芝加哥商業交易所 (CME) 2013 Q4 法說會逐字稿

Welcome to the CME Group fourth quarter 2013 earnings conference call.

(Operator Instructions)

At this time, we will turn the call over to Mr. John Peschier. You may begin, Sir.

Good morning, and thank you all for joining us today. Gill and Jamie will spend a few minutes outlining the highlights of the quarter, and then we will open up the call for your questions. Mary and Bryan are on the call as well and will participate in Q&A. Before they begin, I'll read the Safe Harbor language.

Statements made on the call and 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 statements. For detailed information about our factors that may affect our performance may be found in our filings with the SEC, which are available on our website. With that, I'd like to turn the call over to Gill.

Thank you. Good morning, and thank you for being with us this morning. I'd like to take the opportunity to highlight the 2013 results, focusing on Q4, and then discuss the big picture environment for CME Group in 2014. Afterwards, Jamie will review our Q4 financial results.

During 2013, there were signs that the US economy has regained some traction following its slowdown in late 2012 and early 2013. Fundamentally deleveraging is behind us, and the rebalancing that has taken place positions the economy for growth. In addition, the annual budget deficit is expected to further tighten over the next few years, reflecting a healthy recovery of the private sector. The tone of the Fed is also positive, and this, together with the continued energy boom, all bode very well for our benchmark products across all six asset classes.

Given all the fluctuations and uncertainty we have faced, our job has been to work on behalf of the industry from a regulatory perspective and to provide innovative ways for clients to manage risks. Our response to these challenges on many fronts has been exceptional, and we are very proud of what we have accomplished and the way we have positioned our Company.

With that as a backdrop, our fourth-quarter ADV growth was in line with what we have seen over the last few quarters. Average daily volume, while coal futures and options complex was up 11% compared to fourth quarter 2012, driven primarily by continued strong growth in interest rates, which rose 29% during the fourth quarter compared to the prior-year period. Eurodollar futures and options grew 48%, while treasury volumes rose 15%. In January, compared to the same period last year, interest rate volume increased 18%, and our Euro dollars business remains elevated, up 45% during the month, which is a great sign for us.

Innovative product expansions launched in the last three years accounted for 4.5% of fourth-quarter interest rate activity. Within our energy franchise, we have experienced a strong pickup during the winter months. In particular, we are seeing strength in natural gas. December volume was up 40% year over year, and January it was very strong as well, up 30%.

We drove strong growth in coal in Europe, up 90% in the fourth quarter compared to the same period of the prior year. In addition, volume in our Dubai Omani product grew 36% during the year to more than 6,000 contracts per day, and January activity continues to grow up around 54% to 8,200 contracts per day, including a record day a few weeks ago.

Our other product areas had lower volatility due during the year, including equities, FX, and agricultural products. The steady rise in equity market value during 2013 was not conducive for driving equity volume growth, although we outperformed our primary US peer. However, over the last month, there has been a decent pickup in volatility impacting several products, and the volume across the board has responded accordingly.

Our global focus continues to drive outside growth in volumes overseas. During the fourth quarter, Latin America volumes were up 36%, Asia and Europe volumes were up 12%, with North America up 8%.

In addition, we look to expand our global presence by adding new clearing members in key areas. During the quarter, we added China merchants futures as our fifth Asian Clearing member, which allows us to better address the needs of our increasing client base in the region. We will continue to enhance and expand our network of Clearing members there, allowing us to bring our wide range of global benchmark products to new Asian client segments.

Our options complex also continues to perform well, with fourth-quarter ADV up 39% versus the prior-year period, building on 31% growth during the third quarter. Options on financial products, including rates, equities, and FX, were all of up more than 40% versus the prior year. In January, we traded 1 million equity options within a single day for the first time. We also had an impressive open interest build in options during 2013, with options open interest increasing 28%, outpacing futures, which rose 14%.

During this impressive growth in options -- driving this impressive growth in options is our continued success in growing the electronic participation in this complex. We ended 2013 with 45% of our total options business trading on Globex, up from 35% in 2012.

Moving onto OTC Clearing, we continued to make progress during 2013 following the completion of the three ways of the Dodd-Frank Clearing Mandate. Highlights for the year include becoming the global leader in dealer/customer OTC interest-rate swap open end interest, launching 11 currencies to bring the total to 18, enhancing our value proposition with seven clearing members now being able to offer a portfolio margin and increasing the total global institutions clearing IRS, CDF and FX at CME to approximately 420 firms.

As I mentioned earlier, our efforts to position the Company to benefit from a changing regulatory environment are starting to gain significant traction, and you are seeing a continued shift in market share and open interest into our clearinghouse. Since December, our open interest has grown by $2.7 trillion, or 32%, driven by our real money clients like asset managers and insurance companies. The net result is that we are now the global leader, holding 52% of the global outstanding client cleared swaps open interest. In January, we had the highest volume month since inception at around $124 billion a day.

In addition, we are seeing clients of traditional swaps ramp up their trading of our futures and options products. However, their use of our core products remains at the very early stages, in our view. December marked the eighth straight month we have seen 20 plus percent year-over-year growth in our interest rate futures and options business. Our interest rate per contract reached $0.50 in Q4 for the first time since 2010. This was primarily driven by a continued pickup in volume from non-members.

Our deliverable swap futures contract reached a new record level in December of 12,000 contracts traded per day, up 33% from the prior peak month of September 2013. Open interest reached 11 -- reached 114,000 on December 10 prior to the [roll]. We expect to bill on the success in the current year as we plan to launch several new rate offerings during the year.

Looking forward to 2014, we see good indications that we will be able to build on the momentum realized during the last year. And after four years of modest recovery, most economists believe the US economy appears poised for its best performance since the depths of the financial recession in 2008 and 2009. In addition, the impact of government intervention hasn't just been felt in the US, as key global markets have also been affected.

For example, there's a lot of focus on [Method] Two legislation in Europe. There's still a lot of detail and interpretation that needs to take place, with a fairly long implementation period. One of the key aspects we have been focused on is the impact on non-EU clearing houses with customers based in Europe. The language on that front has progressed quite positively during the process, so we don't expect change in terms of our existing core business cleared in the US.

In light of this, what has been missing from the world economy is the energizing effect of synchronized growth and, with European stability, improved prospects for the US and continued health of the Asian economy, the trends are in our favor. Overall, we see good indications that the fundamental drivers of the core business are improving, and we are optimistic about the long-term prospects for our developing global initiatives. 2014 has started off well, and our main focus is on enhancing efficiencies throughout the firm and capturing incremental revenue.

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

Thanks, Gill, and good morning, everyone. As Gill mentioned, volume grew nicely during the fourth quarter, and the rate per contract increased based on several positive mix drivers. We were impacted by a few unusual items on the expense side, which I'll highlight. But excluding those items, we came in very close to our original guidance on expense for the year.

Adjusted EPS for Q4 was $0.64, excluding the GAAP loss on the NYMEX building sale, which added $27 million of other expense during the quarter, as well as the $7 million pretax impact due to an intangible asset write off by the S&P joint venture, which was recognized as nonoperating income and expense.

Now let's get into some of the details, starting with revenue, which was up 4% compared to the prior year. The rate per contract for the fourth quarter was $0.78, up from $0.762 last quarter. The main driver overall was product mix, with commodity products making up a higher proportion of the total volume in Q4. Within interest rates, as Gill mentioned, we have seen a pickup in a nonmember activity during each of the last two quarters.

OTC swaps revenue totaled $10.8 million, down from the prior quarter, due to a mix shift, with a large sequential increase from our lower-priced high turnover clients.

Moving on, total fourth-quarter operating expense was $337 million, excluding expenses related to the sale of the NYMEX building. For the year, expenses were approximately $1.271 billion. That was $21 million higher than our original expense estimate of $1.25 billion. There were two primary drivers of the variance.

First, in November, we announced that we were a victim of a cyber intrusion, making us one of many organizations subject to this type of crime in recent months. During the second half of the year, we expensed $16 million related to CME's response to the event. One other item to note: during the year, deferred compensation was $9 million due to the strong equity market growth. As you know, deferred comp expense is offset in investment income, so there was no bottom-line impact. Therefore, we do not normally take it into consideration when setting our expense guidance.

Turning to taxes, the pro forma effective tax rate for the year was approximately 37.7%, and 37.2% for Q4. And on the balance sheet, we had almost $2.54 billion of cash in marketable securities, which includes $750 million held in cash for the February 2014 debt pay down.

Our annual variable dividend was paid out in mid-January, and totaled about $870 million, bringing total 2013 related dividends to $1.5 billion, reflecting a payout percentage well over 100%, driven in part from one-time items, primarily the building sale proceeds and proceeds from our interest rate hedge. That leaves us about $900 million in cash heading into 2014. During the fourth quarter, (technical difficulty) expenditures net of leasehold improvement allowances totaled $39 million, bringing it up to $130 million for the year, at the low end of our prior guidance.

Now let's turn to 2014. We expect operating expenses to come in at approximately $1.31 billion, up less than 3% from the adjusted 2013 expense, or up 5% when you exclude the cyber-incident and deferred compensation. This 2014 guidance does not include deferred compensation, is based on our targeted bonus level, which will very depending on performance, and assumes a certain level of license and fee sharing expense, which also varies with volume.

Capital expenditures in 2014 are expected to be $175 million. Included in here is approximately $37 million associated with our NYMEX office space, to bring it up to our corporate vendors and make it more efficient. This will be the first time the space has been updated since the building opened 17 years ago. Excluding that, we expect to be below $140 million again for the year.

We announced several pricing changes, which went into effect recently. First, we adjusted transaction fees and certain tier levels within our core business. Based on 2013 activity and mix levels, we would expect that to result in a 2% to 3% increase to transaction fee revenue. In addition, effective last month, we expanded our market data fees for professional screens from $70 per month to $85 per month.

Lastly, as many of you know, we are working to eliminate market data fee waivers, a policy many clients have increasingly utilized over the last few years. Beginning in 2014, we are not granting any new waivers. And starting in 2015, we will begin charging 50% of the standard fee to existing clients that have the waiver in place. We expect this to add incremental market data revenue beginning in 2015.

With respect to taxes, we expect our 2014 rate to be between 37% to 38%, consistent with 2013.

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 improving 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, given the number of analysts who cover us, we ask that you limit yourself to one question. Please feel free to get back into the queue if you have further questions. Thanks.

(Operator Instructions)

Jillian Miller, BMO Capital Markets.

Thanks, guys. Europe has finalized MiFID 2 legislation, and there is some clauses in there that call for derivatives that have been accessed. And I guess what I'm curious about is whether you think Europe setting that precedent might ultimately creep over to the US?

Maybe you could just run us through what would be required in terms of legislation or regulation, in order to create some open access in the US? And what you think your protections might be? And I guess just generally how you are thinking about the competitive dynamics for futures longer term, given those developments in Europe?

Ms. Miller, this is a Gill. I'll start, then I'll ask the Chairman to add some points here. But I think with respect to the open access provision and MiFID 2, it's not clear to us yet as to what exactly it means.

But there is a clause there that addresses companies such as ourselves, to the extent, I think that if we don't ask for open access, then open access rules will not apply to companies such as ours. Within the European sphere itself, I think the open access rules themselves have not been very clear, so we are waiting for some clarity there. And I'll ask the Chairman to --

Yes, just to add on to what Gill said. It's Terry Duffy. The rule that they put forth a couple weeks ago under MiFID 2 won't take place until 2016. And the reason why they did that is because there is a lot of unclear issues yet to be resolved as far as how they are going to have open access in Europe. But it will not apply to a US DCO or DCM that wants -- unless they want to have open access against that particular entity in Europe.

As far as it bleeding over into the United States, which I think was the second part of your question, as you recall, in 2010, when Dodd-Frank was passed, there was a provision in Dodd-Frank that said no clearinghouse should be compelled to take the counter-party risk of another clearinghouse, which basically means no open access in the United States. And I think that's very compelling.

That's part of what our Congress voted in a very big piece of legislation that I don't see that ever being attacked. There's other parts of Dodd-Frank that I think people are trying to work within under their rules, but the law in and of itself has been passed, implemented, going forward, and now were just seeing things come out in Europe.

But I don't see that coming into the US. Obviously, it would take an act of Congress to change it.

Okay. Thank you.

Rich Repetto, Sandler O'Neill.

Good morning, guys. I guess my question is on February 15 and the SEF implementation or launching. And I can see where the clearing -- you talked about the mix change, Jamie.

When are we going to see the positive benefits? Do you think February 15, will we get that higher-paying client in the mix? Is the potential for the mix to shift back towards -- more weighted towards this higher-paying client?

Rich, it's Bryan. A couple of things. With respect to the SEF mandate, while it's starting in February, there is still a lot of confusion on the part of the client base. We're working very closely with all of them to help effectuate and make sure that they are able to comply with the trading requirements.

We've really been gearing up in terms of supporting the clearing services, and ability to provide portfolio management. But we also see, already, somewhat of an uptick in the context of the core business, particularly as it pertains to our Eurodollar and interest rate complex.

And we are seeing that phenomenon grow particularly as it pertains to the asset management community, as well as within the hedge funds. And that can be translated as you see a nice uptick in our rate per contract within the interest rate quadrant.

Okay. Thanks, guys.

Niamh Alexander, KBW.

Hello. This is actually Kyle Voigt. I'm stepping in for Niamh.

My question is on OTC interest rate swaps clearing. So we're seeing continued growth in clearing volume quarter on quarter, but market share basis versus your large competitor, it looks like your market share is pulled back from highs around 40% down to the 26% to 27% range in December and January. I was is wondering if you can give us some color around underlining drivers of this?

This is Gill. I will start, and I'll ask Bryan to add.

We had a record January for cleared trades, and our open interest is also increased. Compared to December, it has been up 37% or so. So in terms of the open end interest share itself, we are looking quite good, and we are quite pleased with what we have. Something for you to keep in mind is that there's a huge amount of these so-called overnight index swaps. These OIS swaps that are being traded and cleared at [LP], and it makes about 60% or 65% of the trade that they have.

So that's why you are seeing CME having a commanding open end interest share. And we look at the trade counts themselves, those have not changed. So in terms of the number of trades, they are pretty consistent with what we are seeing. And in fact, CME has about 51% of the trade -- that trade count.

And I think our approach has been a very solid one in the context of the client base that we have brought into the circle. Representing -- we're 91 -- I mean we are number one in terms of our global interest rates client open interest, representing 52% of that market share.

And those clients are continuing to increase their usage, both on the OTC clearing side of the equation, expanding their usage as we've increased the number of currencies that we support. That number is now increased to 18, and we are seeing a nice pickup in the non-US denominated currencies as well, which speaks well for the level of open interest that we represent for these long-duration clients.

We also have seen a pickup in the high turnover clients. Their activity towards the end of the year increased as well. I think you have to keep in perspective, as we said last quarter, our focus is in driving overall growth between our core, as well as our OTC clearing services. And combined, the revenue overall growth was approximately 35%. So we're very pleased with that holistic picture of leveraging our core as well as the expansion of our OTC clearing services.

Kyle, this has been very consistently what we have said right from the start, that the OTC clearing activity that we engage in is all about the core, and is actually very complementary, as Bryan points out, to the core. So when we look at the number, to Brian's point, look at them holistically and include what you are seeing in the Eurodollar scene, too, which is seeing a tremendous pickup in the activity.

Okay. Appreciate the color. Thanks.

Chris Allen, Evercore.

Morning, guys.

Morning.

I just want to circle on the market data, on the fee increases there. We have seen the continued decline over the course of the year in that revenue bucket. And I was wondering if you could explain that. Was it due to decreases in the screen count? And I believe last quarter, you provided guidance of about $50 million impact, if the screen count was stable. Is that still in play right now?

Yes. Chris, this is Jamie. Yes. The guidance from last quarter was, if screen counts stay consistent with where we ended -- where we were in the last quarter going forward, and you apply the new rate, yes, that would be an extra $50 million or so of revenue.

We have seen some continued pressure on the terminal count in the fourth quarter, as we continue to see banks downsizing and some of the legacy incentives still were in place in the fourth quarter. So that waiver where people were taking advantage of that waiver for trading terminals. So the teams, obviously, here, have analyzed different alternatives to reinvigorate the revenue -- this revenue source.

And as we mentioned, they've made these changes to the waiver policy that I think, going forward, will help mitigate some of that terminal decline that we've seen from people migrating from paying terminals to waive terminals. And then ultimately, us collecting some fee on those waive terminals in 2015.

Any color on the amount of fee that you could potentially collect from the fee waivers?

It's just too difficult to say at this point, because you do not know how people are going to react, whether they are going to consolidate terminals and whatnot. So we are going to leave that out for now, but I do think it will be somewhat meaningful.

Thanks guys.

Ken Hill, Barclays.

Good morning, guys.

Morning.

Good morning. I wanted to touch on the energy business here. So you guys did some pretty heavy discounting over the course of 2013, in the hopes of bringing new participants into the complex and helping the overall energy complex.

I was just wondering if you could provide any color on if that's changed somewhat of the customer mix there? If you are seeing more commercial participation? Or if it has had any impact on incremental volumes here? Thanks.

Hi. It's Bryan. And yes, I think that the focus and the emphasis that we've put in place on bringing in some of the commercial interest is definitely showing itself more so across the sector. Within our crude product line, within our efforts on building up the Brent contract, as well as our natural gas business. So if you take a look at the overall comparison of how we are tracking volume quarter on quarter versus open interest, we are seeing some very nice pickup.

We had stabilized the rate per contract. We have been able to see some breaks, I think acceleration and pickup in the natural gas contract in particular. We are also seeing some strong uptick in participation in our overall options.

We just recently introduced our natural gas basis contract, and we are very pleased with the initial interest and pickup there. We have 17 companies already that have cleared natural gas basis, and that's particularly referencing back to my earlier comment on commercial interest.

6 of the top 25 natural gas basis customers have executed with us. We have some strong market-maker participation, and we are very excited about the introduction of that contract, as it complements our overall natural gas business.

Okay. Thanks for taking the question.

Michael Carrier, Bank of America.

Thanks, guys. Jamie, I just had a few questions on the expenses.

So I guess first, I just want to make sure the impairment was in the non-op line. So in the unconsolidated subsidiaries. And then just on some of the lines in the quarter, it just seems like the other line item -- I think communications, you guided to a higher level and it came in a lot lower. But yet professional was just a lot higher.

So I just want to make sure we understand whether it's the building loss? Where the cyber investment or the spend came in in the quarter? And I think on the cyber and the deferred comps, how much of that was this quarter, versus -- you guys mentioned it was for the full year, but obviously it was back weighted.

Sure. So the $16 million that I referenced in terms of our spend on the cyber incident came through professional fees, and that was roughly half in Q3 and half in Q4. So call it about $8 million in Q4 from that in professional fees. And then deferred comp was about $3 million of expense in Q4 as well.

And then on other expense, don't forget we tend to be heavier weighted on marketing expense towards the end of the year, because of the events and whatnot that we hold in the fourth quarter. And a lot of the advertising tends to be weighted in the back end. So that's why you saw a little bit heavier spend there as well.

Okay. So the marketing, that would be in that other bucket. So ex the building loss, that was driving a lot of it, partially seasonal?

Yes.

Okay. All right. Thanks a lot.

Dan Fannon, Jefferies.

Good morning.

Good morning.

Jamie, you guys have been successful in exiting or monetizing non-core assets over the last couple of years. Wondering if you are still in the process of exploring? Are there other potential sales or exits in the next 12 months?

And then remind us again on your minimum cash levels, and if that has -- if you think that might change over that same time period looking out over the next 12 months?

Sure. With respect to the -- shedding non-core assets, I think obviously the buildings were the big things that we've done over the last few years. And we have sold all the real estate -- significant real estate that we want to at this point. Obviously, owning our major data center and owning our trading floor facilities, we are going to keep those on the books going forward. And then the other part of the question was around which?

Your minimum cash and if you expect that to grow

Yes, On the minimum cash, we are still targeting $700 million minimum. Do note, though, over the last few years, every time we've paid that annual variable dividend, we brought the cash down to about $900 million, leaving a little bit of a cushion there above our minimum. So just keep that in mind, as well, but the minimum that we are looking at is the $700 million.

Thank you.

Alex Kramm, UBS.

Good morning.

Morning.

Just wanted to come back to the expense guidance. Jamie, you gave a couple of items here, but maybe you can flesh it out a little bit more.

First of all, you didn't give the range this year. So just wondering why you have that much confidence on one particular number. In particular, given that we've had a couple of examples over the last few years when, if I were remember correctly, you were more towards the higher ends or above that. So maybe you can just talk about that?

And then when it comes to the licensing fees, obviously that's going to be driven by equities and energy volume. So maybe just -- what are you assuming there in terms of volume growth so we can bring that up or down a little bit depending upon our volume assumption?

And then just lastly, again, talk about what goes into the expense guidance in terms of expectations for some of the line items and bonus accruals and things like that? Thank you.

Sure. Just in terms of the expense guidance itself, our best estimate at this point is the $1.31 billion. That's what were going to strive towards for the year. So we thought we would give you the number that we are working towards.

And in terms of giving you any volume guidance, I appreciate your desire to get that from us. But as usual, we're not going to provide any of that volume guidance to you on those particular product lines or any product lines. But when I look at that guidance, and you look at the increase versus 2013, I'd say the lion's share of the increase is really tied to staffing with the annual merit and promotion adjustments, obviously, being a component of that. As well as new hires and support of growth and regulatory areas driving the other part of the increase in that line.

In order of absolute dollar magnitude, I'd say the next area of growth in the expense, when you look at the different line items, will be in the occupancy line, as a result of the fact that we are now leasing the NYMEX building, with offsets to that expense in depreciation and amortization, because we no longer own the building.

We should also see, as we said, some growth in the licensing and fee sharing. And then driven also by the full-year impact of the OTC revenue share that comes through that line.

And then we'll continue to see likely increases in professional fees as we continue to invest in growth opportunities. And then when we look at that technology support line, we should see some increase there in the coming years, as we look to reconfigure our backup data center footprint.

But I think that's kind of a laundry list of some of the things that were driving that expense guidance for next year.

Very good. Thanks for the detail.

Sure.

Chris Harris, Wells Fargo Securities.

Thanks, guys. Just a quick one on the interest rate complex. The Fed tapering has clearly been beneficial to volumes.

Just wondering, as you guys look at the volumes, speak to your customers, do you think a lot of the participants now are back into the market, just assuming that tapering is going to be over? Or do you think there's still a large portion of the customer base that's still out of the complex, but potentially could get back in as the Fed continues to accelerate taper?

This is Gill. I'll start, and I'll ask Bryan to add. I think the -- if you look at the indicators over the last four years or so, the front end of the Eurodollar curve, for example, saw a sharp decline in volume and any kind of activity. And that led to us doing some development work across other parts of the curve that made up for some of that loss.

What we have been seeing, particularly over the last 2.5 or 3 months is a pickup -- a significant pickup in activity in those front 8 months, and a corresponding pickup in activity. So in the back months, and the treasury futures and options also reflective of more activity.

So it could be that there are now definitive expectations as to when Fed easing would, and the uncertainty as to whether it will end or not is bringing a lot of folks into the marketplace in order to actually hedge. And that's reflected on the expanded activity that you are seeing in parts of the curve that, for the last four years, have been -- have seen a decline in volume.

In terms of participations, open interest holder activity has also gone up. So that's indications to us that many participants are coming back in the market, particularly over the last three months or so.

Can I just add to that a little bit, Gill? I -- just to give you a little -- this is Terry Duffy.

When you look at what is going on in the interest rate market, with the tapering of $10 billion going on a month, we still have another $70 billion a month to get out of the $85 billion a month of tapering, before we even get to rate movement at all. So I actually believe there's a tremendous amount of participants that are still on the sidelines that are waiting to see that program completely end, and then we'll see some fluctuation in rates. And then we'll see some proprietary trading shops that maybe have not been in there, and not the pure hedgers, but a lot of the high turnover guys. So I still think there's a lot of participants on the sidelines.

Great. Thanks, guys.

Alex Blostein, Goldman Sachs.

Thanks. Great. Good morning, everybody.

Back to the OTC clearing question, I know it came up a couple times. But with respect to the market share dynamic, and I know there is a certain difference between you guys and LCH, but you guys clearly have a pretty significant capital savings to offer to clients. Why do you think that hasn't been higher, as of yet? And what are some of the catalysts that you think we need to look for, for folks just to take up the cost margin and performing margin opportunity that you can offer?

We are actually quite excited about the uptick in the firms that are availing themselves to the cross-margining efficiencies. We have over seven clearing members now that are live with portfolio margining, and several more in the testing phases. And again, I think you have to really focus on the level of global market participation that we have within our complex for OTC clearing.

We are very pleased to see that number growing. We have over 420 global market participants, and our focus and emphasis is continuing to grow that user base, on the client side of the business in particular, and we are the beneficiary of bringing new business into that core.

And with all the things that are going on in terms of compliance with both the rule changes that are occurring here and in Europe and elsewhere, I think to the extent that the focus with some firms are not there, is a matter of prioritization. And we do know that, at this point in time, many of the firms and their customers are focusing on the SEF issue. And those folks that have their members not ready to do cross-margining have found their way into the deliverable swap futures complex for us.

So basically, there is, as Bryan points out, a lot of enthusiasm. And there have been seven firms that have signed up, I think, in the last quarter when we spoke, that number was only two or three firms. So we have seen growth.

And Gill, maybe there was one other thing we can mention as we are talking about OTC. The mandate for the trading of swaps will be kicking in around September 15, and I don't know if we touched much on that. And what that could potentially do to our core business, whether it is futurization or adding basis-type trading with swaps and futures coming together. And that is something that I think we all need to keep a very close watch on, how that is going to materialize, starting in the middle of February and going forward over the next several months.

Got you. And Gill, when you mentioned that there were more users, albeit still early, switching over from using more traditional swaps to futures, any evidence that you see that the type of clients that are doing that? And I don't know if there's any pattern that you could point to, or it that's still too early to tell?

Too early to tell at this time now. In the sense of what trends to expect. But I think as Terry points out, if you look at the next seven months, it'll be instructive as to who would be participating.

And also on our slides, if we look at slide 10, the large open interest holders for deliverable swap futures has continually gone up. It began at a number slightly above 20. And now it is at 50 and change.

Makes sense. Thanks so much.

Thank you.

Ken Worthington, JPMorgan.

Hi. Can you guys hear me?

Yes, Ken. Hi.

Okay. Thank you.

Just want to follow up on MiFID 2. Obviously, we are going to get more details on it. But what is the optimistic case for CME in terms of helping CME better break into Europe? Maybe without having to offer up open access in the US?

And is there potential to maybe take advantage of partnerships that you have with other firms to get access to Europe without reciprocating in the US? And I know we don't have details, but could there be a potential that you are thinking about there?

Hi. This is Gill. I will start here. I think our full focus has been largely to see which parts of the law might encroach on the core business of the firm. And on that front, we are quite pleased with what we are seeing that. There are several compliance-related issues that our entities in Europe have to basically make sure that they are in compliance with those rules.

With respect to the partnership opportunities, as you know, it's been the preferred model for CME, with very small exceptions, to partner with entities around the world. And so we view Europe no differently than we view any other part of the world, with the complete understanding that the client base is very mature there. They understand the products, such as the client base there, that is here. And to the extent that there are partnership opportunities that present themselves, we would almost always look at them.

So at this time, our focus is very decidedly on what the MiFID laws are saying and the implications for the businesses that we have here. And at first glance, it looks pretty much business as usual, with multiple exceptions, as to how it's being conducted in Europe on a going forward basis. So the next 2.5 years will be instructive as to how we position ourselves.

And Gill, if I could just add to that. I think what's important to note here is, when we first decided to list the clearinghouse in Europe and to register for an exchange in Europe, MiFID 2 was not out, and no one even thought of any proposal around open access.

So our business plan was not going to be based around if in fact we could take advantage of an open access throughout the European communities. Actually we opposed that type of language in Europe, because we believe in a vertical silo as we do here in the US.

That being said, I think that we have great opportunities, as a startup in Europe, to continue to build our business. And what we have to do is have a value add. I think, as Gill clearly pointed out, the incumbents are going to have a distinct advantage for the products. That's no different than we all do today in the vertical models. But at the same time, we will be in the new business in London, and we are doing it for the reasons for value add, not because of a law that we think could help make the business more accessible.

Okay. Great. Thank you very much.

Gaston Ceron, Morningstar Equity Research.

Hi. Good morning.

Hi.

Just a quick follow-up on that very issue that you were just touching on. Maybe I missed it, but do have an update on -- you mentioned a [lugnut] exchange. Do you have an update on the timing for that? And also, just so I understand, when and if you open that, the new MiFID rule would apply to that, is that correct?

And also, you seem pretty definitive that it would not bleed into your US business. So does that mean that, even if as volume that originates in Europe, but it comes to the US, the rule would not apply to that? I'm just trying to get it straight.

Okay. You asked quite a few questions.

Sorry.

No. That's fine. I'll start with the one that I remember, but this was the last part of your questions about how confident we are.

Our focus in the first instance is to make sure that European clients will be able to continue to access US markets in the same way and in the same fashion that they currently are doing. So on that front, there is some work that's been done between the regulators here and the regulators over there.

On the second piece is the open access issue that was addressed a short while ago. In terms of the launch of the exchange, we have no update at this point. We still continue to work with Bank of England and other authorities to make sure that they are comfortable with the process and procedures that we have. And that should be resolved soon.

Okay. Thank you very much.

Sure.

Rob Rutschow, CLSA.

Hello. Good morning, everybody. I had a quick question on rates.

It seems that some of the benchmarks that are used, particularly the ones based on surveys, are being shied away from and being changed. And so I'm wondering if you see any opportunities to develop new products or take share -- further share globally in rates. Thanks a lot.

This is Gill. I think that the jury is still out there. I think there is a committee that is being headed by Dr. Duffie from Stanford. And he's looking at the alternatives, and they are scheduled to release a report quite soon here.

I think, as you may have well read, there have been two schools of can. One was basically to fix the indexes as they stand and make sure they are not usually manipulate-able. And the other hand is the one that says, get rid of them and start fresh. And so I think the work that this committee is doing will be instructive, with respect to the direction that we are going to go to.

But in any case, I think what CME Group is focused on is basically growing the complex as we see it on both the short and as well as the long end. And on the short end, where the index -- the LIBOR index is being used for the Eurodollars, we are, and we have been, and continue to look at alternatives that make sense for our client base, and also reflect the operating reality in which these products can be used.

And so whether they are based on a survey of actual transactions or whether they are based on any other criteria, whatever the outcome, CME Group will support them in helping our clients grow their businesses.

And I think you would just note the success that we've had in our innovation and development of new products being responsive to changing dynamics in the marketplace itself. We are very proud of what we've done with the deliverable swap futures, the ultra-bonds, the mid-curve options. E-micro, FX, the weeklies, and the FX as well as in the interest rates.

And so we're [driving] about 7% of our listed interest rate volume now coming from the development of new products and new product innovation.

Thank you.

Jillian Miller, BMO Capital Markets.

Thanks. I was just wondering if you -- for market data, can you tell us what percentage of your current terminals have waived fees versus are paying fees?

No, we don't -- I'm sorry, Jillian. We don't release that information.

Okay. Fair enough. And then just one other question.

I know you raised your fee rates, obviously, in a lot of different categories in January. But from what I saw, there weren't any changes made to volume tiers. And I was just wondering whether you still might have some flexibility there to adjust those higher in 2014, especially for interest rates? Because a lot of the fee hikes were actually in ags, but where you have seen the most volume in open interest growth have been on the rate side. So I wasn't sure if there was some more to do there.

There -- actually, as part of the fee changes, there were some tier adjustments across various products (inaudible). I don't know if there's anymore to comment there.

Okay. Thank you.

I think in terms of fees, this was a large scale, across the board fee increase for us. But in terms of the tweaks that we can perform on the various contract that we have, we will always look at the volumes and the trends. And if it makes sense for us to adjust tiers, we can do that in very quick order.

Okay. Thank you.

Thanks.

Rich Repetto, Sandler O'Neill.

Yes, hi. I just wanted to follow up on the cyber protection expenses. Jamie, you said that eight was split -- eight in 3Q and 4Q. And I guess was -- the question is, was the eight expected -- was that in the guidance for fourth quarter?

Did you know -- would you expect -- or was that a surprise as well? And do you have anything baked in for 2014? I missed that, if you did already say it. On cyber protection in the expense guidance.

Yes. Rich, this is Jamie. It was not in the original guidance for Q4. This is a little bit of a new ground in terms of the spend, so we didn't have that in the guidance.

As far as 2014 goes, whatever we need to spend on security of our system and soundness of our systems is embedded in the $1.31 billion that we -- that I noted earlier.

Okay. And can I take one more crack at -- do you expect the mix to change back to the higher-paying buy side clients in the OTC clearing? Possibly with the February 15 SEF implementation?

You know Rich, it's hard to say. But I would think that a lot of them are already clearing with us. And, if anything, they are looking for ways, potentially, to migrate to futures. So that may weigh on that percentage going forward, as far as the OTC business goes, but obviously benefit the core.

Understood. Thank you.

Chris Allen, Evercore.

Yes. Just had a -- actually, two follow-ups. The building and other revenues, the decline in the quarter, was that driven by the sale of the NYMEX building? Is this a good run rate going forward?

In terms of the building and other, we saw -- a lower compliance fine was part of that. Also, the lower lease revenues from New York and the sale of the building was part of it. And then we also saw a lower process servicing fees because of some year end true-ups with some of our partners. So it was a mix of things.

So in terms of a run rate, hard to give you a sense off of that. But I think, when we look at where we have been, if you look probably at an average of this year, you are probably not too far off. And then adjust a little bit for the building revenues.

Got it. And just in the professional fees, so it was equal in terms of the cyber expenses this quarter and last quarter, but we still saw roughly almost a $10 million sequential increase. Just wondering what was driving that? I'm not sure if I missed that earlier.

Well, you had a -- it was up, really driven by spend on growth initiatives, including international OTC and our energy market distribution. And so that was really what was driving on the professional fees side.

Thanks, guys.

Alex Kramm, UBS.

Hello. Thanks. Just one more follow-up on the fee changes that Jillian just asked about.

You are saying 2% to 3% in aggregate. Maybe, Jamie, can you break it down a little bit more by product bucket? I think interest rates and ags, if you look at the fees, going to get the most. But maybe if you have some more detail you want to share, that would be great.

And then related to that, obviously you been benefiting from the member/non-member shift here a little bit, with everything going on with OTC to futures and things like that. That probably should continue to be in favor of non-member, which are obviously higher. But anything that could change that in the near term that you are seeing? Or do you think there's a continuation of that trend?

I'll highlight -- I'll touch on the -- your question on the rates, and then maybe ask Bryan to comment on the second part. But on the rates, there's not too much more to add there. Really, in terms of fee increases that we are putting in, it will be -- when you look at the larger impacts are likely on the commodity side, particularly in ags, with some of the lower -- the lowest impacts likely on the equity side.

So it's a way to think about where they are coming through, and then the rest are in the middle. And there's no real changes on the Eurodollar side.

And then I would just touch on, again, taking a look at the distribution of users. In these products, we are seeing, again, a very nice uptick in participation across the asset management community, the hedge funds and the corporate, which are typically the higher-paying clients. And to reinforce what I'm saying, if you take a look at asset managers' usage of Eurodollar futures has increased significantly in the first half of the year.

The asset management community represented about 1 million contracts of open interest, which was roughly 12% of our open interest. In line with the timing of the last Dodd-Frank clearing mandate, these holdings have increased substantially in the fourth quarter of this year to over 2.8 million contracts, which represents over 21% of the Eurodollar open interest. So again, reinforcing the increase to the utilization of the futures product from this client base.

Excellent. Thanks again.

Just to finish Bryan's point, in terms of the trends that you asked about. If you look at the earnings calls slides, and you'll see the trends there, along the -- exactly the same lines as what Bryan is referring to, there are increasing trends in terms of large open interest holders across some of the key asset classes. They are returning to 2006, 2007 levels, which is very encouraging for us.

I'm going to turn the call back over to the speakers.

Okay. With that, thank you all very much, and we look forward to talking to you in the next quarter. Thank you.

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