CME

CME Group Inc. (CME)

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CME Group (CME)

Q3 2010 Earnings Call

October 28, 2010 8:30 am ET

Executives

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

John Peschier - Managing Director of Investor Relations

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

Craig Donohue - Chief Executive Officer, Executive Director, Member of Executive Committee, Member of Marketing & Public Relations Advisory Committee and Member of Strategic Steering Committee

Bryan Durkin - Chief Operating Officer and Managing Director of Products & Services

Analysts

Alex Kramm - UBS Investment Bank

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

Edward Ditmire - Macquarie Research

Christopher Allen - Ticonderoga Securities LLC

Michael Carrier - Deutsche Bank AG

Rob Rutschow - Credit Agricole Securities (USA) Inc.

Donald Fandetti - Citigroup Inc

Richard Repetto - Sandler O`Neill

Patrick O'Shaughnessy - Raymond James & Associates

Howard Chen - Crédit Suisse AG

Kenneth Worthington - JP Morgan Chase & Co

Michael Vinciquerra - BMO Capital Markets U.S.

Daniel Fannon - Jefferies & Company, Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Roger Freeman - Barclays Capital

Presentation

Operator

Good day, everyone, and welcome to the CME Group Third Quarter 2010 Earnings Call. [Operator Instructions] 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

Thanks, and thank you all of you for joining us this morning. 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.

Before they begin, I'll 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 on the IR section of our website.

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

Craig Donohue

Thank you, John, and thank you for joining us this morning. I'll be discussing our performance in the third quarter and providing updates on a few of our strategic initiatives before turning things over to Jamie to review the financials.

CME posted solid third quarter results with average daily volume up 14% from the same period last year. Net income of 21% to $244 million and earnings per share of $3.66, up 20%. The foundation of our performance lies in our product diversity. Energy and metals contribute 32% of transaction fee revenues; interest rates, 27%; equities, 21%; and foreign exchange and commodity products contribute the remainder.

The breadth and diversity of our product line is beneficial when we face macro economic headwinds, in particular, market segment. Importantly, I'll note that though we've seen volume performance within the individual asset classes varies throughout the year, we have continued to see open interest build from quarter-to-quarter in everyone of our product lines. Open interest currently sits at 92.4 million contracts, up 12% compared to the same period last year and just below the all-time record of 95 million.

To review some of our volume statistics, third quarter average daily volume was up 14% versus the same period last year and was down 15% versus the second quarter of this year, due to extraordinary performance in Q2 and the typical impacts of seasonality during July and August.

Turning to interest rates. Diminished activity in short-term rates was significantly offset by strong growth in our Treasury products, as I will describe in a moment. Average daily Eurodollar volume was down 7%, however, longer dated Eurodollar contracts with expirations beyond September 2012 saw record average daily volume of 320,000 contracts, up 32% from the prior year as there continues to be more volatility at the long end of the curve. Eurodollar mix curve options, which are short-dated expirations on longer-dated futures contracts, have also experienced impressive volume growth this quarter from approximately 6,000 average daily volume last year to 87,000 this quarter and with open interest growing from 330,000 contracts to 1.2 million contracts today at quarter end.

Importantly, Eurodollar opened interest across the whole yield curve continues to grow including in the first two years. While short-term interest rates continued to be affected by monetary policy, it is important to recognize that Eurodollar products represent only 12% of total transaction fees at CME Group.

As I mentioned, Treasury products had a very strong third quarter with average daily volumes up 38% in futures and with options volumes up 62%. As we've seen expectations for interest rate increases move out on the curve, products at the longer end of the curve are seeing greater activity. An additional positive to the strong Treasury volume is that the Treasury's weight for contract is generally higher than that Eurodollar RPC. We continue also to successfully innovate new products and product extensions that meet customers needs and enhance our performance in this segment of our business. We've had tremendous success with our Ultra Long Bond Treasury features, which posted average daily volumes of 33,000 contracts in Q3 and open interest of 222,000 contracts.

Just this week, we also launched our on-the-run Treasury futures contracts, which our customers are very excited about. The robust liquidity and diversed customer base in our core Treasury products enabled us to effectively develop these product extensions, which in turn allows us to provide our customers with more trading opportunities at CME Group.

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