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CME Group (NASDAQ:CME)

Q4 2010 Earnings Call

February 03, 2011 9:00 am ET

Executives

James Parisi - Chief Financial Officer and Managing Director of Finance & Corporate Development

John Peschier - Managing Director of Investor Relations

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

Craig Donohue - Chief Executive Officer, Executive Director, Member of Executive Committee, Member of Marketing & Public Relations Advisory Committee and Member of Strategic Steering Committee

Analysts

Brian Bedell - ISI Group Inc.

Alex Kramm - UBS Investment Bank

Rob Rutschow - Credit Agricole Securities (NYSE:USA) Inc.

Christopher Allen - Banc of America Securities.

Jillian Miller - BMO Capital Markets

Michael Carrier - Deutsche Bank AG

Richard Repetto - Sandler O`Neill

Kenneth Worthington - JP Morgan Chase & Co

Howard Chen - Crédit Suisse AG

Daniel Fannon - Jefferies & Company, Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Jason Shum

Matthew Heinz - Jefferies & Company

Niamh Alexander - Keefe, Bruyette & Woods

Daniel Harris - Goldman Sachs Group Inc.

Roger Freeman - Barclays Capital

Operator

Good day, everyone and Welcome to the CME Group Fourth Quarter 2010 Earnings Call. [Operator Instructions] At this time for opening remarks and introductions, it's my pleasure to turn the conference over to John Peschier. Please go ahead, sir.

John Peschier

Thank you, and thank you all for joining us this morning. Craig Donohue, our CEO; and Jamie Parisi, our CFO will spend a few minutes outlining the highlights of the fourth quarter and then we will open up the call for your questions. Terry Duffy, our Chairman, is also here this morning.

Before they begin I'll read the Safe Harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements.

More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent forms 10-K and 10-Q, which are available on the Investor Relations portion of our website. During this call, we will refer to GAAP and non-GAAP results. A reconciliation is available in our press release as well as within an income statement trend file in the IR portion of the site, which contains historical quarterly results on a GAAP basis.

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

Craig Donohue

Thank you, John. Good morning, and thank you for joining us on the CME Group Fourth Quarter Earnings Call.

For the quarter, CME Group posted solid results of $763 million of revenue and $458 million of operating income with an operating margin of 60%. I'll let Jamie get into the details on the financial results, while I'll take an opportunity to talk about the big picture environment for CME Group and our customers.

For the entire financial services industry, the past two years have been filled with challenges and uncertainty on many fronts. I think we can all agree that there is still a fair amount of uncertainty ahead but as I look back on CME Group's response to this environment, I see remarkable progress.

We've consistently worked to support the users of our core products, provide fact-based analysis and insight on prevailing market conditions and look for opportunities to develop new products. This work has enabled us to launch exciting new products such as the Ultra Bond Treasury futures, which traded 34,000 contracts per day in January and which provide a variety of new and useful analytical tools to our customers.

In turn, these allow us to have more meaningful conversations with market participants about their trading needs and continue to evolve new offerings for our customers. We've worked with regulators, customers and service providers to develop and launch a cleared over-the-counter interest rate swaps offering, which has cleared over $980 million since launch. We are in what we consider very early stages with this offering but we are pleased to note that the necessary operational and risk management frameworks are functioning robustly as evidenced by the cleared activity to date and early participation has come from a diverse group of firms.

Since our initial launch, we've added two new clearing firms, RBS and Wells Fargo, highlighting the positive reception the offering is getting from market participants. We received all necessary approvals for the launch of CME Clearing Europe, an offering which provides us with long-term strategic flexibility in our efforts to meet our global customers' needs. We are on track to begin clearing nearly 100 over-the-counter energy products later this year. And from there, we will expand to other over-the-counter and listed products. Approximately 20 firms are currently in talks to participate in the offering, including potential clearing members and customers.

We built upon years of education in Washington to call for a measured approach to financial regulation, one that doesn't create unintended consequences and doesn't put U.S. markets at a disadvantage. We recognize that while exchange-traded markets largely will see fairly minimal impacts from Dodd-Frank, regulations for the over-the-counter markets are ongoing. We continue to advocate not just for our benefit but for sound, economically rational regulation.

2011 will be a determinative year in this process and we are committed to the high level of engagement that we've shown so far.

We bolstered our products and services capabilities and our global reach by a multiple strategic initiative. For example, we added Dow Jones Index Services to our product family and Elysian services to our technology suite. On the global front, we deepened our BM&FBOVESPA relationship by initiating a joint multi-asset class platform development effort. Beyond BM&F, we launched or expanded relationships with multiple global partners, including Bursa Malaysia, Nikkei Inc., the National Stock Exchange of India and Bolsa Mexicana. Combined, these efforts help to expand our global membership and clearing membership base and generate opportunities in markets outside the U.S. where we believe customer acquisition initiatives can generate significant long-term growth for us.

Throughout all of these strategic efforts, we further strengthened CME Group's strong financial position by paying down debt and we laid the groundwork for the ongoing return of capital to our shareholders, which Jamie will discuss in more detail.

I'll now provide a few key product highlights for the year. The interest rate complex ended the year up 28%. While this impressive growth was obviously off a down year, we feel that many of the trends in 2010 signal that macroeconomic conditions are continuing to support a more active interest rate environment.

We talked before about how treasuries have seen higher rates of growth in Eurodollars as volatility has come back into the long end of the curve. This is consistent with activity we saw during the prior extended period of Fed inactivity from June 2003 to May 2004. Treasuries in 2009 were 43% of total interest rate volume and in 2010, were 48%.

FX had a record breakout year with 47% growth, continuing a trend of being one of the fastest-growing segments in the global FX market. Ongoing price volatility for physical commodities has created a strong volume environment in agricultural commodities, energy and metals as expectations for increasing global demand continued to grow.

Average daily volume for metals was up 40% for the year and agricultural commodities were up 23%. Energy average daily volume was up 11% for the year with crude and refined products up 21%. Natural gas markets have experienced very low volatility given the increased northeast shale production and average daily volume in these products was up 2%. The energy complex posted strong growth of 22% for January as well with 47% volume growth in our WTI products. This strong volume reflects the world energy markets reliance on WTI as an indicator of global macroeconomic fundamentals.

We were particularly pleased to announce new daily volume records in our benchmark WTI futures and options contracts, which traded a combined 1.7 million contracts on January 28 with WTI options posting a second consecutive record on the following trading day as well.

In the fourth quarter, volume during non-U.S. hours represented 16% of our Globex volume, the highest percentage quarterly we've seen so far as it grew 33% compared to Q4 of '09. We saw considerable strength in interest rates and agricultural products during the overnight period, up 38% and 107%, respectively.

It's exciting to see the liquidity deepen throughout the entire day and we are poised to build on that liquidity by introducing our globally relevant products to new customers around the world.

I'll close my comments today with a brief update on regulation and the implementation of the Dodd-Frank Act. As you know, the CFTC is working towards its July deadline for enacting rules in support of Dodd-Frank. As things now stand, there are numerous open issues, many of which are to a large degree intertwined.

However, as I mentioned earlier, it is important to note that most of these issues are specific to the over-the-counter markets with very minimal impacts expected for exchange-traded markets. We are supportive of measures that will reduce systemic risk while preserving the flexibility and customization of over-the-counter markets, which allow them to serve customers and provide innovation.

We anticipate that given the July deadline, we'll have much more clarity on key issues by that time. In general, a significant focus of our work in Washington is to ensure that proposals currently advanced do not impose excessive compliance costs and other burdens on market participants. It is critical to the health and competitiveness of the U.S. markets that we avoid unnecessary and overly prescriptive regulation. We will continue to work actively with regulators and market participants towards these ends.

To summarize, in this area of significant change in financial services, CME Group has been successful at not only building our business for the future but also with contributing to the regulatory process and laying the foundation for our customers to move their own businesses forward under the evolving market frameworks. We see good indications that the fundamental drivers of the core business will help us sustain growth. And we are optimistic about the long-term prospects for our development of over-the-counter and global initiatives.

With that, I'd like to turn the call over to Jamie to discuss the financials. Thank you

James Parisi

Thanks, Craig. CME Group posted solid fourth quarter financial results with average daily volume of 12 million contracts per day, up 17% versus Q4 of last year, driving a 14% increase in revenue to $763 million.

There are a couple of items included in our GAAP results that I'd like to walk through. First, our GAAP tax expense included a $51.3 million non-cash charge to record a deferred tax liability re-evaluation due to revised state tax apportionment estimates. These changes and estimates are normal course and occur each year once we have completed and analyzed our annual tax returns in various jurisdictions.

On a related note, in the first quarter of this year, preliminary estimates indicate that the impact of the recently passed Illinois income tax increase will result in a non-recurring re-evaluation of our deferred tax liabilities of roughly $5 million.

Second, our GAAP non-operating expense for Q4 included $8.6 million, resulting from the acceleration of hedge expenses from 2011 associated with the early payoff of our term loan, which we mentioned in a press release earlier this month. As a result, we will see a decrease in our interest expense going forward, which I'll touch on later. Excluding these two items, Q4 net income would have been $253 million and diluted EPS would have been $3.77.

Turning to revenues. The overall rate per contract for the fourth quarter was $0.813, up slightly from the third quarter, driven by offsetting mixed factors. On a full year basis, average daily volume was up 19% while the average rate was down 3%.

Market data revenue of $104 million for the quarter was up from the third quarter, due in part to a favorable audit assessment. Subscribers to CME, CBOT and NYMEX data decreased somewhat in Q4 with the total terminal count decreasing to 379,000.

Overall for the year, we saw increased revenue as the price increase instituted at the beginning of 2010 had a greater impact than the decrease in reported terminals.

I'll now take a few minutes to review expenses. Drilling into Q4, compensation and benefits was $120 million. Within compensation, we booked $3.7 million of non-recurring expense related to a voluntary self-audit of our employee classification levels. The fourth quarter bonus accrual totaled $22.2 million, higher than we expected at the beginning of the quarter due to stronger-than-anticipated Q4 volumes and operating income.

Stock-based compensation increased sequentially due to our annual grant which occurs in mid-September. At the end of the year, our overall headcount stood at 2,570, an increase of 50 people during the fourth quarter, reflecting our continued investment in growth opportunities, including the acquisition of Elysian.

Excluding subsidiary employees, our total 2010 employee bonus was $67 million, which came in at the midpoint of our 2010 bonus guidance of $54 million at target and $82 million at maximum.

Turning to 2011, our target bonus is $67 million, including subsidiaries.

During the fourth quarter, we saw a $9 million sequential increase in professional fees due to higher OTC and European clearing expenses, increased regulatory costs related to Dodd-Frank as well as expenses related to the acquisition of Elysian.

In terms of 2011, we expect total expenses to increase to approximately $1.26 billion assuming our target bonus payout up from the $1.17 million last year, which included the $20.5 million impairment we booked in Q2 2010. Of the $110 million annual expense increase, about half is tied to our existing core business, which has annual expense growth of roughly 5%. This is down from core expense growth in 2010 of approximately 8%. The other half of the annual increase is related to higher spending on growth initiatives.

These include co-location, higher OTC costs due primarily to operationalizing our offerings, the development of our multi-asset class trading platform with BM&FBOVESPA, the building of our European clearinghouse and costs to create an enhanced front end for energy trading with our acquisition of Elysian in December.

In the non-operating income and expense category, the interest rate hedge acceleration drove expenses higher as previously mentioned. In terms of 2011 guidance, we expect interest rate expense to drop to approximately $31 million in the first quarter and then approximately $30 million each quarter thereafter. Our effective tax rate in Q4 was 42% excluding the tax-related charge I mentioned earlier.

Looking ahead, due to the announced increase in the Illinois corporate income tax rate, which is retroactive to the beginning of the year, we expect our effective tax rate in 2011 to increase slightly to approximately 43% excluding any deferred tax liability re-evaluations.

Capital expenditures net of leasehold improvement allowances totaled $77 million in the fourth quarter, driven primarily by work on our co-location and data center facilities. CapEx for the year totaled $176 million. In 2011, we expect to spend approximately $180 million on capital.

2010 was a record cash earnings year with CME Group generating $1.1 billion. During the year, we paid down debt of $300 million, paid dividends of $305 million and added to our cash balances to accommodate our various OTC and international clearing efforts.

At the end of the fourth quarter, we had approximately $900 million of cash and marketable securities on our balance sheet. As many of you are aware, our dividend policy is tied to the prior year's cash earnings total.

The CME Group Board of Directors recently approved amending our existing dividend policy to increase our dividend payout from approximately 30% of prior year's cash earnings to approximately 35%, subject as always, to the Board's approval and declaration. This is an initial step in the capital structure plan we highlighted during our second quarter earnings call. Based on our 2010 results, this change is expected to increase our regular dividend by more than 20%. We intend to announce the next quarterly dividend later this month following our February board meeting. The early pay down of our $420 million term loan originally due in August 2011 will position us to reach our targeted level of one-time debt to EBITDA sooner as we pay down outstanding commercial paper.

In addition to the regular dividend increase, we will consider other forms of capital return, likely in the second half of the year, which will potentially include some combination of opportunistic share buybacks and special dividends.

One last point. We have adjusted our planned minimum cash levels to $700 million from $500 million based on fine-tuning our estimates of expected guarantee fund commitment for the OTC initiatives we are involved in and our initial commitment to CME Clearing Europe based on its recent approval by the FSA.

Turning to recent volumes. Our ADV was 12.3 million contracts in January, up 10% compared to the prior year with our commodity-related products, agricultural, energy and metal driving most of the growth.

We will now open up the call for your questions. In order to get to everyone, we are limiting all of you to one question and one follow-up, and then please feel free to get back in the queue as time permits.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Rich Repetto with Sandler O'Neill.

Vis

Richard Repetto - Sandler O`Neill

I guess the first question, Jamie, is on the expenses. You broke it out and gave us some detail on the $110 million increase. I guess the $55 million or half toward the new initiatives, what do you expect as far as revenue offsets for that $55 million?

James Parisi

I think, Rich, there's a couple of items there. On the platform that we're developing with BM&F, the multi-asset trading platform, as you know, we've got about $10 million of revenue this year from them to help codevelop that. We anticipate about $15 million in 2011 for those same efforts and about another $5 million in 2012 related to that. Also, co-lo [co-locations] is an other obvious area of expenditure for us in the current year. And we've said that revenue from that will start in 2012 in the neighborhood of $30 million to $40 million in that first year. And then going forward, clearly, we are investing heavily in our OTC efforts where we do expect to generate revenues but we haven't quantified those yet.

Richard Repetto - Sandler O`Neill

So I guess -- this isn't my follow-up, but it's fair to say that those initiative,s, you expect a good amount of revenue offsets from them? Just -- those numbers you just gave me?

James Parisi

Absolutely. I mean that's -- we're spending on growth. And over the long-term, the reason for doing that is to generate that revenue going forward.

Richard Repetto - Sandler O`Neill

And then my follow-up would be I guess for Craig and Terry. Craig, you made some comments about the OTC and the rule-making process at the CFTC. It seems like it's going down the route of being highly prescriptive. And I guess just to get some color from your perspective on how you see the process going and what are the things that you are most focused on that you think that they got right or that may need some adjustments after the comment period?

Craig Donohue

Well, I'll just start by saying that I think there's an awful lot of stuff, if you're following this, that is coming out in terms of the proposed rule makings. We're commenting very extensively on those. So I don't think I can encapsulate in a very brief answer sort of how we're viewing those different things. In general, most of the focus is obviously on creating a rational and efficient scheme for mandatory clearing, as well as for the trading of swaps that are required to be cleared. We, like everybody else, is paying close attention to that. So in general, I mean I would say that this is a process. The industry has commented. We've been very highly aligned in our commentary with most of our significant customers as well as with other industry stakeholders that have been commenting, including most of the major trade associations. So I think we have a fairly conventional point of view. If you look at the FIA and SEF and others that have been commenting, for the most part, we're highly aligned with them. Most of us support the core principles of what they're trying to do in terms of improving transparency and reducing systemic risk. And we're just trying to work as an industry to find a way to do that where it's not disruptive to the existing kind of business models or efficiency of doing business.

James Parisi

And just Rich, to add to that a little bit, I just got back from Washington last week, and they are going to hold upcoming hearings on the 10th and the 15th. The 10th will be in the Ag committee and the 15th in the financial services committee, both on the House side and this is one of the topics they want to discuss about the implementation of the 240 rules that have been put forward and is it feasible to get all those enacted in the timeframe possible. What are the costs associated with doing that and what is the competitiveness of doing that and are we putting forth some rules that will hurt U.S. institutions. So I think that you've seen Congress, since the election, take note of the Dodd-Frank Act and all these rules being written. And now, they're going to hold hearings to bring not only the regulators in there but folks like ourselves to get our opinion as this process unfolds.

Richard Repetto - Sandler O`Neill

It seems like it's very hard to keep your arms around on the things that are going on because there is so much and the whole thing may change.

Operator

Our next question comes from Alex Kramm with UBS.

Alex Kramm - UBS Investment Bank

Just wanted to start briefly on the competitive environment. Obviously, a new competitor has evolved here that just got regulatory approval, NYP,C and why does he like U.S., NYSE Liffe U.S. And just wanted to see what your most recent thoughts are there. When we talk to market participants, it seems like there's a little bit more drive and urgency than we've seen in some of the previous attempts. And I think you, yourself have said that they have a value proposition and might have a competing end to what they're trying to do. So any update there would be interesting.

Craig Donohue

Sure, Alex. I'll be happy to comment on that. First of all just to clarify, I think what you were referring to was they've received approval for their DCL application. They still need approval for the actual cross margining proposal between cash treasury and treasury futures contracts. I guess what I would do is just repeat what I think we've said before, which is that we certainly view this as an effective competitor. We do take this very seriously. Having said that, we have very, very deep liquidity, very low transaction and frictional costs, excellent technology, very strong customer relationships and extremely low pricing for liquidity providers and high-volume traders in our treasury and Eurodollar futures contracts. And I think like in most cases in the global futures and options industry, developing liquidity to compete with a very highly efficient existing pool of liquidity is always difficult. As well, I think most people tend not to make actual trading decisions on the basis of the capital, the efficiency. And I think you can't view the capital efficiency in isolation because by definition, if you wanted to optimize for cash treasury and treasury futures, you would be self-optimizing for the portfolio margining benefits and cross margining benefits of including CBOT treasury futures and the broader portfolio of CME Group products. So we're looking at it very carefully. We have our own proposals that we are working on to enhance the margin offsets for customers who are active in both the cash treasury and treasury futures markets. So as always, we'll be a vigorous competitor with people who compete with us.

Alex Kramm - UBS Investment Bank

Then just a very quick one on the OTC side, you obviously just launched the European or are intending to, to have something on the clearinghouse side in Europe. It sounds like you started talking to the industry a little bit about Asia too. And I'm hearing that you might be actually having plans for a clearinghouse in Asia. So anything you could tell us about that already? It seems like Asia is much more fragmented when it comes to regulatory considerations and it might be hard to choose a location to do something. So anything there, in your Asia plan in general obviously would be helpful.

Craig Donohue

Sure. I would say generally, the establishment of CME Clearing in Europe, which we're very pleased now to have received all of the necessary regulatory approvals, is really a reflection of our commitment to serving our customers' needs on a global basis. We happen to have a very global customer base. Some of whom have a preference for clearing in Europe versus in the U.S. I mentioned during the call that we have strong initial indications from a variety of traditional clearing member firms as well as energy companies for the suite of energy products, which we will be first making available in CME Clearing Europe. And so while I can't comment on things that we haven't done yet in terms, of the aspect of your question that touches on Asia, we're clearly committed to being a global provider of services to our customers and our focus right now is on CME Clearing Europe.

Operator

Our next question comes from Howard Chen with Credit Suisse.

Howard Chen - Crédit Suisse AG

Craig, just to dig a little deeper on your capital efficiency comment. What's the status of the cross margining agreement between futures and your rate swap clearing efforts? And when do you think we'll expect to get approval there, if we don't have it already.

Craig Donohue

Well, obviously, one of the important things that we're going to be striving for is the ability to provide margin offsets between highly correlated futures contracts and the related swap contracts. And certainly, eurodollar futures and treasury note and bond futures and options and interest rate swaps is an important aspect of that. Right now, I think it's fair to say, Howard, that things are in a state of flux because of the larger kind of rule makings and sort of structural framework that the CFTC is developing for how swap positions should be held at the account level, and how the kind of risk management and default management procedure should work for swap customers versus futures customers. So I'm afraid that it's not as simple as just us making that sort of application because they're sorting out some fairly major structural issues in the manner in which swap positions are going to be held and cleared and margins. So as that gets sorted out over the next several months, we will be like all other industry participants, in a better position to seek and hopefully, gain the ability to provide that cross margin benefit.

Howard Chen - Crédit Suisse AG

And then switching over to the expense guidance, I think one of the challenges at this time of the year is always gauging the relative level of conservatism as we actually don't know your cash targets. But maybe it would be a helpful exercise, I don't know if you agree, if you could discuss in hindsight what your projections coming into 2010 were that really got you to the expense budget that you ultimately ratcheted it up in the middle of the year, clearly with that year now behind us?

James Parisi

As we looked at 2010, I think early on, Howard, our guidance for the year was $1.1 billion of expense. We came in about $70 million higher than that. And really, that was due to a few things, in particular the acquisition of Dow and Elysian contributed to that as did the BM&F co-development effort. And then as we came in towards the end of the year and we had a very solid fourth quarter, our bonuses came in at a better-than-target level so that added to it as well. So and then there were some other one-time things that was a little bit smaller throughout the quarter that we've highlighted along the way. So at any point in time, we try to give you our very best estimate and that's what we've done this time through. And just don't forget that we are investing as we look at the $1.26 billion that we put out there as guidance for this year. A good part of the increase there is tied to those investment and growth opportunities, the OTC.

Howard Chen - Crédit Suisse AG

Just to add one clarification, Jamie, just understanding you did Dow Jones and there's a couple other newer things. But if I just look back at 2010 at the core, and say that the franchise had 19% volume growth, was that better, much better, in line with sort of the original expectations coming into the year? Is that a question that you can answer?

James Parisi

I can answer -- let's talk a little bit on the expense side. The core came in at about 8% higher versus the prior year and don't forget that one of the things that we're facing on the core expense side was a very tough comp in 2009 because we had cut back significantly on much of the discretionary expense in that year as we were buckling down during the economic crisis. From an expected volume growth, I think you can see that because we beat our bonus target, that we came in a little bit higher than we had expected for 2010.

Operator

Michael Carrier with Deutsche Bank has our next question.

Michael Carrier - Deutsche Bank AG

Jamie, one other question just on the expenses. I guess when we look at -- and this is more the core versus the new initiatives. But on the core, like how sensitive would that be? Let's just say that we're assuming average volume growth of, I don't know 10%, 12%, 14%. So if it is a little bit lighter or if it's a little bit stronger, how much operating leverage do you have or how much flexibility do you have more on the core expenses versus the new initiatives?

James Parisi

I think there's a couple of areas that are going to flex naturally with volumes, right. We've talked about those before so the bonus is going to flex as volumes are the key driver of our bottom line and our cash earnings. So that'll flex a bit and you'll also see our license and fee-sharing arrangements line flex as well with volumes. So keep those in mind. And then if we were to, for whatever reason have a challenging year on the volume side and you saw what we were able to do 2009, and we'd look to do something similar.

Michael Carrier - Deutsche Bank AG

In the energy market, it seems like on the WTI product suite the options have seen more strength relative to the past, just wondering if there is something new there? Different customer base, just any color that you can provide there?

Craig Donohue

We weren't sure we caught the last question. You're asking about the strengths of WTI options?

Michael Carrier - Deutsche Bank AG

Right.

Craig Donohue

I don't know if there's anything in particular to say there. Obviously, we've had very strong growth in both futures and options. We've had very significant participation from the commercial participants in the market. But beyond that, it's not something I can speculate on.

James Parisi

I think when you see prices doing what they're doing in the energy markets, we've got a significant up in the market. A lot of strategy-type transactions which happen in options tend to go up in volume when you see markets either highs or lows or whatever you want to assume they're at. So I don't see this as an unusual phenomenon and other than people are just taking great faith in our products for starters, but you do see this happen when prices go one way or another significantly. It takes strategy positions and options.

Operator

Our next question comes from Ken Worthington with JPMorgan.

Kenneth Worthington - JP Morgan Chase & Co

First question is on the BM&F, it looks like volumes in December were about 35,000 contracts a day north, south versus a peak of 214,000 contracts a day in the middle of the year. What are the issues here? And I guess what I'm really after is if there's a read-through to the other exchanges, with which you have or are building trading relationships with?

James Parisi

I think the key driver that you're seeing there is as we've introduced new traders to BM&F through the order routing, some of them become significant enough that they then decide to go and hook up directly with BM&F and not go through Globex. And we worked with BM&F so that they recognize all volume introduced from CME. So in some of that growth, some of the volumes that you're seeing there, that decrease in volume is just due to that. But we are seeing I think good strong growth overall.

Kenneth Worthington - JP Morgan Chase & Co

And are you getting paid for when they go direct as opposed to going through Globex or was that what you were trying to imply with your comments?

James Parisi

Yes.

Kenneth Worthington - JP Morgan Chase & Co

And then just update on ClearPort, the volumes fell, I'm sure there's some stuff going on in the power side which may be affecting it, but any update there because the volume change was striking?

James Parisi

I think it was due to the small power contracts and that's evidenced as you look at the average rate per contract for ClearPort went up a bit over from quarter-to-quarter as well. And nat gas as well, some of that volume has gone from ClearPort over to the exchange traded. For the year, we had a record, don't forget, record revenues from ClearPort of over $300 million.

Operator

Our next question comes from Dan Fannon with Jefferies.

Daniel Fannon - Jefferies & Company, Inc.

Just to clarify one more thing on the expense side and more on the revenue opportunities on Slide 13. You highlight the growth initiatives and it looks like, based on what you have said, that only one of those is going to really contribute to revenues in 2011? Just trying to get a sense of timing as associated with these new initiatives on the top line.

James Parisi

Yes, it's certainly on the co-development effort with BM&F that will impact us for the current year. OTC, we would anticipate getting some revenue in the current year. Co-location, you're right, is more of a 2012 item. And Elysian, we get a little bit of revenue from that and really, that's more of a play to add some functionality that we hadn't had before.

Daniel Fannon - Jefferies & Company, Inc.

And then I guess a little bit of color on your OTC interest rate swap offering that's been out now and wondering what some of the feedback has been from customers. You've announced a few more since we've heard from you last in the third quarter and wondering if we should expect to hear more customer additions and kind of what generally they're saying after a few months?

Craig Donohue

Well, I think we'll just say what we've said before. I mean, this is a process. The whole industry is still awaiting the final rule makings, which are going to drive a lot of the final determinations about choices of clearinghouses and clearinghouse structures. And so in general, I would say, we still have a very high level of engagement with the end-user community and the swap dealer community around our offering. I think we have put in place a very effective capability that is being used and has proven itself to be effective. But this is a process, and I think it's going to take time still for people to react to the final scheme once it's developed and in place. So nothing major, new to report but I think the fact that we have large financial institutions as we commented on during the call, continuing to become involved with us, I think it's a very positive development.

Terrence Duffy

I think also one of the things you are seeing is there are hearings coming up. There has been some rumblings about end-user exemptions and I think people are waiting to see if that's going to bleed off into other products and clearing of these products. But it's been clear, I think on both sides of the aisle, they do not want to attack the Dodd-Frank portion of this. It requires clearing of standardized OTC interest rate contracts. So what we may look at is some of the end-user exemptions and some people may be just waiting to hear what the final results of those upcoming hearings are that I mentioned earlier in February. So other than that, I think it's just as Craig said, more of a waiting game.

Operator

Roger Freeman with Barclays Capital has our next question.

Roger Freeman - Barclays Capital

I guess I had a question on just on the $200 million increase in sort of minimum cash tied to the European clearinghouse. As you think about the U.S. side, are you kind of clear at this point? Because there were some changes that the CFTC was proposing there about what -- if there's going to be any additional capital requirement on that. Is that why the stock buyback or special dividend is a, maybe second half event?

James Parisi

No, it's really -- the European clearinghouse was a piece of our thinking around that $700 million. The other piece of it is just as we go through the various OTC opportunities, what we think that we're going to need in terms of our skin in the game for those opportunities, that's what's driving that.

Roger Freeman - Barclays Capital

Just to clarify it, could that say covers what you're thinking on the U.S. there?

James Parisi

Yes.

Roger Freeman - Barclays Capital

Last question, if I can get a handle on increase in costs, of that $55 million increase, on the growth, the opportunities side, how much of that -- what percent of that is tied to clearing, U.S., Europe, Dodd-Frank, regulatory? And what is the nature of that increase? Is it mostly, I mean is it legal, is it operational, quotes, is it financial, professionals around margining, et cetera?

James Parisi

If you look at it, we're spending probably on our platform and our co-development platform probably in the neighborhood of $28 million. Co-lo, we're probably in the $15 million range. Elysian, a little over $10 million. OTC, probably in $40 million to $50 million range. So it's across the board and it's all tied to growth.

Operator

Our next question comes from Niamh Alexander with KBW.

Niamh Alexander - Keefe, Bruyette & Woods

Can I just touch back on the growth opportunities? It was a big subject for the investors a lot of last year. How do we look at organic growth from here? And how many times -- you talked before about re-engineering the whole product and sales teams kind of away from product focus towards client focus? And you saw more opportunity to kind of expand some energy products and FX. How is that progressing? Is there anything anecdotal you can share with us or is there any numerics you can share with us kind of the fruits of that effort?

Craig Donohue

Well, I think we're making very good progress. I mean this is a big change in the way that we organize ourselves to both acquire new customers and to better support our existing customers. Under Bryan Durkin's leadership, he's I think done a very effective job at getting this structured in a fairly short amount of time. And I think it's leading to a much better kind of focus on the part of our customer-facing resources to really kind of focus on new client segments and also selling the broader range of CME Group products and services to our existing customers. Anecdotally, I think that already we've received incredibly positive feedback from our customer base. But as importantly, we've begun to see customers working with us to adopt a broader range of products than they might have otherwise been using at least to say our discretionary traders, proprietary trading groups and hedge funds and those that have a natural inclination to expand the range of products that they're able to trade. So this is all still very new, but I think it's an important step forward for us and it really does give us more leverage. It's better for us to have people who can interface with customers across the broad range of products and services that we provide rather than a single product. So it's the right step for us, it's going to help us to, I think, achieve a better growth opportunity on a global basis than we could under the old paradigm. But this is only several months old at this point, so we'll have more I think to share with you as time goes by.

Niamh Alexander - Keefe, Bruyette & Woods

And then if I could ask on the technology platform that you're building for exchanges and I know you've kind of allocated some expense to it and the expense increase. But how far long are you, do you think, in the development of the whole equity futures platform, is it something that you could actually go out and start, not necessarily selling, but using it as part of an introductory tool with some of these other exchanges that you haven't really approached yet?

Craig Donohue

Well, it's a phased initiative and so we'll be developing several, let's think of them as modules for the different market segments starting with the Derivative segment, and then cash equities and fixed income. So all in all, this will take us into 2011 until the full multi-asset class capabilities are developed and then implemented in the Brazilian market. And I think we've been clear to say that the multi-asset class trading capability for us is really likely to be more of a strategic partnership kind of tool. Where we have important strategic partnerships around the world, we'd like to use the common technology platform rather than to think of it as sort of us becoming a technology vendor, which really is not within our sights. But I think the best answer to your question is probably 2012 before we're in a position to really use that in that way.

Operator

[Operator Instructions] Our next question comes from Jillian Miller with BMO Capital Markets.

Jillian Miller - BMO Capital Markets

I just wanted to follow-up on Elysian. I kind of sense that you were alluding to this earlier but it sounds like you view this as more of an add-on service to facilitate your Customer Clearing business and compliance rather than say, an independent moneymaker. Is that fair to say?

James Parisi

Yes, it's definitely an add-on functionality to help us on the front end and bring more customers to our energy market.

Jillian Miller - BMO Capital Markets

Do you have a timeline for when that straight through process might be available to the ClearPort users?

James Parisi

We're working on it feverishly and we haven't put any timelines out there.

Operator

Our next question comes from Chris Allen with Evercore.

Christopher Allen - Banc of America Securities.

Just wanted to follow-up on Roger's question, around the $700 million. Obviously, European clearing and over-the-counter, that's going to take a little bit of time to build out. How do we think about the cash balances? Is it necessary to hold the $700 million right now? Could it build the opportunity to become more apparent? And then also, how did the paydown of debt impact the cash balances as some of that was funded with CP?

James Parisi

You know, the $700 million right now is our best estimate. It's hard to say exactly when you may need it so we want to target having that. It's just our conservative nature. So there's that. And then as you noted at the end of the year, we had about $905 million of cash on hand. We did issue some commercial paper at the beginning of this year as we got rid of the $420 million bank loan, we issued probably about $300 million of commercial paper when we did that. So we did use some of that cash towards that. And then we do have some cash outlays in the beginning of the year like the bonus and taxes and that sort of thing. So I would just stick with the $700 million as our target for what we want to have on there as far as cash goes.

Operator

Our next question comes from Matthew Heinz with Stifel, Nicolaus.

Matthew Heinz - Jefferies & Company

Just a quick question on the capital return. How are you thinking about that from a total payout ratio, kind of all in with the buyback, regular dividend and special dividend? And do you plan to fund that strictly with free cash flow? Or are you willing to dip in your cash balances a little bit?

James Parisi

What I've said is we want to maintain that $700 million on the balance sheet and the other aspect of this is we're not going to go out and issue debt in order to return capital. We want to get to that one-time debt to EBITDA level and remain there and to maintain our AA rating. So I think from that perspective in terms of the mix between whether it's buyback or special dividend, it's going to depend on the circumstances at the time. We're going to look to do opportunistic buybacks and look at whether or not it makes sense to use special dividend as a point in time where we have the cash to return.

Matthew Heinz - Jefferies & Company

I'm curious to hear your thoughts on the potential convergence of GAAP and IFRS accounting and how that could impact your customers' desires to, I guess accelerate the OTC clearing, given the potential gross up of derivatives?

James Parisi

That's one I'll have to get back to you on. I'm going go do some further research on that. I don't know that there's that much of an impact from driving that business, but I'll get back to you.

Operator

Our next question comes from Brian Bedell with ISI Group.

Brian Bedell - ISI Group Inc.

Just a couple of real quick ones, first on the cleared energy contracts, the 100 contracts that you mentioned, Craig, just with the timing of launch of those contracts are during the year. And then secondly, whether you're starting to see any traction of customers increasingly using the futures over the versus over-the-counter derivatives and how those conversations are going?

Craig Donohue

Sure. We're working on the actual physical launch of the cleared energy contracts through CME Clearing Europe. I think I mentioned that we have a substantial number of firms are kind of working with us to establish their clearing capabilities. So I'm hoping that, that's something that we're going to achieve in the kind of near term here during the year but there's some more work to be done. We haven't actually announced a date but we will. On the second question, we have definitely seen some customers. And I don't want to overstate that but some customers have definitely either commented to us or we feel have begun to migrate somewhat toward the futures markets as they've been thinking about the regime that will likely apply to them in terms of their swap business. I think it's too soon to have really put any kind of confidence interval on that in terms of what it really means. But yes, we have seen some customers who've adopted futures and I think that's a positive sign.

Operator

Our next question comes from Jason Shum with Bank of America Merrill Lynch.

Jason Shum

Just two quick questions if I can, one, I just want to get a sense on these growth initiatives. Any color in terms of timeline or product launches that you guys are expecting within this year? I know Elysian from the presentation it seems enhanced front-end for energy. So I'm not sure if you guys are rolling out new products for this platform? And then second question, I noticed for the last three quarters, the screens for market data were sort of flat. But this quarter, it fell a little. I just want to get a sense of what happened there.

Craig Donohue

Bryan Durkin, I think if you are able to, you might want to comment first on the Elysian. And if not, I'll be happy to do it. Okay, I'm going to do it because Bryan is stranded in London and apparently can't. Yes, the focus for Elysian initially is for the energy market and the energy customer base. But ultimately, we are viewing Elysian as a really valuable tool for providing that kind of front-end connectivity and market model, if you will, for the broader set of OTC customers that we currently have, and expect to have as we go through this kind of fundamental shift in the market toward swap execution facilities and central counterparty clearing. So it is going to be both but the initial focus is very much on energy. And Jamie, do you want to comment on the second part?

James Parisi

Sure. On the screen counts, Jason, down a bit versus the prior quarter. We've seen a decline in counts coming out of the economic crisis as people are looking to become -- to be as efficient as they can on their expense side. So you got that aspect of it. But also, we have different offerings in our market data area. There's enterprise licenses as one example. So if you see some shifts between and amongst that you might see changes in the stream counts, so some of it is due to that as well.

Jason Shum

So would you say at this point, the economics for I guess the other data products that you have, that's really where the growth is?

James Parisi

The growth that we've seen in the revenue this year is really tied to some of those smaller offerings but primarily to the increase in the price that we instituted at the beginning of the year. So, and I've got to ask, if we could limit everybody to one question going forward so we can give everybody a chance.

Operator

Our next question comes from Jonathan Casteleyn with Susquehanna.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Craig, you talked about a potential negligible impact on exchange traded markets from Dodd-Frank but I'm just wondering from your perspective, is a more restricted OTC market, is that good or bad for the exchange-traded marketplace?

Craig Donohue

Well, I mean obviously, we're not in favor of anything that would restrict the OTC market regardless of what its impact on CME Group is. I think it's an effective market that serves a particular need for customers for certain kinds of very specific hedging and risk transfer tools. So as a kind of a philosophical matter, we're not in favor of that. But I would say generally speaking, I'm not envisioning that the current regime is going to restrict the value of highly standardized swaps that are already being done. And the correlation between the exchange markets and illicit markets tend to be in the more standardized swaps versus the very esoteric kinds of contracts. So if there's an impact, it's likely to be on the more exotic swaps. Exchange-traded products are generally not the natural hedge for residual risks in those kinds of products. So I don't expect that even if the regulatory framework is somehow going to constrain activity or growth in the more complex or exotic portion of the swaps market it shouldn't really have much of an effect on the exchange-listed markets. But again, this is all a question of where the regulators come out on a lot of these different questions. And I don't think I can give you a perfect answer to that right now but that's in general how we think about it.

Operator

Our next question comes from Rob Rutschow with CLSA.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

We've been hearing some rumblings that you may be subject to increased oversight by the Federal Reserve. So I'm wondering if you could comment on the likelihood of that and what, if any, implications that might have for you operationally?

James Parisi

I don't think that, that's going to have very much impact on us. Obviously, today and for the last several decades, we've always worked very closely with certainly the CFTC as our primary regulator, including as our primary regulator of our clearing-related activities. But we have always had a very high level of interface with the Fed on the clearing house as well. I don't think there's anything in Dodd-Frank that is kind of hugely material in terms of changing that dynamic. We interface with them extensively. We share information with them extensively and so there shouldn't be anything material.

Operator

Due to time restraints, our final question will come from Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

I was wondering if you could just go through the timeline for maybe 2011 and '12. What happens from here with the European clearinghouse? When do we start to see different milestones that you guys hit and rolling out to the client solutions?

Craig Donohue

Dan, I think that came up briefly before and I said we haven't put out a specific timeline yet. But we have regulatory approval, we are now working to onboard the clearing member firms. I was just in London last week and we had the opportunity to meet with nearly all of them. There is I think, very strong interest as well as enthusiasm for the energy products that we've put out already. And then I think enthusiasm as well for the expansion of our clearing activities there, but that'll be a process that'll be taking place over the course of the year. And I can't give you a more definitive timeline right now.

Operator

I'll turn the call back over to our speakers for any additional or closing remarks.

John Peschier

I want to thank everybody for their participation and we look forward to talking to you next quarter.

Craig Donohue

Thank you.

Operator

Thank you. And with that, we will conclude today's conference. Thank you for your participation. You may now disconnect.

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