CME

CME Group Inc. (CME)

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CME Group (CME)

Q2 2011 Earnings Call

July 28, 2011 8:30 am ET

Executives

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

John Peschier - Managing Director of Investor Relations

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

Brian Bedell - ISI Group Inc.

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

Alex Kramm - UBS Investment Bank

Rob Rutschow - Credit Agricole Securities (USA) Inc.

Michael Carrier - Deutsche Bank AG

Donald Fandetti - Citigroup Inc

Kenneth Worthington - JP Morgan Chase & Co

Howard Chen - Crédit Suisse AG

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

Jillian Miller - BMO Capital Markets U.S.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Christopher Allen - Evercore Partners Inc.

Daniel Harris - Goldman Sachs Group Inc.

Roger Freeman - Barclays Capital

Presentation

Operator

Good day, everyone, and welcome to the CME Group Second Quarter 2011 Earnings Call. As a reminder, this call is being recorded. At this time, for opening remarks and introduction, I'd like to turn the conference over to John Peschier. Please go ahead, sir.

John Peschier

Thanks, and I'd also like to thank all of you for joining us this morning. Craig and Jamie will spend a few minutes discussing the highlights of the second quarter. Terry Duffy and Bryan Durkin are here as well, and then we'll 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. For detailed information about factors that may affect our performance, you can go to our website and take a look at our Forms 10-K and 10-Q. Again, you can go to the IR portion of the website to find those. With that, let me turn the call over to Craig.

Craig Donohue

Good morning, and thank you for joining us. I will discuss our strong performance in the second quarter and provide updates on a few of our strategic initiatives before turning things over to Jamie to review the financials.

During the second quarter, we delivered excellent top line results, with revenue of $838 million, driven primarily by strong trading volume, which we also saw last year during the second quarter. Volume accelerated during the quarter with $12.1 million in April, $13.5 million in May and $14.9 million in June, averaging $13.5 million for the quarter. We had record open interest during the quarter that surpassed 100 million contracts. We also delivered a highly profitable quarter with earnings per share of $4.38. This was driven by a heightened expense focus, which is reflected in our revised guidance for the year.

Building on our second quarter results, average daily volume is off to a relatively good start in July, up 18% compared to last year. Interest rate volume was strong in the second quarter, highlighted by a 50% increase in June, with Eurodollars up 58% and Treasuries up 44%. This growth was likely driven by increased volatility due to the turmoil in Europe, the end of the second round of quantitative easing and concerns about the potential downgrade of U.S. debt. Our interest rate market share increased from April to July relative to U.S. and European competitors, which can be attributed to our diverse customer base, our strong liquidity and futures along the yield curve, our healthy options business and our significant depth of book and effective spreads.

We are seeing some customers increasing the proportion of business they do on our exchange. For example, according to the CFTC's most recent traders and financial futures report, there has been a sizable increase in asset manager open interest positions in Eurodollar futures contracts, as well as an increase in the number of large open interest holders in many of our interest rate contracts. The open interest from this customer group, which traditionally executes the majority of its business in the OTC market, has jumped from nearly 1 million to 3 million contracts. This now represents almost 20% of total Eurodollar futures open interest, up from 10% a year ago. In addition, commodities volumes remained impressive during the second quarter. Agricultural products and metals products were up more than 30% during the quarter. The commodity markets are clearly being impacted by supply and demand fundamentals and exacerbated by recent weather patterns.

Turning to company initiatives, we continue to lead the industry in successful product innovation and product extensions, as well as enhancements in technology and in our clearing and risk management services. Last quarter, we launched the sovereign yield spread futures contracts. In addition, we continue to build out our nondollar-denominated products by launching Euribor futures and options, which we currently expect to go live at the end of this quarter. We also announced the late August launch of new foreign exchange futures contracts based on the Chinese yuan or renminbi. In order to meet growing customer demand for products denominated in the Chinese currency, these innovative new futures contracts will be quoted in interbank terms, reflecting the number of yuan per U.S. dollar. These futures products are aligned with the OTC market convention for non-deliverable forwards, while providing the benefits of counterparty risk mitigation from exchange-traded products.

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