CME Group Inc. (CME)

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Chicago Mercantile Exchange Holdings Inc. (CME)

Q1 2010 Earnings Call

April 29, 2010 8:30 am ET


Craig Donohue - CEO

Terry Duffy - Executive Chairman

Jamie Parisi - CFO

Phupinder Gill - President

Bryan Durkin - Chief Operating Officer

Kim Taylor - Head of Clearing

Laurent Paulhac - Managing Director, OTC Products & Services

Rick Redding -Managing Director, Products & Services initiative


Mike Carrier - Deutsche Bank

Dan Fannon - Jefferies

Howard Chen - Credit Suisse

Rich Repetto - Sandler O’Neill

Alex Kramm - UBS

Ken Worthington - JPMorgan

Roger Freeman - Barclays Capital

Daniel Harris - Goldman Sachs

Christopher Allen - Ticonderoga Securities

Mike Vinciquerra - BMO Capital Markets

Niamh Alexander - KBW

Chris Brendler - Stifel Nicolaus

Don Fandetti - Citigroup

Jonathan Casteleyn - Susquehanna

Rob Rutschow - CLSA

Justin Schack - Rosenblatt Securities



Good day, everyone, and welcome to the CME Group First Quarter 2010 Earnings Conference Call. As a reminder, this call is being recorded. At this time for opening remarks, and introductions I would like to turn the conference over to John Peschier. Please go ahead, sir.

John Peschier

Thank you all for joining us. Craig Donohue, our CEO; Terry Duffy, our Executive Chairman; and Jamie Parisi, our CFO will spend a few minutes outlining the highlights of the first quarter, and then we will open up the call for your questions. Also joining us for participation in the Q&A session are Phupinder Gill, our President; Bryan Durkin; our Chief Operating Officer; Kim Taylor, our head of Clearing; Laurent Paulhac, Managing Director, OTC Products & Services; and Rick Redding; Managing Director, Products & Services initiative.

Some of our team is working from Chicago, while others are working hard in New York, so please bear with us as we may jump around a little bit during the Q&A session. Before they begin, I’d 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 Form 10-K and 10-Q which are available on the Investor Relations portion of our website.

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

Craig Donohue

Good morning and thank you for joining us. I’m pleased to be speaking to you today from a really different place both in the macroeconomic sense, and certainly from CME’s perspective than we found ourselves during the first quarter last year.

To begin with first quarter volumes tell a positive and compelling story with 12% growth in average daily volume and a 24% increase in open interest since Q1 ’09. With the exception of equities exchange-traded volumes by asset class are up by double digit percentages from first quarter last year. April ADV of 11.6 million contracts is strong, and up from the first quarter. This notable as April has traditionally been one of the slowest months for us. Interest rates were up 33% in Q1, and this month’s volume is up 64% compared to last April.

Recognizing that Q1 ’09 was an extremely depressed volume environment for interest rates, we are very pleased with these growth percentages, but also continue to look forward for potential indicators of ongoing growth.

To that end, we continue to believe that the growing inventory of treasuries will need to be hedged in a more volatile interest rate environment. The expectation for treasury issuance this year is $2.3 trillion, up 7% from $2.1 trillion in 2009.

In addition, the Federal Reserve officially ended its $1.25 trillion program to purchase mortgage-backed securities, a plan that was one of the single largest initiatives ever undertaken by the federal government to support the US economy.

In terms of trading activity, the Fed’s participation in this market restrained hedging and futures trading as they acted to keep the mortgage market range bound. Additionally, Eurodollars have historically been used to express opinions about future Fed activity, and expectations are for a more active Fed once the zero interest rate policy draws to a close.

CME Group’s Fed funds futures are currently reflecting a 34% probability of a rate hike by September, a 52% probability of an increase in November, and a 68% increase by December. As we have mentioned before, we have seen the depth of our central limit order book significantly expand in many product areas and our average bid-ask spread has tightened, particularly in interest rates since the credit crisis.

Slide eight shows the growing liquidity available on our treasury and Eurodollar markets along with other products. The recently announced interest rate offerings from other exchanges and consortiums have captured some headlines. However, our focus has been and will continue to be fostering liquidity in our markets, which supports customer trading, helps us attract new customers and reduces overall trading costs.

Equities have been challenged in the first quarter by the weight of decreasing volatility, a slow upward rise in equity values, and difficult comparables in Q1 ’09. Low volatility has impacted the cash equities market and other futures products, such as the EURO STOXX and FTSE.

However, we have had two days over the last few weeks including this Wednesday when equity volumes exceeded 4.5 million contracts, so as equity markets become less range bound we would expect these volumes to rise as well.

In addition, we’re very pleased with the success we’ve had increasing the volume and revenue contributions from other asset classes. The FX asset class had a record revenue quarter and energy and metals were near peak from a revenue perspective. Taken together, revenue from these three asset classes was up 18% from Q1 ’09. Trends in these products during the month of April continued to show strong strength with volume up 45% compared with April last year.

I would like to now provide you with an update on our globalization strategy as this past quarter has been a very active period for us with a number of significant accomplishments. Our globalization strategy is primarily oriented to expanding our core businesses and building deep liquidity in our products 24 hours a day.

We have a multipronged effort which includes expanding our own global sales force and technology distribution, and by also partnering with leading exchanges and markets where we see high growth potential.

The partnerships allow us to accelerate our market penetration, expand our customer reach, and develop our product sales channels with local brokers. Nearly all of our products are global benchmarks that have universal appeal to customers, both domestically and internationally. We are selectively adding sales and marketing staff in the EMEA, Latin American, and Asian markets, and we now have 50 sales and marketing and business development employees outside of the US contributing to our strong progress and future growth potential in these markets.

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