CME

CME Group Inc. (CME)

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CME Group (CME)

Q3 2012 Earnings Call

October 25, 2012 8:30 am ET

Executives

John C. Peschier - Managing Director of Investor Relations

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

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

Derek Sammann - Senior Managing Director of Financial Products & Services

Kimberly S. Taylor - President of CME Clearing House Division

Analysts

Alex Kramm - UBS Investment Bank, Research Division

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

Howard Chen - Crédit Suisse AG, Research Division

Jillian Miller - BMO Capital Markets U.S.

Roger A. Freeman - Barclays Capital, Research Division

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

Donald Fandetti - Citigroup Inc, Research Division

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

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

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Brian Bedell - ISI Group Inc., Research Division

Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

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

Akhil Bhatia

Presentation

Operator

Welcome to the CME Group Third Quarter Earnings Call. [Operator Instructions] At this time, I'll turn the call over to Mr. John Peschier. You may begin, sir.

John C. Peschier

Thanks, and I thank all of you for joining us this morning. Gill and Jamie will spend a few minutes outlining the highlights for the third quarter, and then we'll open up the call for your questions. Terry Duffy, Kim Taylor and Derek Sammann are on the call as well.

Before we begin, I'll read the Safe Harbor language. Statements made on the call and in the 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 may be found in our filings with the SEC, including our most recent Forms 10-K and 10-Q, which are available 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, John, and good morning, and thank you for joining us this morning. I will discuss our performance in the third quarter and provide updates on a few of our strategic initiatives before turning things over to Jamie to review the financials.

During the third quarter, we continued to take steps to strengthen our business in a dynamically changing environment. One of the main things we think about and have focused on during the last few years is how to position the company to address customer needs as the market rapidly shifts. I'll talk a bit about that today.

Let me start with interest rates. We have worked hard over the last few years to enhance our interest rate product offering in light of the Fed zero-interest rate policy and have had several successful product introductions since 2010. These developments have added more than 305,000 to our average daily volume and 3.8 million of open interest to our interest rate complex. More recently, we announced that we will launch deliverable interest rate swap futures contracts in a couple of weeks. This innovative new product will benefit clients by providing a unique way of -- a unique way to access interest rate swap exposures. Our customers will now have a complementary standardized product that provides the advantages offered by futures contracts, including pricing transparency, ease of legal documentation, the automatic netting of positions and margin savings. Interest rate swap futures were created to meet strong demand from financial market participants, including banks, hedge funds, asset managers and insurers. Citibank, Credit Suisse, Goldman Sachs and Morgan Stanley are among the firms who are for planning to serve as market makers [ph] for the product, enabling market participants to access deep and liquid markets.

Turning to foreign exchange. For the first time ever, CME Group's foreign exchange average daily volume surpassed the volumes of all of the OTC FX platform to become the largest FX venue globally, with CME Group's September average daily notional trade of $129 billion. This was driven by strong growth with asset managers and particularly, with banks. In addition, FX open interest reached its highest level ever in September, and the CFTC's Traders of Financial Futures Report also shows a record level of large open interest holders for CME Group FX products. This confirms that there is -- that the increasing number of market participants are holding more FX risk in the form of CME Group FX futures, which is a trend that counters much of the risk of sentiment in the OTC FX cash markets.

Moving on to energy. We are in the process of expanding our OTC energy offering. Dodd-Frank Regulation is driving changes to the OTC energy markets. CME Group has a long history of providing customer choice and flexibility within a strong regulatory framework. And with this background, we are well-positioned to help customers adapt their current practices to new regulations. Customers can now access the CME ClearPort slate via multiple execution methods, including the ClearPort EFS offered historically, our Globex central limit order book, the trading floor, cross trades and block trades. These expanded execution options provide futures regulatory treatment for those customers to whom this is a concern.

To help energy markets manage through this transition period, ClearPort EFS transactions are exempt from counting towards swap dealer thresholds through the end of this year. In this evolving regulatory climate, we continue to roll out new tools to boost the customer choice, including CME Direct, our platform for side-by-side online trading of exchange listed and OTC markets, and CME Direct Messenger, a sophisticated messaging platform integrated with CME Direct and confirm how to trade confirmation services.

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