CME

CME Group Inc. (CME)

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CME Group (CME)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

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

Derek Sammann - Senior Managing Director of Financial Products & Services

Bryan T. Durkin - Chief Operating Officer

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

Kimberly S. Taylor - President of CME Clearing House Division

Analysts

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

Howard Chen - Crédit Suisse AG, Research Division

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

Alex Kramm - UBS Investment Bank, Research Division

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

Jillian Miller - BMO Capital Markets U.S.

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

Michael Carrier - BofA Merrill Lynch, Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

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

Brian Bedell - ISI Group Inc., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Akhil Bhatia

Presentation

Unknown Executive

[Audio Gap]

…on our website. Also, note the final page of our earnings release contains a reconciliation to our GAAP results this quarter.

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

Phupinder S. Gill

Thank you very much, and thank you all for joining us today. I'm going to highlight CME Group's first quarter, and then turn it over to Jamie to review our financials.

We experienced a solid start of the year. First quarter average daily volume was 12.5 million contracts, up significantly from the 10.5 million contracts we averaged during the second half of last year. Open interest has jumped 18% year to date, up to 82.3 million contracts. Additionally, the first stage of the OTC clearing mandate was completed successfully, with cleared volumes roughly double what they were prior to the mandate.

Let me turn to the highlights of our core business. In the interest rate complex, we successfully grew volumes in open interest, up from the levels that we saw in the second half of 2012. Treasury volume has been particularly strong to start the year, with first quarter ADV of $3.4 million, up 24% compared to the same period last year. This included a Treasury futures monthly record of 3.8 million contracts in February, up 33% over the prior February, and we reached a daily all-time high of 10.1 million contracts on February 26.

Additionally, we've continued to successfully expand our options business with a record level of electronic trading of our 10-year Treasury note options of 54%, as well as generating 48% volume growth in our popular weekly Treasury options. Treasury options volume in February was the second highest month in our history. Overall, interest rate average daily volume was 5.7 million contracts in the first quarter of 2013 compared to 4.3 million during the second half of 2012.

Although the last 2 years have been challenging due to low volatility and low overall rates, we have invested in our interest rate complex through new product development to position it to strongly benefit once we come out of this difficult cycle.

In the intermediate and long term, we would expect an improving economy, the end to quantitative easing and increasing uncertainty around both the long and short ends of the curve, a large part of this for the franchise. This product line also stands to benefit from the migration of noncleared OTC interest rate swaps into clearinghouses and potentially, substitution of futures contracts for some of those OTC products. And CME Group's value proposition is significantly enhanced with the introduction of portfolio margining for both house and client accounts, creating powerful capital efficiencies for our global client base.

Looking at OTC, as I mentioned earlier, there has been a nice pickup in volume since Wave 1 of the CFTC clearing mandate kicked in on March 11, the first of a series of important dates for the industry. Since then, we have averaged 20 billion per day, which is nearly twice the amount we've cleared from the beginning of the year leading up to the mandate.

Interest rate swap open interest has also grown 44% to $1.4 trillion since the beginning of the mandate. Recently, 270 buy side firms have registered with CME for OTC clearing, and we are working closely with hundreds of firms and many intermediaries preparing for Phase 2 that begins on June 10. We continue to work to build liquidity in the deliverable swap futures contract, and we have 35,000 of open interest and several thousand contracts traded per day mainly by hedge funds asset managers, mortgage services and banks. Right now along with our FCMs and end customers, we are focused on on-boarding for Phase 2 of the mandate. Post June, we expect an increased focus on our entire suite of rate offerings, including call futures, the DSF product, as well as cleared swaps.

During March, we've successfully completed the first customer portfolio margining between cleared swaps and futures through one of our FCMs, and we expect 3 to 5 additional clearing members to provide this to end clients in a more scalable way later this quarter, driven by client demand.

The number of intermediaries automating this process should increase throughout the year. Our sales forces is increasingly hearing about the importance of capital efficiencies and our interest rate swap product suite offers the best opportunity to optimize deployed capital, leveraging our existing deep open interest across the U.S. yield curve.

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