芝加哥商業交易所 (CME) 2013 Q1 法說會逐字稿

(Audio in progress)

-- on our website. Also note, the final page of our earnings release contains a reconciliation to our GAAP results this quarter.

Now, I would like to turn the call over to Gill.

Thank you, very much. Thank you all for joining us today. I am going to highlight CME Group's first quarter, and then turn it over to Jamie to review our financials.

We experienced a solid start of the year. Our first-quarter average daily volume was 12.5 million contracts, up significantly from the 10.5 million contracts we averaged during the second half of last year. Open interest has jumped 18% year to date, up to 82.3 million contracts. Additionally, the first phase of the OTC clearing mandate was completed successfully, with cleared volumes roughly double what they were prior to the mandate.

Let me turn to the highlights of our core business. In the interest rate complex, we successfully grew volumes in open interest, up from the levels that we saw in the second half of 2012. Treasury volume has been particularly strong to start the year, with first-quarter ADV of 3.4 million, up 24% compared to the same period last year. This included a Treasury futures monthly record of 3.8 million contracts in February, up 33% over the prior February, and we reached a daily all-time high of 10.1 million contracts on February 26. Additionally, we continued to successfully expand our Options business, with a record level of electronic trading of our 10-year Treasury note options of 54% as well as generating 48% volume growth in our popular weekly Treasury options. Treasury options volume in February was the second highest month in our history. Overall interest rate average daily volume was 5.7 million contracts in the first quarter of 2013, compared to 4.3 million during the second half of 2012.

Although the last two years have been challenging due to low volatility and low overall rates, we have invested in our interest rate complex through new product development to position it to strongly benefit once we come out of this difficult cycle. In the intermediate and long term, we would expect an improving economy, the end to quantitative easing, and increasing uncertainty around both the long and short ends of the curve, are large positives for the franchise. This product line also stands to benefit from the migration of non-cleared OTC interest rate swaps into clearinghouses, and potentially, substitution of futures contracts for some of those OTC products. And, CME Group's value proposition is significantly enhanced with the introduction of portfolio margining for both house and client accounts, creating powerful capital efficiencies for our global client base.

Looking at OTC, as I mentioned earlier, there has been a nice pick up in volume since wave one of the CFTC clearing mandate kicked in on March 11, the first of a series of important dates for the industry. Since then, we have averaged $20 billion per day, which is nearly twice the amount we cleared from the beginning of the year leading up to the mandate. Interest rate swap open interest has also grown 44% to $1.4 trillion since the beginning of the mandate. Recently, 270 buy-side firms have registered with CME for OTC clearing, and we are working closely with hundreds of firms and many intermediaries preparing for phase 2, that begins on June 10.

We continue to work to build liquidity in the deliverable swap futures contract, and we have 35,000 of open interest and several thousand contracts traded per day, mainly by hedge funds, asset managers, mortgage servicers, and banks. Right now, along with our FCMs and end customers, we are focused on onboarding for phase 2 of the mandate. Post June, we expect an increased focus on our entire suite of rate offerings, including call futures, the DSF product, as well as cleared swaps.

During March, we successfully completed the first customer portfolio margining between cleared swaps and futures to one of our FCMs, and we expect three to five additional clearing members to provide this to end clients in a more scalable way later this quarter, driven by client demand. The number of intermediaries automating this process should increase throughout the year. Our sales force is increasingly hearing about the importance of capital efficiencies, and our interest rates swap product suite offers the best opportunity to optimize deployed capital, leveraging our existing deep open interest across the US yield curve.

We also continue to launch new products and product extensions for OTC clearing. During the first quarter, we launched interest rate swaps clearing through our European clearinghouse; and in the second quarter, we anticipate extending our OIS product out to 30 years, adding three new currencies, as well as launching amortizers based on customer demand.

Turning to FX, this complex continues to perform exceptionally well, driven by strength in our Japanese yen and British pound contracts, as well as significant year-to-date growth in our emerging markets FX product suite. First-quarter ADV was 1 million contracts, up 19% year over year. It is important to note we saw particular strength in terms of trading from Europe and Asia during Q1. Volume in FX trading during Q1 from Asia grew 60%, while activity coming from Europe was up 21%. This speaks to the continued FX market share gains we are achieving on a global basis. FX options also continue to be strong, up 70% in Q1, versus the same period last year. In terms of FX open interest, we experienced record levels in March of 2.6 million contracts. Since the beginning of the year, our FX open interest is up 13%. In addition, we achieved a new record of 929 large open interest holders in Q1, up from barely 400 in 2009. This indicates that more customers are holding increasing amounts of FX risk at CME Group.

Equities have also performed well and have significantly outperformed our peer. Q1 2013 ADV was 2.6 million contracts, up 9% year over year. Growth was supported by net inflows through March of $135 billion into equity funds, as well as an increase in the VIX midway through the quarter, which contributed to strong volumes in February, up 22%; March, up 13%; and April, up 16%. E-mini options were up 86% in Q1, versus last year, and up 88% in April, supported by expanded participation in our weekly and monthly options. Also, in the quarter, volume in our Nikkei-based products was up 76% in our yen contract and 116% in our dollar contract. In addition, open interest is up 23% year to date.

Our metals complex has also benefited from recent volatility. This has driven all-time record April 2013 ADV of 532,000, surpassing the last high in August 2011. We also hit multiple records on April 15, which included combined futures and options trading of 1.5 million contracts, 78% above the prior record, and we set all time trading records in gold futures, gold options, and copper futures.

Turning to the agricultural commodities, the Kansas City Board of Trade integration is going well, and volume in that product was up 24% in Q1, versus first quarter last year, and up 21% from the fourth quarter. Going forward, we are excited about the opportunity to leverage our leadership position in this category around the globe, especially in Asia.

Lastly, I will touch on our energy contracts. April was a very strong month with ADV of 1.9 million contracts, up 20% versus the same period last year, driven by increased volatility, rising natural gas prices, and ongoing corrections to infrastructure issues. In April, crude, natural gas, and power were up significantly, compared to the first quarter. In recent weeks, the WTI and Brent spread has tightened considerably to under $9 in the June contract, and the Seaway Pipeline boost of daily activity will continue to be helpful. Longer term, significant US production should help the WTI and our refined and natural gas products, with an increased focus on energy independence and the potential for exports. In the meantime, we are also focused on expanding global solutions through our DME and Brent product offerings to grow our presence in key areas such as Europe and Asia.

One final note, we had record total volume and revenue from Asia during the first quarter. We saw 24% volume growth in Q1, compared to the prior first quarter, and average daily volume totaled approximately 440,000 contracts per day. Transaction fee revenue from the region grew 31%, compared to the prior year. During the quarter, all six product areas grew, with particular strength in Ags, FX, and equity products.

In summary, we remain the only pure play derivatives exchange with the widest range of benchmark products covering all major asset classes. We continue to build on this by investing aggressively in our global growth strategy, which includes launching new products and product extensions, expanding our global footprint through further development of infrastructure and partnerships, as well as enhancing our worldwide sales force, leading to unparalleled distribution of our products and better insight into customer needs. All of this, coupled with a strong expense discipline, equates to significant cash flow generation. This has led to a consistently strong return of capital strategy to reward our shareholders, while continuing investing in the future growth of the Company.

Now, I will turn the call over to Jamie to discuss the financials.

Thank you, Gill; and good morning, everyone. I would like to walk you through the detailed results for Q1.

From a financial perspective, we had a nice quarter. Despite four fewer trading days compared to Q4, our revenue jumped approximately $58 million, and our adjusted expense was only $7 million higher, resulting in incremental margins above 85%. Please take note that excluding the foreign currency fluctuation losses mentioned in the release, our earnings per share would have been $0.73, up over 15% versus Q4 adjusted EPS.

Let me start the Q1 discussion with revenue. The rate per contract for the first quarter was $0.785, down 6% sequentially. The largest driver was product mix. While we saw volume increases across all of the product lines, lower average fee products, like our interest rate contracts, saw faster volume growth than higher-fee agricultural and energy contracts. Another driver of the lower average rate in Q1 was member-nonmember mix, as member volumes grew faster than nonmember volumes. We also saw an impact based on energy-related incentives. First quarter other revenue was $23 million, up from $14 million in Q4, due primarily to a progress payment from BM&FBOVESPA, related to our trading platform co-development.

Moving on, total first-quarter operating expense was $301 million, excluding the previously mentioned FX impact. Breaking down operating expense in more detail, compensation and benefits was $129 million, up $16 million sequentially. This included $10 million of timing-related items that tend to impact Q1 more severely than other quarters. Examples include our vacation accrual that will reverse out later in the year as folks take their annual vacations, and other employment taxes that are subject to caps that get hit earlier in the year. In addition, deferred compensation expense was $2 million higher than the prior quarter as the US equity market was strong in Q1. Remember, this is also recognized as interest income below the line, so has a net zero impact on our bottom line. Finally, our bonus was up $4 million sequentially, based on better performance versus our targets.

Headcount at the end of the quarter was approximately 2,615, up 50 during the quarter, including the KCBT employees, continued hiring in our Northern Ireland office to replace consultants, and hires in growth areas like clearing and sales. Overall, our teams have been very focused on being as efficient as we can on the cost front. Looking at non-compensation expense, each line item was flat to down, with the exception of license fees, due to growth in both equity and CME ClearPort volumes.

Turning to non-operating income, we did not record a dividend this quarter from BVMF. We record dividends on the ex-dividend date, and the ex-date for their Q1 dividend fell in April this year. Based on what they declared, our portion will be approximately $10 million. We will recognize this dividend in Q2, and depending on their timing, we may end up recording two dividends from them in Q2. If we had been able to record this dividend in Q1, our Q1 EPS would have been $0.02 higher.

Turning to interest expense, this item totaled $39 million in Q1, which we guided to last quarter. We will be paying down our upcoming August maturity and will likely look to issue new debt later this year to prefund the February 2014 bonds. Once we have worked through these near-term maturities, our run rate quarterly interest expense will likely be between $26 million and $27 million starting in Q2 2014.

Equity in gains in unconsolidated subsidiaries was $17.5 million, with good results from the S&P Dow Jones joint venture. In April, the Company purchased the non-controlling interest in CME Group Index Services LLC for $80 million. Index Services had maintained a 24.4% interest in the S&P Dow Jones joint venture. As a result of the purchase of the non-controlling interest, our share in the JV increased to 27%. We are also pleased with the recent extension of the long-term agreement between the JV and CBOE, which should favorably impact the JV's results beginning this year.

Turning to taxes, the pro-forma effective rate, excluding the FX impact, was approximately 38.5%.

On the balance sheet, we had $1.9 billion of cash and marketable securities, up approximately $240 million during Q1, and capital expenditures net of leasehold improvement allowances totaled $19 million in the first quarter, driven by technology spending.

In terms of guidance, our 2013 expense projection of $1.25 billion remains unchanged, based on the expected timing of some growth-oriented investments later this year. In addition, our CapEx guidance remains between $140 million and $150 million.

April average daily volume, so far, has been good relative to Q1. Over the last five years on average, ADV has fallen 12% in April compared to the first quarter. This April, we were down only 7%, and the decline is skewed to the product lines with lower average rates. In addition, as footnoted in our release, please note that first-quarter average daily volume and RPC figures do not include the KCBT volume, but the $2.3 million of transaction revenue generated is included in the first-quarter clearing and transaction fee revenue on the income statement. The KCBT volume has been reported within the overall CME Group volume as of April 1.

In summary, we continue to focus on investing for the future; in particular, we have positioned ourselves to fully take advantage of the changing regulatory and competitive landscape as well as the medium-term favorable cyclical trends. As always, while investing in our future, we also remain intensely focused on generating excess capital and returning it to our shareholders.

With that, we would like to open the call up for your questions. This quarter, given the number of analysts who cover us, we ask that you limit yourself to one question, please. Please feel free to get back in the queue if you have further questions. Thank you.

(Operator Instructions)

Rich Repetto, Sandler O'Neill.

My one question is going to be on OTC, Gill -- you addressed a couple of points, at least, that I'm interested in. Even though you are still at about 10% of, let's just say, your peer, on the interest rate swap clearing, but with the promise of a big phase 2, starting in June. I guess my question is, of the 200 people or so you have got connected, how many of those are already clearing? Can you give us any numbers on what -- the uptake -- a little bit more specific in June? And then also, this portfolio margining, I know you mentioned it, but how available will it be for all the buy-side clients come June?

Rich, it's Derek. I will pick up on that. A couple of points on the phase-in. You've heard us we talk a lot about the phase-in clients of the phase 1, we didn't expect a lot of new clients to come on board then. But, phase 2 is significant, and I want to make sure we talk a little bit about the makeup of the group that we have seen so far. As you know, the Phase 2 clients are predominantly dollar-based. Most of these are falling under the dollar-based mandate. And so far, about 61% of the products that we are occurring are dollar-based, and only about 25% of that trading at LCH is dollar-based right now.

Given the fact that we see strength in our dollar-based platform on the clearing side and the bulk of the phase 2 clients are dollar-based, we think we can see some acceleration through that group. The 270 firms that Gill mentioned are those that were working with us, and we believe are prepared for clearing in that day-one timeframe. So, I think we are in a good position to capture a portion of that.

Relative to the portfolio margining, we talked about this last quarter, we are prepared, we've rolled that out. We've had one or two FCMs prepare for that and actually have rolled that out selectively. But to be very honest, we don't expect that to be significantly taken up until we were farther into the phase-in onboarding clients because it's a big impact on the FCMs. And, they and we are primarily focused on onboarding, getting clients into the clearinghouse. So, we have that available. It's a function of bandwidth for the FCMs to work on portfolio margining.

And Rich, it is available for both all clients as well as all house accounts -- anybody who has a swap position that can be offset against the futures is eligible for that offset. So, it is wide open to everybody. If you look at the overall scheme of things, the only exchange, or the only CCP that has those large margin offsets, is CME Group. No one else does have that. So, from a capital-optimize perspective, it is the one solution out there that maximizes capital efficiencies for our client base.

Okay, thank you. Go Blackhawks, and go Bruins (laughter).

Howard Chen, Credit Suisse.

My question is on the core business. Over the years, we have seen higher RPC be a good stabilizer when volumes are weaker, and then get back a little when volumes improve. When you look at the business complex by complex over the past two years or so, it seems like that historical relationship is slipping a bit. I'm curious, when you look at the data, do you agree with that? And, what can you do to possibly help restore that balance that we have seen over the years?

Howard, this is Jamie. I can start, and my colleagues can jump in. As you look at it, it's very much, for the most part, a mix issue, as we have touched on over time. Shifts between member and nonmember, shifts between the various product within a product set will also impact that. So, I don't think there is anything concerning there for us at all.

You did see this quarter a few things impact the rate. The incentives, certainly, on the energy side impacted the energy rate. Those were tied to things like options incentives and incentives around new products, like Brent. Really, what we are trying to do is drive volume growth across the products with things like that. I don't see any concerns, going forward.

If I can just add, Howard, what you are seeing, over time, is we have had customers that are paying the full freight do more and more business. They would typically make a decision to take up membership, which may reduce their fees over time. And as more and more of these clients come and go, they will start at a higher rate, and if it makes sense, they would pay the lower rate once they decide to become, quote-unquote, members of one or more of the CME Group exchanges.

Great. Thanks for taking the question.

Chris Allen, Evercore.

When I back out the KCBOT revenues, I'm arriving at a rate per million traded from over the counter about $3.35. I wonder if you could confirm that, and give us some color, in terms how to think about that rate moving forward? And, what may have impacted this quarter, whether it's from the incentive-pricing standpoint or anything on the competitive front?

Chris, this is Jamie. You're right, the average rate is in the neighborhood of $3 per million across both interest rates -- when you look at the combined rate of interest rates and CDS. Basically, the total revenue for interest rate, CDS was about $2.8 million for the quarter. The rate per million was fairly consistent, I would say, with the rate per million in the prior quarter.

And, what we are seeing is, on the IRS side, the average rate is slightly below the $3 per million rate. And really, when you look at phase 1, it's very much concentrated with the hedge funds. We tend to have a higher percentage of those high-turnover type businesses, who may avail themselves of our high-turnover incentive plan. They are not putting on and holding a lot of open interest -- the ones who are getting that incentive, so it's not taxing the clearinghouse as much. That's the reasoning there. As we go to the next phase, we would anticipate that there would be a heavier mix of the non-high turnover customers who would lift that rate.

Okay. Thanks, guys.

Alex Kramm, UBS.

Just wanted to come back to, I guess, Howard's question on the pricing, in particular on the energy side here. Obviously, that declined a lot, and Jamie, you mentioned something about Brent and options. So, maybe you could give a little bit more detail, in particular, because when I look at it, it seems like a lot of that came on the ClearPort side? Just wondering -- there's been a lot of changes in the energy markets, as it relates to ClearPort, with [Isry] restructuring and you're doing some changes here, as well. So, just wondering if there is some product shift as well, or maybe you're competing a little tougher here, or anything that's going on in that market? Thanks.

Sure. We are certainly competing a little tougher around the Brent where you are seeing those incentives. On the ClearPort side, you did see a decrease in the average rate there, and that was as a result of the conversion from EFS to blocks, which are at a bit lower rate, so that drove the ClearPort average rate down a little bit. And as I said, on the options front, we got some incentive programs going there.

And, Bryan wants to add in.

These programs that are definitely having the intended impact in the context of the growth that we are experiencing, particularly across the Brent complex. We have several dozen firms now that are very actively trading in Brent. We have reached and exceeded an inflection point, in terms of our open interest in that contract, and we are seeing a very heavy spreading occurring between the WTI and the Brent. All of this is tied very much together, in terms of the increasing dominance of the WTI contract. As we have indicated over the last several months, looking at that spread and seeing how that spread is coming in, is very indicative about the domestic prominence of US production of crude oil. So, all of these initiatives that we have undertaken are very strategic in the context of building up our crude, our refined products, as well as our options growth.

Those incentives are ongoing, right?

Yes.

Okay, thank you.

Patrick O'Shaughnessy, Raymond James Company.

My question is about the deliverable swap futures that you guys launched a few months ago. It seems like you are getting some nice traction, some nice progress in terms of building up volume, and then maybe saw a little bit of a step back in April. Can you talk about the customer reception that you have gotten for those products, and what your expectations are at this point?

Yes, it's Derek, I will take that. On the deliverable swap futures, we put that out in December to make sure that we were out in advance of the launch with the mandate kicking off on March 11. We wanted to make sure, based on client demand, that we had a product out there to go through our first roll -- customers are very concerned about that process of taking a future, and then delivering into that swap. We've maintained, I think, about 35,000 or 36,000 contracts open interest. That first roll in March, we saw about 25% of those products actually deliver into a covered swap, which is a little bit higher than we would normally see, but, actually, about what we expected given the customer desire to make sure that process worked smoothly.

What our customers have told us is, they wanted to get through a delivery cycle, they wanted to make and deliver and rely on that liquidity and that volume, but also we are not as surprised to see the banks, who are participating in large parts in that market, are also focused, as are we, on onboarding through these first phases. So, we've maintained levels of open interest. It certainly is there as an alternative to those customers that may not be able to get onboarded for cleared swaps. We are pleased with where we are, we have gotten good open interest, ADV about 4,500, and increase of market makers are beyond just the four or five dealers we have that are considered add participants. So, very pleased about where we are.

Just to add -- unless you said -- there are 27 FCMs that currently clear it. And, there is a recent report by Morgan Stanley that basically articulated that the Treasury futures and swap futures are going to benefit from phase 2. And in particular, those clients that won't be able to make the cut on June 11, they have an alternative. And, the sales force at Morgan Stanley and a couple of the large banks are going to push deliverable swaps.

Thank you.

Jillian Miller, BMO Capital Markets.

I just wanted to touch on the Obama derivative tax overhaul. It seemed like the mark-to-market tax accounting and the elimination of the 60/40 tax treatment for derivatives could have an impact on the desirability of futures products in general. Maybe you could discuss the potential impact of the tax changes on your business, and how likely you think they are to actually come about.

Jillian, this is Terry Duffy. I think that the President's budget, if you look back historically, we have seen this going back to the first President Bush, where they had the elimination of the 60/40 tax treatment and they also have a transaction tax put in that budget. As you know, 60/40 is still in play, and it was voted along in the early '80s that a transaction tax has still not happened. I believe that most people on the Hill understand that this would be a detrimental tax against a very small few people, group of folks who create a tremendous amount of liquidity.

As you may or may not know, corporates do not get 60/40 tax treatment today, only individual market makers do, which make up a tremendous amount of the liquidity in market. They know the bid-offer spread will widen. This is a $2.5 billion score over 10 years; and if you look at the federal budget, that doesn't even hit the first line of the first balance sheet. So, I think people know that it would be cutting off their nose to spite their face if they ever try to deploy or eliminate 60/40 because of the mark-to-market and no long-term capital gains in futures trading. I do think that will not prevail.

Also, Chairman Camp, out of the Ways and Means Committee, has proposed to restructure the tax code, as you know, and he has actually said that he would have an elimination of 60/40 tax treatment, if and only if, the top-end rate was to be 25%. I don't believe that will happen either, but that would not hurt our business whatsoever, if that happened.

And again, with the transaction tax, people are looking at the Tobin tax. As you know, that is an economist over in Europe who has proposed a transaction tax in Europe, of which some of the European countries have approved it. But, what is interesting about that tax is, that has to go for a final vote at the year end, after the German election in November, and I don't think that is going anywhere either, because the EU has already said they will not accept it.

So, I do believe that some of these taxes that have been proposed and the elimination of certain treatment is something that we have seen historically, and we are on top of it, and I am confident that we will be able to continue to fight this back.

Okay, got it. Thank you.

Dan Fannon, Jefferies & Company.

I know you haven't disclosed in a while, but if you could talk about it in general terms about your customer mix, and talk about the segments that are behaving well. And, also maybe, the dynamic when rate volumes have spiked at points in time, how that might have changed, in terms of who is more active, or if it is generally broader based?

I'll start, and then I'll ask Derek to talk about the rate side. There's been no major change in the mix of the client base, as we had spoken in the past, so there's nothing to update you on that. On the rate side --

Yes, on the rate side, we've talked about this before, particularly as it relates to deliverable swap futures. It had more participation from the dealer side and liquidity provision on some of the products that could be complements, or perhaps, products that segue from OTC swaps into overall futures. What we have done is continue to have healthy participation across the rate spectrum between the maker and the taker side. We actually have seen more of a product shift out of euro dollars into Treasuries. Treasury is about 60% of our overall volume now. So, when you look at the growth of that Treasury side, it is important to note -- Gill mentioned that we hit some records in February in our Treasuries complex, and those are records that were set back in '07, '08.

So, a lot of folks are asking us -- what do you see the spike in volumes to be? We are already exceeding the levels in the Treasuries complex, now, in this difficult environment, that we set back in '07, '08. Drivers of that certainly build out more products, specifically to address the client shift to make sure we had products that would address the needs of the asset managers, pension funds, and long-only guys, like ultra bonds. So, product development has been focused on bringing client segments in, as well as diversifying into parts of the curve where there is volatility.

I'd like to add -- it's Bryan -- on to that, in the context of the broad asset classes that we represent and the strong client outreach that you all know we have been working on over the last couple of years. It is definitely having its impact in terms of bringing in new client base across a more diversified use of products, and I'd say we have seen that very prevalent in the hedge fund and the asset management community. And again, I think it goes to the very targeted focus of our sales team.

Great, thank you.

Mike Carrier, Bank of America Merrill Lynch.

Jamie, on the expenses, and maybe, the other revenues, just some moving pieces, but want to understand on the expenses, given the $301 million run rate, and then if we take the guidance, you would be at like a $316 million, roughly, going forward. I know there's some items that are coming online throughout the year. So maybe, give us an update on the timing of when we should expect the expense increase throughout the quarters.

And then, on that other revenue line, given the BMF -- the progress payment, remind us how often can we see that, or is that a one-time? Just trying to gauge that other revenue line. Thanks.

Sure. On the -- in terms of the expenses, going forward, as you know, the run rate given in the guidance is higher than what we experienced in Q1. I think, going forward, the big changes or the -- where you will see some of that come through more dominantly is in compensation, pro fees, and marketing. Compensation is going to grow as we fill open positions to meet existing needs as well as growth opportunities. Pro fees always comes in lumpy, but as we continue to invest in growth opportunities, like the European exchange, for example, and regulatory compliance, we should see a higher run rate there going forward. And on marketing, again, it's lumpy, tends to be more back-end loaded, tied to events and branding that occur later in the year. As I look across the quarters, it's hard to give you a hard and fast -- I'd say it is fairly evenly distributed across the remainder of the year.

Okay, thanks. Anything on that other line on the revenues?

Sure. Was the question around the progress payment from BVMF?

Yes, in terms of -- I know you have had some of those in the past, but just give us an update on -- is that ending? Can we continue to see some of that in the future?

Yes, it was tied to the delivery of the equity platform, which is up and running and has been very successful. They are very pleased with the platform. And there is, I think, one more phase, but I don't anticipate there being any significant payments from that this year.

Okay. Thanks a lot.

Chris Harris, Wells Fargo Securities.

My question is on capital management. You ended the quarter, here, with a fair amount of cash on the balance sheet, and I know we have some debt to pay down later this year. It still seems like you guys are going to be generating a significant amount of cash, and just wondering if you could quantify for us, what your appetite is to return capital this year, whether it be through share buybacks or another special?

As you know, our bent is very much toward dividends, and we pay out 50% of prior-year cash earnings in our regular dividends. And then, at the end of the year, we will do the analysis around another [fifth] dividend -- a variable dividend that we do each year. This past year, we pulled that into December for tax reasons because of the uncertainty in the tax rules. But going forward, I'd say the timing around that variable dividend is very likely going to be the beginning of each year, as we are able to look at the results from the prior year, so probably in the February-March timeframe. But, yes, we are very much committed to returning that excess capital to the shareholders.

So just to confirm, nothing for buybacks this year we should expect?

I wouldn't put that as a high priority, no.

Okay, thank you.

Niamh Alexander, KBW.

If I go back to the deliverable swap futures -- because you mentioned Morgan Stanley's report, but they had taken a stake, also, in your -- in the competitive, I guess, the [air] exchange venue. Where do you stand -- or what's your view on the collateral differential, and especially, I guess, Bloomberg's lawsuit, with respect to the CFTC arguing that five-day bar for swap versus one day for future isn't fair?

Does that -- should all those equal, maybe favor futures, but do you think the lawsuit, itself, could that maybe slow some of the transition into futures, or are people just saying -- heck, it's just so much easier, I will do a future instead of a swap. Could the lawsuit pose any threat to the opportunity there, or slow it maybe?

I'm not sure what the lawsuit will actually do. I think the lawsuit addresses the cost benefit part of the five day versus one day and the CFTC have done sufficient work. We have a very strong view as to what these margin requirements represent, and generally speaking, we believe that CCP should be left to set the margin levels where they deem appropriate, given the risk management, or the risk characteristics of the product that exists.

I'll ask Kim to say a few things about what the one day and five day actually means.

Yes, I think we are very much on record as pointing out that both of these product sets are evaluated by us in setting margins on a risk basis. And, they pose a different risk profile, mostly with regards to the visibility and accessibility of liquidity in the over-the-counter swaps and the ability to liquidate those products very promptly. We feel that they are margined completely in the same fashion, even though the results end up with one product having, currently, a five-day margin, and the other product having, currently, a one- or two-day margin, depending on which product it is.

The other thing I think I would want to point out is that -- I totally agree with Gill that we feel that clearinghouses should be allowed to set margins based on the risk profile that they see in the product. The risk profile of the swap may change over time. The other problem with the way that the issue is being addressed is that, even if the CFTC were to change its rule, the need for the five-day margin period of risk for swaps is embedded in a lot of other international best-practice standards and the Basel capital framework, in such a way that, I don't think that things would change even if the CFTC had a different rule.

Okay, that's fine. Thanks a lot.

Brian Bedell, ISI Group.

Just to go back to the interest rate complex on the swaps, maybe, Derek, if you can comment about the activity around that June 10 deadline. Obviously, a lot of clients are testing right now. Is there any testing going on in the live environment, or do you expect that to really inflect upward as we get very close to the date? And then, your sense of usage subsequent to the June 10 date? And, if you could comment on -- do you think that will be a better inflection, in terms of adoption of futures usage -- again, subsequent to that date. Also, on the September timeframe, how important that is relative to the June date?

And then just lastly on the rates complex, the member -- the lower RPC, was that completely driven by the member-nonmember mix, or were there other things going on? Thanks.

I will try to answer your four questions in one answer if I can. Let me start with your last question, very quickly, because there is a point in here I wanted to mention, and this came up before on the rate side specifically.

Where there have been some shifts that have been trending and pushing rate for contract lower in some of the member-nonmember mix, we have been offsetting portions of that downward pressure by actually putting customers into higher rate-per-contract products. So, if you look at the interest rate complex as a whole, a higher percentage of our rates complex is in Treasuries right now, and that's a higher rate-per-contract product. So, we have offset some of that customer shift mix, which is a downward pressure, by shifting into higher-rate product, which is Treasury. So I just wanted to get that off the board.

If I could comment on the member-nonmember mix impact on the interest rates. Yes, it weighed on the average rate there; but remember, it's a mix issue. Both member and nonmember volumes increased versus the prior quarter. It was just that the member increased faster than the nonmember.

I will come back on the swaps and futures side, very quickly, as well. You heard us talk about these 270 firms. The firms that are in pipeline in [bed] with us, is a broader number than that, and some of these have been testing with us for six months. Explicitly letting us know that they needed to be ready for the point at which the switch would be flipped, so I think a fair number of these guys are ready to go.

In terms of the mix of the customers we are seeing right now, we have got a very high proportion of our business that is IRS, so it's the longer-dated products. We have recently put out some increased product specs that provide a broader set of OIS clearing capabilities as well, so we think we will be able capture a larger piece of that OIS dollar business, particularly, for the phase 2s and phase 3s. You have about 84%, 85% of our mix right now is OIS -- very good because that's longer, kind of stickier, open interest for us. The OIS is shorter, but a higher turnover business for us.

And as I said, we are doing about 65% of the dollar business right now. And, a big chunk of the phase 2 June and phase 3 September clients are primarily dollar-based, so we are very well positioned to pick up a larger percentage of that dollar-based user base, as they come online in both June and September.

Okay, that's helpful. So, we are really not seeing the pickup yet in the volumes, and obviously we should be seeing that in June?

We are going to see this come through -- and the same way that we saw with the March date. We were seeing a lot of preparation, but you are going to see acceleration in and through that date. So, we are anticipating, not necessarily the ramp up before, but through and following on into the third phase, as well.

Thank you so much.

One last point on that. We have seen an increase in our volumes. Our April -- our numbers this past month are up almost 100% from last month -- so 88%, I think, is the precise figure, in terms of our monthly flow. So we are seeing the increase, and expect to see that accelerate, post June 11.

Okay, great. Thanks so much.

Gaston Ceron, Morningstar Research.

Jamie, I know you mentioned the Index JV a little bit during your prepared remarks. Just curious if you could give any additional color on how that business is going? Then, also, if you could say anything about Co-Location?

Sure. The Index JV is operating very well for us. We can see a small increase in our -- in the line in the operating income -- or the nonoperating income driven partly by better or improved economics there.

In terms of Co-Location, we did guide last quarter to a decrease in that business as a result of the shrinking footprint on a per-customer basis, though the number of customers has actually grown a little bit, coming in to Co-Lo. We are on target for that guidance. We were a little bit below it this quarter because we didn't have the full-quarter impact yet because the new contracts came into effect mid-quarter. We will be down around the number that we had -- the 20 million or so that we had guided to last quarter, we will be down around that number, going forward.

Okay, good to know. Thanks.

Akhil Bhatia, Rosenblatt.

Sorry if I missed this, but what were the total OTC revenues in the quarter?

They were about $2.8 million.

Okay. And then, on the other revenues you had the delivery fee from Bovespa this quarter. How much was that, and how do we think about that going forward?

I don't want to call it out specifically because it is a contract between us and them, but I would just say, going forward, that it's not something that we would consider a recurring revenue. There is one more phase that's due -- I believe one more phase that we are working on that's due with them, so I wouldn't anticipate that hitting us, coming into us this year.

Is it fair to say we get back into the high-teens of millions, going forward, as you did the last two quarters?

For --?

For other revenues?

For other revenues?

Yes.

It's hard to say. It will come back down, relative to that progress payment.

Okay. Thank you.

Alex Kramm, UBS.

I wanted to get a quick follow-up on the capital side, here. One, first off, I think you said earlier, Jamie, given that the fourth quarter of special dividend -- prior fourth quarter was really just because of the tax reasons, and now you should go back to beginning of the year. I thought when you and I have talked in the past that you thought, in the fourth quarter, you have enough visibility already that you can actually start paying at the end of the year, now, than the beginning of the year. Just wondering if there is a change of thinking, here, to move that back in the first quarter, or if I missed something?

Then secondly, I think there's been some discussions on building sales, and things like that, that could clearly impact the special dividend. I think there's been some discussions around NYMEX, and also KCBT, so any more color you can give there, in terms of timing, magnitude -- I think NYMEX was priced at like $500 million, last time I saw numbers -- any color you can give, here, would be helpful. Thank you.

In terms of the timing of the dividend, we never committed to continuing in the fourth quarter. One of the considerations, as we thought about -- should we continue pulling forward in the fourth quarter, or just waiting until the end of the year; obviously, waiting until the beginning of the next year, you have a very clear view of what the prior year is. And, the other factor for individual shareholders is, you are not pulling the tax on that dividend into the current year, so a few months' timing, in our mind, made all the sense in the world to put it into the next year.

I'm sorry, the other question was on --?

The buildings.

The buildings, yes. As we said, we are not in the business of -- our core is -- our core competency is not owning and operating and leasing out office space. So, we are always taking a look at our real estate portfolio to see if it makes sense to sell any of those buildings. You saw us do it with the Board of Trade, with a sale leaseback, so it certainly something we will analyze around the building in New York. With the building in Kansas City, it's much smaller in scale, but that -- since we are moving operations back here, timed for July, I believe, that building will very likely sell this year.

Okay. No color on NYMEX, in terms of time or value or anything like that?

Nothing at this point. It's too early.

All right. Thanks, again.

Thank you. That does conclude the question-and-answer session. I now would like to turn the call back to management for closing comments.

Thank you all for joining us this morning. We look forward to talking to you as the next three months go on, and see you all in about three months. Thank you very much.

Thank you. That does conclude today's conference call. Thank you for participating. You may disconnect at this time.