芝加哥商業交易所 (CME) 2013 Q3 法說會逐字稿

Welcome to the CME Group third-quarter 2013 earnings call.

(Operator Instructions)

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

Thank you, and thank all of you for joining us this morning. Gill and Jamie will spend a few minutes outlining the highlights of the quarter, and then we'll open up the call for your questions. Terry, Bryan, Ken, and Bob Zagotta, Head of products and services, are on the call, along with Sean Tully, our Head of rates and OTC, and Derek Sammann, who is in charge of options, FX, and metals.

Before they begin, I'll read the Safe Harbor language. Statements made on the call and in the slides on the website 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, which are available on the Investor Relations section of our website. Now, I'd like to turn the call over to Gill.

Good morning, and thank you for joining us this morning. I'm going to highlight CME Group's third quarter, and then turn it over to Jamie to review our financials. Our focus this morning is about what's new and relevant during the quarter.

We've made some good traction since our last earnings call, in terms of the core business and expanding our OTC clearing activity. Within our core futures complex, third-quarter average daily volume was up 11% compared to the same period last year, driven primarily by continued strong growth in interest rates and [mad] metals. We drove strong growth in electronic trading volumes outside the US in our entire business.

For the third quarter, Latin America volumes are up 23%, Asia volumes were up 22%, and in Europe, activity rose 15%, compared to the third quarter 2012. We have been investing considerable time and effort in these areas, and I'm glad to see it driving volume and revenue growth.

In addition, we are making a concerted effort to drive growth in our options business globally. This business increased by 31% in third-quarter 2013 versus last year. Both interest rate and equity options were up 54%, and FX options rose 32%.

In September, our Treasury options reached an all-time high of 57% electronically traded on CME Globex. Overall, in October, approximately 48% of our total options volume traded electronically, compared to 35% in all of 2012.

Additionally, options trading from European clients jumped by more than 100% in Q3, to more than 100,000 contracts per day. Asia and Latin America were each up over 70%. Lastly, within natural gas options, our market share jumped above 70% in September, compared to a range of 50% to 60% for much of the year.

As I mentioned, one of the main drivers of the top-line growth this quarter was interest rates. Average daily volume was 5.8 million contracts per day in Q3, up 27 -- up, I'm sorry, 29% versus Q3 2012, and open interest to date through October is up more than 60% since the beginning of the year. All four of the major components of our rates business, Eurodollar futures and options, and Treasury futures and options were up more than 20% in Q3.

Eurodollar options volume had particular strength, up 56%, with volume rebounding in the front month of the curve during September, which we haven't seen in a long time. That is illustrated on slide 10 in our earnings deck.

Turning to interest rate OTC clearing, we continue to see a dramatic increase in our cleared swaps business. Our market share in the dealer-to-client business has grown from 5% in Q1 to 14% in Q2, 31% in Q3, and 33% so far in Q4.

We averaged $81 billion per day in the third quarter, doubling the activity from the second quarter 2013. So far, the fourth quarter is up 26%, sequentially, to $102 billion.

Now that the three waves of the Dodd-Frank clearing mandate are behind us, the market is shifting from a compliance phase to an optimization phase. This is a common theme we hear from market participants in our meetings. With increasing client demand for greater capital efficiencies, we now have six clearing members live with portfolio margining of cleared OTC interest rate swaps and interest rate futures, including a few who started offering the solution to customers within the last month.

In addition, product expansion has also played a key role in market share gains. During the third-quarter 2013, we launched the Singapore Dollar which is our 17th interest rate swap currency, and puts us in line with our competitor. Open interest within OTC is something we and market participants are monitoring closely, as we move closer to 50% market share.

Interest rate swap open interest is currently north of $7.4 trillion, and has increased by more than $3.2 trillion since our last earnings call. During this time, our main competitor has added about $500 billion. Clearly, we have done extremely well attracting phase 2 clients, made up primarily of asset managers, insurance companies, and GSEs, and we are pulling in more high-turnover customers as well.

The bottom line is, winning the dealer-to-customer OTC business strengthens our overall franchise and opens up avenues for core revenue growth. Although it is very difficult to quantify, and is still in the early stages, we are seeing evidence that our interest rate complex is benefiting from a migration of activity from OTC into futures. Since May, we have seen a more than 20% growth in our interest rate complex each month, when compared to the same month of the prior year.

This year, we have seen a significant shift in the use of Treasury futures versus cash treasuries, as evidenced by cash market penetration, which you can see on slide 13. Our interest rate non-member percentage, which tends to be driven by the so-called real money clients, rose nicely from Q2 to Q3, which helped the rate per contract. In addition, if you look at the CFTC commitment of traders report on our website, it shows a noticeable increase in asset manager participation, within Eurodollars, increasing from 11% of the open interest to more than 15%.

Lastly, our deliverable swap futures activity continues to grow. We had the strongest roll month in September, and building on that in October, we have the strongest non-roll month to date.

During the turbulence of October, we performed relatively well, despite market uncertainty related to the debt ceiling and the government shutdown. During several weeks, economic data was not readily available, and in some cases, the market adopted a wait-and-see approach as the situation developed.

Nonetheless, we did what we do best, which is to continue to provide an avenue for our clients to manage risk and express their views. In October, our total average daily volume was up 12%, with rates up, as well as equities, which benefited from high turn volatility during an interesting month.

I'm very excited about the growth trajectory of the Company, and our entire employee base has done a tremendous job focusing on execution in the midst of a challenging macro backdrop, with low interest rate environment. Now, I will turn the call over to Jamie to discuss the financials.

Thank you, Gill, and good morning, everyone. Q3 was a solid quarter in many respects. Average daily volume was up 11% compared to the third quarter last year, outperforming our major peers.

Adjusted EPS came in at $0.75, excluding FX-related benefits and several tax impacts. We have seen a drop in our overall tax rate this quarter, and the benefit will be ongoing, which I'll touch on later.

Now, let's get into some of the details, starting with revenue. The rate per contract for the third quarter was $0.762, up from $0.748 last quarter. The main driver was strong nonmember participation during Q3 relative to Q2, particularly in interest rates and energy.

OTC swaps revenue for the quarter was up almost $5 million sequentially to $11.5 million, driven by a 100% jump in interest rate swap clearing activity. In addition to our success in attracting real money clients, we have also been successful in executing our strategy to attract high-turnover clients, primarily large hedge funds, which on a sequential basis led to a contraction in the average rate per million.

I want to clarify that although the rate we capture has declined due to an increase in the mix of high-turnover cost participants, we have been able to substantially grow the higher-paying customer base as well, which includes asset managers and insurance companies. During the third quarter, the total notional amount cleared by this customer segment was up 115% sequentially, with revenue up 94%.

In comparison, during the same time frame, the total notional amount cleared by the high-turnover participant base was up 138%, and revenue was up 125%. Overall, as Gill noted, we are pleased to see IRS dealer-to-client market share jump from 5% in Q1 to 33% so far in Q4.

Our Q3 interest rate product line revenue was up 32% to $181 million, and if you add the incremental interest rate swap revenue, the total rates-related revenue was up 40%. That's how we're thinking about this business. The OTC clearing business is strengthening our overall interest rate franchise.

Moving on, total third-quarter operating expense was $314 million, which included a foreign exchange benefit of $12 million, reversing the Q1 FX expense of the same amount. Excluding the FX benefit, as well as other items noted in the reconciliation, expenses would have been $325 million. As you recall, I guided to a higher expense level for the second half, and that is playing out.

A couple different areas impacted us this quarter. The primary contributor to the sequential increase was in professional fees, which tends to have more variability than other expense lines from quarter to quarter. This was up $7.7 million versus prior quarter, due to an increase in IT and legal consulting fees, higher market studies expense, and higher public relations and brand consulting fees.

Within the compensation line, we had $3.2 million of deferred comp expense, based on the strength of the equity market during the quarter. Keep in mind that this expense is offset 100% in the interest income line. Lastly, in Q3, license fees did not fall as much as would be expected from the seasonal decrease in equity volumes, as we are now recording our OTC revenue share expense in this line item.

Turning to non-operating income. The main thing to point out is interest expense dropped from $39 million to $35 million, based on the paydown of $750 million of debt in August. We expect that to increase back to $40 million in Q4, based on full-quarter impact of the debt we took on in early September, and an increase in our clearinghouse credit facility.

The total interest expense and borrowing cost line is expected to drop by $30 million in 2014, to approximately $123 million, from $153 million this year. We had put in place an interest rate lock in August of 2012, which generated $128 million, which is included in our current cash balance, and which also reduces the all-in accounting effective rate on our recent 30-year bond issuance by about 50 basis points to 4.8% per year. With respect to taxes, excluding the FX impact and non-cash deferred tax items, as well as other prior-year tax benefits, the effective tax rate was 35.6% this quarter.

Turning to the balance sheet, we had almost $1.4 billion of cash and marketable securities, along with an additional $750 million held in cash for the February 2014 debt paydown. During the third quarter, capital expenditures, net of leasehold improvement allowances, totaled $36 million, bringing us to $91 million so far this year.

In terms of guidance, I said last quarter we expected 2013 expenses to range from $1.25 billion to $1.26 billion, and I anticipate that expenses in Q4 will be close to $325 million, which means we expect to be nearer $1.26 billion, including $6 million of deferred compensation expense year to date.

In terms of CapEx, I expect between $130 million and $140 million for the year, which is down from my prior estimate. Within market data, we recently announced to clients we are expanding our fees for professional screens from $70 per month to $85 per month, beginning in January 2014.

We are making very good progress in the sale of our building in New York City. Contrary to some media reports, we have not yet closed the transaction, although we are working diligently to complete it by year end. Assuming we close it, we plan to include the net proceeds in our annual variable dividend.

For modeling purposes, you should know our cost basis for tax purposes is fairly low, so apply our tax rate to whatever you assume we will sell the building for, to arrive at estimated cash flow. In contrast, there will likely be a loss for GAAP purposes, as the building had been revalued on our balance sheet at the time we merged with NYMEX.

Lastly, we have made some great progress on the tax front. We had previously guided in the 38% to 39% range. At this point, we expect 37% to 38% going forward in Q4 and beyond.

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'd like to open up the call for your questions. As we have over the last few quarters, and given the number of analysts who cover us, we ask that you limit yourselves to one question.

Please feel free to get back into the queue if you have further follow-ups or questions. Thank you.

(Operator Instructions)

Our first question comes from Rich Repetto with Sandler O'Neill. You may ask your question.

My question's on the OTC. Jamie, so it looks like in the quarter it was really the tale of whatever, one month, or it was improved overall, but you're doing roughly $60 billion in the first two months and then $120 billion average in September. So I guess the question is on the rate, what was the rate exiting when you really -- when you jumped the average clearing level up to $120 billion? Was it above the $2.15 rate per million we calculate right now for the quarter?

Rich, yes, hi. If you look at the interest rate swap rate for the quarter, excluding CDS, we were around $2.07 per million for the quarter. As I said in my remarks, there was an increase, bigger increase in the high turnover players than there was in the real money players, resulting in that detriment versus the prior quarter.

Also, in the quarter, we saw some of the shorter-dated products like FRAs and OIS grow as a percentage of the volume, so they were up. They were about 22% of volume in Q1. They've grown to about 33% in Q3, and we're continuing to see that mix grow somewhat. And in September it did grow versus August, and we did see a growth in the higher turnover relative to the real money in September, as well. So likely, you would see a decrease in the September rate coming out of the quarter.

And would that continue into -- October is running at about $100 billion, so a similar trend? Is that fair to say?

I haven't dived down into the October numbers yet, so hard for me to say exactly. But you'd think that -- those trends looked like they were moving in that direction, so perhaps. Just overall, we're very pleased with the business, pleased to see the growth that we're getting there, and as Gill mentioned, it's really, I think, helping us in our core.

Okay. That's very helpful. Thanks, Jamie.

Thank you.

Congratulations on a good quarter.

Thank you. The next question comes from Howard Chen with Credit Suisse. You may ask your question.

Question for Jamie, as well. This one, on the variable dividend. Jamie, cash continues to build up nicely. Could you just update us on how much cash and working capital you'd like to hold for the business in tuck-in acquisitions, and should we think of the $128 million of proceeds from that August interest rate swap lock as eligible for this year's variable dividend, something you also want to pay back to shareholders? Thanks.

Yes on the proceeds from the interest rate lock, that would just go into the cash balance that we would consider for return. We haven't changed our guidance on the amount of cash we want to hold. Minimally, we want to have $700 million on the balance sheet to cover our skin in the game and the various financial safeguards packages, as well as to have a little bit of cushion there. So that hasn't changed at all.

Great. Thanks for taking the question.

Thank you. Next question comes from Alex Graham with UBS. You may ask your question.

A little bit more big picture, I think one of the things Gill highlighted was the excitement about the options and the really strong growth there. So maybe you can give us a little bit more detail, what really this is driving, is this just the macro environment? Because you talked about the low volatility environment a little bit, but how much are you actually driving this to?

I think a few years ago there was a huge drive to get options a little bit more electronic. Are you educating your customer base more? Second, what I'm getting, is this more macro, or do you think this growth is sustainable, and will continue even in a better, more volatile environment? Thank you.

Alex, this is Gill, I'm going to start and I'm going to ask Mr. Sean Tully and Derek Sammann to add in their particular asset classes. I think on both of those notes that you mentioned, there is a big macro effect, where the direction is clear, but the timing of the direction is not clear, so in times of uncertainty, such as those, options become a very valuable tool.

Regarding the electronification of options, it has been an effort of ours, particularly, I would say the last nine months or so. You're seeing the results there across all the asset classes. Sean, would you like to add?

I can jump in on the rate side. I think the question was, in terms of the macro picture, as well as driving the volumes. In terms of driving the volumes, over the last few years we've been in a number of new interest rate options products. We added the weekly Treasury options, the long green Euro-Dollar options, the blue mid-curve options, the gold mid-curve options, the purple mid-curve options. We have been driving with increased product relative to the macro environment.

There's no question, the macro environment has been very helpful. While the Euro-Dollar options in Q3 of this year versus Q3 of last year was up 54%, we had red mid-curves for example up 265%, and green mid-curves, these are, again, mid-curves on the Euro-Dollar options, up 262%. But in addition to that, if we look at new products on the interest rate side, mostly options based over the last three years, they've contributed 315,000 ATV in Q3.

Just adding to that, I think taking a step back in terms of the broader options business, we transacted a little over 2.2 million contracts in our options across the board, across asset classes. And what we're recognizing is the scale and the scope of our cross asset options is unique to this business. It's also unique in that volumes on the options side drives incremental volumes for the delta hedgers into our futures business, as well. So that incremental increase of electronification from 43% -- from 35% last year is significant and very intentional on the part of our sales teams, and our effort to approach the market with a broader options sales pitch, and the core capabilities that CME Group has across asset classes. You'll see/hear more from us on our overall options business going forward.

Excellent. Thank you.

Thank you. Next question comes from Jillian Miller with BMO Capital Markets. You may ask your questions.

You, from what I recall, haven't changed your pricing tiers and rate products since I want to say 2008, and more recently, you've had some really strong volume periods. And certainly on the long end of the curve I think you're tracking above pre-crisis volume levels for 2013. I just wanted to see what your thoughts are on the potential opportunity for raising volume tiers, especially in the Treasury products, just given the more positive volume outlook?

This is Jamie, Jillian. I think you're absolutely right. Before the crisis hit, roughly every 18 months or so, because of the way the volumes were growing we were adjusting our tiers, particularly on the interest rate products. We pulled back from that, obviously during the crisis, as our customers were suffering as well. But as we come out and as we see sustained growth in those volumes, we'll certainly be taking a look at that.

Okay. Thanks.

Thank you. Next question comes from Dan Fannon with Jefferies. You may ask your question.

Jamie, just thinking about expenses, maybe even into next year and your budgeting, if we look at kind of the last few years and the revenue environment, and assume that continues into next year, is there any either step-up, step down or movement in expenses that you would highlight, given the investments you guys have been making and potentially need to make going forward?

I think what you've heard us say before is over the long run, we would anticipate our expenses to grow in the mid single digits. I don't anticipate it being too different than that in the coming year.

Certainly, we've been making investments over the last several years in growth opportunities, so those -- many of those are already built into our base, although there are obviously incremental expenses as we grow those offerings further. So I don't see any giant moves.

I mean, one of the things I highlighted in my comments was the overall interest expense is lower, there is a higher expense next year, because we have a significant increase in our clearinghouse credit facility going into next year, that will be one thing that will add as an example. But we'll look for other ways to control expenses.

Thank you.

Thank you. Next question comes from Niamh Alexander with KBW. You may ask your question.

Hi, thanks for taking the question. Residual interest, I guess the CFTC just passed last week the various consumer protections. But one of the issues that's been a big discussion topic among all FCMs has been the residual interest requirement, and how that's going to significantly increase the capital they'd be required to keep, and we think it's going to be really tough for some of the smaller FCMs to stay in the business.

How do you think about how this impacts your business? I heard how your term is presented to regulators, their thoughts on it. It didn't seem very positive.

So help me think about, okay, it's been passed. What's next, and how to think about potential impacts?

Terry Duffy is on the line. Terry, are you there?

Yes, I'm here, Gill. Do you want me to start, Gill, or no?

Sure.

Niamh, on that residual interest, as you know, we felt it was a very flawed proposal from the beginning. We worked very closely with smaller FCMs and with the agricultural community. I testified just as little as two weeks ago with the agricultural community and other participants, and it was the first time in my 20-year history that I've seen all sides, both sides of the aisle agree that this rule was not -- it was fraught with all kinds of dangers, and it was -- obviously the CFTC took notice and they switched to the rule which was originally an FIA proposal, which is nothing for the first -- next year, so it will stay the same as it is, and then it will go to the T1 at 6.00 PM the following day, and then five years from now it could go to 9.00 AM.

So that's five years away. That could happen. We are going to continually work with the ag groups and with the CFTC, and with the folks on the Hill to make sure we get the five-year piece removed from this.

It makes no sense. If it made any sense at all, they would have imposed it on day one, not five years down the road. We feel fairly confident that this residual interest bill is basically dead.

Fair enough. Thanks.

If I could add, I think the CFTC, to the Chairman's point, has also committed to complete an analysis in the next 2.5 years or so, and I think the experience that the FCM community shares in the next 2.5 years is going to be important, with respect to what the CFTC would decide. The compromise solution that they came up with was to extend the time. I think the next few years is going to be very important here.

Thank you. The next question comes from Ken Worthington with JPMC. You may ask your question.

Just on the interest rate swap volume, it still seems pretty tepid, versus original investor and also market participant expectations. First, do you share this view? Second, is there an explanation? I guess this could just be early days, and there's more volume to come, or maybe there's something that we've all just been missing.

And then third, given the size of the OTC market, there would still seem to be the potential for meaningful upside, like orders of magnitude better volumes than we're seeing today. Is that potential still realistic, or based on what we have seen and maybe now know, is that really off the table?

I'll ask Sean to chat about this.

I think we've seen very good growth. If you look at our market share this year, it went from 5% in Q1 to 14% in Q2, to 31% in Q3, and 33% so far in Q4. So we have seen very good growth.

That 33% market share is of the dealer to customer business, and obviously that's being driven out of the Dodd-Frank regulations, where we've seen Category 1, Category 2, Category 3 phases this year. We do expect further growth. We do expect increased -- hope for increased market share, but in addition to that, we will see increasing product.

As Mr. Gill mentioned earlier, we're now clearing 17 different currencies, but we will continue to increase our product scope. With increases, we will be adding some additional emerging market currencies in the near future, and there will be other OTC products that we'll be adding.

In addition to that, you have to look for Europe. The mandate to clear has not yet hit Europe, and we expect the mandate to hit Europe, probably end of 2014 or sometime in 2015. So with increased product scope, increased market share, as well as increased requirements to clear, we think there's a lot of runway.

Okay. Europe is about half the market, though, and we're clearing $100 billion a day. That doesn't -- still doesn't get to the orders of magnitude that the size of the market might have originally suggested. Any thoughts there?

We've been focused on the dealer to customer business. Obviously, the dealer to dealer business is quite large, as well.

And we believe that with our portfolio margining we have a unique value proposition where people can portfolio margin between CMEs and trade futures and our -- the swaps cleared the CME Group. We believe that we'll be able to penetrate other parts of the market, as well.

Great, thank you.

Next question comes from Chris Harris with Wells Fargo Securities. You may ask your question.

Just a numbers question here. The fee increase, you're going to be expecting market data beginning next year. What kind of impact do you expect that to have on revenue?

If you were just to hold terminals constant, which you have to make your own estimates about that, but if you held terminals constant, I want to say it's roughly a $50 million impact on revenues next year. Again, assuming that you don't see a decrement in terminals as a result.

Okay. Thanks, Jamie.

Thank you. Next question comes from Chris Allen with Evercore. You may ask your question.

Actually, if you could just follow up on that question a little bit. The fee increase per screen, it's up about 21% this time, versus roughly about a 12% increase the last two times you increased it. Just wondering, A, what's driven the magnitude of the increase here, and also if you could give us any sense in terms of what has been the usual screen decline when you've seen these revenue -- I'm sorry, the rate increases before?

Sure. When you look at the rate that we're putting in, the new rate that we're putting in place, it's, I'd say, very competitive. In fact, I want to say it's below what some of the key competitors have out there now or what they've announced, so we feel very comfortable around that.

If we look at what's happened in the past around terminals, it very much depends on the environments that we're in. If you went back several rate increases ago, you wouldn't really have seen much of an impact on the number of terminals. The last one, you probably did see more of an impact, but it's also coupled with some legacy issues, around some legacy incentives that we have in place, and we're taking a look at those, as well.

Thanks.

Thank you. Next question comes from Howard Chen with Credit Suisse. You may ask your question.

Just a broad regulatory question. We've seen some stops and starts to the CFTC SEF mandate, with I think the expiration of the no-action the last week. I was hoping you could talk about what you're seeing in the market, and what you're hearing from customers.

Howard, this is Gill. I'll start, then I'll ask Kim to add. She's been working with a lot of firms.

I think on the SEF front, there's still -- we're still in the very early stages, a lot of FCMs, in particular, are a little bit concerned about the lack of consistent rules a lot of these so-called SEFs have. The SEFs are working very closely with both their clients as well as the FCMs to try and get these trades done. There's some confusion when trades come in from a SEF versus from some other.

Then it doesn't give the FCMs, particularly the large FCMs, enough time to accept the trade. That's one example. So there's a lot of what I'll call early stage pains, that both FCMs as well as clients and SEFs are going through, and those things will shake themselves out in the coming weeks.

The only thing that I would add as another example of the way that the SEF mandate is changing the way business is done, and actually, we're very well positioned to benefit from this change, and in this particular respect is with regard to bunched orders. The execution of very large orders and then the allocation of those orders out to multiple accounts, the way that the work flow for that occurred prior to the SEF mandate was very different from the way that customers want it to occur going forward, and we've already been able to accommodate the ability to do what I'll call post clearing allocations of bunched orders, which is a new service. And being very well-received.

Thanks, Kim. Thanks, Gill. My second follow-up, Gill, you highlighted the global expansion.

Was hoping you could just dig a little bit deeper into Brazil specifically, and your various partnerships with BM&FBOVESPA, and give us a deeper update there. Thanks.

Sure, Howard. The growth rate for Latin America is very high. The base volume that we are working off is still low, it's about $60 million, I think we're going to get for the year.

The Brazilian environment, as you know, continues to be a challenging one, and we are working with both the exchange, as well as the various regulators there to talk about the timing of the changes of some tax laws, that have to take place, before the Brazilians can take advantage of what we are offering. I'm also going to ask Bryan to chat a little bit on what he's seeing there.

In anticipation of change occurring from the macro environment, we've really intensified our efforts in developing a central bank program. So we've got boots on the ground where we're intensifying the educational efforts, and the draw of business into our panoply of products. We're very pleased to see the growth trends, given the fairly muted environment that we're working under, and just positioning ourselves for that change.

Thanks, Bryan. Thanks, Gill for taking the calls.

(Operator Instructions)

Our next question comes from Alex Graham with UBS. You may ask your question.

Couple of follow-ups from me too. First of all, Jamie, on the licensing fees, you talked about I think the OTC revenue sharing there. But in general, can you just maybe remind us what's in there and maybe the magnitude of the different pieces in terms of the equity fees with S&P, the ClearPort OTC fees, and then also on the clearing side or whatever else is in there, and how that's been trending? Thanks.

You hit all the main components. It's the equity license fees from S&P, NASDAQ, Dow, et cetera, are in there. You've got the ClearPort fee sharing, and you've got now the OTC revenue sharing.

So generally, I'd say the equity license fees are the largest component, followed by the energy component, and then followed by the OTC share. Just to be clear, in this quarter, the OTC revenue share amount that we booked in there included some catch-up for prior quarters, as well.

But you can't give us exact numbers or anything close in terms of percentages?

No, no.

And then secondly, just coming back to I think Howard's original question on the dividends and the appetite there. Looks like you have significant cash built up, and there will be more by the time you want to pay this dividend. So if I think about the variable dividend, you really still think or does the Board, when you've talked to them, still view this as a true variable one-time? Or could you make an argument where you should bring it up, a nice amount from last quarter and then maybe -- or from last year, and then maybe start thinking about repurchases a little bit more again? Or is this really just this is what it's going to be and a expect most of this to be paid out?

I would say that the philosophical bent is absolutely toward dividends. I wouldn't expect any buybacks of any significant nature going forward, at least in the near term, and it's -- you said one time around that dividend, but it is really an annual, variable, recurring dividend. So, I think it's a bit of a unique structure as we've discussed before and I'd say both the Board and the management is very comfortable with the way that it's been working out.

Okay. Very good. Thank you.

Thank you. The next question comes from Chris Harris with Wells Fargo Securities. You may ask your question.

Broader finance question. How should we expect your capital needs to change as your swaps business gets larger?

The amount of -- you mean our capital requirements on the organization?

Exactly.

I don't see them changing all that significantly. The capital requirements tend to be, for the most part, tied to the size of the annual expense for the business. So I don't see large increases there. And then we also sized our contribution to the financial safeguards package in a very conservative fashion, so we feel very comfortable with the amount that we've got there, as well.

Okay. Great. Thanks.

Thank you. The next question comes from Jillian Miller with BMO Capital Markets. You may ask your question.

Thanks, guys. On portfolio margining, I know you said six clearing members are live, but I just want to get an idea for what percentage of your business that represents. Like, are we talking about 10 or 15% of your cleared interest rate swaps that's benefiting from that now, or is it 50% or more?

This is Gill. The six clearing members and their participation is yielding about $1 billion worth of margin savings, and it's currently a small percentage of the overall business. So firms are still coming up to speed there.

Does the roll-out of that, I guess, to a larger percentage of your business, does that mean that you're going to gain more share? Is that your expectation? Or do you think that everybody's already baking that eventuality into where they're doing their business right now?

I think from an anticipation point of view, a lot of firms have started to test how this would actually work because it can be, unless you have automated the process, it can be very manually intensive. So what a lot of firms have been doing over the last six months or so is making sure they have the process to automate those spreads.

The opportunity beyond the existing open interest on the rate side against the OTC open interest is on the going forward basis, as firms can put on, or clients can put on positions that are risk minimizing or risk neutral on a going-forward basis, and eventually get to an optimized state, where they can use some portion of their business will be in futures and options, and some portion would be in swaps. So there are two ways to look at this opportunity. One, with respect to the existing open interest on the future sides, and secondly on a going forward basis with a Deliverable Swap Futures, the clearing of the swaps and more development on the futures side, would be the opportunity that our firms would have.

Okay.

Just to add on to that, I mean, I think we have to keep in mind that we're just off the heels of the mandate dates themselves. And so in our interactions through our sales calls, the firms are saying, look, first and foremost, we need to make sure that we just got compliant. Now we're really spending our time on how to most effectively utilize our capital and any opportunities that you have, specifically from a margin savings perspective.

We're very keen to be able to test and see how that benefits our firm. So we're going through that optimization phase now.

Okay. Thanks. And then just could you update us on the London exchange, like I think it's been delayed a couple times. I'm not sure exactly why, and what the expectation is for that.

This is Gill. The delay has to do with a technical issue surrounding the delivery of foreign exchange, so we're working very hard with the Bank of England and the FCM and we hope to have an announcement very soon here.

Okay. Thanks.

Thank you. Next question comes from Rich Repetto with Sandler O'Neill. You may ask your question.

Just a follow-up, I guess, on regulation for Terry. And it looks like the Eurex has put in some curves, or very, what do you call it, far out curves on high frequency trading on ordered trade ratios and usage fees.

And I guess the question, Terry, do you think this is just their response to pressure that was just geographical in Germany, or do you think that this is a trend that you might look at, and I know the equity exchanges didn't really follow through, but you do got the concept, really. I guess what do you think of what the Eurex is doing in that area?

Rich, I don't have the detailed information what Eurex did. I can only go off of what I said publicly, and what others have said publicly. We think that HFT trading has deep pools of liquidity, which benefits the participants to do their risk transfer at the lowest cost price.

We focus on the regulatory issues around HFT, and then make sure that we can show confidence in the marketplace, that nothing nefarious is going on, that we've done a really good job doing it, and we're going to continue to support that model. There's no reason for us to change our structure right now as relates to HFTs, because, again, we think they add deep pools of liquidity to our marketplace. I'm not up-to-speed. Others in the room might have a better idea what Eurex did.

I would just add to what the Chairman just stated, that the main focus of what we're looking at in the context of this whole topic is, ensuring that you have the appropriate risk management mechanisms in place, many of which -- we've been an industry leader, in dealing with credit controls, dealing with appropriate level of order to trade ratios in terms of messaging policies to maintain the efficiency of the experience for all users on a platform. So from our perspective, I think, as the Chairman indicated, we held a pretty firm line in that respect in terms of the benefits of this type of user base, but ensuring that we have the appropriate protocols in place to ensure a consistent experience for all market users.

Let me just follow on real quick, because what I will say is a as you know we've dealt a lot with over speculation in the energy markets over the last several years. We're in Washington quite a bit, as you know. I do think that you will see a lot of headlines as relates to HFTs, as we have over the last several months. That won't go away. That doesn't mean anything is going to change, but the headlines will still remain to be there.

Got it. Very helpful. Thank you.

Thank you. Our final question comes from Niamh Alexander with KBW. You may ask your question.

I guess maybe if you could pick which one you want to answer, or maybe I'll get both. The access fees, collocation and things like that, that had been something you had been guiding to grow as you built out the data center, and that was something you have been investing in for some years. Can you help me there, Jamie, think about the growth potential in that revenue line?

You mentioned it in your prepared remarks as well, wondering if Sean might or Derek might address it, it's just some anecdotal evidence of futures and status swaps. What data points are you looking at for evidence of this? You're closest to it, we're watching open interest as well. But what other areas could you point to as to look at maybe some futures creep instead of swaps, instead of just clearing swaps as a way of new revenue growth?

On that first one, Niamh, I'll just say we're not prepared to give any updated guidance around colo. Certainly we saw people rationalizing a space that they were taking in the facility. We have seen some customer growth there.

You just keep in mind that it is still a very profitable business for us. I want to say the margins this last quarter were over 50% in that business. So very -- it was a very good addition for us and it's going to be market-driven.

So we'll continue to wait to see where the demand comes from and look for new ways to leverage that facility. Sean, you want to add, talk on that second point?

Sure. In terms of the move of people into our futures complex, we're seeing it in a couple of different ways. We look at a cash penetration or cash market penetration of our treasury futures. That is a metric that we've been following for a number of years.

We recently reached a new peak in that. Although it's fallen off a bit in the last couple of months, we do remain around the peak level. So we did exceed the 2007 peak.

Another way anecdotally that we look at this, is we can use at EFRs or exchange for risk transactions, which are spread trades between CME treasury futures and interest rate swaps. In the traditional interest rate swap world, very popular trade is an interest rate swap spread, or a transaction which is an interest rate swap traded as a spread to a cash Treasury instrument.

In the new world, it is far more efficient to represent that trade as a CME cleared interest rate swap against a CME interest rate future. So our way of representing it represents nearly the same risk, but you can get up to 85% margin savings relative to the portfolio margining that we talked about earlier.

In terms of EFRs, if you look at volumes in 2013, overall year-to-date volumes in 2013 versus 2012, average daily volume in 2012 was about 19,000 a day, 2013 was about 48,000 a day so far. So we're seeing a very large increase in people beginning to look at ways to use our unique value proposition, I think, with the portfolio margining, with interest rate swaps plus our futures complex, to represent strategies that have been in place for a long time, but in a much more efficient manner.

Just a couple things to add to that. The member, non-member mix has trended positively over the last few months in interest rates. We've seen a pickup of about 1% non-member mix there in this quarter versus last year.

And then finally, as we noted in the prepared remarks, the interest rate revenue was up 40% in total versus last year. So I think all those are supportive of what Sean was pointing out.

Thank you.

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

All right. Thank you everyone for joining us this morning, and we look forward to talking to you in the next quarter. Thanks very much.

Thank you. This does conclude today's conference. We thank you for your participation. At this time, you may disconnect your line.