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CME Group (NASDAQ:CME)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

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 Financial Products & Services

Bryan T. Durkin - Chief Operating Officer

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

Analysts

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

Alex Kramm - UBS Investment Bank, Research Division

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Jillian Miller - BMO Capital Markets U.S.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Akhil Bhatia

Unknown Executive

[Audio Gap]

on our website. Also, note the final page of our earnings release contains a reconciliation to our GAAP results this quarter.

Now I'd like to turn the call over to Gill.

Phupinder S. Gill

Thank you very much, and thank you all for joining us today. I'm going to highlight CME Group's first quarter, and then turn it over to Jamie to review our financials.

We experienced a solid start of the year. First quarter average daily volume was 12.5 million contracts, up significantly from the 10.5 million contracts we averaged during the second half of last year. Open interest has jumped 18% year to date, up to 82.3 million contracts. Additionally, the first stage of the OTC clearing mandate was completed successfully, with cleared volumes roughly double what they were prior to the mandate.

Let me turn to the highlights of our core business. In the interest rate complex, we successfully grew volumes in open interest, up from the levels that we saw in the second half of 2012. Treasury volume has been particularly strong to start the year, with first quarter ADV of $3.4 million, up 24% compared to the same period last year. This included a Treasury futures monthly record of 3.8 million contracts in February, up 33% over the prior February, and we reached a daily all-time high of 10.1 million contracts on February 26.

Additionally, we've continued to successfully expand our options business with a record level of electronic trading of our 10-year Treasury note options of 54%, as well as generating 48% volume growth in our popular weekly Treasury options. Treasury options volume in February was the second highest month in our history. Overall, interest rate average daily volume was 5.7 million contracts in the first quarter of 2013 compared to 4.3 million during the second half of 2012.

Although the last 2 years have been challenging due to low volatility and low overall rates, we have invested in our interest rate complex through new product development to position it to strongly benefit once we come out of this difficult cycle.

In the intermediate and long term, we would expect an improving economy, the end to quantitative easing and increasing uncertainty around both the long and short ends of the curve, a large part of this for the franchise. This product line also stands to benefit from the migration of noncleared OTC interest rate swaps into clearinghouses and potentially, substitution of futures contracts for some of those OTC products. And CME Group's value proposition is significantly enhanced with the introduction of portfolio margining for both house and client accounts, creating powerful capital efficiencies for our global client base.

Looking at OTC, as I mentioned earlier, there has been a nice pickup in volume since Wave 1 of the CFTC clearing mandate kicked in on March 11, the first of a series of important dates for the industry. Since then, we have averaged 20 billion per day, which is nearly twice the amount we've cleared from the beginning of the year leading up to the mandate.

Interest rate swap open interest has also grown 44% to $1.4 trillion since the beginning of the mandate. Recently, 270 buy side firms have registered with CME for OTC clearing, and we are working closely with hundreds of firms and many intermediaries preparing for Phase 2 that begins on June 10. We continue to work to build liquidity in the deliverable swap futures contract, and we have 35,000 of open interest and several thousand contracts traded per day mainly by hedge funds asset managers, mortgage services and banks. Right now along with our FCMs and end customers, we are focused on on-boarding for Phase 2 of the mandate. Post June, we expect an increased focus on our entire suite of rate offerings, including call futures, the DSF product, as well as cleared swaps.

During March, we've successfully completed the first customer portfolio margining between cleared swaps and futures through one of our FCMs, and we expect 3 to 5 additional clearing members to provide this to end clients in a more scalable way later this quarter, driven by client demand.

The number of intermediaries automating this process should increase throughout the year. Our sales forces is increasingly hearing about the importance of capital efficiencies and our interest rate swap product suite offers the best opportunity to optimize deployed capital, leveraging our existing deep open interest across the U.S. yield curve.

We also continue to launch new products and product extensions for OTC clearing. During the first quarter, we launched interest rate swaps clearing through our European clearinghouse, and in the second quarter, we anticipate extending our OIS product out to 30 years, adding 3 new currencies, as well as launching amortizers based on customer demand.

Turning to FX. This complex continues to perform exceptionally well, driven by strength in our Japanese yen and British pound contracts, as well as significant year-to-date growth in our emerging markets FX product suite. First quarter ADV was 1 million contracts, up 19% year-over-year. It's important to note, we saw particular strength in terms of trading from Europe and Asia during Q1. Volume in FX trading during Q1 from Asia grew 60%, while activity coming from Europe was up 21%. This speaks to the continued FX market share gains we're achieving on a global basis. FX options also continued to be strong, up 70% in Q1 versus the same period last year.

In terms of FX open interest, we experienced record levels in March of 2.6 million contracts. Since the beginning of the year, our FX open interest is up 13%. In addition, we achieved a new record of 929 large open interest holders in Q1, up from barely 400 in 2009. This indicates that more customers are holding an increasing amount of FX risk at CME Group.

Equities have also performed well and have significantly outperformed our peer. Q1 2013 ADV was 2.6 million contracts, up 9% year-over-year. Growth was supported by net inflows through March of $135 billion into equity funds, as well as an increase in the VIX midway through the quarter, which contributed to strong volumes in February, up 22%; March, up 13%; and April, up 16%.

E-mini options were up 86% in Q1 versus last year and up 88% in April, supported by expanded participation in our weekly and monthly options. Also, in the quarter, volume in our Nikkei-based products was up 76% in our yen contract and 116% in our dollar contract.

In addition, open interest is up 23% year to date. Our metals complex has also benefited from recent volatility. This has driven all-time record April 2013 ADV of 532,000, surpassing the last high in August 2011. We also hit multiple records on April 15, which included combined futures and options trading of 1.5 million contracts, 78% above the prior record, and we set all-time trading records in gold futures, gold options and copper futures.

Turning to the agricultural commodities. The Kansas City Board of Trade integration is going well, and volume in that product was up 24% in Q1 versus first quarter last year and up 21% from the fourth quarter. Going forward, we are excited about the opportunity to leverage our leadership position in this category around the globe, especially in Asia.

Lastly, I will touch on our energy complex. April is a very strong month with ADV of 1.9 million contracts, up 20% versus the same period last year, driven by increased volatility, rising natural gas prices and ongoing corrections to infrastructure issues. In April, crude, natural gas and power were up significantly compared to the first quarter. In recent weeks, the WTI and Brent spread have tightened considerably to under $9 in the June contract and the Seaway pipeline boost of daily activity will continue to be helpful.

Longer-term significant U.S. production should help the WTI and our refinery natural gas products, with an increased focus on energy independence and the potential for exports. In the meantime, we are also focused on expanding global solutions through our DME and brand product offerings to grow our presence in key areas, such as Europe and Asia.

One final note, we had record total volume and revenue from Asia during the first quarter. We saw 24% volume growth in Q1 compared to the prior first quarter. And average daily volume totaled approximately 440,000 contracts per day. Transaction fee revenue from the region grew 31% compared to the prior year.

During the quarter, all fixed product areas grew, with particular strength in ags, FX and equity products.

In summary, we remain the only pure-play derivatives exchange with the widest range of benchmark products, covering all major asset classes. We continue to build on this by investing aggressively in our global growth strategy, which includes launching new products and product extensions, expanding our global footprint through further developments of infrastructure and partnerships, as well as enhancing our worldwide sales force, leading to unparalleled distribution of our products and better insight into customer needs. All of this, coupled with a strong expense discipline equates to significant cash flow generation. This has led to a consistently strong return of capital strategy to reward our shareholders while continuing investing in the future growth of the company.

Now I will turn the call over to Jamie to discuss the financials.

James E. Parisi

Thank you, Gill, and good morning, everyone. I'd like to walk you through the detailed results for Q1. From a financial perspective, we had a nice quarter despite 4 fewer trading days compared to Q4. Our revenue jumped approximately $58 million, and our adjusted expense is only $7 million higher, resulting in incremental margins above 85%. Please take note that excluding the foreign currency fluctuation losses mentioned in the release, our earnings per share would have been $0.73, up over 15% versus Q4 adjusted EPS.

Let me start the Q1 discussion with revenue. The rate per contract for the first quarter was $0.785, down 6% sequentially. 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 faster volume growth than higher fee agricultural and energy contracts. Another driver of the lower average rate in Q1 was member-nonmember mix, as member volumes grew faster than nonmember volumes. We also saw an impact based on energy-related incentives.

First quarter other revenue was $23 million, up from $14 million in Q4, due primarily to a progress payment from BM&FBOVESPA related to our trading platform co-development.

Moving on, total first quarter operating expense was $301 million, excluding the previously mentioned FX impact. Breaking down operating expense in more detail, compensation and benefits was $129 million, up $16 million sequentially. This included $10 million of timing-related items that tend to impact Q1 more severely than other quarters. Examples include our vacation accrual that we'll reverse out later in the year, as folks take their annual vacations, and other employment taxes that are subject to cap that get hit earlier in the year. In addition, deferred compensation expense was $2 million higher than the prior quarter, as the U.S. equity market was strong in Q1. Remember, this is also recognized as interest income below the line, so it has a net 0 impact on our bottom line.

Finally, our bonus was up $4 million sequentially based on better performance versus our targets. Headcount at the end of the quarter was approximately 2,615, up 50 during the quarter, including the KCBOT employees, continuing -- continued hiring in our Northern Ireland office to replace consultants and hires in growth areas like clearing and sales.

Overall, our teams have been very focused on being as efficient as we can on the cost front. Looking at noncompensation expense, each line item was flat to down with the exception of license fees due to growth in both equity and CME ClearPort volumes.

Turning to nonoperating income, we did not record a dividend this quarter from BVMF. We record dividends on the ex-dividend date, and the ex-date for their Q1 dividend fell in April this year. Based on what they've declared, our portion will be approximately $10 million. We will recognize this dividend in Q2, and depending on their timing, we may end up with -- may end up recording 2 dividends from them in Q2. We had been able to record -- if we had been able to record this dividend in Q1, our Q1 EPS would have been a couple of cents higher.

Turning to interest expense. This item totaled $39 million in Q1, which we guided to last quarter. We will be paying down our upcoming August maturity, and will likely look to issue new debt later this year to prefund the February 2014 bonds. Once we've worked through these near-term maturities, our run rate quarterly interest expense will likely be between $26 million and $27 million starting in Q2 2014.

Equity and gains in unconsolidated subsidiaries was $17.5 million, with good results from the S&P Dow Jones joint venture. In April, the company purchased the noncontrolling interest in CME Group Index Services, LLC for $80 million. Index Services had maintained a 24.4% interest in the S&P Dow Jones joint venture. As a result of the purchase of the noncontrolling interest, our share in the JV increased to 27%. We are also pleased with the recent extension of the long-term agreement between the JV and CBOE, which would favorably impact the JV's results beginning this year.

Turning to taxes. The pro forma effective rate excluding the FX impact was approximately 38.5%.

On the balance sheet, we had $1.9 billion of cash and marketable securities, up approximately $240 million during Q1, and capital expenditures net of leasehold improvement allowances totaled $19 million in the first quarter, driven by technology spending.

In terms of guidance, our 2013 expense projection of $1.25 billion remains unchanged based on the expected timing of some growth-oriented investments later this year. In addition, our CapEx guidance remains between $140 million and $150 million.

April average daily volume so far has been good relative to Q1. Over the last 5 years on average, ADV has fallen 12% in April compared to the first quarter. This April, we were down only 7%, and the decline is skewed to the product lines with lower average rates. In addition, as footnoted in our release, please note that first quarter average daily volume in RPC figures do not include the KCBT volume, but the $2.3 million of transaction revenue generated is included in the first quarter clearing and transaction fee revenue on the income statement. The KCBT volume has been reported within the overall CME Group volume as of April 1.

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 the call up for your questions. This quarter, given the number of analysts who cover us, we ask that you limit yourself to one question, please. Please feel free to get back in the queue if you have further questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Rich Repetto from Sandler O'Neill.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

My one question is going to be on OTC. Gill, you addressed a couple of points, at least, that I'm interested in. Even though you're still at about 10% of, let's just say, your peer on the interest rate swap clearing but with the promise of a big Phase 2 starting in June. And so I guess, my question is, of the 200 people or so you got connected, how many of those are already clearing? And can you give us any numbers on what you -- the uptake a little bit more specific in June? And then also, this portfolio margining. I know you mentioned it, but how available will it be for all the buy-side clients, come June?

Derek Sammann

Rich, it's Derek. I'll pick up on that. So a couple of points on the phase-in. So you've heard us talk a lot about the phase-in clients of the Phase 1. We didn't expect a lot of new clients to come on board then. The Phase 2 is significant, and I want to make sure we talk a little bit about the makeup of the group that we've seen so far. As you know, the Phase 2 clients are predominantly dollar based. Most of these are falling under the dollar-based mandate. And so far, about 61% of the products that we're clearing are dollar based, and only about 25% of that trading at LCH is dollar based right now. So given the fact that we see strength in our dollar-based platform on the clearing side and the bulk of the Phase 2 clients are dollar based, we think we will see some acceleration through that group. The 270 firms that Gill mentioned are those that have been working with us and we believe are prepared for clearing in that Day 1 time frame. So we think we're in a good position to capture a portion of that. Relative to the portfolio margining, we talked about this last quarter. We are prepared. We've rolled that out. We've had 1 or 2 FCMs prepare for that and actually have rolled that out selectively. But to be very honest, we don't expect that to be significantly taken up until we're farther into the phase-in on-boarding clients because it's a big impact on the FCMs, and they and we are primarily focused on on-boarding, getting clients into the clearinghouse. So we have that available. It's a function of bandwidth for the FCMs to work on portfolio margining.

Phupinder S. Gill

And Rich, it is available for both all clients, as well as all house accounts. Anybody who has a swap position that can be offset against the futures is eligible for that offset. So it is wide open to everybody. If you look at the overall scheme of things, the only exchange or the only CCP that has this margin offset is CME Group. No one else does have it. So from a capital-optimized perspective, it is the one solution out there that maximizes capital efficiencies for our client base.

Operator

Our next question comes from Howard Chen, Crédit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

My question's on the core business. Over the years, we've seen higher RPC be a good stabilizer when volumes are weaker and then get back a little when volumes improve. But I guess, when you look at the business complex by complex over the past 2 years or so, it seems like that historical relationship is slipping a bit. So I'm just curious. When you look at the data, do you agree with that? And what can you do to possibly help, like, restore that balance that we've seen over the years?

James E. Parisi

Yes, Howard, this is Jamie. I could start and my colleagues can jump in. As you look at it, it's very much, for the most part, a mix issue as we've touched on over time. Shifts between member, nonmember, shifts between the various products within a product set will also impact that. So I don't think there's anything concerning there for us at all. You did see this quarter, we've -- a few things impact the rate. The incentives, certainly on the energy side, impacted the energy rate. Those were tied to things like options incentives and incentives around new products like Brent. So it's -- really, what we're trying to do is drive volume growth across the products with things like that. So I don't see any concerns going forward.

Phupinder S. Gill

Yes. If I can just add, Howard, that what you're seeing over time is as we've had customers that are paying the full freight do more and more business, they would typically make a decision to take up membership, which may reduce their fees over time. And as more and more of these clients come on board, they will start at a high rate, and if it makes sense, they would pay the lower rate once they decide to become "members" of one or more of the CME Group exchanges.

Operator

Our next question comes from Chris Allen, Evercore.

Christopher J. Allen - Evercore Partners Inc., Research Division

When I back out the KCBOT revenues, I'm arriving at a rate per million traded from over the counter about $3.35. I wonder if you could confirm that and just give us some color in terms of how to think about that rate moving forward and what may have impacted it this quarter, whether it's from the incentivized -- incentive pricing standpoint or anything on the competitive front.

James E. Parisi

Yes. Chris, this is Jamie. You're right. The average rate is in the neighborhood of $3 per million of interest rates, when you look at the combined rate of interest rate and CDS. And basically, our -- the total revenue for interest rate, CDS was about $2.8 million for the quarter. The rate per million was fairly consistent, I'd say, with the rate per million in the prior quarter. And what we're seeing is, on the IRS side, the average rate is slightly below the $3 per million rate. And really, when you look at Phase 1, it's very much concentrated in -- with the hedge funds who tend to have a higher percentage of those high turnover-type businesses who may avail themselves of our high-turnover incentive plan. So they're not putting on and holding a lot of open interests, the ones who are getting that incentive, so it's not taxing the clearinghouse as much. So that's the, kind of, the reasoning there. And as we go to the next phase, we would anticipate that there'd be a heavier mix of the non-high-turnover customers who would lift that rate.

Operator

Our next question comes from Alex Kramm, UBS.

Alex Kramm - UBS Investment Bank, Research Division

Just wanted to come back to, I guess, Howard's question on the pricing, in particular, on the energy side here. Obviously, that declined a lot. And Jamie, you mentioned something about Brent and options, so maybe you can give a little bit more detail, in particular, because when I look at it, it seems like a lot of that came on the ClearPort side. So just wondering, there's been a lot of changes in the energy markets as it relates to ClearPort with ISRI restructuring and you're doing some changes here as well. So just wondering if there's some product shift as well or maybe you're competing a little tougher here or anything that's going on in that market.

James E. Parisi

Sure. Well, we're certainly competing a little tougher around the Brent where you're seeing those incentives. On the ClearPort side, you did see a decrease in the average rate there, and that was as a result of the conversion from EFS to blocks, which are at a bit lower rate. So that drove the ClearPort average rate down a little bit. And as I said, on the options front, we did some -- we've got some incentive programs going there. And Bryan wants to add in.

Bryan T. Durkin

But these programs are definitely having the intended impact in the context of the growth that we're experiencing, particularly across the Brent complex. We have several dozen firms now that are very actively trading in Brent. We've reached and exceeded an inflection point in terms of our open interest in their contract, and we're seeing a very heavy spreading occurring between the WTI and the Brent. And all of this is tied very much together in terms of the increasing dominance of the WTI contract, as we've indicated over the last several months. Looking at that spread and seeing how that spread is coming in is very indicative about the domestic prominence of U.S. production of crude oil. So all of these initiatives that we've undertaken are very strategic in the context of building up our crude, our refined products, as well as our options growth.

Alex Kramm - UBS Investment Bank, Research Division

And those incentives are ongoing, right?

Bryan T. Durkin

Yes.

Operator

Our next question comes from Patrick O'Shaughnessy, Raymond James Company.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

So my question is about the deliverable swap futures that you guys launched a few months ago. Seems like you're getting some nice traction, some nice progress in terms of building up volume and then maybe saw a little bit of a step-back in April. Can you talk about the customer reception that you've gotten for those products and what your expectations are at this point?

Derek Sammann

Yes. It's Derek. I'll take that. On the deliverable swap futures, we've put that out in December to make sure that we were out in advance of the launch with the mandate kicking off on March 11. We wanted to make sure, based on client demand, that we had a product out there to go through a first roll. Customers are very concerned about that process of taking a future, then delivering into that swap. So we've maintained, I think, about 35,000 or 36,000 contracts open interest. That first roll of March, we saw about 25% of those products actually deliver into a cleared swap, which is a little bit higher than we would normally see but actually, about what we expected given the customer desire to make sure that process works smoothly. What our customers have told us is they wanted to get through a delivery cycle. They wanted to make it deliver and rely on that liquidity and that volume. But also, we're not as surprised to see the banks who are participating in the large parts in that market are also focused, as are we, on on-boarding through these first phases. So we've maintained levels of open interest. It certainly is there as an alternative to those customers that may not be able to get on board for cleared swaps. So we're pleased with where we are. We've got good open interest, ADV about 4,500, and increase of market makers are beyond just the 4 or 5 dealers we have. And the considered add participants. So very pleased about where we are.

Phupinder S. Gill

Just to add there and, as you said, there are 27 FCMs that currently cleared, and there's a recent report by Morgan Stanley that basically articulated that the Treasury futures and swap futures are going to benefit from Phase 2 and, in particular, those high clients that won't be able to make the cut on June 11, they have an alternative. And the sales force at Morgan Stanley and a couple of the large banks are going push deliverable swaps.

Operator

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

Jillian Miller - BMO Capital Markets U.S.

So I just wanted to touch on the Obama derivative tax overhaul. It seems like the mark-to-market tax accounting and the elimination of this 60-40 tax treatment for derivatives could have an impact on the desirability of futures products in general. Maybe you could just kind of discuss the potential impact of the tax changes on your business and how likely you think they are to actually come about.

Terrence A. Duffy

Jillian, this is Terry Duffy. I think that the President's budget, if you look back historically, we have seen this going back to the first President Bush where they had the elimination of the 60-40 tax treatment, and they also have a transaction tax put in their budget. As you know, 60-40 is still in play, and it was voted in along the early '80s that the transaction tax has still not happened. I believe that most people on the Hill understand that this would be a detrimental tax against a very small, few people, good for folks who create a tremendous amount of liquidity. As you may or may not know, corporates do not get 60-40 tax treatment today, only individual market makers do, which make up a tremendous amount of the liquidity in the market. They know the bid-offer spreads were widened. This is a $2.5 billion score over 10 years, and if you look at the federal budget, that doesn't even hit the first line of the first balance sheet. So I think people know that would be cutting off their nose to spite their face if they try to deploy or eliminate 60-40 because of the mark to market and no long-term capital gains in futures trading. So I do think that will not prevail. Also, Chairman Camp, out of the Ways & Means Committee, has proposed to restructure the tax code as you know, and he is -- actually said that he would have an elimination of 60-40 tax treatment if and only if the top-end rate was to be 25%. I don't believe that will happen either, but that would not hurt our business whatsoever if that happened. And again, with the transaction tax, people are looking at the Tobin tax. As you know, that's an economist over in Europe who's proposed a transaction tax in Europe, of which some of the European countries have approved it, but what is interesting about that tax is that has to go for a final vote at the year end after the German election in November, and I don't think that's going anywhere either because the EU has already said they will not accept it. So I do believe that some of these taxes that have been proposed and the elimination of certain treatment is something that we have seen historically, and we are on top of it. And I'm somewhat -- I am confident that we will be able to continue to fight this back.

Operator

Our next question comes from Dan Fannon, Jefferies Company.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I know you haven't disclosed it in a while, but maybe if you'd talk about it in general terms about your customer mix and talk about the segments that are behaving well. And also maybe the dynamic when rate volumes have spiked at points in time, how that might have changed, in terms of who's more active or if it's generally broader based.

Phupinder S. Gill

I'll start and then I'll ask Derek to talk about the rate side. There's been no major change in the mix of the client base as we had spoken in the past so that there's nothing to update you on that. On the rate side?

Derek Sammann

On the rate side, we've talked about this before, particularly as it relates to deliverable swap futures. It had more participation from the dealer side of liquidity provision on some of the products that could be complements or, perhaps, products that segue from OTC swaps into overall futures. What we have done is continue to have healthy participation across the rate spectrum between the maker and the taker side. We actually have seen more of a product shift out of euro, dollars into Treasuries. Treasury's about 60% overall of our volume right now. So when you look at the growth of that Treasury side, it is important to note, Gill mentioned that we hit some records in February in our Treasuries complex, and those are records stood back and -- or that were set back in '07, '08. So a lot of folks are asking us, "Well, what do you see the spike in volumes to be?" We're already exceeding the levels from the Treasuries complex now in this difficult environment that we set back in '07, '08. Drivers of that certainly build out more products, specifically to address the client shift to make sure we had products that would address the needs of the asset managers, pension funds and long-only guys like Ultra Bond. So product development has been focused on bringing client segments in, as well as diversifying into parts of the curve where there's volatility.

Bryan T. Durkin

I'd like to add -- it's Bryan -- on to that in the context of the broad asset classes that we represent and the strong client outreach that you all know we've been working on over the last couple of years. It is definitely having its impact in terms of bringing in new client base across a more diversified usage of products. And I'd say we've seen that very prevalent in the hedge fund and the asset management community. And again, I think it goes to the very targeted focus of our sales team.

Operator

Our next question comes from Mike Carrier of Bank of America Merrill Lynch.

Michael Carrier - BofA Merrill Lynch, Research Division

Jamie, just on the expenses and maybe the other revenue, just some moving pieces, but just want to understand on the expenses, just given the $301 million run rate and then if we just take the guidance, you would be at, like, a $316 million, I think, roughly going forward. And I know there are some items that are coming online throughout the year. So maybe just give us an update on the timing of when we should expect the expense increase throughout the quarters. And then just on that other revenue line, just given that BVMF, like, the progress payment, just remind us, like, how often can we see that or is that a onetime. Just trying to gauge that other revenue line.

James E. Parisi

Sure, on the -- in terms of the expenses, going forward, as you know, the run rate, given the guidance, is higher than what we experienced in Q1. I think going forward, the big changes or the -- where you'll see some of that come through more dominantly is in compensation, pro fees and marketing. Compensation is going to grow as we fill open positions to meet existing needs, as well as growth opportunities. The pro fees always comes in lumpy, but as we continue to invest in growth opportunities like the European exchange, for example, and regulatory compliance, we should see a higher run rate there going forward. And on marketing, again, it's lumpy. It tends to be more back-end loaded, tied to events and branding that occur later in the year. So as I look across the quarter, it's hard to give you a hard and fast -- I'd say it's fairly evenly distributed across the remainder of the year.

Michael Carrier - BofA Merrill Lynch, Research Division

And then anything on that other line, on the revenues?

James E. Parisi

Sure. I'll -- was the question around the progress payment from BVMF?

Michael Carrier - BofA Merrill Lynch, Research Division

Yes, just in terms of -- I know you've had some of those in the past, but just give us an update on -- is that -- ending, can we continue to see some of that in the future?

James E. Parisi

Yes, this -- it was tied to the delivery of the equity platform, which is up and running and has been very successful. They're very pleased with the platform. And there's, I think, one more phase, but I don't anticipate there being any significant payments from that this year.

Operator

And our next question comes from Chris Harris, Wells Fargo Securities.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

My question is on capital management. So you guys kind of ended the quarter here with a fair amount of cash on the balance sheet, and I know we have some debt to pay down later this year. But it still seems like you guys are going to be generating a significant amount of cash, and just wondering if you could quantify for us what your appetite is to return capital this year, whether it be through share buybacks or another special.

James E. Parisi

Well, as you know, our bent is very much towards dividends, and we pay out 50% of prior year cash earnings in our regular dividend. And then, at the end of the year, we'll do the analysis around another fifth dividend, a variable dividend, that we do each year. And this past year, we pulled that into December for tax reasons because of the uncertainty in the tax rules. But going forward, I'd say the timing around that variable dividend is very likely going to be the beginning of each year, as we are able to look at the results from the prior year. So probably in the February-March time frame. But yes, we're very much committed to returning that excess capital to the shareholders.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

So just to confirm, nothing for buybacks this year we should expect?

James E. Parisi

I wouldn't put that as a high priority, no.

Operator

Our next question comes from Niamh Alexander, KBW.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Can I go back to the deliverable futures because I -- you mentioned Morgan Stanley's report, but they had taken a stake also in your -- in the competitive, I guess, the ISRI exchange venue, but where do you stand or what's your view on the collateral differential and especially, I guess, Bloomberg's lawsuit with respect to the CFTC? Arguing that 5 days VAR for swaps versus 1 day for future isn't fair. I mean, does that -- that should, all else equal, maybe favor futures? But do you think the lawsuit itself, could that maybe slow some of the transition into futures? Or maybe people will just -- saying, "Oh, it -- heck, it's just so much easier, I'll do a future instead of a swap." Could the lawsuit kind of pose any threat to the opportunity there or slow it maybe?

Phupinder S. Gill

I'm not sure what the lawsuit will actually do. I think the lawsuit addresses the cost-benefit part of the 5 day versus 1 day, and the CFTC has done sufficient work. We have a very strong view as to what these margin requirements represent, and generally speaking, we believe that CCP should be left to set margin levels that they deem appropriate given the risk management or the risk characteristics of the products that exist. I'll ask Kim to say a few things about what the 1 day and 5 day actually mean.

Kimberly S. Taylor

Yes. I think we're very much on record as pointing out that both of these product sets are evaluated by us in setting margins on a risk basis, and they pose a different risk profile, mostly with regards to the visibility and accessibility of liquidity in the over-the-counter spot and the ability to liquidate those products very promptly. And we feel that they are margined completely in the same fashion, even though the results end up with one product having currently a 5-day margin and the other product having currently a 1- or 2-day margin, depending on which product it is. The other thing, I think, I would want to point out is that the -- I totally agree with Gill that we feel that clearinghouses should be allowed to set margins based on the risk profile that they see in the product. The risk profile of the swaps may change over time. The other problem with the way that the issue's being addressed is that even if the CFTC were to change its rule, the need for the 5-day margin period of risk for swaps is embedded in a lot of other international best-practice standards, and the Basel capital framework, in such a way that I don't think that things would change even if the CFTC had a different rule.

Operator

And our next question comes from Brian Bedell, ISI Group.

Brian Bedell - ISI Group Inc., Research Division

Just to go back to the interest rate complex and the swaps, maybe, Derek, if you can comment about the activity around that June 10 deadline. Obviously, a lot of clients are catching right now. Is there any testing going on in the live environment or do you expect that to really inflect upward as we get very close to the date? And then your sense of usage subsequent to that -- the June 10 date and if you can comment on, do you think that will be a better infection in terms of adoption of futures usage, again subsequent to that date? And then also just on the September time frame, how important that is relative to the June date? And then just lastly on the rate complex, the member, the lower RPC, was that completely driven by the member-nonmember mix? Or were there other things going on?

Derek Sammann

I'll try to answer your 4 questions in one answer if I can. Let me start with your last question very quickly because there is a point in here that I wanted to mention when this came up before on the rate side specifically that where there had been some shifts that have been trending and pushing rate per contract lower in some of the member-nonmember mix, we have been offsetting portions of that downward pressure by actually putting customers into higher rate per contract products. So if you look at the interest-rate complex as a whole, a higher percentage of our rates complex is in Treasuries right now and that's a higher rate per contract product. So we've offset some of that customer shift mix, which is a downward pressure, by shifting into higher-rate product, which is Treasury. So I just wanted to get that off the board.

James E. Parisi

And if I could just comment on the member-nonmember mix impact on the interest rates, yes, it weighed on the average rate there, but remember, it's a mix issue. Both member and nonmember volumes increased versus the prior quarter. It was just that the member increased faster than the nonmember.

Derek Sammann

And I'll come back on the kind of the swaps and futures side very quickly as well. So you've heard us talk about these 270 firms. The firms that are in pipeline in debt with us is a much broader number than that, and some of these have been testing with us for 6 months, explicitly letting us know that they need to be ready for the points at which the switch would be flipped. So I think that a fair number of these guys are ready to go. In terms of the mix of the customers we're seeing right now, we've got a very high proportion of our business that's IRS, so it's the longer-dated products. We've recently put out some increased product specs that provide a broader set of OIS clearing capabilities as well. So we think we'll be able to capture a larger piece of that OIS dollar business particularly for the Phase 2s and Phase 3s. So you have about 84%, 85% of our mix right now is OIS, very good because that's longer, kind of stickier open interest for us. The OIS is shorter but a higher turnover business for us. And as I said, we're doing about 65% of the dollar business right now, and a big chunk of the Phase 2 June and Phase 3 September clients are primarily dollar based, so we're very well positioned to pick up a larger percentage of that dollar-based product -- user base as they come online about June and September.

Brian Bedell - ISI Group Inc., Research Division

Okay, that's helpful. So we're really not seeing the pickup yet in the volumes, and obviously, we should be seeing that in June.

Derek Sammann

Yes, we're going to see this come through in the same way that we saw with the March date, where we're seeing a lot of preparation, but you could see deceleration in and through that date. So we're anticipating not necessarily the ramp-up before but through and following on into the third phase as well. But one last point on that, we have seen an increase in our volumes, our April -- our numbers this past month are up -- almost 100% from last month. So 88%, I think, is the precise figure in terms of our monthly flow. So we are seeing the increase. We expect to see that accelerate post June 11.

Operator

Our next question comes from Gaston Ceron, Morningstar Research.

Gaston F. Ceron - Morningstar Inc., Research Division

Jamie, I know you mentioned the Indexes JV a little bit during your prepared remarks. Just curious if you could give any additional color on how that business is going. And then also, if you could say anything about co-location?

James E. Parisi

Sure. The Index JV is operating very well for us. You can see a small increase in our -- in the line -- in the operating income or the nonoperating income driven by -- partly by better or improved economics there. And in terms of co-location, we did guide last quarter to a decrease in that business as a result of the shrinking footprint on a per-customer basis, though the number of customers has actually grown a little bit coming into co-lo. We're on target for that guidance. We were a little bit below it this quarter because we didn't have the full quarter impact yet because the new contracts came into effect mid-quarter. So we'll be down around that -- the number that we had, the $20 million or so that we had guided to last quarter. We'll be down around that number going forward.

Operator

Our next question comes from Akhil Bhatia, Rosenblatt.

Akhil Bhatia

I'm sorry if I missed this, but what were the total OTC revenues in the quarter?

James E. Parisi

They were about $2.8 million.

Akhil Bhatia

Okay. And then just on the other revenues, you had the delivery fee from BOVESPA this quarter. How much was that? And what -- how do we think about that going forward?

James E. Parisi

Yes. I don't want to call it out specifically because it's a contract between us and them, but I would just say going forward that it's not something that we would consider a recurring revenue. There's one more phase that's due -- I believe one more phase that we're working on that's due with them, and so I wouldn't anticipate that hitting us coming into it this year.

Akhil Bhatia

Is it fair to say we get back into the high teens of millions going forward as you did the last few quarters?

James E. Parisi

For?

Akhil Bhatia

For other revenues.

James E. Parisi

For other revenues?

Akhil Bhatia

Yes.

James E. Parisi

It's hard to say. I think, yes, it'll come back down relative to that progress payment.

Operator

And our final question comes from Alex Kramm, UBS.

Alex Kramm - UBS Investment Bank, Research Division

Just wanted to get a quick follow-up on the capital side here. One, first off, like, I think you said earlier, Jamie, that given that the fourth quarter special dividend in the prior fourth quarter was really just because of the tax reasons, and now you should go back to beginning of the year. I thought when you and I have talked in the past that you thought in the fourth quarter you have enough visibility already that you can actually start paying at the end of the year now than the beginning of the year. So just wondering if there's a change of thinking here to move that back in the first quarter or if I missed something. And secondly, I think there's been some discussions on building sales and things like that, that could clearly impact the special dividend. So I think there's been some discussions around NYMEX and also KCBT, so any more color you can give there in terms of timing, magnitude? I think NYMEX was priced at like $500 million last time I saw a number. So any color you can give here would be helpful.

James E. Parisi

Sure. In terms of the timing of the dividend, we never committed to continuing in the fourth quarter. One of the considerations as we thought about, should we continue pulling forward in the fourth quarter or just waiting until the end of the year. Obviously, waiting until the beginning of next year, you have a very clear view of what the prior year is. And the other factor for individual shareholders is you're not pulling the tax on that dividend into the current year, so a few months' timing, in our mind, made all the sense in the world to put it into the next year. Sorry, the other question was on?

Alex Kramm - UBS Investment Bank, Research Division

The buildings.

James E. Parisi

The buildings, yes. So as we said, we're not in the business of -- our core is -- our core competency isn't owning and operating and leasing out the office space. So we're always taking a look at our real estate portfolio to see if it makes sense to sell any of those buildings. You saw us do it with the Board of Trade with the sale leaseback, so it's certainly something that we'll analyze around the building in New York, and with the building in Kansas City, it's much smaller in scale. But that, since we're moving operations back here in time for July, I believe, that building will very likely sell this year.

Alex Kramm - UBS Investment Bank, Research Division

Okay. So -- but no color on NYMEX in terms of time or value or anything like that? Too early yet?

James E. Parisi

Nothing at this point. It's too early.

Operator

That does conclude the question-and-answer session. I now would like to turn the call back to management for closing comments.

Phupinder S. Gill

Thank you all for joining us this morning. We will look forward to talking to you as the next 3 months go on, and see you all in about 3 months. Thank you very much.

Operator

Thank you. That does conclude today's conference call. Thank you for participating. You may disconnect at this time.

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