CME Group Inc. (CME) Q2 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the CME Group Second Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

Thank you, and thank you all for joining us this morning. Craig Donohue, our CEO; and Jamie Parisi, our CFO; will spend a few minutes outlining the highlights of the second quarter, and then we will open up the call for your questions. Terry Duffy, our Executive Chairman, is here as well. Before they begin, I'll read the Safe Harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent Forms 10-K and 10-Q, which are available on the Investor Relations portion of our website. During this call, we will refer to a few non-GAAP figures. A reconciliation of both the non-GAAP EPS and non-GAAP effective tax rate to the respective GAAP figures is available in our press release at the end of the financial statements. Now I would like to turn the call over to Craig.

Good morning, and thank you for joining us. CME Group showed strong performance in the second quarter of 2010 with net income of $271 million, up 13% sequentially, on revenues of $814 million, up 17% sequentially. This strong performance, our best ever on a GAAP basis, was driven by positive volume trends across all asset classes, with overall average daily volume of 13.5 million contracts, up 31% from Q2 '09 and up 17% from Q1 2010. We had record revenue quarters in energy, foreign exchange and agricultural products. Additionally, interest rate revenues were up 29% from the second quarter last year and up 19% sequentially. And equity and metals volume and revenue were also strong for the quarter. As we’ve moved into July, we have experienced normal seasonal patterns, although it is worth pointing out that July average daily volume of 10.7 million contracts is up 11% versus July of last year and is 400,000 contracts per day higher than any quarterly ADV last year. Finally, volume across our six product areas is up for July compared to the same month last year. Looking at drivers of our performance, sovereign debt issues in Europe were obviously a catalyst for the second quarter volume. The stabilization we've seen since the peak of the crisis, as indicated by the plateau-ing of the LIBOR-OIS spread since May 25, among other factors, reflects favorably on the market’s ability to absorb shocks in the short-term and on the ability of local industry participants and central banks to recognize an attempt to resolve critical issues. Partially related to the European crisis, the market shifted its Fed rate hike expectations. We have seen an associated shift in Eurodollar volumes, with those Eurodollar futures expiring 12 to 18 months from now contributing approximately 13% of overall Eurodollar futures volume in July, up 10% from the total in the first and second quarters. We've highlighted before that Eurodollar products tend to be most heavily traded during periods with varying market expectations for rate changes. For the next several months, we expect Eurodollar volumes to reflect the current policy environment, and it is worth pointing out that transaction data positively reflects in certain key measures, such as depth of book and bid-ask spread, when compared to last year. CME Group energy products had an exceptional quarter, with record revenue and volumes. With volatility increasing due to ongoing forecasts for strong crude oil demand, coupled with European instability, our WTI products suite was a strong driver of this performance, boasting record volumes of 977,000 contracts per day, up 52% from Q2 '09 and up 25% from a robust first quarter. Refined products, including heating oil and gasoline, also had record volumes for the quarter. Energy volumes in July have shown a typical seasonal slowdown, but we believe that our products in this area would continue to perform very well over the long term. I mentioned before that we had record revenues in our FX product line as well, and that was, of course, somewhat related to the European crisis. While cyclical factors may have impacted the second quarter volumes, we strongly believe there are many longer-running structural trends in those markets that have and will continue to be very positive for CME Group FX products. Based on the available data, one of these trends is an ongoing shift from OTC markets to CME's exchange-traded and centrally cleared FX products. Our team has worked diligently to position CME Group to take advantage of such structural shifts in the FX market place, and the volume trends over the past year show our success. CME's April volume was up 87% compared to the prior year, while in the OTC markets, as measured by preliminary regional data submitted to BIF, FX trading in the U.K. was up 31% for the same period. Activity in Japan was up 16%, and activity in the U.S. was up 43%, clearly demonstrating that we are picking up share as we outpace the growth of the overall market. As a side note, we're referencing April statistics there, because that is the most recent data that's available on those markets. But CME FX had strong growth since then as well, with July [audio gap] 37% from the prior July. We believe our FX team has built an exceptional platform for future growth opportunities. With that, I'd like to switch gears and talk a little bit about one of those opportunities in FX, and that is a new product we worked with our colleagues at Dow Jones indexes to launch. As planned, we’ve continued the Dow Jones indexing capability with the derivatives expertise and deep customer connections at CME Group. One of the early results of these efforts is our FX$INDEX futures, a contract that will provide a tool for trading the relative value of the U.S. dollar against a basket of major currencies, weighted based on current Fed data. The weighting methodology is unique to CME, and we believe it creates a strong competitive differentiator for this product. It also provides our customers with an efficient means for using the deeply liquid component currency futures to dynamically hedge FX$INDEX futures and, with our Globex distribution to FX markets participants, will enable us to attract a broad international audience. The product launched on Monday, and we are actively working to promote this to our customers. Additionally, our teams worked together to bring the Dow Jones long-term inflation index to market on July 15th, which uses the CME ultra-long treasury futures as an underlying component, along with long-term treasury inflation-protected securities. Like many of our product ideas, this product was developed based on significant customer input, and given the strong uptake and success of the ultra-long treasury futures, we know that market interest in longer-duration products is very high. We continue to explore other joint product development and global expansion opportunities, and we look forward to updating you on our progress in the future. We did a fairly deep dive last quarter on our international growth strategy, and we feel very positive about the work we're currently doing to build the path for future success. As you can see in our slide, in our core business, Globex volumes during non-U.S. hours saw strong growth, with volumes during European hours up 78% and volumes during Asian hours up 76% from Q2 '09. Volume from international telecommunications hubs grew 68% compared to the same quarter a year ago and represented 13% of overall Globex volume, up from 11% a year ago. I also want to take some time today to discuss our views on capital structure. Over the last few years, we've received valuable input from our shareholders on this important topic. We recently completed an internal assessment of our five-year strategy. We've successfully integrated the CBOT and NYMEX acquisitions, and with those assets in place, we believe we have a solid foundation to drive continued organic growth. In the near term, we do not foresee the need for additional large-scale M&A transactions to drive growth. Based on our projections, we anticipate being very well positioned to return excess cash to shareholders as early as next year. In the past, we have returned cash to our shareholders through regular quarterly dividends, special dividends and share buybacks, all of which we will thoroughly analyze as options for future return of cash. One of the results from our plan has been the establishment of capital structure guiding principles, which you can see on the next slide. First, we intend to maintain a target level of cash to meet working capital requirements and our clearing house commitment. We anticipate a minimum cash level of approximately $500, million and success in our OTC initiatives would cause this amount to scale. Second, as we've stated in the past, our intention is to target a high investment-grade credit rating to demonstrate our solid financial position as a leader in the exchange and clearing industry. Third, we intend to pay a stable to growing dividend, and our board will assess that on an ongoing basis. Fourth, we have taken on debt primarily related to the NYMEX transaction, but we intend to maintain a permanent, prudent level of debt. Lastly, we intend to return excess capital in the form of dividends and share repurchases, as I mentioned early. Finally, I would like to share a few thoughts with you on the regulatory environment. We know that a key focus of our investors has been the ongoing developments in financial regulation, and we are fully supportive of the efforts made by all to bolster the soundness of the financial system. The passage of the Dodd-Frank Act reinforces the critical underpinnings of CME Group's markets: transparency and security. We’ve spent a lot of time in Washington over the years highlighting the value of our markets, and we will continue our efforts with government officials, regulators and market participants as the rulemaking process ensues. Throughout that process and in the timeframe following the adoption of new rules, we will be focusing very intensely on ensuring smooth implementation and providing maximum support to our customers. In regards to direct quantifiable impacts on CME Group, we believe the new legislation is directionally positive. We look forward to engaging with our customers and regulators during this process, and in the long term, returning to what we do best: providing safe and secure, liquid and transparent markets for market participant. In conclusion, CME Group had strong results in the second quarter, and more importantly, we have continued to build a very strong base for future growth of our business. We have gotten where we are because of our focus on serving our customers, whether during times of high market volatility or times of sweeping change. As global financial markets evolve in the future, we are well-positioned to offer critical risk management products for our customers. Thank you. And with that, I'll turn the call over to Jamie.

Thank you, Craig. Before I dive into the financials, I just wanted to note that the comments and comparisons I'll be making today will exclude the impacts of the Credit Markets Analysis, otherwise known as CMA, impairment discussed in the press release. CME Group turned in a strong second quarter financial performance, with average daily volume of 13.5 million contracts per day, up 31% from Q2 last year, and revenue of $814 million, up 26% from last year. From a GAAP perspective, this is the highest level of quarterly revenue we have delivered and only $3 million below Q1 of 2008, assuming we had owned NYMEX business at that point. We delivered $536 million of operating income and diluted earnings per share of $4.43, excluding CMA. From Q1 to Q2, our revenue grew $121 million while our expenses grew only $10 million, excluding the one-time Dow Jones transaction expense incurred in Q1. The overall average rate for contracts for all CME Group decreased 4% ,$0.79, compared with $0.823 in the second quarter 2009. So average daily volume was up 31% while the average rate was down 4%. The main driver of the year-over-year rate decrease was our member, non-member mix. Our lower-fee member volume grew 35% while non-member volume grew at 19%. Sequentially, the rate per contract also dropped 4%, primarily driven by a large increase in interest rate volumes, our lowest-rate product, from 5.1 million contracts per day in Q1 to 6.1 million contracts per day in Q2. Market data revenue of $102 million for the quarter was up 17% compared to Q1. This increase is due to the inclusion of a full quarter of CME Group index services revenue. At the end of the second quarter, users of CME, CBOT and NYMEX data subscribed to 385,000 base devices. This count was down only 1,000 screens from the prior quarter, representing some stabilization relative to the trends we have seen since the credit crisis. And I'll take a few minutes to review expenses. Drilling into Q2, compensation and benefits was $103 million, up $4 million from the prior quarter. This increase was attributable to an increase in our bonus accrual due to strong cash earnings performance. Our combined headcount at the end of Q2 stood at 2,460, an increase of 50 people during the second quarter. We reiterate our full-year expense guidance of $1.13 billion to $1.14 billion, excluding the CMA impairment, which implies second-half expense of $573 million to $583 million. Q2 operating income was $536 million, the high-water mark since Q1 of 2008. For the second quarter, our operating margin was 66%. In the non-operating income and expense category, on the investment income line, we recorded $5.5 million in dividends, down $4 million versus Q1. Also interest expense increased due to the full quarter impact of the $613 million of additional debt we incurred for the Dow Jones transaction. In the second quarter, we paid down $300 million of commercial paper, bringing our total debt to $2.8 billion. We will be paying down our next maturity in August, bringing our debt down to $2.5 billion and our debt-to-EBITDA ratio to approximately 1.3x. A detailed illustration of our debt structure is included in our earnings slides. In the second quarter, we repurchased 46,000 CME Group shares. In addition, in the month of July, we repurchased more than 1 million shares of CME Group stocks totaling $279 million at an average price of $272 per share. As part of our announced transaction with BM&FBOVESPA, we issued to them $2.2 million CME Group shares on July 16 and received $607 million. So we have nearly offset the dilution associated with the share issuance. As Craig mentioned earlier, longer-term, we plan to return excess capital to shareholders in an efficient way beginning as early as next year. For the quarter, our effective tax rate was 41.7%, excluding the CME impairment. For the full year 2010, we expect an effective rate of between 41% and 42% on a GAAP basis. Capital expenditures, net of leasehold improvement allowances, totaled $28 million in the second quarter, driven primarily by hardware and software attributed to migration of trading systems to our new data center as well as continued build-out in our office facilities. Our full year guidance remains at $180 million to $200 million, with data center and facility build-out continuing in the second half of the year. In summary, the second quarter was tremendous. We excelled on a top line and delivered virtually all of the incremental revenue to the bottom line. We look forward to leveraging our platform like this in the future and delivering profitable growth. We will now open up the call for your questions. In order to get to everyone, we are limiting all of you to one question and one follow-up, and then please feel free to get back in the queue if time permits.

[Operator Instructions] We'll have our first question from Rich Repetto, Sandler O'Neill. Richard Repetto - Sandler O`Neill: I guess the first question is more on the expense guidance, Jamie. That's a jump up from this quarter's run rate, if you multiply that times two for the back half. And I'm trying to see where the Dow Jones is impacting and how much that's contributing to the expense pickup in the second half.

Yes, certainly, that was impacting it somewhat, and then also, as we continue through the year, we'll continue to see expenditures in our growth initiatives on the OTC front as well as other fronts. So that's driving a good part of it. And we are hiring more, you heard that we added 50 people this past quarter tied to the growth of the company and growth of the top line, and we’re working to continue to invest there, and that's going to drive those expenses as well. Richard Repetto - Sandler O`Neill: Okay. Follow up, but we can do it offline. My follow-up question, I guess, would be to Terry and Craig on financial reform. And, Terry and Craig, you've seen some more activity now. You’ve seen this eras, the sweff [ph] (0:31:54) as well as you get Goldman coming up with agency clearing services. So I guess the question is, with this financial reform package, your role -- you’ve talked about just being the clearer for now, but you can see it fast developing around you as people try to get ahead of the one-year sort of implementation. So I guess the question is, from what you've seen, are you going to stick with the clearing role? Or are there any plans to get more active in, potentially, the trading side as well?

Rich, it's Craig. I think we've made a very strong commitment to our partners in the over-the-counter trading and clearing space to really support them with post-trade clearing services. And we’ve really been working hard to kind of work toward the adoption of the open-access clearing model. So what we envision is partnering with not only the sell side but the buy side to support their activities with swap clearing, but also to support market participants who may be developing swap execution facilities but who value the clearing capabilities of CME Group. So that's really our focus. It's not to say that there's no areas within which we might develop [audio gap] that might ultimately trade on a swap execution facility, but I think it's important to stress that our primary commitment is really to support our customers with clearing services. Richard Repetto - Sandler O`Neill: Okay. That helps.

We'll go next to Michael Carrier, Deutsche Bank.

Just on the rate per contract, you gave the color on the customer mix, which is helpful. And we can get the product mix. Just given the level of volumes, was there much of an impact just in terms of the rate per contract, given any tiering for the different customer segments?

Yes, certainly, as we saw higher levels of volume, there was some impact from the tiering. It wasn't the largest of the contributors to that decrease in the rate, though.

Okay. And then, just on the over-the-counter side, just any update you guys can give in terms of your thoughts? You mentioned just on the clearing and working with the market participants, your regulation is going to take some time. But more from CME's platform, particularly on the rate side, just any update on timing? What you're hearing from customers in terms of liking your platform? Any adjustments or tweaks that you're making? Just any update there?

Mike, it's Craig. I think there's not a lot new to say. Clearly, there's tremendous demand for clearing services on the customer side. And I think it's fair to say that there's a very high level of engagement by the entire industry, certainly including the swap dealer community given the legislation and given the customer interest in Central Counterparty Clearing services. So we're continuing to do what we've been doing, which is we're involved in a very active set of negotiations with market participants, and we have a lot of different work streams that we are working through right now. Obviously, there's a strong movement by the GSEs to Central Counterparty Clearing for rate swaps. And we're doing everything possible to be ready to support all of our customers and all of our swap dealer partners in accomplishing that.

Okay.

We'll go next to Howard Chen, Credit Suisse. Howard Chen - Crédit Suisse AG: Craig, just on regulatory reform. I know it’s challenging to quantify the impact right now, but was just hoping you could just give us a feel for what provisions and what specifics you and the team are looking for during this role-making process. So how do we gauge how big of a potential winner this can kind of be for you and the industry?

I have to say, I think that for the time being, I think that's very difficult in terms of making it quantifiable versus sort of a more qualitative assessment, in part because, as you're likely aware, there are 267 rulemakings that will come from this new legislation. And very broad, enabling authority to the financial market regulators to make a lot of decisions, frankly, about, ultimately, the market structure and the regulatory requirements. So we'll have more to say on that as we start to see some of the rules that are coming forward. But at least as we've looked at the Dodd-Frank Act preliminarily, there's a lot of activity currently done by swap dealers and major swap participants in our markets, which we think won't really be affected very much, at least by the legislation, when you look at what is still a permissible bank activity and you look at the degree to which banks and swap dealers will continue to be able to hedge net swap book risks without any major kind of structural changes, at least in the way that they're organized. So we spent a lot of time on that, but I think we're going to have to sort of withhold any sort of quantification of things until we have a better assessment of the rules. Howard Chen - Crédit Suisse AG: Okay. Look forward to hearing more about it. Just with what all that happened during the second quarter, could you just give us a feel for there are any meaningful shifts in the customer segmentation or breakdown that you sometimes provide?

Howard, Jamie. Basically we saw very consistent participation across the customer sets that’s very similar to what we saw in the prior quarters. Howard Chen - Crédit Suisse AG: Okay.

We'll go next to Alex Kramm, UBS.

Just want to come back to Rich's question from earlier on, the interest rate swap side, in particular as it relates to the ERIS thing. Can you actually outline what exactly you're doing there? And your involvement in how that came together? And then related to that, obviously, in the past, your relationship with the dealers has at some point been challenging. And some of our discussions with them has been that they're not too happy, initially, with what's going on there. So just wanted to see any feedback from discussions? Or clarify that you're still very much focused on the dealer relationship in clearing going forward?

I actually appreciate that question, because I think it's very important to say very strongly that this doesn't change what I said earlier in terms of, really, our commitment being focused on providing post-trade clearing services. But at the same time, as I think we mentioned, the legislation does require open, non-discriminatory access. We had, even well prior to the legislation, articulated that our business model would be sort of an open-architecture model of supporting market participants with clearing services. We have no relationship with ERIS other than, obviously, we’re a provider of clearing services, and we'll be doing that pursuant to a service level agreement. But that does not represent an effort on our part to get involved in sort of the execution component of the market. But we do expect that we'll have a wide array of potential customers that will look to us for clearing services in the interest rate swaps clearing area. What ERIS is planning on doing is, really, trading, basically, swap futures contracts, so variance of traditional swap contracts and interest rates.

Okay. Then, I think the focus here concerning OTC has been mostly on the interest rate side lately, but I think you're still moving forward with CDS, so can you give us any update there? In particular, if you look at the Dodd-Frank Act, it sounds like they’re really pushing for an FCM model, which your main competitor is not really operating under. So just wondering if you think that could be a little bit of a tailwind for you. And if there's been any renewed interest, I guess, from both the sell side and buy side.

So obviously, the requirements of the Dodd-Frank Act are probably very complementary to the structure that we had adopted, given that, as you’ve described it, it really was sort of an FCM-centric model. So in that sense, it's positive, although I would imagine that, like us, our competitors will also be structuring to be in compliance with the new requirements. In that sense, we're already there. But we're also working with market participants to refine the overall structure of our offering, and those discussions are ongoing.

Very good.

We'll go next to Mike Vinciquerra, BMO Capital Markets.

Your new product here, the FX product, makes a lot of sense, given the complementary nature versus your current products. But can you talk a little bit more about the next area, potentially, for the Dow expansion? Where you're looking? Where are the opportunities?

Well, I think what you can see from what we described, I mean, those are a couple of the products that in a very short time since we've entered into the joint venture with Dow Jones, we've been able to kind of bring to market. But in fact, we do have a very broad range of new product development ideas that we're pursuing essentially across all of the different asset classes where we have a significant franchise, either in terms of futures markets or in terms of the Dow Jones indexes area. So we'll have more to say as we kind of bring new products to market, but I think the goal of sort of sharing that with you was really to highlight that we really believe in the complementarities of these different businesses. And it's already beginning to generate new innovation opportunities for us.

Great, okay. And then we talked a lot about kind of a global expansion of your client base, and obviously you’ve got several international agreements in place already. But can you talk more specifically about -- you mentioned that your costs are going to go up from global marketing efforts going forward. Can you talk more specifically about what that, exactly, means? What you guys are pursuing? And how you go about developing new participants outside the U.S.?

Sure. I can start and then Craig can jump in. In terms of the marketing spend, obviously we’re going to look to market more global participants in our markets, and that will increase our expenses on the other expense line. That's one of the areas where, Rich had asked earlier, that’s one of the areas where we'll see additional [audio gap] in the second half. And then, we're also putting some significant focus on our energy sales force, going forward and trying to continue to globalize that product as well, given the global nature of the products themselves. So…

Yes. I just would add, I don't think you should expect kind of major step function increases in human capital to support that. But we are obviously taking a strategic view of where we think the growth is, where we think the customer acquisition opportunities are, and we do want to make sure that we have the sales resources in Europe and Asia and emerging markets that can help us really tap that growth. But I describe it as incremental.

Fair enough.

We'll go next to Roger Freeman, Barclays Capital.

Just wanted to come back to OTC. Can you just clarify that, with respect to sort of the trading opportunity, is your sort of commitment to the clearing side up front here more a function of not wanting to walk that fine line with competing with the customer? Or because you think the market as it exists today isn't really tuned to trade on an exchange model as we think about it because of absolute volumes or average size of trades being more block-oriented?

I think my best answer to that is really that, first of all, the law is already providing for swap execution facilities, so standardized swap contracts that are subject to the mandatory clearing and mandatory trading requirements can be done on either a traditional exchange, a DCM if you will, or a swap execution facility. And the swap execution facility hasn't really yet been kind of defined with a great deal of specificity. That's one of the SEC and the CFTC will be doing. And I think that, that, itself, is going to be important for assessing how certain swap contracts will trade effectively. And so, it's very difficult to sort of answer that question right now. But I would say from where we stand right now and in looking at what the swap execution facility definition is in the legislation, we're expecting that it will be possible for swap dealers and interdealer brokers to structure their own swap execution facilities to continue the business model and market structure which they've historically had. There will be some changes to that, but it may not be, in fact, very revolutionary or transformational. And I think we have to respect the fact that they're going to want to continue doing the business in the way that they have been. And I'll just say again that in the last two years of very heavy engagement with market participants in the over-the-counter markets, the message that they’ve gotten, and we're trying to be very responsive to our customers is, we really think you guys have a great value proposition and clearing. So that's our focus.

Makes a lot of sense. Okay. And then, I guess my second question is just, I guess, the guarantee pool. How do you feel about managing a guarantee pool that's actually going to pretty easily be over a $1 trillion versus $100 billion or so today. Do you think from a risk management perspective, you're going to have to invest a lot around this? Or can you just scale that up? And how will your capital contributions grow if that pool grows to multiples of what it is today? And thinking about that from the standpoint of your returning excess capital shareholders?

So I'm going to sort of say that I think it's somewhat preliminary to try to answer that question. That is very much at the heart of some of the negotiations and discussions that we're having with the market participants. And obviously, we're very comfortable moving into the over-the-counter clearing area. We recognize and appreciate and have made our own assessments of what the sort of kind of margin and guarantee fund dynamics are going to look like depending on what level of swaps are ultimately cleared. So we're comfortable with that and we're comfortable with the risk management aspects, but the sort of capitalization of the clearing facility and the guarantee fund and our contribution to that are really things that have to sort of be held in reserve until we’ve completed that negotiation process.

Fair enough.

We'll go next to Ken Worthington, JPMorgan. Kenneth Worthington - JP Morgan Chase & Co: Maybe turning back to the core business, you give a detailed look of the drivers of the FX volume and potential growth there. Can you provide the same detailed look as what you see as the key drivers of both your interest rate and your energy futures volume businesses over, say, the next 12 to 18 months?

I think we've touched very briefly on that. Obviously, the interest rate products perform best in an environment where we either have kind of directional shifts and changes in interest rate policy or federal monetary policy. And I think it's fairly clear that, at least for the very near term, we're going to be in a more static environment absent something unusual happening. But clearly, if you look at market sentiment and sort of expectations about Fed rate hikes, we're probably looking at the second quarter of 2011. That should obviously be a positive catalyst for volumes to the extent that is realized. And in the energy areas, I mean, there continues to be strong growth and demand for energy as well as volatility in energy prices. And of course, weather and other dynamics are affecting those kinds of supply and demand issues, so that's been a strong catalyst for growth.

Okay. And then maybe second question, did you receive or book any revenue from the BM&F technology relationship? Or were there any meaningful expenses as that relationship ramps up in the second quarter?

Yes, Ken, this is Jamie. We will be incurring expenses. We’re hiring consultants and actually deploying staff toward that development effort. However, there are some payments from BM&F in the current year back due us to help cover some of that. So it's a very small impact overall on our income statement. Kenneth Worthington - JP Morgan Chase & Co: But anything in the second quarter or not? Or is that all pushed forward in the second half of the year?

There's a little bit in the second quarter, probably in the neighborhood of a couple of million dollars and then ramping up slightly from there. Mark Lane - William Blair & Company L.L.C.: And that was a couple million dollars expenses or the revenues?

That would be on the expense side. Mark Lane - William Blair & Company L.L.C.: Okay.

We'll go next to Celeste Brown with Morgan Stanley.

I know you're excited that the U.S. is behind us, at least the first step of the legislation, but I wanted to focus a little bit on Europe and concerns or, whether or not you’re excited about that market, there seems to be some issues, potentially, with protectionism with various countries is clearing. And if that's the case, how would you address it?

Celeste, I'm not sure that I got the full gist of your question. What were you referring to?

Sorry. So Europe is following the U.S. in terms of putting in place clearing requirements and things like that for the OTC market. But it seems like there's a lot of questions around what country or how different countries are going to deal with where clearing houses reside.

Okay. Yes. Well, I think you're aware that we've had underway for quite some time a application to establish a registered clearing house in the U.K. We're continuing to make, I think, very good progress on the completion of our application there and, hopefully, expecting approval very shortly. That will be an enabler for us on couple of different fronts. We’re envisioning that being an opportunity for us to offer more clearing choice to our customers in our core business. So for example, our application includes a large number of energy contracts that we believe there's demand from European customers to clear locally there. And then also, we do envision it will support our efforts to be a broad-based provider across asset classes and across geographies of over-the-counter swaps, clearing services. So we're not feeling any kind of protectionism in that regard. We're going through a professional process and believe we’re being treated very fairly by the local authorities there.

Sorry, I didn't mean protectionism in terms of excluding U.S. companies, but I guess more various countries wanting the clearing house to be in one place versus another place. And does it end being too fragmented to have an efficient marketplace from a clearing investment perspective?

I don't think so. I mean obviously, there are some reported tensions between the European union and the United Kingdom, for example, if that's what you're referring to. But ultimately, as we have today, I mean, we have a large number of major central counterparties that exist in different locations, all of which have significant utility and critical mass in terms of meeting market participants’ needs. So I don't consider it to be significantly fragmented, but there certainly is a multiplicity of central counterparties out there, and I think that will continue to be the case.

Great. And just, as a follow-up, somebody asked the question a bit before about Dow Jones, but I guess, is the timing of the deal closing, does that impact the licensing fee expenses in the quarter? And how should we think about their run rate going forward? Or is it just more of question of mix in the quarter than anything? They’re a bit lower in the quarter than they've been historically.

Certainly, when we closed the Dow and when you consolidate, we no longer have the license fee expense associated with that. So we’ve got the full quarter effect of the Dow in the second quarter, so that should be a good indication going forward.

We'll have our next question from Niamh Alexander with KBW. Niamh Alexander - Keefe, Bruyette & Woods: If I could go back to the U.S. legislation, and John and I were talking about this, there’s some small language in there that I think it protects the versatile model and I think, but it's primarily related to OTC. But I'd appreciate your interpretation of it. So it's essentially saying that a clearing house is not required to take a position from another clearing house. So is that just from the OTC markets? Or could we, say, apply that logic to the ELX situation and maybe in your competitor’s situation in the futures markets as well?

Okay, let me try to provide a little clarity about that. There are different provisions of the Dodd-Frank Act that apply to swaps clearing, and then the provision that I believe you're referring to is a provision that is intended to reduce the systemic risk potential of credit relationships between and among clearinghouses in the listed derivatives markets, maybe to begin with. So on the over-the-counter product side, there is what we call the kind of non-discriminatory open-access provision. And generally speaking, I mean, I think there’s a lot of confusion about those in the first instance in that they absolutely do not provide for inter-operability and fundability per se. It's probably a little bit too arcane to get into in this call. But that's the one side of it. And then the provision that you're referring to is limited to the listed derivative markets, and it really is intended to ensure that there isn't a kind of systemic-risk domino effect by forcing linkages between clearinghouses. And then, maybe the third part is just that I don't think it really has any bearing on the EFF issues, which are not clearing house transfers of positions between clearing houses with credit relationships. So hopefully that's helpful. We could spend more time outside the call if you want to, but… Niamh Alexander - Keefe, Bruyette & Woods: Sure. Yes, no, that does help on the EFF issue as well. And then if I could, just to stick with the legislation again, if I may, position in the futures markets. I guess the comment letters are in, and the CFTC's obviously got a lot to do right now. But what are the biggest risks to your business from proposed position for the futures markets that we should be thinking about there?

Yes, I think first of all, we're very pleased with the final provisions of the Dodd-Frank Act. You'll probably remember that since the inception of the discussions about position limits in energy and metals markets, we've always maintained the view that it would not make sense to impose position limits on already-regulated, reportable and surveyed markets if you didn't also impose those limits on foreign markets or OTC market participants. And I think one of the useful things in the Dodd-Frank Act is it does clearly establish that parity. So first of all, the level-playing-field concerns, I think, have been largely eliminated. Secondly, in looking at, at least the initial proposal from the CFTC, I think, based on the feedback that they got from not only ourselves but other industry participants, I think they've tried to develop a regime and set those limits at a level where they're not going to grossly encumber current market participants’ use of our markets. So I think a lot of those concerns have gone away. Obviously, we still have are of the view that position limits in terms of being mandated are not really that useful and certainly not warranted by the evidence that exists, not only the CFTC's own studies but our own studies of what drove pricing dynamics and crude oil in commodity markets during that summer. But I think in general, it's come out better in terms of addressing some of our concerns. Niamh Alexander - Keefe, Bruyette & Woods: Okay. Fair enough.

We'll go next to Daniel Harris with Goldman Sachs.

I wanted to follow up a little bit on the relationship that you guys struck with CBOE on the mix. And, Craig, you actually mentioned volatility a few times when discussing some of the drivers of your products. What should we be looking for over the next few quarters, both in terms of any index releases and then any launch of the futures? And have you guys thought about what the opportunity is in that relationship?

Well, of course, we're very pleased with that relationship. The CBOE has, I think, done a very good job in the development of the VIX index and VIX futures contracts as well. And so what we're excited about is the opportunity to kind of work together to develop volatility-based products based on other asset classes. Our focus is really not in the equity area since CBOE is already doing a lot of innovation in that area themselves, but we have the opportunity to, basically, use the VIX methodology and to jointly develop new volatility indexes with CBOE collaboratively in products like energy and commodities and foreign exchange. And so that's a fertile area and something that we're working on. Until we actually announce new products, I can't say much more than that. But we think it's a really nice new-product-development area for both of us.

Okay. And then on market data, if we look back over the last five or six quarters, the screen count has continued to slide here post the NYMEX acquisition. Obviously, we've had some rough times in the financial markets. But at what point do you think that we hit some level of stability in the screen count? And is there any thought that, that could go higher over time?

Yes. As you look at it, if you look back at the last significant recession, around 2001, the device counts fell between 10% and 13%. Currently, we're down about 14% versus our peak. And then you saw it in this quarter, where the number of screens falling off has really, that number itself has declined. Only a thousand screens fell off this quarter. So I think you're starting to see us, hopefully, reach that bottom. As Wall Street starts to spend more and hire more, we should see that start to pick up.

Okay.

We'll go next to Christopher Allen with Ticonderoga.

I just wanted to ask about the capital structure guiding principles and how we should think about the growth opportunities in reconciling the two moving forward.

I think, Chris, Craig said it on there that in the near term, we don't see any significant M&A opportunity out there. So we’re going to, of course, keep an eye out, but in light of that, we're going to monitor our capital structure, monitor the excess cash we've got and make sure that we’ve got enough on our balance sheet to cover things like our requirements for our current core business operations, our core clearing operations, potentially the new clearing operations as it relates to OTC, and then some for small bolt-on capability extending acquisition along the way. So I do think when you look at how much cash flow we generate each year, roughly $1 billion, and as we grow, that will grow given the nice leverage in the model that there's going to [audio gap] opportunity in capital as early as next year.

Chris, let me just jump in and add that I think it's important to say, I mean, we have a very bullish view of our growth opportunities organically in our core businesses. I mean, we've just spent a couple of years finishing what I would consider to be kind of the first phase of integration, which is really the operational integrations and sort of accomplishment of the cost synergies of putting the CME in the Chicago Board of trade and NYMEX and COMEX business portfolios together. But the second step of that is, really, to begin to harness the growth and sort of synergy and complementaries that we have across these different business portfolios around the world. So I wouldn't want the sort of the capital structure guidelines and what we described to sort of to be confused with our growth outlook.

And is it fair to say that mostly the over-the-counter growth opportunities basically rely on CME utilizing its current operating infrastructure, so the incremental investment necessary there is going to be minimal?

There's certainly investment associated with it. That's why you've seen some of the increase that we have this year in terms of headcount and some of that increase in the expense versus prior year. So there is some investment baked into our thoughts. We do get to leverage some of our existing platforms, but there is that additional investment. But it's not overly excessive and is something we can manage easily.

Great.

And we'll have our final question from Mark Lane, William Blair & Company. Mark Lane - William Blair & Company L.L.C.: So just to clarify, Jamie, on the expenses. So your original guidance at the beginning of the year was $1.1 billion, and now it's $1.13 billion to $1.14 billion. So what is the specific impact from Dow Jones in the change?

Dow Jones for the year, I want to say, if I'm remembering correctly, was roughly in the neighborhood of $30 million or so, if I'm remembering properly for a full year. So I can get you more details on that also. Mark Lane - William Blair & Company L.L.C.: So there's not really a change in the overall guidance. Maybe a slight little tiny amount of pressure.

Right. Mark Lane - William Blair & Company L.L.C.: And then, on the rulemaking process for the legislation. So how do you see this process playing out? Are there areas that you expect to get better defined first? Major areas? And what might those be? Or how do you see this playing out?

Well, Mark, it’s very difficult to sort of answer that, because each agency has its own sort of agenda. I mean, I can tell you Terry and I, having met with the chairmen of the CFTC and the FTC as well as the other commissioners and senior staff, they've laid out a very aggressive and comprehensive plan for how they will meet the requirements of the Act in terms of the development and promulgation of those rules. We don't have complete transparency into underneath that, what is the order of priority. But we certainly would expect that position limits is something that they will probably take up early, given that, that was already a area of significant workflow for the commission. But we're going to have to wait to really see that. Mark Lane - William Blair & Company L.L.C.: So would you expect like some sort of announcement to say, by a timetable to be laid out? Or you just don't have any idea yet?

Well, there are various requirements within the statutes. They vary depending on the provisions of the act. But I would say just sort of rough, ballpark, on a not-held basis, I think by November or December of this year, we will see already a substantial amount of new rulemaking coming out for comment. Mark Lane - William Blair & Company L.L.C.: Okay, great.

That concludes the question-and-answer session. I'll turn the conference back over to Mr. John Peschier for additional or closing remarks.

Thank you all for joining us. Feel free to call us if you have any follow-up questions, and we look forward to talking to you next quarter.

Thank you.

That concludes today's conference. Thank you for your participation.