芝加哥商業交易所 (CME) 2010 Q4 法說會逐字稿

Good day everyone, and welcome to the CME Group fourth quarter 2010 earnings call. As a reminder this call is being recorded. At this time for opening remarks and introductions it's my pleasure to turn the conference over to 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 fourth quarter and then we'll open up the call for your questions. Terry Duffy, our Chairman, is also here this morning. 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. For 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 on the Investor Relations portion of our website. During this call we will refer to GAAP and non-GAAP results. A reconciliation is available in our press release, as well as within an income statement trend file on the IR portion of the site, which contains historical quarterly results on a GAAP basis. Now I would like to turn the call over to Craig.

Thank you, John. Good morning and thank you for joining us on the CME Group fourth quarter earnings call. For the quarter, CME Group posted solid results of $763 million of revenue and $458 million of operating income with an operating margin of 60%. I will let Jamie get into the details on the financial results, while I will take an opportunity to talk about the big picture environment for CME Group and our customers. For the entire financial services industry, the past two years have been filled with challenges and uncertainty on many fronts. I think we can all agree that there is still a fair amount of uncertainty ahead, but as I look back on CME Group's response to this environment, I see remarkable progress. We have consistently worked to support the users of our core products, provide fact-based analysis and insight on prevailing market conditions, and look for opportunities to develop new products.

This work has enabled us to launch exciting new products such as the ultra bond Treasury futures, which traded 34,000 contracts per day in January and which provided a variety of new and useful analytical tools to our customers. In turn, these allow us to have more meaningful conversations with market participants about their trading needs and continue to evolve new offerings for our customers. We have worked with regulators, customers and service providers to develop and launch a cleared over-the-counter interest rate swaps offering, which has cleared over $980 million since launch. We are in what we consider very early stages with this offering, but we are pleased to note that the necessary operational and risk management frameworks are functioning robustly, as evidenced by the cleared activity to date and early participation has come from a diverse group of firms.

Since our initial launch, we've added two new clearing firms, RBS and Wells Fargo, highlighting the positive reception the offering is getting from market participants. We've received all necessary approvals for the launch of CME Clearing Europe, an offering which provides us with long-term strategic flexibility in our efforts to meet our global customers' needs. We are on track to begin clearing nearly 100 over-the-counter energy products later this year and from there we will expand to other over the counter and listed products. Approximately 20 firms are currently in talks to participate in the offering, including potential clearing members and customers. We built upon years of education in Washington to call for a measured approach to financial regulation, one that does not create unintended consequences and doesn't put US markets at a disadvantage. We recognize that while exchange traded markets, largely, will see fairly minimal impacts from Dodd Frank, regulations for the over-the-counter markets are ongoing.

We continue to advocate not just for our benefit, but for sound economically rational regulation. 2011 will be a determinative year in this process and we are committed to the high level of engagement that we have shown so far. We bolstered our products and services capabilities and our global reach by a multiple strategic initiatives. For example, we added Dow Jones index services to our product family and Elysium services to our technologies suite. On the global front, we deepened our BM&FBOVESPA relationship by initiating a joint multi-asset class platform development effort. Beyond BM&F, we launched or expanded relationships with multiple global partners, including Bursa Malaysia, NEK Inc, the National Stock Exchange of India, and Bolsa Mexicana. Combined, these efforts help to expand our global membership and clearing membership base and generate opportunities in markets outside the US, where we believe customer acquisition initiatives can generate significant long-term growth for us.

Throughout all of these strategic efforts, we further strengthened CME Group's strong financial position by paying down debt and we laid the groundwork for the ongoing return of capital to our shareholders, which Jamie will discuss in more detail.

I will now provide a few key product highlights for the year. The interest rate complex ended the year up 28%. While this impressive growth was obviously off a down year, we feel that many of the trends in 2010 signal that macroeconomic conditions are continuing to support a more active interest rate environment. We've talked before about how Treasuries have seen higher rates of growth than euro dollars, as volatility has come back into the long end of the curve. This is consistent with activity we saw during a prior extended period of Fed inactivity from June 2003 to May 2004. Treasuries in 2009 were 43% of total interest rate volume and in 2010 were 48%.

FX had a record breakout year with 47% growth, continuing a trend of being one of the fastest growing segments in the global FX market. Ongoing price volatility for physical commodities has created a strong volume environment in agricultural commodities, energy and metals, as expectations for increasing global demand continue to grow. Average daily volume for metals was up 40% for the year and agricultural commodities were up 23%. Energy average daily volume was up 11% for the year, with crude and refined products up 21%. Natural gas markets have experienced very low volatility given the increased northeast shale production and average daily volume in these products was up 2%. The energy complex posted strong growth of 22% for January as well, with 47% volume growth in our WTI products. This strong volume reflects the world energy markets reliance on WTI as an indicator of global macroeconomic fundamentals.

We were particularly pleased to announce new daily volume records in our benchmark WTI futures and options contracts, which traded a combined 1.7 million contracts on January 28, with WTI options posting a second consecutive record on the following trading day as well. In the fourth quarter, volume during non-US hours represented 16% of our Globex volume, the highest percentage quarterly we have seen so far as it grew 33% compared to Q4 of '09. We saw considerable strength in interest rates and agricultural products during the overnight period, up 38% and 107% respectively. It is exciting to see the liquidity deepen throughout the entire day and we are poised to build on that liquidity by introducing our globally relevant products to new customers around the world.

I will close my comments today with a brief update on regulation and the implementation of the Dodd Frank Act. As you know, the CFTC is working towards its July deadline for enacting rules in support of Dodd Frank. As things now stand, there are numerous open issues, many of which are to a large degree intertwined. However, as I mentioned earlier, it is important to note that most of these issues are specific to the over-the-counter markets with very minimal impacts expected for exchange traded markets. We are supportive of measures that will reduce systemic risk, while preserving the flexibility and customization of over-the-counter markets which allow them to serve customers and provide innovation. We anticipate that given the July deadline, we will have much more clarity on key issues by that time. In general, a significant focus of our work in Washington is to ensure that proposals currently advanced do not impose excessive compliance cost and other burdens on market participants. It is critical to the health and competitiveness of the US markets that we avoid unnecessary and overly prescriptive regulation. We will continue to work actively with regulators and market participants toward these ends.

To summarize, in this area of significant change in financial services, CME Group has been successful at not only building our business for the future, but also with contributing to the regulatory process and laying the foundation for our customers to move their own businesses forward under the evolving market frameworks. We see good indications that the fundamental drivers of the core business will help us sustain growth and we are optimistic about the long-term prospects for our development of over-the-counter and global initiatives.

With that I would like to turn the call over to Jamie to discuss the financials, thank you.

Thanks, Craig. CME Group posted solid fourth quarter financial results with average daily volume of 12 million contracts per day, up 17% versus Q4 of last year, driving a 14% increase in revenue to $763 million. There are a couple of items included in our GAAP results that I'd like to walk through. First, our GAAP tax expense included a $51.3 million non-cash charge to record a deferred tax liability revaluation due to revised state tax apportionment estimates. These changes in estimates are normal course and occur each year once we have a completed and annualized our annual tax returns in various jurisdictions.

On a related note, in the first quarter of this year preliminary estimates indicate that the impact of the recently passed Illinois income tax increase will result in a nonrecurring revaluation of our deferred tax liabilities of roughly $5 million.

Second, our GAAP non-operating expense for Q4 included $8.6 million resulting from the acceleration of hedge expenses from 2011 associated with the early payoff of our term loan, which we mentioned in a press release earlier this month. As a result, we will see a decrease in our interest expense going forward, which I will touch on later. Excluding these two items, Q4 net income would have been $253 million and diluted EPS would have been $3.77.

Turning to revenues. The overall rate per contract for the fourth quarter was $0.813, up slightly from the third quarter driven by offsetting mix factors. On a full year basis average daily volume was up 19%, while the average rate was down 3%.

Market data revenue of $104 million for the quarter was up from the third quarter due in part to a favorable audit assessment. Subscribers to CME, CBOT and Nymex data decreased somewhat in Q4 with a total terminal count decreasing to 379,000. Overall for the year, we saw increased revenue as the price increase instituted at the beginning of 2010 had a greater impact than the decrease in reported terminals.

I will now take a few minutes to review expenses. Drilling into Q4, compensation and benefits was $120 million. Within compensation we booked $3.7 million of nonrecurring expense related to a voluntary self-audit of our employee classification levels. The fourth quarter bonus accrual totaled $22.2 million, higher than we expected at the beginning of the quarter due to stronger than anticipated Q4 volumes and operating income.

Stock-based compensation increased sequentially due to our annual grant, which occurs in mid-September. At the end of the year, our overall headcount stood at 2570, an increase of 50 people during the fourth quarter, reflecting our continued investment in growth opportunities including the acquisition of Elysium.

Excluding subsidiary employees, our total 2010 employee bonus was $67 million, which came in at the midpoint of our 2010 bonus guidance of $54 million at target and $82 million at maximum. Turning to 2011, our target bonus is $67 million including subsidiaries.

During the fourth quarter we saw a $9 million sequential increase in professional fees due to higher OTC and European clearing expenses, increased regulatory cost related to Dodd Frank, as well as expenses related to acquisition of Elysium.In terms of 2011, we expect total expenses to increase to approximately $1.26 billion, assuming our target bonus payout, up from the $1.17 billion last year, which included the $20.5 million impairment we booked in Q2 2010. Of the $110 million annual expense increase, about half is tied to our existing core business, which has annual expense growth of roughly 5%. This is down from core expense growth in 2010 of approximately 8%. The other half of the annual increase is related to higher spending on growth initiatives. These include co-location, higher OTC cost due primarily to operationalizing our offerings, the development of our multi-asset class trading platform with BM&FBOVESPA, the building of our European clearing house and cost to create an enhanced front-end for energy trading with our acquisition of Elysium in December.

In the non-operating income and expense category, the interest rate hedge acceleration drove expenses higher, as previously mentioned. In terms of 2011 guidance we expect interest rate expense to drop to approximately $31 million in the first quarter and then approximately $30 million each quarter thereafter.

Our effective tax rate in Q4 was 42% excluding the tax related charge I mentioned earlier. Looking ahead, due to the announced increase in the Illinois corporate income taxes rate, which is retroactive to the beginning of the year, we expect our effective tax rate in 2011 to increase slightly to approximately 43%, excluding any deferred tax liability revaluations.

Capital expenditures net of leasehold improvement allowances totaled $77 million in the fourth quarter, driven primarily by work on our co-location and data center facilities. CapEx for the year totaled $176 million. In 2011 we expect to spend approximately $180 million on capital.

2010 was a record cash earnings year, with CME Group generating $1.1 billion. During the year we paid down debt of $300 million, paid dividends of $305 million and added to our cash balances to accommodate our various OTC and international clearing efforts. At the end of the fourth quarter we had approximately $900 million of cash and marketable securities on our balance sheet.

As many of you are aware, our dividend policy is tied to the prior year's cash earnings total. The CME Group Board of Directors recently approved amending our existing dividend policy to increase our dividend payout from approximately 30% of prior year's cash earnings to approximately 35%, subject as always to the Board's approval and declaration. This is an initial step in the capital structure plan we highlighted during our second quarter earnings call. Based on our 2010 results, this change is expected to increase our regular dividend by more than 20%. We intend to announce the next quarterly dividend later this month following our February board meeting.

The early paydown of our $420 million term loan originally due in August 2011 will position us to reach our targeted levels of 1 times debt to EBITDA sooner, as we paydown outstanding commercial paper. In addition to the regular dividend increase, we will consider other forms of capital return likely in the second half of the year, which will potentially include some combination of opportunistic share buyback and special dividend.

One last point, we have adjusted our planned minimum cash levels to $700 million from $500 million based on fine tuning our estimates of expected guarantee fund commitment for the OTC initiatives we are involved in and our initial commitment to CME Clearing Europe based on its recent approval by the FSA.

Turning to recent volumes. Our ADV was 12.3 million contracts in January, up 10% compared to the prior year, with our commodity related products, agricultural, energy and metals, driving most of the 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 fell free to get back in the queue if time permits.

Rich Repetto with Sandler O'Neill.

I guess the first question, Jamie, is on the expenses. You broke it out and gave us some detail on the $110 million increase. I guess the $55 million or half for the new initiatives, what do you expect as far as revenue offsets for that $55 million?

I think, Rich, there is a couple of items there. On the platform that we are developing with BM&F, the multi-asset trading platform, as you know we have got about $10 million of revenue this year from them to help co-developed that. We anticipate about $15 million in 2011 for those same efforts and about another $5 million in 2012 related to that. Also, co-lo is another obvious area of expenditure for us in the current year and we have said that revenue from that will start in 2012 in the neighborhood of $30 million to $40 million in that first year. And then going forward, clearly we are investing heavily in our OTC efforts where we do expect to generate revenues, but we have not quantified those yet.

So, I guess, [this isn't my fault], but it's fair to say that those initiatives expect a good amount of revenue offset from them? Just the numbers you just gave me?

Absolutely. We are spending on growth and over the long-term the reason for doing that is to generate that revenue going forward.

Okay. And then my follow-up would be, I guess, for Craig and Terry. Craig you made some comments about the OTC and the rulemaking process of the CFTC. It seems like it's going down the route of being highly prescriptive. And I guess just to get some color from your perspective on how you see the process going? One of the things that you are most focused on that you think that they got right or that may need some adjustments after the comment period.

Well, I'll just start by saying that I think there is an awful lot of stuff if you are following this that's coming out in terms of the proposed rulemakings were commenting very extensively on those. So I don't think I can encapsulate in a very brief answer how we are viewing those different things. In general, most of the focus is obviously on creating a rational and efficient scheme for mandatory clearing, as well as for the trading of swaps that are required to be cleared. We, like everybody else is paying close attention to that.

So, in general, I would say that this is a process. The industry has commented, we have been very highly aligned in our commentary with most of our significant customers, as well as with other industry stakeholders that have been commenting, including most of the major trade associations. So, I think we have a fairly conventional point of view. If you look at the FIA and [SIFNA] and others that have been commenting for the most part, we are highly aligned with them. Most of us support the core principles of what they are trying to do in terms of improving transparency and reducing systemic risk. And we are just trying to work as an industry to find a way to do that where it's not disruptive to the existing business models or efficiency of doing business.

Just, Rich, to add to that a little bit, I just got back from Washington last week and they are going to hold upcoming hearings on the 10 and the 15. The 10 will be in the Ag committee and the 15 in the Financial Service committee, both on the House side. And this is one of the topics they want to discuss about the implementation of the 240 rules that have been put forward and it is feasible to get all those enacted in the timeframe if possible, what are the costs associated with doing that and what is the competitiveness of doing that and are we putting forward some rules that will hurt US institutions? I think that you are seeing Congress, since the election, take note of the Dodd Frank Act and all, burt as rules being written and now they are going to hold hearings to bring not only the regulators in there, but folks like ourselves to get our opinion as this process unfolds.

It just seems like it very hard to keep your arms around on the things that are going on because there is so much and the whole thing may change. Thank you for the responses.

Thanks, Rich.

Alex Kramm with UBS.

Just wanted to start briefly on the competitive environment. Obviously, a new competitor has evolved here that just got regulatory approval, NYPC and NYSE Liffe, and just wanted to see what you're most recent thoughts were there. When we talk to market participants it seems like there is a little bit more drive and urgency than we've seen in some of their previous attempts. I think you yourself have said that they have a valuable position and might have a competing answer to what they are trying to do. So, any update there would be interesting. Thanks.

I'd be happy to comment on that. First of all, just to clarify, I think, what you're referring to they received approval for their DCO application. They still need approval for the actual cross margin and proposal between cash Treasury and Treasury futures contracts. I guess what I would do is just repeat what I think we said before, which is that we certainly view this as an effective competitor. We do take this very seriously. Having said that, we have very, very deep liquidity, very low transaction and frictional costs, excellent technology, very strong customer relationships and extremely low pricing for liquidity providers and high-volume traders in our Treasury and euro dollar futures contracts and I think, like in most cases in the global futures and options industry, developing liquidity to compete with a very highly efficient existing pool of liquidity is always difficult.

As well, I think most people tend not to make actual trading decisions on the basis of the capital efficiency and I think you can't view the capital efficiency in isolation because by definition if you wanted to optimize for cash Treasury and Treasury futures, you would be sub-optimizing for the portfolio margining, benefits and cross margining benefits of including [EGOT] treasury futures and the broader portfolio of CME Group products. So we are looking at it very carefully. We have our own proposals that we are working on to enhance the margin offsets for customers who are active in both the cash Treasury and Treasury future markets. So, as always we will be a vigorous competitor with people who compete with us.

Okay and then just a very quick one on the OTC side. You obviously just launched the European or are intending to have something on the clearing House side in Europe. It sounds like you've started talking to the industry a little bit about Asia to and I am hearing that you might be actually having plans for clearing house in Asia. So, anything you can tell us about that already? It seems like Asia is much more fragmented when it comes to regulatory considerations and it might be hard to choose a location to do something, so anything there in your Asia plan in general and OTC would be helpful. Thanks.

Sure. I would say generally, the establishment of CME Clearing Europe, which we are very pleased now to have received all of the necessary regulatory approvals, is really a reflection of our commitment to serving our customers' needs on a global basis. We happen to have a very global customer base, some of whom have a preference for clearing in Europe versus in the US I mentioned during the call that we have strong initial indications from a variety of traditional clearing member firms, as well as energy companies for the suite of energy products, which we will be first making available in CME Clearing Europe. So, while I can't comment on things that we haven't done yet, in terms of the aspect of your question that touches on Asia, we are clearly committed to being a global provider of services to our customers and our focus right now is on CME Clearing Europe.

All right, fair enough, thank you.

Howard Chen with Credit Suisse.

Craig, just to dig a little deeper on your capital efficiency comment. What is the status of the cross margining agreement between futures and you're rate swap clearing efforts and when do you think we will expect to get approval there, if we don't have it already?

Right. Well, obviously, one of the important things that we are going to be striving for is the ability to provide margin offsets between highly correlated futures contracts and the related swap contracts and certainly euro dollar futures and Treasury note and bond futures and options and interest rate swaps is an important aspect of that. Right now I think it's fair to say, Howard, that things are in a state of flux because of the larger kind of rulemakings and structural framework that CFTC is developing for how swap positions should be held at the account level and how the risk management and default management procedures should work for swap customers versus future customers. So, I'm afraid that it's not as simple as just us making that application because they are sorting out some fairly major structural issues in the manner in which swap positions are going to be held in cleared and margins. So, as that gets sorted out over the next several months, we will be like all other industry participants in a better position to seek and hopefully gain the ability to provide that cross margin benefit.

Okay, thanks. And then switching over to the expense guidance, I think one of the challenges at this time of year is always gauging the relative level of conservatism as we obviously don't know and shouldn't know your cash targets. But maybe you'd be of help, [watch your size], I don't know if you agree, and if you can discuss in hindsight what you're projections coming into 2010 where that really got you to the expense budget that you ultimately ratcheted up in the middle of the year, clearing, with that year now behind us.

As we looked at 2010 I think early on, Howard, our guidance for the year was $1.1 billion of expense. We came in about $[17] million higher than that. And really that was due to a few things. In particular, the acquisition of Dow and Elysium contributed to that, as did the BM&F co-development effort. And then as we came in towards the end of the year and we had a very solid fourth quarter, our bonuses came in at a better than target levels, so that added to it as well. And then there were some other onetime things that were a little bit smaller throughout the quarter we've highlighted along the way. So, at any point in time we try to give you our very best estimate and that's what we've done this time through. Just don't forget that we are investing as we look at the $1.26 billion that we put out there as guidance for this year, a good part of the increase there is tied to those investment and growth opportunities, the OTC-- .

Understood. And maybe just to add one clarification, Jamie, just understanding you did Dow Jones and there was other, couple other newer things, but if I just look back at 2010 at the core and say that the franchise had 19% volume growth, was that better, much better, in line with the original expectations coming into the year? Is that a question that you can answer?

I can answer -- let's talk a little bit on the expense side. The core came in at about 8% higher versus the prior year. And don't forget that one of the things that we are facing on the core expense side was a very tough comp in 2009, because we had cut back significantly on much of the discretionary expense in that year, as we were buckling down under -- during the economic crisis. From a expected volume growth, I think you can see that because we beat our bonus target, that we came in a little bit higher than we had expected for 2010.

Okay, thanks very much.

Michael Carrier with Deutsche Bank.

Jamie, one other question just on the expenses. I guess when we look at, and this is more of the core versus the new initiatives, but on the core how sensitive would that be? Let's just say that we are assuming average volume growth of 10%, 12%, 14%, so even if it is a little bit lighter or if it's a little bit stronger, just how much operating leverage do you have or how much flexibility. Do you have more on the core expenses versus the new initiatives?

I think there's a couple of areas that are going to flex naturally with volumes, right. We have talked about those before. So the bonus is going to flex as volumes are the key driver of our bottom-line and our cash earnings. So that will flex a bit and you will also see our license and fee sharing arrangements line flex as well with volumes. So keep those in mind. And then if we were to, for whatever reason, have a challenging year on the volume side, you saw what we were able to do in 2009 and we would look to do something similar.

Okay and then just on the follow-up, in the energy market, it seems like on the WTI product suite, the options have seen more strength relative to the past. Just wondering if there's something new there, different customer base, just any color that you can provide there?

We weren't sure we caught the last question. You are asking about the strengths of WTI options?

Right.

I don't know that there is anything in particular so say there. Obviously, we have had very strong growth in both futures and options. We have had very significant participation from the commercial participants in the market, but beyond that it's not something I can speculate on.

I think when you see prices doing what they are doing in the energy markets, we have had a significant up in the market, a lot of strategy type transactions which happen in options tend to go up in volume when you see markets either highs or lows or whatever you want to assume they are at. So, I don't think this is an unusual phenomenon other than people are just taking great faith in our product for starters. But, you do see this happen when prices go one way or the other significantly, it takes strategy position and options.

Okay up. Thanks guys.

Ken Worthington with JPMorgan.

First question is on the BM&F. It looks like volumes in December were about 35,000 contracts a day, north south, versus a peak of 214,000 contracts a day in the middle of the year. What are the issues here? And I guess what I'm really after is if there's a read through to the other exchanges with which you have or are building trading relationships with?

I think the key driver that you are seeing there is as we have introduced new traders to BM&F through the order routing, some of them become significant enough that they then decide to go and hookup directly with the BM&F and not go through Globex. We have worked with the BM&F so that they recognize all volume introduced from CME. So, in some of that growth -- some of those volumes that you are seeing there, that decrease in volume is just due to that. But we are saying, I think, good strong growth overall.

And are you getting paid when they go direct as opposed to going through Globex or is that -- was that what you are trying to imply with your comments?

Yes.

Okay, perfect. And then just an update on ClearPort the volumes fell. I'm sure there's some stuff going on on the power side which maybe affecting it, but any update there just because the volume change was striking?

I think it was due to the small power contracts and that's evident as you look at the average rate per contract for ClearPort went up a bit from quarter to quarter as well. Nat gas as well has come -- some of that volume has gone from ClearPort over to the exchange traded. For the year, we had a record, don't forget, record revenues from ClearPort of over $300 million.

Great. Thank you.

Dan Fannon with Jefferies.

Just to clarify one more thing on the expense side and more on the revenue opportunity. On slide 13 you highlight the non-core or, I'm sorry, the growth initiatives and it looks like based on what you have said that only one of those is going to really contribute to revenues in 2011. Just trying to get a sense of timing associated with new initiatives on the top-line.

Yes, it's certainly on the co-development effort with BM&F that will impact us for the current year. OTC we anticipate getting some revenue in the current year. Co-location, you're right, is a more of a 2012 item. And Elysium we get a little bit of revenue from that and really that's more of a (inaudible) to add some functionality that we hadn't had before.

Okay and then I guess a little bit of color on your OTC interest rate swap offering that's been out now and wondering what some of the feedback has been from customers? You have announced a few more since we heard from you last in the third quarter and wondering if we should expect to hear more customer additions and what generally they are saying after a few months?

I think we will just say what we said before. This is a process. The whole industry is still awaiting the final rulemakings which are going to drive a lot of the final determinations about choices of clearing houses and clearing house structure. So, in general, I would say we still have a very high level of engagement with the end user community and the swap dealer community around our offering. I think we have put in place very effective capability that is being used and has proven itself to be effective. But this is a process and I think it is going to take time still for people to react to the final scheme once it's developed and in place. So, nothing major new to report, but I think the fact that we have large financial institutions, as we commented on during the call, continuing to become involved with us. I think it is a very positive development.

I think also one of the things that you are seeing is there are hearings coming up. There has been some rumblings about end user exemptions that I think people are waiting to see if that is going to bleed off into other products in clearing of these products. But it has been clear, I think, on both sides of the aisle, they do not want to attack the Dodd Frank portion of this that requires clearing of standardized OTC interest rate contracts. So, what we may look at is some of the end user exemptions and some people maybe just waiting to hear what the final results of those upcoming hearings are that I mentioned earlier in February. So, other than that, I think it's just, as Craig said, more of a waiting game.

Great.Thank you.

Roger Freeman with Barclays Capital.

I guess I had a question on the $200 million increase in minimum cash tied to the European clearinghouse. As you think about the US side, are you clear at this point because there were some changes that the CFTC is proposing there about what -- if there is going to be any additional capital requirement on that. Is that why the stock buyback or the special dividends is going to be second half event?

The European clearinghouse was a piece of our thinking around that $700 million. The other piece of it is just as we go through the various OTC opportunities what we think that we are going to need in terms of our skin in the game for those opportunities. That's what's driving that.

Just to clarify, that covers what you're thinking about the US then?

Yes.

Okay. And then second question, just again last question I hammered a lot on the increase in cost. Of that $55 million increase on the opportunities side, how much of that, what percent of that is tied to clearing, US, Europe, Dodd Frank, regulatory and what is the nature of that increase? Is it mostly, is it legal, is it operational, both? Is it financial, professional around margining et cetera?

If you look at it, we are spending probably on our platform and our co-development platform probably in the neighborhood of $28 million. Co-lo we are probably in the $15 million range. Elysium a little over $10 million, OTC probably in the $40 million to $50 million range. So it is across the board and it is all tied to growth.

Yes. Okay, appreciate the color.

Niamh Alexander with KBW.

Craig, can I touch back on the growth opportunities, because I know it is a big subject with investors a lot of last year. How do we look at organic growth from here? And help me understand, you talked before about reengineering the whole product and sales team away from product focus towards client focus and you saw more opportunity to expand some energy products FX. How is that progressing? Is there anything anecdotal you can share with us, numeric you can share with us, the fruits of that effort?

Well, I think we are making very good progress. This is a big change in the way that we organize ourselves to both acquire new customers and to better support our existing customers. Under Bryan Durkin's leadership, he's, I think, done a very effective job at getting this structured in a fairly short amount of time. I think it's leading to a much better kind of focus on the part of our customer facing resources to really kind of focus on new client segments and also selling the broader range of CME Group products and services to our existing customers.

Anecdotally, I think that already we have received incredibly positive feedback from our customer base, but as importantly, we have begun to see customers working with us to adopt a broader range of products than they might have otherwise been using, at least if they are discretionary traders, proprietary trading groups and hedge funds and those that have a natural inclination to expand the range of products that they are able to trade. So, this is all still very new, but I think it's an important step forward for us and it really does give us more leverage. It's better for us to have people who can interface with customers across the broad range of products and services that we provide rather than a single product. So, it is the right step for us. It is going to help us to, I think, achieve a better growth opportunity on a global basis than we could under the old paradigm, but this is only several months old at this point, so, we'll have more, I think, to share with you as time goes by

Okay, thank you, Craig. And then if I could ask on the technology platform that you are building for exchanges and I know you've allocated some expense to it and the expense increased, but how far along are you, do you think, in the development of the whole equities futures platform? Is it something that you could actually go out and start, not necessarily selling, but using as a part of a introductory tool with some of these other exchanges that you haven't really approached yet?

Well, it's a phased initiative and so we will be developing several, think of them as modules, for the different market segments starting with the derivatives segment and then cash equities and fixed incomes. So, all in all, this will take us into 2011 until the full multi-asset class capabilities are developed and then implemented in the Brazilian market. And I think we have been clear to say that the multi-asset class trading capability for us is really likely to be more of a strategic partnership kind of tool where we have important strategic partnerships around the world we would like to use for a common technology platform rather than to think of it as us becoming a technology vendor, which really is not within our sights. But I think the best answer to your question is, probably 2012 before we are in a position to really use that in that way.

Thanks so much.

(Operator Instructions) Jillian Miller with BMO Capital Markets.

I just wanted to follow-up on Elysium. I sensed that you are alluding to this earlier, but it sounds like you viewed it as more of an add-on service to facilitate your customer clearing business and compliance rather than saying independent moneymaker. Is that fair to say?

It's definitely an add-on functionality to help us on the front end and bring more customers to our energy market.

And then as a really quick follow-up, do you have a timeline for when that straight through process might be available to the ClearPort users?

We are working on it feverishly and we haven't put any timelines out there.

Okay, thank you.

Chris Allen with Evercore.

I just wanted to follow-up on Roger's question around the $700 million. Obviously, European clearing and over-the-counter is going to take a little bit of time to build out. How do we think about the cash balances? Is it necessary to hold the $700 million right now could have build as the opportunities become more apparent? Then, also, how did that paydown of debt impact the cash balances as some of that was funded with CP.

The $700 million right now is our best estimate and it's hard to say exactly when you may need it, so we want to target having that, it's just our conservative nature. So, there's that. And then as you noted, at the end of the year we had about $905 million of cash on hand. We did issue some commercial paper at the beginning of this year. As we got rid of the $420 million bank loan, we issued probably about $300 million of commercial paper. When we did that we did use some of that cash toward that. And then we do have some cash outlays in the beginning of the year, like the bonus and taxes and that sort of thing. So, I would just stick with the $700 million as our target for what we want to have on there as far as cash goes.

Great, thanks a lot, guys.

Yes.

Matthew Heinz from Stifel Nicolaus.

Just a quick question on the capital return. How are you thinking about that from a total payout ratio, all in with buyback, regular dividends and special dividend? And do you plan to fund that strictly with free cash flow or are you willing to dip into your cash balances a little bit?

What I've said is we want to maintain that $700 million on the balance sheet. The other aspect of this is we are not going to go out and issue debt in order to return capital. We want to get to that onetime debt to EBITDA level and remain there to maintain our AA ratings. So, I'd think of it from that perspective. In terms of the mix between whether it's buyback or special dividend, it's going to depend on the circumstances at the time. We are going to look to do opportunistic buybacks and look at whether or not it makes sense to do a special dividend at the point in time where we have the cash to return.

Okay, great, thanks. And then if I could just do one quick follow-up. I'm curious to hear your thoughts on the potential convergence of GAAP and IFRS clearing, I'm sorry, accounting, and how that could impact your customers' desires to, I guess, accelerate the OTC clearing given the potential gross up of derivatives.

That's one I will have to get back to you on, I am going to go do some further research on that. I don't know that there is that much of an impact from driving that business, but I will get back to you.

Okay. Thank you.

Thanks.

Brian Bedell with ISI Group.

Just a couple little quick ones. First on the cleared energy contracts, the 100 contracts that you mentioned Craig, just what the timing of launch of those contracts are during the year? And then secondly, whether your starting to see any traction of customers increasingly using futures over -- versus over-the-counter derivatives? How those conversations are going?

Yes, sure. We are working on the actual physical launch of the cleared energy contracts through CME Clearing Europe. I think I mentioned that we have a substantial number of firms that are kind of working with us to establish their clearing capabilities. So, I am hoping that that's something that we are going to achieve in the near-term here during the year? But there is some more work to be done. We haven't actually announced a date, but we will. On the second question, we have definitely seen some customers, and I don't want to overstate that, but some customers have definitely either commented to us or we feel have begun to migrate somewhat toward the futures market, as they've been thinking about the regime that will likely apply to them in terms of their swap business. I think it's too soon to really put any kind of confidence interval on that in terms of what it really means, but yes, we have seen some customers who have adopted futures and I think that's a positive sign.

Thank you.

Jason Shum from Bank of America Merrill Lynch.

Just two quick questions, if I can.One, I just want to get a sense on these growth initiatives. Any color in terms of timeline or product launches that you guys are expecting within this year? I know Elysium, from this presentation it favors enhanced front end for energy, so I'm not sure if you guys are rolling out new products for this platform? And then second question, I noticed for the last three quarters, the screens for market data were sort of flat, but this quarter it fell a little and just wanted to get a sense of what happened there.

Bryan Durkin, I think, if you are able to you might want to comment first on the Elysium and if not I will be happy to do it. Okay, I'm going to do it because Bryan is stranded in London and apparently can't. The focus for Elysium initially is for the energy market and the energy customer base, but ultimately we are viewing Elysium as a really valuable tool for providing that kind of front end connectivity and market model, if you will, for the broader set of OTC customers that we currently have and expect to have as we go through this fundamental shift in the market toward swap execution facilities and central party clearing. So, it is going to be both that, but the initial focus is very much on energy. And, Jamie, I don't know if you want to comment on the second question?

Sure. On the screen counts, Jason, down a bit versus the prior quarter. We have seen a declining count coming out of the economic crisis as people are looking to be as efficient as they can on their expense side. So you have got that aspect of it, but, also, we have different offerings in our market data area. There is enterprise licenses, as one example, so if you see some shifts between amongst that you might see changes in the industry and count. So, some of it is due to that as well.

So would you say, at this point, the economics for the other data products that you have, that's really where the growth is?

The growth that we have seen in the revenue this year is really tied to some of those smaller offerings, but primarily to the increase in the price that we instituted at the beginning of the year. And I have got to ask, if we could limit everybody to one question going forward, so that we can give everybody a chance.

Got it. Thank you very much, that was very helpful.

Thank you.

Jonathan Casteleyn with Susquehanna.

Craig, you talked about a potential negligible impact on exchange rated markets from Dodd Frank, but I'm just wondering if from your perspective is it more restricted OTC market, is that good or bad for the exchange traded marketplace?

Well, obviously, we're not in favor of anything that would restricted the OTC market, regardless of what its impact on CME Group does. I think it is an effect market that serves a particular need for customers for certain very specific hedging and risk transfer tool. As a philosophical matter, we are not in favor of that. But, I would say generally speaking, I am not envisioning that the current regime is going to restrict the value of highly standardized swaps that are already being done. And the correlation between the exchange markets and the listed markets tend to be in the more standardized swaps versus the very esoteric kinds of contract.

So if there is an impact it is likely to be on the more exotic swaps. Exchange traded products are generally not the natural hedge for residual risks in those kinds of products. So I don't expect that, even if the regulatory framework is somehow going to constrain activity or growth in the more complex or exotic portion of the swaps market, it shouldn't really have much of an effect on the exchange listed markets. But, again, this is all a question of where the regulators come out on a lot of these different questions and I don't think I can give you a perfect answer to that right now, but that's in general how we think about it.

Thanks for those thoughts. That's helpful.

Rob Rutchow with CLSA.

We have been hearing some rumblings that you may be subject to increased oversight by the Federal Reserve, so I'm wondering if you could comment on the likelihood of that and what, if any, implications that might have for you operationally?

I don't think that that's going to have very much impact on us. Obviously, today and for the last several decades, we have always worked very closely with, certainly, the CFTC as our primary regulator, including as our primary regulator of our clearing related activities, but we have always had a very high level of interface with the Fed on the clearinghouse as well. I don't think there's anything in Dodd Frank that is hugely material in terms of changing that dynamic. We interface with them extensively, we share information with them extensively and so, there shouldn't be anything material.

Okay. Thank you.

Daniel Harris with Goldman Sachs.

I was wondering if you could just go through the timeline for maybe 2011 and 2012 on what happens from here with the European clearinghouse, when do we start to see different milestones that you guys hit and rolling out to the client solutions?

Yes, Dan, I think that came up briefly before and I said we haven't put out a specific timeline yet, but we have regulatory approval, we are now working to onboard the clearing member firms. I was just in London last week and we had the opportunity to meet with nearly all of them. There is, I think, very strong interest as well as enthusiasm for the energy products that we've put out already. And then, I think enthusiasm as well for the expansion of our clearing activities there. But that will be a process that will be taking place over the course of the year and I can't give you a more definitive timeline right now.

Okay, Craig. Thanks a lot.

Thank you.

I will turn the call back over to our speakers for any additional or closing remarks.

I want to thank everybody for their participation and we look forward to talking to you next quarter.

Thank you.

Thank you. And with that we will conclude today's conference. Thank you for your participation. You may now disconnect. End of Transcript