芝加哥商業交易所 (CME) 2011 Q3 法說會逐字稿

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

Thank you, and thank you all for joining us this morning. Craig Donohue and Jamie Parisi will spend a few minutes outlining the highlights of the third quarter and then we will open up the call for your questions. Terry Duffy and Bryan Durkin are on the call as well.

Before they begin I will read the Safe Harbor language. Statements made on this call and accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent Forms 10-K and 10-Q, which are available on the Investor Relations portion of our website. Now, I would like to turn the call over to Craig.

Thank you, John. And thank you for joining us this morning. I will discuss our record performance in the third quarter, and provide updates on a few of our strategic initiatives, before turning things over to Jamie to review the financials.

During the third quarter, we delivered record top-line results, with revenue of $874 million, driven primarily by strong trading volume. Average daily volume was 14.7 million contracts, up 27%, compared to the prior year. In addition, we delivered another highly profitable quarter, with earnings per share of $4.74, our highest quarter ever excluding quarters with extraordinary items. Heightened expense focus contributed to our success, and is reflected in today's results along with our commitment to maintain expense growth below 5% in 2012, and into the future.

Interest rate volume was strong in the third quarter, up 30% compared with third quarter 2010. This includes growth of 40% in Eurodollars and growth of 21% in Treasuries. Interest rate traders have moved more of their trading activity out the curb to the 3 to 5-year area, as the front end has been less active since the 0% interest rate policy began nearly 3 years ago. In addition, we had record quarterly metals volume up 77%, along with record quarterly equity index volume, up 44%. Overall, commodities volume remained impressive during the third quarter.

Turning to other Company initiatives, we continued to position ourselves for future growth through technology and product innovation. Examples include the initial rollout of the derivatives component of our multi-asset class platform through our partner in Brazil, our recent speed enhancements and our interest rate match engines, which reduced average response times by 50% to 75%, and the expected launch of our co location services early next year. These serve as great catalysts to meet the growing demand from our customers. We went through several examples of product and technology innovation at our analyst day earlier this month. So let me update you on a few other areas.

We have begun to gain momentum in OTC clearing, as we have achieved record levels for clearing OTC interest rate swaps, and credit default swaps. Including a daily record set on October 18 for interest rate swaps, of $8 billion in US customer volume cleared. To date, since launching our OTC clearing services, we have cleared over $83 billion in OTC customer volume, including $72.7 billion in interest rate swaps, and $10.6 billion in credit default swaps, making us the leading OTC clearing services provider by US customer volume. While some clients remain in testing mode, others have moved to production mode. And other potential users of either our OTC offerings or exchange traded offerings have taken notice.

Recently, we began clearing euro denominated interest rate swaps. The new euro denominated clearing offering expands our existing US dollar denominated interest rate swap clearing service, providing OTC risk management opportunities, for interest rate maturities in both currencies, extending out to 50 years. We will continue to further expand our IRS clearing service by year end, with the addition of the British pound, Japanese yen, Swiss frank, and Canadian dollar.

According to data from the Bank for International Settlements, these 6 currencies account for 94% of the plain vanilla interest rate swap market. Looking ahead we are pleased to have 15 clearing members with approximately 500 customer accounts actively clearing trades ahead of the Dodd Frank clearing mandate along with an additional 2,500 customer accounts in the pipeline.

Next, I will briefly touch on the regulatory front. In general, we are pleased to have the position limits rule making process behind us. While we still have concerns about certain provisions of the rules, and the costs of industry compliance, as well as the risk that market participants will seek less burdensome alternatives and shift price discovery offshore, we do believe the CFTC made significant improvements in the final rule, based on industry comments. In particular, we publicly commended the commission and staff of the CFTC for recognizing the need to establish equivalent position limits and the important spot month for physically settled futures and cash settled futures and swaps, which are based on the daily and final settlement prices of the primary physically delivered price discovery contracts.

With the lone exception of natural gas, the CFTC's interim final rule will appropriately limit the risk of inter-market manipulation. We believe the risks mentioned earlier can be alleviated by updating deliverable supply calculations and appropriately revising spot month position limits and affected commodities. Some of which for example, NYMEX WTI and Henry Hub Futures, are approximately 5 and 15 years old, respectively. We are working with commercial market participants and the CFTC staff to appropriately revise existing limits to better reflect current market conditions.

Going forward, we believe our success will continue to be driven by our ability to foster innovation, improve our technology footprint, manage risk in our clearinghouse and ultimately to manage and maximize free cash flow. As we navigate through this period of uncertainty, we remain steadfast in our approach, and have a long history of success that we can build off of to allow us to maintain our position as the leading derivatives exchange. In addition to the strong recent performance of our core business, we are gaining momentum on the OTC clearing front and making progress in terms of clarity related to Dodd Frank.

In closing, I would like to briefly touch on where things stand with MF Global. Yesterday morning, CME's emergency financial committee took emergency action under CME rule 975, to limit all trading for customers of MF Global to liquidation only. MF Global has also been subjected to a bankruptcy petition by a SIPA trustee. Consequently CME Group will no longer recognize MF Global or any of its divisions as a guarantor for purposes of floor trading privileges. Additionally floor brokers and traders guaranteed by MF Global or its divisions may not access the trading floors. We also agreed to facilitate the transfer of open positions at the last settlement price at the request of customers and the remarginning of such positions at the transferee firm.

Throughout the day yesterday, our team worked closely with the firm, public customers, and exchange members, to assist customers in establishing new accounts and dealing with open positions and market exposures. We recognize that yesterday was a very difficult day for all concerned. As is nearly always the case in matters like this, this is a very fluid situation involving complex legal regulatory and bankruptcy-related issues. Yesterday, MF Global Holdings Limited, the parent company of our clearing member firm, and our clearing member firm, MF Global Finance USA, Inc., each filed bankruptcy. Additionally, CME has determined that MF Global is not in compliance with CFTC and CME customer segregation requirements. While we are unable to determine the precise scope of the firm's violation at this time, we are investigating the circumstances of the firm's failures.

We are working with the CFTC and will be contacting the trustee to facilitate the transfer of customer positions and a portion of the supporting collateral. We continue to work with MF Global customers and members, all other CME Clearing member firms also remain in good standing. Given the ongoing regulatory and bankruptcy issues involved, we will refrain from making any additional comments or answering questions on this matter. I would ask that you please respect that during the Q&A session at the end of our call. And at this point, I would like to turn the call over to Jamie who will touch on the third quarter financial highlights.

Thank you, Craig, and good morning, everyone. We posted record revenue of $874 million during the third quarter, up 19% versus last year, while effectively controlling expenses, which were up 4% versus last year, and down $2 million sequentially. Third-quarter average daily volume was 14.7 million in contracts, up 27%, compared to the third quarter of last year. This significant revenue generation coupled with effective expense management drove a 29% increase in operating income to $572 million. Operating margin of 65.4% was the second highest quarterly margin ever and the highest on a [GAAP] basis and was 5 percentage points higher than Q3 last year.

The third-quarter average rate per contract was $0.779, down 4% from third quarter 2010. The rate per contract was also lower on a sequential basis due primarily to a 3% product mix shift, towards financial products, which have lower RPCs than commodity-related products. In addition, we saw a negative sequential impact of higher volume discounts, as Q3 volume increased 9% from Q2.

Market data and information services revenue increased over 5% compared to the third quarter 2010. This was driven by the Dow index business, and to a $1.9 million vendor audit assessment during the quarter. As a reminder, we previously announced that we have increased pricing for our market data by nearly 15%, beginning in January which result in approximately $25 million of additional revenue in 2012.

Turning to compensation and benefits expense, this line item was $120 million, up over $2 million on a sequential basis. We saw an increase in our incentive bonus based on strong results during the quarter. We also increased staffing during the quarter, and as of September 30, our total global head count stands at 2,735. Additionally, based on the equity market dropping more than 10%, during the third quarter, we saw a fairly significant reduction in our deferred comp balances of $4.6 million, which reduced compensation expense. There is no bottom-line earnings impact of this, however, as there is a corresponding $4.6 million reduction in investment income.

Non-compensation expense of $182 million in Q3 was up slightly from a year ago, but down $4 million from Q2, mainly due to reduced marketing expense. Our team is very focused on expense discipline, while we also continue to invest in future revenue-generating opportunities.

In terms of our full-year guidance for 2011, we expect 2011 operating expense to total between $1.23 billion and $1.235 billion. Without the deferred compensation impact I mentioned, our operating expense in Q3 would have been $4.6 million higher. In terms of the higher Q4 expense, our guidance implies marketing-related expense is likely to be $5 million higher, due to two significant customer oriented marketing events in Q4. Also, we will see the full-quarter impact of recent hires in our mid-September stock grants. Lastly, we expect higher professional fees, based on OTC initiatives, and ongoing regulatory work. Of course, deferred compensation continues to be a wild card but is offset by interest income.

Certainly the equity market has appreciated nicely since the beginning of the fourth quarter which could result in higher comp expense in Q4. Our Q3 effective tax rate was 42.3%, and for the fourth quarter, we continue to estimate our effective tax rate will be approximately 42.5%. In addition, as many of you know, we have been working closely with the state of Illinois, as well as other states related to our significant state tax burden. While we are hopeful we will be successful in reducing our state taxes, we will not be providing any guidance on our expectations until we make a decision about our course of action.

Capital expenditures net of leasehold improvement allowances totaled $34 million in the third quarter, driven primarily by $12 million of data center buildout and equipment, and spending related to our new London office space. This brings us to $117 million of CapEx for the first 9 months of the year. We continue to expect total capital expenditures to be $165 million for 2011.

During the quarter, we repurchased 590,000 shares at an average price of $263 a share, and we have purchased over 800,000 shares since we received our Board authorization in May of this year.

In summary, as you can see from our results, we continue to generate significant revenue and remain focused on expense discipline while investing in growth avenues and returning capital to our shareholders. We will 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 this quarter.

(Operator Instructions) Roger Freeman, Barclays Capital.

I guess first question, just in terms of the open interest and the rates complex, still seems to be somewhat lower than we would have expected by now, given the seasonal weakness in September. Just curious your updated thoughts around what is going on there.

This is Bryan Durkin speaking. And while you're correct that you may not have seen quite the uptake that you might have been expecting, we are tracking very consistent with historical performance over the past few years. If you look quarter-by-quarter, and a prior month performance, a lot of the activity that we were seeing in terms of the dropoff was the result of recent expirations. I think a stronger though indicator is the continued strong performance and uptick in the deferred contract months, particularly in the Eurodollar complex. That is again a consistent trend that we have been reporting in terms of the concentration and the uptake in the volume in the deferred months and is very consistent with the activity that we're seeing in the US Treasury side of the complex as well.

We're definitely seeing an increased trend in terms of the convertibility of activity that is typically seen on the OTC side of the market being able to replicate strategies into our exchange traded products. And that's a positive trend. I think by the compliment, the full compliment of what we're offering across the curve, from the very shortest end to the very long end duration, we're pleased with the continuity of performance that we're seeing across the curve.

The other thing I think you have to keep in mind is that we have seen low volatility in October, in particular. We have also certainly seen an impact from the European crisis. There's definitely been some pull-back in terms of assessing where that was all going to shake out. But all-in-all, the performance and the trends that we're seeing in October continue to be positive.

Okay. Thanks for the color there. And I guess my follow-up question, the second question would just be around the OTC swaps, the pipeline that is building, you threw out a pretty big pipeline which sounds great. Just curious what the sort of conversion rate is. Is this building -- do you have enough capacity to even bring this all on. Or is this -- are these indications of -- indications of interest, of how real is this?

Very real. We are very confident first of all in terms of the scalability of our systems and the performance of our infrastructure to be able to handle and be flexible and nimble, to be able to bring on these instruments, some of which are very esoteric to respond to the client's needs. So as we're out there, as part of our sales force efforts, we have definitely, the original compliment of the interest rate swaps product base, and CDMS that we're offering to the markets. We're having good trend in terms of customer participation to handle that on an OTC clearing basis. To be able to extend that to other currencies and be able to support that need is, definitely, I think a value-added service that we're able to represent and to do it in a very quickened fashion. So we're very confident.

Ken Worthington, JPMorgan.

In terms of the technology partnership with Bovespa, I believe you started collecting additional fees this quarter as the new technology was rolled out. Does this ramp from the current levels and maybe can you tell us where the revenue was booked?

This is Jamie. The revenue this past quarter was in the neighborhood of $2 million, but that was mostly tied to progress payment recognition. So that will ramp up going forward. We expect that next year, a conservative estimate would be in the $4 million to $5 million range for the per click fee from Bovespa and it will beam at Bovespa and it will come through the other revenue line.

Okay. Great. And in the past, you had broken out kind of trading volume outside of the US hours. Any update you can provide there? Does the trend continue to play out? I'm sure US volatility is probably skewing the stats a little bit. But some color there would be helpful. Thank you.

If you look at the ETH trading as a percentage of our Globex volume, it has picked up nicely in the third quarter, represented about 16.5% of our overall Globex volume; that was up from about 15% in Q2. And also, as another data point, if you look at our country of origin information, it was about 22% of our volume was coming from outside the US, and approximately 25% to 27% of our revenues.

Rich Repetto, Sandler, O'Neill.

I guess my first question, Craig, is on energy. If you look at your volumes, at least from the prior month, anyway, there is a little uptick, but I guess even more indicative is the price of WTI. That sort of -- that divergence has sort of narrowed. And I guess you spent some time at the analyst day talking about it. Could you give us an update? Are you seeing some of the issues in Cushing resolve themselves or are these numbers just too small to really indicate that?

Well, Rich, I think, as you pointed out already, I think we've seen some very positive developments in the WTI market. And the Brent WTI spread. That spread has narrowed now to less than $17 from $27 in September, and even higher earlier than that. And I think that reflects a number of different factors. Certainly we're seeing logistical solutions being put in place. We have less tight conditions in Cushing in terms of deliverable supply. We've had people developing their own rail transport and other solutions to get crude to the Gulf Coast.

As I think you're aware, the state department took a first and I think very significant step in determining that there were not significant environmental issues with the proposed TransCanada Keystone Pipeline Project. And then conversely, we have seen tighter conditions in the Brent market, as well as I think an increased recognition that there are just fundamental production and supply issues in the Brent market. So obviously we watch this very carefully and we will continue to do so but I would say these are very healthy indicators for the WTI market.

Okay. And then my one follow-up would be on Dodd Frank, Terry or Craig. You got to balance -- from all indications, a balanced sort of rules when it comes to position limits, like you said, the cash and the physical equivalent but they did give you the exception on the natural gas. But I guess the other part, the stuff that is coming up, or another portion of the Dodd Frank is this $50 million capital requirement for clearing members. And I guess the question, how do you think you would implement that? I know ICE has done some things to modify their OTC clearing but how would you adapt that if a similar requirement -- if the rule stays like it is proposed?

Well, Rich, I will take that. I mean I think obviously, we're working with clearing member firms, and with the CFTC on those issues and I guess I would just say that it's been our view that it is not strictly a function of minimum capital. We do believe that the people who are taking on the risk really need to be able to support the default management process, and in the event that we were to have a failure in the OTC clearing area, we want to be sure that the firms not only have the financial capacity, in terms of their guarantee fund contributions, but that they also have the financial capacity and expertise to take on transferred positions and to deal with them effectively. So we're still working through that process.

But we fundamentally believe that it is important that we have a balance. We do want to promote openness and competitiveness in OTC clearing, but we also have to be mindful of the risk management aspects of what it takes for clearing members to actually support the default management procedures of the clearinghouse for OTC products.

Howard Chen, Credit Suisse.

Just following up on the strong activity in the OTC clearing and specifically in October, was there anything specific to what you all did that drove the big ramp up in October? And while I know we are still in a buildup phase, can you speak to any contribution to revenues or earnings?

I think a lot of credit should be given to the intensified sales effort and customer outreach. You're well aware of how we have restructured our organization to more effectively align ourselves with our client segments. And having our team out there, and meeting with our clients, and helping them understand the offerings and the capabilities that we have, and being out there, I think, in the context of providing them with very efficient testing capabilities, and making it fairly seamless for them to be able to test their portfolios, resonated with the client base, and truly had them establish a comfort level to bring that customer business in to clear it with us. So I do think that that was a great motivating factor.

And on the revenue side, Howard, we're still -- it is still early in the game, so we're -- fees are being waived as we build this business, so I'd anticipate that to continue as we continue to build.

Okay. Thanks. And Jamie, on capital management, it looks like dividends and share repurchase totaled about 80% of net income this quarter. Is there anything particular to this quarter that would have made that number lower or higher than you would like to see it? I'm just trying to gauge a sense of whether this is an okay run rate.

Yes, I'm not going to get too much into specifics, Howard, on how we approach this. Other than to say as you know we are very committed to returning our excess capital to shareholders. We put kind of the guidepost out there of the $700 million of cash flow maintained on the balance sheet, but that doesn't mean we're going to manage it right down to the 700 millionth dollar every quarter. So it is going to fluctuate around. But we are committed as I said to return capital, whether it is through buybacks or dividends.

Okay, great. Thanks for taking the questions.

Alex Crane, UBS.

Jamie, just wanted to come back on the tax story here, with Illinois. Obviously you said what you can say I guess at this point, but I think I asked you a couple quarters ago already, if this is the start of something bigger, so now that you've done a lot of work, I assume internally with your team, and obviously you're tracking a lot more of the volume, where it is coming from, internationally and so forth, just wondering if there are opportunities to take over the next few months, years, to also reduce the federal rate by forcing it differently. If we look at some of the other exchanges, obviously their tax rates are a lot lower.

Yes, we're in a little bit different situation then with regard to our international exposure in that they purchase -- most of those exchange purchased operations overseas. So it is an area that we are certainly studying, and will be continuing to work on in the coming couple of years. Right now, our focus is very much on the state tax side. But we're not -- we continue to study the federal side.

Okay. Good. And then I guess just coming back to the position limits maybe for you Craig, or Terry. Obviously, it seems like you are somewhat happy with it, but when we talked to a couple of folks in DC for this rule making and listening to some of the comments by the commissioners that were not in favor, it sounds like, or some people are saying there could actually be some legal challenges to the rule. So just wondering if you are looking at this the same way, you think something could happen, or at this point, if you actually would prefer to just have it done with, you like the rule how it is, and might as well move on instead of trying to throw this over, or benefit, if somebody else challenges it and this continues for a few more months or years.

Well, I think -- I will just repeat what I already said, which is I think there are still areas of real concern with the position limits rules. At the highest level. I mean of course we're continuing to be very concerned that the US is really the only major financial center that seems to be adopting hard position limits and the types of constraints on legitimate participation in the market by commercial bona fide hedgers and so there is always the very real risk that large global multi-national customers will look for risk management solutions outside the US. And there is nothing that has changed that fundamental concern.

I think we were trying to be balanced in our assessment of the final rule, and certainly wanted to give recognition to the fact that the CFTC staff and commissioners work very hard to respond to industry comments and make what we think are very substantial improvements in the rule, so I wouldn't go so far as to say we're happy with the rule, but we're certainly happy that many of the fundamental defects in the rule as it was initially proposed were improved.

And then as I mentioned in particular, we were very concerned about the sort of increased risk of inter-market manipulation that might have occurred through what we think are false incentives to essentially shift people into second order cash settled swap or futures, which really sort of priced off of the actual physical delivery price discovery contract and that was certainly with the exception of nat gas, I think a very important improvement to preserve market integrity.

In terms of litigation, I'm sure that, like us, everyone will be looking at the final rule, as you know, even though the commission took affirmative action to adopt the final rule. We have yet to get through an exhaustive examination of it. We will do that. My hope is that it is behind us, and that as we get through, looking at the final rule more closely, we will determine that while it is not perfect, it is best to move forward. And I hope that will be the outcome. But I can't say yet.

Michael Carrier, Deutsche Bank.

If we look over the past 12, 18 months, there has been quite a bit of innovation on the product side. Do you guys have any stats or do you track how much the volume is coming from the product innovation versus the last 5 years. Just trying to see how much that catches on and even from a time spent, just the reward or the return from spending the time on the product innovation side.

This is Jamie, Michael. I think if you look over the last few years, probably about 2% to 3% of our volume comes from new product innovation. We've seen some really great success over the past year like I've never seen before in new product innovation like the ultra contract, weekly treasury options and others. And so I think we're on a good trend here.

Okay. And then just as a follow-up, maybe just an update on the European clearinghouse. And then just on the balance sheet, it looks like the guaranteed fund went from like $4.2 billion to $7.7 billion. Assuming that is related either to Europe OTC, but just wanted to get a sense or understand what the increase there was.

The most significant piece of that increase of the cash performance bonds is tied to the OTC markets.

It is Craig. On the first part of your question, we're really pleased with the continued building of open interest at CME Clearing Europe. We have clearing activity on a daily basis now. We have approximately more than 100 trading firms and brokers that are now eligible to clear through CMECE. We are continuing to expand the product set, and seeing good progress in European bio-diesel and diesel contracts. And we're looking forward to filing with the CFTC and the FSA to cross-margin CME Clearing Europe positions with positions at CME Clearing here in the United States.

So we're pleased with the progress. We have a long way to go. But I think the number of clearing firms and customers that are now accessing those services and the fact that we're clearing product almost every day is a sign that there's potential for CMECE to become a significant player in the European market.

Niamh Alexander, KBW.

If I could catch you on the performance bond again you are saying it is mostly related to the OTC so given there is $70 billion and a whole lot more out there in terms of no-show value, I'm just trying to understand how should we think about the growth there, maybe a little bit more in. And then as part of that, is the $7.6 billion, does that include the $2 billion effective kind of guarantee fund that typically stands in front of the clearinghouse that all the brokers fund in the event of losses or something like that from a customer or another ICM?

Yes. What you see on the balance sheet is just the cash, what is put up as cash, whether it be for performance bond or for the mutualized security deposit pool, I think in the early going in the OTC markets, people are just using cash. But as time goes on, I believe that they will start to look to use more of some of the other vehicles available, like treasuries, and some of the IEF funds that we provide, so you may see that number fluctuate up a little bit in the beginning and then taper back down, as people use investments.

Okay. Fair enough. Thanks. And then just to clarify, understanding the structure here, I'm trying to respect your request from earlier, but typically we understand in most day-to-day situations, customer collateral doesn't cover a customer loss and FCM is on the hook for it as a guarantor, but then in front of that before the exchange there is a member guarantee fund which is around $2 billion or so and then there's various other lines of protection for the clearinghouse. Am I thinking about that correctly still?

Yes, as far as I -- I think so. You say in front of the mutualized pool, the exchanges get in the game.

And that was, was it like $100 million or something like that?

Yes. On the regular futures and options, yes.

Okay. Thank you very much.

Daniel Harris, Goldman Sachs.

I was wondering in the last few months of conversations, especially as the OTC clearing business has picked up a little bit, have you guys had any dialogue with typically OTC swap participants that are more interested in looking at the exchange traded futures business, versus where they were 3 and 6 months ago?

Yes, indeed I think one of the major value propositions that we offer in addition to our clearing facilities is the broad complement of asset classes that we represent across the curve. And so as we're in there, meeting with the various client segments, and I think you will see a particular interest or awareness coming from the asset management community, being able to be introduced to the exchange-traded futures products, where some of these entities had strictly traded on the OTC side, are now availing themselves and able to replicate their risk management needs utilizing our exchange-traded products. So it is definitely tangible in terms of being able to identify new users coming into the exchange-traded products that we hadn't seen before, which I think underscores the efficacy of the program that we put in place.

Okay. Great, thanks very much. And then just want to come back to your comment about waiving the fees, Jamie, for the interest rate swap given that we are in the early days here of that product. At what point or at what size of that business do you think you would start to implement fees? And then how do we start to think about how those fees will be assessed to the different size of transactions?

I think we're still, as we said, still in the early going here. It is hard for me to give you a great answer there. I would expect that it is going to be sometime though as the book builds, before we start charging. In terms of we will likely charge a transaction fee associated with these rights, so there will be a per transaction fee associated.

Okay.

Jillian Miller, BMO Capital Markets.

So as we try to make sense of the market right now and figure out what 2012 might look like from a volume perspective, I was hoping you might be able to discuss some of the leading indicators you're seeing in your market, just in terms of activity and engagement and then how they might be similar or different from the picture you guys are seeing in late 2008, kind of heading into 2009.

I definitely think that if you looked at some of the fundamentals, we've been operating in a 0% interest rate situation now, for the better part of 3 years. However, the performance of our contracts have indicated from our perspective a strong flight to quality, in terms of dealing with uncertainties in the marketplace. Volatility can change at a whim. And having a place to come that has the deep liquidity that we represent across our asset classes, I think definitely resonates and performances has demonstrated that over what one might expect to be a slow market time, just giving the general market fundamentals and where that looks to be in terms of holding rates constant.

We're definitely seeing the effects in a positive basis, across our interest rates, as well as our metals, complex, and our energies as well. The other thing that I would note is there was definitely a pull-back in assets from 2008, through I would say the beginning of 2010. We're seeing more of that activity coming back into the marketplace and particularly, as it pertains to our interest rate and equity quadrants.

And I would say, too, when you think about it on the expense side, as you've seen, where we're taking a very hard stance on expenses, and saying, indicating that we're targeting growth no higher than 5% a year going forward, which should also add some leverage to that equation.

Okay. Thanks. That is really helpful. My second question would just be on the regulatory front. With respect to the 85/15 rule, it seems like Clearport's products don't currently meet the requirement of having at least 85% traded via central limit order book. Wanted to get your thoughts on how you see that rule kind of shaking out and if it were passed in its current form is it something that could potentially harm Clearport just in the sense that if you have to process this contract with swaps, there could be higher capital requirements involved and some of your participants might lose the 60/40 tax treatment.

Well, let me just say at the outset that I think this is a rule that has really major defects in it. Not just for Clearport contracts, but just more broadly. As it relates to Clearport, I mean first of all, obviously, we can clear products as swaps and we do. We've talked a lot on this call about the success that we're having in interest rate swaps and credit default swaps.

I don't think it is likely that it will be more expensive, even if we're required to clear those instruments as swaps rather than futures. The CFTC has determined to apply one-day margining to commodity and energy swap contracts. So in fact, that will not be sort of a negative factor as it relates to Clearport.

I think the other thing to sort of focus on there is that effectively, to recharacterize Clearport contracts, the swaps will serve no useful purpose because it is not necessarily clear that people will continue to clear those contracts, and so from the CFTC's perspective, I think -- at least many of the commissioners that we've talked to -- are sympathetic to the view that Clearport serves a very valuable purpose, certainly has helped bring stability to the energy market, has mitigated bilateral counterparty credit risks in a very substantial way. And I don't believe that the majority of the commissioners are really convinced that recharacterizing those contracts as swaps will serve any useful purpose. So we will work through that process with them. But I'm expecting that Clearport will continue to be a really important service for customers.

(Operator Instructions) We will go next to Chris Alan.

I know you guys can't specifically comment on MF, but in a situation where there is a segregation issue and customer accounts would not be whole, who is on the hook for that? Is it that customers just lose out because their FCM failed? Is this a specific issue? Or is there actually a clearinghouse issue here?

Well, let's -- let me try to answer that as best I can. And I'm going to really limit any commentary on MF Global but just in general, when you have a combined broker dealer FCM, then you're dealing with the complexities of two different customer protections and bankruptcy regimes, and so, SIPA and sort of segregation are both coming into play.

It is always the case that customers have the risk of other customer losses in the customer-segregated pool, and there is always the risk as well that customer funds are not properly protected. I already commented on that in my remarks earlier. And I'm not going to elaborate further on that. But this issue does not really present a issue at the clearinghouse level.

Brian Bedell, ISI Group.

Craig, if you could just comment a little bit more on the sort of intermediate to long-term strategy in Europe, given some of the rules there, coming out with Mifid II in terms of potential interoperability of clearing, and how your European clearinghouse fits in with that and the launch of these futures products and your LIBOR and the sovereign credit spreads and other initiatives that you might be thinking about?

Well, sure. I mean first of all, we have obviously a very significant customer base in our core business in Europe. We have a very significant amount of average daily volume that comes from Europe and from the UK. We think there is substantial upside for us to continue to expand our existing core businesses and core products and services in Europe.

Obviously CMECE is a reflection of our commitment to broaden the range of clearing services that we provide and to do that in the UK, for European customers, versus just offering a US domiciled clearing solution.

In terms of sort of the future regulatory environment in Europe and the UK, I think it is very premature to sort of prognosticate what the outcomes will be right there.

But what I would say is on the topic of interoperability, I think as you could see, Congress had the wisdom and just recently visiting the topics of market structure, and competition, and adopting Dodd Frank, they chose to make it clear that clearinghouses should not be required or forced to accept the counterparty credit risk of another clearinghouse, and of course interoperability effectively does raise those kinds of issues. And I think in the US anyway, the Congress was very concerned about the domino effect of counterparty credit risks between clearinghouses that have different credit profiles, different risk management and margining methodologies, and different operational features.

So it remains to be seen what will happen in Europe. But we're certainly strongly on record as being concerned about counterparty credit risks at the clearinghouse level. So we will see how that plays out. But our strategy is really to focus on our core business, increasing customer use and attracting new customers in our current core businesses. As we go forward, as a global exchange, we certainly also focus on innovation, globally, so product development for us is not just US centric. It certainly includes the European market and the Asian market as well.

Jonathan Casteleyn, Susquehanna.

Just had a longer term question about your price and volume dynamics. So as volume on average increases 15% per year as your CAGR has suggested, what kind of pricing decline would you expect knowing what you know about your volume tiers, et cetera?

This is Jamie, Jonathan. I don't have an analysis in front of me. I would say it's probably in the couple of percent area. But that assumes a static fee schedule and volume tier regime, right? So over time, we do look at those tier levels, and assess whether they are appropriate still, and have in the past raised some of those levels. So that's the best I can give you at this point.

Matthew Heinz, Stifel Nicolaus.

Just wondering if you can give us a sense of the $83 billion that has been cleared so far in the swaps clearinghouse. Of that, how much is a real sort of Dodd Frank compliant CEF traded business on a voluntary basis? And then I guess just as an extension to that, how do you view the sort of robustness of the current CEF infrastructure as it sits today?

Did you say the current, the robustness of the current CEF infrastructure?

Yes.

Well, first of all, I'm not exactly sure, and we may not be able to get too far into this on this call, but I'm not sure what you mean by CFTC compliance. What we're seeing right now in advance of the mandate is market participants electing and demonstrating their ability and willingness to move toward central counterparty clearing, I think primarily given the increased sort of sovereign risk concerns in Europe and just the overall concerns about bilateral credit risk issues in the marketplace. So people are electing to migrate, because they can, and because they're ready. Obviously, as more time goes by, and we see the CFTC adopt its definitions of swaps and determine what swaps are subject to the mandatory clearing requirement, it's likely to include most of the things that we're already clearing.

In terms of the CEF infrastructure, that's really premature to try to answer. Obviously, people are in the process of determining whether they're going to be operating CEFs and what the requirements will be and what the infrastructure requirement also will be. So I don't really have a comment on that other than the industry is eagerly awaiting the final rules on CEF trading requirements and exchange trading requirements.

Robert Rutschow, CLSA.

I have a two-part question. I guess the first part would be in terms of the clearinghouse, how much of a view do you have into an FCM's end user accounts? And without speaking to MF specifically, what are -- I guess how do you make the determination that they're not in compliance with customer segregation rules?

And then separately the second part of the question would be, if I look at October OI data, it is negative in most areas except for equities. Is there anything besides seasonality that might explain that? Thanks.

Rob, I'm going to be very limited in my response to your first question and just say that on the regulatory side, we do provide audit and capital supervision for our clearing member firms. And so pursuant to our designated self regulatory responsibilities we do have access to detailed customer-account level information. And I think that is the extent of what I'm going to say on the first part of your question.

Gaston Ceron, Morningstar.

Just a real quick question, just a cleanup thing on expenses. Jamie, I think you said something during your opening remarks about increased staffing levels. I know you guys have this target of keeping operating expenses under growth, under 5% per year. Just kind of wondering where the increased staffing is coming from and where do you see that kind of going forward as you pursue this 5% goal.

It's a good question. Right now, it is mostly driven by investments in our growth opportunities, so you're seeing increased staffing in our clearinghouse, for example, tied to over-the-counter markets. You're seeing some increased staffing in technology, tied to some of our ASP arrangements and that sort of thing. I would imagine that over time, that staffing level will level off to some extent so we can meet those 5% goals. But it is it definitely driven by the growth side of the equation.

Rob. I want to apologize because I think you had a second part of your question; the moderator jumped to the next question, so if you don't mind I'm going to ask Bryan to respond to your question so you get an answer.

Sure, Rob, I apologize. As I mentioned earlier we have been dealing with some low volatility in the context of the overall market fundamentals, right? But as we're looking at the trends for our interest rate products in particular, we're very pleased with the overall performance, particularly in the longer-dated end of the yield curve. That trend has been very consistent and I think it is in alignment with what is happening in the general marketplace with respect to the macroeconomic factors that are driving the activity.

I think you are very astute to point out that there is definitely seasonality impacts associated with the decline in the open interest, and as I alluded to earlier, as we're tracking this basis, our overall performance, looking at the cycles, year-on-year, the trend there has been fairly consistent. Also when we look at the European markets, we're seeing very similar trends. So we take a holistic picture at how is the overall performance of the contracts trending, in terms of the volume, both across the front end, to the back end of these contracts, how are we looking vis-a-vis the competition that is out there; how are we trending with respect to the overall macroeconomic factors.

I think another thing to note is that the fix is still over 30, and we're seeing a very nice uptick occurring with respect to the performance of our equity index products as well.

And Mr. Donohue, with no other questions remaining in the queue, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you very much. I want to thank everybody for joining us this morning to discuss our record performance in the third quarter. And we look forward to talking with you next quarter.

And again, that does conclude today's conference call. Thank you for your participation.