CME

CME Group Inc. (CME)

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CME Group (CME)

Q4 2012 Earnings Call

February 05, 2013 4:30 pm ET

Executives

John C. Peschier - Managing Director of Investor Relations

Phupinder S. Gill - Chief Executive Officer, Director, Member of Executive Committee and Member of Strategic Steering Committee

James E. Parisi - Chief Financial Officer and Senior Managing Director of Finance & Corporate Development

Terrence A. Duffy - Executive Chairman, President, Chairman of Executive Committee and Member of Strategic Steering Committee

Bryan T. Durkin - Chief Operating Officer

Derek Sammann - Senior Managing Director of Financial Products & Services

Analysts

Jillian Miller - BMO Capital Markets U.S.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Alex Kramm - UBS Investment Bank, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Edward Ditmire - Macquarie Research

Brian Bedell - ISI Group Inc., Research Division

Presentation

Operator

Welcome to the CME Group Fourth Quarter and Full Year 2012 Earnings Call. [Operator Instructions] At this time, I'll turn the call over to Mr. John Peschier. Sir, you may begin.

John C. Peschier

Thank you. And thank you, all, for joining us this afternoon. Gill and Jamie will spend a few minutes outlining the highlights for the fourth quarter, and then we'll open up the call for your questions. Terry, Bryan and Derek are on the call as well and will participate in the Q&A session.

Before they begin, I'll read the Safe Harbor language. Statements made on this 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 forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website.

Also, note the final page of our earnings release contains a reconciliation to our GAAP results for the quarter.

Now I'd like to turn the call over to Gill.

Phupinder S. Gill

Thank you, John, and thank you, everybody, for joining us this afternoon. I'm going to highlight CME Group's 2012 major efforts, and then share some thoughts about this year. Afterwards, Jamie will review our Q4 financial results.

Despite facing a low volatility and difficult environment in 2012, we made significant progress across several key areas as we are embracing the changing regulatory and global landscape. Looking forward to 2013, we remain cautiously optimistic about the trading environment relative to last year. Based on what we have been working on, we feel we are very well positioned to benefit most when we come out of this challenging cycle. We experienced improved activity in December 2012 and January of this year in comparison to what we saw during much of 2012.

Average daily volume in December was up 1% year-over-year, with an increase in many asset classes. January average daily volume was 11.4 million, a nice jump from the 10.5 million contracts for daily average during the second half of last year. In addition, open interest is up 13% since the end of the year and is currently above 79 million contracts.

Turning to interest rates. The last 2 months were each up versus the prior year. January average daily volume was more than 5.3 million contracts per day, the highest volume levels since June of last year, and up 24% from the 4.3 million average during the second half of last year. The short end of the interest rate curve is still hindered by the 0 interest rate policy, which has negatively impacted Eurodollar activity.

On a positive note, our Fed Funds Futures product is currently indicating a rate increase during Q4 of 2014, which has moved up from mid-2015. At the long end of the curve, our treasury products are performing well, with January 2013 average daily volume up 30% versus the same period last year.

On February 1, we traded a record number of treasury options approaching 1.2 million contracts, with more than half of that volume on CME Globex. Clearly, market participants are watching economic data very closely with the yield on the 10-year rising above 2% recently.

Longer-term catalysts for our interest rate products include the OTC mandate beginning in March, driving more revenue in swap clearing, as well as increased activity in our futures products, the continued resolution of regulatory uncertainty and improved confidence about the economy. In light of these catalysts, we are building our interest rate product suite and our focus remains on driving activity out the curve, examining new interest rate products and building our OTC swap business, which could potentially drive greater use of our core futures and options product.

Moving on to OTC. We have seen a ramp-up in activity leading to the CFTC clearing mandate, with Phase 1 step to begin in March. So far, over 60 institutions have cleared trades at CME, comprising a wide array of market participants, including asset managers, hedge funds, insurance companies, GSEs and proprietary trading firms. Since the launch, we have cleared $1.6 trillion, and open interest is above $850 billion. 2013 is off to a good start, with many new customers on-boarding and clearing their first trades and many existing customers increasing their activity.

January 2013 average daily notional was over $12 billion, and this compares to $6 billion in the fourth quarter and $4 billion in the third quarter of last year. We also added 8 additional clearing members in 2012, bringing our total to 23.

Overall, there are 3 ways for us to help customers navigate the regulatory changes: cleared swaps; existing rate futures contracts; and the new innovative products that we are currently developing and have developed. And we're executing on all these fronts.

We now clear the 7 major interest rate swap currencies that account for 95% of the market, 51 CDS indices and the 12 most active emerging markets' NDS. In addition, we received regulatory approval to implement portfolio margining for all market participants. Initial results are promising as these participants have seen significant risk offsets that account for margin savings of over $1 billion.

Looking forward, we expect to grow the list of cleared OTC products, as well as launch interest rate swap clearing out of our European clearing house in Q1, well ahead of the mandate there. We also had a successful deliverable swap futures product launch in December with very strong buy and sell side support. There is significant interest in this innovative product and it's off to a great start with approximately 65,000 contracts traded to date, representing $6.5 billion in notional value, and the current open interest lies above 12,000 contracts, which represents about $1.1 billion in notional value.

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