Good morning, and welcome to CBOE 2006 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I'd now 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 2016 earnings conference call. On the call today, Ed Tilly, our CEO will provide an update on our strategic initiatives for 2016, then Alan Dean, our Executive Vice President and CFO will review our second quarter 2016 financial results. Following their comments, we will open the call to Q&A. Also joining us for Q&A are Ed Provost, President and COO; and John Deters, Chief Strategy Officer and Head of Corporate Initiatives. In addition, I would like to point out this presentation will include the use of several slides. We'll 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 and not guarantee 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 publically update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. Now, I would like to turn the call over to Ed Tilley.

Thank you, Debbie. Good morning and thank you for joining us today. I'm pleased to report another strong quarter for CBOE Holdings with increases in revenue and adjusted diluted earnings per share of 10% and 11% respectively. Our second quarter financial results were fueled by the ongoing growth of trading in our proprietary index products led by near record trading in fixed futures. It was the fourth consecutive quarter in which trading on our proprietary products exceeded 40% of our overall trading volume. Average daily volume in futures and indexed options trading rose 20% year-over-year in the second quarter, significantly outpacing the year-over-year increase of 2% for multiply listed options traded industry-wide. Throughout the quarter we also made significant progress in our four-point growth strategy; to develop unique products, expand our customer base, leverage strategic alliances, and define and lead the options in volatility space globally. Our strong financial results were largely fueled by spikes in trading in futures and options on the CBOE volatility Index, VIX, and options on the S&P 500 Index SPX. The VIX Index and SPX are widely viewed as proxies for worldwide volatility and the global stock market respectively. Investors worldwide turn to CBOE's marketplace in the face of increased market uncertainty leading up to and in the aftermath of the Brexit vote. Although the referendum was a European versus U.S. market event, traders were able to hedge their global equity exposures using VIX futures in real-time, hours before European markets opened for trade. VIX futures were available for traders during Asian, European, and U.S. market hours and remained open as stock markets around the world reacted. Reaction to the referendum was vividly seen in non-U.S. trading hours on June 24 as it became increasingly clear that Great Britain had voted to leave the European…

Thanks, Ed, and good morning, everyone. I'm pleased to provide an overview of our second quarter's financial results. Positive momentum in our proprietary products carried over into the second quarter resulting in another solid quarter. Our operating revenue came in at $163.3 million, 10% above last year's second quarter. Adjusted operating income was $79.5 million, up 8% versus last year. Adjusted operating margin was 48.7% down 60 basis points compared with 49.3% in the second quarter of 2015. Adjusted net income allocated to common stockholders was $48.7 million, up 9% versus the second quarter of 2015 resulting in adjusted diluted earnings per share of $0.60, an 11% increase compared with the $0.54 per share for the same period last year. Before I continue let me point out that our GAAP results reported for the second quarter of 2016 includes certain unusual items that impact the comparison of our operating performance and that we believe are not indicative of our core operating performance. These items are detailed in our non-GAAP information provided in the press release and in the appendix of our slide deck. Looking at our results further, starting with adjusted operating revenue we reported increases in transaction fees and exchange services and other fees, partially offset by a decrease in other revenue. Transaction fees were up $16.3 million, or 16% compared with the second quarter of 2015 driven by a 10% increase in average revenue per contract, or RPC, and a 6% increase in trading volume versus last year's second quarter. Looking at volume by product category, as shown on this slide, our higher RPC proprietary products significantly outperformed lower RPC multiply listed options with trading in our index options up 19%, and futures up 43% over last year's second quarter. For the multiply listed products, options on exchange…

Thanks. At this point, we would 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 and if time permits, we will take a second question. Operator?

Thank you. [Operator Instructions] And the first question comes from Rich Repetto with Sandler O'Neill.

Good morning, Ed. Good morning, Alan. Solid quarter, especially with the proprietary products and my favorite separate, but it's a positive here. VIX futures, open interests come hit a record, at least -- I think we will for the end of month for July. I'm just tried to see, is that a carryover from Brexit? Is it -- can you give us color on it? Is it any new users or bigger positions of existing users? It generally looked at as an indicator of volume going forward. So it's a positive here.

It is tracking higher Rich and volume, as you pointed out in the quarter was traffic; index future. So couple of different -- kind of a two part observation and a two part answer, volume really continues to be driven in markets that we have seen in June and July by an elevated Livevol. So second quarter versus first quarter, each month has been a higher Livevol so a lot of the volume you see is really driven by our higher frequency traders trading an elevated Livevol level. As for open interest, as you know, the ETP, the Exchange Traded Notes, and ETS, that are tracking VIX, tend to hold those positions and then rebalance as the volatility levels move. So as AUM has been increasing -- we're at a recent high of about $5 billion in AUM that are in various notes, and sponsored notes, ETMs and ETFs. So that number causes the open interest in more of these just holding those positions in futures. But I will point out, you asked if it is the existing users, I'll interpret that as the existing notes, or is -- are there new entries? So two new entrants into the note space; one, out of Japan, Nomura sponsored NEXT notes launched in late 2015, that's the largest new user. And then Easy Tracker out of Europe, roughly the same timeframe, another new user. So long answer, new users coming in, existing users finding greater utility but also Rich, if you're going to look at that open interest, we'll have you start looking at the AUM and that we can track for you in various notes by sponsored exchange traded products.

Got it. Very helpful. Thanks, Ed.

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

Good morning. This is Sameer Murukutla on for Michael Carrier. I guess I was going to focus my question on the equity options space. The competition is very intense and RPC ended the quarter around $0.07 in 2Q. How much lower is the company willing to going to go to maintain market share? And overall, what causes competition in the industry to abate a bit?

This is Ed Provost, I'll take a shot at that. The equity option market share battle continues, it is a battle largely driven by pricing and technology. We saw some favorable shifts in market share this quarter, both on the retail side and on the institutional side. Some of the consolidators who managed a lot of the retail flow found opportunities to direct some of that business to CBOE. And our very strong flow of broker community drew a lot of the institutional large block process to CBOE and we're very, very pleased with the. There were no substantial price changes in the industry over the last several months, and we look at the shifts being more of the results of the assessment across multiple exchanges and where our pricing schedules allowed certain firms to optimize fee schedules at CBOE rather than another exchange they shifted business. It will always come down to pricing, for the most part; and we believe that that competition will continue. Alan has commented off and then RPC and multiply listed space will continue to go down gradually overtime. But we're very pleased with our current position in the multiply traded space.

And this is Alan. Just to expand a few items that I'd referred to; a couple of points that you should keep in mind. First, we are committed to maintaining a market leading or near market leading position in the multiply listed options space. There are more than just transaction fees that we're concerned about as there are other revenue line items, like access fees and market data and exchange services and other fees that are supported by that market leading position. So we're committed to that position. Secondly, I think there is a bottom in RPC in the multiply listed side, $0.04, $0.05, $0.06; I'm not sure, somewhere in that range. But it's higher than what I think we were seeing in the cash equity side of our business, primarily because of market data revenue. On the options side we have a consolidated take, there is market data revenue, and that's divided up by market share. But the pool of revenue that we divide up on the options side is a lot smaller than you see on the cash equity side. So you need to support your multiply listed options business with transaction fees, not just market data revenue. So I think the floor for options RPC is a little bit higher than on the cash equity side. I hope that helps.

I appreciate that. Thanks for the detailed response.

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

Good morning, thanks for taking my question. Just another question on pricing I guess, stay on topic. I believe you made some present changes or incentive changes in the quarter for proprietary products, I think VIX specifically. So could you give some more color on what adjustments you made and what the outlook is for the proprietary side of the business? Thank you.

I don't think we made any pricing changes that had a material effect at all on the index side, either on the futures side or on the options side. I'm trying to think of my notes and think about changes that we made. Debbie is whispering to me, she said frequent trader program. I don't consider that to be a significant event.

No, but I think that's what he might be referring to.

So that didn't have a material impact. So I guess the deterioration of in the quarter -- quarter-on-quarter sequentially, was that mostly due to customer mix or maybe you can give some more color there? Thanks.

The change -- take futures for example, that's an easy answer so I'll take that one first. The RPC in futures is lower in the second quarter of 2016 than it was in 2015. Think about the volume that we were experiencing a year ago compared to volumes that we're seeing now. So this year the market participants on the future side, we had high frequency traders involved in the market who pay less per contract when they trade compared to other participants in the market and that helped drive down the RPC on the future side. Now the impact on the options side, the $0.70 per contract -- I think it was $0.72 a year ago or maybe even last quarter, it's down a little bit. And there is a couple of things there; it's market participants driven by volume so maximizing their volume discounts and their high volume environment, also impacted by what we're trading; where SPX and VIX and not the same they are different. So when the mix of products traded changes that can impact our RPC on the options side. So the change that I saw, that we experienced in RPC on the options side was insignificant and expected.

Okay, thanks.

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

Good morning. And maybe Ed, let me just switch gears a little bit; maybe you try and elaborate a little bit on the number of partnerships you've been working on – you've been extremely busy and announced several things over the last few quarters. Maybe just sort of an update on what you see as the potential financial impact from the collection of these? So what I'm referring to would be the Eris Exchange, Curve Global, you announced the American Financial Exchange partnership a little while back, Bolton acquisition and now the Social Media partnership. And I know these take a long time to develop or just trying to sort of see how we can gauge this over this long-term?

Before we get into the specifics, let me kind of just set you up because the organic growth we've enjoyed for our 43 years here at CBOE will continue, that's our primary focus. The Bolton acquisitions that you're referring to, we are excited about. We think that -- or you've said that perfectly, we think these are years in the making and really promising to second leg to the growth story for CBOE and it certainly will be continue on. I'll ask John Deters who is here this morning to walk down a few of those for you, kind of give the highlights, the reason behind them and what we expect to see over the next months and then year or so. I don't think we will give you the five-year plan, but certainly we would like to tell you how things are going to date, what we expect to see. So I'll turn it over to John.

Thanks, Ed. I'll just be upfront, in the near term, we don't expect these partnerships to have a material impact on our results. But obviously, we build our business looking for growth and we see great potential in all of these partnerships. I'll start briefly with Eris because it's the precious in our portfolio. What we see is in Eris is a really versatile proprietary product set, specifically designed to solve problems in capital markets, in particular, problems with challenges in terms of capital cost, in terms of counter-party risk, in terms of transparency in the traditional swaps market, RPC swaps market. And so the benefits that swaps users through Eris are clear; it's lower execution costs, lower initial margins, lower capital positions; and for the dealer community, larger block sizes. So our objective is to support the growth of Eris going forward, we think it has a very, very strong potential and proprietary products like Eris and the potential of those products. We will support Eris in product development, marketing and promotion, data commercialization and certainly technologies support as well. So we think -- by the way, the timing couldn't be better. We've seen Eris set a series of open interest, particularly in their standards product over the past month alone. So we're excited to put that platform to see it grow. I'll also talk just briefly about Curve because there is a bit of profile around Curve. There has also been a bit of noise in Europe and in the exchange base in Europe in particular, and I just want to highlight Andy Ross, the new CEO of Curve and his team have been executing impressively throughout that noise. And Andy has continued to solidify his team with key milestones in terms of technology, in terms of market…

Any sense of the materiality to 2017? I know in near terms it's too close in but…

I think 2017 I'd give you the same guidance, I know you will have to build models, we're going to tell you this is a long-term build on all these products.

This is Alan. I will say that if any of these initiatives become material to our is results, we'll certainly communicate that and give you an outlook if we think it is material.

Thank you so much for the color.

And the next question comes Chris Harris of Wells Fargo.

I just want to follow-up on discussion on Eris. I think you guys are making a bit of a bet about the success of swap futures as a product and you laid out the benefits of why users want to utilize those products. But, this products has been around a little while and there hasn't been a huge uptake yet. And you talked about open interest being on record but we are talking about a pretty low base overall. So maybe if you could just talk to us about why this has the potential to be good product? How big do you think the market is for this? And then we saw a pretty big decline in cash on your balance sheet quarter-on-quarter, I assume this was Eris, but maybe you guys could eliminate if it wasn't. Thank you.

Let's do the second part first. Yes, cash did decline. Really it wasn't Eris, it was more tax payments than anything else during the quarter. Our cash position wasn't extraordinarily low, I guess as a comparison to year end or the end of last quarter, it is lower but our philosophy on capital allocation hasn't changed. Dividends, like to see those grow, whether dividends stock repurchases keep on doing that. First and foremost, continue to reinvest in our business to ensure future growth. So nothing has changed, I don't think there is nothing to read into that $50 million cash balance sheet at the end of the quarter.

I'll circle back to the first for that question. The timeframe from launch to ultimate commercialization of Eris is dependent in large part on the regulatory regime. The design of Eris is meant to address a lot of the changes that have happened in the regulatory framework, that's U.S. and Europe. And while Dollar-Franc [ph] was passed in 2010 -- method two in Europe came somewhat later. The implementation of those related rules has been a long drawn out process and continues to be. We're just now seeing, in Europe, the implementation of some of those more important capital rules. And that's going to be the catalyst, always has been viewed as the ultimate catalyst for the product. We see in the clear swaps market that a transition has already taken place in terms of the uptake in swaps trading on sub-platforms in terms of new participants, non-bank participants like Citadel entering that market in a big way. And we view that same transition to go over into the swaps future platform in the coming years as well.

I appreciate it.

Thank you. And the next question comes from Andrew Wong with RBC Capital.

Now that CBOE is truly global exchange with opening the London office, can you give us some perspective on the kind of growth opportunity in Europe and beyond? Obviously, we saw the growth potential in Brexit but overtime what product do you think will benefit most from your presence overseas? I guess outside of VIX, do you expect to see more growth or what is the potential from your other indexing in non-transaction products? And who are primary end users, is it similar to the U.S. in Europe?

Andrew, thanks, good question. Before I turn over to Ed Provost, I'm kind of why didn't we speak in and how the office opened in London. I think it is important to stress the fact that what we did see in June and the continuation into July, just to remind everyone this was a non-U.S. event and the world looked to CBOE for hedging needs. And for us, most impressive for us and being able to deliver a liquid market to those looking for a hedge in the non-U.S. trading day. Setting a record in that 2 AM to 7 AM timeframe for VIX futures was so telling and really illustrates what we have been told all along and what we've been sharing with you is that this VIX contract is truly the global hedge for volatility, both during U.S. trading hours and non-U.S. trading hours. As for the opportunity and the business development prospects, I'll turn to Ed Provost.

Continuing with what Ed said, in addition to expanding the user base for our U.S. based indexes, VIX and SPX, we have over the last several years added additional international indexes including the FTSE100, the FTSE China 50, the MFCI Indexes. Again, we're not only are attempting to appeal to the international community with great products that help to manage their risk using products tied to the U.S. market but we are bringing forth products that are tied to market outside of the United States as well. The office in London, of course is significant because it is literal boots on the ground full time. But we've been engaged in Europe, and quite frankly, globally for the last 25 years and we are continuing to see an increase in the use of our proprietary products, in particular are broad-based index products by a global marketplace. And again, Brexit was a great example, but on ongoing basis, we believe the in those products 20% to 30% of the user base is from outside the United States. We attempt through our various efforts to understand exactly the size of that. We are engaged in the program to give the economic incentive for users to identify themselves. And that has so far worked well and allowing us to identify users, their geographical locations and which products they are using. So our ability to look through that data and identify current users is being enhanced every day. So we're very pleased with our efforts internationally and are going to expand that over the years.

Thank you. And the next question comes from Patrick Roshan [ph] with Raymond James.

So as we look at the volumes in SPX, they generally seem to be outpacing what I would consider to be closest alternatives, whether that's SPY or S&P500 futures. Can you talk to some of the drivers that -- I think in particular, how much comes down to allow the product innovation that you're rolling out? How much comes down to maybe a different customer base or maybe other factors?

I think there is a number of drivers and we certainly can't ignore the impact of adding listed extensions to SPX product line. If we look at just the regular Friday weekly, what an amazing story. Have Wednesday Weeklys trade and offering yet another point of precision on hedging and then pending regulatory approval, looking to a Monday exploration which allows sure over the weekend hedging is really has been pretty terrific for us. What we have found, and what we've been tracked is the sophisticated retail investor who may have been trading spiders, and maybe trading spiders in a big way. That has been really the growth in Weeklys and in particular, Wednesday Weeklys. So you are right, there has been terrific growth in outpacing the market. I think in my prepared remarks, if you recall, multi-listed options classes, industrywide up about 2% in our Index complex, up 20. We continue to tell the story. The utility of trading a large notional macro contract, all of the benefits of a macro market hedged with 60/40 tax treatment, a European exercise. So we continue to tell the story encouraged by the uptake in Wednesday and looking forward to it on a Monday list. I'm happy to add more color on a follow-up if you have one.

That's great. Thank you very much.

And the next question comes from Robert Redshaw [ph] with CLSA.

Good morning. Just a question on expense -- your operating expense growth has been a little above average and there has been a lot of puts and takes, and I think for the first five years you were probably more in the mid-single digits in terms of growth rate for operating expenses. So I think the guidance implies that you're going to normalize back to that little but I want to get some thoughts what you think long term or rather the intermediate term operating expense growth rate should be for the rest of this year and into next year?

Good question, Rob. 2016 we're seeing core expense growth higher than we've seen in our prior 5 or 6 years as a public company. And in the past, we've been anywhere from 1%, 2%, 3% growth in core expense, really low-single digits. But what happened in 2016, especially this quarter, a number of things. First off, we have -- the comparison is hard, and if you think back to the second quarter of last year, volume was anemic. We were in cost-cutting mode and so -- in this quarter, it was a good quarter. So was the first quarter, so we work in that cost-cutting. So the comparisons are tough quarter-over-quarter, number one. Number two, we have two things being folded in our core expenses that are increasing the expense for this year as compared to last year. First, is Livevol; so that whole business that we bought last August is in for the fourth quarter this year but wasn't even in our expense reporting last year. So that's a significant item. And then secondly, regulatory expenses are up this year as compared to last year. It doesn't bother me because we have regulatory revenue to offset the increased regulatory expenses. And just like Livevol, even though those expenses are flown into our P&L, there is offset in revenue to offset those expenses. So our -- the culture, the attitude towards expenses set by -- has not changed here at CBOE. We like the operating leverage that we have in our P&L and the way to maximize that leverage is to make sure we control expenses. And that -- so that hasn't changed and there is no difference in attitude or the way we look at our business.

And it's just a matter of anniversary [ph], things look little more like the past.

I'm maintaining the guidance that we have of $211 million to $215 million in core expenses. We will touch under that if you annualized our year-to-date core expenses against that number. What I'm saying is that I expect a few line items, namely compensation and benefits and professional fees and outside services to go up a little bit in the second half.

Okay. Thank you.

Thank you. As there are no more questions at the present time. We would like to turn the call back over to management for any 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 with you on our next conference call. We'll be available today for any follow-up questions you may have.

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