Cboe Global Markets, Inc. (CBOE) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the CBOE Holdings' Fourth Quarter 2015 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note this event is being recorded. I'd now like to turn the conference over to Debbie Koopman, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning and thank you for joining us for our fourth quarter conference call. On the call today, Ed Tilly, our CEO, will discuss the quarter and our strategic initiatives for 2016. Then, Alan Dean, our Executive Vice President and CFO, will detail our fourth quarter 2015 financial results and provide guidance on certain financial metrics for 2016. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our President and COO, Ed Provost; and our Chief Strategy Officer and Head of Corporate Initiatives, John Deters. 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 website. 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.

Good morning and thank you for joining us today. I am pleased to report another year of record financial results at CBOE Holdings. Despite low volatility and lower trading volumes industry-wide in 2015, CBOE Holdings posted record volume in our index trading complex led by all-time highs in SPX options and VIX futures. We also significantly expanded our premium products and global customer reach, while forming new alliances to complement our core strengths and diversify our product offering. The ability to further develop trading in our premium products, while optimizing our operational efficiency, drove new annual highs in revenue and earnings, making 2015 our company's fifth consecutive year of record financial results, enabling us to reward shareholders through increased dividend payments and share repurchases. CBOE continues to lead the industry in all options trading by a significant margin. In the very competitive and fluid multi-listed options arena, CBOE implemented pricing changes that resulted in lower market share, but higher revenue per contract in 2015. At the close of the year CBOE ranked 2nd among the 13 options exchanges with a market share of 15.7%. We further adjusted pricing in 2016 and, for the month of January, CBOE ranked 1st among all options exchanges with a market share of 16.8% in multi-listed classes. Our mission for 2016 and beyond is to be the leader in providing innovative products that facilitate and enhance trading in a global marketplace. Our strategy is straightforward; continue to develop unique products, expand our customer base, form alliances that leverage and complement our core business, and continue to define and lead the options and volatility space globally. While product innovation is central to our value proposition, we are equally committed to further developing our current products. CBOE's S&P 500 Index, SPX options, remain the most actively traded U.S. index option and, after 32 years, continue to thrive and grow. Average daily volume in our SPX options in 2015 rose 6% for a third consecutive year of record volume. Gains were driven largely by strong Weeklys trading, a product that has attracted retail investors to our largely institutional SPX marketplace. We've seen a strong start in 2016, with January SPX average daily volume increasing 19% compared with the prior year and 33% compared with December. As recently announced, we plan later this month to introduce SPX Weeklys with Wednesday Expirations. Wednesday Weeklys, in addition to end-of-week expirations, will increase opportunities to trade SPX and enable investors to better target specific expirations. Wednesday Weeklys will also align with the Wednesday expirations of VIX Weeklys futures and options, providing greater trading flexibility for the increasing number of customers who use both VIX and SPX products. Turning now to VIX futures and options. Historically low levels of market volatility dominated much of 2015, punctuated by significant volatility spikes in the third quarter. While VIX options average daily volume was down 9% from last year's record pace, VIX futures posted a sixth consecutive record volume year with a gain of 2% over 2014. Elevated volatility, and less certainty in the marketplace going into 2016, have driven dramatic increases in VIX trading. In January, VIX options and futures trading was up 34% and 19%, respectively, over January 2015. Expanding our VIX offering and marketplace is a major opportunity and priority in 2016. We continue to leverage our VIX methodology to create new products, as evidenced by the debut of VIX Weeklys futures in July of 2015, followed by VIX Weeklys options in October. VIX Weeklys options averaged 35,000 contracts per day in 2015. We expect continued growth in 2016, given our ongoing business development efforts and the inherent utility of Weeklys trading. In other VIX news, we plan next month to begin overnight dissemination of the spot VIX Index. As you know, VIX measures the real-time implied volatility of the S&P 500 options. Our implementation of extended trading hours in SPX, from 2 a.m. to 8:15 a.m. Central Time, enables us to calculate and disseminate VIX in that time period, thus allowing market participants to view volatility during the overnight session through the same lens used in regular U.S. trading hours. Overnight dissemination of VIX will yield valuable real-time volatility information when news breaks overnight and will allow overseas investors to reference VIX during their regular trading hours, further cementing the role of VIX as the world's gauge for market volatility. Leveraging partnerships with index providers is key to product innovation at CBOE. We became the sole U.S. provider of major FTSE Russell Index products in 2015, beginning with the Russell 2000 Index RUT options in April. I am pleased to report that January was a strong month in RUT options with average daily volume of 106,000 contracts. We plan in 2016 to further leverage our concentrated index options liquidity pool, while expanding our customer base through joint marketing and educational efforts with our FTSE Russell partners. Last quarter we launched options on the Russell 1000 and the Russell 1000 Growth and Value Indexes and we plan to launch options on the FTSE 100 and FTSE China 50 Indexes next month. The global exposure afforded by our exclusive U.S. offering of FTSE Russell products, as well as MSCI products, brings a growing international dimension to our index options franchise. CBOE continues to identify synergies and form alliances that leverage our strengths and enable us to efficiently diversify our product and business lines across new regions and asset classes. In the fourth quarter, we announced our partnership with the London Stock Exchange Group and major dealer banks in the launch and development of the CurveGlobal interest rate platform, which will trade on the LSE Derivatives Market and clear through LCH Clearnet. We anticipate a second quarter launch of CurveGlobal with trading in futures based on major European interest rates. Additional products, including potential new products from CBOE, are expected to follow. Also in the fourth quarter, we teamed with Environmental Financial Products, EFP, for the December 11th launch of the American Financial Exchange, AFX, an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds. CBOE now hosts, operates and is helping to develop AFX, which saw a total value of $326 million of unsecured overnight loans transacted in January, its first full month of trading. We anticipate increased trading in 2016 with the expected participation of additional banks and with new product offerings. AFX plans to launch a 30-day, unsecured loan product, as well as other new products, including a new transaction-based interest-rate benchmark for U.S. interbank lending called Ameribor. CBOE continues to leverage the marketing and educational efficiencies afforded by a comprehensive suite of CBOE Index options and volatility products. In support of an increasingly global product line, we are actively engaging a worldwide customer base through an ambitious educational agenda and by facilitating access to our products and markets through trading technology. Last quarter, in collaboration with the Singapore Exchange, SGX, we launched the CBOE Options Institute at SGX, the first extension of our educational facility. We also expanded our Risk Management Conferences, RMC, with the first CBOE RMC Asia, which successfully debuted this past quarter in Hong Kong. I'm pleased to announce today that this year CBOE plans to establish its first international business development outpost with the opening of an office in London. In what we see as groundbreaking opportunity to expand options and volatility trading, CBOE last week made a majority equity investment in Vest Financial, an investment advisor that provides options-based services through packaged products and develops technology solutions for options-based investments. The Vest managed account platform is accessible through financial advisors and designed to provide investors with access to the same investment tools and protections available to institutions and high net worth individuals. Our investment in Vest allows for enhanced integration of CBOE's proprietary products, strategy indexes and options expertise within Vest's platform, which substantially reduces the complexity of options trading while providing investors with targeted protection, enhanced returns, and a level of predictability unattainable with most other investments. Vest also plans to launch Unit Investment Trusts, Mutual Funds and Exchange Traded Products. I'll close here by thanking the entire CBOE team. As a result of their ongoing efforts, we significantly expanded our product line and increased index trading throughout 2015, despite challenging conditions. We are obviously pleased with the uptick in trading we saw in January, but regardless of the ebb and flow of trading volume, our team remains focused on developing new products, expanding our customer base, and forming alliances that complement our core strengths. Maintaining that focus enables CBOE to continue to define and lead the options and volatility space globally, an approach that continues to serve our customers and shareholders alike. We are energized by the early year-to-date momentum and by the significant opportunities in 2016 to write the next great chapter in CBOE's ongoing growth story. With that, I will turn it over to Alan Dean.

Thank you, Ed, and good morning. Thanks to everyone for joining us to discuss our fourth quarter results. This morning, I will walk you through our financial results for the quarter and then provide guidance on certain financial metrics for 2016. While CBOE Holdings produced strong results for the quarter, we do have a difficult comparison against last year's record-setting fourth quarter. A brief summary of our results for the quarter are shown on this slide. Adjusted operating revenue was $154 million, down 8% compared with last year's fourth quarter. Adjusted operating income was $73.9 million, representing an adjusted operating margin of 48%, down 540 basis points versus the fourth quarter of 2014. Adjusted net income allocated to common stockholders was $48.9 million, a 9% decrease compared with 2014's fourth quarter, while adjusted diluted earnings per share decreased 8% to $0.59. Before I continue, let me point out that our GAAP results reported for the fourth quarter of 2015 include certain unusual items that impact the comparison of our operating performance. These items are detailed in our non-GAAP information provided in the press release and in the appendix of our slide deck. Turning to the details of the quarter. Adjusted operating revenue decreased by $12.5 million, primarily due to a decline in transaction fees resulting from lower trading volume versus the fourth quarter of 2014. Let me also note that adjusted operating revenue excludes $2 million, included in other revenue that represents the recognition of revenue to adjust for incorrect coding of transactions by an exchange participant related to prior periods. Transaction fees were down $11.9 million or 10% from last year's fourth quarter, due to a 25% decline in trading volume, partly offset by a 20% increase in the average revenue per contract or RPC. Our blended RPC, including options and futures, was $0.408 compared with $0.34 in the fourth quarter of 2014. This increase resulted from a shift in the mix of trading volume towards our highest RPC products, index options and VIX futures, as well as an increase in RPC across each product category. The RPC in our options business increased to $0.349 compared with $0.284 in last year's fourth quarter. The RPC on equity options and exchange-traded products increased by 43% and 36%, respectively, while the RPC on index options rose 4%. The RPC increases were primarily due to fee changes made earlier in the year and a decrease in volume discounts and incentives. On the futures side, CFE's revenue per contract increased 4% to $1.69 from $1.62 in the fourth quarter of 2014, primarily resulting from a more favorable mix of trades by account type, as well as fee changes. As this slide depicts, the contribution from our highest-margin index options and futures contracts accounted for 40.9% of total volume in the fourth quarter versus 35.3% in 2014's fourth quarter. Converting the volume into transaction fees, you see that index options and futures contracts accounted for 83.1% of transaction fees, down slightly from 83.7% in the fourth quarter of 2014. For the full year, proprietary products accounted for 82.9% of transaction fees, up from 81.8% in 2014. Looking at other variables influencing operating revenue, access fees declined by $1.3 million or 9% compared with last year's fourth quarter, primarily due to a decline in the number of market maker permits. For the full year 2016, we expect to see a modest decline in access fees, which is consistent with my previous comments on this line item. On the plus side, exchange services and other fees increased by $2.4 million. This increase mainly resulted from higher fees for systems services and revenue contributed from Livevol technology services, which we acquired on August 7th. For 2016, we expect exchange services and other fees to increase to about $47 million, which tracks the fourth quarter run rate and is primarily due to the addition of Livevol. Now turning to expenses. This slide details total adjusted operating expense of $80.1 million for the fourth quarter of 2015, up $2.4 million or 3%, compared with $77.7 million in the fourth quarter of 2014. Adjusted operating expense excludes $1.9 million of severance expense in the fourth quarter of 2014. There were no non-GAAP adjustments to expenses for the fourth quarter of 2015. This next slide details core operating expense of $49.7 million for the fourth quarter, an increase of $3.2 million or 7%, compared with the fourth quarter of 2014. The increase was primarily driven by a $4.4 million increase in professional fees and outside services, offset somewhat by a $0.7 million decrease in compensation and benefits. As was the case in previous quarters of 2015, the increase in professional fees and outside services was primarily attributed to our outsourcing of certain regulatory services to FINRA, which occurred in December of 2014. The decrease in compensation and benefits, primarily reflects lower salaries due to the staffing reduction that occurred in 2014 in conjunction with our regulatory services outsourcing. Volume-based expenses, which include royalty fees and order routing, were $18.1 million for the quarter, a decrease of $2.1 million or 10%, primarily reflecting a $1.5 million decline in royalty fees and a $0.6 million decline in order routing. The decrease in royalty fees was mainly due to lower trading volume in licensed products, which includes index options and VIX futures. Before I move on to taxes, I want to comment on other income and expenses, which increased by $3.5 million on an adjusted basis in the fourth quarter, primarily due to the dividend declared by the Options Clearing Corporation in December. Our adjusted effective tax rate was 36.7% for the fourth quarter of 2015, compared with 39.4% in 2014's fourth quarter. The change in the adjusted effective tax rate, primarily resulted from the preferential tax treatment on the OCC dividend income we recognized in the fourth quarter of 2015. Our adjusted effective tax rate for the full year of 2015 was 38% compared to 38.2% for 2014. We expect our effective tax rate for 2016 to be in the range of 38.5% to 39.5%. Additionally, if OCC declares a dividend in the fourth quarter of 2016 comparable to 2015's fourth quarter, we would expect our effective tax rate to be lower in the fourth quarter compared with the first three quarters of the year, due to the tax treatment related to the dividend income. Let's turn now to a few highlights relating to our balance sheet and capital allocation. In 2015, we generated more than $245 million in cash from operating activities. For the year, our free cash flow was $206 million and we distributed $208 million to shareholders through dividends and share repurchases, while also continuing to fund strategic investments and our growth initiatives that Ed highlighted. For the year, we returned more than $73 million through dividends and more than $135 million through share repurchases. We repurchased over 2 million shares through our share repurchase program, at an average price of $61.63, reducing shares outstanding by nearly 3% in 2015. Since our share repurchase program was implemented in August of 2011, we have reduced our shares outstanding by 8%. At December 31st, we had cash and cash equivalents of $102 million and $57 million remaining on our share repurchase authorizations. Our capital management framework remains unchanged. We are committed to funding the growth of our business and then to return capital to our shareholders through sustainable quarterly dividends and share repurchases. We are confident in our ongoing ability to enhance shareholder value. Moving to our guidance for 2016, core expenses for the full year 2015 came in at about $195 million and in line with our guidance. You might recall, we started 2015 at a range of $195 million to $199 million and pulled back on expenses in response to lackluster volume we experienced earlier in the year. For 2016, we expect core expenses to be in a range of $211 million to $215 million, representing an increase of 8% to 10% versus 2015 and an increase of 6% to 8% compared to the high end of our original 2015 guidance. The increase in 2016, primarily reflects higher expenses for outside services, largely related to our regulatory services agreement, and higher expenses related to the addition of Livevol. However, both of these items also contribute revenue that is expected to offset the incremental expenses. Excluding the expense increases related to these particular items, our core expenses would be up by 4% to 6% compared to 2015, which is in line with our baseline objective. We expect regulatory revenue to increase by about $3 million, reflecting the higher expenses we plan to incur to carry out our obligations as a regulator, and we expect exchange services and other fees to increase by about $5 million, primarily due to Livevol. We also plan to increase spending to support our business development and marketing efforts. Moving on, capital spending in 2016 is expected to be between $47 million to $49 million, up somewhat compared with the $39 million we spent in 2015 as we continue the development of our new trading platform, CBOE Vector. As we stated previously, this project is being done in three phases. Phase one is the build out of new systems for CFE, which is on track to be up and running in the third quarter of 2016, with CBOE and C2 to follow. Depreciation and amortization expense is expected to be between $46 million to $48 million, compared with $46 million in 2015. The year-over-year projected change reflects additions to capital and lower depreciation expense relating to certain regulatory software that will be fully-depreciated at June 30, 2016, which corresponds with a planned transfer to FINRA systems. Following this systems transition to FINRA, certain expenses are expected to shift from depreciation and amortization to outside services, accounting for part of the increase in outside services I mentioned in discussing core expenses. We are off to a strong start in 2016 and are excited about the opportunities we see ahead, as we continue to focus on the strategic initiatives that Ed outlined, while also effectively managing expenses and deploying capital. Thank you for your interest in CBOE. I will now turn the call back to Debbie, so we can take your questions. Deborah Koopman Thanks, Alan. At this point we would be happy to take your 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, and if time permits we'll take a second question. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Rich Repetto of Sandler O'Neill. Please go ahead.

Yes. Good morning, Ed, good morning, Alan. I guess the question is, you have done a very good job at increasing the RPC on the non-proprietary products, the multi-listed options and ETP. So but the market share is declining. Can you talk about what the strategy -- I believe you have sort of -- you have some price modifications in January and can you just talk about the outlook there because you said that this has been important to you in the past?

Yes. It remains important to us. What I have said in the past is, it's our goal to stay at or near the top in multi-listed market share for CBOE and we have been able to do that. In the face of that the 13th options exchange came online last November. The 14th is due I think later this month. And so competition is ramping up and how they are competing as you know is through price and so we -- in 2015 we did lose some market share but RPC as you said went up nicely and we think overall revenue was better. Our market share got to the point where we -- keeping our goal in mind of being at or near the top of market share in the multi-listed category, we felt like we needed to change fees in order to maintain that position and we did that on January 1st. Based on the feedback that we received from our customers both in discussions with them and their actions, our market share as Ed highlighted in his comments jumped in January which was exactly what we hoped would happen. We expect RPC to decline consistent with the message that I have been saying for years, but related to the future, hence I don’t expect precipitous decline, although we are one more up into the quarter so it's really hard to give anything definitive on there. While RPC is important our key focus is optimizing gross revenue by employing competitive pricing and extracting value where we see opportunity. And to restate something I have said before, the multi-list category supports market data revenue, exchange services and accessories, three important revenue categories for us. And so I was pleased with the uptick in market share in January, cementing our current leadership role in what I think over the long run RPC should decline with 14 options exchanges trading all these options.

Thanks for that insight. I will get back in queue.

Our next question comes from Dan Fannon of Jefferies. Please go ahead.

I guess I would just -- a little bit of comment on the environment in January and over time we have seen good and bad volatility in the market and just wanted a sense of how you guys are -- your customer are kind of acting in the current environment? How you kind of see this level of volatility being maintained and what that might mean for your kind of trading and the sustainability of it?

I will take a first observation. I think and what we have shared with you is the end users perception of risk over time and I think you're right. We are in a riskier environment than we have been for the majority of 2015 with the exception of the spikes we saw in and around August and the difference in strategy and the way our users employ our various products. When the downturn in the market is a result of something unforeseen, or something -- a new risk in the marketplace the index complex and specifically VIX really shows that in volumes. So August the surprises to the market were of course were making new all-time lows in oil. Uncertainty about China's growth going forward. It was front page news everyday and that risk profile was a changing risk profile and the volatility of VIX complex certainly reflected that in its volume. What's different in January and continues here in early February is the risks are the same. The headlines are the same. It is still uncertainty in China. Certainly we are still making new [Volvos] or trending lower in oil and that's reflected in very flat volatility surface in and around 21 maybe upward sloping somewhat to 22.5, 23 index. It's just reflecting a riskier environment. So where do our volatility traders or those that employ our various products what they look for? Well each of our products SPX primarily and VIX service different environments differently and provide different utility depending on the profile going forward. When there is an unperceived spike and you have a VIX position on, VIX calls outperform hedging in the SPX. If your perception of risk going forward is rather flat, maybe trending down, SPX puts are the favored hedge. So we see that continuing, as I say, we have real-time [or] into the risk profile as priced by our users by looking at the volatility surface over time. And what the market is telling us is we are in for a riskier next at least six months and as those perceptions change or evolve you will see it first and you can see it in real-time in the surface of volatility looking at those futures contracts. So I will use my interpretation of our data and it says that to ensure portfolio of the S&P 500 expect higher levels of movement in uncertainty certainly over the next six months.

Great. Thank you.

Our next question comes from Michael Carrier of Bank of America Merrill Lynch. Please go ahead.

Hi, Alan, maybe just on the guidance. When you talked about the expenses you mentioned the Livevol and then the regulatory and then the core in that 4% to 6% range. Can you just give us a little bit of color as we go through this year, if you have an environment where maybe the bad volatility is around, how much flexibility do you have with that range? And then it sounds like at the high end you are kind of expecting a fairly like decent environment just given that range. Just wanted to try to figure out how much flexibility you have if the volumes aren't as strong as what we are seeing right now?

Yes. Mike, we do have flexibility, just it's the same level of flexibility approximately that we had last year and I am expecting the $211 million to $215 million assumes a robust year in volume consistent with our growth that we've seen in the past. So in 2015 we went from one -- we started expense guidance of $195 million to $199 million. Then we dropped and I am looking at Debbie here to help me out. I think we went from $190 million to $194 million and that was in July after the spring volume. So that was 8%, 9% drop in expenses and then we went back up as the year got better. So [incentive] comp came back and we reinstituted some things that we had delayed or cut. So I like to call it temporary short-term expense adjustments for a short-term problem and that's the kind of ability that we had to impact expenses and the intention is to, while we do implement these expense reductions to not impact our growth profile, that's important to us. So the same level of expense reduction in 2016 that we saw in 2015 is about what we can do.

Okay. It's helpful thanks.

Our next question comes from Ken Hill of Barclays. Please go ahead.

So I wanted to ask international, so for you guys do you -- at the Asian Investor Risk Conference and in the extension of the options you said too and then your people making out an effort there as well. I was wondering, if you could disclose any volume stats or kind of trading outside the U.S. dollar setting? Normally you guys provide the VIX futures which has kind of trended around that 7% to 10% range of total volume. I was wondering, if there is any update to that and how you see that progressing next year?

Ken, Ed Provost. Yes. We are very happy with how we have made a greater penetration internationally. Ed mentioned in his opening remarks that we didn't [drive] to the point of making a commitment of establishing our first business development output as we are calling it in London that reflects a broader customer base that we have outside the U.S. the extension of trading hours and the like. We are -- from everything we can know and that is from engaging our customers directly, hosting conferences overseas, participating in other peoples conferences, see an increased interest in our product both SPX and volatility. The expansion of our trading of our hours for the dissemination of the VIX spot will be helpful in that regard as well. So we continue to see greater interest and expect that the portion of our overall volume becomes from the extended trading hour session to grow. We certainly see that in absolute volume numbers but there are certainly trades of time where we see percentages much in excess of our historical norms. So we couldn't be more optimistic and again its consistent with what we are doing overseas. I will in speaking about Asia even expand that to the Asia-Pacific Rim because we are not involved in Singapore with the options institute and in Hong Kong with the RMC we still are quite active in Mainland China. We have relationships in Japan and we start a fair amount of time in a very developed Australian market. So we feel very good about the international appeal of our products and those will continue to expand.

Yes. I think I will add to the VIX futures, we also see -- certainly had an interesting January when we look at for the first time in the U.S. and certainly in the listed option market the ability to trade SPX in this options not just the futures and had a pretty interesting January and drew some interest in trading SPX in this options during our extended trading hours. So that almost more than doubled the average in 2015 to about 7,000 contracts per day in January. So again another opportunity for growth going forward. And then again highlighted in the prepared remarks, and having a spot VIX disseminated from 2 a.m. to the start of U.S. again, spot VIX really serving as a trigger for trading decisions and having that available from 2 a.m. till the open in the U.S. is really a nice change also for us.

Thanks for the detail there.

Our next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

Alan question for you around the capital management, you guys have been pretty active in the market in the last couple of quarters. Just kind of curious to hear your thoughts around the relative value and how you are thinking about the pace of buybacks compares given the [indiscernible] given the fact that the valuation of the stock has been on the higher end of historical ranges? So how much does that matter to you guys when you are purchasing shares versus uses of capital?

Well it does matter to us and you said we have been more active in the capital markets the last couple of quarters. I think we've been pretty consistent over the past three or five years even in our activity in share repurchases with a few blips when we were out of the market. But -- and -- so I think we've been consistently -- but consistent in the story that we have told shareholders and analysts and what our capital allocation policy is now. And I've also been consistent saying that we are opportunistic in how we buy our stock. So with a lot of analysis that goes into shares that we buy at one place rather versus another how we view our stock price. And so just generally speaking we will buy more stock when the price of our stock is lower and less when its higher. The bottom line is we believe, our Board believes that in the future of CBOE and the growth potential and the growth profile and so that makes the share repurchases I think a great way to return capital to shareholders. So that's the mindset that goes into our share repurchase program. And as long as I am on the topic I will just restate what our policy, our goal is and our goal is to reinvest in our business to ensure future growth and you have seen that during the year both in capital expenditures and the acquisitions that we made this year. And then secondly pay regular dividends and grew all those dividends along with our business, you saw that this year when we increased our dividend by $0.02 per share last summer. And you have seen consistent activity in our share repurchases. So that's the policy, that's the program. And finally I will say that our Board's very active in how we return -- in thinking about how we return capital earnings to our shareholders and we talk about it, think about it, every quarter. So I will end with that.

Our next question comes from Ken Worthington of JPMorgan. Please go ahead.

When thinking about VIX futures and VIX options how important are ETFs and ETNs at driving volume in volume growth for the products? Maybe both directly as ETFs kind of grow and rebalance and if indirectly as volume from ETFs and ETNs drive other VIX trades?

We just got a great deal of thought on this internally and part of the story on the growth of VIX futures, certainly one of the key drivers was the introduction of ETNs and when Barclays introduced EFX, that rebalancing of the Barclays was required to do either by perspectives or by their internal list controls drove a great deal of these futures and options trading. And that was really part of -- a big catalyst to the growth story in and I will just say cash spinning 2.5 years ago now. So we are -- still an important driver but not the key driver any longer. I think the utility of VIX options and the amounts of liquidity in VIX futures and the ability to click and trade VIX futures around-the-clock, I would say that those strategies have replaced I think the key drivers in VIX futures and options volume. But I don’t -- we love that volume with the growth of ETPs and ETNs that feature volatility exposure, all of that -- primarily most of that hedging shows up in some fashion and the other part as we have seen really equities within the SPX. So we rely heavily on the balancing and trading in and around ETNs and ETPs but not as much as we did a couple of years ago.

Our next question comes from Brian Bedell of Deutsche Bank. Please go ahead.

Just a question now on the RPC and the proprietary products. You commented on the equity options but on the proprietary, both VIX futures and proprietary -- and index options we know with the higher volumes that we are seeing so far this year, just if you can give some color on the direction that you think RPC may take in the first quarter? And then Ed just a real quick question on the VIX futures volumes, just in last week or so looks like they are sort of at normally low relative to the really strong pace in January, can you help us give any commentary on that?

I will start with the RPC and the proprietary products. Two things into one's RPC and VIX and SPX and RUT. The first one is whose trading. So for instance in our VIX futures day traders receive a discount. So if there's more day traders trading VIX futures in a particular period, then you could see RPC drop and there's other discount programs in SPX as well for example. The other factor that influences RPC and it’s obviously is pricing and we -- you can go on our website and look at the fee changes that we made January 1st in all of our products including our proprietary products. And we look for pricing opportunities to grow RPC and our proprietary products in a way that we think will not impact the growth of those products because I rather take a 10% growth in volume driving revenue rather than 10% growth in RPC driving revenue as the trade -- trades and traders tend to come back. So I don’t want to push them away. So in January RPC -- I don't know of anything that would lead me to tell you that January RPC was extraordinarily affected by the volume or other factors there just because of Vector hitting in the month. So I expect RPC to continue at rates but they could be impacted by either rates or participants.

Let me, just the observations that we are hearing from The Street. I think you probably heard us describe VIX Q4 in [dashboard] options and futures trading, and I think the drivers -- I think I have touched on them before. There is really no new risk out there and the trend that began in the fourth quarter of moving from perhaps no risk onto cash continues. So there is a lot of money on the sideline and then I think the most telling again if you look at large pure volatility VIX futures trader kind of flat curve. So the [John Spreaders] and those that have been trading up and down the curves that enjoyed in August and then at the end of the fourth quarter, again that flat curve doesn’t -- as we know doesn’t last for long periods of time. But certainly where we find ourselves today even they cross a little inverse re-degradation on the curve over time. So I think those three factors are probably the most recent passed over the last few days. Again you cited January was pretty traffic, so we love those comparables when we look back to January but a few days here in February we are not going to trend line as 170,000 or so contracts yesterday. Yes, it's up in January but not horrible. So I would go back to those three factors, cash a little more risk of, no new risk on the horizon and a flat curve.

So, you would like volatility either to take another leg up here or a decrease in volatility and reset and then another serve in volatility to [indiscernible]?

Life is a tough word. We don’t want to root for things that are surprising the market much, but I think normal will be staying in that upward sloping curve or trending more towards historic level. That's what the market is used to seeing and when we don’t see what you are used to you look for other alternatives and as I say what was most interesting to us when we listened to practitioners now, it's not whether or not you use VIX futures or options to hedge. It's when you use VIX futures and options and when do you use SPX and it's becoming almost matter of fact that you use them in tandem and those are tools that you go to. And as I said I think on the second question or so, it's interesting that the conversation now has not -- is not CBOE explained vol, it's our practitioners telling us when they use our volatility contracts versus when they use our traditional SPX. I think that's going to be the most interesting story in the evolution of hedging and how the CBOE products are continuing to be the go-to to hedge either global volatility or U.S. exposure and that interchange between running in and out of SPX or trading in and around a volatility complex. So it's really a cool developing story and we look forward to telling it as we learn more.

Our next question comes from Chris Allen of Evercore. Please go ahead.

I just wondered, if there was any way to provide some color just in terms of the percentage impact to the price changes, if you kind of assume the same levels of volumes from '15? And also like how are you guys thinking about the at risk fees and the market data fees moving forward? How susceptible they are to market share from here you are positive or negatively?

The changes that we made on 1st January for this relative to our multi-list category, I don’t expect a precipitous change in the RPC and in the equity in the ETF categories of our options. And although it's hard to take the volume where they had in 2015 and so well we had the new fee schedule roughly to your RPC because the changes that we made were designed to attract new participants to our market which will impact the RPC. So the goal is to optimize revenue, have more revenue from maintaining a market leadership role on site. I know -- I wish I could directly answer your question Chris, but it's the best I can do at this point after a month is just say I don't expect a significant, i.e., just a more precipitous decline in RPC. So that was your first half of this question. What was your -- access fees. So again access fees, again the story that we have talked about over the years I believe were over market and access fees and that was -- I think that was the very first question on the very first earnings call 5.5 years ago. And I said at that time I expected the access fees to decline and they have. Last year they went down more than in the past and it was users -- it was more users becoming more efficient with how they use bandwidth rather than not needing permits. So it wasn’t a reflection of market share or a decline in interest in SPX or VIX, it wasn’t added at all. It was more users becoming efficient. Now going forward 2016 I expect a modest decline, a small decline in the way we are looking at access fees for 2016 compared to 2015. Now market data revenue is composed of two parts. About a half or a little less than half is OPRA, Options Price Reporting Authority. The consolidate fee for all of options, prices and quotes going out and not in. And so that is impactful by market share it certainly is and our declining market share in 2015 certainly impacted that half of market data revenue. But there is another -- the other half of market data revenue which has shown pretty good growth over the past few years and did in 2015 as well and that's the CBOE options proprietary data fee which showed a nice uptick in 2015 compared to 2014 and our CFE data fee which increased slightly over in 2015 over 2014. So the market share will impact half of market data revenue. Well that sure was a long answer to that question.

Our next question comes from Kyle Voigt of KBW. Please go ahead.

I don’t want to belabor this point, but I just had a quick question on the VIX term structure. I know you had say the inverted term structure last year is kind of a key reason as to why the VIX options [indiscernible] volume low a lull in the first half of the year along with high vol-vol. In January we saw that same inverted term structure for most of the month and I believe it's currently inverted. I am just wondering, if you are hearing any different from your clients this time around or seeing anything different in trading patterns to suggest that this is just a different environment that we are in this year versus last year? Thanks.

We haven't heard a lot about this but the biggest difference that we are hearing in term structure is flat to your point, you are right. But I think the difference we are hearing is the amount of cash on the side line, I think that's probably the change in what we did not hear last year. Last year was a lot of head scratching on risk going forward, is it going to continue the choppiness going to continue, if that vol strip is going to remain flat. I think this year there is just cash and waiting and looking. I don’t think that's -- well I should say historically that is the last one. You will accept a new level of risk at 22 over time is your new outlook on risk and its normal, isn't going to be the right word because historic level is low, but if that's what you are going to accept, we are going to place strategies with that assumption in mind. And again back to the utility of having this suite that is so different and flexible and the way that’s its said, if VIX doesn’t serve the purpose that is if you are not expecting a spike from 22 to 28 meaning there is not a new risk assumption on the horizon the utility of SPX puts is maybe your hedge of choice. So we will see that I think changing or actually people taking a position over the next -- fill in the blank, the next month, months, on how they are going to employ, on how they are going to hedge going forward. So yes, the biggest difference again, probably more cash than we have heard in the past on the side line.

Our next question comes from Andrew Wong of RBC Capital. Please go ahead.

On your education efforts CBOE is really the only exchange that actively focuses on educating users on products and kind of creating a curriculum so to speak, around how to trade or use CBOE products effectively And it makes sense given that VIX is a bit more novel than something like a vanilla equity option. But how do you measure the response with respect to these efforts at your conferences? Clearly we see it in the volume growth particularly during overnight hours, but is there some kind of internal measurement or guidepost you use to determine how well your education efforts are working in creating an incremental volume or more interest in your products?

Andrew, Ed Provost in response to that. So yes, we are very probably initiatives that we have been engaged in and really since the very beginning. While at the very beginning we were focused on the broader option product is highly focused on our proprietary products now through our options institute, our risk management conferences and the other engagements we had globally. We measure the -- measuring many respects, obviously we measure the number of attendees that will be for us at the institute at are now three RMCs, so we are holding around the world and we engage them. During the conferences we take surveys of those people relative to the quality of the conferences and then we follow up with them about their trading activities post conference. And again while it's always difficult to be real precise as to its direct impact we see representatives and various institutional users sending new participants every year suggesting that they find great value in what we are teaching and it gives us every bit of confidence that we are expanding the knowledge base of the use of both SPX and VIX both domestically and internationally. So it's something that continues to grow because there is a demand for it. We will speak again from time to time on the base actual product. But we are very, very proprietarily focused tapping our base SPX, of course our Russell products and our MSCI products as well.

Andrew this is Alan. I will add that the education efforts certainly is one of CBOE's successes to be proud of. One aspect of it that Ed didn’t mention that I like is the fact that people pay to come to these education [sites] and it is a revenue source for us. And so it is an amazing thing that they want to come to hear our instructors teach them about our products.

I may add one more I think what you are just saying Ed. Ed uses just a perfect example of those RMC conferences and I think it's important to point out that we have banks hosting their clients which is a pretty cool phenomenon. If a bank is listening to our strategies and the various practitioners their strategies, for them to host their clients to our conference is pretty telling as an endorsement of the utility of the suite SPX, VIX, Russell, MSCI. So another indicator when we are being endorsed by sponsors.

Our next question comes from Alex Kramm of UBS. Please go ahead.

I apologize my line dropped at one point, so this might have been answered already. But just want to go back to the guidance for a second here. So you were talking about revenue offsets and if you look at the fourth quarter clearly Livevol's already in there. There is also the cost run rate to some degree. But when you talk about those revenue offsets for Livevol $47 million if I heard you correctly, that's not really assuming much growth of the exchange services line. So just wondering, why you are not more optimistic about that acquisition? And then secondly you mentioned regulatory fees is another driver of the cost guidance going up, is there revenue offset or did you talk about that? I mean because that’s a phenomenon that’s been going on for almost a couple of years now. So any more help will be helpful. Thank you.

What I believe I mentioned but the exchange services -- exchange fees and other services line item we expect to be $47 million which I think is $5 million over our results for 2015. So that’s pretty significant and that represents the fourth quarter run rate for the entire year. We acquired Livevol in August and so there is a partial year of expenses and revenue. And although -- and Livevol for us in 2016 will be accretive and it will be positive for us. So that’s a good thing. On the regulatory fee side we expect regulatory fees to be up by about $3 million year-over-year and they like to fluctuate by volume and other factors, so that’s another factor offsetting the increase in expenses. Finally depreciation and amortization, although we are off a little bit year-over-year, I will bet that our depreciation and amortization is lower than what you have in your model and that’s because part of the increase in expenses is coming from FINRA and that’s because we are switching over to the regulatory systems. That meant that we had accelerated amortization on our own capitalized programs that we had here. So that now goes away June 30th. So if you factor out Livevol and FINRA then we are up 4% to 6% over the $195 million in 2015. If you compare -- if you back out Livevol and FINRA and compare it to our original guidance that we started 2015 with we are only up about 3%. So I think the number is right there and certainly we spend a lot of time thinking about that number, both in our business plan preparation for the year and our preparation for this press release this month.

That's very helpful. And just to clarify on the Livevol when I said $47 million doesn’t seem to be much growth and I mean off the fourth quarter run rate. Because you would assume that this is a business that hopefully grows from the fourth quarter. So that’s why I was a little bit surprised. So I don’t know if you have to say anything else there.

Well we expect Livevol and what I am trying to give you a reasonable shot at what I am seeing in our guidance. I hope I am wrong on the low side.

Our next question comes from Patrick O'Shaughnessy of Raymond James. Please go ahead.

So, Washington has been busy the last couple of days talking about market structure and they focused primarily on equity market structure, but they are talking about maker-taker and payment or float to retail brokers and access fee caps. I was curious if you guys are hearing of any of that conversation spilling over into options?

We haven't and our comment rather that we stand aligning with the timing of the market structure committee. We represent that we have the same position that we always had on SEC and fee caps specifically that the market should be allowed to raise competitive forces to determine fees whether its equities or options and then ultimately as you know we file everything, we file with the SEC and there is an opportunity for the SEC then to challenge an exchange on a one-off basis if they see some fee unfair to the end user. So while we haven't leaned over yet we are of course taking a much more proactive position in support where we haven't -- to your comments we haven't been asked while we are certainly providing our opinion and it shouldn't surprise you on where we are coming out. So I would say the same answer both on maker-taker and [PFAF]. Nothing specifically directed to the options industry and as you know that from an impact for CBOE whether it's in those proprietary products or our primary exchange fee maker-taker really isn't an issue for us and PFAF really would not become maybe a competitive issue if it was applied evenly throughout the industry. So really our focus in on fee cap and while we are monitoring all of the potential changes for the equity market structure, the big one for us not surprisingly would be keeping our eye on fee caps.

Our next question comes from Vincent Hung of Autonomous. Please go ahead.

So, maybe I missed this, but based on the limited experience I saw, is the VIX Weeklys option complementary contract or is it substitute right now?

This is Ed Provost, Victor, thank you for the question. We see the VIX Weeklys contract is very complementary to the longer duration contracts which have traded for years. We see more existing users using that to manage volatility around event risk. And I am contrasting that with SPX where when we introduced a Weekly contract we drew a healthy new customer base, retail customer base into SPX and away from SPY. In the case of VIX it's not so much drawing a significantly little customer base for giving existing VIX users the opportunity to manage volatility around specific events. So we are very pleased with how that's evolved. It may bring some additional new customers in, but that's probably not most likely scenario. We think it's more likely to give greater opportunities to existing users.

I'd say the other user base that we are able to attract now, the only alternative in shorter dated volatility contracts has been in the ETN space. So VXX the most successful volatility ETN has had a weekly contract where you are able to -- kind of to Ed's point you are able to pinpoint activity that you have targeted in the short term by using a short dated VXX contract. Now for the first time we actually do have our VIX contract and the ability to attract those users who are looking for the short term. So if it’s a substitute perhaps we are going to be able to make a case that we can substitute those that only had VXX in their toolbox to use a short dated Weeklys VIX contract.

Okay, thanks. And just last one for me. I have a broader question. What do you think of the Deutsche Boerse volatility contract? Do you see it as a competitor or just another indicator increasing demand for volatility hedging? I ask because they are continuing to see increased contract volume.

Love it. We view and every other opportunity we can with all of the exchanges that have taken a methodology license with us and our partner, Standard & Poor's, with the opportunity to really highlight the utility of this asset class called VIX and the differences between B stocks and VIX what a wonderful trend. So if there was the liquidity in B stocks now you can imagine perhaps selling B stocks and buying VIX and then that interplay back and forth and before long it would be terrific if we can see that across the globe. So no, anything that heightens the awareness in the utility of a listed volatility contract we are a champion and we will be meeting with all of those who have taken a license for our methodology coming in March at FIA. We do that every year. So we will be sharing the path to success on listed vol with everyone who is willing to listen. So no, we are -- a big endorsement for us when there is interest in B stocks.

This concludes our question-and-answer session. I would like to turn the conference back over to Deborah Koopman for any closing comments.

Thanks a lot. That completes our call this morning. We appreciate your time and your interest in CBOE. We look forward to seeing some of you guys at the conference that is coming up. Thank you.

Thank you, ma'am. Today's conference has now concluded. I want to thank you all for attending today's presentation. You may now disconnect your lines and have a very good day.