芝加哥商業交易所 (CME) 2014 Q3 法說會逐字稿

Welcome to the CME Group third-quarter 2014 earnings call.

(Operator Instructions)

I would now like to turn the call over to Mr. John Peschier. You may begin, sir.

Thank you, and thank you all for joining us today.

Jamie and Gill will spend a few minutes outlining the highlights of the third quarter, and then we will open up the call for your questions. Terry, Bryan, Kim and John Pietrowicz are also here today.

Before they begin, I will read the Safe Harbor language. In this management call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, and are also available on the investor relations portion of our site.

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

Thank you, John.

Good morning, and thank you for joining us today. I will start by talking about the highlights of the third quarter. Then I will provide an overview of the recent leadership reorganization and staff changes. And lastly, I will provide an observation on what we are seeing so far in the fourth quarter, before turning the call over to Jamie.

Our core business performed well during the third quarter with average daily volume of 13.5 million contracts, up 12% compared to third quarter last year. In September, with a slight pickup in volatility across several asset classes, our average daily volume grew 17% and five of our six product areas grew on a year-over-year basis.

During most of the year, our growth has been driven primarily by our interest rate business, so it was nice to see a broadening of the growth across the board. Our options business was outstanding during the month of September with a record 3.1 million contracts traded per day, up 29% from last year. This is bolstered by a record level of options open interest in September of [52] million, up 14% from 2013.

Also during the quarter, we achieved volume records in our weekly FX options, weekly E-mini S&P options, soybean options, and five-year treasury options. Electronic options in September were up 46%, versus the prior year. Specifically, electronic WTI options hit a record 71%.

We are driving this outsized option growth by innovating new product, focusing on our options technology, and executing on our distribution initiatives to expand our global customer base. Our September volume record was short-lived, as this growth trend has continued into October with average daily volume of 3.6 million contracts per day to date, up 68%.

Two other important points about Q3, which illustrates some progress in our two primary growth initiatives. First, our volume from clients based outside the US was impressive, and has been consistently performing well the last four months. Q3 electronic ADV from European clients was 2.1 million contracts, up 22% on a year-over-year basis outperforming North America which rose 13%. In Europe, we saw growth of 28% year-over-year in our interest rates business, and 33% growth in equities during the quarter.

For comparison purposes, our two largest European-based competitors each saw a drop in their total volumes relative to Q3 last year. One driver of the outperformance is a more dynamic environment in terms of our product set, which has drawn more hedging and speculation from European-based firms. Also we have invested in a greater presence in London with customer-facing employees. They have a lot to talk to clients about, and are making some real progress for CME Group.

Along the same lines, in Asia, our volumes rose 12% compared to the same quarter a year ago. Our interest rates were up 23%, and equities rose 36% in Q3 from Asia, offsetting a challenging global FX and metals trading all volumes. Volume in Q3 approached 500,000 contracts per day, and that amount of volume is equivalent to what leading Asian exchanges trade on a daily basis.

Second, our OTC efforts continue to progress during the third quarter. We maintained our leadership position in open interest on the rate side, and $20 trillion notional outstanding. We hit a record of almost $180 billion ADV cleared in September, and our trade count of almost 2,500 during September was more than 50% higher than any month to date. This translated into stronger revenue in Q3.

Within our rates franchise, we recently relaunched bundled futures, as well as options on bundled futures, and we are encouraged by our progress. We plan to launch clearing for swaptions during the first quarter of 2015, pending regulatory approval.

Finally CME Group is committed to expanding our CDS offering, in order to be the number one multi-asset class clearing house for buy-side clients. We have invested in developed of a new risk tradebook, which provides a more holistic model of CDS portfolio risk. This new risk framework, coupled with our plan to launch iTraxx indices will give us the opportunity to increase our market share in CDS clearing during 2015.

Now I would like to spend a few minutes describing our efforts on the expense side, an area where our team was particularly active during the last few months. First, we announced a new executive team and leadership structure in mid-September. I will walk you through the main changes.

Fundamentally and essentially, we reorganized the Company around our client needs, and focused on the best way to meet those needs. The new organization structure also brings the individual business portfolio closer to the office of the CEO, and enhances customer responsiveness.

First, we created the Chief Commercial Officer role filled by Bryan Durkin. He is responsible for driving short-term and long-term revenue by harnessing our product sales team, research group, product marketing, business development and our global offices.

From a product perspective, Sean Tulley heads up our financial products and OTC areas, along with Derek Sammann, who is in charge of commodities and options overall. These three guys and their teams will be intensely focused on providing world-class customer service, expanding on our industry-leading innovation, and enabling clients to navigate in a changing environment. To summarize these changes, this is all about driving increased multi-year revenue growth across each of our six ecosystems.

Our second goal in the reorganization was to drive more efficiency throughout the Company. That is, through improved execution, agility and speed to market in terms of our significant operational backbone. With this goal in mind, we combined technology, clearing and global operations under Kim Taylor, and we believe with this structure we will be able to streamline how we operate, and reap the benefits of greater efficiency. In addition, Bob Zagotta will head up strategy and execution, and will be responsible for the development and execution of the Company's corporate strategy.

And finally, John Pietrowicz, when he takes over for Jamie will work side-by-side with this team and all of the others, to ensure that we are appropriately focused on delivering shareholder value as we execute our plans. And, of course, both Kathleen Cronin and Hilda Harris Piell will continue in their current roles as General Counsel and head of Human Resources. We expect to improve our agility, prioritization, and efficiency, and the end result will be decreased costs and improved profitability, as well as earnings growth.

Following the reorganization announcement, our teams went through a thorough process of streamlining the organizations, so we could be better positioned for growth. We reduced our workforce by approximately 150 people, primarily in technology, along with the elimination of mainly administrative functions. Going forward, our leadership team is very focused on an ongoing review of how we can be even more efficient throughout our business.

Lastly, let me make a few comments with regard to October. Within the month, we have had two of our top three trading days in our history. It is an exceptional month, even if you remove the two highest volume days, we have averaged more than 60 million contracts per day so far.

A couple of observations. During October we have seen strong activity across the board with all six product lines up, and the financial products each up more than 50% compared to October last year. It is a reminder that markets tend to be interconnected in terms of all volumes and volatility, particularly to interest rates.

That appeared to be evident on Wednesday, October 15. On that day, I was very pleased with our ability to handle such a large increase in activity, from a technology and clearing perspective. Our teams worked hard to prepare for heightened activity, and this is an excellent time to assess our readiness for volumes, which were about three times the norm.

If you have listened to our media campaigns over the years, you know we refer to CME Group as a place where the world comes to manage risk. You might be curious about where our volume came from on October 15, and slide 16 on our presentation illustrates that.

A higher percentage of our business came from outside North America than we see in the normal day. We traded 26 million contracts electronically from North America. We had nearly 9 million contracts traded from outside of the US, which is pretty large compared to what our largest [peers] trade on a normal day. We traded 7.4 million contracts from Europe, which is 3.5 times the size of normal activity, and 1.1 million from Asia; more than twice as much as a normal CME day in Asia.

There is a lot of discussion within the industry about innovation, much of which we have driven throughout the history of CME Group. In recent years, we have referenced a number of new interest rates products we have launched since 2010. These contracts amounted for almost 700,000 contracts of ADV on October 15. Our innovation is unparalleled, and we are in a better position to innovate now more than ever before, with the intersection of OTC and exchange traded markets.

And one final point. We traded more than 25 million interest rate contracts on October 15, the highest day ever by far, and 3.5 times our 7.2 million average daily volume in the third quarter. Additionally, the interest rate swap market that day, as measured by the aggregate dealer-to-customer trade swaps business at CME Group and LCH, were below the recent run rate. This Could suggest participants saw the value in turning to our liquid market, with the heightened volatility.

This was referenced in a few news articles, which basically referred to CME Group as the most cost efficient way to trade due to liquidity and capital efficiency. We wholeheartedly agree. Our open interest remains elevated, and, as of yesterday, 804 million contracts, up from where we were on October 14. This suggests that there is heightened engagement as participants prepare for the future.

In summary, we have worked hard to position ourselves to create significant value for shareholders when this challenging cycle turns. While the concept of a Goldilocks environment can be debated, where the markets will vary from being too hot or too cold or just right, we intend to provide the most responsive customer service possible, with as efficient of delivery structure as we possibly can. No matter what happens, we continue to work to be the place where the world comes to manage risk.

And finally, let me turn the call over to the man who has served us with distinction over the past 26 years, my business partner, Jamie Parisi, who is participating in his last earnings call here, before turning the reins over to the man that trained him. (Laughter).

Thanks, partner, and good morning, everyone.

I am very pleased with our performance this quarter. It is nice to see some signs of strength, as I prepare to pass the torch to John. One of the things I talked a lot about over the last 10 years is the significant operating leverage in our business model, and how that leverage cuts both ways depending on the tailwinds and headwinds we are facing.

Looking at the adjusted results, our revenue increased by $48 million or 7% compared to Q3 last year, while our expenses were down 1% to $318 million. The intensified expense focus I mentioned last quarter, coupled with a favorable trading environment, resulted in an incremental margin above 100%, and I expect it to be above 100% next quarter. In a normal period, we are dropping roughly $0.80 to $0.90 of each new revenue dollar to the operating income line.

Now I will turn to some revenue details. The rate per contract for the third quarter was $0.725, down from $0.749 last quarter. The main driver of the change was a 7% growth in total volume from Q2 to Q3, driven mostly by lower priced financial products.

I was very pleased to see the September rolling three month interest rate RPC remained unchanged, compared with August, despite volume being up 8% from the prior month. The FX average rate dipped down 5% from August to September, but you should take note of the 19% increase in the rolling three month FX volume over the same period.

We saw the same thing in equities, with the rolling three month volumes up 8% from August to September, while the associated rate dropped only 1%. I was also pleased to see the volume and revenue growth from outside the US, with the highest proportion ever of non-US electronic volume in revenue in Q3. For the first time, the percentage of electronic trading revenue from outside the US was above 30%.

OTC swaps revenue totaled $15 million, up 17% versus last quarter. In Q3, we captured about $132 per IRS OTC trade, and we cleared approximately 1,750 trades per day in the quarter, up significantly from prior quarters.

Our adjusted expenses were down $[10] million sequentially, and about $4 million, compared to Q3 last year. The main driver was reduced professional fees and other expense. We brought some development projects to completion, saw waning and contingent and consideration expense from prior acquisitions, and reduced discretionary expenses like travel as promised last quarter.

Our compensation was relatively flat sequentially, despite higher stock-based compensation resulting from our annual grants in September. We should see improvement in the compensation expense line in Q4 and beyond, as a result of our recent restructuring.

Two points on the non-operating income line. Our dividend income was approximately $5 million, down from about $9.6 million in the prior quarter, when we received and recorded both the Q1 and Q2 dividends from our partner in Brazil.

We also recorded a dividend from our investment in the Mexican exchange in Q2, with no dividend from them in Q3. We had a slight uptick in interest expense from the prior quarter due to clearing line of credit costs.

Turning to taxes. The effective tax rate for the year has dropped to 37.3% on a pro forma basis, from the prior 37.5%. The effective pro forma tax rate for this quarter was approximately 37%, including a catch-up adjustment for Q1 and Q2, and I expect Q4 to be approximately 37.3%.

And now the balance sheet. We had approximately $1.16 billion in cash and markable securities at the end of the quarter. In Q3, we had a significant cash outflows associated with an estimated tax payment, our regular quarterly dividend, and the semi-annual interest payment due on our debt securities maturing in 2023 and 2043. Lastly during the third quarter, capital expenditures net of leasehold improvement allowances totaled $29 million, bringing us to $95 million through three quarters.

I want to provide a couple of points on guidance for Q4. I expect expenses to be approximately $332 million, driven by higher marketing-related expense which we have talked about before, and sequentially higher license fee and bonus expenses based on the significant increase in revenue so far to start fourth quarter, offset a bit by lower base compensation. Based on that guidance, 2014 expenses should come in at about $1.3 billion at the low end of the range I have previously provided.

Also, my expectations for CapEx this year dropped to $155 million, down from our prior estimate of $175 million, primarily based on timing and reconfiguring our New York space stretching into 2015.

Lastly on expenses, two weeks ago we reduced our workforce by 15%, which Gill mentioned -- 5% by which Gill mentioned. As a point of reference, we ended the third quarter with headcount at 2,825. We have been working on plans for several months, and we basically took a blank sheet approach to determine the best way to drive revenue higher while reducing expense. I personally appreciate the efforts of my colleagues to make the tough decisions to better position our Company for the long term, and wish our colleagues who left the best of luck in the next phase of their careers.

One last piece of guidance I want to provide is related to 2015 expenses. With pro forma expenses for 2014 expected to be $1.3 billion, based on the compensation changes and other expense initiatives, our current estimate is that 2015 pro forma expenses will likely come in basically flat compared to 2014 at approximately $1.3 billion.

And there is some variability around that based on license fees and employee bonus. That excludes the impact of any expense related to our pending transaction with GFI Group or other potential tuck-in acquisitions. We will continue to refine this estimate as we finalize our 2015 budget, and John will provide you an update on the next earnings call.

As I mentioned our pending transaction, let me briefly comment that we are carefully assessing the current situation and filed our S-4 on October 16. Beyond that, we will not address any questions about the transaction as we covered it thoroughly last quarter.

As I step away, I am highly confident in my successor, John Pietrowicz. I expect all of you to really enjoy working with him, as I have over the last 11 years. I wish you all well, and have to say, I have enjoyed getting to know, and to work with many of you who are listening today. I believe my interactions with you over the years definitely made me a better CFO.

Even though I am moving onto the next phase of my life by year end, I will continue on here as a shareholder. And I am highly confident in our teams, and still believe this is truly a one-of-a-kind franchise to own, and I am excited about the future of CME Group. Thank you all.

With that, I would 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 free to get back into the queue, if you have further questions. Thank you.

(Operator Instructions)

Niamh Alexander, KBW.

Hello. Thanks for taking my questions, and congratulations. A solid quarter, great start to the fourth quarter, of course, with all the volume.

And but just help me think about the expenses as well, for the guidance for next year? And thanks so much for giving it ahead of time, a great finish for Jamie too.

But if -- and there are some variables on that. I guess, licensing is one of them. But is there -- what can you share in terms of volume assumptions implicit in that?

Or what we should think about if volume comes out to be much higher than we all think, or you all think? Is it the bonus incentive, what else might vary with that expense guidance?

Hello, Niamh. This is Jamie. We know we don't give out volume guidance. But you are right, there is a couple of items that do vary with volume, particularly our license and fee sharing line.

So there, I would look to -- whatever your assumptions are next year for growth around equity and our energy product in particular, and our OTC business as we do have some fee sharing there as well fall into that line. And likewise on the bonus, we typically have a target that is probably in the $60 million to $70 million range overall, with a max that goes down to -- it maxes out to about $100 million or so. So it is capped.

So there is some variability there, but not huge variability. So more to come there, but we will -- John will keep you guys apprised of any updated guidance on the next call.

Okay, thanks. And do I get a follow-up, or do I get back in line? I can't remember.

Need to get back in line.

Okay, thank you

Rich Repetto, Sandler O'Neill.

Yes. Good morning guys. I guess, since I am limited to one, on the annual variable dividend, is it going to be as simply -- formulaic where it is the excess cash by year end, and you subtract the $700 million, because we are coming up with something a little bit over $2? Is there any other uses of cash, or things that we should think about as we are sort of trying to project that number?

Yes, Rich. This is Jamie again. So the way we look at it each year is to assess the cash that is sitting on our balance sheet, relative to that minimum that we want to hold of $700 million. If you look back over the last couple of years, we didn't go all the way down to $700 million. We went to $900 million. I would say in the first few years of doing this, we wanted to be very careful and not take it all the way down to $700 million.

Over the coming years, as we get more comfortable with it, there is potential to tighten that up a little bit. But, yes, I think you have the general idea right.

And with respect to any other cash outflows, nothing at this point that we have talked about. And even as far as GFI goes, we don't see that impacting the dividend either.

So if we had to put a range, it would be the cash then minus $700 million to $900 million to remain, and then the rest would be -- is that a fair sort of range?

Yes

Okay. And we do expect you to report on your handicap every quarter, as it comes down as well.

It's going to take a while to get that one down, but yes. (Laughter).

Congrats, and we will talk to you soon. (Multiple Speakers).

Thank you.

Alex Kramm, UBS.

Okay. Good morning, everyone. Yes, first off, also to Jamie, thanks for everything over the years, and all the best going forward.

Thank you.

I came on a little bit late, so I don't know if Terry is on, but otherwise it would be for Gil. But over the last two months, we have seen a lot more noise out there in terms of white papers, and asset manager comments around clearing houses and the risk that is getting put in there, and the capital requirements that clearing houses should have, stress tests, living wills, a lot more noise recently.

So maybe just an update of what we are hearing in DC, and from other regulators around the world, when it comes to maybe having to put up -- or have more costs around the clearing house? Or maybe more capital, because obviously that could drive some impact on the annual dividend over time as well?

I am in the room. I will let Kim probably comment, but Ï will say that I have not heard anything coming from the regulator, as it pertains to us coming up with more capital put into -- I think today we put in roughly $370 million between US and Europe of CME's capital towards the guarantee fund. (Multiple Speakers - inaudible). Pardon me?

A little bit more -- (Multiple speakers - inaudible). Said it was $370 million so -- (Multiple speakers).

Regardless, I have not heard anything that should be coming from legislative standpoint or a regulative standpoint. Kim may want to talk a little bit more on the living will stuff, and as it pertains to that. But I have not heard that they are looking for us to put additional capital, outside of the couple articles, one being written by PIMCO, one being written by JPMorgan.

Hello, Alex, this is Gil. Let me just add to what the Chairman has to say, and then I will ask him to also add a few more points here. I think if you are looking at some of these comments that the banks and some of the buy-side guys have put out over the last few months, there is a central theme there, that the concern is that the CCPs would be in general, the next too large to fail. And I think there is some important distinctions, and we are going to put out a short paper on our own, to point out what these distinctions are.

There are a few a things to remember, unlike other counter-parties that have been tagged with this too large to fail, we run a matched book, in other words, that all of the buys equals all sales. We run flat every day.

We mark that matched book to the market at least twice a day. None of the parties that have been described as too large to fail or too important to fail have similar characteristics.

So there is a little bit of concern about what happens when so-called risk is concentrated. I think you should take -- make the distinction between the concentration of positions versus the concentration of risk. And those are two important distinctions.

So I think some of the noise that has been out there is a little bit misguided, and some of the work that Kim and her folks are doing will set the record straight there. Kim, if you want to add a bit?

I think Gill outlined very well that clearing houses are very disciplined at managing risk, and run a flat book. And there are no exceptions made for margins policies or payment of daily mark-to-market, based on the credit worthiness or the customer relationships status of the various clients.

So it is a very rigorous, disciplined approach. And the way that CME looks at it, risk management is what we sell, and protection of the markets is the only business that we have. So this is something that the Firm has a very strong risk management culture.

One of the things that I have noticed about some of the papers that are out, is they kind of try to talk about concentration of risk. And they kind of say that clearing houses need to put more of their own funds at risk, for example, more skin in the game for clearing houses is one of the key topics that is being talked about.

And actually, we have a lot of skin in the game, not every clearing house does. So I mean the point could have some resonance around some of the other clearing houses that don't belong to well-capitalized entities, and don't have the ability to put significant amount of the skin in the game.

So I will put that to the side. But the other thing to remember is that clearing houses are only going to be affected ever by the default of a clearing member. And the more significant and concentrated the exposure of the clearing member.

So the bigger the bank is that fails, the bigger the exposure that the clearing house needs to manage. All of our risk tools are sized to cover that. But one thing we are looking at, is that all of our risk tools, the mutualization process is right now sized, so that the market ensures the entire market.

And I think one of the things that some of these papers are leading us to look at is, whether or not there should be a more concentrated focus on, the bigger the defaulter, the bigger the cost sharing that they put into the process. So strengthening the defaulter pays element of the process for the very biggest defaulters is an area that we are looking at.

And just to sum all that up, we really don't expect any of this to impact our dividend, that we would normally pay in early 2015.

Okay. Very good. Thanks for the long answer.

Brian Bedell, Deutsche Bank.

Good morning, folks, and Jamie, the best to you also. Great working with you over the years.

Thank you, and likewise

Yes, thanks. My question is on the organic traction of the interest rate complex, particularly in the notion of the swap users. Gill, you had mentioned on October 15, you saw a much better usage of interest rate futures, versus swaps.

So maybe if you can talk a little bit more as we move into 2015, the growth trajectory that you envision of getting the swap users to convert to listed futures? What is your sales force saying? Are they seeing evidence of some of the sales efforts they have?

And then also if you could comment on that same dynamic outside the US. You mentioned obviously very good traction, for example on October 15, in that regard with the sales -- the new customer penetration outside the US, as we look into 2015? Thanks

It's Bryan, and I will take that one. First of all, I think if you take a look over the last quarter or so, we have seen very nice uptake from, particularly our asset manager community, as well as our hedge fund community. One of the barometers that we look at in terms of conversion into the futures complex is our assessment of large open interest holders. And during the past few months, if you take a look at that, we have increased the number of large open interest holders from 415 to 1,702.

We also measure our overall penetration of cash market itself, and our treasury cash market penetration has reached as high as 74% year-to-date. That is an all-time high for us.

We also monitor closely the activity for our block transactions. And so, reviewing blocks and EFR transactions, we have seen significant growth in both of those areas.

Our euro dollar futures open interest has hit a record dollar high of 13.5 million contracts, and we are seeing similar uptakes in our treasury open interest. Looking at it from the international basis, again we are seeing considerable positive trends similar to what I just outlined.

And so, your view into coming into 2105 on that, a lot more to go? Or do feel you have made great strides so far, and that pace of pick-up will slow down?

Well, while I can't give any projections in that regard, there continues to be positive I would say, fundamentals in terms of the convergence of interest rate uncertainty, the conversion of OTC to futures. We are continuing to aggressively sell to the various clients segments the opportunities that we present in the context of a full portfolio of clearing OTC interest-rate swaps, portfolio margining, the liquidity of our interest rate complex, and the capital benefits that are associated with that.

In addition, we keep introducing innovative products, and our emphasis is on building our global growth. So we see opportunities all the way around.

Great. Thanks very much.

Kenneth Hill, Barclays.

Hey, good morning, everyone.

Hello, Ken

Hey. I just wanted to start on market data. It looked like you guys saw a couple million dollar decline sequentially there. I am just wondering if you give us an update on how demand is, and how subscriber counts are, particularly on the back of some of the fee hikes you did earlier this year, and the elimination of the [fee waiver], and how we should think about that into the next year, as you start to put some of the -- those guys who were receiving fee waivers, start to charge the [15]% rate there?

Great question. So basically what we saw in the quarter was a small decline in terminal usage. We are going to see variation from quarter to quarter, as desks trading desks open and shut, and try to become more efficient and that sort of thing.

But when I look at the decline in terminals so far this year, it's really -- the decline is really starting to taper off. We are down 2% to 3% in terminals this year.

If I look back over the last several years, we are down on average about 7% in each of those years. And as you know, we have put some policies in place this year that I think are having a positive impact, and helping to mitigate that loss, and eventually hopefully will turn the corner.

We implemented a -- the fee increase earlier this year which is a 15% fee increase, which is also helping us out, and positive relative to the small decrease in terminals. The other thing that we did is, that we are starting to eliminate waivers of fees on trading terminals, and we stopped new waivers starting in March. So we think that is helping to mitigate that decline in terminals.

And then next year, we will begin to charge for those who have been grandfathered in on the waivers, we are going to start charging half of our normal rack rate per month per terminal. We don't know what the impacts of that are going to be exactly, because the number of waived terminals may not be indicative of the end demand, when people have to start paying.

So we have to see how that plays out. But I do think these are all positive going forward for the -- for this particular income line.

I would just like to add to that with the waived terminals, once that policy took effect in March, we have had several dozen firms actually register with us, and that indicates these are several users in the past that had not been paying market data.

Great. Thanks for taking my question.

Michael Carrier, Bank of America Merrill Lynch

Thanks, guys. Just a quick question on FX. If you look at kind of the first half of the year, the FX is pretty muted in terms of volumes, and an obvious pickup for a lot of reasons. But the things that are weighing on FX in the first half of the year, whether it's investigations and stuff like that, versus the pick-up that we have seen.

Do you see more like sustainability, meaning when you look at the users that were in the market? And you look at where open interest stands, do you feel like we are going to be going into an environment, like some of the stats that you have given on interest rates, meaning the user base increases, because it has obviously fluctuated quite a bit?

Hello, Ken this is -- I will start first, Mike, and then I will pass on to Bryan. But with the activity in the FX that you saw until October, or until the third quarter, when we saw a significant pick up in FX, both futures as well as options has been largely tied to the increased volatility, the elections in Brazil, and then there has been some activity in the Mexican peso too. And so, a lot of these things have to do with that.

The options pick up in particular, has been encouraging for us, particularly as we saw volatility start to pick up. And all of it has been done on the GLOBEX platform.

We are seeing a nice trajectory if you look at Q1, Q2. And then more recently, the trend that has been occurring this last few months has been in a positive direction.

One of the barometers as Gill alluded to is the levels of open interest, particularly in our is options contract. And we have hit records in that OI, and we think that is indicative of a positive trend in terms of a re-grouping of interest and new participants coming into the market, and participants that have pulled away from the markets coming back in.

Okay. Thanks a lot, guys.

Patrick O'Shaughnessy, Raymond James.

Good morning, guys. This is Cory on for Patrick. My question is, so you guys have been picking up market share and energy versus your closest competitor in recent months, across crude, natural gas, and refined oil products as well. To what would you attribute these market share gains, and do you think you are at the point now, where you can maybe start charging for Brent trading? Thank you

This is Bryan again. We are pleased with the progress that we have been making in terms of the broad complex. Our position is, both medium and long-term trends are good within the product set we offer.

We are looking to provide a holistic complement of products both in the crude and refined area. As you have alluded to, we picked up some nice market share across each of those asset classes.

We are particularly pleased with the performance on our WTI and Brent efforts. There is a great deal debate that is out there, regarding changes to export restrictions that could help us in the longer-term.

Overall, our CME energy products are up 7% in October excluding Brent futures, and our competitors is flat. Also in Q3, we have outperformed in energy versus our competition. So we feel really good about the strength of the complement of the product base

This is Terry Duffy. But let me add a little something here. I think what is important here is we are getting paid. But we are not getting paid on the Brent. We are getting paid on the return of our share of the West Texas Intermediate has gone from 25% or 30% when we acquired NYMEX in 2008, down to around to 14% or 15% where it is at today.

So if you look at that, we may be giving Brent away for free, or creating an arbitrage for Brent against WTI. But we are building our TI business, and getting paid for that. So I think there is a lot of pluses to what we are doing with Brent complex today.

Okay. Thanks, guys.

Thanks.

Jillian Miller, BMO Capital.

Hey, guys. Thank for taking my questions, and Jamie congrats on the retirement. You will definitely be missed.

So on the expenses, I just want to go back there. I know you are hoping to keep expenses flat given your efficiency program in 2015. But I am just trying to get a gauge for whether the efficiency measures are more like a one-time thing, or a signal that you might be shifting your longer-term thought process around costs?

Like after the program, and after 2015, then do we go back to our prior long-term expense growth guidance of about 5% annually? Or we are entering a new efficiency mode, where maybe in 2016, 2017 we should think about 3%?

Yes, I really -- the way I look at this is, when we talk about the restructuring, it is not just a look at our human capital and how to best to deploy that. It is also looking across the business and how best to deploy the remainder of our capital, and really we did take a white sheet approach.

And I think that there is still some opportunity there. We will continue to look for ways to improve the business. We are looking at things like data center consolidation for example, or becoming more tight on some of the marketing expenditures that we will have in the coming years.

So we can't decrease expenses forever. We have to get back to a normal kind of growth rate at some point in time. That is going to be in the low to mid single-digits I think, going forward.

But I do believe going forward, we still have this very strong focus on expense discipline. But more importantly, a very strong focus on the margin -- the operating margin and net income margin of the exchange, to ensure that we are growing that as best we can

Jillian, this is Gill. When we very seriously contemplated the reorganization a few months ago, it was with respect to changing the way the Company thinks. It was with respect to shifting the mindset of the organization into exactly the lines that Jamie just talked about, significantly increasing or pushing the operating margin philosophy down into the Firm, understanding what each of the cost drivers of the Firm was, now is.

And then, also understanding where the innovation was going to take us, to the point that Terry just made a short while ago, giving away something for free doesn't mean you are giving away everything for free. It forms part of a portfolio that brings in higher income across the board for us.

So that change in philosophy occurred a few months ago, that change in mindset occurred a few months ago. And that change is what we will bring forward on a going forward basis, yes.

Got it. Thank you.

Thank you.

Neil Stratton, Citi.

Good morning. I just wanted to ask a question on OTC clearing, and that continues to exhibit quite strong growth. Just what inning do you think we are in, and how should we think about that for 2015?

Hello, this is Gill. I think when the mandate to clear became mandatory here in the US, it has not kicked in Europe yet. And the mandate to execute has not been fully implemented here, nor even contemplated across the pond yet.

So you decide what inning we are in. I don't play baseball, but I think it is still very early days. And I think a lot of conversation has gone on about the futurization of the marketplace, although we are seeing that along the lines of what Bryan talked about.

Please bear one thing in mind, that these markets are very complementary, and October 15 people turned to the futures because the liquidity that was there, the liquidity that could be seen was a source for them. And so, I think the market evolves on both sides as was intended by the regulations, and you would start to see a change that occurs. And the important point for us, at the very least is that we are positioned well for that change.

On the one hand, we are very happy that we started in the US. I think we have built through the clearing and the IT mechanisms, a bunch of credibility that we carry to Europe.

And if I could just add, I know Kim is probably more equipped to say this than I, but in 2013 we had basically nothing in OTC interest rate swaps clearing, now have $22 trillion roughly in our clearing house today. So we have been able to grow.

I think what is really interesting about how you put the marker on what inning you are in, it goes back to what Kim said earlier. There has been white papers out there. There has been a bit of misinformation about out there, both on the buy-side and the sell-side.

We are going to continue to educate why we are doing things differently. People are looking at, should we put skin in the game? We have skin in the game. Do they know that?

These are all educational things that we have been doing since we launched our OTC initiative, and we will continue to do so. So that will help give us a ballpark of the innings that we are in. But you got to look at where we started, just a very short while ago, and where we have come to today.

If I could add one additional point, to the client perspective. We are really heartened to be garnering more business into our services that had chosen other facilities in the past. And that is largely attributable to Kim and her team's efforts to listen to the client, and be able to deliver tools such as coupon blending, compression services, portfolio margining, all of those complements are really bearing fruit, and taking traction with the client base, for them to see our offering as a differentiator, and providing them significant savings using our OTC facilities and complementing that with derivatives portfolio as well.

I think Bryan hit the nail on the head, as the driver for growth for the next phase of OTC, is going to be capital efficiency. It started out as a mandate compliance type of activity, at least with the US participants, and the people who trade with them. And now it has become a quest for most capital efficient way to obtain this protection. And clearly, we stand out as the most capital efficient place for people to obtain that protection.

Thank you. Are you ready for the next question?

Yes

Rob Rutschow, CLSA.

Hey, good morning, and congrats to Jamie on a great tenure at CME.

Thanks

In terms of expenses, it appears the guidance is for flat expense growth despite the cost cuts that you are doing in terms of headcount reductions. So the question is, do feel like you are going far enough with the expense reduction, particularly considering that the expenses are up about $100 million in the last two years?

I think that we are doing a really very good job. I will say over the past several years, we do view ourselves as having run fairly lean. We took a new approach in our trying to be ever more efficient.

So I think that we have done a nice job. As Gill was saying earlier and I was saying earlier, we are going to continue to really keep a focus in on that area, amongst in addition to the top line obviously, and try to drive as much margin as we can going forward.

When you look at the impacts on the coming year, if I look at what the analyst estimates for our expenses were prior to our announcement of restructuring, they were probably at about $1.360 billion, and we are staying $1.3 billion now. So that is a pretty large decrease I would say, in a year's time. And don't forget, we do have a decent sized expense base, so there is inflationary pressure on that, just as there is with any

Hey, Rob, this is Gill. Let me add to what Jamie said in the context of the $100 million over the last two year comment that you made. Keep in mind, where growth has come from -- for us, and where we have spent the funds in growing the expenses, come from outside of the US.

We talked about what Europe did a few weeks ago. We talked about the growth rate in Asia. That is a direct result of the expenses that we put on the ground there.

And we have gone from essentially a futures and options exchange, to a financial services company running six ecosystems. In other words, we spent a lot to build an ecosystem that is able to, not just clear futures and options, but also list and clear OTC products, and the innovation that comes with that.

So we have built a lot of infrastructure over the last few years. And a lot of our growth has been based upon that we have built, that you have seen come to life in the last few weeks.

Okay. Thanks for the help

Yes.

Thanks, Rob

Gaston Ceron, Morningstar Equity Research.

Hello, good morning.

Good morning

I just -- I'm sorry, I just want to go back over the expense issue again. So I hear what you are saying about how we analysts were viewing kind the 2015 expenses before the staff actions that you are taking. But I guess, if I just look at the guidance, I mean so you are projecting, it just seems like -- on an adjusted level operating expenses are going to be flat year-to-year right?

So I am curious, what is the offset to the lower compensation expenses that you will have, from cutting 5% of the staff? Where else are expenses ticking up, that the ultimate number will be flat?

Gaston, it's Jamie. Remember, as I was saying, we, for the existing expense base, there is going to be inflation on that every year. Right? So for example, we pay merit increases to our staff each year, and in some of the tough years, we have decided not to do that. You can't do that every year, because you have to reward the people who are really doing the hard work, to get us to where we have gotten to. And that is probably about 3% to 4% on our -- on those expenses.

And because we are consuming a lot of professional services, we are subject to increases there, and the increases that they have to pay their people as well. And we are growing our international footprint a bit, so our occupancy expense, for example around the globe will be a bit higher in the coming year. So those are kind of the key areas.

Also to the extent that we see strong volumes or stronger volumes than we see currently, or that we saw in this year, you could see some increase in license fees and fee sharing. So there is just natural areas of expense increase that you are going -- that we are going to get hit with from year to year-to-year. And really we are trying to mitigate that with, with this what I believe is a very meaningful reduction in expenses.

Okay. Thank you

Alex Blostein, Goldman Sachs.

Great, thanks, and good morning, everyone. A quick question for you guys on the interest rate complex in light of some of the changes that have taken place on the buy-side over the last couple of months, with departure of Bill Gross, and the flow pressure I think that PIMCO has seen.

I mean, I guess PIMCO has been obviously very vocal around using futures as a substitute for some of the other products. And I am just wondering, whether or not you think this could potentially have an impact on the complex? Or do you think the security could just kind of transfer out into other institutions?

Looking at our interest rate complex overall, the indicators have actually been positive in terms of the overall performance of the complex, both within the euro dollars and interest rates alone. And I think that has been complemented by additional new products that we have introduced, and we are seeing again a very positive trajectory. If you look at our Ultra Bonds, and our deliverable swap futures, performing extremely well.

This is where the marketplace comes to manage and hedge their risk, and affirmation of that effect was what occurred on October 15, where we have executed more than 3 times our average volume in those complexes. We are seeing a very nice pickup, as well on the international side of the equation, so both within Europe as well as in Asia.

Our interest rate complex is up 28% in Europe, and by comparable levels within Asia. And I think that goes to the intensified sales effort and focus.

People come to these products because of the diverse customer base, as well as the deep liquidity that we offer. So we are not reliant on any particular segment within these markets. And again, I think it is attributable largely to the investments we have made and our sales efforts to broadly develop our hedge fund complements, our asset management complement, as well as the other client segments.

No major customer, I think is a very, important point to note. No major customer brings concentration into any of these products.

That is helpful. Thank you.

Thank you. And at this time, I will turn the call over to Jamie Parisi.

All right. Before we sign off, I just want to say thanks again for all of the great memories. Having spent a lot of time with many of you over the years, I count those as some of the highlights of my professional career. It has been a really wonderful, and I hope to stay in touch with many of you. If I don't see you before year end, so long, and I wish you the best.

Thank you very much.

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