芝加哥商業交易所 (CME) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the CME Group first-quarter 2012 earnings call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would turn the conference over to John Peschier. Please go ahead, sir.

Thank you, and thank you all for joining us. Craig, Gill and Jamie will make some introductory comments, and then we'll open up the call for your questions. Terry, Brian Durkin and Kim Taylor are on the call as well. Before they begin, I will read the Safe Harbor Language. Statements made on this call and in the accompanying slides on our website that are not historical facts are Forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any Forward-looking statements. For detailed information about factors that may affect our performance may be found in filings with the SEC, including our most recent form 10-K which is on our website. Now I'd like to turn the call over to Craig.

Thank you, John. Good morning, and thank you for joining us today. Before I turn this over to Gil to review our first-quarter performance, I wanted to just say that our succession transition has been going extremely well. As I'm sure everyone appreciates, the close-working relationship and teamwork between me, Gill, and Terry over these last nine years is making this transition very easy. Since the announcement of my retirement, we have been and are continuing to transition internal responsibilities. We have also been spending time with our customers, partners, and industry colleagues to ensure a smooth handoff in areas where I was playing a more active role. Given our exceptional progress, I would expect that the formal part of my transition can be completed very soon and likely prior to our annual shareholder meeting. This will give us the ability to accelerate Gill's assumption of the CEO role and ensure that we keep moving forward with purpose on the execution of our global growth strategy.

Given that this will be my last earnings call, I want to thank each and every one of you for your friendship and support during these last eight-and-a-half years. I will miss interacting with you, but wish all of you and my CME Group colleagues much continued success. CME Group is a strong institution with great people, great products, and great partners, and I will enjoy watching the Company thrive and prosper with your continued support and Gill and Terry's leadership. With that, I'll turn it over to Gil.

Thank you, Craig. The CME Group has certainly been blessed to have had Craig at the helm over the past eight-and-a-half years. During -- I'm onto the report now. During the first quarter, global trading volumes were impacted by low levels of volatility. The uncertainty about market direction has led to greater focus on the release of economic data that measures the overall health of the economy. While concerns remain, there are some positive signs that an improving economy would bode well for our product set as the trading community responds to better news. With that as a backup, I'm going to spend my time today talking about the areas that are well within our control. Those include product technology and Clearing offerings. We have accomplished a great deal during the first 90 days of the year. Let me provide you with some examples. First, in terms of products, a couple of takeaway's, while volume has been muted, we are performing fairly well compared to our peers in several product areas. And second, we have seen a nice pickup in open interest, which has jumped by 15% from year-end 2011 to $90.5 million contracts. Lastly, we continue to lead the industry with the breadth of our product innovation and our global relationships.

Interest rate volume was down from the year ago, but down significantly less than our European peers. Although volumes for us have been hindered on the short end, it is important to note the deeper liquidity in the middle of the curve has helped. For example, at the beginning of 2011, we launched Mid-curve options on year four, the so-called Blue Mid-curve options. This contract average almost 250,000 contracts per day in March, and was very active as volatility picked up temporarily. Another important innovation was our weekly Treasury options, which continued to gain traction each quarter. On Thursday, March 8, in anticipation of the [non fund Payroll] report, we traded 78,000 contracts, and it has become a popular gamma product for our trading economic events. These new products build on the success we had two years ago with our Ultra Bond offering. In addition, longer-dated Treasuries, the [tens], the long bonds, and the Ultras are growing faster than shorter-dated Treasuries. The bottom line here is while others have created look-alike products of our benchmarks, we have created new, great products which are generating revenue and serve as important tools for our customers.

Onto FX, [volatility volume] was down, primarily due to government intervention in Japan and Switzerland and uncertainly related to the Euro. CME Group's emerging market currencies, which have been a major focus area for us, were up 20% year-over-year. Our total FX open interest exceeded the all-time record set in 2007, nine times in March. Most importantly, March marked the all-time high in CME Group value traded relative to the current FX market leader, with CME Group reaching approximate 96% of EDS volume. Within equities, open interest has jumped 18% from year-end 2011. While down, volumes in our equity products outperformed the other most actively traded index futures products around the world. Volatility was low during the quarter, with leverage averaging 18 relative to 30 in Q4 2011. So within financial products at CME, we are performing well relative to our peers. We've been quite active in terms of innovation in our agricultural product area too. We recently announced the launch of CBOT black sea wheat futures to begin trading on June 6, subject, of course, to regulatory approval. This is an important next step for CME group as it relates to a new market development effort in Eastern Europe. In addition, along with the Minneapolis Grain Exchange, we launched the MGEX-CBOT wheat spread options.

Within metals, similar to some of the financial products, we have seen a pickup in open interest, primarily gold, which is up 10% compared to the end of 2011. We have seen continued growth in metals volumes traded during non-US hours, which has jumped from 21% of electronic volume in Q1 '09 to 27% in Q1 2012. Of note, copper trading has increased significantly so far in 2012, with the most pronounced pickup occurring in electronic activity during Asian trading hours. Average daily volume for copper products increased more than 40% percent versus Q1 of last year and now represents more than 15% of our metals volume. Interest in copper has been driven by the supply-demand picture, as well as an interest in trading copper on the basis of economic growth in Asia, with China becoming the largest consumer. In addition, we also added to our OTC offering by announcing the April 30 launch of aluminum swap futures based on the [flat] index. Increasing investor demand from Asia and growing competition for resources has led to increased price volatility in some raw materials.

Within energy, the main driver of the quarter was the strength of natural gas, and we had an all-time high in revenue on CME ClearPort. While the WTI [drag] spread wider during the quarter, we believe that the reversal of the [TUA] pipeline, which will be operational in May, is an initial factor which should help narrow the spread by relieving supply stock and cushion. Over the last month, concern about the situation in Iran has decreased and the spread has tightened. From a longer-term perspective, we increased our investment in the Dubai Mercantile Exchange from 28% to 50%. Our goal is to build this product into a third crude oil benchmark that appeals to traders in Asia. Increased trading volumes and wider acceptance of the contracts should encourage producers and buyers of Middle Eastern oil to adopt it as a benchmark for long-term crude sales to Asia. We are pleased to see some very encouraging early signs with a record CME crude electronic volume day yesterday of 13,000 contracts, as well as expecting April to be the fourth consecutive record trading month.

Turning now to the clearing area. Our OTC clearing momentum has continued, as customers have huge utilized our multi-asset platform well ahead of the regulatory mandate. To date, more than 1,800 buy-side accounts have cleared more than $515 billion in total [negotiable] in IRS and credit default slots, with $283 billion cleared during Q1. In addition, the pipeline is expanding with 2,500 additional accounts currently testing with us and 15 of our intermediaries. We are viewed as the leader in D2C OTC Clearing in the US, cleaning more business in Q1 than we did in all of 2011.

In rate swaps, we now offer and clear the top seven currencies, which represent 95% of the vanilla interest rate swap market clear able at CME. Earlier this month we successfully added Australian dollars, Swiss franc, and the Japanese Yen. We remain focused on expanding this business globally and plan to launch OTC interest rate swap clearing through CME CE later this year. We will provide portfolio [margining] of OTC interest rate swap positions in Euro dollar and Treasury futures for house accounts beginning on May 7. The risk reduction achieved will result in capital efficiencies of up to 85%. These are figures that remain unparalleled in the industry. We expect the same capital benefits should be available for customer accounts prior to the mandatory clearing date. Based on recent comments by the CFTC, our working assumptions for the initial phase of mandatory swaps clearing is in the October-November time period for swap dealers, major swap participants, and active hedge funds, while smaller banks and asset managers will potentially follow in early next year. In terms of technology, we had a seamless launch of our co-location services at the end of January, which took considerable effort by technology and operations group. Based on strong demand, we expect to open the second phase of the facility for customers in the second quarter of next year. We will give more clarity on the additional revenue opportunity later this year.

Shifting to our global efforts, in terms of Q1 trading volume, we continue to see faster growth from customers outside the US. Our overall electronic volume in Q1 was up 3% sequentially, with US volume up 2%, while volumes from Asia and Europe each jumped 10%. We have made significant headway with educational efforts, particularly in Asia, and as we mentioned last quarter, we have a healthy pipeline of new Asian intermediaries with which we plan to leverage. During the quarter, we signed on with Bank of China to explore and collaborate in a long-term business relationship that will harness the strength of both organizations to provide mutual benefits as both parties grow their global businesses. These efforts include commercial banking and collateral management activities with [VOTI's] Hong Kong, London, and US branches, as well as potential product offerings. We also further expanded our relationship with BM&F Bovespa by implementing a cross-listing and cross-licensing agreement. Under the arrangement, IBOVESPA, the main Brazilian stock index will be listed and cleared by CME Group as US dollar denominated IBOVESPA futures BM&F will launch S&P 500 index futures to be [fed], settled in Brazil and Rio, along with soy bean and WTI futures.

In summary, it was a busy first quarter for us, and we continue to execute on our plans to position the Company for the long-term in an efficient way. Looking out a few quarters and into the next year, we expect much of the uncertainty related to [non transaction] to be mostly behind us. We expect our OTC globalization and non-transaction related opportunities to continue to take flight. We are optimistic the US economy will continue to progress in the right direction, which should bode well for our product set in the confidence of a cautious trading community. Now I will turn the call over to Jamie to discuss the financials.

Thank you, Gill, and good morning, everyone. Today, I am going to review the results of the quarter, and then I will talk a little bit about our focus on efficiency from a financial perspective. Let me start with revenue. While average daily volume jumped 5% compared to the fourth quarter, ADV was down 11% versus the same quarter a year ago, when we posted exceptionally strong quarterly average daily volume due to the impact of significant unrest in the Middle East and the natural disaster in Japan. The rate per contract for first quarter was $81.1, which was up slightly from the first quarter last year and the same as the RPC in Q4.

Looking at the sequential comparisons, various mix related items offset each other. Product mix was slightly positive to the rate, and that was offset by a negative venue mix and non-member mix, as member volumes grew faster than non-member volumes. In terms of non-volume related revenue, we saw a 12% increase from the fourth quarter, driven by an increase in market data revenue and the addition of co-location, which launched at the end of January. Total co-location revenue during Q1 was $9.7 million, offset slightly by decreases in other connectivity offerings as customers migrated to co-lo. This is revenue -- this revenue is found in the access and communication fees line.

Total expense was $323 million for the quarter, up about $4 million compared with the fourth quarter, excluding MF global items from last year. Starting with compensation and benefits expense, this line item was $135 million following the typical higher first-quarter seasonal pattern due to a jump in the FICA and vacation accrual areas, along with our merit and promotion increases for employees, which typically hit in February. These three areas accounted for an increase of $11.4 million from the fourth quarter. In addition, due to the 12% increase in the equity market in Q1, we booked $4.1 million in deferred compensation expense, which is offset in investment income and was $2 million more than Q4. For modeling purposes, typically every 3% change up or down in quarterly equity market value will drive about $1 million of expense in this category. We saw a reduction in headcount during Q1 of approximately 35 positions from 2,737 to 2,702. During the quarter, we incurred approximately $3 million of severance expense, as we recognized certain -- as we organized certain functions. In total, the seasonal accrual, deferred compensation, and severance-related costs resulted in a $15 million-dollar increase from the fourth quarter.

In addition, we announced internally that we will be offering a voluntary exit incentive plan to a select group of employees, and we will likely provide some detail on this next quarter. At this point, it is difficult to quantify based on the uncertainty of acceptance and the potential to back field some of the positions. Lastly, we are currently in the process of opening an office in Northern Ireland, which is initially focused on certain technology functions we are augmenting overseas. Our plan is to initially hire between 80 and 90 employees there, which will eventually allow us to reduce consulting costs.

In terms of non-compensation expense, in Q1 we recorded $190 million compared to $203 million in Q4 and $185 million in Q1 of 2011. Some specific items to focus on there, we spent approximately $3 million during the first quarter on the index joint venture with S&P, down a bit from the fourth quarter. We had the strongest ClearPort quarter in our history, with approximately $83 million of revenue, which increased the ClearPort rebates by $2.4 million sequentially. This is reflected in the license fee line. In addition, co-lo was operational in February and resulted in an incremental $1.3 million related to depreciation, utilities, and maintenance versus Q4.

Turning to non-operating income, last year during the first quarter, we received dividends totaling $17 million, which included $2.7 million from an investment in Imarex and $14 million from BVMF. This year, we received $6.6 million in dividends from BVMF, which is paid at the discretion of their Board. Our tax rate came in at 38.6%, which included a one-time favorable adjustment. We expect our effective tax rate to come in at 41% for the remainder of the year, which represents the lower end of our original guidance for 2011. Turning to the balance sheet, we had $1.1 billion of cash and marketable securities at the end of March, following the $147 million regular quarterly dividend and the $200 million annual variable dividend, both paid in March. You may have seen the news earlier this week about our sale of the CBOT building. The total sales price was approximately $151.5 million, and based on using some capital losses associated with other portions of our business, we expect to retain more than $145 million of the proceeds. Capital expenditures, net of leasehold improvement allowances, totaled $30 million in the first quarter. For 2012, our CapEx expectations are in the $140 million to $150 million range.

A couple final comments on expenses. For the remainder of the year, the sales of the CBOT building will reduce expenses by approximately $15 million, with a similar amount of revenue eliminated. All else equal, we expect second-quarter expense to drop by approximately $10 million from the first-quarter, driven primarily by a reduction in compensation and building-related costs. Lastly, we expect to close the Dow and S&P transaction during the third quarter, and we will provide additional clarity on the impact for this the voluntary exit program at that time.

In summary, we are very focused on being as efficient as we can to maximize the results, while also investing in long-term growth areas like co-location, globalization, and OTC Clearing. With that, we like to open up the call for your questions. Please only one question and one follow-up.

(Operator Instructions) We will take our first question from Richard Repetto from Sandler O'Neill.

First, I just want to congratulate Craig on his retirement. Craig, the calls aren't going to the same without your articulate answers, put it that way. Congratulations.

Thank you, Rich.

Anyway, my first question is, so on the expense side, Jamie, the $10 million reduction, can you break that out a little bit? What's going on between the building versus the comp, because the building has to revenue offsets? And I just, in general on the expenses, you did mention this voluntary exit incentive. If volumes stayed where they are would you be looking at greater expense reductions over the course of the year?

So in terms of the $10 million reduction for the next -- that we anticipate for next quarter, a lot of that is driven on the comp side, as I said. There's a lot of -- seasonally Q1 is typically very high for the reasons I pointed out. Also as you look at the building, you are going to see impacts in the occupancy line and depreciation line and to a lesser extent, the professional fees line. Those will be the key areas where that impact is going forward. And I would take that, the $15 million of savings that I talked about and pretty much prorate that over the period from the sale date forward.

In terms of overall expense, I think we've been pretty clear all along that we believe that the current situation in terms of volume is cyclical. As a result, we want to be judicious in terms of our expense discipline and not cut into muscle so that we end up spending even more later on down the road. So based on the guidance that I gave last quarter, to me, it is clear that expenses move somewhat, somewhat as volumes increase or decrease, but those expense changes are much smaller than the revenue changes. Obviously, as you would expect and a model like ours where there's a lot of operating leverages. So if volumes were to remain at current levels, which is down roughly 10% or so versus prior year, I would expect that our expenses might grow around 1%, but then when you include the building in there, the impact of the building, likely flat versus the prior year.

Remember that the key drivers here in terms of expense variability as volumes change are going to be the bonus and license the fees. And those numbers I'm giving you roughly up 1 to flat are -- exclude the impact from the disposition of the CMA and Dow and the voluntary exit program. The other thing to think about too is that on the bonus side, there's a certain level when we're more than 20% below our cash earnings target where there's a clip and that bonus expense just totally goes away. But we are not close to that level yet.

The other thing to think about as you're thinking about the expenses for the coming year, we did enter this year with a conscious effort on everybody's part to limit or reduce expenses wherever we can. And you just can look at the baseline expense growth in the slides that we have to see that. And you can also see that we've already been actively managing our staffing growth, as I talked about, flat growth from Q3 to Q4 and then down 35 positions from Q4 too current. We are going to continue to look for efficiencies wherever possible, like the sale of the building, the opening of the Northern Ireland office, the voluntary program. And some of the benefits of these programs aren't necessarily going to be all realized this year. There's going to be some upfront costs associated with some of them, so that's all worked in there. So we're working as hard as we can to reduce expenses.

Rich, this is Gill, if I can just add it to what Jamie was saying. As you can tell from what he said, the leadership of the firm is extremely focused and disciplined both in the short-term as well as the long-term, and while continuing to position us for continued growth.

Okay. Thanks I'm going to pass, that was a very detailed answer. I will pass on my follow-up. But congrats also to you Gill on the new role as CEO. Thanks.

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

Craig, just wanted to add my congratulations on your retirement, as well. This call will be the same without you. Just my follow-up -- my first question is on the CBOT building sale proceeds, do you expect those to go towards the dividend, maybe some share repurchase as the stock remains weak, or allocate it towards something else, Jamie?

I think we're going to be very consistent with what we've said in the prior call in that in terms of any -- at the end of this year, we are going to look back and see what cash we've gotten the balance sheet, and review whether or not it makes sense for us to do that -- the variable dividend the next year. These proceeds will play into that.

Okay, great. Then my follow-up question, maybe one for Kim or Gill, is on OTC Clearing. We can certainly see the nice pickup in volumes ahead of mandatory clearing requirements, but I'm just curious what, if anything, you are seeing or hearing as the Moody's review becomes up front of mind in both clients and the dealers. Are you seeing any acceleration in activity or conversations around that potential event for the dealers?

I will start, Howard, and Kim might want to add, since she's on the ground with this issue. I think what you're seeing, particularly now, is more and more clients are testing if not on boarding with that because in recent conversations with the CFTC, the expectation is that mandatory clearing will begin before the end of the year. And there's a certain amount of excitement, particularly as it relates to the cross margin offset where we on in the best position to provide the most efficient margining offset, both for initially the house account, and by the third or fourth quarter of this year, the hope is it will be extended to the client account. Kim, do you have anything to add?

I think you've rightly identified that counter-party credit concerns are one of the issues that customers look at when they are thinking about moving their business to the cleared environment ahead of the mandate. So I think that will continue to be the case as people evaluate the after effects of the Moody' s downgrade. I think also there are a couple of factors, the downgrade being potentially one. And I think further work developing the capital costs associated with BASEL III on some of the banks, that will also be starting to drive some interest in perhaps more D2D as well.

Moving on, we will take our next question from Julie Miller from BMO Capital Markets.

So it sounds like on the call on your comments, you referenced yourselves as a leading dealer to client OTC clear in the US. That's definitely the case, but it also highlights the fact that there's not a whole lot of dealer to dealer going not in your market. So I just wanted to get an update on what piece of the market you are really going after. Are you happy being a dealer-to-client solution, or do think it is possible and do you want to get some of that dealer volume? And if so, what do you do to go after that?

Jillian, this is Gill. I will start again, and Kim might want to add. From our perspective, as you know, the sweet spot for us currently is the dealer-to-client side, where we have been appealing to the buy side who have expressed some concerns with respect to counter-party risk, and so they have come on board pretty much very enthusiastically from a capital efficiency point of view, to the extent that we continue having the momentum of the D2C trades we had been seeing. It becomes, I think, very capital efficient for the dealers themselves to basically park a lot more of their trades at the CME in order to achieve the capital efficiencies that they cannot otherwise get. So our expectation is that over time, you would see a healthy balance between the D2C trade as well as the D2D. So our ambition, if you will, is to harness both of those activities. But currently, we are seeing very, very strong activity on the D2C side.

I think I would only add just a follow up to something that Gill had already mentioned. In addition to attracting the client business, and thereby making it efficient for the dealers to put their offsetting transactions here, we are very focused on be capital efficient for the dealers in general. The first thing that's coming in that regard that's very concrete is the risk offset between the dealers' interest positions here and the interest rate and the interest rate swaps that they have. And on some of the estimates, there are parties that' save significant collateral costs associated with that.

Okay, thanks. Just as a follow-up, you guys mentioned you're going to be launching a bunch of cross-listed products BM&F this year. Just wanted to get your thoughts on how we should be thinking about the size of that opportunity. And when you look at your relationship with BM&F, what is the most important piece to you? Is it the order routing you've already rolled out, or is it more these cross-listed products?

If you look at our relationship with BM&F, actually it is a very comprehensive one. It includes several dimensions. One -- several of the dimensions you've already mentioned. In addition to that is the joint development effort that we undertook some time ago. We're also working with their client base and the regulatory authorities there to make it easier for trades to flow both north and south, as well as south to north with particular focus by us in the south to north trades. So it is a bigger relationship than that.

With respect to cross listing, I think it addresses a very important opportunity, both for themselves as well as for us. When you have these activities that you see CME engage in where cross-licensing is concerned, whether it be India or Brazil, we are looking at these economies that are by and large closed, but yet there's been an interest expressed by a client base to trade particular products, either at CME or at Bovespa. And so, by listing these products on either side, it exposes each of our client bases to the liquid products that we have. I think it is a long-term venture on our part to grow the volume. And IBOVESPA, taking that as a specific example, it is a phenomenal add-on to what is already a world-class equity complex that we have. It provides our client base with further diversification.

I think too when you look at just in the first-quarter, when you look at the financial impacts in the revenues that we've achieved from a relationship with Brazil, in terms of the software agreement that we've go with them, the co-development agreement, we garnered around $1 million or so in fees tied to that. But then when you look at the fees that we are generating in South America from transaction fees, it's a multiple of that. It's in the first quarter, somewhere around $5 million or so of fees that we generated from people trading in our products on our platform from South America.

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

Just wanted to talk about the volume environment a little bit more. Obviously, Gill, you gave a lot of color by product and what you are seeing there. But can you talk a little bit about, in case I missed it, about the customer mix and if you've seen any changes, in particular, on product-by-product basis? Is a fundamental users that have been pared back? Are there any particular reasons or are you seeing other high-frequency traders pare back a little bit? Or has the mix really not changed and everything is just soft right now? Thank you.

We don't give out exact numbers, but I think it is safe to say that the volume has been down across the board. What has been encouraging about the volume in some of these asset classes is there's been a percentage pick up in activity, in participation activity among the commercials as well as some of the individual products. This is specific to an asset class like foreign exchange. What is encouraging though, is the overall pick up from year-end in terms of open interest. So while volatility is dampening the volume activity of our client base, the open interest across the board is up about 15% compared to year-end last year, and we are seeing a pickup in activity from the asset managers. Bryan, do you have anything to add?

I just think it goes to the efficacy of the sales program that we have in place, where you've got a new users coming into some of these products, as Gill alluded to on the FX side. While we saw some decreases in certain client segments, we've seen new client segments coming in and doing a substantial uptake in the foreign currency products, particularly in the emerging markets. And these are generally position holders, which is a good signal for the future growth of that complex. And it's a similar trend we're seeing in our other products.

Okay, thank you. And just a very quick one for Jamie here. On the transaction fee line, clearly if you just look at the volumes that you report in the RPCs, you obviously get to a little bit of a smaller number. I think the delta is $1.6 million, obviously very small. I assume that CME-CE and also the swaps clearing, can you just give us a flavor of, is that actually true? And then also what these businesses are contributing. I know very small, but just so we have an idea? Thank you.

In terms of the OTC, it's still obviously in the very early stages, but revenue in the first quarter, which is in that transaction fee line, was in the neighborhood of roughly $2 million.

Moving next, we will go to Ken Worthington with JPMorgan.

You mentioned record activity at ClearPort. As you look forward for the rest of the year, what is your outlook there, and what are the key things that I guess either you or we should be focusing on?

A couple of things, it is Bryan. You keep an eye on the acceleration of our capability to roll out product, particularly on the agricultural, as well as in the general -- I mean energy as well as the agricultural sectors. What you are seeing is an increase in the introduction of esoteric OTC structure-type products that is showing direct responsiveness to the client base, and that is accelerating, I think, our efforts and our performance overall with respect to ClearPort. The focus, as well, on the OTC interest rate side of the equation is also something that transcends itself into some of our other core product mixes. So we are seeing some similarity in users -- in new users coming in accessing ClearPort.

Excellent. That's helpful. Then just on Slide 5 on the volatility charts, the strong indication that recent voluntary has been at lower levels. As you think about volatility over a longer period of time, say over 10 years and 20 years, what does that tell you about the level of volatility? Are we getting back to normal volatility levels, or is it really unusually low volatility levels that over a longer period of time should rise? Than maybe 10 to 20 years isn't the right time period, maybe it should be 5 years. If the time period is better on the shorter term, maybe address that as well.

Hi, this is Gill. I will start, and I don't know if anybody has any thing to add here. But, predicting volatility on the going-forward basis is not something that we would know how to do. I think but if you look at expectations or what the general market expectations are with volatility levels as low as they are now almost across the board, you can expect pick up. The question becomes when, right?

And on the rate side, for example, given the Fed announcement yesterday of continued no Fed action to the end of 2014, there is no real consensus among even the FDF or MC, with some people dissension -- with some dissension there. So I think the uncertainty and the dialogue around the uncertainty of when and when the Fed would actually move is going to bode well for the CME Group's market. With respect to the commodities, for example, that's going to be highly dependent upon things that are essentially out of our control, weather, demand. But given, in general, the volatility patterns that we are seeing, the expectation is it is going to be up, and I can't tell you, Ken, if it is going to be the next 3 years, 5 years or 10 years.

This is Terry Duffy. I think one of the interesting things about volatility and looking at traders' behaviors is volatility might be low, but prices are at either all-time highs or all-time lows, which is only telling you one thing, volatility has to increase. If you look at the price of [net] gas at a 10-year low. You look at the price of WTI and (inaudible) it's at all-time highs. You look at the price of interest rates, as Mr. Gill said, at lows. And food products, grain products, trading very numbers, but the volatility being low. We're looking at historical prices both the low and high, but no volatility. That equation has to change. It is only a matter of pure fundamentals. It will change.

Great. Actually great point there. Thank you very much. And best of luck to Craig in the new endeavors. Thank you.

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

I just had a follow up on the expense side. I just want to make sure, when we were talking about the $10 million reduction this quarter, that's off the $323 million. And then, if we are in an environment where the volumes are -- this is relative to what you guys gave last quarter. So the 2% to 3% expense increase for a low-volume environment, but if we are on the negative side, besides the bonus comment that you mentioned that that can decline, any other areas that you can pull back? And if you can size, that like the level that you need to be for that bonus to come down and how significant that could be?

I'm not going to size exactly where the bonus clip is, but as I said before, it is minus 20% off of our internal cash earnings targets. And just in terms of, because of the operating leverage in the model, it is very difficult for us to reduce expenses without coming into muscle over time. So we want to be very careful around that when we are just in a cyclical low. So if we are down at volume levels like we are today, down 10%, and that were to persist throughout the year, I'd think that we'd be somewhere in the flat range in terms of expense growth versus last year. And of course, on top of that, we will look to see where we can to reduce other discretionary expenses, but that's the best I can give you at this point. As the quarter progresses, we will give you some further update. Because the disposition of the DOW and CMA and the voluntary exit program, those are all somewhat -- those all have impacts on the expenses going forward, and we will give you more detail on that next time.

Okay, that's helpful. As a follow-up, just on the OTC comment, you mentioned around $2 million in the revenues today. Just when we think about the traction that you've gained in terms of clients and the amount of open interest that they control, is there any expectation, as you get into the back half of this year or into 2013, on where that revenue can get to? Then just on the co-lo, I just want to clarify, I think you gave what the amount was. If we had a full quarter of a run rate, do have that number going forward?

On co-lo, I would look to again, we've only got two months under our belts, so I would look to the guidance that we've given previously of $40 million to $45 million for the current year. And you're other question was on OTC?

Right.

The expectation, again, we are so early in the process, I don't think that we want to put any expectations out there for the current year. You can look at what we said in the past about what we charge per $1 million, or what we expect to garner per $1 million in terms of revenue. In the interest rate swap side, it is $5 to $6, on the CDS side, we've said $7 to $8. I think if you look at the most recent quarter, we were in that range probably between $6 and $7 per million. So I would use that to model.

Moving on, we will take our next question from Matthew Heinz, Stifel Nicholaus.

Wondering if you could just eliminate the London strategy a little bit for me, maybe in terms of how you expect to leverage CE IRS clearing to help jumpstart the -- your [IBOR] business there, I guess in the similar fashion to what you're doing in the US with cross-margining swaps and futures?

Sure. I will start. It is Bryan. There's definitely through our intensified footprint in Europe and our introduction of the CME-CE clearing offering that we have, we have targeted that client community in the context of managing their OTC interest rate exposure. And we have found a very strong interest in being able to provide that offering locally within the European region. We've intensified our efforts and focus to introduce those products to respond to those regional demands and concerns. We also see that by doing so it is resulting in equivalent new interest in a number of our core products, so by having that offering coming on the horizon in the very near future, we are bringing in, and a beneficiary of bringing in, new business in multiple asset classes from the local region.

Matt, this is Gill. Just to add to what Bryan is saying, I think one of the questions you had was with respect to the potential for cross-margining between CME-CE and the US side. As you may know, we had a long-standing arrangement with the LCH for cross-margining some years ago, and we've begun the conversation with both the FSA and CFTC on allowing CME-CE to be cross-margin with the 50 clearing offerings here. Now in light of the implementation of Dodd-Frank and (inaudible) and (inaudible), this is going to be viewed in a different light. So we don't have any guidance to give with respect to that just yet, but the conversations are beginning now.

This is Kim, if I could just add in. With respect to the rates offering at CME-CE, we are getting good customer response to some of the features that are part of our US offering, the immediacy of clearing, the simplified work flows, the product set that we have, that both are resonating with the customer base in Europe as well.

Okay. I really appreciate the color. And then just as a quick follow-up, you talked a little bit about what's impact -- the government intervention impacting the Asian currencies, and I appreciate that. But what do you think has driven the slowdown in the major European currencies? And I haven't looked at the breakdown in a while, but what's the share or the breakdown between your G-7 and your emerging market currencies in the FX business?

With respect to the slowdown in the European side of the equation, it really is an over hang from the European debt crisis, and the intervention, with respect to those main currencies that would be tied to it. With respect to emerging markets, we are very excited about the continued trend and increase in open interest as well as volume in the emerging sector. The open interest is very high across the board for all of our foreign currencies, and we are going to continue to intensify our efforts. We've seen a wonderful uptake, in particular in the Mexican peso. And I think your other question was the breakdown, 75% of the volume is centralized in the G-7s. So when you look at that and if you see those trends that have occurred over the course of the last two years, there's been a substantial uptick in the emerging markets, and we are continuing that focus.

Moving on, we'll take our next question from Brian Bedell, ISI Group.

Congrats, also for Craig for your retirement.

Thanks, Brian.

A couple questions, first one on your product, on your customer mix. Obviously, you guys are doing a very good job in building organically the customer base and some of the new customer types that you alluded to, Bryan. But if we look at the usage of high-frequency trading within the mix, to what extent do you think we are seeing lower high-frequency usage based on lower volatility and the multiplier effect that you typically get with volumes versus the extent that there is potentially a structural change with just lower participation by high-frequency shops? I guess when we think -- if volatility comes back, do you expect the same type of move back in volumes?

An excellent question. We have seen some reduction in the overall performance of what would be categorized as th more proprietary, high-frequency traders across asset classes. What's very interesting, and I alluded to earlier, is though the significant uptake across other client segments into these same products. So if you take a look at the interest that we are seeing evolving, particularly from the corporate side of the equation, I think historically, we had focused very much so on the commercial users of the markets. With our clients segment team that is very focused on both corporate and commercial, we are seeing new clientele coming into our products. As we do that, those that are traditionally interested in hedging, for example, their foreign currency or interest-rate risk, are taking a look at some of our other asset classes that we offer, and we are seeing, for some slow and incremental, but consistent interest in our commodities, particular our metals and agricultural complex.

If I can add to what Bryan was saying. I think the lack of participation from the so-called high-frequency guys is overwhelmingly due to the lack of volatility, and not necessarily structural changes that might be on the horizon.

That's very helpful. Thank you for that, and then, just a quick follow-up on the RPC for ClearPort and the energy complex. That's been down the last couple quarters in that low 150s range versus higher 150s. I know there was some low-volume contracts, I think the PJM (inaudible) contract, and there was I think a mini WGI contract that influenced that last quarter. Is that something we should consider continuing for the foreseeable future, or do think we will see it a snapback up in that RPC in that line?

It is really hard to say, Brian because at ClearPort, there are hundreds of different products with different rates. So often times the change in that RPC is going to be driven by product mix shift, and it is very difficult to predict the marginal changes in that rate going forward.

Okay. So far, the mix is in favor of this current RPC into the end of the first quarter?

I'm not quite following your question.

Is it the current mix that would give you the RPC that we are getting for first quarter, is that a trend that's continuing into the end of the first-quarter, at least, that we can base our modeling forward on?

As I said, it is very difficult to tell.

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

On the Analyst Day, you give us -- we noticed some really interesting parallels I remember. And one of them, we were talking about the new Dodd-Frank and the OTC opportunity, but some comments from clients that were talking about how the margining requirements for swaps are going to be higher than for futures. So maybe they were thinking about moving into futures instead. And then, are you seeing that come through in the form of block trades? Have you any anecdotal or any evidence that you are actually seeing new customers or people moving out of swaps into futures? And maybe that was what some of the recent headlines were about. Maybe some of the guys in the [pits] are seeing it as well, and they're not so happy about it. It doesn't seem like any of the block trades that happened on that occasion were outside of the balance of block trades. But I'm just wondering if that's maybe an opportunity we should start to build in?

A couple of things, it is Bryan. First of all, we are seeing new business coming into our core interest-rate futures from new clientele that originally has been coming into utilize our interest rate swap OTC Clearing services. I would not say that that is switching business into futures. I would say that it is more augmenting their current risk portfolio. So as they are clearing business through us, they are also looking at the efficiencies and liquidity provided in the core product for interest rates. And utilizing euro dollar strips to augment their interest rate swap exposure on the clearing side.

With respect to the block trades, I wouldn't necessarily make that correlation. There is a whole host of reasons why our users need to avail themselves to our block trading facilities. It is one of four platforms for our user base to be able to facilitate and manage the risk.

Niamh, this is Gill. Just to add to what Bryan was saying, I think even though we can't tell, or we don't know, or would not ascribe the interest in the growth in several of our product lines (inaudible) interest to client preferring futures over OTC. There has been as you pointed out, a lot of talk, particularly among the asset managers about shifting over to futures rather than OTC, for various and sundry reasons. That's not evident.

Okay. That's helpful. Thank you. Thanks, Bryan. Then if I could, there were some recent comments from a very senior politician suggesting about the regulators increasing the budget, which is nothing new, but also suggesting about limiting the leverage that people could apply in the derivatives markets. And I guess it turned our head, because supposedly, it was something that they discussed with the regulators who didn't seem objected to it. So, are you having any discussions at all with the regulators about higher margin requirements in the futures market or anything like that?

Are you referring to the President's remarks on the margin?

That was it.

I actually said this in testimony the other day, that the worst thing to do to try to control prices is to utilize effects margins to do so. Margins are there for a risk management tool, not to effectuate price. And then there's been multiple studies that no matter what you do with margins, it is not going to affect the price in the long-term. We raised margins on energy, I believe five times in the last 12 months in our oil markets, and the prices still marches straight up. So what the President, I think may be a little bit confused, and some of his advisers are maybe a little bit confused, are when you raise margins, when the product is going up, the people that have all the money are the longs. The people that don't have the money are the shorts, and the margin applies to both sides of the equation. That only exacerbates the problem for the upside if you were to try to utilize margins as a tool to effectuate price. I think Congress gets that very, very clearly.

(Inaudible) till the regulators get that too.

Moving on, we'll take our next question from Gaston Ceron, Morningstar Equity Research.

Just a really quick question. I knew you guys, that are going to wait until I think the next quarter to give a little more color on S&P and the DJ joint venture. I guess one question that I had just for modeling purposes going forward is I think, I hope the impact this might have is, can you say, as it stands now, how much of the total revenue did your Dow Jones business that you have today, how much total revenue did that contribute and what are its margins?

The Dow business itself was about $24 million or so of revenue in the quarter. The margins on that are similar to the margins of the overall Company.

Okay. It's my understanding that after the JV is -- the new JV structure is put in place, this will be a below-the-line type of situation, right?

Yes. It will be below the line, and there will be some adjustment on the license fee line as well where we are obviously paying some license fees to the JV for those products.

We'll take our final question from Matthew Heinz, Stifel Nicolaus.

Just a quick follow-up on the RPC in the rates business. I was just recalling some higher block trades percentages in the quarter that caused a bit of a stir in the press. Just wondering how that impacted the rates. RPC, I guess I was surprised to see it down quarter over quarter, given that uptick. Can you just maybe talk about what was going on there?

Sure. There was a -- when you look at the various mix impacts in the rate quadrant, you're right to point out that the venue mix was actually positive for the rate this quarter. As our volume outside the pit grew faster than our regular volumes, our XP volumes grew faster. However, we did see a -- quarter-over-quarter because of the increase in volumes, the discounts also increased, and that more than offset that.

At this time, that will conclude our Q&A session. I'd like to turn it back over to our speakers for any additional or closing remarks.

We'd just had to thank you all for joining us today, and we look forward to talking to you again on the next earnings call in July. Thanks.

Thank you. That will conclude today's conference. We thank you for your participation.