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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

Bryan Durkin - Chief Operating Officer and Managing Director of Products & Services

Analysts

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Brian Bedell - ISI Group Inc.

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

Alex Kramm - UBS Investment Bank

Rob Rutschow - Credit Agricole Securities (USA) Inc.

Michael Carrier - Deutsche Bank AG

Jillian Miller - BMO Capital Markets

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

Kenneth Worthington - JP Morgan Chase & Co

Howard Chen - Crédit Suisse AG

Daniel Fannon - Jefferies & Company, Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Christopher Allen - Evercore Partners Inc.

Roger Freeman - Barclays Capital

CME Group (CME) Q1 2011 Earnings Call April 28, 2011 8:30 AM ET

Operator

Good day, everyone, and welcome to the CME Group First Quarter 2011 Earnings Call. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to John Peschier. Please go ahead, sir.

John Peschier

Thanks, and thank you all of you for joining us this morning. Craig and Jamie will spend a few minutes discussing the highlights of the first quarter, and then, we'll open up the call for your questions.

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 on our website and also in our forms 10-K and 10-Q. Go to the Investor Relations portion of the website to find these.

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

Craig Donohue

Thank you, John, and thank you for joining us this morning. I'm really pleased to share the highlights of an outstanding quarter in terms of revenue and bottom line results. Our results this quarter are attributable to our continued focus on successfully innovating new products, providing superior customer service and the hard work and commitment of our talented employees. With risk management taking on increased economic importance globally, we saw robust volumes in our core business as we delivered the most comprehensive product offering available to our clients. We successfully advanced several key longer-term initiatives, which we think will continue to position CME Group a step ahead of our competitors.

During the first quarter, we delivered record revenue of $832 million, up 20% driven by average daily volume of 13.8 million contracts. Commodity volume rose 29% while financial products increased 17%. We believe that the breadth and diversity of our products and services is the key differentiator from our competitors.

Interest rate volume was strong in Q1 despite the ongoing 0 interest rate policy in the second round of quantitative easing. Our treasury volume was up 30% while Eurodollars rose 23%. We had particular strength in our Eurodollar futures and options in the mid-curve area, with Eurodollar futures volume beyond the first two years up 100%, and our Eurodollar mid-curve option complex up 50%. Within treasury futures, the strongest growth came from our five-year treasury product, which increased more than 46%.

In addition to increasing volume, it's important to note our deep liquidity across our interest rate products suite, as well as the rising open interest. For example, within our Eurodollar futures product, throughout the trading day, we averaged more than 60,000 contracts within the best five bids and offers, representing $60 billion of liquidity. Furthermore, our treasury futures contracts average a total of 40,000 contracts. Since the beginning of the year, open interest has increased by 2.5 million contracts or 34% in Eurodollar futures and 1.2 million contracts or 32% in treasuries, growing faster than the same period last year.

Our interest rate team has continued to deliver product extensions that are demonstrably important to our customers. In January, we launched weekly treasury options and we have seen an immediate positive response from our clients. Average daily volumes surged to 14,000 contracts per day in March. This builds upon the extraordinary success of our Ultra Treasury Bond product launched last year. That new offering increased by more than 100% to 52,000 contracts per day in the first quarter, exceeding our own expectations.

In keeping with our commitment to provide innovative risk management solutions to all of our customers, including products that may be more relevant for European and Asian investors, last week, we announced the introduction of new Sovereign Yield Spread futures. These products, which will be launched at the end of May, are designed to enable asset managers, banks, hedge funds and other institutional investors to efficiently manage exposure at government bond markets in France, Germany, Italy, the U.K., the Netherlands and the U.S.

We also continue to make progress with customer readiness for our interest rate swaps offering. We have cleared trades for 10 large buy-side firms, and we are currently testing with dozens of other firms with many more in the pipeline. Feedback from market participants is that they are waiting for greater clarity on the rules from the CFTC before clearing significant volumes. We are very pleased with our level of client support relative to our competition, but we expect this area to further strengthen our interest rate product value proposition and deepen our relationships with our client base.

Turning to commodities. We had record quarterly revenue in all three product lines: energy, agricultural products and metals, and in both exchange-traded and OTC-cleared products. These records reflect significant shifts in fundamental supply and demand factors, improvement in economic recovery, as well as increased geopolitical uncertainty.

Now, in energy, we saw rising volumes across the board with healthy growth in all of our product segments. CME Group's WTI futures grew 34% in Q1, which outpaced growth in Brent futures at ICE.

OTC activity was very strong during the quarter, with energy-related ClearPort average daily revenue reaching $1.25 million, well above our prior record. Additionally, we achieved record OTC revenues in crude products, power and ethanol, along with strong revenues in our natural gas product line. Notably, we also achieved our highest quarterly ClearPort revenues in agricultural products, metals and foreign exchange. Total clearing revenues during the first quarter in these three product areas was $4 million, up from $1.4 million in Q1 last year.

Agricultural products were a standout in Q1. Volume increased 47% with tight corn and soybean stocks and a wet spring in the Midwest. Open interest continues to expand with March open interest up more than 40%. We are seeing increased activity during non-U.S. trading hours in these products. March 2011 average daily volume during non-U.S. hours was 91,000 per day, up 117%.

Metals had a record daily revenue during the first quarter driven by changing inflation expectations and a flight to safety. Following our launch of iron ore swap and options contract last year, we recently added 3 new swap futures products designed for the global steel industry. The ferrous metals market, which includes iron ore and steel along with related products, is the second largest commodity market by volume after crude oil. And CME Group's ferrous metal futures offer risk management opportunities for these vital global commodities. We recently added a new head of our metals business in London, and our major focus in metals is to drive continued global expansion and greater use of our industrial metals contracts, as well as expanding our OTC metals clearing offering.

Last year, we reorganized our products and services area to enhance efficiency and customer service and to drive ongoing cross selling of our products. We made a thoughtful investment in terms of adding global-sales-oriented headcount. Over the last year, we've grown the sales and customer service organization from approximately 120 to 145 people. And I now want to give you a few metrics for this quarter that we used to assess the near-term performance of our team.

First, the level of customer penetration by asset class has been trending positively. In the first quarter, 62 of the top 100 customers traded either five or six product areas, increasing from 53 firms two years ago. Fourteen firms are now trading only one or two product lines, down from 21 customers in that category before.

Given our global growth strategy, it is important to note that we continue to see strong performance during non-U.S. trading hours. In the first quarter, we had great liquidity during those hours with average daily volume of 1.75 million contracts traded between 4 p.m. and 7 a.m. The overall growth during this time period was 27%, once again outpacing the overall volume growth.

In terms of product areas. During the first quarter, 34% of electronic FX volume came during non-U.S. hours with 24% in metals and 17% in interest rates. The other product areas see approximately 10% of volumes during that time frame.

To illustrate the deepening liquidity, I'll turn to the equity area. We have doubled the E-mini equity volume percentage traded during non-U.S. hours from 5% to 10% over the last two years. And we now trade more equity volume in those products during non-U.S. hours than NYSE's FTSE products trade all day.

Turning to other initiatives. We will officially launch CME Clearing Europe at the end of next week to better serve our European-based customers. We will begin with more than 150 OTC energy and commodity products, with up to 15 clearing firm intermediaries. The initial product set includes eight OTC contracts based on the DME Oman Crude Oil Futures contract. One innovative new offering will be rapeseed oil, which is used for food, cosmetics and in the manufacturing of biodiesel fuels. Our goal is to offer a full multi-asset class OTC clearing service building on CME Group's clearing experience as well as our established and growing European presence.

In the next phase, we expect to add interest rate swaps to the European clearing offering. Once we get more regulatory clarity, we will seek approval to provide margin offsets between cleared OTC products in the U.S. and Europe and CME Group futures and options products. This reflects our industry-leading role in maximizing capital and performance bond efficiencies for our customers and our clearing member firms.

As you know, over the last two decades, we have led the industry in implementing cross margining arrangements and clearing linkages with other clearinghouses, including arrangements with the OCC and LCH, our common clearing link with the CBOT in 2003 and our subsequent consolidation of clearing operations with NYMEX and COMEX. As we expand our capabilities in the OTC clearing, we will continue to focus on delivering these same efficiencies to our valued customers.

We also continue to make excellent progress on our globalization initiatives by providing our customers with access to additional foreign products from our partners on CME Globex. Ultimately, our objective is to bring new global customers onto our platform, where they can trade any of our existing products. Our efforts with partners progressed very well during the first quarter. Phase 1 of our multi-asset class platform, which we are jointly developing with BM&FBOVESPA including the derivatives, is on track to go live in Brazil by the second half of 2011. At that point, we will increase the revenue we derive from this relationship.

In addition, we are beginning to see positive trends in their customers' use of our core products. We had significant growth of 77% in Q1 for the South to North business we track, with particular strength in our agricultural, energy and interest rate products.

In early April, we launched South to North order routing with Bolsa Mexicana, where BMV's customers now trade CME Group product via the order routing link through our Mexico City hub, which is linked to BMV's front end trading platform. We expect the North to South link to go live in the third quarter of this year.

Bursa Malaysia, which trade their futures products on our Globex platform, had record average daily volume in Q1, up 52%. Their leadership team publicly acknowledged the contribution Globex has made to these volume increases.

In addition, the KOSPI futures traded on CME Globex reached its highest levels this quarter. Clearly, we have positive stories to see to share with additional global exchange partners and license providers where we can mutually benefit from new or enhanced relationships.

At this point, I'd like to turn the call over to Jamie, who will touch on the financial highlights.

James Parisi

Thank you, Craig, and good morning, everyone. We are pleased to have posted our highest quarterly revenue ever during the first quarter, while continuing to invest in future growth. We delivered very strong results with average daily volume of 13.8 million contracts per day, up 19% versus Q1 of last year, driving a 20% increase in revenue to a record $832 million. This significant revenue generation drove a 26% increase in operating income to $524 million.

There's one item included in our GAAP results that I'd like to call out. Our Q1 GAAP tax expense included a $164 million benefit associated with the change in our expected effective tax rate and its impact on our deferred tax expense and the release of reserves related to a foreign investment. Excluding the tax benefit, Q1 net income attributable to CME Group would have been $292 million, and diluted EPS would have been $4.36.

Moving on to rate per contracts. Despite near-record volumes during the quarter, the overall rate per contract was $0.808, down just slightly compared with fourth quarter 2010. Although the higher volumes resulted in larger discounts, the relative stability in the rate per contracts can be attributed to the strength of the product mix, with strong growth coming from energy and agricultural products.

Market data revenue of $107 million was up $3 million from the fourth quarter, mainly due to strength of CME Group index services. Activity in our Dow Jones Index business continues to outperform our initial projections. Revenue during the first quarter was $23 million, increasing from an average of $18 million during the last three quarters of 2010. We have seen particular strength in the commodities and ETF [exchange-traded fund] areas of the franchise.

I will now take a few minutes to review expenses. Compensation and benefits was $122 million, up slightly on a sequential basis. At the end of March, our overall headcount stood at 2,605, up 35 compared with the end of 2010, with half of that increase due to our Elysian acquisition and a majority of the rest in our technology area for the development of the new multi-asset class trading platform. Total non-comp operating expense in Q1 was virtually unchanged on a sequential basis and up 2% versus the prior year, primarily driven by Marketing and Other, as well as by licensing and other fee agreements.

Turning to nonoperating income. We received a $14 million dividend during the quarter from BM&FBOVESPA based on our 5% ownership. If you recall, we generally receive a larger dividend during the first quarter, as some of it was a true-up of their 2010 performance.

Capital expenditures, net of leasehold improvement allowances, totaled $38 million in the first quarter, driven primarily by work on our co-location and data center facility. We have approximately 120 customers who have put down initial deposits and several more who have subsequently expressed interest. We currently expect to move customers into our facility at the end of the summer, with extensive testing in the October-November time frame. We are planning to go live during Q1 of next year, at which time, we will begin to generate recurring revenue.

In Q1, we delivered the highest level of cash earnings in our history. Last year, our quarterly cash earnings averaged $270 million, while this quarter, our cash earnings hit $330 million. During the quarter, we paid down debt of $420 million including all the commercial paper we had issued. We raised our regular dividend 22% from $1.15 per share per quarter in 2010 to $1.40 per share in Q1.

During the first quarter, we hit two important milestones related to the capital structure guiding principles we provided in a transparent way last July. At the end of the first quarter, we had more than $700 million of cash and marketable securities on our balance sheet. We also reduced our debt-to-EBITDA ratio to below 1x, which we have targeted since completing the NYMEX and Dow Jones transactions. We continue to make investments in our core business and in the growth initiatives I mentioned earlier, and we expect to continue to generate significant excess cash. Since we currently do not expect to participate in any major M&A activity in the near term, we will be well positioned to return excess cash to shareholders, and we are in the process of formulating the specifics of our capital return strategy. I'm excited regarding seeing the group's prospects and look forward to creating value for our shareholders.

At this point, I will turn the call back to Craig for a few closing remarks.

Craig Donohue

Thank you, Jamie. Let me just summarize by saying that we continue to position the company for sustainable growth. I'm very optimistic about the near-term and long-term opportunities that our company has moving forward. Looking back, we successfully integrated two large acquisitions. We delivered strong cash flow and operating margins during the unprecedented credit crisis. And despite the 0 interest rate policy as a backdrop for two years, and we performed at a very high level. During this time, we never stopped providing new and innovative new products. We never stopped investing in our technology and clearing infrastructure. And we never stopped expanding our global reach through partnerships, or we never stopped adding to the deep bench of our talented employees. I'm proud of our team's performance during the first quarter.

There's a lot of market commentary about potential M&A in our space, which has captured the attention of the media and certainly investors. The rationale discussed by potential exchanges who are active participants include four major considerations: First, the critical importance of the derivatives area in the context of standalone or multi-asset class exchanges; two, the benefits of significant and meaningful product diversity; three, the view that partnering with other exchanges around the world will open markets and drive trading activity in global products, particularly from customers in Asia; and four, the value of providing capital efficiency to customers.

CME Group, in our view, already presents each of these opportunities. We embarked on the right strategy five years ago to position our company to benefit over the long term in all four of these dimensions. And we are not surprised to see other exchanges attempting to follow in the same path. If you are a generalist or an exchange-oriented investor and you are looking for a deep forward-looking innovative franchise with multiple organic growth avenues, then it's time to consider increasing your exposure to CME Group.

Again, we thank you very much for joining us today, and we'd now like to open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Just first question, just having jumped over from the drama playing out on the other call, probably the number one highlight that Duncan [Duncan Niederauer] mentioned at the annual meeting is their success so far in NYPC [New York Portfolio Clearing] and that basically, only -- that most of the customers aren't even connected yet and that there's significant uptake from here. So I'm just kind of curious what you've actually been hearing from customers since that's launched?

Craig Donohue

Roger, it's Craig. I'll tackle that and perhaps Bryan Durkin may like to add. But first of all, I think, as you can tell by looking at the numbers, I think the volume in the open interest continues to be fairly negligible. As I talked about briefly during my comments, the depth of book is significantly greater obviously at CME Group in both our treasury and our Eurodollars contracts than at either ELX or NYPC, roughly 30x deeper. And obviously, institutional customers who are hedging and engaging in risk transfer trades are looking for that very efficient market and depth of book. So while we take that seriously, and we're continuing to obviously compete aggressively in that area, I think it's also notable that when you look at their average daily volume, we've achieved that same number just in new products that we've introduced like the Ultra Bond and like the other products, mid-curve fed funds, the on-the-run treasuries and weekly treasury options. So we're focused on innovation and growth and meeting our customers' needs as we are ensuring that we remain a very effective competitor in today's environment.

Roger Freeman - Barclays Capital

Okay. And then I guess a follow-up on -- well, it's separate, just what's your updated thoughts or where do you think CFTC or where do you think CFTC's leaning in terms of ultimately being able to do portfolio margining across swaps and futures to actually be able to offer customers that offset?

Craig Donohue

Well, it still remains to be seen. They are putting out for comment their proposals. I believe that there's still a very strong different set of opinion among the commissioners on the right sort of range of alternatives for the industry. We have at least one commissioner that has been opposed to sort of the strict segregation of swaps at an individual account level versus what we have in futures. We have another commissioner who has wanted to ensure that the industry has ample opportunity to comment on a wider range of alternatives including alternatives that we support, which is the baseline futures model. And cross margining between swaps and futures is partly a function of resolution of those particular issues. So we're pleased to see that at least some people in the commission are very sensitive to the cost benefit analysis and also wanting to make sure that these structures can be implemented in a way that maximizes capital efficiencies for customers.

Operator

And next, we have Alex Kramm with UBS.

Alex Kramm - UBS Investment Bank

Let me start with something for Jamie on the expense side. I think your guidance that you've given at the beginning of the year was I think $1.26 billion. We're running at I think $1.23 billion annualized. I'm looking at your bonus accrual, which is, I think, already on the higher end of your target range. So can you just put the guidance and where we're running in perspective? Maybe where you're expecting seasonal upticks to get there, or are you actually doing a lot better than you're thinking?

James Parisi

Yes, Alex ,we did give out the guidance at $1.26 billion for 2011. If you annualize the first quarter across each of the categories, I'd say the areas that you end up with, as you pointed out, were coming in, in the first quarter on an annualized basis about $30 million or so less than that guidance. But we're still sticking with that guidance. And so if you take that $30 million, I'd say spread it roughly evenly going forward over the dollars in comp line, over communications and technology, occupancy, licensing and fee agreements and marketing and Other, and a lot of that is just driven by, the growth in these areas is driven by the investments that we're making growth across the exchange. Certainly, on the comp side, we're investing in headcount internationally to grow the business. We're also on the communications and technology side. You'll see that growth there coming as a result of rolling out our co-lo later in this year. On the occupancy side, we've outgrown our London office as we've grown our international staff. So we're moving into new space there, and that's increasing that line item somewhat. And then on licensing and fee agreements, that certainly will grow as we grow our ClearPort and equities business. And marketing and Other again is just tied to the international growth. So those are the areas where you'll see the pickup to get to that guidance for the full year.

Alex Kramm - UBS Investment Bank

And then going to Slide 13, I think it's actually new information, I guess, the volume by product on international -- during international hours. Well thanks, first of all for giving that. But wondering where you think the biggest opportunities are here? I'm looking at energy, for example, and maybe you can talk about that. I mean it's just 8%, it's the lowest across all your products. And I'd say energy is a pretty global commodity, right? So is that an area we're spending a lot of time, or are there any particular reasons why that's so low or lowering food [ph] to get that higher? So any more will be appreciated.

Bryan Durkin

This is Bryan Durkin speaking. We are intensifying our efforts both in Asia, as well as in our EMEA region to increase the level of focus and exposure to all of our commodity asset classes, and in particular, our energy products. We feel that the complementarities and the extension that we are offering with regards to, in particular, our OTC clearing services in Europe through the introduction of our CMA CE is largely driven by interactions that we've had with our local clientele and particularly the commercial end users of the energy product base, to provide localized clearing services in that regard. So you are correct that we are absolutely intensifying our sales focus and efforts in that tone.

Operator

And next, from Crédit Suisse we have Howard Chen.

Howard Chen - Crédit Suisse AG

First, Jamie, on capital management, you spoke to the milestones achieved during the quarter and that you're still formulating the specifics on the capital return strategy. Could you just expand upon that and talk a bit about maybe some of the parameters around what exact specifics that you are all discussing?

James Parisi

Sure, Howard. As we've said, we've been really transparent certainly about the intention to return to capital this year. And I will say, I'm very excited about the fact that we've been able to deliver on everything that we talked about with regard to the capital structure guiding principles. And as you noted, right now, me, my team, the board are focused on formulating our strategy around the return. In that return, we're going to look at various ways of returning that capital to shareholders, whether through buybacks, opportunistic buybacks or dividends. So those are all on the table certainly. And we're very -- we're still early in the stages, I'd say, of accumulating the excess cash to return. We just went over that $700 million mark just a bit this quarter. But as you know, it's a very dynamic business, so it probably won't take long for us to generate more cash to return. So we will be looking at buybacks opportunistically. We will look at the impact on our EPS. We'll be looking at where we feel the valuation of our shares are versus where the market is valuing them and take all that into consideration.

Howard Chen - Crédit Suisse AG

Okay. And then just to follow up on the credit rating. I think during the quarter, S&P placed you on watch negative. It seems like on one hand, you want to put more capital into clear and mine share into clearing initiatives. But the agency seems to be signaling that that could be detrimental to the rating. So how are you thinking about balancing all of that?

James Parisi

We still need to sit down with them. We're meeting with them in the coming months. We're going to walk through all of it. I think we can demonstrate that the capital that we're putting into the clearing house certainly strengthens the risk profile of the clearing house. And I think we're doing the right things in terms of managing the business and managing within clearing. We're always managing the risk there is. That's our main consideration there. One of the issues that they brought up was around the FICOM [ph] structure. And we certainly, around that structure, are able to cap our exposures and totally control our exposures there. And we've done that, and we fully funded that risk. So as I said, think the risk profile of the clearing house is remaining very, very solid.

Operator

And next, we have Dan Fannon with Jefferies.

Daniel Fannon - Jefferies & Company, Inc.

I guess, Craig, I wanted to get your latest thoughts on the debate around WTI versus Brent. During the quarter, there were a couple of shifts by some major corporations away from WTI. And I just want to get whether you think this is a trend that you expect to continue? Just your kind of latest thoughts there.

Craig Donohue

Yes, sure, Dan. I mean, I think fundamentally, you have to focus on sort of the cyclical factors that are driving some of those trading relationships and trading opportunities. But fundamentally, as I think I commented during my remarks, you look at the sort of much larger open interest in WTI than Brent and also the fact that we have more growth in Brent than we saw in -- I'm sorry in WTI futures than we saw in Brent futures during the quarter. And I think that shows that people are continuing to look at WTI as the more liquid global benchmark. So there's a lot of complex cyclical factors that are going on in world energy markets. But fundamentally, we look at the liquidity, the volume and the open interest. We're also focused on continuing to develop a broader product set that meets all of the different needs, energy, consumers and producers and refiners around the world. And so as an adjunct to our already strong leadership position in WTI, we're focused on further development of our East of Suez crude oil market through the DME Oman contract. For the long term, we believe that there will be a number of important products that can be used for hedging and risk transfer purposes. WTI will continue to be a leader, but we'll also look to diversify that as well.

Operator

And next we have Chris Allen with Evercore.

Christopher Allen - Evercore Partners Inc.

Just wanted to ask if you could provide an update on the FICOM [ph] membership, where that stands in terms of when it's going to be launched. And if you have any color in terms of what's the potential absolute dollar capital savings across the customer base that could be realized from this membership?

Bryan Durkin

This is Bryan speaking again. We're very pleased with the, what we would consider the soft launching of the FICOM [ph]. And what I mean by that is we've been aggressively testing with a dozen or so of our end users to validate the margin offsets that we believed would be realized. And we're very pleased with the preliminary testing results in that regard. We fully expect to see one or two at least of our larger users come live over the course of actually the next few weeks, so we're anxious to see that come to fruition. As far as the other candidates that are involved in this offering, they're working through some of the internal logistics and making sure that all of the internal testing has been confirmed and finalized before they go live. But in terms of the offsets, we have seen upwards of 50% to 60% reduction as a result of this initiative. So we're very enthusiastic about it going live.

James Parisi

And I think the other thing to add to that is in addition of FICOM [ph] in our base business, that there's significant capital efficiencies already embedded in our interest rate product. So as you look between treasuries and Eurodollars and between the various Eurodollar contracts and the various treasury contracts, there's already $3 billion of margin efficiencies embedded in the clearing house in those products.

Bryan Durkin

I mean, this is an added benefit to the full complement of interest rates products that we offer.

Christopher Allen - Evercore Partners Inc.

And just one follow-up, I guess, for Jamie, was there any impact in computation in investment income from deferred comps this quarter?

James Parisi

Yes, there's a bit of favorability, I want to say it was around $800,000 to $900,000 of favorability in the comp line, with the offset obviously being down in the investment income line.

Operator

And next, we have Ken Worthington with JP Morgan.

Kenneth Worthington - JP Morgan Chase & Co

With regard to the non-U.S. trading volume, have you found if there is a critical volume level that's kind of a tipping point for future volume growth? I think in the past, Jamie has talked about the tipping point for electronic volume or once you hit a certain threshold, the high frequency traders start to participate and volume kind of accelerates. Does this concept apply to the foreign trading as well, and have you hit it or is it yet to come?

Craig Donohue

Ken, I think it's very difficult to put a number on that in the same way. Generally speaking, I think it's a different situation when you're talking about sort of the tipping point that some people think comes with 10% or 15% or 20% market share, whatever your view is. I think this is different. This is really extending liquidity and trading activity and volumes out throughout the 24-hour trading day. And I wish I could, but I don't think I can give you a very reliable answer to that. But obviously, the continued trend for us is, we're seeing this kind of increased growth in electronic volumes during non-U.S. hours as depicted on our slides. But I think, if you were to also look at it by time slides, you'd see that, essentially, it's mostly at the moment extending out from sort of the North American trading hours time zone. And so we're kind of building our way out, I guess is the way I would describe it, prior to our opening in North America and then following our late afternoon close.

Kenneth Worthington - JP Morgan Chase & Co

Maybe as a follow-up, given enough time, any idea on how much volume you'd expect could come outside of U.S. business hours given the current mix? It doesn't matter how long in the future, but, like, I guess on how big those volumes could be as a percent of total volume.

Craig Donohue

Right. Obviously, we can't speculate with kind of a prediction or projection. But I think that will depend on the particular product set. But obviously, FX, I think, is an excellent example of a truly global market where there's very active trading activity and liquidity to be found in the different segments of the FX market, literally around-the-clock. So FX and metals, energy and commodities, I think in that order, are likely to be ones that could be very actively traded and ultimately at a level that is commensurate with what we see in North America, and then, perhaps less so in the equities market where access to the cash market or related markets might be an impediment to the same degree of volume occurring during non-U.S. hours as U.S. hours.

James Parisi

And if I may add to our reconstituted sales force, particularly within Asia and in Europe, based upon how we've been able to segment that sales force, we are much more targeted in our capabilities to do the cross sales across the various asset classes that Craig just alluded to. And I can affirmatively say that the interest and the demand for particularly the commodities products is there. We are spending a lot of time working with our client base in terms of providing educational instructions on the utilization of these instruments to support and complement their risk management needs. I would say the same goes for the interest rate complex. And in particular, one of the reasons why we've driven forward with our Sovereign Yield Spread contract is to complement and provide the user base there with a single risk management tool in which they can bundle and manage the risk in these various government bonds in one transaction. So we're very enthusiastic, and it will be a major part of our focus, as I alluded to earlier.

Operator

And next, we have Rich Repetto with Sandler O'Neill.

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

I guess the question, Craig and Terry, if you're there, is back to the consolidation issue. I agree with you, Craig. It appears that there is some capping [ph] going on, at least bringing the interest rate, European interest rate, curve together. But I think the aims of some of these mergers is to go beyond that in regards to a multi-asset global exchange. And I guess my question to you, are you comfortable with the strategy? Were your partnership and linkages with your partners hold up versus that strategy as it undoubtedly moves to Asia afterwards and whether deals like that can get done?

Craig Donohue

Right. Well, Rich, I think the way that I would answer that is -- I mean, first of all, we've been committed for a very long time to our more focused strategy in terms of the composition of our business. And we've never frankly been very big believers in the sort of large multi-asset class exchange concept, if you will. In that it's not clear that it has actually delivered demonstrable value to customers in terms of increased efficiencies from a technology or post-trade clearing process perspective. And I think it's also somewhat evident that the synergy opportunities from those very different and very differently regulated businesses are inferior to the synergy opportunities of combining much more similar kind of derivatives businesses as we have done. That just happens to be our point of view. Obviously, we have great growth dynamics. We're continuing to exhibit those, as you can see from this quarter. We've got a very robust growth opportunity for extending ourselves globally and into new product areas and ultimately as well into the OTC markets and index services. I would say, just on the last part of your question, I think it's evident that we are one of the most, if not the most, attractive partner to large global exchanges just by evidence of what we've done over the last several years in trading, very strategic investments and commercial partnerships and arrangements with some of the leading exchanges in the world. Most of our products have a great correlation to a lot of these properties exchanges in markets and regions as well. With our new multi-asset class trading platform that we've jointly developed with BM&FBOVESPA, we'll be also in a strong position to leverage that technology and ultimately distribution network for partners that have a presence in the cash equities and equity options markets. So I think we're confident in our strategy and the positioning that we have and in the growth opportunities that we have.

Terrence Duffy

Rich, this is Terry Duffy. I am here, and I completely agree with what Craig said. And just going back to the prior question, and I think it circles around to it, when you look at how can you predict volumes coming from outside of non-U.S. hours, it's very difficult to do. But one of the things you have to look out is, as I think is what Craig and Jamie and Bryan has outlined through this call, is the investments that CME has put into place over the last five years, not just in North America but throughout the world. So we're very optimistic about the future.

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

Okay. And then, the one follow-up here, given those comments. I mean, obviously you've done a wonderful job of building these partnerships, getting non-U.S. hour trading volumes. But the ultimate -- from what I hear you saying, the partnerships -- do partnerships ever -- would you ever go beyond the partnerships? Because at some point, that's going to get tested, I assume, by others. They will seek to acquire the people you've partnered with or merge with those people. So when does it, or is that -- how do you think about that? How does CME position there?

Craig Donohue

Well, I think, Rich, if you look at what we've done, we've picked what I would call national champions in each of the major developing and emerging markets that are at least as of yet prepared to expand globally and partner strategically and from an equity perspective. So we've got a head start first of all in that. But we have been of the view and continue to be of the view that some of these national champions are sort of viewed as protected assets within their countries or regions. And so I think there's a quite a bit of evolution that has to happen in at least the developing and emerging markets before you see large-scale outright mergers, acquisitions and combinations. I think what you saw in Singapore and Australia, which would be relatively freer and open economies to some of the other developing and emerging markets that we're involved with. If ultimately, it just wasn't in the national interest, then that transaction couldn't go forward. That is the reality in terms of the dynamics. So I think we're well-positioned. We have a lot of time by virtue of being a significant shareholder, a major partner strategically or technologically with these kind of national champions. I think we're extremely well positioned.

Operator

And next, we have Jillian Miller with BMO Capital Markets.

Jillian Miller - BMO Capital Markets

Just going back to that global volume topic. I was wondering if there might be an opportunity through market maker incentives or some kind of market maker programs to create even more deep liquid markets during the non-U.S. hours that then could drive even faster pickup there?

Bryan Durkin

It's Bryan Durkin. Actually, we do have very specific programs for both the European markets, our Asian markets and our Latin American markets, and it has proven to be a very useful and productive tool as far as building partnering and drawing stickiness into our products. So you can expect to see a continuation of that model as we further develop our markets in each of those regions.

Jillian Miller - BMO Capital Markets

Okay. And then it's my understanding that you're in the process of developing FX OTC clearing? So if you could just update us on the progress there? And I'm also wondering if your strategy is at all dependent on whether the regulators decide to include or exclude the FX forwards in the Dodd-Frank mandates?

Craig Donohue

Yes, why don't I tackle the last part of that and then let Bryan let you know where we stand in terms of our efforts. But I think just yesterday, in fact, but within the last couple of days, the CFTC in its proposals has sought to include FX options and swaps as instruments that would be subject to the mandatory clearing requirements. So that is consistent with what we have been expecting and what we have been planning for. The focus of the industry and of CME has not really been on the swap -- the spot and the forward market. So that's sort of where things stand. That's obviously something ultimately that is also subject to the determination of the treasury department in terms of their ability to exempt those instruments. But at least, preliminarily, the CFTC has sought to include them as swap or OTC derivative instruments that would be required to be cleared.

Bryan Durkin

And from a readiness perspective and the actual instruments that would be likely to clear OTC through our mechanism, we have been working very closely with the new base, both on the buy side and sell side, in developing our model and making sure that, from an operational perspective, that we have the facilities in place and the structure in place to accommodate the market readiness as we come to a closer definitive understanding of the regulatory environment. So we're not losing any time in that respect in terms of our preparedness in working with the marketplace in anticipation.

Operator

And next, we have Jonathan Casteleyn with Susquehanna.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Just on the new co-location revenue guidance, what are the expected margins on that $30 million to $40 million? And would you expect that to hit the bottom line next year?

James Parisi

We haven't said specifically what those margins are. I think in the early going, they'll be certainly lower than the margins in our existing business. But as we get up and running and start to fill the center out, we'll start to approach our margins over the longer run. So I wouldn't look for CME-like margin in the 2012. But after that, we'll start to approach that.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Okay, so you would expect to hit the bottom line next year I guess? Or will it be offset by new OpEx?

James Parisi

I think it will certainly be positive for the bottom line next year.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Okay, great. And then on the OTC product launch in May, 150 new products, it's a big number. Any sort of understanding of revenues and expenses into the second quarter?

James Parisi

I think it's the -- first of all, as with any new products, we tend to -- we do wave fees. So there is a fee waiver associated with the products that are being launched, I want to say it's roughly a six-month fee waiver, and there are some caps around that in terms of the amount of the contracts. So I wouldn't anticipate seeing any significant revenue in the immediate term. And typically, as you know, with any new offering, it does take a while for volumes to ramp up.

Craig Donohue

One of the beauties behind that model is the complementarity to our overall energy complex and our expectations in terms of further developing the trading, as well as the clearing services.

Operator

And next we have Niamh Alexander with KBW Brokerage.

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

Thanks for taking my questions. Can I touch on the OTC clearing in Europe? You're just about ready to launch that now. Is that primarily commodity sale? And can you talk to me about who your competition there will be? And then what other products are kind of contained in the pipeline for that?

Craig Donohue

Initially, we're going out with a large slate of OTC energy products. We're also offering the rapeseed oil and some other agricultural swaps that are in the pipeline, as well as metals. We are ultimately going to be moving forward with an interest rate swap product as well. And we're working, of course, very closely with our user base and the 15 client firms that have been helping us develop this offering in terms of additional product extension.

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

And Bryan, can you help me understand, I mean, what's your offering versus the competitor? And my understanding is ICE is there and they might be selling different products. But for example, customers in Europe may already be in a position to net against the existing European clearinghouses. Is ICE and like [ph] -- should we think of those as the incumbent competitors for those services? And help me think about the capital efficiencies you could offer clients.

Bryan Durkin

I think that's a fair comparison. In particular, our client base are existing users of our other products, and they've definitely sought the ability and venue to be able to have a localized clearing facility. We think over time, we will see the benefits of capital efficiencies and margin offsets. That's our goal with respect to the broader set of asset classes that we represent.

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

Okay, fair enough. And if I could, just on the other subject of WTI and the Brent, and you've noted that your operations have been higher for so long, but it's also has for Brent this past quarter. But Dow Jones during the quarter had indicated that they were considering moving their index to Brent from WTI. And there's a lot of assets I guess married to that index. Help me think about the risk to WTI volume should that happen in 2012?

Bryan Durkin

Well, I think you have to look very closely at the overall liquidity and the transparency of the WTI market. The marketplace in itself does look to this as a benchmark in terms of pricing their risk. And so, when you take all of those factors into consideration and the fact that this product trades 2.5x greater than the Brent, as well as how the market is able to look to the actual pricing transparency of this contract, we feel very confident about continuing to build the complex overall. Those index weighting adjustments were, and we believe are, negligible.

Operator

[Operator Instructions] Next we'll go to Michael Carrier with Deutsche Bank.

Michael Carrier - Deutsche Bank AG

Jamie, just on the market data, you mentioned, I think like a $5 million swing sequentially. And I just wanted to get any color on that in terms of what drove that, if it was all Dow Jones or if it was something else?

James Parisi

The total swing in market data was more in the neighborhood of $3 million. There was the swing in the Dow Jones which was in the neighborhood of $4 million to $5 million. But then it was offset a little bit. We did see a slight decrease in pickup in the number of terminals. So that aided to it a little bit. We're still feeling some of the effects as people are coming out of the recession and just being sure they're very efficient.

Michael Carrier - Deutsche Bank AG

Okay. And then one more on the International side. I guess, just with any other relationships that you guys have currently in place, anything in the next 12 months, whether it's new pricing initiatives or your relationships that could see a step up in the growth rate that you've been seeing? And then I guess just on the FX side, when you look at the increase in those volumes relative to the other products, any way to gauge like how much of that is being driven by users in the OTC market moving onto an exchange, just given that it's one of the more standardized products?

Craig Donohue

Yes, Mike, let me take the first part and ask Bryan to address the second part of that. I think you heard us comment during the call back that we're up 70% in terms of the business from South to North, if you will, in terms of our Brazil relationship. I think we also mentioned that as we now implement the new multi-asset class trading platform in Brazil that we'll see increased revenues associated with that. Obviously, we'll also see revenue growth from our other arrangements including continued volume growth at Bursa Malaysia derivatives and order routing revenues from Mexico. So I think you have to look at it kind of in the aggregate across each of these. They're small in relationship to our total revenues. But for the future, as we continue to build and expand on these and as we grow our global customer base, we obviously believe it's going to be material to us for the long run.

Bryan Durkin

With respect to the new users coming into utilizing the FX futures products, you are very astute to pick up on that phenomenon. I mean, it's definitely been an interest that has grown, particularly in the European sector where we have end users that had traditionally not looked towards our product and are moving their business onto the exchange-traded offering. So we're going to continue, obviously, penetrating those opportunities aggressively as part of our overall sales effort.

Operator

And next, from ISI Group, we have Brian Bedell.

Brian Bedell - ISI Group Inc.

Maybe one short-term question, one longer-term one. On the shorter-term side, for the rate for the contract, if we assume a stable mix of volume in the second quarter and appreciating that volumes are at least down so far in April, what do you expect the member benefits to be, I guess, as we move into the quarter? I guess what I'm getting at is, should we expect the RPC for the individual lines, again assuming mix is constant, to be moving up if we have a softer volume period in the quarter? And then, if you could just highlight some more guaranteed volumes that you'd be getting same quarter since you have the treasury rolls [ph] and so on?

Craig Donohue

I can respond on the RPC side. Certainly, in a situation where you have a fixed product mix and you see -- if you were to see decreased volumes, you'd pick up some on the rate in terms of the tiering. On the member, nonmember mix, that's a harder one to call. That fluctuates around quarter-to-quarter. But generally speaking, it stays relatively constant over time.

Brian Bedell - ISI Group Inc.

Right. So bottom line, we should see an improvement in RPC just given that -- if volumes are weaker in the second quarter?

Craig Donohue

All those the same. But as you know, there's a lot of other mix factors that come to play.

Brian Bedell - ISI Group Inc.

Right. And then just the longer-term question, how would your international strategy change if NYSE Liffe ended up in either ICE's hands or if it ended up -- if the Deutsche Boerse in New York merger goes through? And what types of things are you doing now as the competitors are distracted internationally?

Craig Donohue

Well, again, I mean, I think we've been a leader in focusing on growth and developing in emerging markets. We certainly have more strategic investments and commercial linkage arrangements with major exchanges around the world. We're very focused on that. And I don't think that, that changes whether NASDAQ and ICE are successful in their efforts with New York Stock Exchange or whether New York Stock Exchange and Deutsche Boerse are successful in completing their transaction. Our focus is on expanding our global distribution network, acquiring more customers. And a big part of what we're doing through these partnerships is using them as a way to expand liquidity in our existing, very successful products into these time zones. And that just doesn't change by virtue of what various of our competitor organizations are doing.

Operator

Next, we have Matthew Heinz with Stifel, Nicolaus.

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Just a little bit more on the international strategy, if you will. I know this has been covered in pretty good detail so far. But you've spoken a lot about the attractive growth opportunities you see in Asia but also the challenges in penetrating this market. Asia seems to be kind of a fairly broadly defined and fragmented market. And I guess I'd just be curious to hear your thoughts and maybe get some more granularity on how you plan to attack this opportunity in terms of specific countries, products and kind of whether you plan to open more of an on-the-ground store-front presence in China, India, Korea or whether you're still favoring that sort of cross routing arrangements that you have in place now? And then also, just some thoughts on how you plan to leverage the European clearinghouse with regard to your Asia strategy would be great?

Bryan Durkin

Sure, this is Bryan. First, I'll take our strategy in terms of covering that very broad landscape that you referenced. We have built up a large, I would say, central office of upwards of 35 professionals located out of Singapore. And that group has the responsibility of managing both the respective business lines that we represent, so all of the asset classes are represented there, as well as our client development and sales teams across all the client segments that we represent. So there is representation for the corporates, commercials, proprietary spendings, asset managers, hedge funds out of that region. They then have the responsibility of covering the broader Asia region and are complemented by assistance that we have from individuals that are stationed in China. We also have representation in Hong Kong. We're certainly looking to expand our resources in those particular regions as well to be able to have continuity and more boots on the ground on a day-to-day basis, both within Hong Kong, and I failed to mention Japan and China as well. So we put -- we've certainly invested, I would say, significantly in our human capital to be able to better penetrate these markets by where we have them strategically located. I think we are doing a fairly solid job of covering the landscape both in Korea, China, Japan, Taiwan and other sectors around there. Malaysia, I failed to mention as well. I think your other question was how you plan on leveraging European clearing and growing your Asian presence. Certainly, the suite of 150 products that we're going live with, again, we feel that, in particular, a number of these products should appeal particularly on the energy side, as well as we're hopeful in building up the interest on the agricultural side and starting out with the rapeseed oil.

Operator

And we have time for one final question from Rob Rutschow with CLSA.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

Just a quick question on the RPC, a follow-up on RPC. I guess the sequential improvement in RPC and agriculture and maybe FX was a little better than it has been in the past. So does that point to a shift in the user base towards maybe some smaller or retail-type clients? And then as correlated to that, how would the non-U.S. activity impact RPC going forward?

James Parisi

Let me start with some of the higher level RPC impacts on those two, and maybe Bryan and Craig might want to weigh in. As we look at commodities, the sequential increase was really driven by -- it was across the board actually in terms of the various mix impacts, primarily in the nonmember/member mix. So we saw nonmembers growing a bit faster than members for the quarter versus last quarter. And additionally, we saw the product mix within ag also helped as we saw some of the higher contract or higher-priced contracts within the ag like wheat and livestock trade a bit faster than the other products within that suite. That's what kind of what drove on the commodities side. On the FX side, we saw an increase, a slight increase, and the nonmember mix helped drive it. But more so, we saw a shift where there was a shift in the type of contracts being traded. There's a small increase in the percentage of EFPs [exchange for physicals] that are traded in that market, which carry a very high rate per contract with them.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

Okay. If I can follow up also on the M&A question. You stated pretty clearly you're not interested in sort of a stand-alone cash-equity-type business. And as we look overseas to some of the emerging markets, they tend to have more diversified businesses and they tend to also be monopolies. So in the event that you're looking outside of the U.S. with the acquisition target and are able to get something done, how does that monopoly characteristic play into your decision making? So if the equity market and a potential acquisition target is a monopoly, does that impact your decision making towards doing an acquisition?

Craig Donohue

I think, again, just to reiterate, we've said for quite some time now even before the more recent state of merges and acquisitions proposals that for the foreseeable future we're not really focused on large-scale mergers and acquisitions transactions. So with that caveat, I guess my answer to that would be we're always going to be cognizant of the quality of the businesses and the competitive dynamics that those businesses face and -- among many other factors in making decisions like that. But in the past, when we've made those comments, we've clearly reflected that you have a hypercompetitive environment in at least the U.S. and European equity markets and equity options markets, and, in general, a very difficult time establishing and maintaining a sustainable competitive advantage or differentiation because the products themselves are not innovative. So that would be one factor among many, many other factors that we would consider as we approach those types of opportunity.

Operator

And that does conclude the question-and-answer session for today. I will now turn the call back to Craig Donohue for closing remarks.

Craig Donohue

Well, I know we've gone a little bit long, but we want to thank you for joining us today. And we certainly look forward to talking with you again next quarter.

Operator

That does conclude today's conference, and we thank you for participating.

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