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| CME > SEC Filings for CME > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
The following discussion is provided as a supplement to, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes in this Form 10-Q and CME Group's Annual Report on Form 10-K for the year ended December 31, 2008.
On March 23, 2008, CME Group acquired Credit Market Analysis Limited and its wholly-owned subsidiaries (collectively, CMA). On August 22, 2008, NYMEX Holdings, Inc. (NYMEX Holdings) merged with CME Group. The following Management's Discussion and Analysis of Financial Condition and Results of Operations includes the financial results of CMA beginning on March 24, 2008, and the financial results of the former NYMEX Holdings beginning August 23, 2008.
References in this discussion and analysis to "we," "us" and "our" are to CME Group and its consolidated subsidiaries, collectively. References to "exchange" are to Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), and New York Mercantile Exchange, Inc. (NYMEX), collectively.
RESULTS OF OPERATIONS
Financial Highlights
The comparability of our operating results for the second quarter and first six months of 2009 to the same periods in 2008 are significantly impacted by our merger with NYMEX Holdings. In the discussion and analysis that follows, we have quantified the incremental revenue and expense resulting from these transactions wherever such amounts were material and identifiable. While identifiable amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts.
The following summarizes significant changes in our financial performance for the periods presented.
Quarter Ended Six Months Ended
June 30, June 30,
(dollars in millions, expect per share data) 2009 2008 Change 2009 2008 Change
Total operating revenues $ 647.8 $ 563.2 15 % $ 1,294.9 $ 1,188.3 9 %
Total operating expenses 249.0 219.5 13 509.7 444.7 15
Operating margin 62 % 61 % 61 % 63 %
Non-operating income (expense) $ (23.9 ) $ (10.1 ) n.m. $ (59.8 ) $ (2.8 ) n.m.
Effective tax rate 41 % 40 % 42 % 35 %
Net income $ 221.8 $ 201.2 10 $ 420.9 $ 484.7 (13 )
Diluted earnings per common share 3.33 3.67 (9 ) 6.33 8.91 (29 )
Cash flows from operations 438.4 504.7 (13 )
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n.m. not meaningful
• The additional operating revenues were attributable primarily to revenues contributed by NYMEX products and services as well as rental income. These increases were partially offset by a decline in overall CME and CBOT trading volume as well as processing services revenues due to the merger with NYMEX Holdings.
• Increases in amortization of purchased intangibles, compensation and benefits costs as well as licensing and other fee agreements resulting from the merger with NYMEX Holdings largely contributed to the overall increases in operating expenses.
• The decrease in non-operating income (expense) was attributable primarily to an increase in interest expense and other borrowing costs resulting from debt issuances in August 2008 and February 2009. The decrease from 2008 was partially offset by a net loss on the derivative related to foreign currency exchange rate fluctuations on our BM&FBovespa SA (BM&F) investment in 2008.
• Our effective tax rate was lower in 2008 due mostly to the favorable impact of an Illinois tax law change in the first quarter of 2008. In addition, the effective tax rate rose in 2009 due to an increase in our state and local tax rates as a result of our merger with NYMEX Holdings in August 2008.
• The decrease in diluted earnings per common share reflected the impact of common stock issuances made in conjunction with the NYMEX Holdings merger.
Operating Revenues
Quarter Ended Six Months Ended
June 30, June 30,
(dollars in millions) 2009 2008 Change 2009 2008 Change
Clearing and transaction fees $ 536.8 $ 458.5 17 % $ 1,064.6 $ 983.6 8 %
Quotation data fees 82.1 59.8 37 167.6 116.6 44
Processing services 0.1 18.5 (100 ) 0.2 36.0 (99 )
Access and communication fees 11.5 10.8 8 23.1 21.3 9
Other 17.3 15.6 12 39.4 30.8 28
Total Operating Revenues $ 647.8 $ 563.2 15 $ 1,294.9 $ 1,188.3 9
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Clearing and Transaction Fees. Incremental trading volume generated by NYMEX products and CME ClearPort services as well as an increase in the average rate per contract contributed to an increase in revenues in the second quarter and the first six months of 2009 when compared with the same periods in 2008. This increase was partially offset by a decline in CME and CBOT product trading volume in the second quarter and first six months of 2009.
Trading Volume
The following table summarizes average daily trading volume. For comparative
purposes, CME, CBOT and NYMEX products have been presented separately. All
amounts exclude TRAKRS, Swapstream and Hurricane Risk Landfall Options (HuRLO)
contracts.
Quarter Ended Six Months Ended
June 30, June 30,
(amounts in thousands) 2009 2008 Change 2009 2008 Change
Products and Services Average Daily
Volume:
Interest rate:
CME 2,544 3,497 (27 )% 2,368 3,972 (40 )%
CBOT 1,845 2,971 (38 ) 1,752 3,365 (48 )
Equity:
CME 2,830 2,825 - 3,074 3,210 (4 )
CBOT 158 169 (7 ) 185 192 (4 )
Foreign exchange:
CME 568 665 (15 ) 538 653 (18 )
Commodity and alternative investment:
CME 80 98 (18 ) 81 99 (18 )
CBOT 738 835 (12 ) 671 842 (20 )
NYMEX 1,138 - n.m. 1,162 - n.m.
CME ClearPort 537 - n.m. 583 - n.m.
Aggregate Average Daily Volume:
CME 6,022 7,085 (15 ) 6,061 7,934 (24 )
CBOT 2,741 3,975 (31 ) 2,608 4,399 (41 )
NYMEX 1,138 - n.m. 1,162 - n.m.
CME ClearPort 537 - n.m. 583 - n.m.
Electronic Volume:
CME 5,140 5,884 (13 ) 5,204 6,543 (20 )
CBOT 2,191 3,170 (31 ) 2,090 3,508 (40 )
NYMEX 935 - n.m. 951 - n.m.
Electronic Volume as a Percentage of
Total Average
Daily Volume 79 % 82 % 79 % 81 %
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n.m. not meaningful
The overall decrease in volume during the second quarter and first six months of 2009 when compared with the same periods in 2008 was primarily the result of a decline in interest rate products volume. This decrease in volume was partially offset by the addition of NYMEX products and CME ClearPort services. In the following discussion on volume, NYMEX volume information for the prior period is provided for comparative purposes only and does not correspond to revenue recognized by CME Group prior to the merger date.
Interest Rate Products
In the second quarter and first six months of 2009, the overall decrease in interest rate volume was attributable to the global credit crisis and the Federal Reserve Bank's zero interest rate policy for short term interest rates. As long as these conditions are present and in the absence of offsetting events and circumstances, we expect to continue to see lower interest rate trading volume in 2009 when compared with 2008.
The following table summarizes average daily volume (ADV) and changes in ADV relative to the same periods in 2008 for our key interest rate products.
Quarter Ended Six Months Ended
June 30, 2009 June 30, 2009
(amounts in thousands) ADV Change ADV Change
Eurodollar futures 1,832 (29 )% 1,705 (40 )%
Eurodollar options 710 (22 ) 661 (41 )
U.S. Treasury futures and options:
10-Year 922 (31 ) 870 (42 )
5-Year 399 (47 ) 378 (56 )
30-Year 278 (34 ) 281 (44 )
2-Year 174 (47 ) 159 (58 )
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We believe that volatility and the zero interest rate policy, which have reduced certain customers' ability or need to assume and maintain positions, contributed to a decrease in volume for Eurodollar futures and options. The uncertainty regarding counterparty credit risk and interest rate expectations as a result of the recession is believed to have caused the increased market volatility.
We believe that the overall decline in U.S. Treasury note futures and options volume is primarily attributable to the credit crisis, which has resulted in reduced corporate debt issuances, reduced mortgage issuances and refinances, a slowdown in U.S. Treasury cash market trading and the Federal Reserve Bank's plan to purchase U.S. Treasury securities. Additionally, the current zero interest rate policy reduces market participants' need to hedge interest rate risk.
The overall interest rate product volume has increased in the second quarter of 2009 when compared with the first quarter of 2009. We believe these increases are primarily attributable to improving conditions in financial markets as a result of steepening interest rate yield curves, an increase in debt security issuances and an increase in mortgage refinance activity.
Equity Products
During the second quarter of 2009, trading volume for equity products was consistent with the 2008 volume. The increase in E-mini equity product volume resulted from an increase in volatility. The increase in volume was offset by the termination of our license to list Russell-based contracts in September 2008 and a decline in E-mini NASDAQ 100 product volume. Year to date, the decline in trading volume for equity products was due primarily to the termination of our license to list Russell-based contracts and a decline in E-mini NASDAQ 100 product volume.
During the second quarter of 2009, E-mini S&P 500 contracts increased by 17% to 2.4 million contracts per day. The increase in E-mini S&P 500 product volume was offset by the termination of our license to list Russell-based contracts and a decline in E-mini NASDAQ 100 product volume. Trading volume for the Russell-based contracts
averaged 0.2 million contracts per day for the second quarter of 2008. E-mini NASDAQ 100 contracts declined 18% to 0.3 million contracts per day. We believe that the shift in volume from E-mini NASDAQ contracts to E-mini S&P contracts is attributable to a shift by market participants to more liquid products during the period of high market volatility caused by the recession. Average volatility, as measured by the CBOE Volatility Index, increased to 33% during the second quarter of 2009 compared with 21% in the same period of 2008.
During the first six months of 2009, E-mini equity product volume decreased by 3% to an average of 2.9 million contracts per day when compared with the same period in 2008. The decrease in overall E-mini equity volume was largely attributable to the termination of our license to list Russell-based contracts. Trading volume for the Russell-based contracts averaged 0.3 million contracts per day for the first six months of 2008. In addition, average daily volume for the E-mini NASDAQ 100 contracts declined by 23% to 0.3 million contracts per day during the first six months of 2009. This decrease was partially offset by an increase in E-mini S&P 500 contracts, which rose by 12% to 2.6 million contracts per day during the first six months of 2009. Average volatility increased to 39% during the first six months of 2009 compared with 23% in the same period of 2008.
Foreign Exchange Products
We believe that the decline in trading volume for foreign exchange products in the second quarter and first six months of 2009, when compared with the same periods in 2008, is due primarily to extreme market volatility, convergence of global interest rates and increased risk aversion by market participants resulting from the recession. During the second quarter of 2009, average daily volume for Japanese yen products decreased by 39% to 82,000 contracts. Volume for euro products decreased by 15% to an average of 201,000 contracts. Year to date, volume for Japanese yen products decreased by 40% to an average of 86,000 contracts per day. Average daily volume for the Swiss Franc decreased by 42% to 38,000 contracts. In addition, volume for euro contracts decreased 8% to an average of 203,000 contracts per day.
Commodity and Alternative Investment Products
During the second quarter and first six months of 2009, overall trading volume for commodity and alternative investments increased when compared with the same period in 2008 due primarily to the addition of exchange-traded NYMEX products to our existing product lines. NYMEX products consist primarily of energy futures and options as well as futures and options on precious and base metals.
CME ClearPort Services
During the second quarter of 2009, volume for over-the-counter contracts cleared through CME ClearPort (formerly NYMEX Clearport prior to the merger in August 2008) increased by 29% to 0.5 million contracts per day when compared with the same period in 2008. Year to date, average daily volume for the contracts cleared through CME ClearPort increased by 31% to 0.6 million contracts in 2009. Contracts cleared through CME ClearPort include primarily natural gas, crude oil, power and other energy-related contracts. The revenue contributed by CME ClearPort clearing services was $55.1 million and $122.1 million in the second quarter and first six months of 2009, respectively.
Average Rate per Contract
In the second quarter and first six months of 2009, an increase in the average
rate per contract contributed to the increase in revenues when compared with the
same periods in 2008. All amounts in the following table exclude TRAKRS,
Swapstream and HuRLO products.
Quarter Ended Six Months Ended
June 30, June 30,
2009 2008 Change 2009 2008 Change
Total volume (in millions) 657.6 707.8 (7 )% 1,291.3 1,541.7 (16 )%
Clearing and transaction fees (in millions) $ 536.8 $ 458.4 17 $ 1,064.5 $ 983.3 8
Average rate per contract $ 0.816 $ 0.648 26 $ 0.824 $ 0.638 29
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During the second quarter and first six months of 2009, the addition of NYMEX products and CME ClearPort services to our existing offerings contributed largely to the overall increase in rate per contract. For the second quarter and first six months of 2009, average rates per contract for NYMEX products were $1.56 and $1.52, respectively. Average rates per
contract for CME ClearPort services were $1.63 and $1.69 for the second quarter and first six months of 2009, respectively. In addition, the average rate per contract increased due to a lower portion of CME and CBOT interest rate products as a percentage of total volume compared with CME and CBOT equity products, which have a higher rate per contract. As a percentage of total volume, equity products trading volume increased by 7% and 10% in the second quarter and first six months of 2009, while interest rate products volume decreased by 8% and 12% when compared with the same periods in 2008.
The increase in average rate per contract during the second quarter and first six months of 2009 was partially offset by a decrease in the average rate per contract for E-mini S&P futures and options because incremental volume exceeded the fee cap on volume traded on the CME Globex platform.
On June 16, 2009, we announced changes to our fee structure for all product lines, which will be effective beginning in the third quarter of 2009. These changes are being made to harmonize fees among different product types and different customer types. Impacts from fee changes will be dependent on asset class mix, execution venue and customer type, but on an aggregate basis we do not expect revenue to change materially due to the harmonization.
Volume/Rate Analysis
Average rate per contract is impacted by our rate structure, which includes volume-based incentives; product mix; trading venue, and the percentage of trading volume executed by customers who are members compared with non-member customers. Due to the relationship between average rate per contract and volume, the change in revenues attributable to changes in each is only an approximation. Using the total volume and average rate per contract data provided in the table above, we estimate that clearing and transaction fees revenue increased by $119.4 million due to the increase in average rate per contract and decreased by $41.0 million due to the decline in total volume, resulting in a net increase in revenues in the second quarter of 2009 of $78.4 million. For the first six months of 2009, we estimate that clearing and transaction fees revenue increased by $287.6 million due to the increase in average rate per contract and decreased by $206.4 million due to a decline in total volume, resulting in a net increase in revenues of $81.2 million.
Concentration of Revenue
We bill a substantial portion of our clearing and transaction fees to our clearing firms. The majority of clearing and transaction fees received from clearing firms represent charges for trades executed and cleared on behalf of their customers. As of June 30, 2009, we had approximately 130 clearing firms. Two firms represented 12% and 11% of our clearing and transaction fees revenue for the first six months of 2009. Should a clearing firm withdraw, we believe the customer portion of firms' trading activity would likely transfer to another clearing firm of the exchange. Therefore, we do not believe we are exposed to significant risk from the loss of revenue received from a particular clearing firm.
Quotation Data Fees. The growth in revenues in the second quarter and first six months of 2009 when compared with the same periods in 2008 was primarily attributable to incremental revenue of $24.0 million and $48.8 million generated from NYMEX services in the second quarter and first six months of 2009, respectively.
Quarter Ended Six Months Ended
June 30, June 30,
(dollars in millions, except monthly fee per device) 2009 2008 Change 2009 2008 Change
Average estimated monthly basic device screen count 420,000 297,000 123,000 427,000 299,000 128,000
Basic device monthly fee per device $ 55 $ 55 $ - $ 55 $ 55 $ -
Estimated increase in revenue due to an increase in
screen counts $ 20.3 $ 42.3
Data feed surcharges 1.6 3.2
CME, CBOT and NYMEX services 21.9 45.5
CMA services 0.3 3.7
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The two largest resellers of our market data represented approximately 56% of our quotation data fees in the first six months of 2009. However, we consider exposure to significant risk of revenue loss to be minimal despite this concentration. In the event that one of these vendors no longer subscribes to our market data, we believe the majority of that vendor's customers would likely subscribe to our market data through another reseller. Additionally, several of our largest institutional customers that utilize services from the two largest resellers report usage and remit payment of quotation data fees directly to us.
Processing Services. The termination of our prior trade matching agreement with NYMEX as a result of our merger contributed to the decrease in revenues in the second quarter and first six months of 2009 when compared with the same periods in 2008. This agreement with NYMEX generated revenues of $18.0 million and $35.0 million in the second quarter and first six months of 2008, respectively.
Access and Communication Fees. The increase in revenues was due largely to the ongoing upgrade of customer bandwidth connections and continued expansion of our co-location program. The growth in revenues was partially offset by a decrease in trading floor-related fees resulting from the consolidation of our Chicago trading floors in mid-2008. The incremental revenues resulting from the merger with NYMEX Holdings were not material during the second quarter and first six months of 2009.
Other Revenues. The increase in revenues in the second quarter and first six months of 2009 when compared with the same periods in 2008 was largely due to rental income and associated revenues generated from building operations acquired in our merger with NYMEX Holdings. Total incremental revenues from NYMEX Holdings' operations were $3.5 million and $6.6 million for the second quarter and first six months of 2009, respectively. In addition, trading revenues generated by GFX Corporation (GFX) increased by $2.5 million in the first six months of 2009 due to an increase in trading activity during the first quarter of 2009.
Operating Expenses
Quarter Ended Six Months Ended
June 30, June 30,
(dollars in millions) 2009 2008 Change 2009 2008 Change
Compensation and benefits $ 88.0 $ 73.6 20 % $ 174.7 $ 146.9 19 %
Communications 11.6 12.8 (10 ) 24.0 27.6 (13 )
Technology support services 11.6 18.1 (36 ) 23.4 35.1 (33 )
Professional fees and outside services 22.4 16.0 39 44.0 30.8 43
Amortization of purchased intangibles 30.5 17.9 70 63.8 34.1 87
Depreciation and amortization 30.1 34.5 (13 ) 61.1 68.8 (11 )
Occupancy and building operations 18.1 17.3 6 38.2 34.0 13
Licensing and other fee agreements 21.7 12.0 80 46.3 25.5 81
Restructuring 1.4 0.2 n.m. 4.6 2.0 n.m.
Other 13.6 17.1 (21 ) 29.6 39.9 (26 )
Total Operating Expenses $ 249.0 $ 219.5 13 $ 509.7 $ 444.7 15
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n.m. not meaningful
Compensation and Benefits. The net increase in expenses for the second quarter and first six months of 2009, when compared with the same periods in 2008, consisted largely of the following:
Estimated Increase (Decrease)
(dollars in millions) Quarter to Date Year to Date
Average headcount $ 9.6 $ 20.0
Stock-based compensation 1.7 4.1
Non-qualified deferred compensation plan 2.4 3.0
Bonus - (0.6 )
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• Average headcount increased by 16%, or about 310 employees and 17%, or about 330 employees, in the second quarter and in the first six months of 2009, respectively, when compared with the same periods in 2008. The increases were due primarily to the addition of approximately 400 employees in our merger with NYMEX Holdings in August 2008. The increases were partially offset by the impact of our restructuring initiatives. As of June 30, 2009 and 2008, we had approximately 2,250 and 1,950 employees, respectively.
• Stock-based compensation increased in the second quarter and first half of 2009, when compared with the same periods in 2008, due primarily to the expense related to June 2008 grant and the conversion of stock options . . .
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