芝加哥商業交易所 (CME) 2012 Q3 法說會逐字稿

Welcome to the CME Group third-quarter earnings call. At this time, all participants are in a listen-only mode. (Operator Instructions)

At this time, I'll turn the call over to Mr. John Peschier. You may begin, sir.

Thanks and thank all of you for joining us this morning. Gill and Jamie will spend a few moments outlining the highlights of the third quarter and then we'll open up the call for your questions. Terry Duffy, Kim Taylor and Derek Sammann are on the call as well.

Before they begin, I'll read the Safe Harbor language. Statements made on the call and in the 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 our website. Also, note the final page of our earnings release contains a reconciliation to our GAAP results this quarter. Now, I'd like to turn the call over to Gill.

Thank you, John, and good morning and thank you for joining us this morning. I will discuss our 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 continued to take steps to strengthen our business in the dynamically changing environment. One of the main things we think about and have focused on during the last few years is how to position the Company to address customer needs as the market rapidly shifts. I'll talk a bit about that today.

Let me start with interest rates. We have worked hard over the last few years to enhance our interest rate product offering in light of the fed zero interest rate policy and have had several successful product introductions since 2010. These developments have added more than $305,000 to our average daily volume and $3.8 million of open interest to our interest rate complex. Morse recently, we announced that we will launch deliverable interest swap futures contracts in a couple of weeks. This innovative new product will benefit clients by providing a unique way to access interest rate swap exposure. Our customers will now have a complementary standardized product that provides the advantages offered by futures contracts including pricing transparency, ease of legal documentation, the automatic netting of positions and margin savings. Interest rate swap futures were created to meet strong demand from financial market by disciplines including banks, hedge funds, asset managers and insurers. Citibank, Credit Suisse, Goldman Sachs and Morgan Stanley are among the firms who are planning to service market majors for the product enabling market by disciplines to access deep and liquid markets.

Turning to foreign exchange, for the first time ever, CME Group's foreign exchange average daily volume surpassed the volumes of all of the OTC FX platforms to become the largest FX venue globally with CME Group September average daily notional traded of $129 billion. This was driven by strong growth with asset managers and particularly with banks. In addition, FX open interest reached its highest level ever in September and the CFTC's traders of financial futures report also slows a record level of large open interest holders for CME Group FX products. This confirms that there is an-- that the increasing number of market participants are holding more FX risk in the former CME Group huge futures which is a trend that counters much of the risk of sentiment in the OTC FX cash markets.

Moving on to energy, we are in the process of expanding our OTC energy offering. Dodd-Frank regulation is driving changes to the OTC energy markets. CME Group has a long history of providing customer choice and flexibility within the strong regulatory framework, and with this background, we are well positioned to help customers adapt their current practices to new regulations. Customers can now access the CME ClearPort Slate by multiple execution methods including the ClearPort EFS office historically, our Globex central limit order book, the trading floor, cross trades and block trades. These extended execution options provide futures regular treatment for those customers to whom this is a concern. To help energy markets manage through this transition period, ClearPort EFS transactions are exempt from counting toward swap viewer thresholds through the end of this year.

In this evolving regulatory climate, we continue to roll out new tools to boast the customer choice including CME Direct, a platform for side-by-side online trading of exchange listed and OTC markets, and CME Direct Messenger, a sophisticated messaging platform integrated with CME Direct and ConfirmHub trade confirmation services. CME Direct Messenger will be powered by market-leading instant messaging software developed by Pivot which we recently acquired. Additionally, we are in the process of applying to be a swaps data repository which will allow us to assist customers in managing their swap reporting needs.

We understand our customers concerns during the slate of regulatory flux. We continue to deal-- to lead the effort with other market participants to ensure our offering meets their needs and to advocate on behalf of our clients for clear, logical regulatory policy that protects end-users ability to manage risk safely and effectively. Our leadership here, the strength of our product offering and its flexibility going forward as well as our strong focus on meeting customer needs will continue to make CME ClearPort a key risk management tool for energy markets during and after this period of regulatory change.

CME Group agricultural commodities continue to meet the demand of our customers. Average daily volume for the third quarter was up 14% compared to the same period last year. Open interest has also grown from 6.1 million open contracts at the beginning of the year to 8.8 million contracts on October 23, which represents a growth of 44%.

Moving on to our growth initiatives, we continue to expand our product offering and enhance our global partnerships. We announced the launch of US dollar denominated IBOVESPA futures that have recently started to trade. This new cross listing arrangement provides our customers access to Brazil's key benchmark product and this initiative allows our clients to improve their ability to manage market and counter-party risk exposure across various asset classes. In addition, BM&FBovespa has begun trading in the S&P 500 futures contract which has settled to cash to the price of the S&P 500 index futures contract. This is the first futures contract traded under Brazilian exchange to reference a US stock index and it has gotten off to a good start.

Turning to the Clearing arena, we remain well positioned to benefit from the regulatory mandate as we continue to focus on our capability to onboard new customers and expand our OTC product offering. We have worked extensively with the buy side and sell side for a purpose built solution to meet the needs for real-time clearing unlike some of our competitors. Overall, we continued to experience a significant increase in firms finalizing their internal OTC Clearing readiness and selling up production accounts to prepare for Clearing.

In addition, we recently announced the approval to provide portfolio margining of OTC interest rate swap positions and euro dollar and treasury futures for customer accounts beginning in the fourth quarter of 2012. The risk reduction achieved will result in capital efficiencies for customers of up to 90% for certain portfolios and these are numbers that remain unparalleled in the industry. This offering complements the same portfolio margining for house accounts that went into effect in May of this year. Also, we recently incorporated a pricing discount plan for high turnover swap participants who tend to maintain risk mutual portfolios that do not require large amounts of initial margin. This is an important step for us to continue to onboard a more diverse portfolio of clients, which we feel will benefit our markets by providing liquidity and higher efficiencies.

Shifting onto our globalization efforts, we continue to make progress during the quarter. We applied to the FSA to create a London-based derivatives exchange with an expected launch in mid 2013, pending regulatory approval. This will allow us to build on the success I mentioned earlier in FX. Similar to the demand we have experienced in the US with customers migrating to the FX product suite, there has been a strong demand for market participants in Europe to have access to the FX futures market under the umbrella of the FSA. With that in mind, we will initially begin offering foreign exchange futures products and then expand into other asset classes.

We continue to see an increase in business coming from our diverse set of clients in Europe with more than 16% of our total volume now originating from that area and 24% of that in foreign exchange. Having an exchange in London that can leverage the central counter-party model of CME Clearing Europe will allow us to align ourselves even more closely with our regional clients in both listed futures and OTC markets, and provide additional opportunities to expand our non-US customer base through regional training and clearing sold solutions for Europe as well as for Asia.

Additionally, we continue to make significant progress in our efforts in China. As we have mentioned before, our objective has been to facilitate operational readiness of the Chinese FCMs. This progress was evident when 35 chairmen and CEOs of Chinese FCMs visited Chicago last month and spent a week at CME Group in order to bridge their knowledge and operational gaps in market access, onboarding, clearing and risk management, regulatory readiness and products and hedging. We also renewed the existing MOU with the Shanghai futures exchange which has created a forum for information sharing between the two organizations regarding the potential development of derivatives products in China.

In addition, we expanded our overall suite of Chinese Renminbi products to include deliverable Renminbi futures. We also announced the launch of Chinese steel rebar swap futures which allows customers who have exposure to the Chinese construction and rebar industries to manage their price risk by using the most relevant price data.

Lastly, we also announced last week that we have entered into a definitive agreement to acquire the Kansas City Board of Trade, the world's premiere exchange for trading hard red winter wheat futures and options contracts which serves as the international benchmark for wheat used in bread. This acquisition will expand and diversify our agricultural product offerings to include high-protein wheat, which is the largest physically produced US wheat grade and the primary export of wheat globally from North America. In addition, it'll provide us the opportunity to grow the core through spread opportunities between wheat products as well as growth in options including new products. It'll also give an enhanced opportunity to provide capital and operational efficiencies for clients.

In summary, I want to reiterate that we have taken steps to strengthen our business in this environment and we will not be complacent. We remain efficient and continue to generate a lot of cash while also investing in the business. We are working hand-in-hand with clients, including an expanding group of intermediaries, to help them navigate in this new world. Now, I would like to turn the call over to Jamie to discuss the financials.

Thanks, Gill, and good morning, everyone. Today I'm going to review the results of the quarter. It was a tough environment with regard to trading volume, but we continue to make progress in terms of what we can control. Excluding the nonrecurring tax entries, our earnings per share would've been $0.70 for the quarter.

Let me start the detailed discussion on the quarter with revenue. As Gill mentioned, average daily volume was down compared to an exceptionally strong third quarter last year. However, we saw an uptick in the rate per contract over the same period. The rate per contract for the third quarter was $0.822, which was up 6% from the third quarter last year and up 1% sequentially. Compared to the last quarter, the product mix was favorable and lower incentives had a positive impact on the RPC.

Turning to expenses, total operating expense was $287 million. Although the lower expense was partially driven by the removal of costs previously associated with the Dow Jones and CMA businesses, it also reflects our continued focus on managing the organization as efficiently as possible while still progressing with key longer term growth initiatives. That said we also had some positive timing related benefits in Q3, which will result in additional expense in Q4.

Let's get into some of the details. Compensation and benefits was $118 million, which included a $12 million bonus accrual, down 38% from Q3 last year. And we also recorded $14 million in stock-based compensation. In addition, due to the 6% increase in the equity market in Q3, we booked $1.9 million in deferred compensation expense which is offset with higher investment income compared to a $1.7 million credit to expense in Q2 for deferred compensation losses.

With respect to staffing, our overall headcount went down during Q3 from 2,604 to 2,546, driven primarily by the S&P Dow Jones transaction with 110 employees having moved off the CME Group payroll in July. Additionally in the quarter, we added 33 employees from the Pivot acquisition and we hired 13 folks in our new Northern Ireland office.

Turning to non-compensation expense, the main items that dropped sequentially were amortization and professional fees, both as a result of the S&P Dow transaction. In addition, other expense dropped sequentially due to timing related items in marketing and a reduction tied to currency fluctuations. Looking ahead to Q4, we expect expenses to come in between $300 million and $305 million, which includes a full quarter of expense from the Pivot transaction. The two line items which will likely rise are other expense, due primarily to higher marketing costs driven by several events in the fourth quarter, and professional fees mainly due to regulatory related expenditures. During our last earnings call, I said I expected our second-half expense to be $595 million. With today's results combined with the Q4 guidance, that drops to between $587 million and $592 million.

Turning to nonoperating income, we received $9.7 million from dividends from our investment in BM&FBovespa and Imerex up from $6 million last quarter. Also in the third quarter, we issued $750 million of 10-year debt at an all in cost of 3.4% per year. We will be using these funds to retire our outstanding 5.4% notes due next August. In terms of modeling this interest expense, this quarter was partially impacted and increased to $30.2 million. The run rate for interest rate expense over the next few quarters will approximate $35.5 million, and then once the old debt matures we will save approximately $15 million annually due to the lower rate over the next nine years.

Lastly, equity and gains of unconsolidated subsidiaries was $16.5 million with our share of the S&P Dow Jones business coming in at $17 million, a bit stronger than we originally projected. Capital expenditures, net of leasehold improvement allowances, totaled $35 million in the third quarter. For 2012, our CapEx expectations are now in the $140 million to $145 million range. The pro forma tax rate was 40.7% in the quarter, and we expect the Q4 tax rate to be slightly below this.

Turning to the balance sheet, we had $2.1 billion of cash and marketable securities at the end of September which included a $750 million of debt that we took on. As Gill mentioned, we announced the potential acquisition of the Kansas City Board of Trade last week. We think the combination of these complementary wheat products will lead to capital and operational efficiencies for our customers while we work to expand the business. We will be investing $126 million of cash in this transaction and we expect the deal to generate returns in excess of our cost of capital while also being slightly accretive.

Even with this transaction, we will have excess cash at year end. As I mentioned this quarter, we remain focused on returning this access to our shareholders and our Board will meet prior to the end of the year to discuss our plan. In summary, we continue to focus on investing for the future, being ever more efficient in generating and returning excess capital to our shareholders. With that, we'd like to open up the call to your questions. Only one question and one follow up, please.

Thank you, we will now begin the question-and-answer session. (Operator Instructions) Alex Kramm with UBS.

Gill, I just heard your comments on this high turnover discount that you're talking about now on the OTC Clearing side, so maybe you can elaborate a little bit on that? The questions are -- that sounds to me like proprietary market maker. Not sure how much of that exists in the swaps market today, but obviously market structure is changing, so how do you think those guys are going to enter the market? How quickly do you think they're going to be there? And most importantly I guess for Jamie, how does that change your $5 to $6 outlook for interest rate swap clearing an average per million, thanks?

Thanks, Alex, that's a good question. We're talking very specifically about a very select number of clients who would actually trade a lot but may not hold these types of open interest. So, as we focus on clearing of these OTC transactions, what we're trying to do with this pricing scheme is to capture every different type of client. This is just simply one type of client that may not hold the open interest that you might expect the majority of the client base to actually hold. So it is appropriate given the role that this particular type of client plays.

Yes remember, this is a group of customers that we hadn't previously been targeting so it's incremental to the model for us. And remember, most of the expenses associated with the OTC Clearing were already in our expense base, so the more business we can drive across the platform, even at incentive rates, the better off we are.

Alex, if I could just add one thing to what Jamie just said, keep in mind we're talking about a marketplace and an environment that is evolving and you won't see the full impact of what is going to be done by the so-called high frequency guys versus the rest of the marketplace until about the end of the year when the full impact of clearing sinks in, the end of next year.

All right, great. And then maybe just shifting gears for a second here to energy, I mean obviously it's not a secret that Brent has been taking market share from WTI and to some degree that's really not your fault. Obviously, that's where the market is going. I guess one of the things we've seen here over the last year or so is that when you look at open interest trends your competitor has actually been taking some market share when it comes to open interest in particular, and talking to some energy traders. People are saying that there are some folks that are moving acquisitions over away from you, because they want to get the capital efficiencies with Brent which is obviously taking market share. So, obviously that's not a great trend. My question is are you seeing that yourself, are you engaging with clients? What kind of options do you have to recapture some of that particular capital efficiency on the energy side that you might be losing here?

Thanks, Alex, that's another good question. I didn't understand the capital efficiency point, because we're just talking about capital efficient markets. You got to have both sides of it because we have, as you may know, upward of 85% of the TI marketplace. Brent is enjoying the lead that they have largely because of the short-term nature of the issues that TI is facing -- the structural issues that TI is facing. I would sum up the environment as TI having some short-term challenges, which is the reversal of the pipeline and when that occurs, I think some of the short-term challenges will be behind us. And Brent having what I will describe as long-term challenges that our supply base which is what they acknowledge in the industry.

So, if you look forward on a going forward basis with respect to what the environment might look like as far as these transparent marketplaces for pricing crude are going to shape themselves out. You can expect three benchmarks around the world where you can have a North American benchmark, which TI very clearly is the North American benchmark or the benchmark of this part of the world. The European benchmark which is Brent, and then the unmet need which is on the agent consumer base they tend to for the most part consume sour crude. And no one is meeting their needs with the exception potentially of the DME that is beginning to get the volume that has been elusive for them over the last few years. So the open interest shift that you have seen is largely based I think not so much on capital efficiencies as much as it is pricing, which is one way to move open interest. And those types of moves by and large via our experience are not generally sustainable over the long term.

All right, good. Maybe we'll follow up on the capital efficiencies offline. Thanks.

Rich Repetto with Sandler O'Neill.

Good morning, Terry, Gill and Jamie. The question on cash and the special dividend. It looked like cash levels absent the debt raised you did stayed flat, I was wondering if you could explain some of the ins and outs of that, Jamie? And then related to the special dividend as we approach year end, because you're carrying this extra debt. Would you go below the $700 million target knowing that you could replenish it and you have that cash there? I know it's dedicated for the debt pay down so, just about the special dividend I guess and the parameters?

Okay, Rich, so a couple questions there. One was on the cash side there is some activity on the cash side this quarter that I'd classify as investing or financing type activity, so every quarter we have the $150 million dividend roughly that we pay, so that certainly was an outflow. We also had outflows associated with our acquisition of Pivot and some other outflows tied to some interest rate loss that we have. So it was all financing related and the total of that was probably in the area of $270 million.

On the -- in terms of using some of that $750 million at the end of the year as part of the return and then replenishing that later, we tend to take a pretty conservative approach here. We want to maintain that $750 million to fulfill the maturity that's coming up next year. So as I said on the last call, that's off the table in terms of that the consideration for a return. We will have excess cash above and beyond that we'll be looking at.

Okay, that's helpful. And I guess my follow up would be on the OTC side. I guess you are as you noted today, you're seeing a spike again in OTC Clearing barn, it doesn't seem like there's a lot of revenue right at this point. That's one part of it, but I guess the broader question, as we look at your OTC strategy, Terry and Gill, you launched this DFS or will launch the DFS product, you got an arrangement with Eris, you got an arrangement now with truEX, you're trying to be a swap will be depository, data depository. So I guess the question is, is there an overarching strategy? You talked about possibly being a SEF as well as an overarching strategy as you attack the OTC or is it going to be we're trying to get in every area and every opportunity?

Yes thanks, Rich. I think if you-- I think you summed up the parts of the strategy that we have. And if I were to describe an overarching strategy for the CME here is generally it's going to be serve a full comprehensive service offering to our client base that includes options that they have. They can either continue to execute the swap as they do now and clear them with us and they can for various and sundry reasons convert into the swaps deliverable futures that you talked about. And for both these camps, if they're looking for capital efficiencies, CME Group is probably the only entity that provides them with the most comprehensive capital efficiencies with our margin offsets both on the house side and in a couple of weeks here, it'll be introduced onto the client side where in some of the portfolios that we have run we've seen savings of up to 90%.

So, no other offering that we know of can provide the same kind of efficiencies because no other offering that we know of has the futures offset. And we're talking here in terms of the OTC will even though we are focusing the participants and interest rate side, we're talking about all asset classes here, Rich. So CME Group across six asset classes is in the position to offer margin offsets that no other exchange can.

Understood. Thanks, guys. And Terry let's end that NHL strike too, thanks. (laughter)

Howard Chen with Credit Suisse.

Gill, you provided some helpful color on what's going on with the regulatory landscape and how you all see it. You mentioned the concerns your customers are having and we can see the comments you and Terry and the team have made to the market. But I'm just curious, how much do you think that confusion is impacting current activity levels and how is impacting current activity levels? Are you seeing any change, a mix of business being done out there?

Thanks, Howard, I'll start and then Terry might want to add. In the context of the FSA regulated exchange that I talked about, we're talking about a client base that currently does not trade in this part of the world, they're extremely concerned about what the Dodd-Frank reach might actually do to them. I think they have decided to very squarely not participate in the US side. So we're not talking about a client base that is currently participating here and has chosen not to, but the uncertainty that Dodd-Frank is bringing on board has made them-- have created a mindset for these guys to stay on that side of the pond. And so that's the reference that I made.

The overall concern that market participants have is also -- in fact I think if you saw what transpired a few weeks ago with respect to ClearPort and the transactions on ClearPort, it has created a bunch of confusion among our client base that we are trying to navigate through that confusion by trying to work in a collaborative way with the CFTC so that we might provide guidance to our client base to help them through this difficult transition.

Howard, it's Terry, I agree with everything that Gill said. I think that what he's referencing in the ClearPort issue of two weeks ago, we were clearly told by the chairman and his staff that Core Principle 9 and the rules associated with that would not be addressed until the SEF rules were written. And then they did an about-face on us and they addressed Core Principle 9 and they put a lot of uncertainty into the marketplace and our clients. So we saw a huge drop off in ClearPort trading in a two-week period going from roughly 400,000 to 250,000 a day. And then when we were able to get the Commission to allow the existing ESFs or exchange swaps for futures to push to the end of the year, give our clients a reasonable amount of time to transition to smaller block transactions versus what they were doing on ClearPort, we started to see an uptick back in that business. So people are accepting that, but it was a disruption.

I actually look at the entire year, Howard more of a macro event on volumes than I do just the regulatory issues. I think the regulatory issues have a play in it, but I do believe and I've said this here for a year, so this isn't the first time I've said it, that this year was setting up for a disaster for volume from day one. That we had so many different macro events going on, it was going to be very difficult for volumes to grow. The market started and ended up in the same place in 2011 and people spun themselves around. And we now came off a record year, so it's going to be very difficult to match that and people now have had no certainty as far as government policy issues or anything of that nature. So in hence what we've seen is corporations hoard cash and individuals hoard cash at the same time. And that's not just me saying, that's a fact. We got over $2 trillion sitting on the books of corporations today and the amount of money that's sitting in people's personal bank accounts or under their mattresses has got to be staggering. There's so much uncertainty where to keep it, where it's safe, where it's not.

So I think there's many macro events and then with this fiscal cliff coming down the road, we have a big issue here. This government of ours could be shut down if in fact certain things play out and people don't know what that means for the marketplace. So again, it's hard to do risk managing transactions when you're figuring on decisions that we only -- we haven't seen since Newt Gingrich in '94 the last time something like this happened. So this is not the average course of business and I think people need to realize that but we will get clear skies and smoother waters as time goes on here and I think we'll get back to more of a normalcy.

Okay thanks, Terry and GIll, that makes a lot of sense to me and that's a decent segue into my follow up which is on near and long-term expenses. Jamie, on the near term can you just break out how much Pivot brings in terms of revenues, expenses and how much of that removal of the JV related expenses account for this quarter? And then just more broadly following up on what you just said, Terry, volumes way down 16% from an elevated level last year, core expenses will be flat to down a little bit. I mean I realize it's hard to bet against you guys in terms of volume growth over the whole entire exchanges life, but if some of these macro issues persist and volumes don't reaccelerate, what are some of the other options on the table? Thanks.

Sure. In terms of Pivot, it's being integrated into the business, I'm not going to give you detailed financials on it, it's rather small. But I will say for the increase that you're seeing from Q3 to Q4 in terms of the guidance that I gave you may be half-- upwards of half of the increase is tied to Pivot, sorry a little bit less that maybe a quarter of it is tied to Pivot. So that gives you some sense there. In terms of taking the expenses out of the JV from the JV and the sale of CMA et cetera, we said that last quarter was probably around on a net basis somewhere around $11 million a quarter so that aspect of it. In terms of expenses going forward, we are in the middle of our budgeting process for the coming year, so I don't want to give any details out there yet. We will give more details on that in the call next time around.

I think there's an element of the question that you had too with respect to where growth is going to come from given the environment that we're in that Terry so accurately summed up a short while ago. I think along the lines of what Jamie was saying, I think the expense discipline that he talked about is a cultural part of what we are on a going forward basis. So I have every confidence that will continue. But in terms of the new client base, in spite of the tough environment in Europe, in spite of what folks are saying is going to be a slowdown in growth in Asia, what we are seeing is close to $800 million of our top line has come from outside of the US.

The new exchange in London will continue to tap a new client base. The time that we spent with those 35 CEOs from China is, I think, going to be extremely beneficial for us in the coming year. I think-- I had spoken in the past about a pipeline of Asian clearing firms coming into us from Singapore, Hong Kong as well as Taiwan. And I think those things are going to take place over the course of the next year and what that represents to us is a brand new client base. So even as the environment continues in its current form, as I think you can expect where growth will come from is going to be from a brand new client base as well as the new product opportunities that we see as a result of Dodd-Frank.

Great. Thanks for all those thoughts.

Jillian Miller with BMO Capital Markets.

With respect to the ClearPort transition to futures I was just wondering longer term does this transition provide potentially a boost to ClearPort activity in the sense that if this change promotes more transparent futures like trading it could spur more activity in the products and greater trade velocity, or do you think that the mode of execution for the products is going to remain similar and we just see block futures trades used rather than the bilateral swaps?

Hi, Jillian this is Gill I'll start and guys might want to add. I think from where we sit, I think it may represent one of two outcomes if not a combination of the two as you point out. There will be some set of our clients that are going to transition to futures. There are yet another set of our clients who are very comfortable trading what they consider to be swaps and they will continue in that way and they will continue doing blocks and they will do blocks of some size.

Yes, I think it's Derek here. Hi, Jillian. I would add to that across-- if you look across the broader product set what we are seeing is greater acceptance, the standardization, so it certainly creates an opportunity for futures products that align and have the same economic equivalent of the swaps market. And those products that are most standardized lend themselves to being a central [to builder book] key products which is one of the core principles behind Core Principle 9. So we're seeing that, we're actually relative to the deliverable swap future very pleased with the progress we made particularly at the dealer community on the basis of accepting what might be a shift towards futures and to really execute the same level of risk. Certainly providing client choice on the execution whether it comes in the format of an exit transaction or central order book or swap that we clear it's about client choice we been doing a good job to listen to our customers and provide those options.

Okay, thanks. And then on market data can you tell us how much of the sequential decrease this quarter was related to stripping out Dow Jones in the CMA and how much might have been related to a lower screen count or demand for the core data product?

Sure, Jillian this is Jamie the Dow Jones CMA revenue in Q2 that flowed through that line was in the neighborhood of $25 million. So that's what came out related to that. The remainder of the decrease would have been tied generally to some continued decrease in terminals as you continue to see layoffs on the street.

Okay, got it. Thank you.

Roger Freeman with Barclays Capital.

The deliverable interest rate swaps, futures, just that in context with other-- some of the efforts on swaps as futures. I mean is this happening to some extent, do you think, because of the slow progress in formulating the swaps, the clear swaps and trading market? That the market is moving more towards a futurized product? And then on that, is this-- was this something that was developed with the dealer partners? Are the economics to you any different than anything else that you've developed?

Yes, this is a futures product clearing out right to the extent we just talked about client choice and the capital efficiency of trading at this particular underlying risk and equivalency of an interest rate swap in the future creates capital efficiencies attended to a financial future which is a one-day margin versus a five-day margin treatment under Dodd-Frank for financial swaps. So to the extent that the interest that we've gotten for this product is -- I think it's not underestimating the support for the product when we can claim that we've got market makers in the form of Goldman, Morgan Stanley, Citi and Credit Suisse. There's a lot of support or this product from both the buy side and the sell side. Compare that to the traction we got with our original swap future five years ago, it was a different time and a different opportunity. So I think the trends that you're talking about regarding the pace of change regarding the focus on capital efficiencies has a new created a new climate for support for futurized products that look like swaps.

And on the economic side, do remember that this product is licensed, so the license fees are similar to what we would pay on other licensed products. And then the fees are around the treasury, around the treasury rates.

Okay, that's helpful. And then as the follow up, just on the professional fees there's been some back and forth over the quarters in terms of the regulatory component as you work through all the Dodd-Frank issues. Jamie is there any run rate overhead that you could call out around all things Dodd-Frank related that we to think about eventually working its way-- the way out?

It's really hard to pinpoint that because there's just so many different aspects of and I don't have the number here for you, professional fees in general are going to be -- are going to fluctuate up and down from quarter to quarter whether it's because of regulatory issues or growth opportunities that we're looking at or other issues where we've got to pull in consultants, so it's really hard to give you a run rate.

Okay, understood. All right, thanks a lot.

Niamh Alexander with KBW.

Hi, thanks for taking my questions. One on the position limits we saw the [Sishma] case and they got a win there, can you help me understand your position? Or am I thinking about this right, I'm less concerned about position limits with futures on futures, it's when they start building the swaps with the futures that things could get a little more restrictive. So, what is the status now and has it gone back to there are no limits in place because of the court ruling? Or is the regulators still imposing limits across all the commodities in the energy?

I think officially, Niamh, the position is there are no position limits in place. The position the CME Group has, we continue to enforce them and we expect there's going to be a response from the CFTC. You have read about the potential responses that there might actually be, but officially we will continue the way we have always conducted ourselves by putting in the position limit that makes sense for us.

I think what's also important to add to what Gill said, we do have a hard position limits on the last three days of trading and then prior to that we have accountability levels which are basically in line with our competition that has the same kind of type of structure but may call it something different. So, even though some of our competition has come out and said that they will not adhere honestly imposing him position limits and the ruling has come out it doesn't impact the way business was done prior to the ruling.

Okay, thanks I appreciate it. And then if I could come back to the swap futures that is a pretty impressive names you have supporting you on this product and it is very different than what we had several years ago. On the economics, Jaime I just want to probe a little farther because some of your competitors like Eris and whatnot it seems like their charging there on those futures products will be more a dollar value where you said A, you'd be paying a license fee I think it was Goldman that you were collaborating on developing this. And then B, though you're going to price it like your treasury futures, which is one of your lowest fee products, is that correct? I mean help-- it's lower than the average $0.48 in the rates complex is it--?

Actually treasures are a little bit higher than the average in the rates complex.

Okay.

Yes and it's priced in the line, this is both the opportunity and the challenge for the markets as the [ceded] convergence between OTC and futures when you look at economic equivalent products obviously there's going to be a function of aligning the season all in costs the transact of those products as well. So when we're looking at customer choice and trying to provide maximum customer choice, we're trying to make sure that we've got consistency in terms of what the customer chooses to transact and where they transact.

So yours should be less expensive then the others all else equal if they're going to be pricing a notional values, is that fair?

I think when you look at the contract size and you look at how we've actually looked at the equivalent notional per transaction we try to align those, so we are consistent with equivalent risk that a customer might put in relative to a treasury future for example. And there's no comp outside CME, because no one else has this particular product. But we think about the notionalized and the cost per notional $1 million transaction.

Okay, thanks I appreciate it and I'll follow up later on the cash. Thanks.

Don Fandetti with Citigroup.

Gill, could you remind us where high-frequency trading is as a percentage of your total mix and how that's trended and whether or not you're seeing any movement between products? And then just lastly around some of the reg on high-frequency, I mean it seems pretty contained, would just be curious to hear your views on that?

In terms of what they represent at CME, they're less than a third of the overall revenue of the firm. Our position on high-frequency trade, trade is the same they continue we believe they provide a significant value to us. We also believe that we-- that they actually reduced frictional cost rather than add to it and they're simply repeating a lot of academic analysis that has been done is actually saying and we're also seeing that ourselves. I don't know if you saw last week or the week before last, the CIO of Vanguard who is a user of our markets, he mentioned the value of these traders and these types of trades. And what we are doing actively is working with the CFTC through their so-called technical advisory group. Our COO Bryan Durkin serves on that group and that group is taking a very systematic approach to who are these traders, what do they do, how do you define what a high-frequency trader is and the value that they add. And so there is no change from the front. Even though the focus of the investigation currently seems to be on the cash side, we expect that there will be some bleed over to our side too.

So in terms of volumes, it's probably somewhere in that 40% range still?

I think it would be between 30% and 40%, yes.

Okay, thank you.

Dan Fannon with Jefferies.

Good morning. I guess, Jamie, if we could do-- you did a nice walk through of the puts and takes around cash flow in this past quarter. If we think about the fourth quarter, is there anything that we should think about outside of normal course of business with regards to your dividend, taxes and other things that might be inhibiting to being potentially return to shareholders?

I guess the one big thing that to keep in mind in is that you've got the KC BOT transaction out there, so that $126 million of cash that I mentioned earlier would be something that could come out of the cash in the fourth quarter.

Okay. And then in terms of regulatory capital on the balance sheet, $700 million has been the number you guys have framed in the context of what happens with LSE and LCH this past quarter and frankly just the ebb and flow of the regulatory environment, does that number do you think go up over time? Or how much cushion is there do you think versus what's required and what you guys actually are holding?

Yes, I think that for now the $700 million is still -- it's the minimum cash where you want to get, that we want to target to hold. It does, as you point out, includes all of our contributions to the financial safeguards packages, both here and in our European Clearing House. It also helps cover some of our liquidity requirements that are imposed on us by our regulators. Right now we're comfortable that we're meeting and exceeding the regulatory requirements in terms of capital from the regulators, but all those, as you rightly point out, have not yet been finalized. So there's still a little bit of a question mark over that. One of the key things that's going to drive the capital requirements for the Clearing House in particular is going to be the strength of the financial safeguards package, our financial safeguards package is very good, very strong position and that's one of the key drivers of what that CCP capital requirement is going to be.

Great, thank you.

(Operator Instructions) Chris Allen with Evercore.

Just wanted to ask on the special dividend, you guys have talked before about accelerating to 2012, how dependent is that on the outcome of the election and the potential dividend tax law change?

I would say it's not dependent on the outcome of the election. I think even -- no matter what the outcome of the election is going to be, the tax laws are going to take time for people to address. So just to be on the safe side I think it's something that we should consider at year end and we'll be talking to our Board about that.

Great. Thanks, guys.

Ken Worthington with JPMorgan.

Hi, thank you. You just answered the last of my questions. Thank you very much.

Brian Bedell with ISI Group.

A question for Derek on the over-the-counter interest rate swap market and conversion to futures. You actually talked a lot about this on the call, but maybe if you can help us think about the timing of your expectation of getting OTC users to adopt futures contracts over the next say couple of quarters given the launch of the deliverable product and the Clearing mandate in the first quarter. If you can give us a sense of-- it's hard to predict volumes of course, but a sense of your expectations as take up with futures contracts maybe later this quarter into the first quarter into the second quarter?

Sure I think it probably is easiest to talk in terms of what we think the expectation for the timeline for impact in the market is. So we're really working on the assumption that the first impact from Dodd-Frank is going to hit roughly in about February with the first phase hitting the active hedge funds, the major swap participants and the swap dealers. That's going to include mostly vanilla product on the major currencies which is the bulk of the IRS market. The second wave hits in about May, get down to the non-dealer bank, the insurance companies and active hedge funds. And then it scales out through August through the tail end of the year. So we've had as you've heard us talk about the past, a number of firms both alive with us now but also a number firms testing in preparation for the actual impact of the mandate.

In the launch in the deliverables swap future, you've seen us with a pretty strong track record of product launches. I think Gill had mentioned in some of his prepared comments around the ability to scale and grow our business and you think about the impact our open interest, over 10% of our current open interest is coming from products we've developed over the last two years. Very strong statement and track record of being able to grow product to adapt to client demand. So in terms of I had a crystal ball I'd tell you what those numbers are going to be, but we certainly think that given the up take we're getting from both the buy and the sell side as the impact start to hit the bottom line of the firms that we're looking for a decent trajectory of our futures launch, for the deliverable swap future. It's an 2013 launch, but we're expecting that to scale for the first and second quarters of next year.

Again harping on the same issue of customer choice, if customers want to clear, they can choose the OTC Clearing services. If they want to really shift their business or a part of their business directly into futures, we have had in the smaller players that might get maybe squeezed out of the ability to clear, have an opportunity to leverage the deliverables swap future as an alternative to stay in that market and stay active and also benefit directly from the capital efficiencies.

Got it, that's helpful color. Thank you very much.

Matthew Heinz with Stifel Nicolaus.

You spoke a bit earlier about the role of proprietary trading firms as OTC market makers, I'm just wondering to what extent do you expect these firms to be involved in this swap futures product, trading those along side swaps for [arbor] opportunities? And then further on that topic, how are you helping customers perform all in transaction cost analyses for these products relative to swaps, aside from just the clear advantage on capital efficiencies?

Yes, I can pick up and I think Kim could probably talk to some of the Clearing efficiencies as well. From the perspective of the -- what we talked about on the deliverable swap futures and the capital efficiency, not just the one day versus five-day margin treatment, but also the fact that these positions net down because they are a future. As opposed to sitting as open line items on an interest rate swap. These net down on a daily basis and so they're highly efficient from a trading in and out perspective. I mean to the extent that the cross margining is available day one in the form of deliverable swap futures relative to our treasures and euro dollar complex, they'll also be available as cross margin, I believe 19 November is the date, that we're rolling out clients portfolio margining as well.

There are some tools that we've been putting out there, we got an optimizer tool that allows customers really for the first time to load a portfolio and actually have that help them determine what amounts and what type of their futures portfolio to allocate to their swaps portfolio to optimize their margin offset. So to the extent that firms are trying to participate in TCA and understand the impact of their business, this optimizer tool we think is the best tool we can provide right now to help them optimize what they've put in the Clearing House for clearing.

And I think the first part of the question that you had was with respect to what extent we expected the so-called proprietary traders to participate. I think you have to make the decision between high-frequency guys and proprietary guys, some of the proprietary guys are high-frequency guys, not all of them are but I would expect some of these high-frequency traders to be very involved as the liquidity develops in the swap products themselves. And to the extent that they do participate and trade flat at the end of the day, the pricing scheme that we talked about at the start of this would actually help them and encourage them to add the liquidity to the swaps marketplace.

That's a great point and just picking up one more theme there from the participation point of view, a lot of the prop firms that we're talking about are firms that have not traditionally been able to access the OTC bilateral rule and interest rate swaps. So by providing a liquidity pool and a customer base that's actually interacting in an equivalent product, they have an opportunity as a new client segment to participate in the market that wasn't available to them before.

A lot of those high turnover targeted firms in the swaps arena our members of CME already, so on the swaps future side they would come in at the normal rates for a member.

One additional thing that I'll just mention is that the theme of our over-the-counter Clearing service has been to try to the greatest extent possible to capture for the end client the efficiencies in OTC swaps that they get in futures while letting them preserve their execution and their economic profile of the OTC product that's slightly different. And we haven't mentioned yet the real-time clearing as a big factor in people's ability to-- actually it helps facilitate the entry of new participants into the market and it also helps facilitate broader choice of access method or execution method for the existing participants in the market.

Okay, that's all very helpful, thank you. And then if I could just have one quick follow up for Jamie on the debt refi. On the interest expense, you said you expect to save $15 million annually after the refi next August. So, is that from your current run rate of about $29 million per quarter or $115 million per year?

Yes. Because we're 2% -- it's 2% savings on the all in cost on the debt that we're replacing.

And you expect that to be the case and so that should begin to accrue in 4Q next year, correct?

Correct.

Okay, thanks very much, guys.

Gaston Ceron with Morningstar Equity Research.

Just real quick I wanted to follow up on the Kansas City deal. Just wondering if you could-- we haven't seen-- to my recollection we haven't seen a deal in a little bit of a while so I'm wondering if you could give us a quick update on your M&A philosophy coming out of this deal if you see any more future opportunities around the same lines or not if you think that this was more of an isolated situation? Thanks.

Hi, Gaston this is Gill. I think we had mentioned on several calls that we were going to be opportunistic and if you look at the weak marketplace and the benchmarks standards that we have with our Chicago Board of Trade, we -- I think the Kansas City Board of Trade wheat contract is a significant enhancement to the quality of the product class for us, it made enormous sense for our client base. It provides an up and all opportunity to enhance the value of the weak offering that we have with this complimentary add on. So I think it's very much in line with what we have which is a set of global benchmarks across all of the asset classes and we simply added yet another one of those benchmarks to what is a very viable offering to begin with.

But do you see -- I mean how do you access the M&A landscape as it stands right now? Do you think this was a great opportunity but an isolated one or do you think that there could be other interesting things like that down the road or tough to say?

I don't know about the Chicago Board-- that the Kansas City Board of Trade acquisition represents the beginning of a trend but I do know it is opportunistic buy for us. There may be some other things out there we have nothing to announce at this time, but as Jamie has emphasized in the past, we will continue to remain opportunistic with respect to opportunities that emerge not just here but around the world.

Great. Thank you very much.

Patrick O'Shaughnessy with Raymond James.

So a few weeks ago ICE announced that they're going to start offering CDS index futures, is this a product that you guys would be interested in and what do you see as the success potential of that type of product?

Hi, Patrick this is Gill. I think with respect to the CDS case we had said that our focus is going to be in Clearing the marketplace, and our philosophy were swaps is concerned is to be a Clearing service provider not just in credit default swaps, energy and rates but across all of the six asset classes that we have. So we are focused on clearing the index futures once they get done or any of the buy products that come about from index trade.

Okay, that's helpful, thanks. And then a follow up for Jamie, you guys have some five-year notes that are expiring in February 2014 as well. Are you probably going to go through the same process of refinancing those early or is it too early to tell?

It's a little early now but I would anticipate that we will do a refinancing. We've said all along that we want to maintain a reasonable level of debt on the balance sheet. As you know, we're targeting the no more than one times debt to EBITDA ratio, so refinancing those would keep us right in that ballpark.

Great. Thanks.

[Makiel Batio] with Rosenblatt Securities.

I just wanted to ask about portfolio margining. What percent of customers would actually be eligible to realize the savings of up to 90% you mentioned?

Actually the program is available to all customers who trade in both sets of products, so there aren't any restrictions on who would be eligible. It's hard to estimate what the -- who would get what percentage savings because it's dependent on the products that they trade and the structure of their portfolio, so the results vary.

It makes sense, though, to assume that because the euro dollars and the treasuries that we trade are natural complement to the swap that are being traded out there to the extent that you have a client base that trades swaps. They would have some portion of the offset in our futures market.

Okay. So is there -- have you done any studies on what percent of customers trade in both markets and could realize some offsets versus those who only have one-sided portfolios?

We don't -- the transparency that we have on our side of the world is not replicated on the OTC side. So the only information that we have is in talking directly to our buy side clients. I would say a very large chunk, in fact a majority of the buy side clients are very enthusiastic and interested in the margin offsets that we have. That's the specific reason we have put up the optimizer tool out there. We're the only ones that the optimizer tool because we are the only ones that offsets, and the take-up among the client base for the optimizer tool has been very encouraging to us.

Okay, great. Thanks, guys.

At this time I'll turn the call back over to the speakers.

All right, thanks everybody for your interest in CME Group and we look forward to talking to you in the next quarter. Thank you.

Thank you and this does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.