CME Group' CEO Hosts 2013 Annual Shareholder Meeting (Transcript)

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 |  About: CME Group Inc. (CME)
by: SA Transcripts

CME Group Inc. (NASDAQ:CME)

2013 Annual Shareholder Meeting

May 22, 2013 4:30 pm ET

Executives

Terrence A. Duffy - Executive Chairman, President, Chairman of Executive Committee and Member of Strategic Steering Committee

Kathleen M. Cronin - Senior Managing Director, General Counsel and Secretary

Phupinder S. Gill - Chief Executive Officer, Director, Member of Executive Committee and Member of Strategic Steering Committee

Terrence A. Duffy

Well, good afternoon, ladies and gentlemen. It's my pleasure to welcome you to the 2013 Annual Meeting of Shareholders of CME Group, and I call the meeting to order. I'm Terry Duffy. I'm the Executive Chairman and President of CME Group, and I will be presiding at this meeting.

With us today in the audience are members of the CME Group Board of Directors, our management team, and joining me on the dais are Phupinder Gill, our CEO; Jamie Parisi, our CFO; and Kathleen Cronin, our General Counsel and Corporate Secretary. Kathleen will act as secretary of the meeting today. Representatives from Ernst & Young, our independent registered public accounting firm, are also present at the meeting and will be able to answer your questions regarding their representation of our independent registered public Accountant.

A representative from Broadridge Financial Solutions has been appointed as our independent inspector of election, as located immediately outside the room. Our goal today is to conduct an effective orderly meeting, during which everyone has an opportunity to be heard. The meeting to be conducted in accordance with the rules of conduct that you received when you registered will be covered in the items forth in the agenda. Failure to abide by the rules of the conduct is a cause for removal of the meeting. We will conduct 2 separate Q&A sessions. So I know many people might have different questions as it relates to issues around the company. But we'll -- first one we'll do is we'll have Q&A and the proposals. And then we'll go into general questions as it relates to general business of the company.

To provide everyone the opportunity to be heard, questions will be limited to 2 minutes and the presentation of the shareholder's proposal will be limited to 4 minutes. To advise you of when you have exceeded your time limitation, you will hear a chime. At such time, please conduct your -- conclude your business or your remark.

Please ensure that your electronic devices are set to silent now, so we appreciate that. As a reminder, audio and video taping and photography during this meeting is strictly prohibited.

Now Kathleen Cronin, our Corporate Secretary, will establish that the meeting has been duly called and a quorum is present.

Kathleen M. Cronin

Thank you, Terry. All shareholders of record at the close of business on March 27, 2013, are entitled to vote at this meeting. An affidavit has been provided by the inspector of election attesting to the fact that the notice of meeting, the proxy statement and CME Group annual report were mailed or made available electronically to all shareholders of record beginning on April 12, 2013. A list of shareholders entitled to vote at the meeting has been available at our offices for the past 10 days and is available for examination by any shareholder during the meeting from the inspector of election.

I have been advised by the inspector of election that at least 1/3 of the shares entitled to vote on all of the proposals with the exception of the election of the Class B-2 Nominating Committee is represented in person or by a proxy at today's meeting. And therefore, a quorum is present for such proposals.

Because our bylaws permit the chairman of the meeting to adjourn the meeting and to regulate the business and conduct of the meeting in his discussion, we ask Mr. Chairman that you declare all proposals with the exception of the proposal for the Class B-2 Nominating Committee duly convened and adjourn this -- the proposal for the Class B-2 shareholders to a future time so that the company may solicit additional votes.

Terrence A. Duffy

On the basis of the secretary's report, I declare that the meeting is duly convened with the exception of the proposals submitted to the Class B-2 shareholders for the election of the Class B-2 Nominating Committee. The proposal for the B-2 shareholders is adjourned and will be reconvened on June 11 at 1:30 p.m. Central Time at 20 South Wacker Drive to allow the company to solicit additional votes.

The polls for voting on all matters are hereby open at this time. It is now 3:40 p.m. If you've previously voted, there is no need to vote today. If you still need to vote, please raise your hand and a ballot will be provided to you. Anybody that has a ballot, sir? You have a ballot -- you need a ballot, sir? I'm sorry? Okay, you have not voted yet. So can we get him a ballot, please? Anybody else who need a ballot before we close -- put them in? Okay, it seems everybody has their ballots or have already submitted their ballots except for the one, is that correct? Okay, the polls are closed after all the proposals have been presented and discussed. All votes will be submitted during today -- today during the meeting will be subject to final verification by the inspector of election. The next order of business is a description of the matters to be voted on at today's meeting. Kathleen, please present those matters now. Please reserve your questions and comments, as I said earlier, on the proposals until all proposals have been presented. Kathleen?

Kathleen M. Cronin

At today's annual meeting, there are 5 management-sponsored proposals and one shareholder proposal. I will review the company-sponsored proposals and a representative of Norges Bank is in attendance today to present the shareholder proposal. All of the proposals are described in more detail in our proxy statement, copies of which may be obtained from the inspector of election.

As we stated earlier, the proposal for the Class B-2 shareholders did not achieve a quorum and will be presented at the June 11 meeting.

The first proposal is the election of 9 equity directors. The following persons have been nominated as equity directors of the company: Terrence Duffy; Charles Carey; Mark Cermak; Martin Gepsman; Leo Melamed; Joseph Niciforo; C.C. Odom; Jack Sandner; and Dennis Suskind.

Second proposal is the ratification of the appointment of Ernst & Young as our independent registered public accounting firm.

The third proposal is an advisory vote on the compensation of our named executive officers.

The fourth proposal is the election of one Class B-1 director and one Class B-3 director. The nominees for the Class B-1 director are Paul J Heffernan and Howard Siegel. The nominees for the Class B-3 director are Peter Kosanovich and Steven Wollack.

The fifth proposal is the election of 5 members to the Class B-1 Nominating Committee and 5 members to serve on the Class B-3 Nominating Committee. Information on the 10 nominees for each of these committees is contained in the proxy statement.

The Board of Directors has recommended that shareholders vote for the election of the equity directors, the ratification of the appointment of Ernst & Young and for the approval by advisory vote of the compensation of our named executive officers. No recommendations were made in connection with the election of the Class B directors or the election of the Class B Nominating Committees, which were submitted for approval solely by the Class B shareholders.

Terrence A. Duffy

At this time, I would ask that Edmund Aronowitz [ph] -- Edmund, did I pronounce that properly? A representative from Norges Bank who will present Norges Bank's proposal -- shareholder proposal to implement proxy access. Mr. Aronowitz, please come forward. You will have 4 minutes to present your proposal.

Unknown Shareholder

My name is Edmund Aronowitz, and I'm here today on behalf of Norges Bank for the purpose of introducing for consideration Item #4, a shareholder proposal, which asks the company to amend the bylaws to require the inclusion of shareholder-nominated candidates for the Board of Directors in the company's annual statement provided to shareholders.

Norges Bank believes that shareholders' rights to nominate candidates to the Board of Directors of publicly listed companies is a fundamental principle of good corporate governance. The current rules only allow for shareholder nominations pursuant to [indiscernible] and provisions in the company's bylaws designed to discourage such nominations or, in the course of extremely costly and cumbersome proxy fights, where shareholders must submit alternative agendas at annual general meetings and distribute proxy materials to other shareholders.

Norges Bank's proxy access proposal asks that the company simplify this process by allowing shareholders only at least 1% of the company's shares for a period of at least 1 year to have their nominees included directly on the company's meeting agenda and proxy statement. The request of stock ownership requirements are intended to help prevent inappropriate use of the nomination process. At the same time, individual shareholders can only nominate up to 25% of the number of directors standing for election at a shareholder meeting, and no more than 25% of the elected board can be nominated by shareholders. Proxy access is an effective means to increase board accountability. Approving this proposal will let the board know that poor performance and bad corporate governance practices could have an effect on the reelection. Proxy access is in the interest of both the company and all of its shareholders. We therefore urge shareholders to vote for this proposal. Thank you.

Terrence A. Duffy

Thank you, Mr. Aronowitz, for that. We appreciate it. As a reminder, our Board of Directors has recommended that the shareholders vote against this proposal for the reasons described in the proxy statement.

Ladies and gentlemen, this concludes the introduction of the proposals to be presented at this meeting. The floor is now open for questions or comments from shareholders relating to the proposals being voted on today. As a reminder, a separate -- as I said earlier, a separate discussion period has been scheduled later in the proceedings for general matters relating to the company. Please limit your questions to 2 minutes or less. If you wish to speak, please raise your assigned number card and wait to be recognized. Once recognized, please identify yourself by stating your name and identifying whether you are a shareholder of record or a proxyholder and what particular proposal you would like to discuss.

Question-and-Answer Session

Terrence A. Duffy

Yes, sir?

Martin Glotzer

Thank you, Mr. Chairman. My name is Martin Glotzer of Chicago. I've attended these meanings for many, many years, and I am a shareholder. The first question is am I clear on why we're having an adjournment to June for voting on the other directors or so?

Terrence A. Duffy

So on the adjournment for the -- we don't have a quorum for the Class B-2 Nominating Committee. So in order to ensure a quorum so we can elect those nominating committees for the Class B-2 Directors, we're going to give it more time so that the company can go out and solicit more voters of that class. And so...

Martin Glotzer

But I see on Page 69 that we estimated spending $10,000 with the proxy solicitors. Wasn't that enough to get the votes out to have the meeting at this time and not adjourned, or are we spending more money to get the proxies out?

Terrence A. Duffy

We will not spend more money getting the proxies out. We will use some of the staff's resources to go out and contact the members who own those B-2 rights to cast their ballots.

Martin Glotzer

Question on the auditors, on the engagement. Is the same partners here today that were on the audit -- on the engagement a year ago?

Terrence A. Duffy

Question being asked, is the same partners from Ernst & Young that were on the audit a year ago, is that correct, Martin? Is that the question?

Martin Glotzer

Yes. And the question I asked them, when they did the -- completed their audit a year ago, we're talking about internal controls. Do they make any recommendations on internal controls? Let's ask of the auditors.

Terrence A. Duffy

So the question is did they make any recommendations on internal controls. Are they here? Where are they?

Unknown Executive

[indiscernible]

Terrence A. Duffy

Ron [ph], do you want to make a comment?

Unknown Executive

So we do have [indiscernible].

Terrence A. Duffy

We have people -- this is webcast, right? So why don't you -- we need a microphone, yes.

Unknown Executive

We do have normal internal control suggestions in the normal course of an audit that we discussed with management. We did not identify any material weaknesses in connection with our audit.

Martin Glotzer

So then you came back this year, what did you see this year? Did they write -- did they accept your recommendations or they just continued as is? Because internal controls is a very important part of an engagement.

Unknown Executive

That's right. You're right. And we have a separate opinion on internal controls, an opinion on the financial statements and opinion on the internal controls. And you will see the opinion on internal controls is a clean opinion.

Martin Glotzer

I have a question on the shareholder proposal and the management's objection. I object to the word unique. This isn't -- this place isn't a unique operation. I've been the president of the Cincinatti Union Stock Yard Company since 1965. I ran a stock exchange of -- only I dealt with live animals, and we were a hotel for cows. And there's no difference between our company, which we only -- I assume, we furnaced the building for buyers and sellers to come together. I don't see anything unique about this, and I believe -- what the problem is, since I submitted shareholder proposal since 1960, what the problem is the proponent of shareholder proposals don't see what the management rights until it's in the proxy statement. Had the proponents reviewed the management's objections, they might have had a correction of the word unique. Thank you.

Terrence A. Duffy

Thanks, Martin. I think, Martin, you were referring to the Norges proposal, why management believes that it's inappropriate for shareholders to support it. And so you know the proposal, as the gentleman stated, was for proxy access to have it 1 year or 1% of the company. These proposals have been brought forward to other companies that are in the S&P 500 and have failed miserably. Last year, we had a similar proposal come forth, and I think the percentage of shareholders have thought this was a good idea. It was roughly under 38% of our shareholder base. So, again, this is something, Martin, that is up for the shareholders to determine. We do believe this is a unique company. We're one of only a handful of exchanges in the United States, so we do classify it as unique but not completely different and we don't believe we should be subjected to different rules of other public companies, which we're not. So for that reason, management has asked the shareholders not to support this proposal. Questions?

Okay, it appears to be no more questions on the proposals. We will now proceed with the next item of business. If you have not yet return your ballot, please raise your hand and someone will collect your ballots. Sir, you're still working on the ballot so why don't we -- yes? Is it complete, sir, or do you need more time? Why don't we just give the gentleman a minute. I want to make sure that all ballots are in, so just give us a minute. Anybody else that has a ballot, Beth Hausoul will be happy to take it from you. Okay, Beth, do you have all the ballots? Beth, you have all the ballots, correct? Okay. As there appears to be no more votes outstanding, I hereby declare that the polls are closed as of 3:50 p.m. Now I'd like to ask Kathleen Cronin to present the preliminary unaudited report of the inspector of election. Kathleen?

Kathleen M. Cronin

The inspector of election has tabulated the preliminary voting results relating to the proposals presented. The preliminary voting results remain subject to final verification by the inspector of election. And in accordance with the SEC rules, we will file an 8-K with the SEC within 4 business days containing the final tabulation of votes.

The preliminary results show that the 9 equity director nominees have been elected to the board, with each director receiving at least 89% of the votes cast for his election. Our audit committee's appointment of Ernst & Young for 2013 has been approved, with approximately 98% of the votes cast for the proposal. The compensation program for our named executive officers has been approved on an advisory basis, with approximately 97% of the votes cast for the proposal. Insufficient support for the approval of the shareholder proposal for proxy access was received, with approximately 33% of the votes cast for the proposal. The results of the election for one Class B-1 and B-3 director will be announced by press release this evening. In addition, the results of the election of 5 members to serve on each of the nominating committees for the Class B-1 and Class B-3 will be distributed to our members as soon as possible following the receipt of the audited inspector of election report. As a reminder, the proposal for the election of the Class B-2 Nominating Committee was adjourned to June 11.

Terrence A. Duffy

A report of the corporate secretary in the preliminary voting results is accepted. And that completes the formal business of the shareholder meeting. I hereby declare that the 2013 Annual Meeting of Shareholders adjourned as of 3:55 p.m. We will now have a couple of presentations. It will be brief. Myself and Mr. Gill will both give a little bit of an overview of the company, and then we want to make sure we have plenty of time for shareholders to ask any questions or give comments that they may have.

As businesses begin to emerge from difficult economic environment globally, it's clear that risk management is more important now than ever. Our focus has been to expand ways to help customers more effectively manage risks as the demands of competition and regulation intensified.

Total company volume in 2012 was nearly 3 billion contracts traded. This generated more than $1.2 billion in cash from operations.

Reflecting this strength, we raised our regular quarterly dividend, as you know, 59% in 2012. We increased our payout target from approximately 35% to approximately 50% of prior year's cash earnings.

During 2012, we returned more than $1.2 billion to our shareholders, representing an aggregate dividend yield of nearly 7%. This included an annual variable dividend of approximately $430 million based on 2012 results. This dividend was paid in 2012 rather than the first quarter of 2013, because of, as we all know, the uncertainty surrounding future tax treatment of dividends. Looking ahead, we will keep investing in the company's growth while also continuing to return capital to shareholders in the most efficient way.

As part of our global strategy, we plan to launch a new London-based derivatives exchange later this year to serve customers outside the United States. More than 25% of our trading revenue is now originating from Europe, Asia and Latin America. Having an exchange that can leverage our European clearing house will provide additional opportunities to serve our growing non-U.S. customer base. This initial launch will be a suite of FX products. This will allow us to serve clients in the $4 trillion a day OTC FX market, largely traded out of London. We plan to expand into additional asset classes over time.

We also expanded our efforts in Asia by enhancing agreements with key partners, including the Shanghai Futures Exchange and the Bank of China. This follows our global growth strategy of serving local needs through selective partnerships. During 2012, we implemented our cross-listing and cross-license agreement with BM&FBOVESPA, the largest exchange in Latin America, and we increased our stake in the Dubai Mercantile Exchange to 50% to help build new benchmark for crude oil trading in that region.

Our successful acquisition of the Kansas City Board of Trade was another milestone. We are combining the KCBoT Hard Red Winter Wheat with our liquid Chicago Board of Trade Soft Red Winter Wheat futures and options market. This will provide customers with greater capital efficiencies, new trading opportunities and additional products to manage their global wheat risk -- their global wheat price risks.

Since we integrated, we've already seen the 24% growth in the KCBoT products in the first quarter compared with the first quarter last year. We also completed our joint venture with McGraw-Hill to create S&P Dow Jones Indices. In addition, earlier this year, we increased our stake in the JV from 24.4% to 27%. As a result, we secured a perpetual exclusive license on S&P futures, options and OTC swaps. This will further strengthen our position in index products and services.

We're also pleased with the recent extension of the long-term agreement between the JV in the Chicago Board Options Exchange, which will drive long-term benefits for the CME Group.

Let me briefly turn to summaries and clearing initiatives that we put in place. The safety and soundness of central counterparty clearing for OTC instruments has become increasingly important. You don't have to pick up the paper to know that this has been at the forefront, not only in Washington D.C. but obviously throughout New York and the rest of the financial services community throughout the world. We have worked closely with our customers and clearing firms to provide a comprehensive multi-asset class clearing solution. Our solution offers operational ease and creates capital efficiencies when combined with listed futures products.

We have added a significant number of buy- and sell-side firms for OTC clearing, and we have seen the considerable pickup in cleared volumes since the first clearing mandate back in March, which Mr. Gill is going to touch on in more depth in just a moment.

In addition, our swaps data repository is now active. The repository will be used to collect data for all asset classes. We also launched the deliverable interest rate swaps futures and contract with strong support from market participants. This new deliverable interest rates futures contract is very interesting because it trades as a future, but it expires as a swap. This is interesting because it gives the market exactly what it's been accustomed to for so many years.

Let me just quickly turn to the regulatory front. We continue to work with -- closely with key congressional committees, with CFTC and other futures industry participants. In the wake of probably one of the most difficult incidents that we had in our industry, which is MF Global, we've had to work to enhance -- to protect customer funds held at the firm level where the failure occurred. We implemented a number of industry-supported initiatives. Our goal is to strengthen customer protections and ensure the integrity of futures markets.

Customers of MF Global can expect to recover at least $0.99 to $1 for the 4d clients [ph], which are the majority of our client base, and as much as $0.97 on $1 for our 30-7 clients, which generally are U.S. clients trading on foreign exchanges. Although this outcome is a good one for the impacted customers, it does not diminish the fact that the event happened. And the event is unacceptable. I say that because we've never seen anything like this in our history of our business, yet it happened. And it affected a lot of people. Yes, the money is going to be returned and most people have gotten their funds back. But, again, it's not acceptable. But what's interesting about this proposal, what's happened here, is what's going on in Washington D.C. I had a great pleasure of testifying 8x as it relates to MF Global sitting next to Mr. Corzine on most of those events, and it was a very long and tedious process as we went through the legislative process. And I was very concerned that new rules or regs could be forced upon us or threw the baby out with the bath water, as they say, on a 160-year-old system that works very, very well.

We were successful because of our credibility and actually in doing the right things that we did not get any new rules or laws passed on us as it relates to MF Global. Why is that important? Because of the years that we have spent there, making it certain that CME Group's name is a credible institution, thanks to guys like Leo Melamed, Jack Sandner and others. They've done a great job. And we're going to continue to press on that, it's very important. I don't know what more to say about D.C. other than it's the most frightening place in the world. And if you believe everything you see and all the rhetoric you read, you will not be able to go sleep at night. But what's important is they stayed focused and really keep the pressure going back at them. And I think when this board took the initiative when MF Global first happened, by putting up pledging $550 million to get customers back in business right away was a giant step. And by this board not overreacting and then underwriting a check for supposedly a $1.6 billion loss that wasn't there, we never believed was there, was very impressive and the right thing to do. Why is it? Because, like we said, there's $0.99 in the $1 that is coming back.

It still, as I said, doesn't diminish the fact that people were out of money for a period of time. But I am -- would be very concerned if we're ever to write a significant check like that. We never would have got it back. But because we didn't do that, we did all the right things, people were forced to give back the money to the participants of the 4d [ph] clients and the 30-7 [ph] clients. So as painful as the process was, the result was a good one. And I'm a big believer you learn by situations like this, and I think we have. We've implemented new procedures, and policies are put in place. One of them that we put in place unfortunately caught somebody else, and that was Peregrine Financial, who, for 20 years, took $200 million from clients unbeknownst to them. Because we electronified it. It was one of our recommendations, along with the NFA who undercovered this scandal.

You can never fully protect everybody. You could put a cop on every corner, and someone will still try to commit a crime. I think this institution did a tremendous job of shoring up and protecting our reputation of 168 years of doing a lot of good things for the market. So that being said, Washington, as I say, is a very scary place for a lot of reasons. And also, as you may have read, that the President's budget is out again and in that budget. And you can't blame President Obama for this and I don't blame President Obama, this goes back to the first President Bush, where the first President Bush thought it'd be a good idea to put a transaction tax on it. I don't think first President Bush knew he was doing that. But it's coming from their office, and they put it in their budget. And President Obama has it in his budget again to eliminate 60-40 tax treatment for our participants. And he also has in there to put a user fee to pay for the agency and his budget.

So the President has in there to pay CME Group or whoever is going to pay $315 million to pay for the CFTC. To give you a little bit of an idea, some of our -- to generate $315 million is about $0.045 aside at the static volume that we're trading today. If we lose volume, you can imagine how quickly that can go up by the cost per trade. So you can get the $0.07, $0.08, $0.09, $0.10 a trade real quick. We charge some of our liquidity providers $0.07. It's 100% tax increase. So you could imagine how ridiculous this is and how penny-wise and dollar-foolish a proposal like this can be. Market makers, liquidity would dry up. Their spreads would widen. I've said this to Congress over and over again, I said it as little as yesterday when I testified in Washington that what happens when you -- the cost of business goes up on a handful of people? They can no longer provide the tight liquid markets that we enjoy today for people who do risk transfer. When they do that, they widen. That cost gets passed off to somebody. That somebody is all of us.

Because the market makers, you can tax them all you want. They're just going to eventually pass it off by widening their bid offer, and then the cost of doing business goes up to the farmer, goes up to the reinsurance, goes up for the banker, goes up for everybody. Who eased those costs? The consumers do.

So when you're trying to score $315 million, I'll show you how to blow several billion dollars by doing that. And that's to try to put 100% tax on liquidity.

I think that our arguments are good. I think that they're valid. Otherwise, I wouldn't be saying them. I've been traveling with many people on our board and staff for years, saying these are not new, but they're also a reality.

Our competition is out there. There's a tax called the Tobin tax. We're all familiar with this tax out in Europe. This is proposed by an economist. I love economists. They're a lot like weatherman, you could be wrong all the time and still have a job.

So there's a tax called the Tobin tax, and it's also been proposed throughout the European Union and voted on and supported, except for Great Britain. Great Britain said, "No, we're not having a Tobin tax." France said," We won't have a tax on derivatives, but we'll have it on other products." They said we're holding the vote now. They held the vote. But they said, "We'll do something different. We'll ratify that vote at the end of the year of 2013 on the Tobin tax." Why is that? Because there's something called an election in Germany in November. And the last thing you want to do is to be opposing a Tobin tax when you're up for election when most of your people think you need to have this money.

So you get pass the election, and then you would call the union back together and say, "Ok let's ratify the vote. Who's in?" Sweden tried this before, didn't they? How did that work out? Not so well. They got rid of the tax. Switzerland tried it before. Not so well, they got rid of it. Why? Because markets go away from these taxes. Same thing is going to happen with the Tobin tax, in my opinion. They will not institute it in its present form. They will vote on something completely different. Why do I bring that up? I talked about Washington, I talked about the President's proposals, I talked about other things in there, very scary. Regulatory arbitrage is what it's called. There are people waiting for United States of America to make these ridiculous decisions so the rest of the world can benefit.

When asked yesterday in congressional hearing, what do I think of some of the no-action letters by the CFTC coming in at the 11th hour, I said to Congress that the worst thing that could happen to any participant in the market is uncertainty. That's exactly what our government had put upon the users of all their market is uncertainty. They said, "How would that -- how do you look at what -- the way they're doing things, how do you deploy your business model?" I said, "We cannot deploy a successful business model with uncertainty within a regulator, yet they want us to pay $315 million for uncertainty." For me, it's just -- it's gotten to a point where I think Washington is finally getting it that if we go down this path of overprescriptive rules, I am -- I said yesterday I'm a huge believer in rules, but you've got to put teeth in the rules that make sense around the world. You need to put rules in place that people are afraid to break those rules. We have rules that you break and all of a sudden they say, "Just don't do it again. But if you do it again, don't do it again." That's not a rule. We need to put teeth in the rules because what's going to eventually happen, markets are going to leave and then we'll become an importer of the greatest service in the United States of America has, and that's financial services. And when you become an importer of financial services, you become an importer of the prices covered with their financial services product. I say at the Congress over and over again, and I will say it every time I get invited to Washington or even when I'm not invited because I think it's critically important. And that's what we're going to continue to do in Washington. We're going to continue to hone in and bring our message in -- for the CME forward. I said this many times. I don't ever want to jinx it. It's the 12th year I've been doing this job. If I would have lived my life by what Washington was going to do to us over the last 12 years, I would've committed suicide a long time ago.

It's just frightening what they could have done here. I will tell you that if anybody can name one rule or one law that's passed in the last 12 years that's had an impact on this business, I'd be hard-pressed to hear it because there hasn't been one. And if you want to say Dodd-Frank is the rule that's been passed that had an impact on our business, read all 2,342 pages of it. Because in there, it says that no clearing house shall be compelled to take the counterparty risk of another clearing house. That means if you want to have a trade done at one clearing house and transfer it to another, that clearing house has a right to reject it. That means that you cannot put a trade on it, the intercontinental exchange, and take it off at the CME or put a trade on to CME and take it off at the intercontinental exchange. Why? Because we innovate, and we should not be punished for innovation by rules that look like in the securities world. And we're not going to be, and we're going to continue to fight going down that path.

So looking forward, we're going to build on our positive momentum so far for 2013. Our senior management and I have spent a lot of time meeting with key customers. We're doing things completely different. Gill has done a remarkable job since taking over as CEO, and we have worked very closely together to promise we just don't see each other very much. And that's evident in our selection of ties this morning, obviously, because we wore the same damn tie. But that's not a bad thing because what we do, do is we communicate. And we can communicate very effectively. But Gill goes one way; I go another way. Bryan Durkin may go a different way, and we're doing that because we're going to continually, continually get our message out. We're going to be commercial. It's important for the CME Group to be commercial. If we're going to succeed in the future, we have to continually be commercial in the business that we do. That's what we're doing. We're not saying we'll send 4, 5, 6 people to come see you. Mr. Gill will come see you, I will come see you, Jamie will come see you. Mr. Durkin will come see you, somebody from senior management will come see you. And we'll keep coming back. We're going to keep coming back. And we're going to keep coming back for a couple of reasons. Why? We have a great value proposition for the people that are going to use our products, not just in the United States. These are domestic products. As I said, 20% to 25% of our revenues now are coming from outside of the United States. This is a very diverse, interesting, different company than it was just as little as 5 or 6 years ago. The competition is something that I've never seen in my entire life.

When you look at prices of products today, the correlations are amazing. Why is that? Because a lot of the volatility is going to go nowhere. So I was talking with John Kerlan [ph], one of our smart guys here just not too long ago and we're looking at different products at the CME trades. You look at the price of corn where all the grand traders, it's sitting in the $1 range for a couple of years. The problem is it's at a very high end. If we were sitting at $2.80 a bushel and government supports for still $2 a bushel, we'd all say that's just the way corn trades. But it's hard to [indiscernible] it and hard to buy it, I want to say $7 for 3 years, so we're not quite sure if it's high or cheap. When you look at crude oil, crude oil has been at $90 to $114 a barrel for 3 years. I'm not quite sure if that's cheap or expensive anymore, right? And I'm sure the rest the world doesn't either. When you look at interest rates, they've been essentially 0 for a very long period of time. You go right down the line. Natural gas has been in the $1 range for 3 years. Think about all the asset classes that we've trade, but think about something else.

22 million contracts passed through the doors of the CME Group today, 22 million. Can you imagine 10 years ago trading 22 million contracts in 1 day? We didn't trade 22 million contracts in half a year. It's amazing what we've been able to do in the last couple of years in a very static environment. Static environments change. We are well positioned for the change. We put the pieces of the puzzle in place for when macro events change, we will all prosper for it I want to thank you for your time and attention this afternoon.

Phupinder S. Gill

Thank you, Terry. When I saw the chairman 5 minutes before coming down here, he said, "Nice tie. Who lent it to you?" And he was right, I had to tell him it was Brian.

The chairman highlighted many of the regulatory issues, and he also highlighted many of the milestones that we have accomplished up to this point in time. I would like to focus my comments on the long-term growth strategy and the future outlook for the firm.

CME Group has essentially, over the last 165 years, built and grown some of the key assets to become who we are today. These assets are essentially the diverse range of global benchmarks that we have, our world-class trading infrastructure and our best-in-class risk management expertise. In fact, we are the industry leader in risk management for both listed, as well as the OTC derivatives.

Our technology is distributed to 150 countries around the world, and we are positioned very well for continued innovation and growth. Our record for successful innovation and history of maintaining a focus on what's coming in front of us has allowed us to maintain a highly defensible business model that has seen double-digit growth rates over the last 40 years.

I'd like to provide you with some perspectives on the performance of our asset classes, beginning with the financials. And first, looking at rates. We have worked very hard to enhance our product offering in light of the Fed 0 interest rate policy. In fact, the innovation that we have done over the last couple of years have yielded us 300,000 contracts a day simply in the contracts that we launched in the last 2.5 years.

And to give you a sense as to how 2013 is shaping up for us, first quarter average daily volume in the rate side of 5.7 million contracts compares very favorably to the 4.3 million contracts that we saw in the second half of last year. Including a record February in our treasury complex, the equity complex is trending very positively for us. We had strong inflows into actively managed funds. As Terry said a short while ago and as a reminder, we have locked up some very critical IP, with the S&P and Dow Jones joint venture that we are engaged in.

On the FX side, as many of you know, we run the largest regulated FX marketplace in the world. And that saw average daily volume of 1 million contracts in the first quarter. And -- sorry about this, oh, I'm in the right place. And we saw also record volumes in pounds and the yen.

Onto the commodities, beginning with the energy sector, April saw an average daily volume of 1.9 million contracts, making it the most liquid and extensive energy complex in the world. We continue to see improvements in new opportunities, and we are promoting, as many of you know, the 3 global benchmarks that are listed on CME Globex.

The agricultural commodities, as Terry pointed out, continues to do well for us. And the addition of the Kansas City Board of Trade into the CME Group family has been received very, very well.

Our COMEX division continues to perform extremely well, too, with recent records that you see on the screen here.

Onto the OTC opportunity that has come about as a result of the Dodd-Frank act. Essentially, there's going to be some market structure shifts. And in essence, the changes that are being imposed on the marketplace via the Dodd-Frank Act actually presents some pretty interesting revenue opportunities for us.

In particular, there are going to be 3 ways in which we're going to help our clients. In the first instance, we could clear the swamps exactly as the clients want them cleared. We could offer the clients the existing futures that we have. We have a very extensive suite of interest rate products that clients can use to replicate some of the swap trading that they're currently engaged in. And finally, through the innovation of the CME research and rating, they can trade the new products as a result of the Dodd-Frank Act. And I'm talking in particular about a product that Terry mentioned, which is a deliverable swap future.

Essentially, given all the innovation that we have done over the past 160 years, we are the only CCP, we are the only central counterparty that can offer margin offsets across all 6 asset classes, no one else can. And that is a result of the businesses that we have built.

The new innovation for deliverable swap features that we rolled out late last year, that contract has performed really well. And we are very pleased with its performance. Essentially, we're off to a very, very good start where OTC is concerned. And in particular, since the March mandate and coming into the June mandate, the second wave of clients will come into us. We have seen a phenomenal pick up in the amount of swaps that are currently being cleared. May-to-date is seeing average daily notional values of $33 billion or so that are being cleared on a daily basis.

From this chart, if I could walk you through, if you look at the first quarter of this year, we had, up to that point in time, done about $20 billion contracts. In preparation for the second mandate and the second wave, we have taken on several hundred accounts. And we have also started to clear, and that clearing has picked up in a way that we expect when the vast majority of those customers that clear swaps will come in to us.

And finally, our global growth efforts. CME Group has been deeply involved with globalizing our markets for well over 35 years, from the pioneering efforts of Leo Melamed and Jackson Sander, many years ago, the internationalization efforts of CME has taken on a brand-new flavor, particularly in the last 5 to 10 years.

The global benchmarks that we offer across the 6 asset classes make us a natural choice for international exchanges, clients and even, investors. We have opened up a CCP in London in a few short months, as you heard from the chairman, will have an exchange there. And we have launched several regionally relevant products too. Our international partners are on this slide, and in particular, I'd like to recognize the BM&F, whom we work very closely with on both product development, client development and systems development. Edemir Pinto, who is also a member of our board, is here, and CME Group is very proud of his relationships not just with BM&F but also every single one of our exchange partners in Latin and South America, Africa and various parts of Asia and Europe.

Our assets, our core growth strategy, the improving global economy and our efforts in OTC and globalization all are positioning us very strongly for continued growth, and we look forward to working with our clients and our shareholders. With that, I will turn it back to the chairman and I look forward to answering any questions you have. Thank you.

Terrence A. Duffy

Thank you, Gill. I think Gill raised an interesting point, Leo just returned back from Shanghai and Beijing, I think, just last night? That [indiscernible] How long have you been home? An hour ago? How long have been home? You're still in China. It's been a while but -- received an interesting email today that things are already loosening up over there with some of the requirements coming out of mainland China into the -- so that they could trade outside markets. But Leo has been very instrumental in this region, and I know that we've talked about it for a long time. And we've seed a lot of different efforts throughout the world. And I'll harp on this again, but I didn't think that we'd see 20% to 25% of our revenue being derived from Latin America, Asia and other parts of the world, big part of that is due to Leo's efforts. He has been constantly pushing on going to China, and I got to be honest, I've been there a few times, I told myself, "I really don't see the attraction to this place, but if you think so, okay, great." But that's what we do. We seed these type of investments and sometimes, they take time. We're starting to see some of the fruition of not only Leo's hard work, but Gill's and others who -- Gill's spent some time over there to. This is really important for the future of this company, so I think that, that 20% number could start to move dramatically, as these markets continue to evolve. This -- it's a small world but yet we've only even scratch the surface, so it's pretty exciting about where we're going as a global company. And as I said earlier, this company looks so much different than it did just a few years ago. We are truly a global company in 150 countries around the world with our products today. I mean, to say that 10 years ago, before Globex was really up and running to the extent it is today, it's just unbelievable where we've come. So everybody from the board to the shareholders to the members should be very proud of being involved in an organization that went from a sleepy backwoods organization, back of the yards trading post to a world-class global exchange that it is today throughout the world.

So we look forward to your questions. And first of all, we appreciate you being patient with us as owners of this company, and we look forward to delivering your results. With that, we'll open it up to questions.

Terrence A. Duffy

Anyone have a question or a comment? Martin? Martin, we got -- we had your question.

Martin Glotzer

You don't have an answer yet.

Terrence A. Duffy

Okay. I'll give you the answer now.

Martin Glotzer

It's always nice to complement the chairman at the beginning of the meeting, it was very nice to hear the educational events of Washington. I certainly appreciate it. And there's one subject that I could use the word unique, and that's the large number of directors that we have here at this company. We probably have the most directors of any publicly owned company in the United States, and I'm not against it. And I think at this particular company, it's good to have a large number of directors, each of them bringing their own ideas on how the company should be run. But in the end, as a consensus, for the benefit of all of our shareholders to move forward to all the projects. So I'm glad we have so many directors at this company. Thank you.

Terrence A. Duffy

Thanks, Martin, that's refreshing to hear. I happen to agree with you on all accounts, Martin, I knew you and I had a lot in common. On that point, we've been question about the board and I had made some comments earlier about we were going to reduce the size. There's no question a 30-person Board of Directors is large for a large publicly held company like ours, and we are addressing that. We -- I don't get concerned about it because I believe each and every individual, like Martin just said, brings a unique perspective to this board room, which helps engage the business. So I appreciate your comments, but at the same time, the governance committee is looking at this very seriously. We're never going to put a number and I don't think we need to share or put ourselves in that box about how many directors we should or should not have. We realized we have a few too many right now, we're going to work on taking it down to a number that looks a little bit more corporate. So we appreciate your comments, Martin. Yes, sir?

Unknown Shareholder

Hi, I'm Tulley Davey, [ph] I was a member for over 25 years. I have a question about the OTC market and the clearing. Some of the comments that I've heard from banks about the clearing -- possibility of clearings through the Merck for their OTC products has been on the subject of price. They seem to feel that the pricing of doing it through the Merck clearing will be more expensive than what they currently have. Now I don't know if this is just ignorance on their part or if there's something valid to this. But would you...

Terrence A. Duffy

Yes. So you have to realize a couple of things. First of all, the clearing house that is most competitive with CME is the LCH, the London Clearing House, on clearing OTC derivatives, of which is mostly owned and controlled by the dealers. So first of all, they would naturally say that. Second of all, their guaranteed fund was roughly, I believe, around $30 million, while ours was several hundred or going to be over $100 million.

Unknown Executive

It was $650 million.

Phupinder S. Gill

$650 million with a very large open interest, and that was a $700 million with a small open interest rate. And their true guaranteed fund was 3x that amount, if not, more.

Terrence A. Duffy

Right. But there also was -- in the pricing, it was a little bit of a misdirect on the pricing that we were priced higher, we're technically -- we're not priced higher because of the guaranteed fund and things of that nature. So I think that, as I said in some of my remarks earlier, we have been very commercial with both buy and sell side of the equation. I don't think anybody felt that OTC clearing was going to really change the makeup of this firm from a revenue perspective. I think it could help change the perspective of this firm or the synergies with the asset classes that we have to offer, so they can get the offsets as it relates to our futures products. Dodd-Frank has also made it more attractive to trade futures and OTC also, as you know. So I think that, that being put together, our value proposition is much more compelling because of the large suite of asset classes that we have on the derivative futures side of the business. For -- that's a little bit different of a story than what you were hearing maybe as long as 12 or 24 months ago. So the pricing is not near what it was the difference that they said. Is that fair, Gill?

Phupinder S. Gill

Yes, that's fair. If I could just add, to the chairman's point and everything is very fluid at least initially. And so there's a lot of misinformation that has gone out there. We have tried our best to correct that misinformation. LCH has gone and fixed a lot of the issues that they have had. And to top it off, what we have done and we rolled this out a couple of weeks ago, is roll out an advertising campaign that is targeted to end-clients, and it's basically fact versus fiction. And we addressed the issue of price, we addressed the issue of the guarantee, we addressed the issue of the margin offsets. And I think all the customers that received this correspondence from us are beginning to be educated in the right way. The advertising campaign that we put out there has specific quotes from some very large clients. So the impact of that campaign has been fantastic in terms of getting the truth out there. Good question but it's largely not so much the ignorance of the bank, but misinformation by whoever is passing this information out.

Terrence A. Duffy

All right. Mr. Bjorn [ph].

Unknown Shareholder

I'm glad this topic came out because it's a concern of mine as well. I'm not really concerned with the revenue side as the risk side. And most recently, I've seen advertising with interest rate swaps and that doesn't concern me so much because, as a participant in the fixed instrument market, I know everything is tied to the yield curve. And it is what it is, and I think it's relatively a little risk. But I am concerned, and I don't know what we're doing, and I'd like you to address what we're doing in terms of CDS and collateralized default swaps and such because when that stuff goes, everybody goes. And I don't think that margin is going to mean a damn thing. So I'd like you to address that. What are we doing and whatever we're doing, how are we protected against it? Do we have a separate entity that is set up and when that goes we're protected or what?

Phupinder S. Gill

You're referring to credit default swaps, right?

Unknown Shareholder

Yes.

Phupinder S. Gill

Okay. What we have with the credit default swap is we have put all of our focus, the majority of our focus, at this time on the interest rate swap, because the mandate is kicking in and it's very closely tied to the products that we have. And so from a credit -- for the credit default swaps, to address some of the issues that you have beyond the 5-day margining that is out there. In fact, for credit default swaps, in many cases, the margin may be higher to address some of the risks that you are concerned about. But it's also a separate guarantee fund. And so it basically isolates stuff. And that all these margin requirements, guarantee fund requirements are dynamic in the sense that as the conditions change, that will actually change. So your collateral requirements take up for credit default swaps more so than for the futures that you had been trading for a long, long time are going to change a lot more than you would otherwise see for all the other stuff that we would trade, and they have no offsets at this time. So you're talking about a book of business that we have that's basically going to be marginal in an extreme growth basis. So from a safety and sound [ph] point of view, we have taken many elements into account. So you've got, from a margining point of view, you've got a margining system for the futures that we have, you have a margining system for the rate swaps and you have a unique margining system on top of that for the credit default swaps. Taking into account the unique risk that it has that the other products don't. What this does is leads to higher charge.

Terrence A. Duffy

Yes, sir?

Unknown Shareholder

I'm both an A and a B shareholder. I really have just like 3 parts here, if you want to bear with me. Excluding exchange fees per trade, does the Core Rights of members included voting on any additional access to trading fees above and beyond the money already paid for a B share membership?

Terrence A. Duffy

You are asking if the Core Rights of a member -- what did you say on fees? I'm sorry, I didn't hear it all.

Unknown Shareholder

Okay. Excluding exchange fees that we paid at trade per trade, do the Core Rights of members include voting on any additional access to trading fees above and beyond the money?

Terrence A. Duffy

No. No.

Phupinder S. Gill

No. No.

Terrence A. Duffy

The Core Rights of the members are for Core Rights, and these aren't made up, these are from the year 2000 when we voted on this proposal by 98%. And I figured that the Core Rights would come up, I thought I would just write them down. So there's 4 Core Rights. Core Right 1, the divisional product allocation rules applicable to each membership class as set forth in the rules of the exchange, is 1 Core Right. Second Core Right is the trading for access rights and privileges granted to members of the exchange. The third Core Right is the number of authorized and issued shares of any class of b common stock. The fourth Core Right is the eligibility requirements for any person to exercise any of the trading rights or privileges of the members in the exchange. So those are the 4 Core Rights. Then we went on to say there was other de-mutualization disclosures during the vote. They're not binding, but they're also obviously something that we put in there when we were looking for your vote but not as a Core Right to be voted on. So those are the 4 things you voted on. Then we also put in there that -- it's 12 years later, but we said it, for floor access, electronic trading rights, use of lease of trading privileges and then clearing fees, we put those in there. It doesn't give the membership an ability to vote on any of those particular items. It's just -- where's Meg? No? Meg, where are you? What is that -- what do these consider?

Kathleen M. Cronin

Labor statements [indiscernible] as to how we would operate the company.

Terrence A. Duffy

Right. So it's just basically -- there are things in there how we would operate the company, but it doesn't give you the right to vote on those. Am I saying that clearly, Kathleen?

Kathleen M. Cronin

Yes, that's correct. They're not contractual rights, they were just undertakings of the time as to how we were continuing to operate the business.

Terrence A. Duffy

So the 4 things that you get a vote on is, obviously, if you want to increase the amount of Bs, which I don't think you're going to do very well if you asked for that vote, you can vote on trading floor access to -- so that you don't want that. And you can authorize -- and you also have product allocation rules that are applicable to each membership division. So those are the Core Rights of a membership.

Unknown Shareholder

Okay. Well I went to the informational meetings before we de-mutualized, and I don't think that's what was implied at all. So in any event, is the access to trading via computer, is that not a technological extension of the trading floor?

Terrence A. Duffy

The access to the trading of -- a computer, is that not an extension of the trading floor?

Unknown Shareholder

Right.

Terrence A. Duffy

I defer to legal, but I don't think so.

Kathleen M. Cronin

No. The Core Right was specific to the trading floor, not to Globex.

Terrence A. Duffy

The Core Right -- it clearly says in Core Right #2 trading floor access.

Unknown Shareholder

Trading floor access?

Terrence A. Duffy

That's what it says.

Unknown Shareholder

Is there some place I can get all these information other than...

Kathleen M. Cronin

It's all in the charter.

Unknown Shareholder

What charter? I've been looking...

Kathleen M. Cronin

The CME Group charter which lays out the rights that the B shareholders has all the Core Rights in it and it's exactly what they entail.

Unknown Shareholder

And where can I find the CME Group charter?

Terrence A. Duffy

I'll give it to you. I'll give it to you.

Unknown Shareholder

Okay. And then so we have this new thing called co-location of access to trading.

Terrence A. Duffy

Co-location -- is that what you said, co-location?

Unknown Shareholder

Co-locator.

Terrence A. Duffy

Did you say co-location?

Unknown Shareholder

Co-locator.

Terrence A. Duffy

Co-location is a facility that we have out in a separate location that is an equal opportunity for people who would like to rent that space from CME that has most of the service for our firms are located in this particular location. You can imagine an electronic server, if we put it in this room right now, half of the guys will try to lease the building across the street to try to get as close as they could to the server. So the best thing to do for all participants involved is we spent a tremendous amount of money to build this facility outside of CME, put the Globex servers and the clearing servers out there, and then we allow people to come in, to pay us, to put their servers in there. In that way, everybody has the same exact access to the math engine. That's what co-location.

Unknown Shareholder

And we charge a fee for that?

Terrence A. Duffy

We charge a fee for that.

Unknown Shareholder

Which is?

Terrence A. Duffy

It depends. I don't know what's the standard fee, the revenue is roughly around $40 million, I think, roughly.

Phupinder S. Gill

Yes.

Terrence A. Duffy

About $40 million a year. Good business.

Unknown Shareholder

Okay. I'm going to need that CME Group charter.

Unknown Executive

Thank you.

Unknown Shareholder

Terry, I want to say that the year has been pretty good, the stock is up 27%, 28%. And that's good for all of us, and we appreciate the efforts in the work that all of you have done. And at the backside of it is, it seems that as we go along, ICE continues to make inroads on us, gain more traction, get more market share. And I'd like to just to have your thoughts on how that is. It may be very simple but we're on a long-term gain plan, and their cash now in a short-term gain. I just like to have a little read out on that because -- I'll tell you, I have some friends that were trade members and so forth. And they own board trade stock and they sold all of it and bought ICE. And of course, the like to let you know that they are really smart doing that. But what's the long-term look, please, as far as how we compete or what our competitive posture is in our market viability and so forth, in the coming years against ICE?

Terrence A. Duffy

Yes. I mean, that's a good question, and I hear it often. First of all, we have to compare the 2 companies. IntercontinentalExchange has -- I think they're up, John, roughly 30-some-odd percent, year-over-year, in those stock prices, I believe. We're up 20-some-odd percent, year-over-year, on our stock price. You have to imagine, they've been in one of the hottest asset classes in the last 20 years that we've ever seen as far as participation, and that's the energy business. And they also -- were managing one asset class during this entire period. So you can manage one asset class fairly easily when the ship or the boat is going downstream or are going parabolic, right? It's pretty easy. What's hard to do is what I talked about earlier, is manage a business that's got -- your biggest product line is interest rates and the policies have been 0, manage a business that's got grain market sitting at the same price for 3 years and haven't moved, but they're at crazy prices, nobody has to do with them. And then you look at some of our other businesses. So we're managing multi-asset classes, they're managing a single asset class, and that's been parabolic. So in all due respect to them, it's been their good fortune. The other part of your question, which is a concern, which is they've taken some of our market share in that space. They have, it's undeniable. The net gas business especially is something that they have taken some of our business over the last couple of years. We have put certain things in the place, and we are still implementing certain programs. I think you will just here on the last call with ICE, if you were listening to their -- maybe Rich can say it better than I, about what their concerns are and this CME has been has become more aggressive in competing with them. We're going to become a lot more aggressive with them. They are in the midst of going about a merger transaction with the New York Stock Exchange, and they are going to try and deploy the IntercontinentalExchange model onto the LIFFE business. We're talking about $8.1 billion transaction with an enterprise value of $11.1 billion when you add in the debt for the New York Stock Exchange. They are going to have their hands full, which is good for them. We've done a lot of this work already. I'm not being de minimis, and I never will, of the IntercontinentalExchange. I think they're a fine run organization, but at the same time, to compare them to CME Group is truly not fair because they don't have nearly what the CME Group has. They are not in 150 countries around the world, they have not spent $1.5 billion on their technology, they have one asset class today, they do not have the multi-asset classes that CME has. We are in a very good position for the future. Sometimes you have ebbs and flows in markets and sometimes they hurt. But if you follow that, like we did in the newspaper in Washington, D.C., you'll drive yourself nuts. So we are staying focused in our business plan. We are going to get more aggressive in our energy space, which we are, and we're going to continue to build our other asset classes. So I said this many times, if we did not have competition, we probably would be trading butter and eggs still, and probably onions, except they outlaw the meat though. The only commodity in the country that's got a law that's says you can't trade them. But that's what's good for CME Group is competition. If we don't have it, we would be resting on our laurels. We are not resting on our laurels, we are being aggressive. And that's why we're on the road, we're going to continue to cultivate new clients, clients that nobody else thought of. We're going to create new products that people don't even know they need yet, but they're going to need them tomorrow. And that's what we're doing each and everyday around here. So I'm confident in our competitive landscape, whether it relates to the IntercontinentalExchange, whether it relates to the NYSE LIFFE transaction. Thank you. Yes, sir?

Justin Bouchard

My name is Justin Bouchard. I'm a member. I've got a very small trading firm, and I also owned an ICE fee that's brewed on the CME. About 4 years ago, I was managing a group of about 20 to 30 traders. And what I found was as we kept adding traders, they kept imitating each other's strategies and they basically mimic the same thing over and over. So my choice was to get out of that situation and start my own trading company, so now I've just got 4 traders. And I found that the result is that it's a lot like teaching in a classroom. The quality of education that they get is so much greater, they're more disciplined, they're more responsible traders. And I think that model is something that CME is just missing out on because of the cost of buying a seat and then the extra step on top of that to get to a corporate equity membership. So if I wanted to go out and buy 2 full CME seats, 2 IMMs and the other 4 that costs a certain amount of money, and then you have to go and buy the stock. So I'm not prepared to do that and what's happened is my traders who've been trading LIFFE, they have been trading ICE, EUREX and other exchanges, and they're not trading CME. So we're missing out on a ton of volume. We used to be trading millions of contracts. And my question is why are we still doing that? And what can we do to improve it?

Terrence A. Duffy

Thanks, Justin, for the question. And let me just, kind of, maybe put a little color to Justin's question. I don't know Justin, so -- but I think I know where you're going with this. When you got a 106J firm and you try to put a handful of guys together, here is your requirement, your requirement is own x amount of seats, x amount of shares, x amount of capital. Your total outlay for that is $4.2 million. And you're adding the seats, the shares and the other requirements. Sounded about right? $4.2 million to trade products at the CME Group, correct? Correlation for the LIFFE products, correlation for the EUREX products are about 95% or higher to our products that we trade, even the proprietary products, those S&P and NASDAQ, that we have. So you can get almost a U.S. exposure trading somewhere else because the correlations are so high, except for one thing, you don't have a $4.2 million outlay to do so is your concern. It's a very interesting argument, and it's a very difficult argument. I've had a lot of people say to me over the years, "The B shares are being devalued. You guys are doing this, you're doing that." We haven't done a damn thing to devalue anything. We are running a business and growing a business with a $4.2 million hurdle rate, that nobody else has, to do your business. You have to pay $4.2 million to come trade here and trade whatever the fee is at LIFFE or EUREX, not $4.2 million. We're competing with that, and I still support that for a number of reasons. I think that there is a value to owning something versus leasing something. I think there is an inherent value to what you provide your clients. Can I justify $4.2 million? It's hard, it's very hard. We are looking at ways to reduce that cost to you. There are certain things I can't reduce, which is the B share requirement. That is roughly $2.5 million to $3.2 million, depending on what day of the week it is and the amount of memberships you want. That's an issue. But there's other things with the share requirement that we're looking at, dealing with things of that nature, but there's also revenue impacts that are associated with that. So I know -- it's funny because I was just looking at this the other day, exactly what the cost is for a small group to put together to trade CME's products versus what the cost is to trade our competitor's products. And that's a hard -- it's a hard thing for us to deal with, but we're going to deal with it, we're going to continue to deal with it. I'm a huge believer not only will the A shares benefit, the B shares will benefit also. Your cost of $4.2 million will be secondary to nothing because your opportunity costs are going to be so much greater trading CME Group's products than LIFFE or EUREX. And that's what we're shooting to do. But we are fighting a little bit like that. That's part of what we signed up for and that's what we're going to do about them. We have programs in place to bring liquidity here, and I think liquidity begets liquidity, and if that wasn't the case, again, we wouldn't have traded 22 million contracts today.

Justin Bouchard

How about a fixed cost for the membership instead of an equity, a floating rate...

Terrence A. Duffy

I'm not a big believer, I'm a free market guy. And I'm a big believer of that, these memberships are what they are. I know there is some criticism the other day when the trustee came in and so -- so why didn't CME by them? Well nobody said that when the banks came in to buy them, why didn't CME come in there and fix them, so they could buy them cheaper? When the guy paid $1.5 million for a B1 share a couple of years ago, I haven't heard from that guy. Why? Because he already understands the cost of that. They go up and they go down. And that's the way they have done it for a lot of years. And when we signed that de-mutualization agreement in 2000, that's one of the things that the membership got to keep, was their B trading right. And we've never influenced the price of that and we never will.

Justin Bouchard

Yes. I just want to stress my strong opinion that larger trading groups will damage the system and when you have smaller trading groups, the benefit is just so much greater.

Terrence A. Duffy

I talked to Gill and Brian and Jamie all the time that we need to diversify our ADV. We cannot be beholden to a handful of large participants. We need to have more smaller participants. But to your point, and it's exactly the point, it's $4.2 million. It's a lot of money. And you haven't made a trade yet. So we understand that, we are looking at certain ways to bring in smaller groups at a smaller amount of money, but at the same time, I cannot, cannot impact that B share. I won't. It's -- that's part of what I cannot do, not right now. They can vote it, but I can't.

Phupinder S. Gill

Justin, this has been a sole point with several of the prospects that have tried to come in over the past 10 to 12 years. What we have done in -- with respect to this A share requirement, for example, we eliminated it, unless you have principal risk, which is what your group is actually doing. And that requirement has come down from where it was, which was 72,000 shares before we split. So times 5, right? So 350,000 shares has come down to whatever the requirement you have now. I can share with you the experience of the vast majority of the firms that have bit the bullet and joined. Many, if not most of them, have found that the payback period from that investment of B shares, it comes up very fast. Depending on the volumes that you actually trade and on the differential between what it would be had you not bought the seats, versus what it is since you bought the seat, and then extends into a trading opportunity. Your guys can now have an average P&L per trade of $0.17 instead of $0.22 -- minus $0.22. So it adds to the trading opportunity, and I would encourage you, at least at this time, to think in those terms because it has benefited the vast majority of those guys that have joined us.

Justin Bouchard

Right. To be clear, it's not a question of biting the bullet, it's not an option.

Phupinder S. Gill

It's a financing, the sheer amount of it, right?

Terrence A. Duffy

I think, also, what you're saying -- I won't put words in your mouth, but how do you start new participants to come in at that level? I mean, we can all say we'll get the money back in 12 months, but there is no one saying we're going to be successful in the first 12 months of trading. Maybe we'll lose the first 12 months of trading, and now our $4.2 million would have turned into $5.5 million. So I completely understand what you're saying, I get it, and I hear it all day long. But the problem is we have these other restrictions that we signed onto in 2000 that we have to deal with. The one thing that we can deal with and we are looking at is the share requirement, Justin. I am laser-focused, I'm bringing in more participants into this marketplace. We have to diversify it. Otherwise, it will be a situation where machine eats man. I am convinced with that. We cannot allow that to happen. So we need to have a bigger universal participants in this exchange, and we can expect $4.2 million with a guarantee of making $0.01. So I hear you loud and clear, we're dealing with what we have in front of us all.

Unknown Shareholder

Yes. Just want to comment on one thing you just said. You want to fight the war of machine versus man, but when one person is trading all by themselves, they can't manage their risk 24 hours a day. You need a team working around the clock. You need teamwork, you need communication. And once you do go from one member to a team, a small team, the quality of your risk control, the quality of your trading improves greatly. So if you have these 2 options, you can go and buy your own seat or you can go and buy this corporate equity membership and there's nothing really in between. So those are just my 2 cents.

Terrence A. Duffy

No, I appreciate your comments very much and they're very real and very timely. And we are trying to address them as best we can. Thank you. Any other questions or comments? Come on, good opportunity. Yes? Donnie?

Unknown Shareholder

Comment about CME Europe, I was wondering what the motivation was, first of all? And going back to what Justin was saying, the seat structure will be in place in Europe as well?

Terrence A. Duffy

No. The seat structure will not be in place in Europe.

Unknown Shareholder

So the commissions, the whole rate, the system...

Terrence A. Duffy

That has nothing to do with the Core Rights of the membership. So this -- the structure in Europe, and correct me, if you guys think of doing it any differently, but we only opened a clearing house, so far. We are not approved for a registered exchange, recognized exchange in Europe as of yet. Our application is still pending, we're hoping sometime over the next several weeks we achieve that, I assume. So again, we just have a clearing entity to date. We hope to list it with our FX products to start with, and then go from there. But we have to wait until we get approved to become a registered exchange. You want to comment on it?

Phupinder S. Gill

Yes. Sure. The motivation behind that exchange has been a certain set of clients of potential clients who have not, up to this point in time, traded outside of Europe and don't intend to. And so in order for us to reach that client base and the interest of that client base has, beginning an exchange in London made a lot of sense for us.

Terrence A. Duffy

Donnie, I think traders are creatures of habit. We all know that we all bend them, so when you're trading euro dollars for 20 years, or you're trading livestock for 20 years and someone says, "You want to go trade New York copper or something?" You go ask, "New York, I'm not trading that." Right? So you can imagine that the home field advantage, whatever you want to call it, that what Gill is referring to. People are not going to trade U.S. products, so we have to go to them. So I think it's a good thing, even though 20-some-odd percent of our revenues now coming from outside the United States, you still have to cater to that hometown crowd. We may have to do something very similar in Asia, too. Thank you.

Any more questions or comments? Okay. Since there is no more questions or comments, let me just take this opportunity again to thank each and every one of you for your interest in CME Group. We have a new policy -- not a new a policy, we have a policy, and that policy is going to be very forthcoming and very open and very direct, good and bad. And that's just the way I think it you have to be if you're ultimately going to be the ultimate successful leader in this business. So between Gill and myself, Jamie, Brian, the rest of the management team, we are here to listen to your concerns, listen to your issues, there is no issue too small or no issue too big. I want to thank you again for being here today, and I wish you a good day. Thank you very much.

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