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CME > SEC Filings for CME > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for CME GROUP INC.


8-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2012.
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), New York Mercantile Exchange, Inc. (NYMEX), Commodity Exchange, Inc. (COMEX), and The Board of Trade of Kansas City, Missouri, Inc. (KCBT), collectively, unless otherwise noted.

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)           2013         2012       Change        2013          2012         Change
Total revenues                $  714.6     $  683.2           5 %   $ 2,249.3     $ 2,253.7           -  %
Total expenses                   314.1        287.2           9         935.5         937.3           -
Operating margin                    56 %         58 %                      58 %          58 %
Non-operating income
(expense)                     $   (1.6 )   $   (0.2 )      n.m.     $   (19.8 )   $    23.5        (184 )
Effective tax rate                  41 %         45 %                      39 %          45 %
Net income attributable to
CME Group                     $  236.7     $  218.0           9     $   783.7     $   729.5           7
Diluted earnings per common
share attributable to CME
Group                             0.71         0.66           8          2.35          2.20           7
Cash flows from operating
activities                                                              898.6         897.2           -

n.m. not meaningful
In the third quarter of 2013 compared with the same period in 2012, the overall increase in revenues was attributable to an increase in clearing and transaction fees resulting from higher contract volumes. The higher contract volumes were partially offset by a decrease in average rate per contract. In the first nine months of 2013 when compared with the same period in 2012, overall revenues remained flat. The increase in clearing and transaction fees was offset by a decline in market data and information services revenue resulting from the de-consolidation of our index business that was contributed to S&P/Dow Jones Indices LLC (S&P/DJI), a new business venture with The McGraw-Hill Companies Inc. (McGraw), and the sale of Credit Market Analysis Ltd. (CMA) to McGraw.

The overall increase in expenses in the third quarter of 2013 when compared with the same period in 2012 was largely due to an increase in compensation and benefits expense related to an increase in salaries and headcount as well as an increase in bonus expense due to improved performance relative to our cash earnings target. Overall expenses in the first nine months of 2013 when compared with the same period in 2012 remained relatively flat. The increase in compensation and benefits expense related to an increase in salaries and headcount as well as an increase in bonus expense was offset by declines in expenses resulting from the de-consolidation of our index business contributed to S&P/DJI and the sale of CMA.

The decline in non-operating income in the first nine months of 2013 when compared with the same period in 2012 was attributable to the net gain recognized in the second quarter of 2012 related to the de-consolidation of our index business that was contributed to S&P/DJI and the sale of CMA to McGraw as well as an increase in interest expense in 2013. The decline in non-operating income was partially offset by an increase in income from our investment in S&P/DJI.

The overall decreases in effective tax rates in the third quarter and first nine months of 2013 when compared with the same periods in 2012 were attributable to a benefit accrued for the domestic production activities deduction in the third quarter of 2013 offset by increases to reserves for uncertain tax positions and increases in deferred income tax expense due to a change in state and local apportionment factors in the third quarter of 2013. The decreases in the effective tax rate in the third quarter and first nine months of 2013 were due to the recognition of deferred tax liabilities associated with the closing of our venture with McGraw in the second quarter of 2012.


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Revenues
                                   Quarter Ended                         Nine Months Ended
                                   September 30,                           September 30,
(dollars in millions)            2013         2012        Change        2013          2012         Change
Clearing and transaction
fees                          $  597.9     $  562.2           6  %   $ 1,883.6     $ 1,826.9           3  %
Market data and information
services                          78.6         82.8          (5 )        238.9         307.8         (22 )
Access and communication
fees                              20.3         23.2         (12 )         62.4          65.5          (5 )
Other                             17.8         15.0          18           64.4          53.5          20
Total Revenues                $  714.6     $  683.2           5      $ 2,249.3     $ 2,253.7           -

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 as well as 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 fees revenue by total contract volume. All amounts in the following
tables exclude our CME credit default swap, CME interest rate swap and all CME
Clearing Europe contracts.
                                   Quarter Ended                          Nine Months Ended
                                   September 30,                            September 30,
                                 2013         2012        Change         2013          2012         Change
Total contract volume (in
millions)                        769.1        682.8          13  %      2,436.3       2,238.1           9  %
Clearing and transaction
fees (in millions)            $  586.2     $  561.3           4       $ 1,861.8     $ 1,823.9           2
Average rate per contract     $  0.762     $  0.822          (7 )     $   0.764     $   0.815          (6 )

We estimate the following increases (decreases) in clearing and transaction fees based on changes in total contract volume and changes in average rate per contract during the third quarter and first nine months of 2013 when compared with the same periods in 2012.

                                                                                   Nine Months
(in millions)                                                     Quarter Ended       Ended
Increases due to changes in total contract volume                $        65.7     $    151.5
Decreases due to changes in average rate per contract                    (40.8 )       (113.6 )
Increases in clearing and transaction fees                       $        24.9     $     37.9

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 changes in revenue attributable to changes in each is only an approximation. Overall revenues from clearing and transaction fees include revenues for our cleared-only CME interest rate swap and CME credit default swap contracts. In the third quarter and first nine months of 2013 when compared with the same periods of 2012, clearing and transaction fees generated from our CME interest rate swap and credit default swap contracts increased by $10.2 million and $17.3 million, respectively. The increases in revenues were largely attributable to an increase in cleared CME interest rate swap contracts resulting from the first, second and third phases of the over-the-counter clearing mandate in March and June 2013 required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.


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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. Average daily contract volume
amounts exclude our CME credit default swap, CME interest rate swap and all CME
Clearing Europe contracts.
                                 Quarter Ended                        Nine Months Ended
                                 September 30,                          September 30,
(amounts in thousands)         2013        2012        Change         2013           2012       Change
Average Daily Volume by
Product Line:
Interest rate                  5,839       4,514          29  %      6,117           5,085         20  %
Equity                         2,409       2,391           1         2,700           2,569          5
Foreign exchange                 792         846          (6 )         947             871          9
Agricultural commodity (1)     1,009       1,171         (14 )       1,074           1,194        (10 )
Energy                         1,609       1,590           1         1,711           1,761         (3 )
Metal                            360         327          10           410             361         13
Aggregate average daily
volume                        12,018      10,839          11        12,959          11,841          9
Average Daily Volume by
Venue:
Electronic                    10,199       9,293          10        11,203          10,024         12
Open outcry                    1,173         979          20         1,068           1,144         (7 )
Privately negotiated (2)         646         567          14           688             673          2
Aggregate average daily
volume                        12,018      10,839          11        12,959          11,841          9

(1) Average daily volume for agricultural commodity products includes volume for KCBT beginning on January 1, 2013.
(2) CME ClearPort average daily volume is included in privately negotiated volume.
Interest Rate Products
The following table summarizes average daily contract volume for our key interest rate products. Eurodollar Front 8 futures include contracts expiring in two years or less while Eurodollar Back 32 futures include contracts with expirations after two years through ten years.

                                  Quarter Ended                          Nine Months Ended
                                  September 30,                            September 30,
(amounts in thousands)           2013        2012        Change          2013           2012        Change
Eurodollar futures and
options:
Front 8 futures                 1,188        1,020          16  %      1,202            1,187           1  %
Back 32 futures                   860          554          55           880              592          49
Options                           761          489          56           594              624          (5 )
U.S. Treasury futures and
options:
10-Year                         1,498        1,156          30         1,704            1,308          30
5-Year                            767          529          45           833              575          45
Treasury bond                     388          404          (4 )         492              436          13
2-Year                            219          243         (10 )         252              235           7

In the third quarter and first nine months of 2013 when compared with the same periods in 2012, overall interest rate contract volumes increased largely due to periods of higher long-term interest rate volatility in 2013. The high long-term interest rate volatility was attributable to changes in market expectations regarding the Federal Reserve's intention to revisit their quantitative easing strategy and to outline an exit strategy from their plan as well as a change in expectations regarding the Federal Reserve's continued zero interest rate policy. In September 2013, the Federal Reserve announced that they would not taper their quantitative easing strategy indicating a change in strategy from their position earlier in the year. We believe this initially led to an increase in long-term interest rate volatility, which contributed to an increase in volume for mid- and long-term interest rate contracts including Eurodollar Back 32 futures and 5-Year and 10-Year Treasury contracts.
Short-term interest rate volatility remained low in early 2013 compared with prior periods due to the Federal Reserve's ongoing zero interest rate policy. The Federal Reserve's announcement in September 2013 resulted in an increase in short-term interest rate volatility, which contributed to an increase in Eurodollar Front 8 and Eurodollar options contracts in the third quarter of


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2013 when compared with the same period in 2012. The Federal Reserve's announcement had little effect on the 2-Year Treasury volumes in the third quarter of 2013 as market participants continued to focus primarily on the 5-Year and 10-Year Treasury contracts.
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)           2013        2012        Change           2013           2012        Change
E-mini S&P futures and
options                         1,931        1,887           2  %       2,173            2,036           7  %
E-mini NASDAQ futures and
options                           222          231          (4 )          236              249          (5 )

Overall equity contract volume remained relatively flat in the third quarter of 2013 when compared with the same period in 2012 due to a lack of volatility in the equity markets.
Overall equity contract volume increased in the first nine months of 2013 when compared with the same period in 2012 due to periods of higher volatility in early 2013. We believe the high volatility was caused by changes in market expectations regarding the Federal Reserve's intention to revisit their quantitative easing strategy. We also believe the increase in equity contract volume in the first nine months of 2013 was also due to a greater need for equity futures and options contracts resulting from an increase in assets under management in equity-based funds.
In general, equity products such as the E-mini NASDAQ contracts that hedge market risks different than those of the E-mini S&P 500, our most liquid equity product, do not tend to benefit from macro-level events or increased general market volatility to the same extent.
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)       2013        2012    Change           2013           2012    Change
Euro                        235           283     (17 )%        287               303      (5 )%
Japanese yen                149            89      68           201                94     115
British pound               120           110       9           130               108      20
Australian dollar           107           139     (23 )         119               141     (15 )
Canadian dollar              67            99     (32 )          78                99     (21 )

The overall increase in foreign exchange product volume in the first nine months of 2013 when compared with the same period in 2012 was largely attributable to increases in Japanese yen and British pound contract volumes. The increase in Japanese yen contract volumes in the first nine months of 2013 when compared with the same period in 2012 was largely due to higher volatility resulting from reduced efforts by the Japanese central bank to control yen exchange rates in early 2013. In addition, increased volatility and economic uncertainty within Great Britain in 2013 contributed to an overall increase in British pound contract volumes in the first nine months of 2013 when compared with the same period in 2012. As volatility returned to the Japanese and British markets, market participants shifted their focus from safe haven currencies, such as the Australian and Canadian dollars, to the Japanese and British markets. This shift contributed to a decrease in volume for the Australian and Canadian dollars. Additionally, euro contract volumes decreased due to lower volatility when compared with previous periods. Volatility was higher in 2012 due to concerns related to the European credit crisis.
Japanese yen contract volume decreased in the third quarter of 2013 when compared with contract volumes in early 2013 due to potential changes in tax laws and a renewed threat of intervention by the Japanese central bank to control exchange rates. This contributed to an overall decrease in foreign exchange contract volume in the third quarter of 2013 when compared with the same period in 2012. We believe the overall decrease in the third quarter of 2013 when compared with the same period in 2012 was also attributable to lower volatility caused by the continuation of the Federal Reserve's zero interest rate policy.


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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)       2013        2012    Change           2013           2012    Change
Corn                        327           396     (18 )%        352               421     (16 )%
Soybean                     242           301     (19 )         241               287     (16 )
Wheat                       125           125       -           147               135       9
Soybean oil                  89           115     (22 )         100               117     (14 )

The overall declines in total agricultural commodity contract volumes in the third quarter and first nine months of 2013 when compared with the same periods in 2012 were attributable to lower weather-related volatility in mid-2013, which resulted in higher grain supplies and movement toward a more normal historical supply and demand environment. High volatility in mid-2012 resulted from severe drought conditions in the Midwest and a very tight supply environment. The overall decrease in agricultural commodity volume was partially offset by incremental wheat contract volume from the addition of KCBT's hard red winter wheat contract.
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)       2013        2012    Change           2013           2012    Change
Crude oil                   840           699      20  %        813               761       7  %
Natural gas                 420           547     (23 )         524               635     (18 )
Refined products            276           306     (10 )         302               319      (5 )

Overall energy contract volumes remained flat in the third quarter and first nine months of 2013 when compared with the same periods in 2012. Crude oil product volumes increased due to improvements in distribution infrastructure. We believe that revisions to our trading volume incentives program also contributed to increases in crude oil contract volumes in the third quarter and first nine months of 2013 when compared with the same periods in 2012.
The declines in natural gas contract volumes in the third quarter and first nine months of 2013 when compared with the same periods in 2012 were attributable to lower volatility due to an increase in domestic supplies above forecasted amounts. Additionally, natural gas contract volume declined in the first nine months of 2013 when compared with the same period in 2012 due to lower weather-related volatility in early 2013. In addition, the declines in refined products contract volume in the third quarter and first nine months of 2013 when compared with the same periods in 2012 were due to a decrease in demand in the underlying physical market.
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)       2013        2012    Change           2013           2012    Change
Gold                        216           194      11 %         247               218      13 %
Copper                       61            59       4            72                67       7
Silver                       64            56      15            69                61      14

Total metal contract volumes increased in the third quarter and first nine months of 2013 when compared with the same periods in 2012. The increases in metal contract volumes were driven by short periods of high price volatility caused by changing market expectations regarding economic conditions. Lower volatility in the third quarter of 2013 resulted in decreased volumes in the third quarter of 2013 when compared with early 2013. Average Rate per Contract
The average rate per contract decreased in the third quarter and first nine months of 2013 when compared with the same periods in 2012 due to a shift in the relative mix of product volume. In the third quarter of 2013, interest rate product volume,


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when measured as a percentage of total volume, increased by 7%, while agricultural commodity product and equity product volumes each decreased by 2%, and energy product volume decreased by 1% when compared with the same period in 2012. In the first nine months of 2013, interest rate product volume, when measured as a percentage of total volume, increased 4%, while agricultural commodity and energy product volumes decreased by 2% each when compared with the same period in 2012. Interest rate contracts have a lower average rate per contract compared with agricultural commodity, equity and energy products. In addition, the decreases in average rate per contract in the third quarter and first nine months of 2013 when compared with the same periods in 2012 resulted from increases in incentives and discounts on our energy contracts. Concentration of Revenue
We bill a substantial portion of our clearing and transaction fees directly 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. One firm represented 11% and one firm represented 10% of our clearing and transaction fees revenue in the first nine months of 2013. 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 revenues in the third quarter and first nine months of 2013, when compared with the same periods in 2012, were attributable to declines in market data subscriber counts resulting from continued cost-cutting initiatives at customer firms as well as ongoing incentives. In addition, the decrease in the first nine months of 2013 when compared with the same period in 2012 was due to the contribution of the index business to S&P/DJI and the sale of CMA in the second quarter of 2012, which resulted in a decrease in revenues of $52.7 million in the first nine months of 2013. The index business contributed to S&P/DJI consisted of assets that generated market data revenues. CMA was sold to McGraw as part of that transaction.
Effective January 1, 2014, users of our basic service will pay $85 per month for each device compared with $70 per month in 2013 and 2012.
The two largest resellers of our market data represented approximately 52% of our market data and information services revenue in the first nine months of 2013. 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.
In the first nine months of 2013 when compared with the same period in 2012, the increase in other revenues was attributable to $8.8 million in fees recognized upon delivery of services under our technology agreement with BM&FBOVESPA S.A. (BM&FBOVESPA) in the first quarter of 2013. The increase in other revenues was also attributable to $5.1 million of insurance proceeds from business interruption resulting from Hurricane Sandy, which we received in the second quarter of 2013. The increase in other revenues in the first nine months of 2013 was partially offset by a $7.0 million decrease in rental income resulting from our sale of two CBOT buildings in April 2012.

Expenses
                                   Quarter Ended                          Nine Months Ended
                                   September 30,                            September 30,
. . .
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