CME Group Inc. (CME) Q3 2013 Earnings Report, Transcript and Summary

John C. Peschier - Managing Director of Investor Relations 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 Derek Sammann - Senior Managing Director of FX, Metals and Options Solutions Sean Tully - Managing Director of Interest Rate Products Terrence A. Duffy - Executive Chairman, President, Chairman of Executive Committee and Member of Strategic Steering Committee Kimberly S. Taylor - President of CME Clearing House Division Bryan T. Durkin - Chief Operating Officer

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Howard Chen - Crédit Suisse AG, Research Division Alex Kramm - UBS Investment Bank, Research Division Jillian Miller - BMO Capital Markets U.S. Daniel Thomas Fannon - Jefferies LLC, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Christopher J. Allen - Evercore Partners Inc., Research Division

Welcome to the CME Group Third Quarter 2013 Earnings Call. [Operator Instructions] At this time, I'll turn the call over to Mr. John Peschier. You may begin, sir.

Thank you, and thank all of you for joining us this morning. Gill and Jamie will spend a few minutes outlining the highlights of the quarter, and then we'll open up the call for your questions. Terry, Bryan, Kim and Bob Zagotta, Head of Products and Services, are on the call; while Sean Tully, our Head of Rates and OTC; and Derek Sammann, who is in charge of Options, FX and Metals. Before they begin, I'll read the Safe Harbor language. Statements made on the call and in the slides on the website 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 this morning. I'm going to highlight CME Group's third quarter, and then turn it over to Jamie to review our financials. Our focus this morning is about what's new and relevant during the quarter. We've made some good traction since our last earnings call in terms of the core business and expanding our OTC clearing activity. Within our core futures complex, third quarter average daily volume was up 11% compared to the same period last year, driven primarily by continued strong growth in interest rate and mad metals. We drove strong growth in electronic trading volumes outside the U.S. in our entire business. For the third quarter, Latin America volumes are up 23%; Asia volumes are up 22%; and in Europe, activity rose 15% compared to the third quarter 2012. We have been investing considerable time and effort in these areas, and I'm glad to see it driving volume and revenue growth. In addition, we are making a concerted effort to drive growth in our options business globally. This business increased by 31% in third quarter 2013 versus last year. Both interest rate and equity options were up 54%, and FX options rose 32%. In September, our treasury options reached an all-time high of 57% electronically traded on CME Globex. Overall, in October, approximately 48% of our total options volume traded electronically compared to 35% in all of 2012. Additionally, options trading from European clients jumped by more than 100% in Q3 to more than 100,000 contracts per day. Asia and Latin America were each up over 70%. Lastly, within the natural gas options, our market share jumped above 70% in September compared to a range of 50% to 60% for much of the year. As I mentioned, one of the main drivers of the top line growth this quarter was interest rates. Average daily volume was 5.8 million contracts per day in Q3, up 27 -- up, I'm sorry, 29% versus Q3 2012, and open interest to-date through October was -- is up more than 60% since the beginning of the year. All 4 of the major components of our rates business, Eurodollar futures and options, and treasury futures and options, were up more than 20% in Q3. Eurodollar options volume had particular strength, up 56%, with volume rebounding in the front month of the curve during September, which we haven't seen in a long time. That is illustrated on Slide 10 in our earnings deck. Turning to interest rate OTC clearing. We continue to see a dramatic increase in our credit swaps business. Our market share in the dealer-to-client business has grown from 5% in Q1 to 14% in Q2, 31% in Q3 and 33% so far in Q4. We averaged $81 billion per day in the third quarter, doubling the activity from the second quarter 2013. So far, the fourth quarter is up 26% sequentially to $102 billion. Now that the 3 waves from the Dodd-Frank clearing mandate are behind us, the market is shifting from a compliance phase to an optimization phase. This is a common scene we hear from market participants in our meetings. With increasing client demand for greater capital efficiencies, we now have 6 clearing members live with portfolio margining of cleared OTC interest rate swaps and interest rate futures, including a few who started offering their solutions to customers within the last month. In addition, product expansion has also played a key role in market share gains. During the third quarter 2013, we launched the Singapore dollar, which is our 17th interest rate swap currency and puts us in line with our competitor. Open interest within OTC is something we and market participants are monitoring closely as we move closer to 50% market share. Interest rate swap open interest is currently north of $7.4 trillion and has increased by more than $3.2 trillion since our last earnings call. During this time, our main competitor has added about $500 billion. Clearly, we have done extremely well attracting Phase 2 clients, made up primarily of asset managers, insurance companies and GSEs, and we are pulling in more high turnover customers as well. The bottom line is winning the dealer-to-customer OTC business strengthens our overall franchise and opens up avenues for core revenue growth. Although it is very difficult to quantify and is still in early stages, we are seeing evidence that our interest rate complex is benefiting from a migration of activity from OTC into futures. Since May, we have seen more than 20% growth in our interest rate complex each month when compared to the same month of the prior year. This year, we have seen a significant shift in the use of treasury futures versus cash treasuries as evidenced by cash market penetration, which you can see on Slide 13. Our interest rate nonmetals percentage, which tends to be driven by the so-called real money clients, rose nicely from Q2 to Q3, which helped the rate per contract. In addition, if you look at the CFTC commitment of traders who bought on our website, it shows a noticeable increase in asset management participation within Eurodollars increasing from 11% of the open interest to more than 15%. Lastly, our Deliverable Swap Futures activity continues to grow. We had the strongest roll month in September. And building on that, in October, we had the strongest non-roll month to-date. During the turbulence of October, we performed relatively well despite market uncertainty related to the debt ceiling and the government shutdown. During several weeks, economic data was not readily available, and in some cases, the market adopted a wait-and-see approach as the situation developed. Nonetheless, we did what we do best, which is to continue to provide an avenue for our clients to manage risk and express their views. In October, our total average daily volume was up 12%, with rates up, as well as equities, which benefited from heightened volatility during an interesting month. I'm very excited about the growth trajectory of the company, and our entire employee base had done a tremendous job focusing on execution in the midst of a challenging macro backdrop with low interest rate environment. Now I will turn the call over to Jamie to discuss the financials.

Thank you, Gill, and good morning, everyone. Q3 was a solid quarter in many respects. Average daily volume was up 11% compared to the third quarter last year, outperforming our major peers. Adjusted EPS came in at $0.75, excluding FX-related benefits and several tax impacts. We have seen a drop in our overall tax rate this quarter, and the benefit will be ongoing, which I'll touch on later. Now let's get into some of the details, starting with revenue. The rate per contract for the third quarter was $0.762, up from $0.748 last quarter. The main driver was strong nonmember participation during Q3 relative to Q2, particularly in interest rates and energy. OTC swaps revenue for the quarter was up almost $5 million sequentially to $11.5 million, driven by a 100% jump in interest rate swap clearing activity. In addition to our success in attracting real money clients, we have also been successful in executing our strategy to attract high turnover clients, primarily large hedge funds, which on a sequential basis, led to a contraction in the average rate per million. I want to clarify that although the rate we capture has decline due to an increase in the mix of high turnover participants, we have been able to substantially grow the higher-paying customer base as well, which includes asset managers and insurance companies. During the third quarter, the total notional amount cleared by this customer segment was up 115% sequentially, with revenue up 94%. In comparison, during the same time frame, the total notional amount cleared by the high turnover participant base was up 138%, and revenue was up 125%. Overall, as Gill noted, we are pleased to see IRS in dealer-to-client market share jump from 5% in Q1 to 33% so far in Q4. Our Q3 interest rate product line revenue was up 32% to $181 million. And if you add the incremental interest rate swap revenue, the total rates related revenue was up 40%. That's our thinking about this business. The OTC clearing business is strengthening our overall interest rate franchise. Moving on. Total third quarter operating expense was $314 million, which included a foreign exchange benefit of $12 million, reversing the Q1 FX expense of the same amount. Excluding the FX benefit, as well as other items noted in the reconciliation, expenses would have been $325 million. As you'll recall, I guided to a higher expense level for the second half, and that is playing out. A couple of different areas that impacted us this quarter. The primary contributor to the sequential increase was in professional fees, which tends to have more variability than other expense lines from quarter-to-quarter. This was up $7.7 million versus prior quarter, due to an increase in IT and legal consulting fees, higher market studies expense and higher public relations and brand consulting fees. Within the compensation line, we had $3.2 million of deferred comp expense based on the strength of the equity market during the quarter. Keep in mind that this expense is offset 100% in the interest income line. Lastly, in Q3, license fees did not fall as much as would be expected from the seasonal decrease in equity volumes, as we are now recording our OTC revenue share expense in this line item. Turning to nonoperating income. The main thing to point out is interest expense dropped from $39 million to $35 million based on the pay-down of $750 million of debt in August. We expect that to increase back to $40 million in Q4 based on full quarter impact of the debt we took on in early September and an increase in our clearing house credit facility. The total interest expense and borrowing cost line is expected to drop by $30 million in 2014 to approximately $123 million from $153 million this year. We had put in place an interest rate lock in August of 2012, which generated $128 million, which is included in our current cash balance, and which also reduces the all-in accounting effective rate on our recent 30-year bond issuance by about 50 basis points to 4.8% per year. With respect to taxes, excluding the FX impact and noncash deferred tax items, as well as other prior year tax benefits, the effective tax rate was 35.6% this quarter. Turning to the balance sheet. We had almost $1.4 billion of cash and marketable securities, along with an additional $750 million held in cash for the February 2014 debt pay-down. During the third quarter, capital expenditures, net of leasehold improvement allowances, totaled $36 million, bringing us to $91 million so far this year. In terms of guidance, I said last quarter we expected 2013 expenses to range from $1.25 billion to $1.26 billion, and I anticipate that expenses in Q4 will be close to $325 million, which means we expect to be nearer $1.26 billion, including $6 million of deferred compensation expense year-to-date. In terms of CapEx, I expect between $130 million and $140 million for the year, which is down from my prior estimate. Within market data, we recently announced to clients we are expanding our fees for professional screen from $70 per month to $85 per month beginning in January 2014. We are making very good progress in the sale of our building in New York City. Contrary to some media reports, we have not yet closed the transaction, although we are working diligently to complete it by year end. Assuming we close it, we plan to include the net proceeds in our annual variable dividend. For modeling purposes, you should know our cost basis for tax purposes is fairly low, so apply our tax rate to whatever you assume we will sell the building for to arrive at estimated cash flow. In contrast, there will likely be a loss for GAAP purposes as the building had been revalued on our balance sheet at the time we merged with NYMEX. Lastly, we've made some great progress on the tax front. We had previously guided in the 38% to 39% range. At this point, we expect 37% to 38% going forward in Q4 and beyond. 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. [Operator Instructions] Thank you.

[Operator Instructions] Our first question comes from Rich Repetto with Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: My question is on the OTC, Jamie. So it looks like in the quarter was really the tail of whatever 1 month -- or it was improved overall, but you're doing roughly $60 billion in the first 2 months and then $120 billion average in September. So I guess, the question is on the rate, what was the rate exiting when you really did -- when you jumped the average clearing level up to $120 billion? Was it above the $2.15 rate per million we calculate right now for the quarter?

Rich, if you look at the interest rate swap rate for the quarter, excluding CDS, we're around $2.70 per million for the quarter. And as we said in the -- as I said in my remarks, there was an increase -- bigger increase in the high turnover players than there were -- than there was in the real money players, resulting in kind of that decrement versus the prior quarter. Also in the quarter, we saw some of the shorter-dated products like FRAs and OIS grow as a percentage of the volumes. So there were about 22% of volume in Q1. They've grown to about 33% in Q3, and we're continuing to see that mix grow somewhat. And in September, it did grow versus August, and we did see a growth in the higher turnover relative to the real money in September as well. So likely, you would see a decrease in the September rate going coming out of the quarter. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Okay. And would that continue into -- October's running at about $100 billion. So similar trend, is that fair to say?

I haven't dived down into the October numbers yet. So it's hard for me to say exactly. But you'd think that those trends look like they were moving in that direction, so perhaps. Just overall, we're very pleased with the business, pleased to see the growth that we're getting there. And as Gill mentioned, it's really, I think, helping us in our core.

Our next question comes from Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: A question for Jamie as well, this one on the variable dividend. Jamie, cash continues to build up nicely. Can you just update us on how much cash and working capital you'd like to hold for the business and tuck in acquisitions? And should we think of the $128 million of proceeds from that August interest rate swap lock as eligible for this year's variable dividend something you also want to pay back to shareholders?

Yes. Thanks, Howard. Yes, on the proceeds from the interest rate lock. That would just go into the cash balance that we would consider for a return. We haven't changed our guidance on the amount of cash we want to hold. Minimally, we want to have $700 million on the balance sheet to cover our skin in the game in the various financial safeguards package -- packages, as well as to have a little bit of cushion there. So that hasn't changed at all.

Our next question comes from Alex Kramm with UBS.

I guess, a little bit more big picture. I think one of the things Gill highlighted was the excitement about the options and the really strong growth there. So maybe you can give us a little bit more detail what really this is driving? I mean, is this just the macro-environment? Because you had talked about the low volatility environment little bit. But how much are you actually driving this to? I think a few years ago, there was a huge drive to get options a little bit more electronic. Are you educating your customer base more? So I guess, what I'm getting is, is this more macro? Or is this -- do you think this growth is sustainable and will continue even in a better, more volatile environment?

Alex, this is Gill. I'm going to start, and I'm going to ask Mr. Sean Tully and Derek Sammann to add in their particular asset classes. I think, on both of those notes that you mentioned, there is a big macro affect, where the direction is clear, but the timing of the direction is not clear. So in times of uncertainties, such as those options become a very valuable tool. Regarding the electronification of options, it has been an effort of ours, particularly, I would say, in the last 9 months or so. And if you -- the results there across all the asset classes. Sean or Derek, would you like to add?

Sean, you're on the rates side?

Sure. If I could jump in on the rate side, I think the question was in terms of the macro pictures, as well as driving the volumes. In terms of driving the volumes, over the last few years, we bid in a number of new interest rate options products. We added the weekly treasury options, the long green Eurodollar options, the blue mid-curve options, the gold mid-curve options, the purple mid-curve options. So we have been driving with increased product relative to the macro-environment. There's no question, the macro-environment has been very helpful, while the Eurodollar options in Q3 of this year versus Q3 of last year was up 54%. We had red mid-curves, for example, up 265%, and green mid-curves -- these are, again, mid-curves on the Eurodollar options, up 262%. But in addition to that, if we look at new products on the interest rate side, mostly options based over the last 3 years, they've contributed 315,000 ADV in Q3.

And just adding to that, I think, taking a step back in terms of the broader options business, we transacted a little over 2.2 million contracts in our options across-the-board across asset classes, and what we're recognizing is the scale and the scope of our cross-asset options is unique to this business. It's also unique in that volumes on the options side drives income from volumes for the delta hedgers into our futures business as well. So that incremental increase of electronification from 43% from 35% last year is significant and very intentional on the part of our sales teams in our effort to approach the market with a broader options sales pitch and the core capabilities that CME Group has across asset classes. You'll see here more from us on our overall options business going forward.

Our next question comes from Jillian Miller with BMO Capital Markets.

So you guys, from what I recall, haven't changed your pricing tiers and rates, products since -- I want to say, since 2008. And more recently, you've had some really strong volume periods. And particularly on the long and the mid-curve, I think you're tracking above precrisis volume levels for 2013. So I just wanted to kind of see what your thoughts are on the potential opportunities for raising volume tiers, especially in the treasury products, just given the more positive volume outlook?

Yes. This is Jamie, Jillian. I think you're absolutely right. Before the crisis hit roughly every 18 months or so, because of the way the volumes are growing, we were adjusting our tiers, particularly on the interest rate products. We pulled back from that, obviously, during the crisis as our customers were suffering as well. But as we come out and as we see sustained growth in those volumes, we'll certainly be taking a look at that.

Our next question comes from Dan Fannon with Jefferies.

I guess, Jamie, just thinking about expenses, maybe into -- even into next year when you're budgeting, if we look at kind of the last few years and the revenue environment, assume that continues into next year, is there any either step-up, step-down or movement in expenses that you would highlight, given kind of the investments you guys have been making and potentially need to make going forward?

I think what you've heard us say before is over the long run, we would anticipate our expenses to grow in the mid-single digits. I don't anticipate it being too different than that in the coming year. Certainly, we've been making investments over the last several years in growth opportunities, so those -- many of those are already built into our base, although there are, obviously, incremental expenses as we grow those offerings further. So I don't see any giant moves. I mean, one of the things I highlighted in my comments was the -- while overall interest expense is lower, there is a higher expense next year because we have a significant increase in our clearing house credit facility. Going into next year, that will be one thing that we'll add, as an example, but will look for other ways to control expenses.

Our next question comes from Neve Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: The residual interest -- I guess, the CFTC just passed last week, say, various consumer protections. But one of the issues that's been kind of a discussion topic among all the FCMs has been the residual interest requirement and how that's going to significantly increase the capital they'd be required to keep. And we think it's going to be really tough for some of the smaller FCMs to stay in the business to that effect. How do you think about how these impact your business? Because I've heard how your chairman's presented to regulators their thoughts on it, and it didn't seem very positive. So help me think about, okay, it's been passed, so what's next and how to think about potential impacts?

Neve, Terry Duffy is on the line. Terry, are you there?

Yes, I'm here, Gill. Do you want me to start, Gill, or no?

Sure.

Neve, on that residual interest, and as you know, we felt that was a very flawed proposal from the beginning. We worked very closely with the smaller FCMs and with the agricultural community. I testified just as well as 2 weeks ago with the agricultural community and other participants, and it was the first time in my 20-year history that I've seen all sides -- both sides of the aisle agree that this rule was not -- it was fought with all kinds of dangers, and it was, obviously, the CFTC took notice, and they switched to the rule, which was originally an FIA proposal, which has nothing for the first -- next year, so it will stay as the same as it is. And then it'll go to the T1 at 6:00 p.m. the following day, and then 5 years from now, it could go to 9:00 a.m. So that's 5 years away that could happen. We're going to continually work with ag groups and with the CFTC and with the folks on the Hill to make sure that we get the 5-year piece removed from this. It makes no sense. If it made any sense at all, they would have been posted on day 1, not 5 years down the road. So we feel fairly confident that this residual interest rule is basically dead.

Neve, if I can add, I think the CFTC, to the Chairman's point, has also committed to complete an analysis in the next 2.5 years or so. And I think the experience that the FCM community shares in the next 2.5 years is going to be important with respect to what the CFTC would decide. So the compromised solution that they came up with was to extend the time. I think the next few years is going to be very important here.

Our next question comes from Ken Worthington with JPMC. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Just on the interest rate swap volume. It still seems pretty tepid versus original investor and also market participant expectations. I guess, first, do you share this view? Second, is there an explanation? I guess this could just be early days, and there's more volume to come, or maybe there's something that we've all just been missing. And then third, given the size of the OTC market, there would still seem to be the potential for meaningful upside like orders of magnitude, better volumes than we're seeing today. Is that potential still realistic? Or based on what we have seen and maybe now know, is that really off the table?

Ken, I'll ask Sean to chime in on this.

Sure. I think we've seen very good growth. If you look at our market share this year, it went from 5% in Q1 to 14% in Q2 to 31% in Q3 and 33% so far in Q4. So we have seen a very good growth. That 33% market share is of the dealer-to-customer business, and obviously, that's being driven out of the Dodd-Frank regulations where we've seen a Category 1, Category 2, Category 3 phases this year. We do expect further growth. We do expect increased -- hope for an increased market share. But in addition to that, we will see increasing products. As Mr. Gill have mentioned earlier, we're now clearing 17 different currencies, but we'll be -- we will continue to increase our product scope with increases -- we will be adding emerging -- some additional emerging marked currencies in the near future. And there will be other OTC products that we'll be adding. In addition to that, you have to look for Europe. The mandate to clear has not yet hit Europe, and we expect the mandate to hit Europe, probably, the end of 2014 or sometime in 2015. So with the increased product scope, increased market share, as well as increased requirements to clear, we think there's a lot of runway. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. But Europe is about 1/2 the market though, and we're clearing $100 billion a day. That doesn't -- still doesn't get to the orders of magnitude that the size of the market might have originally suggested. Any thoughts there?

Yes. We've been focused on the dealer-to-customer business. Obviously, the dealer-to-dealer business is quite large as well. And we believe that with our portfolio margining, we have a unique value proposition, where people can portfolio margin between CME's interest rate futures and our -- the swaps cleared at CME Group. We believe that we'll be able to penetrate other parts of the market as well.

Our next question comes from Chris Harris with Wells Fargo Securities.

Just a numbers question here. The fee increase you're going to be expecting in market data beginning next year, what kind of impact do you expect that to have on revenue?

If you were just to hold terminals constant, which you have to make your own estimates about that, but if you held terminals constant, I want to say it's roughly a $50 million impact on revenues next year, again, assuming that you don't see a decrement in terminals as a result.

Our next question comes from Chris Allen with Evercore.

Actually, if I could just follow-up on that question a little bit. The fee increase per screen, it's about 21% this time versus roughly about 12% increase for the last 2x you increased it. I'm just wondering: a, what's driven the magnitude of the increase here? And also if could you give us any sense in terms of what's been the usual screen decline when you see in your revenue -- I'm sorry, the rate increases before?

Sure. When you look at the rate that we're putting in -- the new rate that we're putting in place, it's, I'd say, very competitive. In fact, I want to say it's below what some of the key competitors have out there now or what they've announced. So we feel very comfortable around that. If we look at what's happened in the past around terminals, it very much depends on the environment that we're in. If you went back several rate increases ago, you wouldn't really have seen much of an impact on the number of terminals. The last one, you probably did see more of an impact, but it's also coupled with some legacy -- issues around some legacy incentives that we have in place, and we're taking a look at those as well.

Our next question comes from Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Just broad regulatory question. We've seen some stops and starts for the CFTC SEF mandate. With, I think, the expiration of the no action in the last week, I was just hoping you could talk about what you're seeing in the market and what you're hearing from customers.

Howard, this is Gill. I'll stop, and I'll ask Kim to add as she's been working with a lot of the firms. I think on the SEF front, they're still in the very early stage -- stages, a lot of FCM, in particular, are a little bit concerned about the lack of consistent rules and a lot of these so-called SEFs have. The SEFs are working very closely with both their clients, as well as the FCMs to try and get these trades done. There's some confusion when trades coming from a SEF versus from some other venue. It doesn't give the FCMs, particularly the large FCMs, enough time to accept the trades. That's one example. So there's a lot of what I'll call early stage pains that both FCMs, as well as client and SEFs are going through, and those things will shake themselves out in the coming weeks.

The only thing that I would add as another example of the way that the SEF mandate is changing the way business is done. And actually, we're very well positioned to benefit from this change in this particular respect and with regard to bunched orders. The execution of very large orders, and then the allocation of those orders out to multiple accounts, the way that the workflow for that occurred prior to the SEF mandate is very different from the way that the customers want it to occur going forward, and we've already been able to accommodate the ability to do what I'll call post-clearing allocations of bunched orders, which was a new service, and being very well received. Howard Chen - Crédit Suisse AG, Research Division: And my second follow-up, Gill, you highlighted the global expansion. I was hoping you could just dig a little bit deeper into Brazil, specifically in your various partnerships with BM&FBOVESPA and give us a deeper update there.

Sure, Howard. The growth rate for Latin America is very high. The base volume that we are working off is still low. It's about $60 million, I think, we're going to get in for the year. The Brazilian environment, as you know, continues to be a challenging one, and we are working with both the exchange, as well as the various regulators there to talk about the timing of the change -- changes of some tax laws that have to take place before the Brazilians can take advantage of what we are offering. I'm also going to ask Bryan to chat a little bit on what he's seeing there.

In anticipation of change occurring from the macro-environment, we've really intensified our efforts in developing central bank programs. So we're -- we've got boots on the ground where we're intensifying the educational efforts and the draw of business into our panoply of products. So we're very pleased to see the growth trends, given the fairly muted environment that we're working under and just positioning ourselves for that change.

[Operator Instructions] Our next question comes from Alex Kramm with UBS.

A couple of follow-ups for me, too. First of all, Jamie, from -- on the licensing fees, you talked about, I think, the OTC revenue sharing there. But in general, can you just maybe remind us what's in there and maybe the magnitude of the differences just in terms of the equity, fees with S&P and the ClearPort OTC fees and then also, I guess, on the clearing side, or whatever else is in there and how that's been trending?

Sure. On the -- you hit all the main components. It's the equity license fees from S&P, NASDAQ, Dow, et cetera, are in there. You've got the ClearPort fee sharing, and you've got this, now, the OTC revenue sharing. So generally, I'd say the equity license fees are the largest component, followed by the energy component and then followed by the OTC share. Just to be clear, in this quarter, the OTC revenue share amount that we booked in there included some catch-up for prior quarters as well.

Okay. But you can't give us exact numbers or anything close in terms of percentages?

No.

And then secondly, just coming back to, I think, Howard's original question on the dividend and the appetite there. I mean, it looks like you have, I mean, significant cash buildup, and there will be more by the time you want to pay this dividend. So if you think about the variable dividend, do you really still see or does the board when you talk to them still view this as a true variable onetime? Or could you make an argument where you should bring it up in nice amounts from last quarter, and then maybe over from last year, and then maybe start thinking about repurchases a little bit more again? Or is this really just, this is what it's going to be and expect most of us to be paid out?

I would say that the philosophical bend is absolutely towards the dividends, so I wouldn't expect any buybacks of any significant nature going forward, at least in the near term. And it's the -- you called -- you said onetime around that dividend, but it is really an annual variable recurring dividend. So I think it's a bit of a unique structure, as we've discussed before. And I'd say both the board and the management is very comfortable with the way that's been working out.

Our next question comes from Chris Harris with Wells Fargo Securities.

Broader finance question. How should we expect your capital needs to change as your swaps business gets larger?

The amount -- you mean, our capital requirements on the organization?

Exactly.

I don't see them changing all that significantly. The capital requirements tend to be, for the most part, tied to the size of the annual expense for the business. So I don't see large increases there. And then we also size our contribution to the financial safeguards package in a very conservative fashion, so we feel very comfortable with the amount that we've got there as well.

Our next question comes from Jillian Miller with BMO Capital Markets.

On portfolio margining, I know you said 6 clearing members are live, but I just want to get an idea for what percentage of your business that represents. Like, are we talking about 10% or 15% of your cleared interest rates swaps that's benefiting from that now? Or is it 50% or more?

This is Gill. That 6 clearing members and their participation is yielding about $1 billion worth of margin savings, and it's currently a small percentage of the overall business. So firms are still coming up to speed there.

Does that -- does the rollout of that, I guess, to a larger percentage of your business, does that mean that you're going to gain more share? Is that your expectation? Or do you think that everybody's kind of already baking that eventuality into where they're doing their business right now?

I think from an anticipation point of view, a lot of firms have started to test how this would actually work because it can be -- unless you have automated the process, it can be very manually intensive. So what a lot of firms have been doing over the last 6 months or so is making sure they have the process to automate those spreads. The opportunity beyond the existing open interest on the rate side against the OTC open interest is on a going-forward basis, as firms can put on or clients can put on positions that are risk-minimizing or risk-neutral on a going-forward basis and eventually get to an optimized state, where they can use some portion of their business will be in futures and options, and some portion would be in swaps. So there are 2 ways to look at this opportunity: one, with respect to the existing open interest in the futures side; and secondly, on a going-forward basis, with the deliverable swap futures, the clearing of the swaps, and more development on the futures side would be the opportunity that our firms would have.

And just to add on to that. I mean, I think, we have to keep in mind that we're just off the heels of the mandate states themselves. And so in our interaction through our sales calls, the firms are saying, "Look, first and foremost, we need to make sure that we just got compliant." Now we're really spending our time on how to most effectively utilize our capital and any opportunities that you have. Specifically from a margin savings perspective, we're very keen to be able to test and see how that benefits our firm. So we're going through that optimization phase now.

Okay. And then just -- can you update us on the London exchange? I think it's been delayed a couple of times. I'm not sure exactly why and what the expectation is for that.

Yes. This is Gill. The delay has to do with a technical issues surrounding the delivery of foreign exchange. So we are working very hard with the Bank of England and the FCA, and we hope to have an announcement very soon there.

Our next question comes from Rich Repetto with Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Just to follow up, I guess, on regulation for Terry. And it looks like the EUREX has put in some curves or very, what do you call it, far-out curves on high-frequency trading on order trade ratios and usage fees. And I guess, the question, Terry, do you think this is just their response to pressure that was just geographical in Germany? Or do you think that this is a trend that you guys might look at? And I know the equity exchanges didn't really follow up through, but you do got the concept release. So I guess, what do you think of what EUREX is doing in that area?

Rich, I don't have the detailed information on what EUREX did. I can only go off what I've said publicly and what others have said publicly. We think that HFT trading as deposal liquidity, which benefits the participants and duly risk transfer at the lowest cost price. So we focus on the regulatory issues around HFT, and then make sure that we can show confidence in the marketplace that nothing nefarious is going on, and we've done a really good job doing that, and we're going to continue to support that model. There's no reason for us to change our structure right now as it relates to HFTs -- because again, we think they had deposal liquidity to the marketplace. So again, I'm not up to speed. Others in the room might have a better idea of what EUREX did.

I would just add to what the chairman just stated that the main focus of what we're looking at in the context of this whole topic is ensuring that you have the appropriate risk management mechanisms in place, many of which we're -- we've been an industry leader in dealing with credit controls, dealing with a appropriate level of order-to-trade ratios in terms of messaging policies, to maintain the efficiency of the experience for all users on a platform. So from our perspective, I think, as the chairman indicated, we've held a pretty firm line in that respect in terms of the benefits of this type of user base, but ensuring that we have the appropriate protocols in place to ensure a consistent experience for all market users.

Let me just follow-on real quick because what I will say is, as you know, we've dealt a lot with over speculations in the energy markets over the last several years. We're in Washington quite a bit as you know. I do think that you will see a lot of headlines as relates to the HFTs that we have over the last several months. That won't go away. That doesn't mean anything's going to change, but the headlines will still remain to be there.

And our final question comes from Neve Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: I guess, maybe, if you could pick which one you want to answer then or maybe I'll get both, but the access fees and collocations, things like that. And that had been something that you had been guiding to grow as you build out the data center, and that was something kind of you have been investing in for some years. So can you help me there, Jamie, and think about the growth potential in that revenue line? And then you've mentioned it in your prepared remarks as well, and I'm wondering if Sean might or Derek might address it, it's just some anecdotal evidence of futures instead of swaps. I mean, what data points are you looking at for evidence of this? I mean, you're closest to it. We're watching open interest as well. But what are the areas could you point to us to kind of look at, maybe some futures credit instead of swaps, instead of just clearing swaps as the way of your kind of revenue growth?

On that first one, Neve, I'll just say we're not prepared to give any updated guidance around collo. Certainly, we saw kind of people rationalizing the space that they were taking the facility. We have seen some customer growth there. And you just keep in mind that it is still a very profitable business for us. I want to say the margins this last quarter were well -- were over 50% in that business. So as you know, very -- it's a very good addition for us, and it's going to be market driven. So we'll continue to wait to see where the demand comes from and look for new ways to leverage that facility. Yes, Sean. Sean, you want to add a little -- talk on that second point?

Sure. In terms of the move of people into our futures complex, we're seeing it in a couple of different ways. We look at a cash penetration -- or cash market penetration of our treasury futures. That is a metric that we've been following for a number of years. We recently reached a new peak in that. And although that's fallen off a bit in the last couple of months, we do remain around the peak level. So we did exceed the 2007 peak. Another way, anecdotally, that we look at this is we can look at EFRs, or exchange for risk transactions, which are spread trades between CME treasury futures and interest rate swaps. In the kind of traditional interest rate swap world, a very popular trade is in interest rate spread or a transaction which is an interest rate swap traded as a spread to a cash treasury instrument. In the new world, it's far more efficient to represent that trade as a CME cleared interest rate swap against the CME interest rate future. So our way of representing it now represents nearly the same risk, but you can get up to 85% margin savings relative to the portfolio margining that we talked about earlier. In terms of EFRs, if you look at volumes in 2013, overall year-to-date volumes in 2013 versus 2012, average daily volume in 2012 was about 19,000 a day. 2013 was about 48,000 a day so far. So we're seeing a very large increase in people beginning to look at ways to use our unique value proposition, I think, for the portfolio margining with interest rate swaps, plus our futures complex, to represent strategies that have been in place for a long time, but in a much more efficient manner.

Just a couple of things to add to that. The member, nonmember mix has trended positively over the last few months. In interest rates, you've seen a pickup of about a 1% nonmember mix there in this quarter versus last year. And then finally, as we noted in the prepared remarks, the interest rate revenue is up 40% in total versus last year. So I think all those are supportive of what Sean was pointing out.

I think, at this time, I'll turn the call back over to the speakers.

Well, thank you, everyone, for joining us this morning, and we look forward to talking to you in the next quarter. Thanks very much.

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