洲際交易所 (ICE) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter and year-end 2009 IntercontinentalExchange earnings conference call. Today's call is being recorded.

I would now like to turn the presentation over to your host for today's call, Kelly Loeffler, Vice President of investor relations and corporate communications. Please go ahead.

Good morning. To obtain a copy of the Company's fourth-quarter earnings release and presentation, please visit the investor section of our website at theice.com. These items will be archived and our call will be available for replay. Before we begin please be aware that our comments may contain forward-looking statements that represent our current judgments and are subject to various risks, assumptions and uncertainties as outlined in the Company's filings with the SEC, including our Form 10-K, which was published this morning. For a description of the risks that could cause our results to differ materially from those that are described in the forward-looking statements please refer to the filing. Actual results may differ materially from those that are expressed or anticipated in any forward-looking statement.

We will discuss adjusted net income attributable to ICE, adjusted operating income, adjusted operating expenses, adjusted margins and adjusted earnings per share, as well as adjusted EBITDA. These are non-GAAP financial measures that exclude non-operating charges that we believe are not reflective of our normal operating performance. The reconciliation of these non-GAAP financial measures to the equivalent GAAP results and an explanation of why we deem these non-GAAP measures meaningful appear in our press release and earnings presentation.

With us today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer. At the conclusion of the prepared remarks we'll take your questions. I'll now turn this call over to Scott.

Good morning and thank you all for joining us. I'm pleased to report that ICE once again achieved record quarterly results during the fourth quarter and for the full-year 2009 we delivered exceptional results by virtually any metric. ICE delivered double-digit revenue growth, resulting in our sixth consecutive year of record revenue. This was coupled with record operating income, record net income, and record cash flow. Not only did we turn in strong growth in our core business, we also executed on the ambitious set of strategic and financial objectives that we committed to at the start of 2009. These included successful launch of the leading CDS clearinghouses in Europe and the US, the introduction of over 200 new OTC energy contracts, and the integration of two acquired companies. These objectives were achieved despite an economic environment that remained weak throughout the year. Our ability to sustain growth and capitalize on new opportunities, regardless of the business cycle, is a result of our diversification and consistent innovation. Our GAAP results for fourth quarter and full year, which are reflect in this presentation, include a number of nonrecurring items, which are detailed in the appendix of the presentation. This morning we will focus our comments on the adjusted figures, as we believe they provide a more accurate view of our business performance.

If you turn to slide four, I'll begin with fourth-quarter 2009 results. We achieved record consolidated revenues of $257 million, up 24% over 4Q 2008. Consolidated adjusted net income attributable to ICE grew 39% to $84 million compared to $60 million adjusted net income in the prior fourth quarter. Our tax rate for the quarter and the year was 36%, which was at the high end of our guidance. This primarily related to changes in state tax laws and the mix of our business across the state. We expect our tax rate in 2010 to once again be in the 34% to 36% range. Adjusted diluted EPS rose 37% to $1.12, and our adjusted EBITDA increased 32% versus the fourth quarter of 2008.

Let's move now to slide five. Starting on the left-hand side of the chart, transaction and clearing revenues rose 29% to $229 million during the quarter. This includes $102 million from our futures segment, $87 million from OTC energy, and $39 million from OTC credit. Market Data and other revenues totaled $27 million. Shifting to the right side of the slide we detail fourth-quarter consolidated operating expenses on a GAAP and adjusted basis. Our 4Q expense includes a number of items which are not reflective of our normal operating expenses. These items include additional severance expenses associated with our recent acquisition, an additional compensation and SG&A expense from true-ups related to adjustments of withholding and sales use taxes. On an adjusted basis fourth-quarter operating expense increased 12% year to year, driven primarily by investments in our CDS clearing initiative and a $5 million true-up of our full-year bonus accruals as a result of a very strong end to a very strong year. While this true-up is for the full year and thus not reflective of our quarterly run rate compensation expense, we've not excluded it from our adjusted expense because it is consistent with our pay-for-performance culture.

Adjusted operating margin, which you can see on the lower right side of the slide, improved to 52% compared to 47% in the prior fourth quarter. The adjusted operating margin, excluding our CDS brokerage business, was 62%. Despite some of the noise in our operating expense we delivered strong profit and cash growth in the fourth quarter and are well positioned to continue to profitably expand our business, launch meaningful new products that leverage our clearing and execution infrastructure, and enter new markets.

Moving to slide six I'll cover our energy futures business. During the fourth quarter, ICE Futures Europe achieved record transaction revenues of $68 million, up 28% year to year, with average daily volume, or ADV, of 689,000 contracts. Notably our benchmark Brent crude and Gasoil futures revenues reached record levels during the quarter. Open interest for ICE Futures Europe grew 24% during 2009, reflecting the strong presence of global commercial customers in our market and our attractive product suite. As reported last week volumes in our energy futures markets remain strong with January ADV up 21% over January 2009 including Brent ADV up 20% and Gasoil up 36%. Importantly, growth rates have accelerated further in the first part of February.

Turning to slide seven you'll see the fourth-quarter performance of our Agriculture & Financial Futures exchange. ADV was 360,000 contracts per day, which was off about 1% from last 4Q. Our AG complex, and sugar in particular, was generally strong and recovered throughout the year following the challenges of a difficult credit market. However, the Russell Index volumes, like the rest of the equity product market, were soft. Nonetheless we continued to increase our Russell 2000 market share relative to the S&P 500 futures and believe we are well positioned to benefit when markets recover. Earlier this month we reported that January 2010 average daily volume for ICE Futures US increased 30% and growth has continued to accelerate in the first part of February.

Our OTC segment performance is detailed on slide eight. Total OTC transaction revenues rose 37% in the fourth quarter, with average daily commissions, or ADC, for energy reaching a record $1.3 million, up 53% from 4Q 2008. This was also the third consecutive quarter of record revenues in our OTC oil and power market and we had the best quarter for our natural gas business since 3Q 2008. Our strong results were also driven by the more than 200 new products that we began clearing in 2009. These new product contributed over $3.5 million in net revenue, or roughly $0.03 of earnings per share in fourth quarter. For all of 2009 these new OTC product added over $7 million in revenue, and this is despite being very early in our product life cycle. In total, a record 97% of our 4Q volume was cleared. Our OTC energy business continued to perform well in January, with average daily commissions exceeding $1.4 million, and February results thus far are very encouraging.

Turning to our credit businesses, revenues totaled $39 million during the fourth quarter. This includes $29 million from Creditex and $10 million from CDS clearing. Creditex' electronic transaction services accounted for 39% of our fourth-quarter Creditex revenue. The traditional brokerage business for credit derivatives is showing some early signs of improvement and our electronic product offerings continue to provide attractive margins. On the CDS clearing side we generated $10 million of revenue during the fourth quarter and full-year revenues of $31 million, which was slightly above the high end of our prior guidance. Despite heavy investment typical of any start-up business, CDS clearing was cash flow positive during its first nine months of operation. While our credit derivative strategy is at an early stage we believe it is an important platform for future growth that will offer healthy returns when credit markets normalize.

Turning now to slide nine you'll see the summary financials for our full-year performance. Consolidated revenues were $995 million, up 22% versus 2008. Adjusted net income attributable to ICE rose to a record $334 million. Adjusted EBITDA grew 14% and operating cash flow increased 30% over 2008. In another year of economic turmoil we continue to invest and expand our business and we emerged with more earnings, more cash, and more revenue-producing assets.

On slide gen you'll find a snapshot of our guidance for 2010. I won't review it now in detail, but I will note one item. For CDS clearing we have provided preliminary 2010 revenue guidance of $60 million to $80 million. This is based upon assumptions relating to product rollouts, regulatory approvals, additional customers, founding member pricing structures, and a gradual improvement in the CDS market. The year-to-year revenue growth implicit in this guidance will be supported by lower expenses as start-up investment subsides. Thus, we expect net margins on this revenue guidance to be between 16% and 20% after accounting for the 50% profit sharing with the selling shareholders of the clearing corp.

Before handing the call over to Jeff I'd like to highlight the consistent track record of growth and strong financial returns we've established, starting on slide 11. This morning I've covered the growth in our core business and the successful delivery of many strategic initiatives. All of this enabled us to grow revenues 22% in 2009, which contributes to our nearly 60% compound annual growth rate since 2005. Importantly, of the $840 million of revenue growth from 2005 to 2009, more than half of that growth has been organic. However, the key question is whether this top-line growth and the associated investment required generate value for our shareholders.

Let's turn to slide 12 to answer that question. The metrics on this slide demonstrate the consistently-strong financial returns our business model has produced. We have a strong core business, which provides solid growth and profitability; we take a very balanced and disciplined approach to capital deployment and acquisitions; we act quickly to identify and consistently deliver on synergies; and finally, we have an innovative customer-oriented culture with rewards tied directly to the Company's results and aligned with our shareholders' interest. This means that we come to work every day focused on growing our top line, improving margins and carefully managing every line of expense. However, we recognize that investors don't directly benefit from revenue or margins alone. They benefit from profit, cash, and high returns on invested capital. These are the true measures of value creation, and as this chart demonstrates, we have consistently delivered strong value and returns to our shareholders. We have grown adjusted EBITDA and operating cash by nearly 80% a year since 2005, including strong growth once again in 2009. As a result, we are generating industry-leading returns on invested capital, or ROIC.

ROIC matters because it considers the capital we deploy for acquisitions, CapEx and operating expenses, and dispassionately asks whether management is making optimal decisions to deploy capital in an efficient manner, and importantly, generating returns in excess of our cost of capital. We believe the answer to those questions is reflected on the lower left-hand portion of this chart is an unequivocal yes for ICE and our shareholders. Even as we have heavily invested in future growth over the last two years, and regardless of the economic environment, the nearly 16% returns we delivered in 2009 and the strong returns in 2007 and 2008 are well above our cost of capital, and clearly distinguish ICE from our peers and demonstrate the positive economic value we are creating for shareholders. With that, I will ask that you please refer to this morning's earnings press release for further details on our quarterly performance, as well as more detailed guidance for 2010. I'd like to note that we filed our 10-K this morning, and I'll be happy to address any questions during the Q&A.

Jeff, over to you.

Thank you, Scott, and good morning. While ICE's strong financial performance speaks for itself I want to update you on our strategies to continue to build the business. I also want to mention, on behalf of the global management team at ICE, that we are never satisfied, regardless of our industry-leading results. Given the strong foundation we've built there are many avenues for our continued growth over the next several years, and as entrepreneurs, we will continue to create opportunity. ICE's core business comprises execution, clearing, data, and trade services across the futures and over-the-counter markets. Since the beginning of the decade, and particularly over the last two years, we've expanded our reach into the over-the-counter markets by introducing successful new contracts and by building world-class clearinghouses. In our broader business we've expanded the number of customers and segments that we serve, and we've taken advantage of change in technology to develop new approaches to our century-old business.

While regulation of our industry will continue to evolve, we've demonstrated that our markets continue to grow amid change. Regulatory and legislative proposals are not factors that we believe will hinder or change the opportunity set before our global franchise. The factors that have driven our growth historically are much larger than these, and they're secular in nature. Any changes that have occurred have more often than not presented opportunities rather than risks, and today we operate a business that's likely to benefit from regulatory change, including clearinghouses, electronic trade execution, and processing platforms. Despite the economic and regulatory uncertainty that's existed in one form or another for several years we have a demonstrated track record of developing solutions to support such evolution, and our revenues, our earnings, our volume, and our open interest all stand at record levels. In other words, we are well positioned to take advantage of the opportunities that come along with change. Our results continue to reinforce the fact that ICE can deliver solutions that are responsive to a dynamic environment, and accretive to our shareholders.

I'll take a few minutes to provide some context for the foundation of our growth. Our core business is rooted in the physical commodity markets, which continue to significantly outperform within the exchange sector. These markets have provided steady and healthy earnings growth and cash flow, as well as access to new business opportunities for us. As Scott has just detailed, our core business has been a consistent performer, despite the difficult economic climate. You will see beginning on slide 13 that strategic diversification across our business is an important driver of our opportunity set. First, we acquired new businesses that have diversified and expanded our reach into new markets. You can see on the slide the healthy diversification that we've achieved among product, market participants, and geographies. Since the start of 2007 we've added five clearinghouses and three new asset classes. These classes include agricultural futures, financial futures, and credit derivatives, and today they account for about a third of our revenues. Each represents a significant addressable market in which we have just begun to tap the potential. These moves required adopting a strategic vision about what it would take to produce revenue growth down the road rather than just relying on cost cutting as a strategy.

In terms of customers we're one of the most commercially-oriented exchange operators based on our customer mix. ICE's markets have been generally defined and developed out of commercial hedging needs, particularly in the over-the-counter markets. In 2009, over 50% of our over-the-counter energy revenues came from commercial end users. And this percentage has been rising through the years as we have diversified our product offering. You can also see that we've established attractive geographic diversification, with 40% of our revenues now coming from outside the United States. The broad distribution of our electronic market for commodities has served us well amid the economic downturn. As countries outside of the West continue to grow, the reliance on commodity market and the use of hedging is also growing. We're also seeing growth across Europe and in natural resource-based economies. I've spoken many times about the growth potential that commodities hold, and this continues to bear out in our results. We've effectively tapped new geographies and developed new product simply by leveraging our core commodity business.

Great examples of our global product platform are ICE's Brent crude and Gasoil futures markets. Both just turned in their 12th consecutive annual record volume years and Gasoil set yet another daily volume record just yesterday. Brent continues to be a dominant global oil benchmark due to its role in pricing the majority of physical crude markets around the world, and Gasoil has become a dominant refined oil product benchmark due to its role in setting refined product prices outside the US. These are just two examples of products that we use to provide entrees into new geographies at very low incremental cost to ICE.

The next area that I'd like to touch on is our measurable results in developing new products. Many are aware of the success that we've had with the ICE West Texas intermediate crude oil contract, which we launched in 2006, and last year, which contributed $49 million to our consolidated revenues, but there are many more recent new product success stories at ICE. In 2009 we had success with the launch of a coal futures market and we've continued to set records with this suite of coal products into the new year. Coal is another globally-relevant product and we're forging new trading relationships in Asia, Europe, and the United States. In addition, we've just cleared our first iron ore contract last week and according to many estimates, iron ore is one of the largest commodities purchased by China. Our futures contracts, such as iron ore and coal, are designed as hedging tools for both buyers and sellers of physical commodities, as well as for firms with exposure to industrialization in these emerging economies.

In the energy markets we've brought new products to market quickly and effectively. As we discussed fourth-quarter earnings call last year, we had a pipeline of new over-the-counter energy products to roll through ICE Clear Europe in 2009, and we did so successfully, with over 200 new contracts introduced, resulting in market share and volume gain. The $7 million from these products that Scott mentioned earlier is on top of the incremental revenues related to cross selling and basis trading with our existing core products. As a result of these efforts to grow our markets, last year we achieved our sixth consecutive record for average daily commission in the over-the-counter markets. So you can see we've had tangible results from new products, which have helped to establish ICE futures and over-the-counter energy marketplaces as perhaps the most comprehensive available.

Now if you'll turn to slide 14 I'll touch on another milestone that we achieved in 2009, which was our move into clearing financial over-the-counter markets. Based on our depth of understanding of the over-the-counter markets we were able to respond effectively to the call by regulators for credit default swap clearing. Today we operate the leading global credit default swap clearing solution, serving both the buy side and the sell side. This was and continues to be an important accomplishment, not only for ICE, but for market participants and regulators. Many of you have followed our progress as we've assisted with the restructuring of the CDS markets over the past two years. On the slide here you'll see the quantitative and qualitative results of our leadership. It required substantial effort by the team here at ICE working nonstop over the last 18 months to successfully deliver this initiative.

For those new to ICE let me just recap briefly. In June 2008, seeing the need for clearing in the credit markets, just as we did years earlier in the energy markets, we announced our acquisition of he Creditex, a leading provider of CDS trade execution and trade processing. We moved very quickly to close that transaction in August of that year, and we incorporated a team with tremendous credit knowledge. The collapse of Lehman Brothers occurred between the closing of the Creditex transaction in August and the successful launch of our new European clearinghouse in November 2008, and amid all of this we announced that we were going to acquire The Clearing Corporation, furthering our clearing objectives. Finally in March 2009 we closed on that transaction and launched what is now the leading clearinghouse for credit default swaps in the United States. And in July we launched what is now Europe's leading credit default swap clearinghouse.

ICE Trust and ICE Clear Europe have served as a model for addressing the complexities of the over-the-counter markets, serving the buy side and the sell side and working across regulatory jurisdictions. To date, ICE has cleared over 5.5 trillion dollars in credit default swaps in the aggregate. As of year end, the cash in ICE's CDS guarantee fund, supporting the over-the-counter credit default swap markets exclusively, exceeded $3 billion, which we believe is one of the largest cash guarantee funds for any single product. In addition to providing the only dedicated default fund for credit default swaps we put in place the most stringent risk standard of any competing model, a model that delivers capital efficiency without changing the work flow of our market participants. In other words, we've effectively removed financial and systemic risk without introducing operational risk. This year we plan to deliver operational and product additions for credit default swap clearing and we're working closely with customers to ensure that our solution remains the most comprehensive in supporting the recovery and the growth of over-the-counter markets.

But let me conclude on slide 15 with a quick recap of some of the defining features of ICE's model that we believe will allow us to continue to outperform our peers. First, ICE's business is primarily driven by commercial participation. As a result, we grew and withstood the test of reduced liquidity during economic uncertainty. Secondly, our business is well diversified and global, providing access to opportunities that arise across markets and across geographies. And thirdly, we've demonstrated our flexibility to respond to the need across both futures markets and over-the-counter markets. These strengths have produced consistently strong operational and financial performance. We grew our top and bottom line while investing in future growth. In fact, ICE's net income for 2009 was 31% higher than 2007 when the financial crisis began. Importantly, our early results this year demonstrate continued health in our business, with current quarter-to-date futures and over-the-counter average daily commission up over 30% year over year. Open interest and volumes in many of our major benchmark contracts are at their all-time highs.

In closing, you can see that ICE is working to affect positive evolution in markets, responding to the risk management needs of our growing customer base, and exploiting the opportunities that exist amid a sea of continued change. On behalf of everyone here at ICE I want to thank our customers, again, for trusting us with their business in 2009 during a period of great uncertainty, and I want to thank all of my colleagues here on the ICE team for their hard work in exceeding our objectives last year.

Let me now turn it over to the operator, and operator, could you please moderate our question-and-answer session?

Thank you. (Operator Instructions). Our first question we'll hear from Roger Freeman with Barclays Capital.

Oh, hi, good morning. I guess let me just first on CDS. Jeff, what are your thoughts about the uptake on the single name side? It started out very weak, and it's picked up a bit, but we're hearing in general there seems to be limited customer interest actually in doing this, and I guess the question is, is it going to have to be mandated? Maybe also what's in your guidance -- what are the assumptions in theat guidance for this year on 40 to -- the $60 million to $80 million?

Sure. Last week I think we did about 10,000 trades, which is one of our biggest clearing weeks ever, so I would say that broadly speaking there's tremendous up-take and as we clear single names there's a lot of demand for single names and in fact, tension in the market as to which names we should rollout first. As you can imagine, right now there's a big push to provide a deal with the single names related to the sovereign debt, particularly in Europe with a lot of risk attached to that. So there's debate as these products get rolled. Nonetheless, what we're seeing is tremendous use once we roll them out. I think implicit in your question is the buy side, or people who are nonbank market participants are not under regulatory pressure to use clearing, and my sense is that some will and some won't, and there will be an evolution. I think it looks a lot to us the like the energy business, when we started in 2002 clearing was very disliked by most market participants and as we just made -- commented in our prepared remark, we now have 97% of the business that goes across our trading platform goes to clearing. So in a period of seven years or so there's been a dramatic change and I would think it will be shortened in the credit markets given regulatory pressure, but nonetheless, it will be a multi-year process.

Yes, just to put a couple numbers around that, as Jeff mentioned, we had a good week last week. In single name, on an inception-to-date basis, give or take a little bit, $120 billion of notional cleared, half of that came in last week, so there is clearly up take on the single names and we would expect that to continue. As you know, we didn't rollout every single name the first -- at launch. We're continuing every supple weeks to rollout more single names. As we work through that rollout we'll see the notional grow and then revenue will go along with that. And just directly to your question, embedded in the $60 million to $80 million is the rollout schedule we've got through single names. It'll occur predominantly through the first quarter, but some into the early part of second quarter, and an expectation that we will see good uptake, just as we did with indices. In addition to that, we're getting some good early signs from the markets, both on the clearing side and on our brokerage business. In January we did see the trading activity around indices and single names pick up, which is a further good indication for us as we look through the rest of the year.

Okay, that's helpful. I'll just use my follow up on CDS, as well. Are the economics for the buy side to clear through your clearinghouse better than for them to just buy CDS on the dealers that they're counterpartying with as protection? And Jeff, can you just clarify on the sovereign what you're rolling out and when, because that sounds like it would be an interesting opportunity?

Sure. I think there's no one answer on the buy side economics. People that have a very balanced portfolio I think will find that as they move into the clearinghouse they will likely have lower net margin, net capital outstanding. People that take directional risk will find that it's very expensive to clear, and every prime broker has different rates and structures and are looking at their customer position slightly differently, so there's no one good answer. That's why I say, Roger, I think it'll be an evolutionary, not a revolutionary process.

Yes,

The second part of your question on sovereigns, sovereigns present a unique risk and it's one that we're debating with the market and with regulators. For example, if you have an Italian bank that's writing protection against the default of the Italian government, what is that risk, and is it possible for an Italian bank to survive the collapse of its own government? Those are the kinds of things that come into clearing sovereigns that -- the market has never really seen addressed in a holistic way before, and we're be asked to be at the center of that discussion. There's obviously tremendous demand, and I suspect once we move through the distress in sovereign trading there'll be some other sector that will come to the forefront and will present unique challenges, so we're kind of chasing those around.

Yes, interesting stuff, thanks.

Thank you.

And next we'll move to Ken Worthington with JPMorgan.

Hi, good morning. Jeff, maybe to follow up on your comments on the geographic diversity in Asia, when you think about growth for ICE over the next five years how important is Asia to the growth story? And then if you can give us any metrics on Asia, like what portion of the -- of your energy business comes from -- excuse me -- Asia today versus maybe a year ago, or growth of trading screens in Asia? Anything we can use to wrap our fingers around the concept.

Sure. I think -- let me just say we use Asia as an acronym for the concept of emerging market growth. What we're seeing is, that as emerging markets grow, even markets like China where we have no direct access, people that are doing business there are having to use more commodities, and as they use more commodities they're taking up the concept of hedging around them. So broadly speaking, we've done well because there is growth outside of the West, and there is risk outside of the West, and people are hedging against that growth. And as you know more than anyone, Ken, even in economies where there's been economic shrinking, people still hedge, because they're really trying to figure out their risk profile, and in many cases, we don't care whether prices are moving up or down. It's hard to put a specific number on it, but you can see the trends in our non-US business, which is -- and you can also see how Brent crude oil, which is a marker for Europe and Asia, is outperforming the volume growth of our West Texas intermediate contract, which is levered to the United States economy, and so you can just see the trend pulling us to the East.

Okay. Any idea on screens? It seems like that might be a metric you might be able to share.

We don't necessarily look at that it way. We do monitor, in trying to budget for the Company internally, the growth of user IDs and passwords and demand for data, all of which continues very robustly, has through the whole economic downturn.

Screens and participation and IDs all continued to grow throughout 2009 just as they had in the prior years, Ken. We don't look specifically at the screens necessarily in Asia because a lot of the trading activity that covers Asia goes through London. As Jeff alluded to, two-thirds of the world's oil is benchmarked to Brent. Brent trades on our London exchange. If you're looked at the Brent growth over the past few months I think a lot of what you're seeing is trading that relates to Asia but that's coming through the London exchange. So we don't break the screens down along countries. I'll tell you, from a country revenue standpoint we saw Singapore in 2009, as an example, grow in the relative percentage of business we get, but in terms of looking at it more deeply than that we don't really split it up that way.

Great, thank you very much.

Next we'll move to Mike Vinciquerra with BMO Capital Markets.

Scott, I just want to clarify on the -- I don't want to focus on CDS too much here, but the revenue guidance, $60 million to $80 million, I want to make sure I understand, when you're talking about the 16% to 20% profit after the sharing, are you talking about -- is that on an after-tax basis to ICE, pretax? How are we looking at that, just to make sure we're on the same page?

Net income. It's net income.

Got it. Very good, okay. And then as far as CDS, the contract turnover, once the products are in the clearinghouse are you guys getting a sense now after ten months of what the real turnover is going to be? Are these product strictly for hedging, and therefore don't turn over much, and it's more new generation of contracts that's going to drive growth in the business, or anything you can share there would be helpful?

Yes, it's still really early on the single name side, so not great visibility. On the index side what we've seen is as the notional comes in, it compresses down by 90ish-%. If you watch over time it compresses down another 3% to 5% to 7%, so we're getting some view that the compressed volume does, over a three to six-month period, trade in and out. But in terms of having a great metric on turnover, it's not something we've been able to establish yet. We've still got a mix of backloading and new trades coming in, so as we get better insight, if we get a metric I think would be useful we'll clearly share it with you, but as of yet the turnover metric's not apparent.

I understand, okay. And then just one regulatory question. The issue around exchange for futures, clearly it's not aimed at you guys at this point but the market, it's clear, is worried about this as a potential opening of the clearinghouse to pseudo fundability. Can you guys just comment on that and whether or not there seems to be any threat to you over the near to midterm?

Sure. Well, first of all, we believe this is an issue that's unique to the US interest rate business, and that's a business that we're not in. And the reason I say that is because long ago, our principal competitor, NYMEX, adopted EFFs for look-alike products to us, so this issue was dealt with in energy years ago. And I would say that that product is probably completely unsuccessful and irrelevant in energy, and that's because the market has developed an active position management marketplace that exists between primarily ICE and CME NYMEX, where positions are moved back and forth as needed. We have no barriers that we've put up to allow those positions to move, and I think you can see that there's been tremendous growth in both energy businesses over the last number of years while that market has become active.

I would say, just editorially, I think the reason that this is getting a lot of attention is the fact that there seems to be no demand for moving positions back and forth between those two exchanges, and in other words, regulators would not have to be involved in this discussion at all if there wasn't demand. These markets will form up and brokers and market makers would be happy to make two-way markets to move positions, as they do routinely now in energy. So we agreed with the CFTC that it was improper for the CME to adopt the rule that basically says that any trade done on a competitor is a wash trade, but we also agree with CME that it has an obligation to manage its markets and to make sure that trades at excess for clearing and puts across its ticker are price discovery contracts, and so I believe this debate will be settled in the middle, if you will.

And last thing I would say is that part of the good debate that's coming out around financial reform, I think people are understanding that inter connecting clearinghouses that are full of trades is no different than inter connecting a series of banks that are full of trades. And that was a bad idea a few years ago in the banking sector, and it potentially could lead to the same consequence in the exchange sector if we interconnected all this. So I think there's much more caution on the part of the market now to make sure that trades are properly accounted for, that they've been entered into, and in a price discovery manner that they've been made transparent, and that the risk is contained in places that regulators can get their hands on them in the time of crisis.

Very helpful, thanks, Jeff.

Thank you.

And next we'll move on to (inaudible).

Good morning.

Good morning, guys. Sorry, I was on mute. A couple questions for you. Can you help us think about the dynamic in you -- in both your futures and your OTC energy business? The volumes were quite strong in January, and your rolling RPC also increased. Is there something going on the beginning of the year, or should we continue to expect to see volume growth and RPC growth. which was, I would expect, unusual in this environment?

I think one of the things that's going on is that we've introduced a lot of new products, as we've talked about, and as we introduce those product, there's take-up, and you're seeing both volume growth and RPC growth, particularly for -- as we get into some of the niche products that are more complicated and risky and for which we can charge a premium to manage that risk versus the alternatives. We don't give forward guidance. I don't --

With regards to rate for contracts, just like I would caution you when it moved down $0.03 not to draw a line through that, I wouldn't draw a line up through up $0.03 either. We, in any given month or quarter, have mix issues with regard to how many market makers we have and what volume of commercial participants we come in. So the volume growth is strong, I don't -- I wouldn't have any expectation that our rate for contract up or down will have move that significantly from the trends you've seen recently.

Okay, great. And then you gave us some guidance on the costs. I know you explicitly didn't give guidance on comp expense or anything like that, but can we think about a normalized payout ratio, so we can build those -- build comp into our models and then focus more on the revenues for the rest of the year?

Yes. So let me touch on that little a bit. I think -- one of the things we've got inside our comp expense, as you know, is we've got our broker business, and so frankly I hope to see comp grow with that, because that means our revenue is growing in that business. But based on the assumptions we've got right now for growth in that business in 2010, I think on a normalized basis, you should expect comp expense to be in the $57 million to $60 million range a quarter. That obviously assumes that we've got on-target performance relative to our bonuses and that's an issue I'd touch on, as well. Within those bonuses, to the extent we do outperform, which is what all of us come to work every day trying to do, any up side that we have relative to our board-established objectives, which as is typical of every year prior to this, require double-digit top-line and bottom-line growth, 85% of every dollar of up side drops straight to the bottom line, and the expense we do incur for additional outperformance that goes to employees largely reflects restricted stock units that are given to employees, which have retention value because they continue to vest. And in addition to that, align the employees' interest with shareholders, because as the stock goes up they benefit from that, as well.

So I think on a normalized basis you'll be looking at somewhere in the $57 million to $60 million range a quarter, and again our hope is that that goes up because performance is better than the targeted budget right now. And I think overall, just to put a head on it, expense overall for the year I would expect to be down a little bit on a GAAP basis, and even adjusted for the one-time items that we detailed, I wouldn't expect us to have more than 3% to 5% growth on a year-over-year basis. And again, as I mentioned, that's going to support double-digit top-line growth and margin expansion.

Great, that's extraordinarily helpful. Thank you.

Next we'll move to Michael Carrier with Deutsche Bank.

Thanks, guys. Hey, Scott, just one more thing on the expenses. Just given the adjustment on the taxes, I think it was around $5 million it looks like on the adjusted pro forma table, was that all in SG&A? What's a normalized SG&A number?

No, it was roughly $3 million in SG&A, and about $2.5 million in comp, and so I think we had the normalized SG&A on chart five of the presentation, for the quarter it was around $22 million. And I think if you look back, our quarters have typically been in the $22 million to $23 million range.

oh, thanks. And then just on the increase in the buyback plan, up to $300 million, and just given that your cash is now approaching $600 million, any timing on that? And then on the CDS guidance of $60 million to $80 million, also on that, any initiatives throughout the year where you think that a certain quarter should be more weighted in terms of when those revenues are realized, or just pretty even across the quarters?

Well, I think on the $60 million to $80 million you'll see that as a build through the year. I wouldn't take the midpoint and divide by four because we're still rolling out single name products, we're still building out the buy side business, so that's not something I would pick a midpoint and divide by four. I think you'll see it build over the quarters. As I mentioned, the fourth quarter revenues were in the $10 million range. You can think of that as a starting point and then building quarter by quarter as we rollout more product and bring on more customers.

And let me comment on the cash. We have the great fortune of sitting on around $500 million of cash with relatively low debt, and because of our strong cash flow and our very strong banking group that we have surrounding us, opportunities we believe increasingly to get access to credit should we need it. So we're sitting here being cautious, opportunistic, and those opportunities may come in buying back our own shares and as you that follow our stock know that sometimes things that happen in regulation or rumors that circulate tend to move our stock dramatically, and we want to be opportunistic, if that's the best return on shareholder capital that we can deploy that capital. And as well, we look at M&A opportunities and basically buy versus build on the initiatives that we have in front of us. So we're in a very strong position, and we recognize that we're in that position, and we're not going to do something without a lot of calculated measure.

Okay, thanks, guys.

And we'll move on to Jonathan Casteleyn with Susquehanna.

Yes, thanks, good morning. I'm just wondering if you can comment on if you're seeing any abnormal seasonality in your OTC business, or would you expect the activity that's a new stepped up trend to continue throughout the year, or if you've seen any abnormal seasonality in the fourth quarter?

Jonathan, I'm always reluctant to predict what may happen in the future but I would tell that you some of trends that are helping to drive that growth clearly are tailwinds with us. The continued growth in our oil business, our oil business in OTC in the fourth quarter was literally six times larger than it was in fourth quarter a year ago. Our power business was double. So as we've rolled out new plus, as more people want to move to a cleared solution, those trends will help to continue to support our growth. As I mentioned in my prepared remarks, our natural gas business had its best quarter since third quarter of 2008. Again, we've seen the prices move up in natural gas over the past quarter, or so, and the volatility around larger prices tends to drive larger volumes. So I think some of the trends that have supported the growth recently clearly remain in place. The extent to which those will last is not something that we'd predict.

Tight, okay. Then as far as the gradual improvement in the CDS markets that are built into your clearing forecast, what assumption is behind that as far as legislative he proceedings; i.e., as the house bill stands now, is passage of that, is that something you view as positive? Then just being that you sit in a fairly important position do you see something from a legislative standpoint forthcoming, specifically around CDS?

This is Jeff, Jonathan. A lot of the other exchange heads, I've listened to their calls, and they seem to know where Congress is moving and where people in the EU are moving much better than we do. We have no idea what's going to come out of any legislative reform. We're active on the hill, and we're involved in the process and we're active in Brussels and involved in that process, but literally have no idea when or if or what will happen legislatively. What we do know, though, is the obvious, which is the trend is to try to force contracts onto exchanges for transparency, try to force them into clearinghouse for risk management, try to get data sold so that people can see business in more near real time. So I guess an analogy, and maybe in a tribute to Captain Phil from "Deadliest Catch," the best thing that we can do is put our boat where we think the fish are going to be and throw the nets out, and that's what we're doing. I think that trend is something we've been doing for years now and that trend is going to continue. It may or may not accelerate, but nonetheless, I feel very good about where we've positioned our boat.

And just one metric, Jonathan, for what it's worth, is we are seeing the banks higher on CDS debt. We did see a January, which was the best month of our brokerage business in the past 13 months, so the market tends to react in advance of legislation, and right now, they're building their debts and they're building their trading volumes.

Great, thanks for that insight.

And we'll move on to Rich Repetto with Sandler O'Neill.

Yes, hi, guys. Jeff, first I'm chuckling about your comment that you said the CME said all trades done at a competitive were wash trades, but they --.

They'll probably get angry about that, but I think that's effective what the rule did and I think that you shouldn't read any more into what the CFTC said, other than that doesn't seem like a reasonable rule. But in fairness to the CME, and I want to be very fair to them, they are right in that they have an obligation to make sure the markets that they run are real trades that are part of the price discovery process, and they've said that they intend to do that, and that is what I think the law says that they should do, as well as ICE.

Jeff, the -- now my question is -- that was just a comment -- my question is, you purchased your [Quiet and I Bought] in 2007, Creditex in 2008, and you launched CDS last year, what can investors expect. Is there something in the works this year, or is it year where you continue just to focus on the rolling out of new product and scaling some of the things, the initiatives you've taken on the last couple years?

I guess without showing the man behind the curtain -- (LAUGHTER)

That's whom we're trying to find.

The great position that we're in as managers right now is that we do have have a very strong operating business, and we're smart enough to not [trust] the control panel to screw that up. So we really enjoy tremendous tailwinds as we're moving forward. Our growth that we're seeing in the first quarter, for example, is above an already increased year as opposed to many of our peers, which are back to their 2006, 2007 volume ranges and growing to basically recover back. We never went down so we're in a tremendous position and that means that I think our shareholders can hopefully, along with all of us as managers who are shareholders, enjoy continued growth in the business. We sit on this ability to do transactions, and I suppose partly why we have outperformed in terms of return on invested capital is that when we make an acquisition it's really against a strategic initiative that's going to drive, in our mind, top-line growth as opposed to mergers that involve cost cutting, which others have done and they've done very, very well, but it's just never really been our competency or our desire.

And the other thing we've done, Rich, over the past couple years is we've built the business and a financial model that position us very well to move in any number of directions as we get to this year, with presence in Europe and the US, multiple clearinghouses, leveraged at around the half a times our trailing 12-month EBITDA, and net debt that's actually +$250 million because of the $550 million we've get in cash. So as we think about the next strategic step, we built the business model and the financial model that gives us tremendous flexibility to go where we'd like to go.

Okay, and then a quick follow up -- hopefully it's quick -- on the energy position limits, Jeff. you've had time to digest, I know you talked about your 51%, I think you said, to commercial end users, but is there -- trying to learn the impact on both, because other people are more focused, say, on liquidity providers, but anything you've seen after digesting it that would be -- that is helpful, harmful, to energy trading?

Yes, I think a couple things have come out of it so far. First of all, the debate that's been going on and the really thoughtful process that the CFTC has put in place, which has allowed ample time for input and thought on what should be done, it really has shed the light on the fact that there has not been a speculation problem, which is something that we and our peers have said when we look at our own data. And the focus now has changed more to trying to limit concentration in markets, which is much more of rank-management focus than a price-discovery focus. And we agree broadly that it's beneficial for exchanges not to have customers that have highly-concentrated positions. It's in our exchange collective best interest to have as broad a business as we can with the most customers that we can. So the proposal that's out there now is relatively detailed. We will be making some comments,again, in the details of how such regulation would and could be implemented, and I expect that we'll be putting and filing input this month. So I don't want to, again, foreshadow exactly would those details are, but broadly speaking, we feel very good about the process, and broadly speaking, we feel good about the shift in the debate away from this speculation debate.

Okay, thanks a lot and congrats on the growth.

And we'll move on to Daniel Harris with Goldman Sachs.

Hi, good morning, guys.

Good morning.

Moving back to the AG business and away from some of the other stuff that we've been talk about, it's been obviously one of the more difficult areas to project forward, and I think a lot of that had to do over the last few years with the change in credit dynamics from the banks. As guys sit there today, how do you view credit availability to traders, and how do you think that impacts people's decisions on what they're doing financially and what they're underlying?

You can see in our -- I think if you drill through our AG markets, which is something that we do, you can see that our sugar business, which is the most global business and is the business that is probably the most levered to emerging market growth, is doing very well, and that sug -- and that is a business where there are a lot of small players, right; these are sugar mills, sugar refiners, and cane growers and what have you. It seems like that business is doing well, and outside of the West there is access to capital and investment and growth. If you look then at, let's say, cotton, which is -- we have delivery in the United States in our cotton product, so it's much more levered to US economy, you'll see that there's a tremendous amount of stress in the cotton markets in getting access to credit, in recovering from past investment decisions that people in the cotton market have made. You've seen a shift away from acreage planted in cotton, which may be driven by the access to capital as much as mix. And so, across our AG markets it's a mix, and the bottom line is, I think, the more levered you are to the US credit markets probably the less well you're doing.

And just to put some number on it, ROI, as we said in the presentation, in AGs is up 15% from where it was at the end of 2008. At the end of January, it was up again, and sugar is a terrific grower for us, but our other AG contracts grew 13% in January and have continued to perform well into February. So the OI growth, the volume growth that we're seeing across the AG products would certainly suggest that those markets are recovering.

Okay, thanks. Just on the Russell, obviously there could be some macro issues that affect equity trading in general, but you guys have talked in the past about the growth in value in the [seat] that you may rollout at some point. Any update on those and whether that's going to be a 2010 event, and if so, whether the -- you've been getting a lot of demand from the end users for that?

Yes, I don't want to say exactly when we're going to roll them out. It is something that we view as an opportunity for us, and we continue to evaluate it. Obviously there is a lot of stress in equity trading, and as Scott said his prepared remarks, we hold our staff accountable for trying to grow our market share against the S&P 500. That's our benchmark, because they're not going to necessarily be able to grow absolute volumes if we get in a bear stock market. And the growth in value, as you know, are really contracts that you use at the core for hedging fund managers that are running growth in value funds, and we are really waiting until we see money flowing into growth funds as an investment vehicle. And right now you all know the markets much better than we do, and it's kind of a stock picker's market, and trend following market, and a bit bearish to begin with, at least at the moment, so it doesn't feel to us like we're poised to have a lot of growth in value investment right now.

Oh, guys, thanks very much.

And our final question will come from Rob Rutschow with CLSA.

Hey, good morning.

Good morning.

Just another follow up on the CDS clearing. Are there any additional big firms that are out there that you haven't signed up yet that might move the needle on the net income capture, or any other items that we should think about that might move that 16% to 20% around?

Yes, embedded in the $60 million to $80 million is an assumption that we'll continue to sign up new banks that aren't currently members. We've got 13 in the US and 13 in Europe. There clearly are more than that, that are significant players in the market. So there's some of that growth embedded in it, and, yes, there are a couple of large banks that are out there that do material business that aren't yet members with whom we're in very active dialogue.

And we use that concept of banks as members simply because we have a very, very high threshold for membership right now, $5 billion net worth, so we suspect that our model will be clearing -- high net worth clearing firms in the center of the market, providing access to the smaller customers, smaller banks and smaller buy side firms as our version of futures commission merchants, which we call DCMs in this model.

Okay. My second question might be a little premature, but what would be the impact to you guys, and also what would be the opportunities, if we actually saw a disillusion of the Euro or significant contraction there?

That's a tough one. (LAUGHTER)

Rob, that's almost an impossible question to answer. If an entire currency goes down what would the impact be to the Company. Obviously we have Euro holdings in our clearinghouse, but we think about those contingency plans and we look at concentration levels. We're -- I don't even know how you'd begin to answer that question.

Just from a bit that's obvious, we largely receive revenue in dollar denomination because oil products just happen to be denominated in dollars and so we collect commissions in dollars. And, of course, we pay our staff outside the US in Europe and our costs are Euro denominated. So I guess to the extent that dollars stay strong and Euro gets cheap, we'd probably benefit on a net basis, assuming that the rest of the world hangs together.

Okay, thanks. I thought it was worth a shot.

Yes, thank you. was that our last call -- or last question? Great. Well, thank you, everybody, we appreciate you joining us this morning. We appreciate all the support that you gave us in 2009, and my colleagues and I will be back together with you next quarter.

And that will conclude today's call. We thank you for your participation.