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CME Group Inc. (CME)

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CME Group Inc. (CME)

Q3 2009 Earnings Call Transcript

October 29, 2009 8:30 am ET

Executives

John Peschier – Managing Director, IR

Craig Donohue – CEO

Jamie Parisi – Managing Director and CFO

Rick Redding – Managing Director, Products & Services

Phupinder Gill – President

Terry Duffy – Executive Chairman

Kim Taylor – Managing Director and President of Clearing House Division

Analysts

Roger Freeman – Barclays Capital

Howard Chen – Credit Suisse

Mike Vinciquerra – BMO Capital Markets

Rich Repetto – Sandler O'Neill

Chris Allen – Pali Capital

Ken Worthington – JP Morgan

Daniel Harris – Goldman Sachs

Michael Carrier – Deutsche Bank

Dan Fannon – Jefferies

Donald Fandetti - Citigroup

Jonathan Casteleyn – Susquehanna

Rob Rutschow – CLSA

Justin Schack – Rosenblatt Securities

Patrick O'Shaughnessy – Raymond James

Presentation

Operator

Good day everyone, and welcome to the CME Group third quarter 2009 earnings call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I'd like to turn the conference over to John Peschier. Please go ahead sir.

John Peschier

Thank you and thank you all for joining us. Craig Donohue, our CEO; and Jamie Parisi, our CFO will spend a few minutes outlining the highlights of the third quarter and then we will open up the call for your questions.

Also joining us here today for the Q&A session are Terry Duffy, our Executive Chairman; Phupinder Gill, President; Kim Taylor, who runs our Clearing House; and we have a sick Rick Redding, our Head of Products and Services also who made it in today.

Before they begin, I will read the Safe Harbor language. Statements made on this call and in the accompanying 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, including our most recent Forms 10-K and 10-Q, which are available in the Investor Relations section of our website.

During this call, we will refer to GAAP and non-GAAP pro forma results. A reconciliation is available in our press release, and there is also a file on the Investor Relations portion of our website that provides detailed quarterly information on both a GAAP and pro forma basis.

With that I would like to turn the call over to Craig.

Craig Donohue

Good morning and thank you for joining us today. During the third quarter, we saw increasing stability in the macroeconomic climate as evidenced by multiple factors. The LIBOR-OIS spread has further tightened to its lowest level in almost two years, indicating a lower risk premium on credit due to greater economic stability.

Long-term funds flows continue to move into mutual funds, primarily fixed income products. Hedge fund assets under management rose for the second quarter, and hedge funds net asset flow was positive for the first quarter this year. Finally, after extremely reduced activity in the third and fourth quarters of 2008, mortgage originations have shown sharp upturns in every quarter this year.

While many of these metrics are below historical highs, the sustained nature of the trends as well as the indication that market participants are seeking higher risk in return are promising for the overall economy and for CME Group's business. CME Group’s volume also demonstrates area of stability and improvement.

Third-quarter overall average daily volume was 10.1 million contracts and exploring the details by product area there are some promising trends. Additionally, October average daily volume was approximately 10.7 million contracts. It will be the best non-roll month volume of the year, and open interest is currently up 18% from year-end 2008 and the combined CME, CBOT, NYMEX product lines.

The interest rate complex posted its highest quarterly volume since Q3 ’08 with average daily volume of 4.4 million contracts. Within rates, Eurodollars continued to see growing activity in contracts in the second and third year of the yield curve. In the third quarter, these contracts contributed 53% of overall Eurodollar futures volume versus only 44% for the same quarter a year ago.

Changing expectations around interest rates are a key driver of CME Group's interest-rate volumes and this shift in Eurodollar activity indicates that market participants see more likelihood for changing interest rates further out on the calendar than in the near term, which is in line with current federal reserve policy and with prevailing economist views on the timing of potential Fed moves.

While we certainly are not in the business of trying to predict interest rate moves, we highlight this volume trend as one example of how interest-rate expectations affect CME Group’s volumes. Another metric impacting interest rates that we closely follow is cash market penetration of treasury futures.

Our treasury complex has shown growing cash penetration or treasury futures activity as a percent of cash treasury trading activity over the course of 2009 ending the quarter at 56%, up from 53% at the end of the second quarter, and from 46% at the end of December.

Increased cash market penetration at a time of heightened treasury issuance positions CME Group well to capture hedging activity when interest-rate expectations start to shift. Energy volume in the third quarter was in line with year-to-date average daily volume of 1.5 million contracts. However, on a revenue basis the energy complex generated 161 million, which is up 11% from the prior quarter and is a record for quarterly revenue.

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