CME Group's fourth-quarter earnings underperformed the Zacks
Consensus Estimate but beat the year-ago number by a penny. Higher
expenses and lower rate per contract more than offset top-line
growth, driven by higher volumes, resulting in deteriorated
margins. Interest rate volatility, higher tax rate, lack of a
significant growth catalyst and intense competition also pose
operational and financial risks. While a diverse derivative-product
line and gradual clearance of regulatory clouds should drive
volumes in the future, it also indicates higher infrastructure
costs. Though the current scenario appears bleak, CME Group's
efforts to promote, expand and cross-sell its core exchange-traded
business through strategic alliances, meaningful acquisitions,
newer product initiatives along with its global presence should
generate decent growth in the long run, justifying our Neutral
Formed in 2007 by the merger of the Chicago Mercantile Exchange
(CME) and the Chicago Board of Trade (CBOT), CME Group is the
largest futures exchange in the world in terms of trading volume as
well as notional value traded. The Chicago Mercantile Exchange was
originally formed as a nonprofit organization in 1898, but was a
century later converted to a for-profit company in 2000. It became
the first publicly traded financial exchange in the U.S. in Dec
2002. CBOT, established in 1848, is a leading futures and options
exchange. In Apr 2005, CBOT converted into a for-profit stock-based
holding company and for-profit membership exchange subsidiary. As
of Dec 31, 2012, CME Group had approximately 2,600 employees.
CME Group offers the widest range of benchmark products covering
all major asset classes, specifically futures products and options
on futures. The broad product groups are futures and options based
on interest rates, equity indexes, foreign exchange, commodities,
energy and metals, besides alternative investment products such as
weather and real estate.
CME Group's interest-rate trading, which accounted for 40% of
the average daily volume in 2012 has benefited from strong demand
for Eurodollar futures contracts (per management, CME Eurodollars
are the most actively traded futures contracts in the world).
Equity trading (25% of average daily volumes in 2012) includes
trading of futures products based on indices such as the S&P
500 and NASDAQ 100. Foreign exchange and Agricultural commodities
accounted for 17% of the average daily volume in 2012, while energy
and metals accounted for 18%. Additionally, the company's clearing
house clears, settles and guarantees every futures and options
contract traded through the exchange, in addition to cleared
over-the-counter (OTC) products, including credit default swaps
(CDS) and interest rate swaps (IRS). Over 80% of CME Group's
revenue are derived from the clearing and transaction fees assessed
on each contract and executed through the trading venues and
cleared through its clearing house.
CME Group has the most diverse product range as a result of
continued innovation and evolution and also from mergers and
acquisitions. The addition of the CBOT product lines largely
contributed to an increase in overall trading volume. The
integration was completed in 10 months and the company is on track
to realize approximately $150 million a year in cost synergies. The
combined entity controls 98% of the U.S. futures market. In Feb
2008, the company completed its transaction with BM&F Bovespa
exchange in Brazil and in Feb 2010, CME Group got into a strategic
partnership with BM&F Bovespa to develop a new multi-asset
class electronic trading platform, thereby enhancing its growth
opportunities by offering an integrated technology solution for
global derivatives and non-U.S. equities trading. CME Group owns a
5% stake in BM&F Bovespa.
Additionally, in Aug 2008, the company acquired NYMEX and in the
first half of 2010, CME added Commodity Exchange Inc. (Comex)
metals products to its portfolio. Comex operates as a subsidiary of
NYMEX. In 2009, CME acquired a 25% equity stake in Bursa Malaysia
In Mar 2010, CME launched a new joint venture company, CME Group
Index Services LLC, where CBOT attained 90% stake while Dow Jones
& Company has the remaining 10% interest. This new joint
venture will own the Dow Jones Indexes, which includes the Dow
Jones Industrial Average (DJI) and approximately 130,000 index
In Oct 2010, CME Group started clearing OTC IRS through CME
Clearing, marking it as a multi-year growth initiative, although
its contribution to margins is expected to take a longer lead time.
On Feb 28, 2011, the company launched a new clearing membership
platform, Financial Instruments Clearing Membership (FICM). This
new platform would help reduce the trader's cost by nearly 65%
enjoying a cross-margin for the company's interest rate futures
products and US Treasury's futures franchise. The FICM was expected
to be initiated by the end of Mar 2011 but awaits regulatory
approval. Moreover, in Dec 2010, CME Group acquired Elysian Systems
Ltd. (Elysian), an independent provider of electronic trading and
market technology. The company launched CME Clearing Europe in May
2011 in London.
Further, in Feb 2012, CME Group acquired another 25% stake in
the Dubai Mercantile Exchange (DME), thereby owning 50% of this
Dubai's commodities exchange in total. Moreover, in Apr 2012, the
company acquired U.S.-based second-largest carbon exchange GreenX
Holdings LLC for an undisclosed price.
In Jul 2012, CME Group, who owns 90% of the CME Group-Dow Jones
JV that owns Dow Jones Indexes, along with McGraw-Hill, owner of
S&P Indices, announced the launch of S&P-Dow Jones Indices
under their joint venture (JV), which was formed in Nov 2011.
Accordingly, McGraw-Hill will contribute its S&P Indices
business and the CME Group-Dow Jones JV will contribute the Dow
Jones Indexes business to create S&P-Dow Jones Indices.
According to the terms of the JV, McGraw-Hill will own 73% of
S&P-Dow Jones Indices, CME Group will own 24.4% through its
affiliates and New Corp.'s Dow Jones will own the remaining 2.6%.
Further, according to the deal, McGraw-Hill s S&P Capital IQ
acquired the Credit Market Analysis (CMA) business, which was
acquired by CME Group in Mar 2008.
In Dec 2012, CME Group acquired the rival exchange Kansas City
Board of Trade (KCBT) for a cash payment of $126 million.
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