Cboe Global Markets, Inc. (CBOE) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the CBOE Second Quarter 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Now, I’d like to turn the conference over to Debbie Koopman. Ms. Koopman, please go ahead.

Thank you. Good morning and thank you for joining us for our second quarter 2015 earnings conference call. On the call today, Ed Tilly, our CEO, will provide an update on our strategic initiatives for 2015. Then, Alan Dean, our Executive Vice President and CFO, will review our second quarter 2015 financial results. Following their comments, we will open the call to Q&A. Also joining us for Q&A is our President and COO, Ed Provost. In addition, I'd like to point out that this presentation will include the use of several slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the investor relations portion of our Web site. As a preliminary note, you should be aware that this presentation contains forward-looking statements, which represent our current judgment on what the future may hold, and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, after this conference call. Now, I'd like to turn the call over to Ed Tilly.

Thank you, Debbie. Good morning and thank you for joining us today. I’m pleased to report that CBOE Holdings posted solid earnings in the second quarter, despite the low volume, low volatility trading environment that persisted through the industry for most of the quarter. I’m also pleased to note, that as volatility began to spike and trading activity picked up towards the quarter’s end and into July, CBOE was well positioned to benefit most notably in our premium index products. Let’s take a look at a few of the volume bright spots. Second quarter average daily volume and S&P 500 index, SPX options trading, while down sequentially, rose 5% from 2014 second quarter and is up 6% year-to-date through July 29. As expected, we saw a significant average daily volume increase in Russell 2000 Index, RUT options which began trading exclusively at CBOE in April. We’ve seen volume increase each month since CBOE became the home of RUT options and in July RUT posted its strongest month of the year. We are confident we will further grow our RUT marketplace going forward. As the exclusive home of RUT options, CBOE not only provides the product with a concentrated pool of liquidity, we’re also able to leverage our position as the go to place for all things related to index options and to connect with new and existing RUT customers worldwide. RUT options are now prominently featured across a range of CBOE educational channels, including the Options Institute, CBOE’s Risk Management Conferences, RMC, and the Options Hub, our highly popular social media platform. CBOE also saw stronger VIX trading. VIX options average daily volume rose 22% from the previous quarter. The trend within the quarter was also positive, with month-over-month increases that continued into July, which is on track for another monthly sequential increase of 15%. VIX futures average daily volume rose 11% over the second quarter 2014 and is up 12% in July compared to June. Average daily volume in VIX options and futures for July is on track to be at its highest monthly levels since last October. Recent volatility spikes notwithstanding, we remain in a low-vol regime, with the VIX Index still hovering well below historical levels. Still, we remain guardedly optimistic about VIX trading in the second half of the year, given the return of large traders to the market, a maturing U.S. bull market, and impending U.S. interest rate hikes. Regardless of volume trends and the ebb and flow of VIX, our strategy is straightforward. We will continue to execute our core growth initiatives to increase index and volatility trading at CBOE, domestically and abroad, through our unique ability to create, collaborate, and connect with the marketplace. Overseas investors continue to embrace SPX and VIX options for efficient exposure to the U.S. equity market and global volatility, and we continue to make it more convenient for them to access those products. Last year, we implemented near 24-hour trading in VIX futures. VIX futures volume during non-U.S. trading hours held steady at a little over 8% in the second quarter. As the Greek debt crisis escalated in the second week of July, however, the overnight session accounted for as much as 13% of VIX volume, which averaged nearly 300,000 contracts per day for the week. In March 2015, we implemented an additional six-hour trading session in VIX and SPX options beginning at 2:00 a.m. Chicago time to align with the open of trading in London and the close in Asia. As expected, volume in extended trading hours in both SPX and VIX options has been a gradual, steady build with the exception of July, when volume in VIX options, like VIX futures, rose dramatically in the face of heightened global volatility. Product innovation is a cornerstone of our growth strategy. We were thrilled last week to launch Weekly VIX futures and look forward to rolling out the options on October 8. VIX Weeklys are a natural extension and complement to the standard VIX futures and options, offering investors more opportunities to trade VIX. VIX Weeklys also respond to customers who tell us they’re looking for volatility exposures that more precisely track our benchmark VIX Index. The closer VIX futures and options are to expiration, the closer they track the VIX Index. By filling in the gaps between monthly expirations, Weeklys offer investors short-term protection, as well as the ability to fine-tune the timing of their trades. We received significant customer demand to list VIX Weeklys futures and early feedbacks from both the buy-and sell-side has been positive. We are encouraged that we’ve seen some volume from day one. We expect Weeklys futures volume to continue to gradually build as we roll out additional expirations and launch VIX Weeklys options. In other product development news, on August 3, we will be unveiling 10 new CBOE option strategy benchmarks that highlight the long-term utility of options as risk management and yield enhancing investment tools. Two of the benchmarks will use popular SPX Weekly options to create new versions of our flagship S&P 500 CBOE Index BXM and PutWrite, PUT Indexes. The other indexes highlight completely new systematic hedging and risk-managed option selling strategies featuring SPX and VIX options. Our new options-based strategies are aimed at providing fund managers, investment advisors, institutional investors and others with tangible measures of how options, particularly CBOE’s proprietary options can be used creatively to improve risk-adjusted returns within an investment portfolio. Education and product development go hand in hand at CBOE, and CBOE’s Options Institute continues to grow and pave the way for greater understanding of our evolving products and marketplace. We were particularly excited therefore to announce plans for the first extension of the Options Institute in collaboration with the Singapore Exchange, SGX, which is expected to launch in the fourth quarter of this year. CBOE’s world-renowned Options Institute conducts nearly 400 educational events per year, including classroom training at our state-of-the-art facility, webcasts and off-site seminars. A wide range of offerings and course levels allow us to connect with customers across a range of touchpoints as their educational and trading needs evolve and grow. The CBOE Options Institute at SGX will leverage CBOE’s options expertise and the Options Institute brand name with SGX’s position as the gateway to the region’s financial markets as we look to respond to the tremendous interest we see for our products in Asia. The CBOE SGX collaboration enables us to quickly and efficiently ramp up to meet the growing demand for options education in the region. Instructors at SGX will be trained by veteran instructors from the Options Institute at CBOE. The Institute’s trademarked content highlights CBOE products and will be translated into Mandarin by SGX. The Options Institute at SGX marks the second CBOE educational initiative planned for Asia in 2015. As previously announced, we’re expecting -- we’re expanding CBOE’s Risk Management Conference, RMC, beyond the U.S. and Europe with the first RMC in Asia later this year. RMC, which attracts sophisticated and influential market participants who tend to be early adopters of new CBOE products and services, will make its Asia debut in Hong Kong, November 30 to December 1. I’ll wrap up here by commending the entire CBOE team for maintaining a disciplined and consistent approach to executing our strategic growth initiatives throughout the second quarter and beyond, regardless of macro trading conditions. A companywide commitment to our strategy for long-term growth positioned CBOE to benefit optimally when market conditions changed, as they did most notably in June and July. We are pleased to begin the third quarter with that positive momentum and we’re very enthusiastic about the opportunities that lie ahead to further increase index and volatility trading at CBOE. With that, I’ll turn it over to Alan.

Thanks, Ed, and good morning, everyone. Let me start with an overview of our results for the quarter. CBOE turned in a solid performance for the second quarter, achieving top line and bottom line growth both year-over-year and sequentially. We were particularly pleased to see stronger trading volume throughout the quarter and into July in our VIX Index options, despite the continuation of lackluster trading in multiply listed options industry-wide. Operating revenue came in at $148.7 million, 3% above last year's second quarter. Operating income was $73.4 million, representing an operating margin of 49.3%, up 90 basis points compared with 48.4% in the second quarter of 2014. Net income allocated to common stockholders was $44.6 million, up 5% versus the second quarter of 2014, resulted -- resulting in diluted earnings per share of $0.54, an increase of 8% compared with $0.50 per share for the same period last year. We had no non-GAAP adjustments for the second quarter of 2015 or 2014, so the financial results discussed for the quarter are on a GAAP basis. Now, I’ll review our results in more detail, starting with operating revenue. As shown on this chart, the increase in operating revenue primarily reflects increases in transaction fees and other revenue, offset somewhat by decreases in access fees and regulatory fees. Transaction fees increased $3.7 million, or 4%, compared with the second quarter of 2014 resulting from a 14% increase in the average revenue per contract or RPC, partially offset by a 9% decrease in trading volume versus last year's second quarter. While total trading volume in our options products was down 10%, the volume in our highest margin futures contracts increased 10% over last year’s second quarter. Furthermore, looking at options trading volume by product category, our higher margin index options outperformed the lowest-margin, multiply-listed options. Trading volume in equity options decreased by 15%, options on exchange-traded products fell by 12% and index options declined by 2% year-over-year, but increased 7% compared with the first quarter. Offsetting the volume decline, our blended RPC, including options and futures, increased to $0.368 from $0.322 in last year's second quarter. The increase in RPC primarily reflects the net impact of a higher RPC generated across each product category, as well as a shift in the mix of trading volume towards our higher-margin, proprietary products. The RPC in our options business increased to $0.308 compared with $0.275 in the second quarter of 2014, reflecting RPC increases of 18% for equity options, 5% for options on exchange-traded products and 4% for index options, primarily resulting from fee adjustments made this year and lower volume discounts and incentives. Revenue per contract at CFE, our futures exchange, increased 7% to nearly $1.76 from $1.64 in last year's second quarter, as a result of fee changes implemented in January and a change in the mix of market participants. With respect to the shift in the volume mix, our highest margin index options and futures contracts accounted for 37.2% of total trading volume in the second quarter, up from 33.9% in the same period last year. As a result of the shift in the volume mix and higher RPC, transaction fees generated from our proprietary products represented a higher percentage of our total transaction fees year-over-year and sequentially. In the second quarter, index options and futures contracts accounted for 82.4% of our transaction fees, up from 80.9% in the second quarter of 2014 and 81.3% in the first quarter of this year, largely driven by the higher contribution from our futures business. Looking at some of the other factors influencing operating revenue, other revenue increased by $3.8 million, primarily due to higher regulatory fines assessed to trading permit holders for disciplinary actions. This revenue will be used to offset regulatory expenses. In addition, access fees declined by $1.4 million, reflecting a decrease in trading permits. Regulatory fees decreased $1.1 million, which is primarily attributed to lower rates for our options regulatory fee compared to the second quarter of 2014 and the elimination of regulatory fees related to CBSX, our stock exchange which ceased trading in 2014. Turning to expenses, this next slide details total operating expenses of $75.3 million for the quarter, an increase of $1.1 million, or 2%, compared with last year's second quarter. Operating expenses for the quarter reflect higher costs for professional fees and outside services, royalty fees, and depreciation and amortization, offset somewhat by lower costs for compensation and benefits. Core operating expenses were $46.7 million, a decrease of $1.8 million or 4%, compared with the second quarter of 2014. This decline primarily reflects a decrease of $6.2 million in compensation and benefits, partially offset by an increase of $4.7 million in professional fees and outside services. The decline in compensation and benefits largely reflects lower expenses related to salaries, stock-based compensation, and the provision for incentive compensation. The increase in professional fees and outside services, as well as the decrease in salaries, is primarily attributed to our outsourcing of certain regulatory services to FINRA, which occurred in December of 2014. As we told you on our last earnings call, during the second quarter we took steps to cut or delay certain expenses and capital projects in response to sluggish trading volumes. At the same time, we noted that we’d look to unwind certain cost reductions following a sustained improvement in volumes. Given the improvement we have seen in our VIX index options and futures volume, along with the continued strong volume in SPX options, we plan to gradually reverse some of the cost cuts in the coming months. We have -- we always viewed the cost cutting measures as short -- as a short-term solution to a short-term problem and we’re pleased that volume has returned to a level that we’re comfortable dialing up certain expenses and projects in a disciplined manner. Taking this into account, we still expect our core expenses for the year to be in the range of $190 million to $194 million; however, I expect to be at the high end of this range for the full-year. Looking at volume based-expenses, royalty fees increased by $2.1 million, or 14%, primarily due to a shift in the mix of licensed products traded, which resulted in a higher average royalty rate per licensed contract for the quarter. Previously, we told you that we expected the royalty rate per licensed contract to be $0.15 starting in the second quarter. The rate per contract came in higher, at $0.163, reflecting the shift in mix I referenced earlier, which we saw in the first quarter as well. Looking forward, I’d expect the rate per licensed contract to stay at this level, barring any significant shift in the mix of products traded. Turning to the balance sheet, we finished the quarter with cash and cash equivalents of $90 million, compared to $138 million at the end of March and $148 million at the end of December. The decrease in cash compared to March primarily reflects tax payments made during the quarter. Our business continues to generate a significant amount of cash. Through June, we generated net cash flows from operating activities of nearly $106 million versus $121 million in the same period last year. Capital expenditures through the first half of the year were just under $18 million. I look for capital spending to pick up somewhat in the back half of the year, so we’re reaffirming our guidance for capital expenditures of $37 million to $40 million for the full-year, which includes the development of our new trading platform, CBOE Vector. Through the first half of this year, we’ve used more than $35 million to pay dividends and nearly $82 million to repurchase our stock. At June 30, 2015, we had approximately $111 million of availability remaining under our existing share repurchase authorizations, which includes an additional $100 million authorized by our Board back in May. Our Board has authorized $500 million to use for share buybacks since the inception of our program in 2011. Further underscoring our commitment to returning capital to shareholders, we were pleased to announce that the Board increased our quarterly dividend rate by 10% to $0.23 per share from $0.21 per share, effective with the third quarter dividend payment. This increase is our fifth consecutive since we instituted a dividend payment in September of 2010. Since that time, our compounded average growth rate for our quarterly dividend has been 18%. So let me conclude by saying that we’re very optimistic about the growth opportunities we see going forward. As we begin the second half of the year, we’ve good momentum in our business and remain in a strong financial position. We will continue to make the necessary investments to position CBOE for long-term growth while prudently managing our use of cash in the near-term. With that, I’ll turn the call back over to Debbie.

Thanks, Alan. At this point, we’d be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue, if time permits we'll take a second question. Operator?

Good morning, Ed. Good morning, Alan.

Hi, Rich.

Good morning, Rich.

So you’ve mentioned in the prepared remarks the rebound in VIX options and futures and especially in July. And you’ve mentioned also the return of -- I thought you said something like big volume users, but with my one question I wanted to ask, can you give us any more color or explanation or insight on who these people are or what -- is it simply just a higher level of VIX volatility in general, is there something else that’s attracting them and how sustainable is it, if we see volatility move up and down towards the year-end?

Sure, Rich. Great question and a couple of answers there. We have returned to a more normal shape of the volatility curve. What that means is it upward sloping. So front month about 13, sloping up to about 18, which is the historic level of volatility, so we’ve that term structure play in place, much of what we’ve enjoyed in the growth of VIX options has returned. That’s the biggest VIX option story. Along with that, we talked in the first quarter, hey, what happened to the big trader? The big traders use the most efficient tool for tail risk hedging is pure VIX play, VIX options with the greatest leverage. That was very expensive, if you remember, with the high vol of vol and high option prices in VIX in the first quarter. VIX vol of vol has returned to its closure, to its historic level. So we’ve got a tail risk hedge back in play. We’ve got a term structure strategy back in play and so it’s a sustainable sure. Remember, VIX is using real prices to hedge a portfolio the S&P 500. Our traders tell us by looking over the term structure that is looking month in, month out over the calendar, that they expect while front month is low, roughly 13 out six months it returns to historic level. So that is a structure that our users are used to from a term structure play. And then our tail risk hedgers can find great coverage in that tail risk hedge as vol of vol has returned to its more normal levers -- leverage. As for futures, the futures growth has another -- a different driver. So the range in futures which in the first quarter was relatively flat, if you remember, we’ve had a range from about 12 and then through the risk of Greek default up to about 18. So that range and trade from a futures traders perspective provided great opportunity, so we saw the day trader or the more active futures traders taking advantage of that move from 12 to 18 back to 16, up to 18 and now back to 13. So there has been a lot of activity from the more active futures trader as well as the market makers who are hedging a greater daily volume of options trade. So we benefit again from the options volume increasing in our futures is that’s the go to -- first go to hedge for our options market makers, we’re managing their portfolio pure VIX options. So lot of moving parts. Is it sustainable? Yes. Can we tell you its going to be exactly like that for the next couple of months? No, but this is a more normal vol environment upwards sloping over time and we expect and it would be -- not be surprised if those strategies that are in play, in July and June continue going forward. Long answer to a simple question, Rich. Sorry about that.

No, no. That’s good, because it’s very important when you’re looking at the CBOE. But I did want to congratulate you on the Blackhawks NHL Stanley Cup Championship, but I did hear the NHL is investigating, them using soft pucks.

Yes, we deflated the pucks, Rich.

Thanks, guys.

Thank you. And the next question comes from Ken Worthington with JPMorgan.

Hi. Thank you for taking my question. Just on the VIX Weekly, can you just remind us maybe why the short-term VIX product didn’t seem to succeed as maybe we had hoped and why the VIX Weekly wont suffer a similar fate?

This is a really simple story from our users perspective. We knew that there was demand and there remains -- is demand each day for a shorter term contract for volatility. When we rolled out the volatility in VXXT that is an implied volatility over a nine-day period. That is different than what we’ve thought and what our users are used to in applied volatility contract for 30-day. The new Weekly, which is already traded more futures in its first five days than the VXXT did in two months, so is the utility and the easy adoption of the early short-term users in futures contracts to satisfy their needs for the short-term. The other difference as the -- we added more expiries as the -- as we come closer to expiration, VIX futures track more closely Spot VIX. So that is more utility for those users who are trying to track closer to the cash VIX level, we’ve given them 52 opportunities now throughout the year, that tracking becomes much tighter. VXXT didn’t track that number at all. Obviously, it was a nine-day implied volatility number. So there is great buzz around the early days of VIX Weekly futures trading and they’re now announcing the October 8, we think we can get the buzz of the options traders around a short-term contract that answers their needs as well.

Great. Thank you very much.

Thank you. And the next question comes from Christian Bolu with Credit Suisse.

Good morning, all.

Good morning.

Good morning.

So thanks for the thoughts -- earlier thoughts on kind of VIXs volumes and why that’s rebounded. But just maybe a longer term question, given all that you’ve seen over the last seven months, how does it inform your thoughts around relative maturity of the VIX product?

The last couple of months didn’t change our opinion on the maturity at all. What it taught us was the different utility and how different users choose their hedges. And what we learned I think was the most exciting that we learned in the first quarter in a depressed VIX option volume was the utility back into our SPX complex. So if you remember first quarter across the industry was not our best quarter -- was not the industry’s best quarter. But what stood out was the utility of going back into SPX, and that volume was one of the few contracts that actually showed an increase in the first quarter, we were up roughly 1%. So we’re learning much about the VIX complex, its utility and how it behaves in different market environments. I think what is interesting and we made our announcement today on new benchmarks. With that mind there’s been terrific buzz around capturing vol risk premiums and one of our new contracts or benchmarks that we announced STGV which is a premium capture strategy with controlled downside risk. First quarter that would have been really interesting. And so our research guys went out and found a benchmark that allows and is designed to capture the risk premium fond over the VIX structure. So we’re learning, we’re teaching our users how to use our contracts in different environment. So maturity hasn’t changed, and they are scared to talk about how the business development efforts, how are educational process and collaboration with SGX can continue telling our story globally and domestically.

Thanks, Ed. Yes, as Ed mentioned and this was referred to in Ed’s preliminary remarks. We continue our vast educational efforts with respect to our proprietary products with heavy focus and both VIXs futures and VIX options. We will be engaged in Asia in two forms in this year both our new RMC in Hong Kong at the end of November and again the collaboration we have with SGX where there is a significant interest by investors in knowing and understanding how to use index options and volatility product. So we look forward to that. We will be in Geneva, Switzerland next month and we have seen every bit of strong interest by participants in learning about our products in particular. Don’t see again, just reflect what Ed said, any advancement in the life cycle of this product. We still see tremendous growth in front of it, and some of the lower volume that we saw earlier in the year really was market conditions driven and not a question of the growing maturity of the product.

Yes, I think I like to follow-up on part of the, in the answer I gave earlier is, we know and as far as maturity, we have much to do in short-term exposure and demands around volatility trading. VXX the most successful ETN, trades roughly 40% of its volume in non-standard expiry meaning short-term or Weeklys. We’ve just unveiled our first contract on the future side. I think there’s a great opportunity for us to educate and that to the need for short-term vol exposure when we launch October 8 Weekly contract. New users, new teaching opportunity for us enables to broaden the user base. And again continuing to expand on our extended trading hours were really early stages of VIX options in extended trading hours. So there’s plenty of opportunity there as well.

Great. Thank you for all that color.

Thank you. And the next question comes from Alex Blostein with Goldman Sachs.

Hi, guys. Good morning.

Good morning, Alex.

Quick question for you guys on expenses. So not a huge change obviously in the guidance staying within the range, but just kind of curious to hear which project specifically are you planning to kind of bring back on line now that the revenue environment got a little bit better and then maybe also talk a little bit about the ability to roll those back to just kind of how stick those expenses could be if the VIX levels remain kind of like in the 12% to 13% -- the 12% to 13% level zone? Thanks.

Yes, good question Alex. The line items that we impacted in our expense reductions when we reduced guidance and it included compensation of benefits. So we did things like incentive compensation that’s obvious, hiring freeze, over time that’s in comp and benefits and travel [ph] promotion we look at advertising, various business development projects, travel, also professional fees and outside services primarily contract services. All things that as I said in my prepared remarks, things that we could temporarily delay or reduce and then reinstate later as when volume comes back. So now that we’re seeing volume come back, it will be primarily compensation and benefits that will represent the increase the moving through that range in our guidance. And I think we’re pretty good at dialing back expenses when we need to in response to volume but we did it this year, we did it last year. So those options remain open to us if something bad happen on the revenue side where we had to respond, we would.

Got you. Thanks.

Sure.

Thank you. And the next question comes from Michael Carrier with Bank of America Merrill Lynch.

Thanks guys, just a question on the CRPC. Just given that it was part of the strength of the quarter, and I understand the mix, the products. But if I look at the multi-listed products, it seems like even there the RPC has been coming in better than expected, no market share, maybe there’s some offset there. But I just wanted to get your updated thoughts on the pricing versus market share dynamic in the competitive space. Because it just seems like the RPC is definitely higher over the, maybe last 8 to 12 quarters, market share is down. But I just wanted to see how you guys think that plays out in terms of profitability and how you guys are positioned.

Yes, Michael. We implemented a number of fee changes so far this year; the first set came in January 1. We did another -- few more changes on June 1 and they were all aimed at -- it had two objectives, showing up our multi-list market share and maximizing our revenue and it worked really well. We saw increasing as you said our increasing revenue per contract across the board when you compare year-over-year and sequentially in equity options we saw a nice increase there. And at the same time we most recently saw increasing multi list revenue really maximizing going to a level that we’re very pleased with and it’s driven by those gains and revenue per contract. The outlook, will it hold, will at RPC hold? In the short-term I’d say probably, yes. The question is for how long? I don’t expect competitors to react, they always have. And my long-term view really hasn’t changed. I expect a steady to slow decline of revenue per contract in the multi-list side, I expect it to level off, the decline in level off at some point. On the product side, I would expect steady pricing for options with some upside opportunity for futures. But we would always rather see increasing revenue come from expanding user base, therefore volume and not price. So we’re very tentative, deliberate what we do on our product pricing in terms of -- and how we approach our customers. So to sum up, changes that we made, we’re successful optimizing or maximizing our revenue on our multi-list side. We’re happy with our market share and on the product side, happy with the gains that we’ve seen there as well.

Okay. Thanks a lot.

Thank you. And the next question comes from Kyle Voigt with KBW.

Hi. Thanks for taking my question. I guess, I’m going to use my question on capital. So just looking at the balance sheet as Alan mentioned, the cash fell to just below $9 million in June. And I appreciate the color on the tax payments made during the quarter, but you also returned a significant amount of cash to shareholders I think above all is generated from operations. And then, if we look at back, in the past I think you’ve said $40 million to $60 million was a good level of operating cash. So I guess my question is, is that $40 million to $60 million still good level to think about and then also what is your appetite to go below the current cash level of $90 million or should we think that you’re wanting to see that level build back up from here? Thanks.

Good question. No, my view hasn’t changed. In the past you’re right, I have said $40 million to $60 million and that most recently expanded, it maybe some $40 million to $70 million, just give myself a little wiggle room on that. The wondering thing about exchanges in CBOE in particular is we generate lots of cash month in, month out and -- so that’s why it doesn’t concern me to drop down to a level even $50 million or $60 million. So, we have no intentions of building our cash balances back up. Our policy, the board’s policy is the same now as it was last year and the year before which is we don’t want to hang on to shareholder money. First, we’re going to reinvest in our business to ensure our future growth. We want to regular increases with our dividends that match the growth in our business. You saw us do that again yesterday. And then we want to return any excess cash to shareholders, preferably through stock repurchases but we’re not ruling anything out. We could be special dividends we’ve done that in the past. It could be a variable dividend, we’ve never done that. But nothing is off the table, that’s my point. And the consistency is, don’t hang on to shareholder cash.

Thanks, Alan.

Sure.

Thank you. And the next question comes from Brian Bedell with Deutsche Bank.

Hi. Good morning, folks.

Good morning.

Good morning.

Alan, a question for you on the other revenue run rate; the extra revenue captured for the financial disciplinary actions. First, is there any offsetting expense against that in the quarter and then what would you think of that as a normal run rate for the other revenue line. And then Ed, I just want to ask about the growth potential for the Russell and the MSCI contracts and your view on that.

Okay, I’ll tackle the other revenue question. Starting with the backend, no I don’t -- the increase of in other revenue for the quarter is an aberration, it was fine, it was significant fine. And so the run rate you have to factor out that that increase quarter-over-quarter to come to our annual run rate. Now where are the expenses for that? They’re in the $190 million to $194 million that I’m guiding you to on core expenses, they’re in there. Now are they all there this quarter? No, some of them happened in the first quarter, second quarter. Some will happen third quarter, fourth quarter. It’s in the $190 million to $194 million. Sometimes the revenue as it was this quarter related to our regulatory responsibilities is a bit choppy, we saw that this quarter, and while the expenses are much more predictable. And so the -- when we said, when I said in my prepared remarks and I think was might have been even in the press release that this revenue can only be used to offset regulatory expenses. That’s true but it may -- it may not happen -- it didn’t happen this quarter, some of it happened last quarter and some of it will happen next quarter. So, I’m sorry for the confusion if that wasn’t clear on what I said.

That’s okay. So, was it, say around $1 million in expenses offsetting this quarter or…

So I’ll be even more granular. We have a regulatory process, surveillance market, regulation and financial compliance, all the things that we are charged to do as an SRO we do, and the expense related to that -- its rather predictable and it happens at a regular level, month in, month out. We offset those expenses with regulatory revenue, we see regulatory fees. We have that line item there, and combined with fines. So, the fines we can't use to underwrite some other part of our business, that the SEC doesn’t want us to do that, so we don’t. So, I can't say of the $3.8 million increase quarter-over-quarter while a $1 million of expense happened in the quarter, that’s just not the case its -- the regulatory function is a continuous process.

Okay. That’s fair.

And Brian, the second part of the question I’ll start with, we have just two terrific partners with the Russell suite with FTSE now and with MSCI, and its two different stories. Obviously with the well established contract with the Russell, the story there in the opportunity is really our pledge to our partners that while making this exclusive April 1, the idea for CBOE and for LSE was not say, hey CBOE go see if you can capture that business that’s at another exchange and we’ll call it a day. It’s quite the opportunity. We have let and told the industry that we are the go to place for all things index trading. Russell is no different. With the concentrated liquidity pool, experts in trading and pricing cash settled index product, we’ve ended the debate I think with July at the most busy month of the year for Russell trading in whether or not multi-list has any impact on overall trading volumes. The concentration of liquidity and the specialist of liquidity pool being able to price index options is far more important than a multi-list argument. And so, our job now is a concentrated effort on new users for Russell, and that looking forward to launching the FTSE 100 options and other FTSE products later this year. So there is a terrific opportunity for us with a concentrated business development effort now and promoting the Russell at every one of CBOEs outward customer facing opportunities including RMC. MSCI a different story obviously. Very successful ETF contract. We’ve taken some steps to bolster what we’re offering on the cash settle product. We’ve added the front three months to better meet the institutional customer demands, but we’ve got more work to do on the MSCI than clearly we do on Russell. What both contracts share however is the same argument that we’ve made for years in existing spider or ETF users when they look and we tell them the benefits of trading the cash settled, large notional European style exercise contract. So we’ll be doing the same with MSCI, with the successful for example EEM, ETF and we’ll be doing the same with IWM users in Russell, the same story we’ve told with spider users and moving them to SPX. So there’s a great opportunity and that’s the business development effort with the FTSE, Russell and MSCI.

Okay. That’s great color. Thanks very much.

Thank you. And the next question comes from Chris Harris with Wells Fargo.

Thanks. Hi, guys.

Good morning.

So a follow-up question on the VIX. We know that volumes over the short-term here have been moving around with volatility in the shape of the curve and viability of certain trade. So we’ve kind of addressed a lot of that. I really just wanted to get your guys thoughts on the growth of new users you’re seeing entering VIX or trading VIX, and whether you can comment on if that’s accelerating, if that’s sort of stagnant? Do you have any data you could share on that would be really great?

I might take the first look, new users are difficult. What we tend to see is how the contract is being users, and I think my VIX futures reference is pretty aligned with what we’ve said in the past that we attract users, new, existing, different utility when mark and the future side, when we see a range in that futures price. So again that moved to 12 to 18, not only attracts existing users and not only do those higher frequency traders trade more, other futures traders who are looking in the high frequency range, looking for a higher volatility futures contract that VIX story is very compelling. I was able to join our business development team in London just a couple of months ago. And when we mentioned VIX futures and we bring up VIX futures charts and we look at volume, that’s a really exciting story for those higher frequency future shops and we know that there’s a great opportunity going forward. As for the business development effort and the utility of VIX and VIX options I think I’ll let Ed, make a couple of comments on what we’re hearing from the option side.

Yes. Thanks for the question Chris, and going back to Ed’s comments, we have some degree of difficulty going all the way down to the customer and in identifying specific clients. But we spent a lot of time talking to customers both those that are currently using the products and those who are prospective users. And in particular international efforts have shown an increasing interest in the product. We put this product out there as the proxy for global market volatility and indeed it is followed internationally whether or not people trade it. It is increasingly recognized as the barometer for global market volatility and we see an increased interest in end user base internationally. Indeed that is part of our efforts with respect to the SGX initiative and that’s why we’ll be featuring this highly at our Hong Kong RMC. So again, very much an international story, not to say that we’ve fully grasped all of our potential users domestically because we continue to promote the product to institutional users, both the active type such as hedge funds and some of the lesser active types like pensions and endowments and things like that. So we see plenty of upside in the potential for this product among all user types.

Thank you.

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to management to make closing comments.

Thank you. That completes our call this morning. We appreciate everyone's participation today and your interest in CBOE. We look forward to speaking to you on our next conference call, and we’ll be available today for any follow-up questions you may have.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.