $573 million to $583 million, with the one-time costs of the errant trades and higher deferred compensation pushing us to that level.

In the non-operating income and expense category, investment income was up $8 million sequentially, due to a $3 million increase in the BM&F BOVESPA dividend, plus the $5 million increase in deferred comp earnings mentioned earlier. Equity and losses of unconsolidated subsidiaries reflects a $2 million increase, due to writing down to zero our investment in One Chicago, our single stock futures JV.

In the third quarter, we paid down $300 million of debt, bringing our total debt to $2.5 billion, which reduced interest expense by $2 million. Our debt-to-EBITDA ratio is now under 1.3 times. A detailed illustration of our debt structure is included in the earnings slide.

At the end of the third quarter, we had approximately $613 million of cash and marketable securities on our balance sheet. For the quarter our effective tax rate was 41.2%, and we expect our tax rate to fall between 41% and 42% in total for the year.

Capital expenditures, net of leasehold improvement allowances, totaled $44 million in the third quarter, driven primarily by hardware and software purchases tied to the migration of our Globex trading system to our new data center, additional investment in the data center related to our co-location offering, as well as continued build out of our office facilities. We expect our capital expenditures to come in near the low end of our full-year guidance of $180 million to $200 million.

Turning to recent volumes, so far in October, ADV is tracking at similar levels to Q3, at 11.4 million contracts, up 9% compared to the same timeframe last year.

In summary, we added to our solid 2010 financial performance in the third quarter. So far this year, we have generated over $800 million of cash earnings, while investing significantly in growth initiatives, and paying down $400 million of debt. We are well on our way to returning excess capital to shareholders as early as next year.

We will now open up the call for you questions. In order to get to everyone we are limiting all of you to one question and one follow up, then please feel free to get back in the queue as time permits.

Thank you, sir. (Operator Instructions). And we will take our first question from Niamh Alexander with Keefe, Bruyette & Woods.

Thanks for taking my questions. If I could touch on the interest rate swaps clearing initiative you announced earlier in the week -- congratulations. Help me understand the guarantee fund, it's separate right now and there's no netting benefit with the future. So what milestone should we be looking towards, or what can help us get closer to understanding when customers maybe can mesh? Would that be a good driver of additional volume into the pro -- into the clearinghouse?

Okay, thanks, Niamh. So what we're doing right now is working with the CFTC to discuss that. I just want to sort of caution everyone that the ultimate approval of that capability is really tied into much larger and broader questions that the CFTC is working on right now as they're contemplating central counterparty clearing of swaps alongside traditional exchange-traded futures and options contracts.

So we're working on the specific methodology, as are they, for facilitating capital and cross-margin efficiencies between swaps and between futures and options. So that's a process that's going to take, I'm sure, a number of months as they formulate their more detailed proposals, but we're working with them on that.

And would that be a catalyst to bring in -- do you think that would be a catalyst to start to bring in a lot more volume once that gets approved, or people aren't going to wait?

Well, I think generally speaking the consensus in the industry seems to be -- and I think that's been reflected even in recent analyst reports -- that most people are expecting to increase their activity over a roughly 12-to-24 month timeframe, with many people waiting until there's greater clarity on the rules that are implementing the swap trading and clearing requirements.

So I think that is probably the biggest gating factor. And then, of course, obviously as we see the final rules and accounts structure for swaps and exchange rate futures and options that will be incrementally helpful as well.

Okay, thanks for taking my questions.

We'll move on to our next question from Rich Repetto with Sandler O'Neill.

Good morning, guys.

Hi, Rich.

The first question, Craig, and I guess Terry if he's there. In your announcement on the OTC interest rate swap clearing you had a number of notable names buy-side and sell-side and I was just trying to get more of the commitment level of these people. Like if you had to rate where ten is -- fully committed, exclusive where one being sort of a rubber stamp and you just wanted to participant, where is the general commitment level? And I'm trying to get to the question of will there be multiple clearing platforms and interest rate swaps?

Rich, it's Terry, I am here. I think that there will be multiple platforms for this clearing of interest rate swaps, but the commitment levels -- I think Craig outlined that there's $628 million that we did last week.

There were some comments made months back by the government-sponsored enterprises, Fannie and Freddie, that they wanted -- they told their regulator they would be prepared to clear by October 18th. We told everybody we would be prepared to clear by October 18th. That's exactly what we did, so you saw some of the transactions going.

But I think really the answer is, the commitment we'll see more as the rules are finalized, as Craig pointed out, and it's really hard to determine what the overall commitment's going to be at this early stage of the game right now. So I wish I could give you more information, but I really can't. And, Craig, if you can add to that?

Okay, and thank you, that's helpful. That's a fair answer. And my one follow up would be, I guess, for Jamie. On the Dow Jones I know you mentioned something about AUM being down, but it looks like in the equity, the unconsolidated -- the below-the-line item it doesn't look like there was anything there. Was Dow Jones breakeven and did expenses go up for Dow Jones in the quarter?

It's not quite that simple. I think you're talking about the other interest in Dow Jones and that line, the way it's constructed, all the -- when you consider all of the amortization and the interest expense for Dow Jones it does come close to a breakeven, but it was slightly positive for the quarter. But when you go through all the accounting the allocation out for the partner is close to zero.

Okay, I can follow up off line. Thanks, guys. Thank you.

We'll go next to Alex Kramm with UBS.

Hey, good morning. Just following up on the interest rate swap opportunity here, can you actually start talking a little bit about the economics? From what we understand the pricing terms might not be 100% hammered out yet, but can you actually help us a little bit in terms of how you're thinking about pricing in terms of maybe present value on different tenors, any economic sharing with participants, anything to get us a little bit more to work with? Thanks.

Yes, it's Craig. I'll just -- I'm going to be very limited and just say that obviously, our pricing methodology is based on the notional amount cleared but we're going to sort of keep that in reserve until we get farther along in this process.

Obviously, as Terry mentioned, we were successful in meeting our commitment to be prepared to clear by October 18th, which we've done, but we have a lot of work to do with our partners and participants to finalize the terms of the structure and their participation. So we'll have more that we can share with you as that process gets further along the way.

All right, then let me just ask one more one question on this thing. You obviously mentioned the 12-to-24 months but when we talk to the buy-side there are certainly also people out there that want to be early adopters, who want to really start clearing as soon as possible.

So you just said you have a lot of things to work through still, but when do you think you can actually be ready that the people that want to have it in their -- as part of their general work flow, the execution process, that they can actually do this and move pretty quickly?

Well, I think -- again, just obviously, with us having already commenced clearing and having now $660 million of notional value outstanding, we're able to do this, we're intending to keep doing this. We are prepared to support our customers and participants who are ready and willing to do that now.

I was only meaning to reflect that I think more broadly, many participants have indicated that it's likely to be 24 months before they have the vast majority of their interest rate swaps transactions being centrally cleared, so I was just reflecting the broader sentiment. But we're ready and we're working with customers who want to do this.

Okay, thanks.

Our next question is Mike Vinciquerra with BMO Capital Markets.

Good morning. Kind of staying in the OTC space I wanted to ask regarding ClearPort if there's any update on what the regulators are thinking. I know there are some questions about how you essentially futurize the swaps. Is there any concern there and do you think the question marks about that are hurting your volume or your growth prospects at all in that business in the near term?

Okay. Hi, Mike, it's Craig. I think -- and I can ask Brian Durkin if he would like to comment as well -- but I don't think that the issues that we're grappling with as it relates to new provisions of Dodd-Frank and rules on ClearPort are really impacting ClearPort. ClearPort has continued to perform very well.

So we're working through a process right now of -- in the emerging world we're getting to where there's a fairly clear distinction between swaps that are required to be centrally cleared but also as they are cleared traded on either a swap execution facility or an exchange versus futures, trying to work with market participants, customers and the regulators to try to determine what the path forward is for ClearPort.

We're confident that we have a range of alternatives that will continue to make ClearPort very valuable to customers. There are some products that are more actively traded on ClearPort, and for which there may be effective ways to, I think you said futurize them, and then there's a range of products that are less actively traded. So we've got some solutions, we're discussing those with people, but I think in the end ClearPort will continue to be a very successful and valuable service for market participants.

Okay, thank you. And then staying on the same topic, I believe you guys have announced that you're going to apply as a SEF. Correct me if I'm wrong on that. But if that's correct, in what areas do you think you'd be most interested in providing execution services in the OTC market?

We haven't really settled up on that and not because we're being cagey, but I think recognize that it's still not yet fully defined what a swap execution facility is going to be. What we have said before is that our primary focus is really on providing post-trade clearing services to the over-the-counter swaps market.

And separately we said that where there's a need or where there's some particular value that we think uniquely we can provide we're certainly not ruling out the possibility to become a swap execution facility. But I think it's really premature to do that for the moment and obviously we're going to continue to look at that as things evolve.

I guess next July can't come fast enough. Thanks very much, guys.

We agree.

Next we'll go to Ken Worthington with JPMorgan.

Hi, good morning. Okay, one question with two parts. You made the point that -- on your slides that volumes in the US -- US hours are growing at 37%, but through the international hubs growing at 15% year over year. It seems like this implies that US traders are trading after hours. Am I reading that correctly?

And then the follow up is, the volumes in is international hubs grew at 15% year over year, in line with overall CME volume growth. Given your emphasis on the foreign business, can you give us more color on the revamped sales force and your expectation for foreign business due to that build out?

Yes, let me take -- oh, go ahead, Jamie.

I'm just going to start on the first part and then --

Great.

-- hand over to my colleague. The first thing to recall is that on the international hub, all of our international volume does not come through the hub, just only a subset of the volume. There's plenty of folks internationally who hook up directly to CME and don't go through that. So we provide these different views because we don't have a perfect way of measuring that international volume to give a flavor of those volumes. So be a little careful on how you interpret the hub volume.

This Bryan Durkin, and in line with the restructuring and realignment of our products and services team we're putting an extensive focus on the buildup of our efforts, particularly within our global offices, within EMEA, so the European region, as well as Asia.

As Jamie had indicated, the hub activity is just one indicator of the fruits of our efforts in terms of our intensive sales efforts across those regions, and we're very pleased with the progress that we're making and we're continuing to invest in at that regard because we really and truly believe that the opportunities are there across all of our client segments to further build that growth.

And your expectations for that growth?

We don't normally give out growth guidance, as you know, but we certainly expect it to grow rather significantly for us going forward. Obviously that's why we're focusing on it so intently.

Okay, thank you very much.

We'll take our next question from Howard Chen with Credit Suisse.

Hi, good morning, everyone.

Hi, Howard.

Just maybe another follow up on the interest rate swap opportunity. Just stepping back you've given us a feel for how much you've spent year to date, but as we look forward how are you going define long-term success and what financial parameters do you think we should we holding you to?

I think in the long run clearly it's going be the level of cleared volume and the revenues coming through and we will be able to -- in the longer run we will be putting that information out there. Just remember that as far as the clearinghouse goes, it is a scalable operation with lower marginal costs, as we add business to it. So we do believe this to be very profitable for us in the future.

Okay, thanks, looking to hear -- forward to hearing more. Maybe separate topic, one for Craig or Terry, there's been some heightened focus on high frequency trading over recent months. I was hoping you could just comment on what, if anything, you anticipate we see in terms of proposals for the exchange-traded futures market and just your broad level of concern here given it's a big driver of the business.

One things, Howard -- it's Terry -- that I've said for a long time now, especially when I testify in DC as it relates to high frequency trading, these people are truly liquidity providers. They are not looking for long-term direction of any one particular market at all. They're mostly competing for the bid offer to lay off in other marketplaces, which deepens the pools of liquidity for people that are trying to manage risk.

So when I go to Congress and remind them that most participants in the US equity market or anything else, they are not competing for the bid offer, they're competing for their portfolio, risk management for six weeks, six months or six years, they need to have that deep liquidity and that's what -- exactly what HFT traders provide. And when you walk them through how they provide this liquidity, the regulators and legislators start to get it.

So it's a new phenomenon in high frequency trading and I think people are trying to understand it more than anything else. So the natural thing is when you don't understand something is to blame something. So I think that's what we're seeing right now, but I think people will realize that this is very valuable liquidity as time continues.

That's helpful. Thanks, Terry.

We will move on to the next question from Dan Fannon with Jefferies.

Hey, good morning. Could you please update us on -- to see if there's any change in your customer mix within your core business? You used to break it out of the slide on the charts, but I don't think we've seen it here the last few quarters.

Dan, we don't provide that in detail anymore for competitive reasons, but I think you can take from my comments that certainly we saw a small pick up in the nonmember category. I'd say generally across the other categories there wasn't any significant changes other than that.

Okay. Then you gave good color on the co-location revenue opportunity in 2012. Can you talk a bit from a profitability perspective as you think about that business and then even more broadly the OTC initiatives that you are working on and contemplating going forward, how we should think about that in the context of the overall margin on an operating basis compared to where we sit today?

On the OTC business, we've said before I think the operating margin on that business will be somewhat lower than our existing core business due to the fact of the various constituencies involved and the desire to share some of the economics around that. And then on the co-lo, I think that'll be -- we haven't put numbers out on that yet, but I think that will be a fairly solid margin on that. I'm not going give you too much more color.

I do believe while both these are a little bit longer term, we believe co-lo will start to contribute in a descent way in 2012, and on the OTC side we said it's a multi-year effort.

Great, thank you.

Our next question comes from Rob Rutschow with CLSA.

Hi, good morning.

Hi, Rob.

I realize we're fairly early days here, but can you talk about what the duration is of the interest rate swaps you've cleared and how that compares to your rate futures? And then -- and the point of the question is to really try to flesh out what the case for and against netting is and what the stumbling blocks are with the CFTC at this point?

Rob, we've had a mix of transactions that have been cleared and I think it's just way too soon to start breaking down the transactions that have been cleared so far. So over time there'll be more transparency into that, but for the moment a small amount of actual activity that's been done, as I mentioned.

On the second part, I think certainly one of the issues is just wanting to make sure that from a customer protection perspective the manner in which swaps and futures and options positions are held and the risks that futures customers might have or swap customers might have is a key area of focus as we think about how to strike a right balance between protecting customers, having effective risk management systems for both swap clearing and futures and options clearing, but at the same time also facilitating capital and margin efficiencies that are valuable to market participants.

So those are at a high level and I think the issues that the industry and the regulators are really focused on, but I think that the goal is to provide that balance, to make sure we have an effective customer protection regime and at the same time to provide capital and margin efficiencies that actually make these markets efficient and competitive.

Okay. Looking ahead I think your clearing dollar denominated swaps at this point -- and you've talked about Euros for next year -- what other currencies would we expect you to add in the next 12-to-18 months?

Well, we're working on multi-currency offerings. We'll have more to say on that as we further our plans and work more with market participants and clearing member firms. But I think you've heard us say before that we're already a global provider of clearing services and exchange-traded markets, and our goal and intention is to be a global provider of clearing services in the over-the-counter swaps market, as well.

I think you're probably aware that we have an application pending in the UK to be organized as a clearinghouse in Europe, as well, so our goal and intention is to be multi-currency.

Okay, thank you.

We will move on to our next question from Jonathan Casteleyn with Susquehanna Research.

Thanks, good morning. Are there any remaining efficiencies for the NYMEX products to benefit from electronic trading being that they hit the Globex system last and any way to quantify that?

Well, obviously, the vast majority of the NYMEX futures and options products are already being traded electronically, so I assume you are referring to ClearPort contracts?

Exactly. I mean just -- any general efficiency uptake from more electronic trading in NYMEX, including ClearPort being that they basically were inserted onto a bigger platform last, being the Globex system.

Right. Well, I think in general there's continued kind of upside potential in exchange-traded options products, not just NYMEX but also various of the options products that are offered on CME, as well as the Chicago Board of Trade, so that would be one area.

And then, again, just going back to my earlier comments, we are looking at ClearPort contracts and trying to make some preliminary determinations about whether there are some products that might be effectively traded in a central limit order book environment, or as futures versus swaps.

Got it. And then just on BM&F can you talk about the volume that ran through the JV in the quarter and then are there any major upcoming developments left to spur volume or increase the level of participation?

Sure. I'll just -- I'll say just generally, one of the things that we are working together on and which has been very successful is that as customers begin to become active in BM&F BOVESPA markets through our order routing linkage, they also then do gravitate toward actual co-location where they're participating directly on a co-location basis in the Brazilian markets.

So that's beneficial to both of us, as well, and we collaborate in that transitioning from just pure order routing to direct access through co-location. We're continuing to see interest in that building. We have a pipeline of participants who are becoming increasingly aware of the efficiencies and the value of accessing the BM&F BOVESPA markets.

So I do think there's a lot of continued benefits there. You've seen us working with other exchanges, as well, on cross-listing of products in different currencies and that's certainly another area of opportunity for us in terms of BM&F BOVESPA.

And then just lastly I would say we're making great progress on the development of our new multi-asset class trading platform, which ultimately will be deployed by BM&F BOVESPA and I think the increased scalability and capacity and speed advantages of that new platform should be further attractive to our customer base.

Understood, thank you

Jonathan, on that south to north order routing it's -- the volume has about quadrupled over the last four years, off a very small base, of course. But as Craig pointed out, I think the more important thing is that we continue to drive volume directly to CME and CME products from that region.

And we'll take our next question from Patrick O'Shaughnessy with Raymond James.

Good morning, guys. My first question is about your energy product group. Certainly I think you've seen healthy growth there and your West Texas contract has done pretty well. But I think to some extent we've seen West Texas growth outpaced by Brent crude and it seems like Brent is growing as more of a global benchmark these days. Is that a fair assessment and what do you think that implies for the growth prospects of West Texas volume going forward?

I would take strong issue with that. I think there are cyclical factors at times that come into play. If you just look back over the last several years you'll see times when WTI has clearly out-performed Brent and conversely times when Brent had seemed to out-perform WTI.

But I think the most important thing to look at is that the WTI market is more than 2.5 times the size of the Brent market and that suggests to me that that is ultimately what people look to as the global benchmark for hedging in risk management in crude oil and that's been true for quite some time. So I would disagree with that.

Okay, appreciate that. And then my follow-up question. You've obviously spoken in some detail about interest rate swap clearing, but on your slide you also did mention FX clearing and CDS clearing. Can you give an update about where you feel like you are making progress in those initiatives, how many resources you're really dedicating toward those?

And I guess with FX clearing specifically, certainly it hasn't been mandated by Dodd-Frank yet and I know some industry participants are trying to make sure it doesn't happen, so your thoughts on the likelihood of that moving to a cleared environment at some point?

Sure. In general, obviously OTC clearing is a very important component of our overall growth strategy and so we do have a significant number of people deployed on that. That's been true for a couple of years now, both as it relates to interest rate swaps clearing as well as credit default swaps clearing, which is still, I think, in a very early stage, particularly in the dealer-to-client segment.

So that's an area where we do have substantial resources devoted. Although I would point out that these are existing resources that also support the operation and growth of our core business activities, as well.

On the FX side, obviously we're also waiting to see, ultimately what develops in terms of whether the exemptive authority by the Treasury Secretary will be exercised in order to treat foreign exchange swaps or options or forwards differently than other financial swap instruments. I don't have any particular insight into that.

I've seen the arguments on both sides but that'll be something that we'll be awaiting just as the rest of the market is, as well. I would say we're not actively involved in taking a position on that because, as you might remember, our position throughout the legislative process was not to support mandatory clearing requirements generally.

Can I just add a little to what you said, Craig, because I completely agree. But I think one of the interesting things -- when you look at FX not being included in the Dodd-Frank, I think that's almost irrelevant because with the interest rate swaps being in Dodd-Frank and we're going to start to see, I believe, the efficiencies that central clearing can provide for interest rate swap participants, I think that FX will just be a natural follower.

It doesn't need a law to mandate it. As Craig said, we did not pursue mandating any of these things to begin with, we always thought that capital commitments should be different for cleared versus non-cleared. So I think once people start to realize the benefits of interest rate swaps clearing the FX will follow without any legislation needed.

Great, thank you very much.

And we'll move on to our next question from Michael Carrier with Detusche Bank.

Thanks, guys. Another question on -- I guess on the core business. When you look at the growth in the FX volumes, just seems like obviously you're gaining a lot of traction. From the OTC side, like if you think about one of the most, I would say, standard products out there, FX you could probably throw in that category. So when you look at the increase in that volume, any way to gauge how much of that is from increased customers moving over, just to the futures product from the OTC versus just taking share from some of the other players in the market?

Well, I think we have some insight into that and we definitely have seen our customer end base broaden and we see more participants coming into the market, I think reflecting the fact that we're now, obviously, a major source of liquidity on a daily basis in most major currencies.

So we are seeing broader participation, both in terms of types of customer segments, as well as we've seen really good growth in the non-US hours. That's a key focus for us. We're going to be really increasing our sales and marketing and leadership capabilities, primarily in the European market time zone, to better take advantage of what we think is a great growth opportunity for us in FX.

Okay, thanks, and then just one for Jamie. On the market data revenues with the Dow Jones JV, what portion of the revenues are related to AUM? Just because average markets are up about 8% in the fourth quarter versus the third quarter, so just trying to gauge what the benefit can be going forward.

And then just on the BM&F other revenue item, the $5 million I think you mentioned, is that like a one time and then we should expect that other revenues to pull back, or is there going to be some ongoing revenues in there? Thanks.

Okay, sure. On the market data, Dow Jones is probably -- for the quarter is about $17 million and a majority of that is AUM based. And then on the other revenue line item where we saw a pick up because of the fees that we receive from BM&F BOVESPA for the co-development of the platform we expect to see a similar number in the coming quarter, potentially also in the first quarter, and then there'll be some more later on but it's hard to tell how that's going to flow in. It will depend on how the development progresses.

Okay, thanks, guys.

And we'll move on to our next question from Roger Freeman with Barclays Capital.

Hey, good morning. I wanted to just ask a question on the financial guarantee rule that the CFTC proposed. I'm not sure if Kim's there, but I'm wondering how that compares with how you look at your financial resources available today, because they're taking a -- they're basically severely limiting the ability to assess dealers in there, and I'm not sure if that's consistent with how you do it today? Any thoughts on that?

It's Craig, I'll take that. Obviously, we're looking closely at that. I think you're -- I assume you're referring to the -- what people call the [SITCO] proposal and the amount of available liquid capital resources that are --

Yes.

Okay. So we're looking at that. I think for the moment I would say, and obviously that can change, depending on who the largest participants are and what their particular exposures and margin requirements are.

But for most part, at least as we're currently looking at it and understanding it and in relationship to who our largest participants are today, we're not expecting that to have a material effect on the capital requirements to support activity in the clearinghouse. But that's something we're going to be discussing further with the CFTC as the process evolves.

Right. Okay, that's helpful. Okay, and I guess my second question, just coming back to the efficiencies and the interest rate swap offering right now, I guess, it sound like it's a fairly manual process, like some of the early trades are taking an hour or so to get cleared, and I guess LCH sounds like running more ten seconds or so. How long does it take to get -- do you think, just in terms of the complexity here, to get down to a point where this is something that could move past being a pilot project?

We are -- this is Bryan Durkin. In terms of that commentary we're working very, very closely with all of the participants that have connected into our clearing organization. We pride ourselves on the ability to get the transactions into our system in a real-time basis.

We are working closely with the service providers of the firms to ensure that any issues on their end are resolved, and if there's anything that we can do to streamline on that side of the equation, we're working very closely with them. I think we need to recognize that this is not about speed or high velocity, and it's not a high-velocity business. But that being said, we really do pride ourselves on the ability to get the transactions in very quickly.

Okay, thanks.

And we'll take our next question from Chris Allen with Ticonderoga.

Good morning, guys.

Hi, Chris.

Most of my questions have been answered, but just one thing, on the capital return plan, what's your level of flexibility if you foresee a dividend tax increase coming next year in terms of accelerating the plan rather than waiting to the first-quarter, 2011?

It's certainly something that we will consider but there's no definitive plans in place as of yet.

Got it. All right, thanks a lot, guys.

We'll take our next question from Don Fandetti with Citi.

Good morning. Craig, investors seem to be focusing the potential negative impact of QE2 on your business and I was just curious how you think about the pluses and minuses of quantitative easing and if you think there's any real risk to your open interest or volumes?

I think it's very difficult, Don, for us to speculate on that. Obviously, the overall environment in terms of zero interest rate policy, fed involvement in quantitative easing has been somewhat challenging for that segment of our business. But I think if you look at it, I would say under those circumstances the business and interest rates has actually performed I think very well.

You clearly see people moving farther out the yield curve and so we're benefited by the diversity of the range of interest rate products that we provide and certainly the increased activity in treasuries, which has been substantial, has helped to ameliorate or offset some of the difficulties in the short-term interest rate market and Euro/dollar futures.

But I'll go back to the point that I made before, which is that we're seeing open interest building significantly in all of our interest rate products, and -- including even in the very near-term, short-term contract. So we'll wait and see what the next round of quantitative easing really involves. But it's just very difficult for me to speculate on what that means for volume and what other factors might come into play that could be either incrementally positive or negative for interest rates.

Okay, thank you.

And we'll hear next from Edward Ditmire with Macquarie.

Good morning. With exchange consolidation restarting in 2010 after a year or two on the back burner, can you give your latest thoughts on your opportunity as a consolidator? Are we more likely to see CME go outside of its current futures focus, go outside of US borders, or outside of the exchange business as in the Dow Jones acquisition?

I would say that our posture on that is remaining the same. We've clearly indicated that we do not expect any large scale mergers and acquisitions activity in the near future.

I think when you look back at the totality of mergers and acquisitions in the exchange space over the last decade, we clearly have had the most focused strategy, at least in terms of how we view our expertise and capabilities. And obviously that has been in the derivative markets and the exchange-traded derivative markets with, obviously, the exception of -- we have a very positive view about the opportunities in the index services area.

But, generally speaking, we're continuing to be of the same view. We have great growth opportunities in our core business. We are focused on globalizing our core business, and obviously, we're focused on leveraging our current capabilities in clearing and risk management into the over-the-counter swaps market.

So those are the avenues of growth for us and I don't think you will see us taking on large transactions to further expand our business when we've got those kinds of organic growth opportunities in front of us.

Great, thank you.

And that's all the time we have for questions today. I'd now like to turn the conference back over to Craig Donohue for any additional or closing remarks.

I just want to thank everybody on behalf of my colleagues for joining us today. We will look forward to talking with you again next quarter.

That does conclude today's conference. We do thank you for your participation.