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| CME > SEC Filings for CME > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-2012
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 Quarterly Report on Form 10-Q and in our Annual Report on Form
10-K for the year ended December 31, 2011.
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 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) 2012 2011 Change 2012 2011 Change
Total revenues $ 683.2 $ 874.2 (22 )% $ 2,253.7 $ 2,544.1 (11 )%
Total expenses 287.2 302.1 (5 ) 937.3 913.4 3
Operating margin 58 % 65 % 58 % 64 %
Non-operating income
(expense) $ (0.2 ) $ (26.2 ) (99 ) $ 23.5 $ (63.9 ) (137 )
Effective tax rate 45 % 42 % 45 % 32 %
Net income attributable to
CME Group $ 218.0 $ 316.1 (31 ) $ 729.5 $ 1,066.4 (32 )
Diluted earnings per common
share attributable to CME
Group 0.66 0.95 (31 ) 2.20 3.19 (31 )
Cash flows from operating
activities 897.2 999.8 (10 )
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• In the third quarter and first nine months of 2012, when compared with the same periods in 2011, the decreases in total revenues were attributable largely to declines in clearing and transaction fees revenue resulting from lower contract volumes.
• Total expenses decreased in the third quarter of 2012 when compared with the same period in 2011 due to a decrease in amortization of purchased intangibles as a result of the contribution of certain Dow Jones Index assets and liabilities (the DJI asset group) to a new venture with The McGraw Hill Companies Inc. (McGraw) and to the sale of Credit Market Analysis Ltd (CMA). There was also a decline in compensation and benefits expense due to lower accrued bonuses and a decrease in average headcount. The decrease in average headcount was attributable to the contribution of the DJI asset group and the sale of CMA. The declines in bonus expense and average headcount were partially offset by annual salary increases and rising healthcare costs. The increase in total expenses in the first nine months of 2012 compared with the same period in 2011 was due to higher compensation and benefits expense resulting from additional stock-based compensation and employee separation costs, partially offset by a decline in accrued bonus expense. Expenses associated with S&P/Dow Jones Indices LLC (the McGraw venture), our new venture with McGraw, also contributed to the rise in total year-to-date expenses. The impact of these increases on total year-to-date expenses was partially offset by a decrease in expense from the amortization of purchased intangibles.
• We recognized a gain of $59.9 million resulting from the contribution of the DJI asset group to the McGraw venture and the sale of CMA, and a gain relating to a recovery of an impairment loss on a corporate debt security, which resulted in an increase in non-operating income (expense) in the first nine months of 2012 when compared with the same period in 2011.
• In the third quarter of 2012 when compared with the same period in 2011, the increase in the effective tax rate was attributable to adjustments to the deferred tax liabilities associated with the McGraw venture. The increase in the effective tax rate in the first nine months of 2012 was due to the establishment of deferred tax liabilities associated with the McGraw venture. The increase was partially offset by non-recurring reductions to tax expense related to the McGraw venture and the sale of CMA in the first nine months of 2012 as well as a change in the state tax apportionment in the first nine months of 2011.
Revenues
Quarter Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2012 2011 Change 2012 2011 Change
Clearing and transaction
fees $ 562.2 $ 732.7 (23 )% $ 1,826.9 $ 2,111.8 (13 )%
Market data and information
services 82.8 107.0 (23 ) 307.8 321.9 (4 )%
Access and communication
fees 23.2 12.0 93 65.5 34.8 88 %
Other 15.0 22.5 (33 ) 53.5 75.6 (29 )%
Total Revenues $ 683.2 $ 874.2 (22 ) $ 2,253.7 $ 2,544.1 (11 )%
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Clearing and Transaction Fees
The following table summarizes our total contract volume, revenue and average
rate per contract. Total contract volume includes contracts that are traded on
our exchange and cleared through our clearing house. Contract volume also
includes cleared-only CME ClearPort contracts. Volume is measured in round
turns, which is considered a completed transaction that involves a purchase and
an offsetting sale of a contract. Average rate per contract is determined by
dividing total clearing and transaction fee revenues by total contract volume.
All amounts exclude our TRAKRS, credit default swap, interest rate swap and CME
Clearing Europe contracts.
Quarter Ended Nine Months Ended
September 30, September 30,
2012 2011 Change 2012 2011 Change
Total contract volume (in
millions) 682.8 940.9 (27 )% 2,238.1 2,648.4 (16 )%
Clearing and transaction
fees (in millions) $ 561.3 $ 732.7 (23 ) $ 1,823.9 $ 2,111.8 (14 )%
Average rate per contract $ 0.822 $ 0.779 6 $ 0.815 $ 0.797 2
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We estimate the following decreases in clearing and transaction fees based on
change in total contract volume and change in average rate per contract during
the third quarter and first nine months of 2012 when compared with the same
periods in 2011.
Nine Months
(in millions) Quarter Ended Ended
Decrease due to change in total contract volume $ (212.1 ) $ (334.4 )
Increase due to change in average rate per contract 40.7 46.5
Net decrease in clearing and transaction fees $ (171.4 ) $ (287.9 )
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Average rate per contract is impacted by our rate structure, including volume-based incentives; product mix; trading venue, and the percentage of 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.
Contract Volume
The following table summarizes average daily contract volume. Contract volume
can be influenced by many factors, including political and economic factors, the
regulatory environment and market competition.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
Average Daily Volume by
Product Line:
Interest rate 4,514 6,518 (31 )% 5,085 6,464 (21 )%
Equity 2,391 4,040 (41 ) 2,569 3,269 (21 )
Foreign exchange 846 988 (14 ) 871 956 (9 )
Agricultural commodity 1,171 1,029 14 1,194 1,111 7
Energy 1,590 1,673 (5 ) 1,761 1,801 (2 )
Metal 327 454 (28 ) 361 412 (12 )
Aggregate average daily
volume 10,839 14,702 (26 ) 11,841 14,013 (15 )
Average Daily Volume by
Venue:
Electronic 9,293 12,462 (25 ) 10,024 11,845 (15 )
Open outcry 979 1,557 (37 ) 1,144 1,473 (22 )
Privately negotiated 209 257 (19 ) 225 241 (7 )
Total exchange-traded
volume 10,481 14,276 (27 ) 11,393 13,559 (16 )
Total CME ClearPort 358 426 (16 ) 448 454 (1 )
Aggregate average daily
volume 10,839 14,702 (26 ) 11,841 14,013 (15 )
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Interest Rate Products
The following table summarizes average daily contract volume for our key
interest rate products. Eurodollar front 8 contracts include contracts expiring
within two years. Eurodollar back 32 contracts include contracts expiring within
three to ten years.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
Eurodollar futures and
options:
Front 8 futures 1,020 1,686 (40 )% 1,187 1,892 (37 )%
Back 32 futures 554 598 (7 ) 592 539 10
Options 364 908 (60 ) 453 810 (44 )
U.S. Treasury futures and
options:
10-Year 1,156 1,603 (28 ) 1,308 1,544 (15 )
5-Year 529 773 (32 ) 575 762 (25 )
Treasury bond 404 475 (15 ) 436 426 2
2-Year 243 297 (18 ) 235 328 (28 )
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Overall interest rate contract volume decreased in the third quarter and first nine months of 2012 when compared with the same periods in 2011 due to low interest rate volatility as a result of the Federal Reserve's continued intent to maintain its zero interest rate policy through mid-2015. The increase in volume in the long-term interest rate products, including the Eurodollar back 32 futures and the Treasury bond futures and options contracts, in the first nine months of 2012 when compared with the same period in 2011 was attributable to periods of higher long-term interest rate volatility in early 2012. The Federal Reserve's announcement in January 2012 to extend its zero interest rate policy shifted market expectations regarding long-term interest rates, which resulted in periods of higher volatility in early 2012.
Equity Products
The following table summarizes average daily contract volume for our key equity
products.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
E-mini S&P futures and
options 1,887 3,284 (43 )% 2,036 2,621 (22 )%
E-mini NASDAQ futures and
options 231 351 (34 ) 249 309 (19 )
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In the third quarter and first nine months of 2012, when compared with the same
periods in 2011, the decreases in equity contract volume were due to declines in
equity market volatility, as measured by the CBOE Volatility Index. The declines
in volatility in the third quarter and first nine months of 2012, when compared
with the same periods in 2011, were the result of unchanged economic conditions
within the United States and European markets. In addition, we experienced
periods of high volatility within the equity markets during 2011, which we
believe were attributable to events in Asia and the Middle East as well as the
downgrade of the United States credit rating.
The overall decrease in volume for the first nine months of 2012 when compared
with the same period in 2011 was partially offset by an increase in equity
contract volume in the second quarter of 2012 due primarily to financial and
political uncertainty in the European Union.
Foreign Exchange Products
The following table summarizes average daily contract volume for our key foreign
exchange products.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
Euro 283 387 (27 )% 303 369 (18 )%
Australian dollar 139 141 (1 ) 141 122 16
British pound 110 116 (5 ) 108 123 (12 )
Canadian dollar 99 107 (7 ) 99 95 4
Japanese yen 89 116 (24 ) 94 129 (27 )
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The overall decreases in foreign exchange contract volume in the third quarter
and first nine months of 2012, when compared with the same periods in 2011, were
primarily attributable to declines in euro contract volume. We believe trading
activity in euro contracts has been impacted by the lack of a directional trend
due to uncertainty related to the health of the European Union and concern over
the possibility that the Federal Reserve will provide additional economic
stimulus in the United States. The lack of a trend has reduced trading in euro
contracts among customers who trade based on medium- to long-term expectations.
We believe that intervention by the Japanese central bank to control the yen
foreign exchange rate beginning in mid-2011 caused market participants to reduce
their trading in Japanese yen contracts and to focus on higher yielding
currencies, such as the Australian and Canadian dollars. We believe the decline
in the British pound contract volume was due to lower volatility in the third
quarter and first nine months of 2012 when compared with the same periods in
2011.
Agricultural Commodity Products
The following table summarizes average daily contract volume for our key
agricultural commodity products.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
Corn 396 399 (1 )% 421 444 (5 )%
Soybean 301 219 37 287 228 26
Wheat 125 101 24 135 122 10
Soybean oil 115 96 20 117 106 10
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The increases in agricultural commodity contract volume in the third quarter and first nine months of 2012 when compared with the same periods in 2011 were attributable to higher volatility resulting from severe drought conditions in the Midwest in the second and third quarters of 2012. We believe the increased volatility was the result of supply constraint concerns for soybean and wheat supplies. Corn volumes remained relatively flat in the third quarter and first nine months of 2012 when compared with the same periods in 2011. Early market expectations of excess supply in 2012 dampened corn price volatility in early 2012, which kept trading volumes relatively flat compared with 2011.
Energy Products
The following table summarizes average daily contract volume for our key energy
products.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
Crude oil 699 849 (18 )% 761 932 (18 )%
Natural gas 547 492 11 635 530 20
Refined products 306 265 15 319 271 18
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Energy contract volume decreased slightly in the third quarter and first nine
months of 2012 when compared with the same periods in 2011. Declines in crude
oil contract volume contributed to overall decreases in energy products volume.
We believe the declines in crude oil contract volume were attributable to lower
price volatility in 2012 compared with 2011. Political unrest in the Middle East
in the first quarter of 2011 resulted in changes in global supply, which
contributed to higher price volatility in early 2011. Additionally, lower crude
oil contract volume was attributable to oversupply in Cushing, Oklahoma. We
believe that these supply constraints have eased due to the reversal of the
Seaway Pipeline in the second quarter of 2012, which is expected to increase in
the coming months. However, uncertainty remains over the impact it will have on
the overall crude oil market. The decreases in crude oil contract volume were
partially offset by increases in natural gas contract volume. The increases in
natural gas contract volume were attributable to higher volatility resulting
from weather-related events, which caused rising natural gas consumption.
Metal Products
The following table summarizes average daily volume for our key metal products.
Quarter Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 2012 2011 Change 2012 2011 Change
Gold 194 310 (37 )% 218 252 (14 )%
Copper 59 50 17 67 49 38
Silver 56 79 (29 ) 61 98 (38 )
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The overall decreases in metal products volume in the third quarter and first
nine months of 2012 when compared with the same periods in 2011 were
attributable to lower volatility in the precious metals markets in 2012 when
compared with 2011. We believe the August 2011 announcement of the Federal
Reserve's intent to maintain its zero interest rate policy and deepening
Eurozone worries, which caused high volatility within other financial markets,
resulted in an increased interest in precious metals as an asset class. This
increased interest resulted in relative decreases in gold and silver contract
volume in the third quarter and first nine months of 2012 when compared with the
same periods in 2011. This decrease was partially offset by an increase in
volume for copper contracts as a result of economic growth in Asia as well as
global supply constraints.
Average Rate per Contract
The average rate per contract increased in the third quarter and the first nine
months of 2012 when compared with the same periods in 2011 due to a shift in the
relative mix of product volume. In the third quarter of 2012, agricultural
commodity and energy product volumes, when measured as a percentage of total
volume, increased by 4% and 3%, respectively, while interest rate and equity
product volumes decreased by 3% and 5%, respectively. In the first nine months
of 2012, agricultural commodity and energy product volumes both increased by 2%
while interest rate and equity product volumes decreased 3% and 2%,
respectively. Agricultural commodity and energy products have higher fees
compared with interest rate and equity products.
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. Two firms each represented 12% of our clearing and transaction
fees revenue in the first nine months of 2012. 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 ongoing loss of revenue received
from or through a particular clearing firm.
Other Sources of Revenue
The decreases in market data and information services revenue in the third
quarter and first nine months of 2012, when
compared with the same periods in 2011, were attributable to decreases in market
data and information services revenue from Index Services. In the second quarter
of 2012, the DJI asset group, including assets which generated market data and
information services revenue, was contributed to the McGraw venture. In
addition, the decreases in revenue were due to declines in basic device counts
in the third quarter and first nine months of 2012 due to cost-cutting
initiatives at customer firms. The decreases in market data and information
services were partially offset by an increase in our basic device service fee
from $61 per month to $70 per month for each device effective January 2012.
The two largest resellers of our market data represented approximately 45% of
our market data and information services revenue in the first nine months of
2012. Despite this concentration, we consider exposure to significant risk of
revenue loss to be minimal. 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 our two largest resellers report usage and remit payment of their
fees directly to us.
We launched our co-location program in the first quarter of 2012, which
generated $14.0 million and $37.6 million of access and communication revenue in
the third quarter and first nine months of 2012, respectively. These increases
in revenue were partially offset by decreases in revenue generated from other
network connections due to the migration of customers to the co-location
program.
In April 2012, we sold two buildings in Chicago, which resulted in decreases in
rental income of $6.1 million and $10.6 million in the third quarter and first
nine months of 2012, respectively, when compared with the same periods in 2011.
In addition, the initial phase to develop a new multi-asset class electronic
platform for BM&FBOVESPA S.A. (BM&FBOVESPA) was completed in the third quarter
of 2011, which resulted in decreases in other revenues in the third quarter and
first nine months of 2012 when compared with the same periods in 2011. This
agreement with BM&FBOVESPA generated $1.9 million and $6.1 million in the third
quarter and first nine months of 2011, respectively. Additional revenue related
to the development of the electronic platform will not be recognized until
future phases are delivered. In the second quarter of 2011, we recognized a $9.8
million gain on the sale of certain Index Services assets related to one of its
service offerings, which contributed to a decrease in other revenues in the
first nine months of 2012 when compared with the same period in 2011.
The decreases in other revenues were partially offset by increases of $1.6
million and $4.5 million in processing services revenue generated from various
strategic relationships in the third quarter and first nine months of 2012,
respectively, when compared with the same periods in 2011.
Expenses
Quarter Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2012 2011 Change 2012 2011 Change
Compensation and benefits $ 117.5 $ 119.9 (2 )% $ 383.7 $ 359.7 7 %
Communications 9.8 11.0 (10 ) 30.8 31.7 (3 )
Technology support services 11.8 13.3 (12 ) 36.7 38.7 (5 )
Professional fees and
outside services 26.7 29.0 (8 ) 99.2 90.4 10
Amortization of purchased
intangibles 26.2 33.0 (21 ) 90.3 99.2 (9 )
Depreciation and
amortization 34.5 32.4 6 103.0 95.1 8
Occupancy and building
operations 18.8 18.5 1 57.8 56.9 2
Licensing and other fee
agreements 19.2 22.6 (15 ) 63.2 64.7 (2 )
Other 22.7 22.4 2 72.6 77.0 (6 )
Total Expenses $ 287.2 $ 302.1 (5 ) $ 937.3 $ 913.4 3
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Operating expenses decreased by $14.9 million in the third quarter of 2012, while increasing $23.9 million in the first nine months of 2012 when compared . . .
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