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CME > SEC Filings for CME > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for CME GROUP INC.

Form 10-Q for CME GROUP INC.


4-Aug-2014

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, 2013.
References in this discussion and analysis to "we," "us" and "our" are to CME Group Inc. (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), CME Clearing Europe Limited (CMECE)
and CME Europe Limited (CME Europe), collectively, unless otherwise noted. In addition, CME serves as a swap execution facility, which is a regulated platform for swap trading, and serves as a swap data repository, which provides public data on swap transactions and stores confidential swap data for regulatory purposes.

RESULTS OF OPERATIONS
Financial Highlights
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,
except per share data)           2014         2013        Change        2014          2013         Change
Total revenues                $  731.6     $  816.1         (10 )%   $ 1,509.0     $ 1,534.7          (2 )%
Total expenses                   319.6        308.3           4          642.5         621.4           3
Operating margin                  56.3 %       62.2 %                     57.4 %        59.5 %
Non-operating income
(expense)                     $   10.1     $   (0.3 )      n.m.      $     2.0     $   (18.2 )      (111 )
Effective tax rate                37.5 %       38.7 %                     38.9 %        38.7 %
Net income attributable to
CME Group                     $  263.8     $  311.2         (15 )    $   530.6     $   547.0          (3 )
Diluted earnings per common
share attributable to CME
Group                             0.79         0.93         (15 )         1.58          1.64          (4 )
Cash flows from operating
activities                                                               554.7         768.8         (28 )

n.m. not meaningful
In the second quarter and first six months of 2014 when compared with the same periods in 2013, the decreases in revenues were attributable to lower exchange-traded contract volumes and decreases in other revenues due to proceeds recognized from business interruption insurance in 2013 and declines in rental income. The overall decreases in revenues were partially offset by increases in market data fees related to higher fees for basic real-time market data service and higher over-the-counter contract volumes.

The increases in expenses in the second quarter and first six months of 2014 when compared with the same periods in 2013 were attributable to increases in compensation and benefits expenses relating to higher headcount and expenses associated with the development and continued enhancement of our product offerings and our electronic platforms, partially offset by higher net gains on foreign currency fluctuations and a recovery of expenses recognized in the second quarter of 2014 related to the MF Global bankruptcy in 2011.

The increases in non-operating income (expense) in the second quarter and first six months of 2014 when compared with the same periods in 2013 were due to decreases in interest expense due to the repayment of the 5.75% fixed rate notes due February 2014, the repayment of the 5.4% fixed rate notes due August 2013 and the issuance of the 5.3% fixed rate notes due September 2043 that were effectively fixed at a rate of 4.73% through an interest rate swap agreement.

The overall decrease in effective tax rate for the second quarter of 2014 when compared with the same period in 2013 was largely due to a benefit accrued in the second quarter of 2014 related to the domestic production activities deduction.

Cash flows from operating activities decreased in the first six months of 2014 when compared with the same period in 2013 largely due to cash collateral on hand related to our forward-starting interest rate swap contract in the first six months of 2013.The forward-starting interest rate swap contract was outstanding during the first six months of 2013 in advance of our debt offering in the third quarter of 2013.


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Revenues
                                   Quarter Ended                         Six Months Ended
                                     June 30,                                June 30,
(dollars in millions)            2014         2013        Change        2014          2013         Change
Clearing and transaction
fees                          $  609.3     $  692.5         (12 )%   $ 1,261.5     $ 1,285.7          (2 )%
Market data and information
services                          89.6         79.4          13          179.0         160.3          12
Access and communication
fees                              20.4         20.6          (1 )         40.8          42.1          (3 )
Other                             12.3         23.6         (48 )         27.7          46.6         (40 )
Total Revenues                $  731.6     $  816.1         (10 )    $ 1,509.0     $ 1,534.7          (2 )

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
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 by total contract volume. Volume and average rate per contract
disclosures exclude our CME interest rate swap, CME credit default swap, CMECE
and CME Europe contracts.
                                   Quarter Ended                         Six Months Ended
                                     June 30,                                June 30,
                                 2014         2013        Change        2014          2013         Change
Total contract volume (in
millions)                        796.0        916.7         (13 )%     1,629.2       1,667.2          (2 )%
Clearing and transaction
fees (in millions)            $  596.0     $  685.6         (13 )    $ 1,235.3     $ 1,275.6          (3 )
Average rate per contract     $  0.749     $  0.748           -      $   0.758     $   0.765          (1 )

We estimate the following increases (decreases) in clearing and transaction fees based on change in total contract volume and change in average rate per contract during the second quarter and first six months of 2014 when compared with the same periods in 2013.

                                                                                     Six Months
(in millions)                                                      Quarter Ended       Ended
Decreases due to changes in total contract volume                 $       (90.4 )   $    (28.8 )
Increase (decrease) due to changes in average rate per contract             0.8          (11.5 )
Decreases in clearing and transaction fees                        $       (89.6 )   $    (40.3 )

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 contract volume, the change in clearing and transaction fees attributable to the change in each is only an approximation.
Clearing and transaction fees as presented in the consolidated statements of income include revenues for our cleared-only CME interest rate swap and CME credit default swap contracts. In the second quarter and first six months of 2014 when compared with the same periods in 2013, clearing and transaction fees generated from these contracts increased by $6.5 million and $16.2 million, respectively. The increases in revenues were largely attributable to increases in CME interest rate swap contract volumes resulting from the over-the-counter clearing mandate required to be implemented starting in mid-2013 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 conditions,
the regulatory environment and market competition.
                                 Quarter Ended                        Six Months Ended
                                   June 30,                               June 30,
(amounts in thousands)         2014        2013        Change         2014          2013       Change
Average Daily Volume by
Product Line:
Interest rate                  6,668       6,828          (2 )%      6,696          6,261          7  %
Equity                         2,465       3,079         (20 )       2,674          2,851         (6 )
Foreign exchange                 638       1,042         (39 )         726          1,027        (29 )
Agricultural commodity         1,085       1,107          (2 )       1,125          1,107          2
Energy                         1,457       1,796         (19 )       1,579          1,764        (11 )
Metal                            323         471         (31 )         339            435        (22 )
Aggregate average daily
volume                        12,636      14,323         (12 )      13,139         13,445         (2 )
Average Daily Volume by
Venue:
Electronic                    10,888      12,459         (13 )      11,289         11,721         (4 )
Open outcry                    1,101       1,134          (3 )       1,139          1,014         12
Privately negotiated (1)         647         730         (11 )         711            710          -
Aggregate average daily
volume                        12,636      14,323         (12 )      13,139         13,445         (2 )

(1) Privately negotiated venue average daily volume includes both traditional block trades as well as what was historically categorized as CME ClearPort. 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. Eurodollar Back 32 futures include contracts with expirations after two years through ten years.

                                  Quarter Ended                          Six Months Ended
                                     June 30,                                June 30,
(amounts in thousands)           2014        2013        Change          2014          2013        Change
Eurodollar futures and
options:
Front 8 futures                 1,451        1,315          10  %      1,441           1,210          19  %
Back 32 futures                 1,012        1,035          (2 )       1,028             890          16
Options                           779          608          28           800             507          58
U.S. Treasury futures and
options:
10-Year                         1,665        1,921         (13 )       1,689           1,811          (7 )
5-Year                            875          921          (5 )         874             868           1
Treasury bond                     419          582         (28 )         408             546         (25 )
2-Year                            280          270           4           268             268           -

Overall interest rate volume remained relatively flat in the second quarter of 2014 while volume increased in the first six months of 2014 when compared with the same periods in 2013. Eurodollar futures and options contract volume increased in the second quarter and first six months of 2014, when compared with the same periods in 2013, resulting from volatility caused by improved domestic macroeconomic data.
Volumes for U.S. Treasury contracts decreased in the second quarter and first six months of 2014 when compared with the same periods in 2013. Volatility within the U.S. Treasury market was higher in early 2013, despite some volatility caused by improved domestic macroeconomic data in early 2014. Volumes were higher in the first half of 2013 due to short periods of high volatility created by the Federal Reserve's intention to revisit their quantitative easing strategy and outline a quantitative easing exit strategy in early 2013.


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Equity Products
The following table summarizes average daily contract volume for our key equity
products.
                                  Quarter Ended                          Six Months Ended
                                     June 30,                                June 30,
(amounts in thousands)           2014        2013        Change          2014          2013        Change
E-mini S&P 500 futures and
options                         1,890        2,469         (23 )%      2,068           2,298         (10 )%
E-mini NASDAQ 100 futures
and options                       310          256          21           313             244          28

Overall equity contract volumes decreased in the second quarter and first six months of 2014 when compared with the same periods in 2013 due to decreases in E-mini S&P 500 contract volumes resulting from lower volatility, as measured by the CBOE Volatility Index, in early 2014. The equity market volatility was very low in the first half of 2014 compared with the short periods of high volatility in the first half of 2013 related to the anticipation of changes in the Federal Reserve's intention to revisit their quantitative easing strategy. The decreases in overall equity volumes in the second quarter and first six months of 2014, when compared with the same periods in 2013, were partially offset by increases in E-mini Nasdaq 100 contract volume, due largely to periods of higher volatility, as measured by the CBOE Nasdaq-100 Volatility Index. We believe that higher volatility in the index was largely attributable to the technology sector.
Foreign Exchange Products
The following table summarizes average daily contract volume for our key foreign exchange products.

                             Quarter Ended                     Six Months Ended
                               June 30,                            June 30,
(amounts in thousands)       2014        2013    Change          2014          2013    Change
Euro                        190           296     (36 )%       212              314     (32 )%
Japanese yen                124           243     (49 )        145              229     (37 )
British pound                97           129     (24 )        109              135     (19 )
Australian dollar            71           145     (51 )         84              126     (33 )
Canadian dollar              53            85     (37 )         63               84     (25 )

The overall decreases in foreign exchange contract volumes in the second quarter and first six months of 2014 when compared with the same periods in 2013 were attributable to decreases in exchange rate volatility across all major currencies. Subdued expectations regarding interest rate changes across European countries and Japan led to decreases in exchange rate volatility throughout these regions. Additionally, allegations regarding possible collusion by certain foreign exchange market participants in other marketplaces had a continued negative impact on overall global foreign exchange product trading during the second quarter and first six months of 2014. Agricultural Commodity Products
The following table summarizes average daily contract volume for our key agricultural commodity products.

                             Quarter Ended                     Six Months Ended
                               June 30,                            June 30,
(amounts in thousands)       2014        2013    Change          2014          2013    Change
Corn                        359           371     (3 )%        374              365      3  %
Soybean                     228           237     (4 )         241              240      -
Wheat                       164           157      4           165              158      4
Soybean oil                  98           108     (9 )         101              106     (5 )

The overall agricultural commodity contract volumes remained relatively flat in the second quarter of 2014 and the first six months of 2014 when compared with the same periods in 2013. Contract volume increased in the first quarter of 2014 due to volatility caused by an increase in grain supplies from 2013 to 2014 as well as higher price volatility in corn and wheat products due to political instability in the Black Sea region in the first quarter of 2014. Volumes were slightly lower in the second quarter of 2014 due to good crop development, which reduced price volatility as supplies continued to return to historical levels.


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Energy Products
The following table summarizes average daily contract volume for our key energy
products.
                             Quarter Ended                     Six Months Ended
                               June 30,                            June 30,
(amounts in thousands)       2014        2013    Change          2014          2013    Change
Crude oil                   724           847     (15 )%       725              799      (9 )%
Natural gas                 365           559     (35 )        484              577     (16 )
Refined products            278           302      (8 )        286              315      (9 )

Overall energy contract volumes decreased in the second quarter and first six months of 2014 when compared with the same periods of 2013. The declines in crude oil and natural gas contract volumes were attributable to decreases in price volatility in early 2014 when compared with early 2013. Refined products contract volumes decreased in the second quarter and first six months of 2014 when compared with the same periods in 2013 due to decreases in demand in the underlying physical market.
Metal Products
The following table summarizes average daily volume for our key metal products.

                             Quarter Ended                     Six Months Ended
                               June 30,                            June 30,
(amounts in thousands)       2014        2013    Change          2014          2013    Change
Gold                        175           277     (37 )%       191              262     (27 )%
Silver                       67            83     (19 )         66               72      (9 )
Copper                       60            89     (32 )         61               78     (22 )

Overall metal contract volumes decreased in the second quarter and first six months of 2014 when compared with the same periods of 2013 due to decreases in contract volumes resulting from lower metals price volatility. In early 2013, short periods of high volatility were caused by improved macroeconomic data. In addition, demand for gold continued to slow due to lower economic growth rates in India and China, which are both large consumers of gold. Average Rate per Contract
The average rate per contract remained flat in the second quarter of 2014 and decreased slightly in the first six months of 2014 when compared with the same periods in 2013. The impacts due to higher fees associated with transaction fee pricing changes that were implemented at the beginning of 2014 were offset by a decrease due to shifts in relative mix of product volume. Interest rate product volume, when measured as a percentage of total volume, increased by 5% and 4% in the second quarter and first six months of 2014, respectively, while nearly all other product lines decreased. Interest rate contracts have a lower average rate per contract compared with other product lines. In addition, increases in incentives and discounts on our energy contracts as well as increases in tier discounts on Eurodollar products also resulted in decreases in the average rate per contracts in the second quarter and first six months of 2014 when compared with the same periods in 2013.
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 12% of our clearing and transaction fees revenue in the first six months of 2014. 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 increases in market data and information services revenues in the second quarter and first six months of 2014 when compared with the same periods in 2013 were attributable to increases in fees for basic real-time market data service to $85 per month in 2014 from $70 per month in 2013. The increases were partially offset by declines in market data subscriber counts resulting from continued cost-cutting initiatives at customer firms as well as utilization of a legacy incentive program.
The two largest resellers of our market data represented approximately 41% of our market data and information services revenue in the first six months of 2014. 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


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institutional customers that utilize services from our two largest resellers report usage and remit payment of their fees directly to us.
In the second quarter of 2013, we recognized $5.1 million of proceeds from business interruption insurance claim related to Hurricane Sandy, which resulted in decreases in other revenues in the second quarter and first six months of 2014 when compared with the same periods in 2013. In the fourth quarter of 2013, we sold the NYMEX building, which resulted in decreases in rental income of $2.2 million and $4.5 million in the second quarter and first six months of 2014, respectively, when compared with the same periods in 2013. In the first six months of 2014 when compared with the same period in 2013, the decreases in other revenues were also attributable to $8.7 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.

Expenses
                                   Quarter Ended                         Six Months Ended
                                     June 30,                                June 30,
(dollars in millions)            2014         2013        Change         2014          2013        Change
Compensation and benefits     $  139.7     $  128.9           8  %   $    275.2     $  258.3           7  %
Communications                     8.3          8.6          (4 )          16.5         17.5          (6 )
Technology support services       14.6         13.8           5            28.5         26.2           9
Professional fees and
outside services                  37.5         27.9          35            67.1         49.8          35
Amortization of purchased
intangibles                       25.2         25.9          (2 )          50.4         51.8          (3 )
Depreciation and
amortization                      34.3         33.2           3            68.4         65.8           4
Occupancy and building
operations                        23.2         19.0          22            46.4         37.5          24
Licensing and other fee
agreements                        25.7         26.9          (5 )          54.7         48.1          14
Other                             11.1         24.1         (54 )          35.3         66.4         (47 )
Total Expenses                $  319.6     $  308.3           4      $    642.5     $  621.4           3

Operating expenses increased by $11.3 million and $21.1 million in the second quarter and first six months of 2014 when compared with the same periods in 2013. The following table shows the estimated impacts of key factors resulting in changes in operating expenses:

                                                    Quarter Ended,                    Six Months Ended,
                                                    June 30, 2014                       June 30, 2014

                                                             Change as  a                        Change as  a
                                            Amount  of      Percentage of      Amount  of       Percentage of
(dollars in millions)                         Change        Total Expenses       Change         Total Expenses
Salaries, benefits and employer taxes      $       8.3            3  %        $     14.7              2  %
Business enhancements and platform
development                                        4.5            1                 10.7              1
Contingent consideration                           4.6            1                  7.7              1
Acquisition-related expenses                       4.7            2                  7.1              1
License and other fee agreements                  (1.2 )          -                  6.6              1
Voluntary exit incentive plan                      5.8            2                  5.8              1
Bonus expense                                     (4.0 )         (1 )               (1.2 )            -
Litigation accruals                                  -            -                 (8.0 )           (1 )
MF Global bankruptcy claim                       (14.5 )         (5 )              (14.5 )           (2 )
Net losses (gains) on foreign currency
fluctuation                                       (3.9 )         (1 )              (19.0 )           (3 )
Other expenses, net                                7.0            2                 11.2              2
Total increase                             $      11.3            4  %        $     21.1              3  %

Operating expenses increased in the second quarter and first six months of 2014 . . .

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