CME Group Inc. (CME) Q2 2013 Earnings Report, Transcript and Summary

Jennifer George Phupinder S. Gill - Chief Executive Officer, Director, Member of Executive Committee and Member of Strategic Steering Committee James E. Parisi - Chief Financial Officer and Senior Managing Director of Finance & Corporate Development Bryan T. Durkin - Chief Operating Officer Terrence A. Duffy - Executive Chairman, President, Chairman of Executive Committee and Member of Strategic Steering Committee

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Howard Chen - Crédit Suisse AG, Research Division Christopher J. Allen - Evercore Partners Inc., Research Division Kenneth Hill - Barclays Capital, Research Division Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Daniel Thomas Fannon - Jefferies LLC, Research Division Alex Kramm - UBS Investment Bank, Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Michael Carrier - BofA Merrill Lynch, Research Division Brian Bedell - ISI Group Inc., Research Division Gaston F. Ceron - Morningstar Inc., Research Division Kenneth M. Leon - S&P Capital IQ Equity Research

Welcome to CME Group Second Quarter 2013 Earnings Call. [Operator Instructions] I will now turn the call over to Jennifer George. You may begin.

Thank you for joining us. Gill and Jamie will spend a few minutes outlining the highlights of the second quarter, and then we will open up the call for your questions. Terry, Bryan and Bob are on the call as well and will participate in the Q&A. Before they begin, I'll read the Safe Harbor language. Statements made on this call and in the slides on our website that are historical -- 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, which are available on the Investor Relations section of our website. Now I'd like to turn the call over to Gill.

Good morning, and thank you for joining us today. I'm going to highlight CME Group's second quarter, and then turn it over to Jamie to review our financials. I'm pleased to announce strong results for the second quarter, highlighted by multiple records across our industry-leading diverse portfolio of products. Within our core futures, we are seeing a glimpse of how our complex will perform as our economy improves and government intervention recedes. There's a lot of interesting activity happening within our interest rates, OTC and energy complexes, which I'll spend some time discussing this morning, along with a few other areas. Second quarter average daily volume was 14.3 million contracts, up 16% from the second quarter of last year. In addition to robust activity from U.S. customers, we had strong growth in electronic trading volumes outside of the U.S. Asia volumes were up 28% on our Globex electronic trading platform. European volumes were up 18% compared to second quarter 2012, and our emerging Latin America business rose 40%. Open interest also jumped 26% year-to-date, up to 88 million contracts, driven by broad-based growth across our product complex, including euro dollar and treasury options, E-mini options, WTI futures, natural gas, gold futures and corn. Additionally, the second phase of the OTC clearing mandate was completed successfully on June 10, and we are steadily picking up market share versus LCH SwapClear. Turning to the highlights of our core. Our interest rate complex continues to perform well. Second quarter average daily volume was 6.8 million, up 33% compared to the same period last year. Treasury average daily volume was 3.8 million overall, up 38% compared to last year, with strong growth in options, up 82% versus the same period last year. We set an all-time treasury futures volume record in May, which exceeded the prior record in February. Euro dollars futures and options averaged 3 million contracts per day, up 28% versus the second quarter 2012. July volumes there remain strong, relatively speaking, up 28%. Turning to OTC clearing, as I mentioned earlier, there has been a nice increase in activity following wave 2 of the Dodd-Frank clearing mandate that started on June 10. Category 2 clients have overwhelmingly chosen CME Clearing, and Category 1 hedge funds and international dealers are shifting more of their volume to what they consider to be the most capital efficient clearing solution, which is CME. At this point, over 300 institutions have cleared trades with us. We had 29 new clients in July, who had not previously traded on our platform. This momentum has led to strong sequential growth in the daily notional amount cleared in interest rate swaps. Second quarter averaged $41 billion per day, tripling activity during the first quarter. Third quarter to date is currently at $62 billion per day. Our dealer-to-customer market share has grown from 5% in Q1 to 23% in July. In addition, open interest increased by more than 100% during the last 2 months from $2 trillion to over $4 trillion, with over 3,600 client accounts currently holding open positions, while our competitors' open interest grew by 6% during the same period. Since May 31, combined IRF open interest between CME and LCH has increased by $2.5 trillion, and we have accounted for $2 trillion or over 80% of that amount. I believe this indicates we have done very well attracting Phase 2 clients, made up primarily of asset managers, insurance companies and GSEs to our platforms. We plan to build on this momentum and continue to focus on our entire suite of rate offerings, including core futures and options, the Deliverable Swap Futures, as well as cleared swaps. On August 26, we are launching 4 additional currencies of IRF, bringing our total to 17. At this point, our global interest rate swap product scope will be completely in line with the competition. In addition, one of our significant value propositions is portfolio margining. Four clearing members are now live with our solution, and we expect an additional 2 to 3 to be live by the end of this month. We made progress with our Deliverable Swap Futures contract, which increased in average daily volume from 3,100 in Q1 to 5,500 in Q2. We set a daily record volume of 30,000 contracts traded on June 5. It is still early in the process, but this product stands out as an early success story on the futures side post-Dodd Frank, with near 64,000 contracts of open interest currently in place. Turning to FX. Second quarter volume grew by 13% to a record of more than 1 million contracts, equating to $127 billion per day of notional. This was driven by a quarterly record in the Japanese yen product, in addition to several other currency pairs. FX options also continued to be strong, up 36% in Q2 versus the same period last year. It is important to note that we saw particular strength in terms of trading from Asia during the quarter, which grew 48% year-over-year. This continues to speak to the continued FX market share gains we are achieving on a global basis. Equities have also performed well. Second quarter average daily volume was 3.1 million contracts, up 5% versus second quarter 2012, and June was up 10%. E-mini options were up 67% in the second quarter versus last year, supported by expanded participation in our weekly and monthly options. In addition, we had record quarterly volume in our Nikkei 225 yen-based product, and volume tripled in our Nikkei 225 dollar-based compared to the prior year. Lastly, open interest is up 22% year-to-date, which bodes well as potentially more assets flow into equities. Our metals complex also continues to benefit from recent volatility. This led to a quarterly average daily volume record of 471,000 contracts, up 27%. Driving this result is strong growth in our gold and copper bond contracts. In addition, open interest has grown 29% year-to-date. Turning to agriculture commodities. The complex continues to perform well following a year of record volatility, driven by last year's extreme drought-like conditions in the Midwest. Lastly, I will touch on our energy complex, where a lot has changed since our last call. Overall, energy volumes strengthened during the second quarter, and in July, we were up 11% compared to the same period last year. Focusing on crude, during 2011 and 2012, we were very consistent in our discussion with our investors and the media about the issues at Cushing and the impact on our TI business and our view that ultimately, the spread between the TI and Brent would tighten as infrastructure changes took root. That has occurred. Supplementing that, early in the year, we made a concerted effort to intensify our dialogue with important energy-related participants in the U.S., Europe, Asia and the Middle East. We have had the opportunity to discuss the infrastructure impact and our strategy of offering a full suite of crude products, including TI, Brent and our growing Omani product with many clients. In addition to crude, we engaged in dialogue about natural gas, refined products and the other 5 CME Group product areas. Terry and I have been spending a lot of time on the road, along with other senior executives, and helping our sales force. Indeed, 2 weeks ago, we were in London, Geneva, Singapore, Shanghai and Tokyo with many important energy participants, including large integrated trading houses and producers. In terms of performance, we had open interest records in both the TI and the Brent futures contracts during the month of June. Given the heavy focus of energy participants on the current shift in crude oil share, the marketplace has taken notice of our WTI, regaining a leading position in June and July as the spread has shrunk. Average daily volume in our Brent Futures contracts has growth from 24,000 in Q1 to 37,000 in Q2 to near 54,000 in July. Importantly, we are seeing excellent commercial participation and rising open interest. The main driver of commercial participation in our Brent contract is the fact that these clients are leveraging the capital efficiencies across our full suite of refined products and crude. In particular, with significant capital efficiency in certain crack spread trades. Finally, our DME product continues to build from a smaller base and has averaged 8,000 contracts per day in July, up from around 6,000 contracts per day in the first half of the year. In other words, we are close to hitting the inflection point. In summary, there's a lot of work left to be done in the energy sector, and we are committed to help our clients with a wide range of solutions. One final note on the core derivatives business, we had record total volume and revenue from Asia during the second quarter. As I mentioned earlier, we saw 28% second quarter volume growth, with average daily volume exceeding 500,000 contracts per day for the first time. Transaction fee revenue jumped 30% to $42 million during the quarter. Interestingly, all 6 product areas grew, with particular strength in FX, Ags and interest rates. In summary, although we're very pleased with the strong result from the quarter and the momentum we have experienced during the first half of the year, we are not satisfied. We still have plenty of work to do to keep the company well-positioned once we get past the headwinds we have faced over the last few years. However, what you saw during the quarter is the strength and capability of our core futures complex and ones we do with multiple records across the product portfolio. Our global growth strategy, which includes launching the exchange in Europe later this year, pending the completion of regulatory review, will further build on our potential, and we are extremely excited about the future of CME Group. Now I'll turn over the call to Jamie to discuss the financials.

Thanks, Gill, and good morning, everyone. Q2 was a excellent quarter in many respects. Volume was up 16% compared to second quarter last year. Sequentially, volume was up 15%, and total revenue was up 14%. While revenue was up almost $100 million sequentially, expenses were up only $9 million, reflecting an incremental margin of 90%. Let me start the Q2 discussion with revenue. The rate per contract for the first quarter was $0.748, down from $0.785 last quarter. The largest driver was product mix. While we saw volume increases across all of the product lines, lower average fee products, like our interest rate contracts, saw a 21% volume growth versus 10% for all other products. The next largest driver of the lower average rate in Q2 was volume discounts, which impacted us in rates and FX, with the volume surge from March to June. And lastly, we continued to aggressively incent growth in our energy products. Second quarter other revenues was $24 million, which included $5 million of business interruption insurance claims related to the coordinated market closure due to Hurricane Sandy last year. Moving on, total second quarter operating expenses was $308 million, including a foreign exchange benefit of $1.6 million. Additionally, as a result of volume and revenue growth, we saw sequential increases of $6 million in license fees and $5 million in our Q2 bonus accrual. Breaking down operating expense in more detail. Compensation and benefits was $129 million, down slightly from the prior quarter. Lower payroll-related benefit costs and vacation accruals followed the normal seasonal pattern, dropping from Q1, and were offset by the higher bonus expense I just mentioned. Headcount at the end of the quarter was approximately 2,680, up 65 during the quarter, primarily driven by customer-facing hires in products and services and clearing, along with additional technology employees added in Northern Ireland. Overall, our teams are committed to being as efficient as we can on the cost front, even as macro conditions improve. We saw our operating margin during the quarter improve to more than 62%, up significantly from Q1. Turning to nonoperating income. As we indicated on the last earnings call, we recorded 2 dividends from BVMF, totaling $15.6 million. Equity in gains in unconsolidated subsidiaries was $20.2 million, with $21.4 million coming from the S&P Dow Jones joint venture. The uptick was driven by our increase in ownership, as well as the increase in equity volume and completion of the integration of the 2 businesses. Turning to taxes. The effective tax rate was consistent with Q1 at approximately 38.7%. On the balance sheet, we had more than $2 billion of cash and marketable securities following 2 tax payments during the quarter. $750 million of this cash will be used today to pay down maturing debt that we had pre-funded late last year. As a result, we expect interest expense to drop approximately $3.4 million per month as we eliminate the double carry. During the second quarter, capital expenditures, net of leasehold improvement allowances, totaled $36 million, bringing us to $55 million so far this year. In terms of guidance, we expect 2013 expense to range from $1.25 billion to $1.26 billion. The expansion of the range is being driven by volume performance, which impacts the variable expenses I mentioned earlier. In terms of specific line items, I expect compensation to be higher in the second-half, driven by new hires, higher professional fees based on growth-oriented projects we are working on and higher other expense due to back-end loaded marketing and customer events. Turning to CapEx guidance. We are lowering our guidance to $140 million. That's the lower end of the previously provided range. In summary, we continue to focus on investing for the future. In particular, we have positioned ourselves to fully take advantage of the changing regulatory and competitive landscape, as well as the medium-term favorable cyclical trends. As always, while investing in our future, we also remain intensely focused on generating excess capital and returning it to our shareholders. With that, we'd like to open up the call for your questions. As we did last quarter, given the number of analysts who cover us, we ask that you limit yourself to one question. Please feel free to get back in the queue if you have further questions. Thank you.

[Operator Instructions] Our first question comes from Rich Repetto. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Yes, Sandler O'Neill. So my question, Gill, is on OTC. If you back into -- and Jamie. If you back into the rate per million cleared, it looks like -- it was -- it looks like it could have even be lower than the first quarter. We were expecting it to jump with Phase 2. Can you give us a little bit of color what's going on there and sort of the rate that you exited the quarter? And then just a little bit more broadly, the whole OTC strategy. Now that you've got the SEF starting to approve and your DSF contracts sort of gaining some momentum as well.

Sure, this is Jamie. I'll start. In Q1, the interest rate average rate per million was about $2.75. In the current quarter, it's about $2.38. Remember, we're going through the whole transition as we're going through Phase 1 and Phase 2. The mix of the high turnover volume in that was variable between those quarters. So it's going to take some time for us to get to a steady state to see what that's going to be. And if you look at the July -- July, we're probably -- we've picked up some. Volume in the area of $2.60-ish in July on interest rate swaps. So we're starting some tick back up in that rate.

Rich, with respect to the second part of your question, we have been extremely consistent, in that our focus was going to be on the clearing of swaps because it was going to be very beneficial to our client base with respect to margin offset. And to the extent that the client had additional needs, such as the Deliverable Swap Futures, we will roll such products out too. So what we are doing and what we are executing on is extremely consistent with what we have been saying.

And sorry, Rich, I meant to say June, not July, for that $2.58.

And the next question comes from Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: One of your competitors was recently named the administrator of the LIBOR contract. You've been really active in building index services over the past few years. So I was just hoping you could discuss why a role like that might not make sense for you. And any level of concern that you have that a new administrator of that contract can alter licensing, expenses and exclusivity agreements over time.

Sure. Howard, I'll take a crack at that. We did significant due diligence on this when the opportunity first arose. And we made the determination there was not much of an opportunity there to serve as an administrator. The existing license that we have from the BBA, that will continue to be in force, even under the new administrator. The new regulation in the U.K. around LIBOR that was implemented earlier this year, it's clear that all the entities must have open access to the benchmark. So we don't expect the non-exclusive license for either Euribor or LIBOR to change that will provide any kind of advantage to any administrator. So there was no -- there did not seem to be any particular upside for us.

The next question comes from Chris Allen with Evercore.

I just want to talk a little bit about energy. You mentioned the aggressive discounting on pricing. And obviously, that's held back the revenue expansion over the prior 2 quarters despite some very solid volume growth. I'm just wondering how to think about that going forward. Any timeframe on when the discounts may fade? The sustainability of Brent volumes without those discounts? Any color on that will be great.

Chris, it's Bryan. You need to take a close look at the progress that we've achieved. Recall the representations that we've made over the last couple of earnings reports, which was, our goal has been, all along, to continue to grow the portfolio of energy products that we represent. We've achieved great growth and recovered a majority of percentage of the WTI activity overall. We're seeing very nice trends with the Brent volume, as you've indicated. And then if you take a more holistic look at the other products, particularly heating oil, RBOB, gas/oil, and the ability to spread amongst those products, we're seeing a nice uptick across each and every one of those products, as well as the open interest. And we're looking to continue growing that involvement. So one of the key things for us has been incorporating greater growth within Brent from the commercial participation side of it, and we're seeing nice involvement there. So the goal here is to continue building up the market share across the quadrants.

Our next question comes from Kenneth Hill with Barclays.

So I think initially, when we -- the first 2 mandates kind of rolled out, you saw customers more focused on the blocking and tackling, kind of getting operationally ready. And then you mentioned kind of recently, you've seen the Category 1 customers start considering the solutions based on capital requirements. So where are you kind of with the Category 2 folks? Have they started going through that process right now? And what are you guys doing to facilitate some of those discussions?

This is Gill. I'll start, and Bryan or Bob might want to add. I think we're actively working with the Category 2 clients, who are coming directly to us from a non-cleared solution that they were currently in. For the Category 1 clients, they are the ones that are moving their open interest from the LCH to us, principally because of the capital efficiencies that they see, and other product development opportunities that they might have down the road. Keep in mind that even though this is an OTC-cleared solution for both LCH and ourselves, LCH simply accepts OTC swaps as they come in to them. CME actively also launches futures products that will add to the capital efficiencies that most of our clients need. That's a very important differentiator as we go down the road between what LCH will provide to their client base versus what CME can provide to the same clients.

Our next question comes from Ken Worthington with JPMC. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: I'd like to get more information to help us understand the outlook for the OTC clearing revenue ramp. So with that in mind, what percentage of the market do you think has kind of signed up and is clearing at this point? Maybe what portion of the marketable products have you yet to list? And I don't know if I can ask this, but how do you expect the pricing to ramp over time as the initial incentives, I guess, expire or roll off? So any flavor on any of those would be very helpful.

This is Gill. I will start. I think once August 26 comes along, we will have the full suite of products that are out there. There are some products that are -- have traditionally been labeled as not clearable swaptions, is one such product that is out there. We are working very actively with both the banks, as well as the buy-side, to try and solve these issues to see if they indeed can be solved so they can -- we can bring in more capital efficiencies to our client base. In the meantime, in terms of the size of the product that come on in or the amount of product that we have cleared, I think by the time you get to the end of the second quarter of next year, the vast majority of the products would have been cleared. And then the only remaining question at that point is what is the most capital-efficient place for you to pass the open interest that you might have? So you have the euro dollar portfolio that we have here. You have the treasury complex, you have the billable swaps, huge futures that we have. You have all the product development opportunities that lie ahead of us versus the OTC swaps that we are now beginning to actually clear. So you would get a clearer sense of what that universe looks like by the middle of next year, I believe. In terms of pricing and random pricing incentives would actually go away and fade, and we can start to look at this on more of a normalized run rate basis, I think it's fair also to wait until we have the vast majority of all the swaps in to us.

Our next question comes from Neve Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: NYMEX, the building sale, you announced that you hired some consultants and then some brokers. Just help me think about it. Is it realist to think if you do net some cash, and there could be significant cash from this, would this be part of -- would it be feasible to think of this maybe making up part of the annual variable dividend next year? Or is -- would the timing be too early for that? And if you could help me quantify how to think about this at all, Jamie, that would be helpful.

Sure, Neve. When you think about the NYMEX building, it's probably about half the size of the Board of Trade building. So that's one thing to think about in comparison. Obviously, it's in a market where values are a bit higher. So you can put those sorts of things together as you think about the value it could be. And I think we will hopefully have an answer by the end of this year in terms of whether or not we're going to sell it. And if the decision is to sell it, then I believe it will be done by the end of this year. So it would be in that -- the cash would be available for the variable dividend. The other thing to keep in mind is that it has a very, very low basis on our books from a tax perspective that we inherited from NYMEX, so there would be some taxes -- tax impact on it as well. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And the SIPA Building, was that around 150-ish in the mix?

Yes.

Your next question comes from Dan Fannon with Jefferies.

Just a question on volume tiers and how often you guys are evaluating them. And how should we think about that as volumes potentially rise going forward, we might see the threshold for those discounts go higher.

Dan, this is Jamie. If you look back historically, prior to the economic crisis, it was probably roughly every 18 months or so that we would look and evaluate the tiers. But it's driven by market conditions. So going forward, it's something that we'll continue to keep our eye on. If we're -- the tiers are getting to a point where people are meeting them when they wake up in the morning, then we'll look to see whether or not we should be adjusting them. So this is something that we actively keep an eye on.

Our next question comes from Alex Kramm with UBS.

I just wanted to come back to the whole Brent energy discussion. I think you used a couple of very big words here today, like excellent adoption and nice tick up and stuff like that. So obviously, the market share is really looking good. I just wanted to get a little bit more color on how you're really doing that. And you talked a lot about the commercial. So when I look at the commitment of trader report, I think you have like a handful of players that are showing up as commercial today. So maybe you can give us a little bit more color what the pipeline is and how many you really have. And then same thing when I talk to energy desk, it sounds like lots of fundamental players don't really think about Brent when they -- or think about you when they think about them Brent, so they are not really seeing the volume. So just maybe talk a little bit more of how you're engaging with even like the trading desk on Wall Street and when you think that they could really embrace the product. Because we're not hearing it yet, I guess, is my point.

I'll start. One of the things that we're really able to sell as a very strong value proposition, and I tried to allude to it earlier, was the spreading capabilities. And what I didn't focus on is the capital efficiencies and the margin savings associated with those spreads. And so now that we have a fairly strong critical mass in terms of volume and open interest, particularly on the Brent side of things, you're really able to latch into those spreads and be able to bring that value proposition to those end users. And yes, we are absolutely seeing those benefits pay off in the context of utilization and pickup in the spread and the capital efficiencies. And we believe that, that's going to just continue to take on more traction.

Alex, this is Gill. If I can add to what Bryan said. I think Bryan also talked about this a short, while ago. The key driver in getting more Brent is that it helps the entire suite that we have. If you look at a classic product launch that is new, I think a reasonable threshold of open interest and volume would be about 30,000 to 40,000. The point that we are making is we have achieved that. We have surpassed that in a very short period of time. The more important piece of this is the products around just the pure Brent, that has also seen a lift, the crack spreads, the TI, Brent trades, those things are actually growing. So we did use those so-called big words because it's a big deal. This has been occurring. It's been lifting the energy complex in a very significant way, and it's only the beginning. One of the questions that has been asked in the past is, when are you going to start charge for Brent? That's not a focus to us in any way, shape or form at this time. Building the entire complex, the energy suite across-the-board, across the 3 benchmarks that I articulated a short while ago, which no other exchange has, that is what we're trying to push for, between Omani, Brent and crude and the derivative products that are created from those, that is going to be the focus of our energy guidance.

Sorry, not to have a follow-up. But to my earlier question, do you have an exact number of how many commercials players are involved? Or is it too early to really...

The number of commercials we have are actually growing and we will not share that number at this time.

And the next question comes from Alex Blostein from Goldman Sachs.

I want to shift gears and talk about the metals business for a second. It seems like there's incremental focus from the regulators on some of the broker dealers, and just kind of curious to hear your thoughts on the potential implications of that on the business for you guys near-term, as well as the longer-term.

This is Bob, Alex. We don't think that there's immediate implications relative to a lot of the scrutiny that's going on there. But we are looking very closely at how the ecosystem can shift and what that might mean for us. We don't have any specific comments on what has been in the press today, but we are watching the situation very closely.

It's Terry Duffy. Let me just chime in because I think this is an important topic that a lot of people aren't picking up on right now, and that is a lot of the dealer community that are being under a lot of scrutiny as it relates to the physical trading of commodities and metals and things of that nature. What they have said is that they're going to use other derivative products, such as futures and others, to get the exposure to the market versus what they used to use in the cash market. So I actually see this as potentially a net positive for us to continue to offer up deep liquid markets for them to do their risk management needs. So I don't see this affecting us in any way, shape or form.

Next question comes from Chris Harris with Wells Fargo Securities.

Question is on the swaps business. We're all pretty focused right now on swaps clearing revenues. But I know you guys have historically said in the past that volume migration will probably be the bigger opportunity than clearing alone. So just wondering whether your thesis on that opportunity has changed at all. And I know it's really difficult to tell, given the data, but in your futures volumes, are you seeing kind of any users switch to that complex that would ordinarily be trading in swaps?

This is Bryan. As we've indicated in the past, we've had some new users come into the market on the futures side, particularly as you look at the asset management community, the corporate community, who had a portfolio of interest rate swaps that they needed to clear. They have been taking a good look and being active and more active in our futures markets. And something that I would like you to kind of look at is we've seen a real pickup in our DFR transaction. So that's an indicator in terms of, again, giving these users facilities to be able to hedge their interest rate swap exposure by also doing equivalent business in our treasury, which we view has had a nice uplift. When you look at the open interest and the volume over the past quarter, there's definitely a correlation basis when phase 2 kicked in and the activities that we're seeing in our uptake in interest rates and increase in our treasuries, in our euros. So we're looking at that as well as an indicator and obviously using that as a strong selling proposition.

It was swaps that have been traded against treasuries.

Our next question comes from Michael Carrier with Bank of America.

Jamie, just a question on 2 things that you pointed out. Just on the RPC, just curious on the equity side. What's been driving maybe the upward trend over the past couple quarters? We've seen a pickup in volume, but just wanted to see if there was anything going on, on that front. And then just on the expense guidance, the $1.25 billion to $1.26 billion. I think in the past you've said if you were in a weaker environment, sort of what the low end could be, like meaning where you can pull back. Obviously, the volume environment has improved and so we don't need to focus too much on that. But just curious in terms of the expense flexibility that you have, particularly on the comp side, versus like the new initiatives that you see ramping up in the second half.

Sure. On the first question, in terms of the equities rate, what you're seeing there was a little bit of upward pressure on rate. It's just a member, non-member mix issue. So you're seeing non-member growth faster than member growth in that category in the last quarter. So that helped push that rate up a bit. So that was the key driver there. On the expense guidance side, it's really -- that change in the guidance putting the range out there, it's very much tied to the variable expenses that are out there, our license fees and our bonuses. Now obviously, if there was a situation where volumes fell off, those things will also decline and would help move us back down to the lower end of that range. And depending on where the volumes were, potentially down through that range. Now saying all that, we've been very diligent around expenses, so there's not a lot of additional room there to continue to pare. We've done everything that we can and we continue to look for areas to become more efficient. But I wouldn't say that there's some large pools of expenses that are out there that we could easily reduce if volumes came in. So as we've said before, we want to be careful not to cut into the muscle because we do believe that there's a lot of growth opportunities in front of us, and we don't want to shortchange those.

Our next question comes from Brian Bedell with ISI Group.

Just following along on that over-the-counter interest rate swap question on to futures. Maybe, Bryan, if you can expand your commentary on what your outlook is for, say, the next 2, 3, 4 quarters in terms of the sales effort to build upon the futures volume and the collateral benefits of futures, whether you think that's an active ramp as we move through that process or that the new clients that came on is sort of static. And then just a quick follow-up on Asia versus Europe in terms of the growth opportunity, the timing of the launch of the European exchange and whether you're sort of more optimistic about growth in Asia that you alluded to, Gill, versus the new launch in Europe.

So on the first one, our approach, from a sales perspective, is to be able to offer the totality of product for the client to be able to manage their risk. So as we're in talking to those that are traditionally non-users of the futures markets but they have an interest rate swap portfolio that they need to clear, it's an opportunity and an entrée for us to, first of all, take care of the main issue at hand and provide them with those clearing facilities, but also introduce them to the efficiencies and liquidities of our interest rate portfolio from the exchange traded side of it. And we've done a lot to build tools that is very -- that we leave for these clients to really reflect on after we spend our time with them, helping them understand how they can better utilize their capital, capitalize on margin efficiencies. And they can run their portfolios through these varieties of tools so that they can see very tangible evidence on their side to say, "Yes, this definitely does make sense for us and for our portfolio." And then we follow up, and we bring them in. And so I can't give a perspective in terms of what the volume growth will be on the futures side of it, but I can absolutely say that we're seeing greater usage on the futures side, not only from new clients, but from pre-existing clients that, as they're bringing those OTC products in for clearing, we're seeing an uplift in their activity on the futures side.

With respect to the question that you had on the growth outside of the U.S., keep in mind, Latin America is also an area of focus for us, although currently, the meaningful income is coming from both Europe and Asia. Europe, as you might know, has been a mainstay revenue base for us, and that has grown particularly in the last 5 to 6 years. That growth, with respect to the current products that are being offered, will continue both on the OTC front as well as on the core futures side. With respect to the new exchanges, we expect to be up and running sometime in the fall. It represents a different opportunity for a client base that would otherwise not trade in the U.S. With respect to Asia, we're talking about new clients that have not come into trading our core products yet. And in particular, China, Taiwan, Hong Kong, Singapore and a couple of other places will drive that growth. A couple of days ago, Nanhua Futures, one of the futures brokers in China, joined us as a full clearing member out of their office in Hong Kong. That is something that we have talked about over the course of the last 18 months with respect to Chinese FCMs looking to join us. Nanhua joins Bank of China International as the first 2 Chinese FCMs that have joined us, with a pipeline of more firms behind them. That is going to be part and parcel of the growth drivers of our products in Asia. A short while ago, I talked about the growth of the Nikkei 225. A lot of that liquidity is not just in the North American time zone, but also in the European and Asian time zone. With the addition of these additional FCMs and their client base, you can expect to see tighter liquidity spreads, both in Asia, as well as Europe. So there's different opportunity sets in Europe, as well as in Asia, both of them targeting the core, and Europe having the additional element of folks looking at the OTC clearing solution that we have, too.

Our next question comes from Mikael Vadia [ph] with Rosenblatt Securities.

Just a question on market data and access fees. Is there anything to highlight that might change the trend that we've seen in these 2 lines? They've been declining a little bit over the last few quarters. Just any update on trends there?

Yes, we've seen some continued pressure on the terminal count, basically due, as we said before, to tightening of employment on Wall Street and the efficiencies that firms are looking for there, but also tied to incentives that we -- legacy incentives that we've offered over time. So we're taking a look at the full picture going forward to see where and how we can drive more value out of that business.

And that would be market data?

Yes.

Do you have any timing on when some of these incentives might roll off?

Not at this point.

Okay, anything to note on access and communication fees?

Just on the access and communication fee revenue line, it's behaving as we said we believed it would at the end of -- when we gave the guidance at the end of the last -- at the end of Q4. So nothing of note there.

And next question comes from Gaston Ceron with MorningStar Equity Research.

Jamie, I just wanted to go back to the OTC pricing issue. I don't know if you mentioned this and I missed this, but I think stabilizing -- you look out over the longer term, I mean, are you still looking for that $5 to $6 range that I think you guys mentioned in the December call? Or is the ultimate kind of settled base a little bit more unclear at this point?

I'd say it's unclear, because remember the $5 to $6 base was for the customer set -- the pure customer set that aren't the higher turnover folks, the high turnover folks we put that incentive pricing in for. And obviously, the mix is going to be something less than the $5 to $6. And as we said earlier, it's not clear yet when and if we'll take those incentives off. So still an open question. But the $5 or $6, as we moved through the process and learned more, it was really tied much more to a particular customer set versus those high turnovers.

And next question comes from Ken Leon with S&P Capital IQ. Kenneth M. Leon - S&P Capital IQ Equity Research: The question I have is on regulation. And with a change of the profile, the CFTC at the commissioner level, what do you think are the 1 or 2 burning issues that are going to be in front of us for the next 6 to 9 months?

It's Terry Duffy. I'm not quite sure what changes at the commission we're going to see yet. There's been a lot of speculation as to whether the Chairman will maintain his position or not. There's speculation that other commissioners, whether be there or not. We do know that Commissioner Summers is the only one that's announced to date and has left. So that's the only one for sure that we know is going to be changed. So the rest of it is purely speculation on the makeup of what the commissioners is going to look like. I think some of the issues that we're going to look going forward over the next several months are on some of the cross-border issues that we have still yet to be resolved. They were, as you know or may not know, they were punted for 70 to 75 days as of last July 15. And one of the big issues is 1-day margin in the United States versus 2-day margin in Europe. We do twice daily mark-to-market where Europe only does it once a day. So essentially, we do have 2-day margin. I think there's a misdirect on margin and people are using it as a political scapegoat in the regulatory environment, because our margin is based on risk-based according with the product, not just on days. The days is just a minimum. But I do think that, that is one of the issues that will take center stage. The other issue could be the residual interest issue for some of our smaller FCMs, which could be a problem for them. So we're working very closely with the smaller FCMs and the commission to make certain that they don't get into a situation where the cost of doing business with the American agricultural community and others is going to be impacted. So I think those are 2 of the big pressing issues over the next several months. Kenneth M. Leon - S&P Capital IQ Equity Research: And was the cross-broader issue a big part of the conversations in the travels that you guys have -- I imagine you've done overseas?

Yes, I just came back, and so did Gill. I was in Europe and Gill was in Asia. One of the pressing things that I heard from all the clients was a concern about access to U.S. markets and to make certain that they would have that ability to do so. I do believe that the participants in both Europe and the United States will have enough pressure on their regulators to make sure that there's a harmonized regulatory environment so everybody can use these global markets to do their risk management. So I do think that cooler heads will prevail and the regulators would come up with a solution that makes sense for everybody. I think, right now, we're still, I hate to say it, but we're in kind of a silly season in Washington right now and people are getting ready to go out, and there's not much going on. So we'll get more clarity as we get into September.

And our final question comes from Brian Bedell with ISI Group.

I just have one quick follow-up. Just on the volume trends into summer. Obviously, we're getting to the weak seasonal season. But to what extent are you seeing a pare-back in high-frequency trading affecting volumes? I think we're seeing it in some other asset classes as well. Maybe if you can comment on that for CME volumes and to the extent you think the -- sort of the weak July volume trends also continue into August, given seasonality and/or HFT?

Brian, this Gill. Clearly, there are more people that want to talk to you about the house, and I'm going start. The volume drop-off that you are seeing is very typical and not driven by any one client type. It's just a typical drop across-the-board. But keep even that in mind, taking the rates, for example, where many people are focused on. Our July rate volume is actually up 25% versus July last year. And the volume level of 4.9% in this past month is not unusual as you compare it to the early part this year. And even April of this year, there's only a 4.8%. So we're seeing volume levels that I would say are very typical for this time of the year and not at all attributed to any one client class. Bryan or Jamie?

Very well said.

At this time, I'm showing no further questions. I'll turn the call back over the speakers.

Thanks very much, guys. As I said a short while ago, there's a lot of work left to be done, and we look forward to talking to you guys next quarter. Thank you.

Thank you. This does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.