Add
CME to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CME > SEC Filings for CME > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 third quarter and first nine 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 this transaction 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 Nine Months Ended
September 30, September 30,
(dollars in millions, except per share data) 2009 2008 Change 2009 2008 Change
Total operating revenues $ 650.4 $ 680.9 (4 )% $ 1,945.3 $ 1,869.2 4 %
Total operating expenses 249.0 260.2 (4 ) 758.7 704.9 8
Operating margin 62 % 62 % 61 % 62 %
Non-operating income (expense) $ (45.6 ) $ (24.7 ) 84 $ (105.4 ) $ (27.5 ) n.m.
Effective tax rate 43 % 57 % 42 % 43 %
Net income $ 202.3 $ 168.7 20 $ 623.2 $ 653.4 (5 )
Diluted earnings per common share 3.04 2.81 8 9.37 11.61 (19 )
Cash flows from operating activities 737.8 862.7 (14 )
|
n.m. not meaningful
• Incremental revenues generated by NYMEX products and services was the primary driver for the increase in operating revenues during the first nine months of 2009. Additional revenues were partially offset by a decrease in overall CME and CBOT trading volume as well as processing services. Our processing service agreement with NYMEX was terminated as a result of our merger. The decrease in operating revenue during the third quarter of 2009 was due to the overall decline in trading volumes. The decline was partially offset by a full quarter of revenue recognized for NYMEX in 2009.
• During the first nine months of 2009, overall increases in operating expenses were attributable largely to 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. The overall decrease in operating expenses in the third quarter of 2009 was due primarily to the goodwill impairment charge related to our Swapsteam operations in the third quarter of 2008.
• The increase in non-operating expense was due primarily to an increase in interest expense and other borrowing costs resulting from debt issuances in August 2008 and February 2009 and an impairment loss on our investment in IMAREX ASA (IMAREX).
• During the first nine months of 2009, the decrease in diluted earnings per common share reflected the impact of common stock issuances made in conjunction with the NYMEX Holdings merger as well as the other impacts on net income discussed above.
• The decrease in revenues from CME and CBOT trading products also contributed to a decrease in cash flows from operating activities.
Operating Revenues
Quarter Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2009 2008 Change 2009 2008 Change
Clearing and transaction fees $ 540.6 $ 558.7 (3 )% $ 1,605.2 $ 1,542.3 4 %
Quotation data fees 81.4 75.7 8 249.0 192.3 29
Processing services 0.1 17.9 (100 ) 0.3 53.9 (99 )
Access and communication fees 11.4 10.9 4 34.5 32.2 7
Other 16.9 17.7 (5 ) 56.3 48.5 16
Total Operating Revenues $ 650.4 $ 680.9 (4 ) $ 1,945.3 $ 1,869.2 4
|
Clearing and Transaction Fees. The decrease in revenues in the third quarter of 2009 was attributable primarily to an overall decline in trading volumes. During the third quarter, the decline in revenues was partially offset by an increase in the average rate per contract as well as incremental volume generated from NYMEX products and CME ClearPort services in the third quarter of 2009 when compared with the third quarter of 2008. During the first nine months of 2009, the increase in revenues is attributable to an increase in the average rate per contract and the incremental trading volume generated by NYMEX products and CME ClearPort services. This increase was partially offset by a decline in CME and CBOT product trading volume in the first nine months of 2009.
Trading Volume
The following table summarizes average daily volume. For comparative purposes, CME, CBOT and NYMEX products have been presented separately. The 2008 average daily volume for NYMEX products has been calculated for the period August 23 through September 30, 2008. All amounts exclude TRAKRS, Swapstream and Hurricane Risk Landfall Option (HuRLO) contracts.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2009 2008 Change 2009 2008 Change
Products and Services Average Daily
Volume:
Interest rate:
CME 2,462 3,082 (20 )% 2,400 3,671 (35 )%
CBOT 1,961 2,948 (34 ) 1,823 3,224 (43 )
Equity:
CME 2,516 3,596 (30 ) 2,883 3,341 (14 )
CBOT 140 245 (43 ) 169 210 (19 )
Foreign exchange:
CME 660 710 (7 ) 580 672 (14 )
Commodity and alternative investment:
CME 85 101 (15 ) 83 100 (17 )
CBOT 623 722 (14 ) 655 801 (18 )
Energy (including CME ClearPort):
NYMEX 1,483 1,490 - 1,476 1,490 (1 )
Metal (including CME ClearPort):
NYMEX 201 268 (25 ) 204 268 (24 )
Aggregate Average Daily Volume:
CME 5,723 7,489 (24 ) 5,946 7,784 (24 )
CBOT 2,724 3,915 (30 ) 2,647 4,235 (37 )
NYMEX 1,684 1,758 (4 ) 1,680 1,758 (4 )
Electronic Volume:
CME 4,930 6,426 (23 ) 5,111 6,503 (21 )
CBOT 2,281 3,216 (29 ) 2,155 3,409 (37 )
NYMEX 1,056 1,054 - 999 1,054 (5 )
Electronic Volume as a Percentage of
Total Average
Daily Volume 80 % 81 % 80 % 80 %
|
n.m. not meaningful
During the third quarter and first nine months of 2009, when compared with the same periods in 2008, a decrease in interest rate products volume contributed to a decline in overall volume. This decrease in overall volume was partially offset by the incremental volume generated from NYMEX products and CME ClearPort services. In the following discussion on volume, changes in NYMEX and CME ClearPort volumes are calculated using volume for the entire year in 2008. NYMEX and CME ClearPort volumes generated prior to the merger date do not correspond to revenues recognized by CME Group.
Interest Rate Products
The overall decline in interest rate volume was due largely to the credit crisis and the Federal Reserve Bank's zero interest rate policy for short-term interest rates. We expect to continue to see lower interest rate trading volume in 2009 when compared with 2008 as long as these conditions are present and there are no offsetting events or circumstances.
The following table summarizes average daily volume and changes in average daily volume relative to the same periods in 2008 for our key interest rate products.
Quarter Ended Nine Months Ended
September 30, 2009 September 30, 2009
Average Average
Daily Daily
(amounts in thousands) Volume Change Volume Change
Eurodollar futures 1,815 (22 )% 1,743 (35 )%
Eurodollar options 645 (14 ) 655 (34 )
U.S. Treasury futures and options:
10-Year 938 (26 ) 893 (38 )
5-Year 441 (43 ) 399 (52 )
30-Year 299 (30 ) 287 (40 )
2-Year 216 (39 ) 178 (52 )
|
We believe the decrease in volume for Eurodollar futures and options is attributable to the zero interest rate policy and increased risk aversion following the credit crisis, which have reduced certain customers' ability or need to assume and maintain positions.
The overall decline in U.S. Treasury note futures and options volume is believed to be caused by the credit crisis, which has resulted in reduced corporate debt issuances, reduced mortgage issuances and refinancing activity, a slowdown in U.S. Treasury cash market trading in the third quarter of 2009 when compared with the third quarter 2008 as well as the Federal Reserve Bank's purchase of U.S. Treasury securities. In addition, market participants' need to hedge interest rate risk has been reduced by the current zero interest rate policy.
During the second and third quarter of 2009, overall interest rate product volume has increased relative to the first quarter of 2009. We believe that these increases were due to increasing stability in the macroeconomic climate.
Equity Products
During the third quarter of 2009, volume for E-mini S&P 500 contracts decreased by 24% to 2.1 million contracts per day and average daily volume for E-mini NASDAQ 100 contracts declined 35% to 0.3 million contracts. Volumes in the third quarter of 2009 declined as a result of decreased levels of market volatility compared with previous quarters in 2009. Average volatility, as measured by the CBOE Volatility Index, decreased to 25% in the third quarter of 2009 compared with 39% in the first six months of 2009. Additionally, the decline in volume was attributable to the termination of Russell-based contracts. Trading volume for Russell-based contracts averaged 0.2 million per day in the third quarter of 2008.
Year to date, average daily volume for E-mini equity products decreased by 13% to 2.8 million contracts when compared with the same period in 2008. The termination of our license to list Russell-based contracts contributed to the decline in overall E-mini equity volume. Russell-based contracts trading volume averaged 0.3 million contracts per day for the first nine months of 2008. In addition, volume for the E-mini NASDAQ 100 contracts decreased by 27% to an average of 0.3 million contracts per day during the first nine months of 2009. Trading volume for E-mini S&P 500 contracts during the first nine months of 2009 remained consistent with the same period in 2008.
Foreign Exchange Products
We believe that the decline in average daily volume for foreign exchange products during the first nine months of 2009, when compared with the same period in 2008, is due largely to extreme market volatility, convergence of global interest rates and increased risk aversion by market participants resulting from the credit crisis.
The following table summarizes average daily volume and changes in average daily volume relative to the same period in 2008 for our top foreign exchange futures and options products.
Quarter Ended Nine Months Ended
September 30, 2009 September 30, 2009
Average Average
Daily Daily
(amounts in thousands) Volume Change Volume Change
Euro 227 (13 )% 211 (10 )%
British pound 109 17 94 6
Japanese yen 100 (28 ) 91 (36 )
Australian dollar 81 50 60 19
Canadian dollar 69 36 58 13
|
We attribute the decline in average daily volume in the third quarter and first nine months of 2009 for our Euro and Japanese yen products to the convergence of interest rates towards zero between the European, United States and Japanese markets. The growth in trading volume of the British pound, Australian dollar and Canadian dollar is attributable to a divergence between interest rates in the United States and the interest rates in the British, Australian and Canadian markets.
Commodity and Alternative Investment Products
We believe the overall average daily volume for commodity and alternative investments products decreased during the third quarter and first nine months of 2009 when compared with the same periods in 2008 due largely to a decrease in market volatility and decreased demand for commodity products as a result of the credit crisis. We believe the credit crisis has reduced certain customers' ability or need to assume and maintain positions.
Energy (including CME ClearPort)
Energy products primarily consist of crude oil, natural gas, power and other energy-related exchange-traded contracts and over-the-counter contracts cleared through CME ClearPort. Average daily volume for energy contracts cleared through CME ClearPort increased by 1% and 18% to 0.5 million contracts in the third quarter and first nine months of 2009, respectively, when compared with the same periods in 2008 as market participants looked to mitigate counterparty risk on their over-the-counter exposures through central counterparty clearing.
Metal (including CME ClearPort)
Metal products generally include gold, silver and other precious and base metals. During the third quarter and first nine months of 2009, we believe metal products volume decreased by 24% and 15% to 0.2 million contracts per day, respectively, when compared with the same periods in 2008 due primarily to lower volatility and decreased demand for metal products as a result of the credit crisis.
Average Rate per Contract
An increase in the average rate per contract favorably impacted revenues in the
third quarter and first nine months of 2009 when compared with the same periods
in 2008. All amounts in the following table exclude TRAKRS, Swapstream and HuRLO
products.
Quarter Ended Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
Total volume (in millions) 648.5 775.6 (16 )% 1,929.4 2,317.3 (17 )%
Clearing and transaction fees (in millions) $ 540.5 $ 558.6 (3 ) $ 1,605.1 $ 1,541.9 4
Average rate per contract $ 0.834 $ 0.720 16 $ 0.832 $ 0.665 25
|
During the third quarter of 2009, the average rate per contract increased when compared with the same periods in 2008 due to the incremental impact of NYMEX products and CME ClearPort services. The average rates per contract for NYMEX products and CME ClearPort services were $1.495 and $2.304, respectively, in the third quarter of 2009. The average rates per contract for NYMEX products and CME ClearPort services were $1.508 and $2.161, respectively, for the period August 23, 2008 through September 30, 2008. The increase in average rate per contract was partially offset by an increase in member and special program volume as a percentage of total volume to 84% from 82%. Member volume and special program volume earn a lower rate compared with non-member volume.
The average rate per contract increased in the first nine months of 2009 due to the addition of NYMEX products and CME ClearPort services to our existing product line, which had an average rate per contract of $1.537 and $1.992, respectively, in the first nine months of 2009. Additionally, 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 volume, equity products trading volume increased by 6% in the first nine months of 2009, while interest rate products volume decreased by 8% when compared with the same periods in 2008. The increase in average rate per contract during the first nine 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 during the first nine months of 2009 exceeded the fee cap on volume traded on the CME Globex platform.
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 $87.9 million due to the increase in average rate per contract and decreased by $106.0 million due to the decline in total volume, resulting in a net decrease in revenues in the third quarter of 2009 of $18.1 million. For the first nine months of 2009, we estimate that clearing and transaction fees revenue increased by $385.8 million due to the increase in average rate per contract and decreased by $322.6 million due to a decline in total volume, resulting in a net increase in revenues of $63.2 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 September 30, 2009, we had approximately 130 clearing firms. Two firms represented 13% and 11% of our clearing and transaction fees revenue in the first nine months of 2009. Should a clearing firm withdraw, we believe that the customer portion of the firm's 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. Increases in revenue in the third quarter and first nine months of 2009 were due to the following:
Quarter Ended Nine Months Ended
September 30, September 30,
(dollars in millions except monthly fee per device) 2009 2008 Change 2009 2008 Change
Average estimated monthly basic device screen count 404,000 358,000 46,000 420,000 319,000 101,000
Basic device monthly fee per device $ 55 $ 55 $ - $ 55 $ 55 $ -
Estimated increase in revenues due to an increase
in screen counts $ 7.6 $ 49.9
Data feed surcharges 0.8 3.9
Vendor licensing fees 0.6 3.4
Vendor audit assessments (3.7 ) (3.5 )
CME, CBOT and NYMEX services 5.3 53.7
CMA services 0.5 4.2
|
The increase in revenues was attributable to incremental revenues of $12.5 million and $61.3 million generated from NYMEX services in the third quarter and first nine months of 2009, respectively, when compared with the same periods in 2008. Incremental revenues from NYMEX services were partially offset by a decrease in CME and CBOT revenues. Average basic device screen counts for existing CME and CBOT customers declined in the third quarter and first nine months of 2009 due primarily to cost-cutting initiatives at customer firms. The decrease in vendor audit assessments in the third quarter and first nine months of 2009 was due primarily to $4.4 million of assessments recognized in the third quarter of 2008 related to audits of customer-reported device counts. This represented revenue that would have otherwise been recognized in prior periods.
Effective January 1, 2010, all users of our basic service will pay $61 per month for each basic device.
The two largest resellers of our market data represented approximately 55% of our quotation data fees in the first nine 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 decrease in revenues in the third quarter and first nine months of 2009, when compared with the same periods in 2008, is attributable to the termination of our prior service agreement with NYMEX as a result of our merger. Our trade matching agreement with NYMEX generated revenues of $10.7 million and $45.7 million in the third quarter and first nine months of 2008, respectively. In addition, we agreed to terminate the operations of FXMarketSpace Limited (FXMS), our joint venture with Reuters, during the third quarter of 2008. As a result, we recognized $6.6 million in the third quarter of 2008 for upfront fees paid by FXMS for clearing and trade matching services that would have otherwise been recognized through January 2012. For the quarter-to-date and year-to-date periods, revenue from services provided to FXMS totaled $7.1 million and $8.1 million, respectively, in 2008.
Access and Communication Fees. The growth in revenues for the first nine months of 2009 when compared with the same period in the prior year was attributable primarily to the ongoing upgrade of customer bandwidth connections and our co-location program. The increase 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.
Other Revenues. The rental income and associated revenues generated from building operations acquired in our merger with NYMEX Holdings were the primary drivers of the increase in revenues in first nine months of 2009 when compared
with the same period in 2008. Total incremental revenues from NYMEX Holdings' operations were $8.5 million for the first nine months of 2009. In addition, . . .
|
|