芝加哥商業交易所 (CME) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the CME Group first quarter 2011 earnings call. As a reminder, this call is being recorded.

At this time, for opening remarks and introductions I'd 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 and Jamie will spend a few minutes discussing the highlights of the first quarter and then we'll open up the call for your questions.

Before they begin, I'll read the Safe Harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. For detailed information about factors that may affect our performance may be found on our web site and also in our forms 10K and 10Q. Go to the investor relations portion of the website to find these.

Now I'd like to turn the call over to Craig.

Thank you, John. Thank you for joining us this morning.

I'm really pleased to share the highlights of an outstanding quarter in terms of revenue and bottom line results. Our results this quarter are attributable to our continued focus on successfully innovating new products, providing superior customer service, and the hard work and commitment of our talented employees. With risk management taking on increased economic importance globally, we saw robust volumes in our core business as we delivered the most comprehensive product offering available to our clients. We successfully advanced several key longer term initiatives which we think will continue to position CME Group a step ahead of our competitors.

During the first quarter, we delivered record revenue of $832 million, up 20% driven by average daily volume of 13.8 million contracts. Commodity volume rose 29%, while financial products increased 17%. We believe that the breadth and diversity of our products and services is a key differentiator from our competitors. Interest rate volume was strong in Q1despite the ongoing zero interest rate policy and second round of quantitative easing. Our treasury volume was up 30% while Eurodollars rose 23%. We had particular strength in our Eurodollar futures and option in the mid-curve area. With Eurodollar futures volume beyond the first 2 years, up 100% and our Eurodollar mid-curve option complex up 50%. Within treasury futures, the strongest growth came from our 5-year treasury product, which increased more than 46%.

In addition to increasing volume, it's important to note our deep liquidity across our interest rate product suite as well as the rising open interest. For example, within our Eurodollar futures product, throughout the trading day, we averaged more than 60,000 contracts within the best 5 bids and offers, representing $60 billion of liquidity. Furthermore, our treasury futures contracts averaged a total of 40,000 contracts. Since the beginning of the year, open interest has increased by 2.5 million contracts, or 34% in Eurodollar futures, and 1.2 million contracts, or 32% in treasuries, growing faster than the same period last year.

Our interest rate team has continued to deliver product extensions that are demonstrably important to our customers. In January, we launched weekly treasury options and we have seen an immediate positive response from our clients. Average daily volume surged to 14,000 contracts per day in March. This builds upon the extraordinary success of our Ultra Treasury Bond product launched last year. That new offering increased by more than 100% to 52,000 contracts per day in the first quarter, exceeding our own expectations.

In keeping with our commitment to provide innovative risk management solutions to all of our customers, including products that may be more relevant for European and Asian investors, last week we announced the introduction of new Sovereign Yield Spread futures. These products, which will be launched at the end of May, are designed to enable asset managers, banks, hedge funds, and other institutional investors to efficiently manage exposure to government bond markets in France, Germany, Italy, the UK, the Netherlands, and the US. We also continue to make progress with customer readiness for our interest rate swaps offering. We have cleared trades for 10 large buy side firms and we are currently testing with dozens of other firms with many more in the pipeline. Feedback from market participants is that they're waiting for greater clarity on the rules from the CFC before clearing significant volumes. We are very pleased with our level of client support relative to our competition and we expect this area to further strengthen our interest rate product value proposition and deepen our relationships with our client base.

Turning to commodities, we have record quarterly revenue in all 3 product lines, energy, agricultural products, and metals, and in both exchange traded and OTC cleared products. These records reflect significant shifts in fundamental supply and demand factors, improvement in economic recovery, as well as increased geopolitical uncertainty. Now in energy, we saw rising volumes across the board, with healthy growth in all of our product segments. CME Group's WTI futures grew 34% in Q1, which out-paced growth in Brent futures at ICE. OTC activity was very strong during the quarter with energy related ClearPort average daily revenue reaching $1.25 million, well above our prior record. Additionally, we achieved record OTC revenues in crude products, power, and ethanol, along with strong revenues in our natural gas product line. Notably, we also achieved our highest quarterly ClearPort revenues in agricultural products, metals, and foreign exchange. Total clearing revenues during the first quarter in these 3 product areas was $4 million, up from $1.4 million in Q1 last year.

Agricultural products were a standout in Q1. Volume increased 47% with tight corn and soybean stocks, and a wet spring in the Midwest. Open interest continues to expand with March open interest up more than 40%. We're seeing increased activity during non-US trading hours in these products. March 2011, average daily volume during non-US hours was 91,000 per day, up 117%.

Metals had a record daily revenue during the first quarter driven by changing inflation expectations and a flight to safety. Following our launch of Iron Ore Swap and Options contract last year, we recently added 3 new swap futures products designed for the global steel industry. The ferrous metals market, which includes iron ore and steel along with related products, is the second larger commodity market by volume after crude oil. And CME Group Ferrous Metals Futures offer risk management opportunities for these vital global commodities. We recently added a new head of our metals business in London and our major focus in metals is to drive continued global expansion and greater use of our industrial metals contracts as well as expanding our OTC metals clearing offering.

Last year, we reorganized our products to enhance efficiency and customer service and to drive ongoing cross-selling of our products. We made a thoughtful investment in terms of adding global sales-oriented head count. Over the last year, we've grown the sales and customer service organization from approximately 120 to 145 people, and I now want to give you a few metrics for this quarter that we use to assess the near-term performance of our team. First, the level of customer penetration by asset class has been trending positively. In the first quarter, 62 of the top 100 customers traded either 5 or 6 product areas, increasing from 53 firms two years ago. 14 firms are now trading only 1 or 2 product lines, down from 21 customers in that category before.

Given our global growth strategy, it is important to note that we continue to see strong performance during non-US trading hours. In the first quarter, we had great liquidity during those hours with average daily volume of 1.75 million contracts traded between 4.00 PM and 7.00 AM. The overall growth during this time period was 27%, once again outpacing the overall volume growth. In terms of product areas, during the first quarter, 34% of electronic FX volume came during non-US hours, with 24% in metals and 17% in interest rates. The other product areas see approximately 10% of volumes during that time frame.

To illustrate the deepening liquidity, I'll turn to the equity area. We have doubled the E-mini equity volume percentage traded during non-US hours from 5% to 10% over the last 2 years, and we now trade more equity volume in those products during non-US hours than NYSE's FTSE products trade all day. Turning to other initiatives, we will officially launch CME Clearing Europe at the end of next week to better serve our European-based customers. We will begin with more than 150 OTC energy and commodity products with up to 15 clearing firm intermediaries. The initial products that include 8 OTC contracts, based on the DME Oman Crude Oil Futures contract.

One innovative new offering will be rape seed oil, which is used for food, cosmetics, and in the manufacturing of biodiesel fuels. Our goal is to offer a full multi-asset class OTC clearing service, building on CME Group's clearing experience as well as our established and growing European presence. In the next phase, we expect to add interest rate swaps the European clearing offering. Once we get more regulatory clarity, we will seek approval to provide margin offsets between cleared OTC products in the US and Europe, and CME Group futures and options products. This reflects our industry-leading role in maximizing capital and performance bond efficiencies for our customers and clearing member firms. As you know, over the last two decades, we have led the industry in implementing cross-margining arrangements and clearing linkages with other clearing houses, including arrangements with the OCC and LCH, our common clearing link with CBOT in 2003, and our subsequent consolidation of clearing operations with NYMEX and COMEX. As we expand our capabilities in OTC clearing, we will continue to focus on delivering these same efficiencies to our valued customers.

We also continue to make excellent progress in our globalization initiatives by providing our customers with access to additional foreign products from our partners on CME Globex. Ultimately, our objective is to bring new global customers onto our platform, where they can trade any of our existing products. Our efforts with partners progressed very well during the first quarter. Phase one of our multi-asset class platform, which we are jointly developing with BM&FBOVESPA, including the derivatives component, is on track to go live in Brazil by the second half of 2011. At that point, we will increase the revenue we derived from this relationship. In addition, we are beginning to see positive trends in their customers' use of their core products. We had significant growth of 77% in Q1 for the south-to-north business we track, with particular strength in our agricultural energy and interest rate products.

In early April, we launched south-to-north order routing with Bolsa Mexicana, where BMV's customers now trade CME Group products via the order routing link through our Mexico City hub which is linked to BMV's front-end trading platform. We expect the north-to-south link to go live in the third quarter of this year. Bursa Malaysia which trades their futures products on our Globex platform had record average daily volume in Q1, up 52%. Their leadership team publicly acknowledged the contribution Globex has made to these volume increases. In addition, the KOSPI futures traded on CME Globex reached its highest levels this quarter. Clearly, we have positive stories to share with additional global exchange partners and license providers where we can mutually benefit from new or enhanced relationships.

At this point, I'd like to turn the call over to Jamie, who will touch on the financial highlights.

Thank you, Craig. Good morning, everyone.

We are pleased to have posted our highest quarterly revenue ever during the first quarter, while continuing to invest in future growth. We delivered very strong results with average daily volume of 13.8 million contracts per day, up 19% versus Q1 of last year driving a 20% increase in revenue to a record $832 million. This significant revenue generation drove a 26% increase in operating income to $524 million. There's one item included in our GAP results that I would like to call out. Our Q1 gas tax expense included a $164 million benefit associated with a change in our expected effective tax rate and its impact on our deferred tax expense and a release of reserves related to a foreign investment, excluding the tax benefit Q1 net income attributable to CME Group would have been $292 million and diluted EPS would have been $4.36.

Moving on to rate per contract, despite near record volumes during the quarter the overall rate per contract was $0.808, down just slightly compared with fourth quarter 2010. Although the higher volumes resulted in larger discounts, the relative stability in the rate per contract can be attributed to the strength of the product mix, with strong growth coming from energy and agricultural products. Market data revenue of $107 million was up $3 million from the fourth quarter, mainly due to strength of CME Group services. Activity in our Dow Jones index business continues to outperform our initial projection. Revenue during the first quarter was $23 million increasing from an average of $18 million during the last 3 quarters of 2010. We have seen particular strength in the commodities and ETF areas of the franchise.

I'll now take a few minutes to review expenses. Compensation and benefits was $122 million up slightly on a sequential basis. At the end of March, our overall head count stood at 2,605, up 35 compared with the end of 2010 with half of that increase due to our Elysian acquisition and the majority of the rest in our technology area of the development of the new multi-asset class trading platform. Total non-comp operating expense in Q1 was virtually unchanged on a sequential basis and up 2% versus the prior year, primarily driven by marketing and other as well as by licensing and other fee agreements.

Turning to non-operating income, we received a $14 million dividend during the quarter from BM&BOVESPA, based on a 5% ownership. If you recall, we generally receive a larger dividend as some of it was a true up of the 2010 performance. Capital expenditures, net of leasehold improvement allowances, totaled $38 million in the first quarter driven primarily by work on our co-location and data center facility. We have approximately 120 customers who have put down initial deposits and several more who have subsequently expressed interest. We currently expect to move customers into our facility at the end of the summer with extensive testing in the October/November time frame. We are planning to go live during Q1 of next year at which time we will begin to generate recurring revenue.

In Q1 we delivered the highest level of cash earnings in our history. Last year our quarterly cash earnings averaged $270 million while this quarter our cash earnings hit $330 million. During the quarter, we paid down debt of $420 million including all of the commercial paper we had issued. We raised our regular dividend 22% from $1.15 per share, per quarter in 2010 to $1.40 per share in Q1. During the first quarter, we hit 2 important milestones related to the capital structure guiding principles we provided in a transparent way last July. At the end of the first quarter we had more than $700 million of cash and marketable securities on our balance sheet. We also reduced our debt to EBITDA ratios to below 1 times. Which we have targeted since completing the NYMEX and Dow Jones transaction. We continue to make investments in our core business and in the growth initiatives I mentioned earlier and we expect to continue to generate significant excess cash.

Since we currently do not expect to participate in any major M&A activity in the near term, we will be well positioned to return excess cash to shareholders and we are in the process of formulating the specifics of our capital return strategy. I'm excited regarding CME Group's prospects and look forward to creating value for our shareholders.

At this point, I'll turn the call back to Craig for a few closing remarks.

Thank you, Jamie.

Let me summarize by saying that we continue to position the Company for sustainable growth. I'm very optimistic about the near-term and long-term opportunities that our Company has moving forward. Looking back, we successfully integrated 2 large acquisitions. We delivered strong cash flow and operating margins during the unprecedented credit crisis and despite the zero interest rate policy as a back drop for 2 years. And we performed at a very high level. During this time, we never stopped providing new and innovative products. We never stopped investing in our technology and clearing infrastructure, and we never stopped expanding our global reach through partnerships, or we never stopped adding to the deep bench of our talented employees. I am proud of our team's performance during the first quarter.

There's a lot of market commentary about potential M&A in our space which has captured the attention of the media and certainly investors. The rationale discussed by potential exchanges who are active participants include 4 major considerations. First, the critical importance of the derivatives area in the context of stand alone or multi-asset class exchanges. Two, the benefits of significant and meaningful product diversity. Three, the view that partnering with other exchanges around the world will open markets and drive trading activity in global products, particularly from customers in Asia. And four, the value providing capital efficiency to customers. CME Group, in our view, already presents each of these opportunities.

We embarked on the right strategy 5 years ago to position our company to benefit over the long term in all four of these dimensions. We are not surprised to see other exchanges attempting to follow in the same path. If you are a generalist or exchange-oriented investor and you are looking for a deep forward-looking innovative franchise with multiple organic growth avenues, then it's time to consider increasing your exposure to CME Group. Again, we thank you very much for joining us today and we'd now like to open the call for your questions.

Thank you. The question and answer session will be conducted electronically.

(Operator Instructions).

We'll take our first question from Roger Freeman with Barclays Capital.

Hello, good morning.

Hello, Roger.

Hi. This first question may -- just having jumped over from the drama playing out in the other call. Probably the one highlight that Duncan mentioned at the annual meeting is their success so far in NYPC, and that basically, most of that the customers aren't even connected yet, and their significant uptake from here. So, I'm curious what you've actually been hearing from customers since that's launched?

Roger, it's Craig. I'll tackle that and perhaps Bryan Durkin may like to add. First of all, I think as you can tell by looking at the numbers, I think the volume and the open interest continues to be fairly negligible as I talked about briefly during my comments. The depth of book is significantly greater, obviously at CME Group, in both our treasury and Eurodollar contracts than at either ELX or NYPC, roughly 30 times deeper. Obviously, institutional customers who are hedging and engaging in risk transfer trades are looking for that very efficient market and depth of book.

So, while we take that seriously, and we're continuing to obviously compete aggressively in that area, I think it's also notable that when you look at their average daily volume, we've achieved that same number just in new products that we've introduced like the Ultra Bond. And, like the other products mid-curve fed funds, the on-the-run treasuries, and weekly treasury options. So, we're as focused on innovation and growth and meeting our customers' needs as we are ensuring that we remain a very effective competitor in today's environment.

Okay. Thanks. Then, I guess the follow-up, slightly separate. What's your updated thoughts or where do you think CFTC's leaning in terms of ultimately being able to do portfolio margin cross-swaps and futures to be able to offer customers that offset?

Well, it still remains to be seen. You know, they are putting out for comment their proposals. I believe that there's still a very strong difference of opinion among the commissioners on the right, sort of range in alternatives for the industry. We have at least commissioner that has been opposed to the strict segregation of swaps at an individual count level versus what we have in the futures.

We have another commissioner who has wanted to ensure that the industry has ample opportunity to comment on a wider range of alternatives, including alternatives that we support, which is the baseline futures model. And cross-margining between swaps and futures is partly a function of resolution of those particular issues. So, we're pleased to see that at least some people in the commission are very sensitive to the cost benefit analysis and also wanting to make sure that the structures can be implemented in a way that maximizes capital efficiencies for customers.

All right. Thanks a lot.

Next we have Alex Kramm with UBS.

Hello, good morning.

Hello, Alex.

Let me start with something for Jamie, on the expense side. I think your guidance that you've given at the beginning of the year was $1.26 billion. We're running at $1.23 billion annualized. I'm looking at your bonus accrual which I think is already on the higher end of your target range. Can you just put the guidance and what we're running in perspective? Maybe, where you're expecting seasonal upticks to get there or you are actually doing a lot better than you're thinking?

Yes, Alex, we did give out the guidance at $1.26 billion for 2011. If you annualize the first quarter across each of the categories, the areas -- you end up as you pointed out, we're coming in the first quarter on an annualized basis about $30 million or so less than that guidance. But, we're still sticking with that guidance, and, so, if you take that $30 million, I'd say you spread it roughly evenly going forward over the salaries and comp line, over communications and technology, occupancy, licensing and fee agreements, and marketing and other. A lot of that is just driven by the growth in these areas. It's driven by the investment that we're making in growth across the exchange.

Certainly, on the comp side, we're investing in head count. Internationally, to grow the business, we're also on the communications and technology side. You'll see that growth there coming as a result of rolling out our co-lo later in this year.

On the occupancy side, we've outgrown our London office as we've grown our international staffs, so we're moving into new space there and that's increasing that line item somewhat. And, then, on licensing and fee agreements, that certainly will grow as we grow our ClearPort and equities business, in marketing and other. Again, it's just tied to international growth. So, those are the areas where you'll see the pickup to get to that guidance for the full year.

All right. Thanks. And, then going to Slide 13, I think that's actually new information, the volume by product on during international hours. So, thanks, first of all for giving that, but I'm wondering where you think the biggest opportunities are here. I'm looking at energy, for example, and maybe you can talk about that. It's just 8%. It's the lowest across all your products. I'd say energy is a pretty global commodity, right?

So, is that an area where you're spending a lot of time? Or are there any particular reasons why that's so low? (inaudible) to get that higher? And, any more color would be appreciated. Thanks.

This is Bryan Durkin speaking. We are intensifying our efforts both in Asia as well as in our EMEA region to increase the level of focus and exposure to all of our commodity asset classes and in particular, our energy products. We feel that the complementarities and the extension that we're offering with regards to, in particular, our OTC clearing services in Europe, through the introduction of our [CMACE], is largely driven by interactions that we've had with our local clientele and particularly the commercial end users of the energy product base, to provide localized clearing services in that regard. So, you are correct that we are absolutely intensifying our sales focus and efforts in that zone.

All right. Thanks.

Next from Credit Suisse, we have Howard Chen.

Hi, good morning, everyone.

Good morning, Howard.

Congrats on this quarter. First, Jamie, on capital management, you spoke to the milestones achieved during the quarter and that you're still formulating the specifics on the capital returns strategy. Could you just expand upon that and talk a bit about maybe some of the parameters around what exact specifics that you're all discussing?

Sure, Howard. As we've said, we've been really transparent certainly about the intention of return capital this year. I will say I'm very excited about the fact that we've been able to deliver on everything that we talked about with regard to the capital structure guiding principles. As you noted right now, me, my team and the Board are focused on formulating our strategy around a return. In that return, we're going to look at various ways of returning that capital to shareholders, whether through buybacks, opportunistic buybacks, or dividends. Those are all on the table certainly.

And, we're very -- we're still early in the stages, I'd say, of accumulating the excess cash to return. We just went over that $700 million mark just a bit this quarter. But, as you know, it's a very dynamic business so it's not going to take long for to us generate more cash to return. So, we will be looking at buybacks opportunistically. We'll look at the impact on our EPS. We'll be looking at where we feel the valuation of our shares are versus where the market's valuing them, and take all of that into consideration.

Okay. Thanks. Just a follow-up on credit rating. During the quarter, S&P placed you on watch negative. It seems like on one hand, you want to put more capital into -- into clearing initiatives but the agency seems to be signaling that, that could be detrimental to the rating. So, how are you thinking about balancing all of that?

You know, we still need to sit down with them. We're meeting with them in the coming months. We're going to walk through all of it. We think we can demonstrate the capital that we're putting into the clearing house certainly strengthens the risk profile of the clearing house and I think we're doing the right things in terms of managing the business and managing within clearing. We're always managing the risk there. That's our main consideration there.

One of the issues that they brought up was around the FICM structure. And we certainly around that structure are able to cap our exposures and totally control our exposures there. And we've done that and we've fully funded that risk. So as I said, I think the risk profile of the clearing house is remaining very, very solid.

Okay. Thanks a lot.

Thank you.

And, next, we have Dan Fannon with Jefferies.

Good morning. I guess, Craig, I wanted to get your latest thoughts on the debate around WTI versus Brent. During the quarter there were a couple of shifts by some major corporations, away from WTI. I just wanted to get whether you think this is a trend that you expect to continue, or just your latest thoughts there?

Yes, sure, Dan. I think fundamentally, you have to focus on sort of the cyclical factors that are driving some of those trading relationships and trading opportunities. Fundamentally, as I think I commented during my remarks, you look at the much larger open interests in WTI than Brent, and also the fact that we had more growth in WTI futures than we saw in Brent futures during the quarter. I think that shows that people are continuing to look at WTI as the more liquid global benchmark.

So, there's a lot of complex cyclical factors that are going on in world energy markets. But, fundamentally, we look at liquidity, the volume, and the open interest. We're also focused on continuing to develop a broader product set that meets all of the different needs of energy consumers and producers and refiners around the world.

And, so, as an adjunct to our already strong leadership position in WTI, we're focused on further development of our east of Suez crude oil market through the DME Oman contract. For the long-term, we believe there will be a number of important products that can be used for hedging and risk transfer purposes. WTI will continue to be a leader, but we'll also look to diversify that as well.

Great. Thank you.

And, next, we have Chris Allen with Evercore.

Good morning, guys. Nice quarter.

Good morning, Chris.

I just wanted to ask if you could provide an update on the FICM membership, where that stands in terms of when it's going to be launched. If you give any color in terms of what's the potential absolute dollar capital savings across the customer base that could be realized from this membership?

This is Bryan speaking again. We're very pleased with the, what we would consider, the soft launching of the FICM. And, what I mean by that is we've been aggressively testing with a dozen or so of our end-users to validate the margin offsets that we believed would be realized. And, we're very pleased with the preliminary testing results in that regard. We fully expect to see one or two at least of our larger users come live over the course of actually the next few weeks. So, we're anxious to see that come to fruition.

As far as the other candidates that are involved in this offering, they're working through some of the internal logistics and making sure that all of the internal testing has been confirmed and finalized before they go live. In terms of the offsets, we have seen upwards of 50% to 60% reductions as a result of this initiative. We very enthusiastic about it going live.

The other thing to add to that is in addition to FICM, in our base business that there's significant capital efficiencies already embedded in our interest rate products. So, as you look between treasuries and Eurodollars and between the various Eurodollar contracts and various treasury contracts, there's already $3 billion of margin efficiencies embedded in that clearing house and those products.

This is an added benefit to the full complement of interest rate products that we offer.

Thanks. And, just one follow-up, I guess for Jamie. Was there any impact in compensation, in investment income, from deferred comp this quarter?

Yes. There's a bit of favorability. I want to say it was around $800,000 to $900,000 of favorability in the comp line.

Good, thanks, guys.

The offset obviously being down in the investment income line.

Next, we have Ken Worthington with JPMorgan.

Hi, good morning. With regard to the non-US trading volume, have you found that there's a critical volume level that's a tipping point for future volume growth? I think in the past, Jamie has talked about a tipping point for electronic volume, once you get a certain threshold the high frequency traders start to participate in volume accelerates? Does this concept apply to the foreign trading as well, and have you hit it or is it yet to come?

You know, Ken, I think it's very difficult to put a number on that in the same way. Generally speaking, I think it's a different situation when you're to talking about the tipping point that some people think comes with 10% or 15%, 20% market share, whatever your view is.

I think this is different. This is really extending liquidity and trading activity and volumes out throughout the 24-hour trading day. I wish I could, but I don't think I can give you a very reliable answer to that. But, obviously, the continued trend for us is we're seeing this kind of increased growth in electronic volumes during non-US hours, as depicted on our slides. But, I think if you were to also look at it by time slice, it's essentially mostly at the moment extending out from sort of the North American trading hours time zone.

We're building our way out, I guess, is the way I would describe it, prior to our opening in North America then following our late afternoon close.

Maybe as a follow-up, given enough time, any idea on how much volume you'd expect could come outside of US business hours, given the current mix? It doesn't matter how long in the future, but a guess on how big those volumes could be as a percent of total volume?

Right. Obviously, we can't speculate with a prediction or projection. But, I think that would depend on the particular products set, but obviously, FX I think is an excellent example of a truly global market where there's trading activity and liquidity to be found in the different segment of the FX market literally around the clock. FX and metals, energy, and commodities, I think in that order, are likely to be ones that could be very actively traded and ultimately at a level that is commensurate with what we see in North America. And, then, perhaps less so in the equities market where access to the cash market or related markets might be an impediment to the same degree of volume occurring during non-US hours as US hours.

And, if I may add to our reconstituted sales force particularly with Asia and with Europe, based upon how we've been able to segment that sales force, we are much more targeted in our capabilities to do the cross sale as cross the various asset classes that Craig just alluded to. I can affirmatively say the interest and the demand for particularly the commodities products is there. We are spending a lot of time working with our client base in terms of providing educational instructions on the utilization of these instruments to support and complement the risk management needs.

I would say the same goes for the interest rate complex. In particular, one of the reasons why we've driven forward with our Sovereign Yield Spread contract is to complement and provide the user base there with a single risk management tool in which they can bundle and manage the risk in these various government bonds and one transaction. So, we're very enthusiastic and it will be a major part of our focus as I alluded to earlier.

Great. Thank you.

And, next, we have Rich Repetto with Sandler O'Neill.

Hi, guys. I didn't know whether I'd get in here or not. I guess the question, Craig, and Terry if he's there, is back to the consolidation issue.

When -- I agree with you, Craig, it appears that there is some copying going on, at least bringing the European interest rate curve together. But, I think the aims of some of these mergers is to go beyond that, in regards to a multi-asset global exchange. I guess my question to you, are you comfortable with the strategy? Will your partnership and linkages with your partners hold up, versus that strategy as it undoubtedly moves to Asia afterwards and whether deals like that can get done?

Right. Well, Rich, I think the way that I would answer that is first of all, we've been committed for a very long time to our more focused strategy in terms of the composition of our business. And, we've never, frankly, been very big believers in the large multi-asset class exchange concept, if you will in that. It's not clear that it has actually delivered demonstrable value to customers, in terms of increased efficiencies, from a technology or post trade clearing process perspective.

And, I think it's also somewhat evident that the synergy opportunities from those very different and very differently regulated businesses are inferior to the synergy opportunities of combining much more similar kind of derivatives businesses as we have done. That just happens to be our point of view. Obviously, we have great growth dynamics. We're continuing to exhibit those as you can see from this quarter.

We've got a very robust growth opportunity for extending ourselves globally and into new product areas ultimately as well into the OTC markets and index services. I would say just on the last part of your question, I think it's evident that we are one of the most, if not the most, attractive partner to large global exchanges, just by evidence of what we've done over the last several years in creating very strategic investments and commercial partnerships and arrangements with some of the leading exchanges in the world.

Most of our products have a great correlation to a lot of these properties, exchanges in markets and regions as well. With our new multi-asset class trading platform that we have jointly developed with BM & FBOVESPA, we'll be also in a strong position to leverage that technology and ultimately distribution network for partners that have a presence in the cash equities and equity options market. I think we're confident in our strategy and the position that we have, and in the growth opportunities that we have.

Hello, Rich. It's Terry Duffy, I am here and I completely agree with what Craig said. This is going back to the prior question and I think it circles around to it, when you look at how can you predict volumes coming from outside of non-US hours? It's very difficult to do. One of the things you have to look at is what Craig, Jamie, and Bryan have outlined through this call, is the investments that CME has put into place over the last five years, not just in North America but throughout the world. So, we're optimistic about the future.

Okay. And, the one follow-up here, given those comments. Obviously, you've done a wonderful job building these partnerships getting non-US hour trading volumes. But, the ultimate -- from what I hear you saying -- that partnerships, do partnerships ever -- would you ever go beyond the partnerships because, at some point, that's going to get tested, I assume, by others. They will seek to acquire the people you partner with or merge with those people. So, when does it or is that -- how do you think about that? How does the CME position there?

Well, I think, Rich, if you look at what we've done, we've picked what I would call national champions in each of the major, developing and emerging markets that are, at least as of yet, prepared to expand globally and partner strategically and from an equity perspective. So, we've got a head start, first of all in that, but we have been of the view and continue to be of the view that some of these national champions are viewed as protected assets within their countries or regions.

I think there's quite a bit of evolution that has to happen, in at least the developing and emerging markets before you see large scale outright mergers, acquisitions, and combinations. I think what you saw in Singapore and Australia which would be relatively freer and open economies to some of the emerging markets that we're involved with, where, ultimately, it just wasn't in the national interest and that transaction couldn't go forward. That is a reality in terms of dynamics.

So, I think we're well positioned. We have a lot of time. By virtue of being a significant shareholder, a major partner strategically or technologically with these national champions, I think we're extremely well positioned.

Okay, guys. Very helpful, thank you.

And, next, we have Jillian Miller with BMO Capital Markets.

Thanks, good morning.

Good morning, Jillian.

Just going back to the global volume topic, I was wondering if there might be an opportunity through Market Maker Incentives or some kind of market maker programs to create even more deep liquid markets touring the non-US hours that then could drive even faster pickup there?

Thank you for that question. It's Bryan Durkin, actually. We do have very specific programs for both the European markets, Asian markets, and our Latin America markets. And, it has proven to be a very useful and productive tool towards building partnering and drawing stickiness into our product. So, you know, you can expect to see a continuation of that model as we further develop our markets in each of those regions.

Okay. Thanks. Then, it's my understanding that you're in the process of developing FX [FTC] clearing. If you could just update us on the progress there. I was also wondering if your strategies at all depend on whether the regulators decide to include or exclude the FX forward in the Dodd-Frank mandates?

Yes, why don't I tackle the last part of that, and then let Bryan let you know where we stand in terms of our efforts. But, I think just yesterday in fact within the last couple of days the CFTC in its proposals had sought to include FX options and swaps as instruments that would be subject to the mandatory clearing requirements. That is consistent with what we have been expecting and what we have been planning for. The focus of the industry and of CME has not really been on the spot and the forward market.

That's where things stand. That's obviously something ultimately that is also subject to the determination of the Treasury Department, in terms of their ability to exempt those instruments. But at least preliminarily, the CFTC has sought to include them as swap or OTC-derivative instruments that would be required to be cleared.

From a readiness perspective in the actually instruments that would be likely to clear OTC through our mechanism, we have been working very closely with the user base, both on the buy side and the sell side, in developing our model and making sure that from an operational perspective that we have the facilities in place, and the structure in place, to accommodate the market readiness as we come to a closer, definitive understanding of the regulatory environment. So, we're not losing any time in that respect, in terms of our preparedness and working with the marketplace in anticipation.

Okay. Thank you.

And, next we have Jonathan Casteleyn with Susquehanna.

Thanks, good morning. Just on the new co-location revenue guidance, what are the expected margins on that $30 million to $40 million? Would you expect that to hit the bottom line next year?

We haven't said specifically what those margins are. In the early going, we'll be certainly lower than the margins in our existing business. As we get up and running, and start to fill the center out, they'll start to approach our margins over the longer run. I wouldn't look for CME-like margins in the 2012 but after that, we'll start to approach that.

Okay. So, would you expect to hit the bottom next year? Or would it be offset by new OpEx?

I think it would certainly be positive for the bottom line next year.

Okay, great. And on the OTC product launch in May, 150 new products. It's a big number. Any sort of understanding of revenues and expenses into the second quarter?

I think it's, first of all, as with any new products, we do waive fees. So, there is a fee waiver associated with the products that are being launched. I want to say it's roughly a six-month fee waiver. There are some caps around that in terms of the amount of contracts. So, I wouldn't anticipate seeing any significant revenue in the immediate term, and, typically, as you know, with any new offering, it does take a while for volumes to ramp up.

That's helpful. Thanks.

One of the beauties behind that model is the complementarity and our overall energy complex and our expectations in terms of further developing the trading as well as the clearing services.

And, next, we have Niamh Alexander with KBW Brokerage.

Hi, good morning. Thanks for taking my questions. Can I touch on the OTC clearing in Europe? You're just about ready to launch that now. Is it primarily commodities still? Can you talk to me about who your competition there will be? And, then, what other products are in the pipeline for them?

Initially, we're going out with a large slate of OTC energy products. We're also offering the rape seed oil and other agricultural swaps that are in the pipeline as well as metals. We are ultimately going to be moving forward with an interest rate swap product as well, and we're working, of course, very closely with our user base and the 15 client firms that have been helping us develop this offering, in terms of additional product extension.

Bryan, can you help me understand what you're offering versus the competitors? My understanding is ICE is there, and there might be slightly different products. But, for example, customers in Europe may already be in a position to net against the existing European clearing houses. Is ICE and like, should we think of those as the incumbent competitors for those services? Help me think about the capital efficiencies you could offer clients.

I think that's a fair comparison. In particular, our client base, our existing users of our other products and they've definitely sought the ability and venue to be able to have a localized clearing facility. We think over time, we will see the benefits of capital efficiencies and margin offsets. That's our goal, with respect to the broader set of asset classes that we represent.

Okay. Fair enough. Thanks, Bryan. If I could just on the other subject of the WTI in the brand, you noted that your open interest has been higher for so long and also outgrew Brent but this past quarter. But Dow Jones during the quarter had indicated that they were considering moving their index to Brent from WTI, and there's a lot of assets married to index. Help me think about the risk to WTI volume, should that happen in 2012?

Well, I think we have to look very closely at the overall liquidity and the transparency of the WTI market. The marketplace, in itself, does look to this as a benchmark, in terms of pricing their risk. And, so, when you take all of those factors into consideration and the fact that this product trades two and a half times greater than the Brent, as well as how the market is able to look to the actual pricing transparency of this contract, we feel very confident about continuing to build the complex overall. Those index weighting adjustments were, and we believe are, negligible.

Interesting. Thanks.

As a reminder, we'd like to ask request you please limit your questions to one question with one follow-up. Next, we'll go to Michael Carrier with Deutsche Bank.

Thanks, guys. Jamie, just on the market data, you mentioned like a $5 million swing sequentially and just wanted to get any color on that in terms of what drove that, if it was all Dow Jones or if it was something else?

The total swing in market data was more in the neighborhood of $3 million. And, there was the swing in the Dow Jones which was in the neighborhood of $4 million to $5 million, but then it was offset a little bit. We did see a slight decrease in pickup in the number of terminals. That ate into a little bit. We're still feeling some of the effects as people are coming out of the recession and just being very efficient.

One more on the international side. I guess with in any of relationships that you guys have currently in place, anything in the next 12 months, whether it's new pricing initiatives or relationships that could see a step up in the growth rate that you've been seeing? And, I guess, just on the FX side, when you look at the increase in those volumes relative to the other products, any way to gauge like how much of that's being driven by users in the OTC market moving onto an exchange, just given that it's one of the more standardized products?

Mike, let me take the first part and ask Bryan to address the second part. I think you heard us comment during the call that we're up 70% in terms of the business from south-to-north if you will, in terms of our Brazil relationship. I think we also mentioned that as we now implement the new multi-asset class trading class platform in Brazil that we'll see increased revenue associated with that.

Obviously, we'll also see revenue growth from our other arrangements including continued volume growth at Bursa Malaysia derivatives and order routing revenues from Mexico. I think you have to look at it in the aggregate across each of these. They're small in relationship to our total revenues, but, for the future, as we continue to build and expand on these, and as we grow our global customer base, we obviously believe it's going to be material to us for the long run.

With respect to the new users coming in to utilizing the FX futures products, you were very astute to pick up on that phenomenon. It's definitely been an interest that has grown, particularly in the European sector where we have end users that had traditional had not looked towards our product and are moving their business onto the exchange traded offerings. So, we're going to continue obviously penetrating those opportunities aggressively as part of our overall sales effort.

Okay. Thanks, guys.

And, next from ISI Group, we have Brian Bedell

Good morning, folks.

Good morning, Brian.

One short-term question, one long-term one. On the shorter-term side, for the rate per contract, if we assume a stable mix of volume in the second quarter and appreciating that volumes are at least down so far in April, what do you expect the member benefits to be, as we move into the quarter? I guess what I'm getting at is, should we expect the RPC for the individual lines, assuming mix is constant, to be moving up, we have a softer volume period in the quarter? And then if you could just highlight some more guaranteed volumes that you'll be getting in some quarters (inaudible) Treasure rules, and so on?

I can respond on the RPC side. Certainly, in a situation where you have a fixed product mix and if you were to see decreased volumes, you pick up some on the rate in terms of the tiering. On the member/nonmember mix, that's a harder one to call. That fluctuates around quarter to quarter but generally speaking, it stays relatively constant over time.

Bottom line, we should see an improvement in RPC, just given if volumes are weaker in second quarter?

All else the same but as you know there's a lot of other mixed factors that come to play.

Right. Ignoring the mix. The longer term question, how do you or how would your international strategy change if NYSE ended up in either ICE's hands, or if it ended up at the Deutsche Boerse in New York merger go through, and what types of thing are you doing now as the competitors are distracted internationally?

Again, I think we've been a leader in focusing on growth and developing in emerging markets. We certainly have more strategic investments and commercial linkage arrangements with major exchanges around the world. We're very focused on that.

I don't think that changes whether NASDAQ and ICE are successful in their efforts with New York Stock Exchange, or whether New York Stock Exchange and Deutsche Boerse are successful in completing their transaction. Our focus is on expanding our global distribution network, acquiring more customers. And, a big part of what we're doing through these partnerships is using them as a way to expand liquidity in our existing, very successful products into these time zones. And that just doesn't change by virtue of what various of our competitor organizations are doing.

Great. Thank you.

And, next we have Matthew Heinz with Stifel Nicolas.

Hi, good morning.

Good morning.

Just a little bit more on the international strategy, if you will. I know this has been covered in pretty good detail so far, but you know you've spoken about the attractive growth opportunities you see in Asia, but also the challenges in penetrating this market. Asia seems to be a very broadly defined and fragmented market.

I'd just be curious to hear your thoughts an more granularity on how you plan to attack this opportunity, in terms of specific countries, products and kind of whether you plan to open more of an on-the-ground store front presence in China, India, and Korea or whether you are still favoring the cross-routing arrangement that you have in place now? Also, just some thoughts on how you plan to leverage the European clearing house, with regard to your Asia strategy. That would be great.

This is Bryan. First, I'll take our strategy in terms of covering that very broad landscape that you referenced. We have built up a large, I would say, central office of upwards of 35 professionals located out of Singapore. And, that group has the responsibility of managing both the respective business lines that we represent, so all of the asset classes are represented there as well as our client development and sales teams across all of the client segments that we represent. So,, there is representation for the corporates, commercials, proprieties, banks, asset managers, hedge funds out of that region.

They then have the responsibility of covering the broader Asia region and are complemented by assistance that we have from individuals that are stationed in China. We also have representation in Hong Kong. We're certainly looking to expand our resources in those particular regions as well to be able to have continuity and more boots on the ground on a day-to-day basis both within Hong Kong and I failed to mention Japan and China, as well.

So, we put certainly invested significantly in our human capital to be able to better penetrate these markets by where we have them strategically located. I think we're doing a fairly solid job of covering the landscape both in Korea, China, Japan, Taiwan, and other sectors around there. Malaysia, I failed to mention as well.

I think your other question was how you plan on leveraging European clearing and growing your Asian presence. Certainly, the out of the suite of 150 products that we're going live with, again, we feel that, in particular, a number of these products should appeal particularly on the energy side, as well as we're hopeful in building up the interest on the agriculture side and starting out with the rapeseed oil.

Okay, that's very helpful. Thank you.

And, we have time for one final question Rob Rutschow with CLSA.

Hi, good morning.

Good morning, Rob.

Just a quick follow-up on the RPC. The sequential improvement in RPC and agriculture and maybe FX is a little better than it has been in the past. So, does that point to a shift in the user base towards maybe some smaller or retail type clients? Then as is corollary to that, how would the non-US activity impact RPC going forward?

Let me start with some of the higher level RPC impacts on those too, and maybe Bryan and Craig might want to weigh in. As we look at commodities, the sequential increase was really driven by across the board actually, in terms of the various mix impacts, primarily in the nonmember/member mix. So, we saw nonmembers growing a bit faster than members, for the quarter versus last quarter. And, additionally, we saw the product mix within ags also helped as we saw some of the higher contract or higher priced contracts within the ags, like wheat and livestocks, trade a bit more, grow faster than the other products within that suite.

That's what drove on the commodity side. On the FX side, we saw an increase, a slight increase on the nonmember mix help drive it. More so, we saw a shift where there was a shift in the type of contracts being traded. There was a small increase in the percentage of EFPs that were traded in that market, which carry a very high rate per contract with them.

Okay. If I could follow up also on the M&A question. You stated pretty clearly you're not interested in sort of a stand alone equity, cash equities type business. As we look overseas to some of the emerging markets, they tend to have more diversified businesses and they tend to also be monopolies.

In the event that you're looking outside of the US with acquisition targets and are able to get something done, how does that monopoly characteristic play into your decision-making? So, if the equity market and the potential acquisition target is a monopoly, does that impact your decision-making doing an acquisition?

You know, I think, again, just to reiterate, we've said for quite sometime now even before the more recent spate of mergers, acquisitions, proposals that, for the foreseeable future, we're not really focused on large scale mergers and acquisitions transactions. So, with that caveat, my answer to that would be, we're always going to be cognizant of the quality of the businesses and the competitive dynamics that those businesses face, in among many other factors in making decisions like that.

In the past, when we've made those comments, we've clearly reflected that you have a hyper competitive environment in at least the US and European equity markets and equity options markets. In general, it's a very difficult time, establishing and maintaining a sustainable competitive advantage or differentiation because the products themselves are not innovative. So, you know that would be one factor among many, many other factors that we would consider as we approach those types of opportunities.

Okay. Thank you.

And, that does conclude the question and answer session for today. I will now turn the call back to Craig Donohue for closing remarks.

Well, I know that we've gone a little bit long, but we want to thank you for joining us today. And, we certainly look forward to talking with you again next quarter.

That does conclude today's conference and we thank you for participating.