芝加哥商業交易所 (CME) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the CME Group second quarter 2011 earnings call. As a reminder, the call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to John Peschier. Please go ahead, sir.

Thanks, and I'd also like to thank all of you for joining us this morning. Craig and Jamie will spend a few minutes discussing the highlights of the second quarter. Terry Duffy and Bryan Durkin are here as well. 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 on 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 may differ materially from what is expressed or implied in any forward-looking statements. For detailed information about factors that may affect our performance, you can you go to our website and take a look at our forms 10-K and 10-Q. Again, you can go to the IR portion of the website to find those.

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

Good morning, and thank you for joining us. I will discuss our strong performance in the second quarter and provide updates on a few of our strategic initiatives before turning things over to Jamie to review the financials.

During the second quarter we delivered excellent top line results, with revenue $838 million driven primarily by strong trading volume, which we also saw last year during the second quarter. Volume accelerated during the quarter with 12.1 million in April, 13.5 million in May, and 14.9 million in June, averaging 13.5 million for the quarter. We had record open interest during the quarter that surpassed 100 million contracts. We also delivered a highly profitable quarter with earnings per share of $4.38. This was driven by a heightened expense focus, which is reflected in our revised guidance for the year. Building on our second quarter results, average daily volume is off to a good start in July, up 18% compared to last year.

Interest rate volume was strong, highlighted by a 50% increase in June, with Euro dollars up 58% and treasuries up 44%. This growth was likely driven by increased volatility due to the turmoil in Europe, the end of the second round of quantitative easing, and concerns about the potential downgrade of US debt. Our interest rate market share increased from April to July relative to US and European competitors, which can be attributed it our diverse customer base, our strong liquidity and futures along the yield curve, our healthy options business, and our significant depth of book and effective spreads.

We have seen some customers increasing the portion of business they do on our exchange. For example, according to the CFTC's most recent Traders and Financial Futures Report, there's been a sizeable increase in asset manager open interest positions in Eurodollars futures contracts, as well as an increase in the number of large open ended holders in many of our interest rate contracts. The open interest from this customer group, which traditionally executes the majority of its business in the OTC market, has jumped from nearly 1 million to 3 million contracts. This now represents almost 20% of total Eurodollars futures open interest, up from 10% a year ago.

In addition, commodities volumes remained impressive during the second quarter. Agriculture products and metals products were up more than 30% during the quarter. The commodity markets are clearly being impacted by supply and demand fundamentals and exacerbated by recent weather patterns.

Turning to company initiatives, we continue to lead the industry in successful product innovation and product extensions, as well as enhancements in technology and in our clearing and risk management services. Last quarter we launched the sovereign yield spread futures contracts. In addition we continue to build out our non-dollar denominated products by launching Euribor futures and options, which we currently expect to go live at the end of this quarter.

We also announced the late August launch of new foreign exchange futures contracts based on the Chinese yuan or renminbi. In order to meet growing customer demand for products denominated in the Chinese currency, these innovative new futures contracts will be quoted in inter-bank terms, reflecting the number of yuan per US dollar. These futures products are aligned with the OTC market convention for non-deliverable forwards, while providing the benefits of counter-party risk mitigation from exchange traded products.

Our efforts with our partners continue to progress. Development of our mutli-asset class trading platform, which we are jointly developing with BM&FBOVESPA, remains on track, with the derivatives module scheduled to go live in Brazil in stages over the next few months. At that point, we will begin to receive a fixed invariable per transaction license fee, expected to be $8 million to $10 million per year based on current derivative volume levels. This revenue will increase as our partner's derivatives volume grow.

During the second quarter, while the overall volume was relatively flat versus the prior year, the volume we track coming from South America and Mexico to CME Group grew 60%. In June it grew more than 100% and averaged a record 46,000 contract size per day. In addition, we're pleased to build on our strong relationship with the Osaka Securities Exchange, the premier Japanese derivatives and securities exchange, with a strategic arrangement to cooperate on joint product development, marketing and promotion. Under this arrangement, the companies will offer Japanese yen denominated products for their global customer base.

The addition of yen denominated futures based upon the Dow Jones Industrial Average at Osaka and the E-micro Nikkei 225 contract at CME Group will provide market participants with nearly 24-hour access to global benchmarks, sized for their need and denominated in the currency see of their choice. Both products are expected to be offered in early 2012.

We also continue to extend our central counter-party clearing capabilities globally through CME Clearing Europe. CME CE is up and running and we have started to see activity in energy and agriculture OTC cleared products. Our main focus in this early stage is building on our network, which will connect new clearing firms and enabling customers and brokers to participate.

We currently have 16 clearing firms and a strong clearing member pipeline. At the same time, we are continuously expanding our European and Asian customer base for CME CE. At this point we have more than 60 clients and brokers registered on CME CE on CME ClearPort. In addition, we are in the process of broadening our offering, which includes the deepening of our OTC commodities offering by adding the 150 plus products that we are all ready offering, as well as pursuing readiness to make our OTC interest rates swap's clearing solutions available through CME Clearing Europe.

To conclude, the world is changing before our eyes. Financial markets, always dynamic and innovative, are changing at an even faster pace than the world at large. CME Group is uniquely positioned to take advantage of these profound changes by insuring that we have the products, technology, clearing capabilities, and global distribution systems to benefit from the opportunities created by these changing market dynamics. We are confident of our potential and progress going forward.

And at this point I would like to turn the call over to Jamie, who will touch on the financial highlights.

Thank you, Craig, and good morning, everyone.

We posted revenue of $838 million during the second quarter while effectively controlling expenses, which were down $4 million sequentially. Q2 average daily volume of 13.5 million contracts was flat compared with Q2 last year, despite the record May 2010 average daily volume of 16.8 million contracts. This significant revenue generation, coupled with effective expense management, drove a 4% increase of operating income to $535 million.

Operating margin of 63.8% was one of our highest quarterly margins ever and up from 63% last quarter. Additionally, this morning we reduced our 2011 expense guidance by $25 million and our CapEx guidance by $15 million. Lastly, the reduction in our expected effective tax rate to 42.5% for the second half would decrease second half income tax expense by approximately $5 million based on consensus estimates.

The second quarter total average rate per contract was $0.807, up 2% from second quarter 2010. Although there was an unfavorable product mix relative to first quarter of 2011, with a higher percentage of interest rate activity, the second quarter average rate per contract was in line with first quarter 2011 due to lower volume discounts and a favorable venue mix.

Within market data and information services we saw sequential increase due to an audit assessment which offset a slight drop in base screens, while the DOW index business grew from the prior quarter due to higher commodities and ETF related revenue. Within other revenue, we recognized $9.8 million rated -- related to the sale of an asset in our index business with related expense of $3.2 million recorded in other expenses, and a related $1 million expense in the net income attributable to redeemable controlling interest lines.

Turning to compensation and benefits. This line items was $118 million, down $5 million on a sequential basis. We reduced our bonus accrual relative to the first quarter and our base compensation and benefits was also down, due primarily to a decrease in our vacation accrual. Non-compensation expense increased less than 1% versus the prior quarter.

In terms of our expense guidance, originally we had guided to $1.26 billion in 2011, which we reduced by $25 million to $1.235 billion. While we continue to invest in the growth initiatives we have spoken about before, including co-location, OTC clearing and our new multi-asset class trading platform, we are being as efficient as possible on this spend as well as on the core spend.

In the first half to the second half of the year, we expect to see increases in occupancy and depreciation related to [co-lo] and our new London office, in compensation related to our positions during the year, and in professional fees tied to growth initiatives.

Non-operating expense was $25 million during the second quarter. Investment income was less than $5 million, reflecting a lower dividend from BVMF and the reversal of a $2.7 million dividend reversal from Imarex, originally recorded in Q1, which is now being characterized as a return of capital. Our effective tax rate was 42% in the quarter, primarily related to tax planning efforts underway. For the second half of 2011, we estimate our effective tax rate will be approximately 42.5%, down from our prior guidance of 43%.

Capital expenditures, net of lease hold improvement allowances, totaled $44 million in the second quarter, driven by primarily by continued work on co-location and build-out in our newly completed London location. This brings us to $83 million of CapEx during the first half of the year. We now expect total capital expenditures for 2011 to be $165 million, down from $180 million estimated previously.

During the quarter, we purchased approximately 220,000 shares of CME stock following our buyback announcement on May 9.

In summary, it was a nice quarter for CME Group from a financial perspective, with robust profit margins and cash generation. We saw volume accelerate during the quarter, and so far the summer volumes have been solid. While we continue to invest in top line growth, the expense related to our growth oriented projects is leveling off.

Our first half 2011 expense growth was 9.7%, excluding the write-down we had in Q2 last year. Our revised expense guidance implies year-over-year growth of approximately 5% for the second half. We intend to prioritize and intensify our focus on cost efficiency as we build our plans from 2012 and beyond during our annual budgeting process in the fall. When our plans are completed, we will share the highlights with you.

We'll now take your questions. Please limit yourselves to one question and one follow-up so we can get to everyone. Given the number of analysts on the call, please expect us to strictly enforce this rule.

(Operator Instructions). We'll take the first question from Roger Freeman from Barclays Capital.

Hi, good morning. I want to come back to -- sorry, I was on speaker. I want to go back to the comment about I think it was asset managers, and I missed the other customer category that you had noted had significantly higher open interest year-over-year.

Is -- one of the things we've been hearing from the dealer channels is that there's been some impact on longer data to OTC, like five year and greater swaps, but of concern around the Basel requirements, but not so much on shorter duration. So I was kind of curious as to what you think is going on there.

Yes, Roger, it's Craig, and I'll come to your question in a second. We saw -- in June we saw very strong volume growth of more than 50% from both the bank and proprietary trading customer segments, both of which are participating in our markets as well as our competitors' markets, which I think is very encouraging.

What I was referring to was the Eurodollar futures commitments of traders report for asset managers, and we've seen very, very strong growth in their accumulation of open interest in the Eurodollar market over the course of the last year effectively. They hold approximately 20% of the open interest, and so we've seen them migrating we think increasingly to the futures market from the swap market, in part for the reason thank you highlighted in your question.

Okay, great. I guess the second question is just on the capital plans. You have I think a $750 million buyback. Bought a little bit this quarter, but how do you anticipate, given other opportunity sets for deploying the capital, how aggressive you think you might be over the next 6 months or so?

Well, obviously, we got the authorization on May 9, and we got into the market very shortly thereafter, so I think we were somewhat aggressive at the beginning, then we went into blackout toward the end of the quarter. Going forward we'll continue with the buyback. We do have the authorization from the Board, and we're going to work from here and we're going to analyze it on a regular basis.

All right, thanks.

Moving on, we'll take your next question from Rich Repetto from Sandler O'Neill.

Good morning, Jamie.

Good morning.

Craig, I guess the first question is on -- you brought up Brazil first when you talked about your partnerships, and a peer competitor has invested in a clearing firm CTEEP, and was I just trying to see how does that affect the -- you think -- the competitive landscape down in Brazil and given your strong relationship with BM&F?

Rich, I assume you're referring to the ISA investment in CTEEP?

Yes, I don't pronounce it correctly.

No, that's okay. I probably don't either. Obviously, in partnering and investing in BM&FBOVESPA, we have a very strong belief in the strength of their franchise. As you know, they are the preeminent market in Latin America. They have very strong liquidity. They're in the process now of building the new multi-asset class trading platform with us, which we think is going to drive growth in both their futures and cash equities segments.

As you also know, they operate the most substantial central counter-party clearing capabilities in Brazil, with four different clearing houses. So we think they're really well-positioned in the marketplace. We haven't yet seen the full dimension of what ISA's plans are with CTEEP. But CTEEP, as you know, is not as broad and deep in terms of the markets that it facilitates and is mostly focused on post-trade clearing and custody.

Okay, that's helpful. And I guess my follow-up, because I thought it was interesting when you talked about the bank and proprietary trading activity in -- being up 50% in June. As I look at volumes in June, the most significant -- was all of that activity or the vast majority of it focused in interest rate futures? And is that --I guess that -- I'm trying to feel like -- gauge the sustainability of the increase.

Yes, what I was referring to was an interest rate, and I think it's just generally reflective of most of our customer segments. As you know, we had very good activity, not only in treasury futures broadly speaking, but we continue to see strong growth in Eurodollar futures in the first two years, up more than 12% and significantly greater growth farther out the yield curve.

Okay, okay, thanks, guys.

Moving on, we'll take our next question from Michael Carrier from Deutsche Bank.

Thanks, guys. I guess one question on -- just on the clearing business, and I think we've heard some comments about this in the US and then globally on whether clearing houses -- exchanges would be deemed systemically important and what that would mean. So I guess any update on that, because it's different. It's not like banks where it's just capital. It can be -- maybe it's investments in technology -- disclosure. Then just on the collateral, if we did get a downgrade in the US, just how you think about that, what the process would be in the clearing house, any impact. Thanks.

Sure, no problem. We'll be suggest to federal oversight as a systemically important financial market utility or what we call a systemically important derivatives clearing organization. We have already proactively set aside $500 million for our guarantee fund contribution for the OTC clearing initiatives and for CME Clearing Europe, and we're already above the requirements in terms of capital and guarantee fund lines in place to match the default of the one or two clearing member firms at CME Clearing. We will be covered by that, but we're already above of those requirements and effectively it won't have much impact on us.

And then with respect to your second question, obviously on a real time proactive basis, we regularly make adjustments to both margin requirements, as well as haircuts that we apply to different forms of collateral. I think so far this year we've had nearly 70 different margin increases. Margin increases and haircuts are both driven by historical and implied volatility measures and other risk management considerations that we apply. You might have seen just earlier this week we did announce both margin increases as well as increases in the haircuts that we apply to our treasury futures products, as well as cash treasury securities that we accept as collateral.

Okay, and then just as a follow-up, Jamie, just on the new guidance, both on the expense side and on the tax side. I guess what drove the taxes lower -- or I mean, the expenses lower?

Then on the tax front, I think you guys have mentioned in the past pondering relocating. Like what drove this? Are you back to a level where you're comfortable being there? Are you still looking at different opportunities ahead given the higher taxes in Illinois?

On your first part of your question on the expenses versus the guidance, I would say there was really three factors. One is regulatory clarity has been delayed somewhat. We have slowed down our filling of open positions related to our OTC efforts.

Secondly, in terms of our equity and energy product lines, growth has probably been somewhat softer than we anticipated. So then we are experiencing lower license fee and fee-sharing expense.

Lastly, we have been going out to our teams and asking to ferret out the share expenses efficiencies wherever possible, so we're seeing decreases in discretionary expense going forward. Those are some of the key drivers there.

On the tax side, the decrease that we've seen thus far from the 43% guidance down to a 42.5% guidance was really driven by work that our tax team has done here internally to optimize sourcing of revenue from higher tax jurisdictions, so it's very much an effort that's been ongoing for some time and that will continue to be ongoing.

That said, in terms of the state income tax rate that you alluded to, we are working with leaders in the Illinois legislature, as well as going out there and meeting with several other states to see what is available out there to lower our tax burden. Because as you know, we do have the highest tax burden, I'd say, in terms of the rate that we pay in Illinois of any corporation.

Okay, thanks, guys.

Moving on, we'll take our next question from Alex Cram, UBS.

Hi, Good morning. Just following up on that last question on the tax side a little bit. Jamie, can you give us a little bit more detail on the things that you're considering or can be doing?

As you said, sourcing the revenue. If you look at some of your competitors that have international operations, obviously they have a much lower tax rate. Are there opportunities with your international volume growing, that you can actually book some of these trades maybe in when they come through the [hubs]? Or is that something that it's going to be because you're a US-based company and maybe Globex is based there, your data centers are there -- that's something that's only a dream?

I wouldn't say it's a dream. It's not an easy process. It's not just because you're generating revenue there that you get to source the revenue overseas. It has do with where your intellectual property around all that and basically your means of production. Where are they located, which are primarily here in Illinois. But there are strategies to follow that we're looking into to see if we can improve upon that and improve upon the sourcing.

Maybe more on the volume side again, coming back to the interest rate business in particular. Craig, I think you mentioned the end of QE2 and also the debt ceiling issues. Have you actually seen the market participants come back to the market? I think there was some discussions after -- during QE2 some people were sitting on the sidelines, the market was a little bit distorted by the Fed being there and everything. Have you seen people coming back to the market at all, or is it basically unchanged?

And I guess related to that, can you maybe make a comment on secular growth through new people coming to the markets in general? I think historically when you look at some of the GSEs, for example, I think one of them was not as active in the futures market; now they are. Do you still see people coming to the futures market? Do you think this is still a growth opportunity, even domestically, or do you think this is more a global effort now? Thank you.

Thanks, Alex. On the first part, again, we did see very strong growth in June in the interest rates market, I think as you're well aware. The Treasury was essentially purchasing 70% of the issuance that's out there. So we do think that has created incentive for market participants to come back into the market and be more participative and for people who need to hedge risks that are holding those cash treasury securities, whereas the Fed obviously wouldn't be hedging those risks. So that has been positive.

Our sales force is definitely getting very strong interest from clients in terms of using futures market alternatives to the swap market, as they're beginning to face the increased costs, not only in terms of capital but margin requirements to support their swap trading activities, as well as clearly a fairly large amount of uncertainty about the total range of impacts to them from using the swap market, given the ongoing and delayed nature of the rule making process for implementing Dodd-Frank.

When we go out to talk to people about interest rate swaps clearing at CME Group, they're as interested in talking to us about that as they are about using our products as substitutes for alternatives. I think it's early, but that is the feedback that we're getting from a lot of the buy-side institutions that we have relationships with.

All right, thank you.

Moving on, we'll take your next question from Howard Chen from Credit Suisse.

Good morning.

Hi, Howard.

Craig, just to follow-up on that topic of systemic importances, I'm not sure I heard you correctly. To refine the point, do you think that Fed and/or FSOC oversight of systemic utilities will ultimately mean anything different or additional from how the CFTC oversees their DCO designation?

That obviously remains to be seen as this whole process gets completed, but I would say it's not likely that it will materially change how we function and how we operate. We already have a very extensive level of involvement with the Fed.

I think that the Fed respects the primary jurisdiction of the CFTC as well as their expertise in oversight of derivatives clearing organizations. So I don't think this is going to have a material impact on how we operate and the success of our business or the way in which we manage risks due to the fact that we have worked so closely with the Fed for many, many years.

Okay, thanks. And separate topic, just totally different. Can you update us on what's going on with the Dow Jones joint venture? Maybe what are you all working on? How things are progressing versus original targets at formation? We don't have all of the details, but I just feel like things have slowed a little bit from some the historical growth rates that you all touched on at the time that you formed it. Thanks.

Sure. I'll just touch briefly on that. Since acquiring the Dow Jones Index Services business, that has been performing very well and actually above our expectations at the time of acquisition. We're continuing to work on new product development, but we're pleased with the direction of that business in terms of its revenue and profit growth, and we're going to continue to look to our capabilities there to expand the range of not only indexes that are provided, but also the range of products that we can trade that are based upon those indexes.

And, Howard, I would just like to add on the revenue side on the Dow indexes, we're seeing revenue in the second quarter of 2011 of roughly $23 million. And if you look back a year ago, it was around $19 million. So do I think we're seeing some decent growth.

Great, that's really helpful. Thanks, Jamie. Thanks, Craig.

Thank you.

Moving on, we'll take our next question from Chris Brendler from Stifel Nicolaus.

Hi. Can you just update us a little bit on the -- a little more color on the competitive environment in the rate business? You showed that nice slide on holders in open interest. Can you give us a little more color on what you're seeing in terms of the competitive conditions and your depth of the book versus your competitors?

Sure. This is Bryan Durkin. Obviously, we're very pleased with the performance overall with our interest rate complex. And I think it goes to the efficacy of the composition of market participants and diverse composition of those participants in our markets.

Our open interest levels are at all-time highs. We're monitoring very closely the composition of the large holders of that open interest. We currently have in our Eurodollars alone 282 large open interest holders, which is defined as positions of 3,000 contracts or more.

Looking at the competition and seeing some of the buildup in the open interest, we recognize that it must be fairly or significantly concentrated in that it's less than 20 open interest holders at NYPC or ELX. None of that information has risen to the level of reporting in the commitment of traders reports, which is indicative of the tight concentration.

So we're continuing to buildup, obviously, with the extensions of the products that we are introducing in our overall interest rate complex. We feel very strongly about the capital efficiencies associated with the broad swath of products that we offer in that regard across the curve. We're continuing to heavily concentrate on the buildup of the back month liquidity, particularly longer dated back month opportunities within our Eurodollar complex, and we're very pleased to the very strong and significant growth in open interest towards the back end of the curve.

Yes, I would agree. Second question, follow-up question -- separate topic on Dodd-Frank and swaps and clearing. Can you just give us an update on your views on the progress there and the timing and when we might actually see a little more traction?

Well, I wish I could give you a very good answer to that. But like all other market participants, the implementation timeline and the sequencing of implementation is not really well-established yet. So there's still a tremendous amount of final rules to be brought forward to the commission for approval. We continue to urge the commission to prioritize the implementation of the clearing mandate, and all of the ancillary rules pertaining to that, so that market participants will have greater clarity about not only the timeline but the requirements and costs as well.

We think in the total scheme of the various rule makings that the CFTC is working on that that's the highest priority, and I think most other market participants agree with that. But so far they have not really come to a consensus view on the sequencing of the rules that they would like to implement. My guess is we're probably talking about the end of the year.

Okay, great. Thanks very much.

Moving on, we'll take our next question from Chris Allen, Evercore Partners.

Good morning. How are you doing?

Hi, Chris.

Jamie, just one question. You mentioned before that BM&F received fixed and variable transaction fees, about $8 million to $10 million moving forward. I'm wondering how that -- whether that's incremental to kind of the current run-rates in terms of the revenues you're receiving from BM&F or -- because I know you were getting almost like one-time development costs revenues in these quarters. I'm wondering how that compares on an incremental basis.

On an incremental basis, for this year we're probably in the neighborhood of -- in terms of the fixed payments on the progress payments, we're probably in the neighborhood of $10 million to $15 million. There's only $800,000 of that in the current quarter, so what we will be seeing -- and as we're saying, these are kind of one-time payments, right? Going forward, this will be an ongoing revenue stream of the $8 million to $10 million, and it will be coming through our services line.

Got it. Thanks a lot, guys.

Moving on, we'll take our next question from Niamh Alexander from KBW.

Hi. Thanks for taking my questions. If I could touch on the potential for US downgrade and default. Help me understand what are the biggest risks that CME management is cautioning against and your working towards. Help me understand what is the worst case potential outcome for your Company?

Obviously, Niamh, as we briefly addressed earlier, we want to make sure that we have sufficient margin on deposit to cover 99% of the risk of a given position in terms of a one-day price move. But we also want to make sure that we have sufficient collateral on deposit, and that the quality of that collateral and the manner in which we valued it allows us to meet all obligations to market participants.

So we do have a very kind of real time approach to risk management and risk coverage. We mentioned already that we've taken some affirmative steps to increase margin requirements, as well as to increase the haircuts that we apply to treasury notes and bonds, agency securities and foreign sovereign debt securities that we accept. We will continue to take a very real time approach to managing those risks.

Separately, were we to see increased volatility and market activity, we believe we're very well prepared to facilitate a more significant number of transactions here from a matching perspective.

So on balance, I think we're well-prepared, but we're working through that and watching very carefully what happens. I think you're aware that we have a very substantial financial safeguard system. We also have and continue to have a very substantial amount of excess margin on deposit with us, consistent with historical levels and far in excess of what market participants actually requirements are with us, so we think we're in very strong shape.

Okay, that's helpful. Thanks, Craig. On my follow-up, if I could touch back on the position limits, with the new commissioner coming on board, I understand some of his comments have been about making sure you have the correct data in place. I'm reading CME's comment letter to the CFTC's proposal. You pointed out, along with others, that the CFTC needs to gather a lot of data and analyze it before -- the legislation requires them to do that -- before they implement it. I know you can't tell me what you're thinking -- what the CFTC's thinking, but you're in the business.

How long do you think it would take to effectively analyze and gather that kind of data before -- if they were to wait to put rules into effect? How long could that take? Could it be at least a year before you could really effectively make a decision?

It's hard for me to speculate on that, but I can say that obviously in order to accomplish that, first of all, we will have to have a final set of rules on position limits and a more precise definition of the requirements or the position limits regime.

But as well, we'll have to have the updated repository rules finalized, and there will have to be an implementation period for market participants to be able to adjust and to be able to submit that data so that it is available to the commission and they have the data that then enables to them to what the right approach in terms of aggregating positions that market participants are holding in the swap market as well as the futures market. So, I am afraid that probably is a while away for those reasons.

But I think you know that our view is, first of all, we have hard position limits all ready during the expiration period in all of these products, and we continue to be concerned about the position limits proposal in terms of how it might artificially constrain legitimate market participant activity, including bona fide hedging and risk management activity.

Okay, thanks, Craig.

Moving on, we'll take our next question from Rob Rutschow from CLSA.

Good morning.

Hi, Rob.

I was interested in your comments on the shift in user base for rates out of OTC and to exchange traded derivatives. Are there any changes going on with the way the futures contracts are being accounted for and have the accountants figured out a what to make them more easily qualified for hedge accounting? And then, separately, are you guys innovating new products that sort of address that issue?

Yes, sure, Rob, let me address that. First of all, I think if you just looked at it historically in terms of the many distinctions and differences between the swaps and futures markets, many of those historical distinctions are beginning to give way. Obviously, as you see more consistent regulatory paradigms for swaps and futures, convergence of business systems in terms of either central counter-party clearing or perhaps the so-called exchange trading, or pre- and post-trade price transparently requirements for swaps, and obviously the capital on margin aspects of supporting and financing transactions in the swap market versus the futures market. The accounting standards for hedge effectiveness have not yet materially changed, but there's a convergence process now between US accounting standards and international standards. The international standards we believe draw less of a distinction between the exchange traded products and swap products in terms of their ability to satisfy hedge effectiveness types of rules.

So those things are beginning to blur. We're continuing to work with the FASB folks to try to sort of influence that process, in part because while you can make the argument that a tailored swap agreement might actually better meet the hedge effectiveness test, it's also predicated on the ability to liquefy that exposure in a liquid market, as well as it's predicated upon the performance of the counter-party. Both of those areas are areas where centrally cleared products offer, we think, advantages. So we're working through that.

I would expect over a period of time but not overnight that some of those distinctions from the accounting perspective will likely blur as well for those reasons.

That's very helpful. Thanks. A separate unrelated question. Can you tell us how -- what percentage of your clients are in Asia, and then specifically what percentage are in China, and how that's changed over say the last year or two?

So, this is Bryan Durkin. We've been more closely tracking the level of business that's coming out of the Asia region, and we are seeing a broad composition of the user base across Hong Kong, China, Korea, as well as within Singapore where we have a large composition of our resources located. We are continuing to build upon, as you know, our efforts in further penetrating all of the Asia region. We are building out more of our resources within Hong Kong and Shanghai to better service and penetrate access to those locales.

We're very pleased with the level of diversification from the user base within the Asia region, which is representing the broad swath on the products that we represent. We have a very strong representation across each of the client segments as part of our restructured organization so we can better target and penetrate each of those client segments with the goal of increasing cross-asset sales as well as acquisition of new clients.

Okay, thank you.

Moving on, we'll take our next question from Ken Worthington from JPMorgan.

Good morning. Perfect time here to follow-up on that last question. Last quarter you highlighted about 15% of Globex volume was executed outside of US trading hours, and obviously it's a growth area for you guys. Is that continuing to build? Is it possible to get maybe an update on that number? And any commentary about how the build outside of US trading hours is going?

Yes -- excuse me -- this is Jamie. If you look at the percentage of trade that's been outside the US trading hours, it did hold constant through -- in Q2 versus Q1. You're going to see ups and down obviously in this. And when you look at Q2 in particular, when you think about April and that Europe was on vacation for half the month, I'm certain that that had some impact on the volumes coming to us from outside the US.

Okay, great --

But as you've indicated, it is a significant portion of our strategy, which is underscored by the focus and level of resources that we have both in Europe and within Asia. And to reinforce my earlier comments, that is going to be a significant area of focus for us in terms of growth.

Excellent. And then another sort of old disclosure piece, you used to talk about your customer mix. You had a slide for many quarters, like hedge funds, proprietary trading firms, investment bank, non-members. Would you release where those stats are today so we can kind of gauge where things stand?

Well, we don't release those stats specifically any more, but I will say they really haven't changed all that much from the last time we had.

Okay, great. Thank you very much.

Moving on, we'll take our next question from Jillian Miller from BMO Capital Markets.

Thanks, guys. With regard to your plans to list your EIBOR contracts in the second half of the year, I guess I'm curious why now? I'm not sure if you're hoping to take advantage of client disruption related to the life merger or the expected movement of the clearing from the UK to Germany, or if there is some other consideration. Because it seems like the timing of this could potentially play into your competitor's favor and their antitrust review.

Actually, the timing of introducing this contract was very strategically focused in the context of the buildup of our deep and liquid Eurodollar complex, particularly the strong interest and strength that we've been able to build up in the longer end of that curve.

We've certainly prided ourselves in being very closely connected to the client base that utilizes these instruments, and we've had a strong interest in our ability to extend and introduce that product in the context of the spreading capabilities that we've been able to demonstrate. It certainly is also complimentary to the Sovereign Yield Spread product that we recently introduced.

And so when you take the totality of interest rate products that we're currently offering, the liquidity associated with that, the capital efficiencies, it was a logical extension for us.

If I might just comment also. I think it's important to note that we are not trying to hurt or help the Deutsche Boerse transaction one way or the other. We're doing what's in the strategic interest of the CME Group that was outlined by Bryan. Whether it helps or hurts them with antitrust is not any part of our strategy.

Thanks, makes sense. It seems there's a trend toward listing products in non-US dollars, and I just wanted to get a better idea for who those contracts appeal to. I mean, is it primarily like European and Asian investors or is it maybe US traders who are looking for closer hedge or something else along those lines?

It really includes all of the above. Certainly as we've intensified our local efforts within the European regime and within Asia proper, we want to be very responsive to addressing the risk management needs of the client base that do business on our markets. And also those that don't, being able to encourage them to come to our marketplace by us providing them with tools in currencies that are most familiar to them in terms of denomination, and be able to provide both execution and clearing services to address those needs.

Thank you.

(Operator Instructions). Moving on, we'll take our next question from Jonathan Casteleyn from Susquehanna.

Thanks, good morning. I guess S&P, the rating agency, came back to you intra-quarter and did not downgrade the long-term rating. I'm just wondering what changed or if you have any idea what changed from their prospective?

Yes, Jonathan, this is Jamie. We sat down with them obviously and walked through our business, talked to about some of their concerns around the FICM program, and I think as they learned more about what we're doing, they -- it influenced their decision on to keep -- to maintain our rating. We are none negative outlook, but so is the industry generally speaking, and I think that's just tied to broader trends.

Okay. Can you remind us of your longer term objective within your BM&F investment? I think you're now three years into your initial four year holding period. So I'm just wondering what's the outlook beyond next year? I believe you can write the investment up now, can't you, within one year of the restriction being up?

Let me take the first portion of that and let Jamie respond to the second portion of your question.

We view our relationship with Brazil, which is reciprocal essentially, as a long-term relationship. We are working together to increase flows into our respective markets from our respective customer bases and the different kinds of geographies that we cover. We continue to have very strong growth in participation from Brazilian banks and asset managers and hedge funds into CME Group's core products, with south to north volumes increasing substantially.

As you know, we also have a revenue arrangement where order flow that comes through the CME Globex network or customer base that is either routed there or facilitated through their co-location services. We participate in revenue growth associated with that activity, and we are working together right now to develop their technology. And obviously Jamie talked about the per contract royalties that we expect to achieve as they implement the platform.

So it's a long-term arrangement. Obviously, we have reciprocally the holding period for the stock, but we're always going to judge this on the basis of the value -- ongoing value of the strategic partnership rather than the simply investment that we each have in each other.

And if I can add to that. On the -- if you look at the volumes that are coming to us through our Latin American incentive program, which I think has been significantly influenced by our partnership with Brazil. As Craig was saying, up pretty significantly. They're about 39,000 sides last quarter, up about 60% versus last year, generating revenues on just those sides of about $1.4 million. But if you consider that those sides are trading against other volume potentially here in the US, the volume -- the revenue is likely higher than that.

On your question around the accounting for the BM&F stake, you will see, if you look at last quarter, we did write that back up -- or, I'm sorry -- so that will go through equity going forward. It's not something that's going to flow through to the income statement unless there's another -- we review that and other assets like it for impairment, but that's not likely.

Okay, thank you.

Moving on, we'll take our next question from Don Fandetti from Citi.

Hi, good morning. Craig, I was curious how you rank your growth opportunities today? And secondly, there's clearly been a lot of volatility and change and uncertainly in the capital markets in reg. Do you look at your Company as having the same earnings or top line growth trajectory as it has had historically? Do you still remain positive on that front?

On the first part of your question I would say that, as you've heard from us before, we believe we have very strong growth prospects in our core business. We are working very hard to expand our business on a global basis. A lot of the work that we're doing to expand access points in important developing and emerging markets, listing new products either in conjunction with strategic partners or those that we simply develop and innovate on our own that have appealed to foreign investors.

We have very globally relevant products, so products like FX, metals, energy and commodities, we believe we have we have a lot of untapped demand for those products as we build out not only our distribution network and distribution partnerships, but our own sales and marketing and education capabilities in Asia, in particular, but other developing markets as well.

So core business growth is probably the highest priority that we have, and then obviously we're looking to growth in new areas like co-location services, expanding our clearing services on a global basis through CME Clearing Europe. We have a very robust OTC clearing business already. It's roughly 10% of our total revenues. We're expanding that very successfully beyond oil, power and gas into FX, metals and commodities, and we see substantial opportunity there. And then as well, obviously, we're very focused on interest rate swaps and CME's credit default swap clearing services, and then as we touched on very briefly earlier, index services as well.

So we have a variety of growth initiatives beyond the core, but we've got a lot of confidence in our ability to grow the core. And I think when we look at what's happening and the emergence of greater levels of capital markets and hedging and risk transfer activity on a global basis, we still think this is a reasonably young industry and that there's substantial growth opportunities available to us now as a global exchange with global technology and distribution systems and customers. So, we have said we think we can continue to generate the kind of growth that we've seen over the last 40 years.

Moving on, we'll take our next question from Daniel Harris, Goldman Sachs.

Good morning, guys. Thanks for taking my question. Just wanted to come back to the launch of the EIBOR product set that you guys have. Obviously, a deep and liquid market in that product as well. And as you guys have seen in the US, it's very difficult to attract liquidity and open interest.

So I was wondering what is your strategy here going forward to attract new clients with market making incentives or other strategic strategies to actually move that product up over the next few years?

As I alluded to earlier, we really have strong confidence in our ability, both from a technical prospective and leveraging market client segments, particularly on the proprietary side of things, to assist in the buildup of liquidity and new contracts.

As you have alluded to, it is difficult when you're introducing a new contract, and you have to have all the components in place from a technical prospective to the user base prospective to the construct of the actual contract.

This has been in the works for us for some time. We feel that, again, strategically, from where we've been able to buildup that depth of liquidity as I alluded to earlier in the back months of Eurodollar and across the whole curve, coupled with very strong interest from the proprietary trading group side, both within Europe proper itself, as well as in the US. So we have a nice mix, I believe, of participants that are going to work with us to help us in building up and establishing that contract.

Okay. Thanks for that. And then shifting gears here completely. Smaller business for you guys now that the business has diversified as much as it has, but the market data piece of the business, you guys historically used to have pricing power there to raise fees every year or two. Just wondering what your thought there is in terms of the screen count seems like it's stabilized after falling for a while. A, whether you think it grows, and B, if you think there's any ability to actually raise fees at some point?

As you noted, we have been generally every other year or so take a price increase. The last one we took was just last year. And as we took that price increase and you look at the revenues generated from the price increase swaps the loss in revenues from the shrinkage in terminals. So this is something that we analyze on an ongoing basis, and I can't really say too much about pricing going forward.

Thank you.

And we'll take our final question from Brian Bedell from ISI Group.

Hi, good morning, folks.

Hello.

A question for Jamie to start, on the expense guidance. Does your reduced expense guidance take into account a lower volume outlook for the second half? And I guess generally speaking, do you -- or does the budget include lower volumes for the second half, or is it stable with the first half?

I'd say generally, no, it doesn't account for lower volumes in the second half, and I guess that's all I'm going to say on volume.

Okay. And then another question, more strategically on WTI and Brent. As you probably know, WTI gained -- I'm sorry, Brent gained considerable share in June. You've gained some of that share -- or WTI has gained some of that market share back in July. Just maybe if you can talk a little bit about what the strategy there is in terms of developing new product or working with the market participants to use WTI more, given the gap that we're seeing in the WTI and Brent prices?

Sure. It's Craig. I'll tackle that. I think, first of all, if you looked at relative market share in kind of the Brent and WTI markets over a multiyear period, you would see different fluctuations in that, mostly attributable to cyclical factors that come into play at different times in terms of each of those different markets. WTI continues to be the much stronger benchmark with volumes and open interests that are considerably greater than those in ICE Brent, and that continues to be very strongly the case.

So we look at a lot of the current dynamics in terms of the spread differential between WTI and Brent as really kind of driven by just current supply/demand fundamentals and logistical issues that ultimately will solve themselves within the next year or two. We continue to introduce across all of our asset classes, including energy, a wide range of product extensions. We have listed and made available both for trading and clearing different sour crude index products with Argus.

I think for the long run, as you know, we believe there will be a number of important benchmarks in crude oil markets, and we have a continued emphasis on developing an east of Suez benchmark through our investment in the Dubai Mercantile Exchange, where more recently we've continued to see very strong volume performance in those products. That's a long-term market development initiative, but with the macro shifts that are happening in the world, we think that there's the opportunity to develop that into a substantial benchmark.

Thank you, that's very helpful.

With that I want to thank everybody. I think we're through with our questions. We appreciate you joining us this morning, and we certainly look forward to being with you again next quarter.

Thank you that will conclude today's conference. We thank everyone for their participation.