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Executives

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

John Peschier - Managing Director of Investor Relations

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

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

Donald Fandetti - Citigroup Inc

Kenneth Worthington - JP Morgan Chase & Co

Howard Chen - Crédit Suisse AG

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

Jillian Miller - BMO Capital Markets U.S.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Christopher Allen - Evercore Partners Inc.

Daniel Harris - Goldman Sachs Group Inc.

Roger Freeman - Barclays Capital

CME Group (CME) Q2 2011 Earnings Call July 28, 2011 8:30 AM ET

Operator

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

John Peschier

Thanks, and I'd also like to thank all of you for joining us this morning. Craig and Jamie will spend a few minutes discussing the highlights of the second quarter. Terry Duffy and Bryan Durkin are here as well, 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. For detailed information about factors that may affect our performance, you can go to our website and take a look at our Forms 10-K and 10-Q. Again, you can go to the IR portion of the website to find those. With that, let me turn the call over to Craig.

Craig Donohue

Good morning, and thank you for joining us. I will discuss our strong performance in the second quarter and provide updates on a few of our strategic initiatives before turning things over to Jamie to review the financials.

During the second quarter, we delivered excellent top line results, with revenue of $838 million, driven primarily by strong trading volume, which we also saw last year during the second quarter. Volume accelerated during the quarter with $12.1 million in April, $13.5 million in May and $14.9 million in June, averaging $13.5 million for the quarter. We had record open interest during the quarter that surpassed 100 million contracts. We also delivered a highly profitable quarter with earnings per share of $4.38. This was driven by a heightened expense focus, which is reflected in our revised guidance for the year.

Building on our second quarter results, average daily volume is off to a relatively good start in July, up 18% compared to last year. Interest rate volume was strong in the second quarter, highlighted by a 50% increase in June, with Eurodollars up 58% and Treasuries up 44%. This growth was likely driven by increased volatility due to the turmoil in Europe, the end of the second round of quantitative easing and concerns about the potential downgrade of U.S. debt. Our interest rate market share increased from April to July relative to U.S. and European competitors, which can be attributed to our diverse customer base, our strong liquidity and futures along the yield curve, our healthy options business and our significant depth of book and effective spreads.

We are seeing some customers increasing the proportion of business they do on our exchange. For example, according to the CFTC's most recent traders and financial futures report, there has been a sizable increase in asset manager open interest positions in Eurodollar futures contracts, as well as an increase in the number of large open interest holders in many of our interest rate contracts. The open interest from this customer group, which traditionally executes the majority of its business in the OTC market, has jumped from nearly 1 million to 3 million contracts. This now represents almost 20% of total Eurodollar futures open interest, up from 10% a year ago. In addition, commodities volumes remained impressive during the second quarter. Agricultural products and metals products were up more than 30% during the quarter. The commodity markets are clearly being impacted by supply and demand fundamentals and exacerbated by recent weather patterns.

Turning to company initiatives, we continue to lead the industry in successful product innovation and product extensions, as well as enhancements in technology and in our clearing and risk management services. Last quarter, we launched the sovereign yield spread futures contracts. In addition, we continue to build out our nondollar-denominated products by launching Euribor futures and options, which we currently expect to go live at the end of this quarter. We also announced the late August launch of new foreign exchange futures contracts based on the Chinese yuan or renminbi. In order to meet growing customer demand for products denominated in the Chinese currency, these innovative new futures contracts will be quoted in interbank terms, reflecting the number of yuan per U.S. dollar. These futures products are aligned with the OTC market convention for non-deliverable forwards, while providing the benefits of counterparty risk mitigation from exchange-traded products.

Our efforts with our partners continue to progress. Development of our multi-asset class trading platform, which we are jointly developing with BM&FBOVESPA remains on track, with the derivatives modules scheduled to go live in Brazil in stages over the next few months. At that point, we will begin receiving a fixed and variable per transaction license fee expected to be $8 million to $10 million per year based on current derivative volume levels. This revenue will increase as our partner's derivatives volumes grow. During the second quarter, while the overall volume was relatively flat versus the prior year, the volume we track coming from South America and Mexico to CME Group grew 60%. In June, it grew more than 100% and averaged a record 46,000 contracts sides per day. In addition, we are pleased to further build on our strong relationship with the Osaka Securities Exchange, the premier Japanese derivatives and securities exchange, with a strategic arrangement to cooperate on joint product development, marketing and promotion. Under this arrangement, the companies will offer Japanese yen-denominated products for their global customer base. Addition of yen-denominated futures based upon the Dow Jones Industrial Average at Osaka and the E-micro Nikkei 225 contract at CME Group will provide market participants with nearly 24-hour access to global benchmarks sized for their needs and denominated in the currency of their choice. Both products are expected to be offered in early 2012.

We also continue to extend our Central Counterparty Clearing capabilities globally through CME Clearing Europe. CME CE is up and running and we have started to see activity in both energy and agricultural OTC-cleared products. Our main focus in this early stage is building on our network, which will connect new clearing firms and enabling customers and brokers to participate. We currently have 16 clearing firms and a strong clearing member pipeline. At the same time, we are continuously expanding our European and Asian customer base for CME CE. At this point, we have more than 60 clients and brokers registered for CME CE on CME ClearPort. In addition, we are in the process of broadening our offering, which includes the deepening of our OTC commodities offering by adding the 150-plus products that we are already offering, as well as pursuing readiness to make our OTC interest rate swaps clearing solution available through CME Clearing Europe.

To conclude, the world is changing before our eyes. Financial markets are always dynamic and innovative, are changing at an even faster pace than the world at large. CME Group is uniquely positioned to take advantage of these profound changes by ensuring that we have the products, technology, clearing capabilities and global distribution systems to benefit from the opportunities created by these changing market dynamics. We are confident about our potential and our progress going forward.

And 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 posted revenue of $838 million during the second quarter, while effectively controlling expenses, which were down $4 million sequentially. Q2 average daily volume of 13.5 million contracts was flat compared with Q2 last year despite the record May 2010 average daily volume of 16.8 million contracts. This significant revenue generation, coupled with effective expense management, drove a 4% increase in operating income to $535 million. Operating margin of 63.8% was one of our highest quarterly margins ever and up from 63% last quarter. Additionally, this morning, we reduced our 2011 expense guidance by $25 million and our CapEx guidance by $15 million. Lastly, the reduction in our expected effective tax rate to 42.5% for the second half will decrease second half income tax expense by approximately $5 million based on consensus estimates. The second quarter total average rate per contract was $0.807, up 2% from second quarter 2010. Although there was an unfavorable product mix relative to first quarter 2011 with a higher percentage of interest rate activity, the second quarter average rate per contract was in line with first quarter 2011 due to lower volume discounts and a favorable venue mix.

Within market data and information services, we saw a sequential increase due to an audit assessment, which offset a slight drop in base screens, while our Dow Index business grew from the prior quarter due to higher commodities and ETF-related revenue. Within other revenue, we recognized $9.8 million related to the sale of an asset in our index business. With the related expense of $3.2 million recorded in other expenses and the related $1 million expense in the net income attributable to redeemable controlling interest line.

Turning to compensation and benefits, this line item was $118 million, down $5 million on a sequential basis. We reduced our bonus accrual relative to the first quarter and our base compensation and benefits was also down, due primarily to a decrease in our vacation accrual. Non-compensation expense increased less than 1% versus the prior quarter. In terms of our expense guidance, originally we had guided to $1.26 billion in 2011, which we reduced by $25 million to $1,235,000,000. While we continue to invest in the growth initiatives we have spoken about before, including co-location, OCC clearing and our new multi-asset class trading platform, we are being as efficient as possible on the spend, as well as on the core spend. From the first half to the second half of the year, we expect to see increases in occupancy and depreciation related to co-lo and our new London office, in compensation related to our positions filled during the year and in professional fees tied to growth initiatives.

Nonoperating expense was $25 million during the second quarter. Investment income was less than $5 million, reflecting a lower dividend from BVMF and the reversal of a $2.7 million dividend from IMAREX originally recorded in Q1, which is now being characterized as a return of capital. Our effective tax rate was 42% in the quarter, primarily related to tax planning efforts underway. For the second half of 2011, we estimate our effective tax rate will be approximately 42.5%, down from our prior guidance of 43%. Capital expenditures, net of leasehold improvement allowances, totaled $44 million in the second quarter, driven primarily by continued work on co-location and buildout in our newly completed London location. This brings us to $83 million of CapEx during the first half of the year. We now expect total capital expenditures for 2011 to be $165 million, down from $180 million estimated previously. During the quarter, we purchased approximately 220,000 shares of CME stock, following our buyback announcement on May 9.

In summary, it was a nice quarter for CME Group from a financial perspective, with robust profit margin and cash generation. We saw volume accelerate during the quarter and so far, the summer volumes have been solid. While we continue to invest in top line growth, the expense related to our growth-oriented projects is leveling off. Our first half 2011 expense growth was 9.7%, excluding the write-down we had in Q2 last year. Our revised expense guidance implies year-over-year growth of approximately 5% for the second half. We intend to prioritize and intensify our focus on cost efficiency as we build our plans for 2012 and beyond during our annual budgeting process in the fall. When our plans are completed, we will share the highlights with you. We will now take your questions. [Operator Instructions]

Question-and-Answer Session

Operator

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

Roger Freeman - Barclays Capital

I wanted to go back to the comment about, I think, it was asset management and I missed the other customer category that you have noted had significantly higher open interest year-over-year. One of the things we've been hearing from the dealer channels is that there's been some impact on longer-dated OTC, like 5 year and greater swaps, because of concerns around the Basel requirements but not so much on shorter duration. So I was kind of curious as to what you think is going on there?

Craig Donohue

Yes, Roger, it's Craig. And I'll come to your question in a second. We saw, in June, we saw very strong volume growth of more than 50% from both the bank and proprietary trading customer segments, both of which are participating in our markets, as well as our competitors' markets, which I think is very encouraging. What I was referring to was the Eurodollar futures commitments of traders report for asset managers. And we've seen very, very strong growth in their accumulation of open interest in the Eurodollar market over the course of the last year effectively. They hold approximately 20% of the open interest. And so we've seen them migrating, we think, increasingly to the futures market from the swap market in part for the reason that you highlighted in your question.

Roger Freeman - Barclays Capital

Okay, great. And then I guess the second question is just on the capital plans, you have, I think, $750 million buyback, bought a little bit this quarter. But how do you anticipate given sort of other opportunity sets for deploying the capital? How aggressive do you think you might be over the next 6 months or so?

James Parisi

Obviously, we've got the authorization on May 9, and we got into the market very shortly thereafter. So I think we're somewhat aggressive at the beginning. And we went into blackout sort of at the end of the quarter. Going forward, we'll continue with the buyback. We do have the authorization from the board, and we're going to work from here and we're going to analyze it on a regular basis.

Operator

Moving on, we'll take our next question from Rich Repetto from Sandler O'Neill.

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

Craig, I guess, the first question is on -- you brought up Brazil first when you talked about your partnerships and a peer or competitor has invested in the clearing firm, CTEEP. And I was just trying to see, how does that affect, you think, the competitive landscape down there in Brazil? And this -- giving you strong relationship with BM&F?

Craig Donohue

Richard, I assume you're referring to the ISA investment in CTEEP?

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

Yes, I don't pronounce it correctly.

Craig Donohue

Yes, no, that's Okay. I probably don't either. But, obviously, in partnering and investing in BM&FBovespa, we have a very strong belief in the strength of their franchise. As you know, they are the preeminent market in Latin America. They have very strong liquidity. They're in the process now of building the new multi-asset class trading platform with us, which we think is going to drive growth in both their futures and their cash equity segments. As you also know, they operate the most substantial Central Counterparty Clearing capabilities in Brazil with 4 different clearinghouses. So we think they're really well positioned in the marketplace. We haven't yet seen the full dimension of what ISA's plans are with CTEEP. But CTEEP, as you know, is not as broad and deep in terms of the markets that it facilitates and is mostly focused on post-trade, clearing and custody.

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

Okay, that's helpful. And I guess my follow-up, because I thought it was interesting when you talked about the bank and proprietary trading activity being up 50% in June. As I look at volumes in June, the most significant -- was all that activity, part of the vast majority of it focused in interest rate futures? And is that, I mean -- I guess, I'm trying to feel like, gauge the sustainability of the increase?

Craig Donohue

Yes, what I was referring to was in interest rates. And I think that's just generally reflective of most of our customer segments. As you know, we have very good activity not only in treasury futures broadly speaking but we continue to see strong growth in Eurodollar futures in the kind of first 2 years, up more than 12% and significantly greater growth further up the yield curve.

Operator

Moving on, we'll take our next question from Michael Carrier from Deutsche Bank.

Michael Carrier - Deutsche Bank AG

I guess, one question just on the clearing business. And I think we've heard some comments about this in the U.S. and then globally, on whether clearinghouses, exchanges would be deemed systemically important and what that would mean. So, I guess, any update on that? Because it seems it's different, it's not like banks where just capital can be just -- maybe it's investments in technology, disclosure. And then just on the collateral, if we did get a downgrade in the U.S., how you think about that, what the process would be in the clearinghouse? Any impact?

Craig Donohue

Sure, no problem. We'll be subject to Fed oversight as a systemically important financial market utility or what we call a systemically important derivatives clearing organization. We have already proactively set aside $500 million for our guarantee fund contribution for the OTC clearing initiatives and for CME Clearing Europe. And we're already above the requirements in terms of capital and guaranty fund lines in place to manage the default of the 1 or 2 largest clearing member firms at CME Clearing. So we will be covered by that, but we're already above those requirements and effectively, it won't have much impact on us. And then with respect to your second question, obviously on a realtime proactive basis, we regularly make adjustments to both margin requirements, as well as haircuts that we apply to different forms of collateral. I think so far this year, we've had nearly 70 different margin increases. Margin increases and haircuts are both driven by historical and implied volatility measures and other risk management considerations that we apply. You might have seen just earlier this week, we did announce both margin increases, as well as increases in haircuts that we apply to our treasury, futures products, as well as cash treasury securities that we accept as collateral.

Michael Carrier - Deutsche Bank AG

Okay. And just as a follow-up, Jamie, just on the new guidance, both on the expense side and on the tax side. I guess what drove the taxes or I mean the expense lower? And then on the tax front, I think you guys have mentioned in the past partnering, relocating. Like, what drove this? Are you back to a level where you're comfortable being there? Are you still looking at different opportunities ahead given the higher taxes in Illinois?

James Parisi

On your first part of your question, on the expenses versus the guidance, I'd say, it was really 3 factors: one, as regulatory clarity has been delayed somewhat, we have slowed down our filling of open positions related to our OTC efforts; secondly, in terms of our equity and energy product lines, growth has probably been somewhat softer than we anticipated. So then we are experiencing lower license fee and fee-sharing expense; and then lastly, we have been going out to our teams and asking them to ferret out expense efficiencies wherever possible. So we're seeing decreased in discretionary expense going forward. So those are some of the key drivers there. On the tax side, the decrease that we've seen thus far from the 43% guidance, down to the 42.5% guidance was really driven by work that our tax team has done here internally to optimize sourcing of revenue from higher tax jurisdictions. So it's very much an effort that's been ongoing for some time and that will continue to be ongoing. That said, in terms of the state income tax rate that you alluded to, we are working with leaders in the Illinois legislature, as well as going out there and meeting with several other states to see what is available out there to lower our tax burden. Because as you know, we do have the highest tax burden, I'd say, in terms of the rate that we pay in Illinois of any corporation.

Operator

Moving on, we'll take our next question from Alex Kramm, UBS.

Alex Kramm - UBS Investment Bank

Just following up on that last question on the tax side a little bit. Jamie, can you give us a little bit more detail on the things that you are considering or can be doing? You said, sourcing the revenue, I mean if you look at some of your competitors that have international operations, obviously, they have a much lower tax rate. Are there opportunities with your international volume growing that you can actually book some of these trades maybe when they come to the hubs? Or is this something that, it's going to be because you're U.S.-based company and maybe Globex is a space there, your data centers are there, that's something that's, is only a dream?

James Parisi

I wouldn't say it's a dream. I'd say it's not an easy process. It's not just because you're generating revenue there that you get to source the revenue overseas. It has to do with where your intellectual property around all of that and your -- basically your means of production, where are they located, which are primarily here in Illinois. But there are strategies to follow that we are looking into to see if we can improve upon that -- improve upon the sourcing.

Alex Kramm - UBS Investment Bank

Okay. And then maybe more on the volume side, again, coming back to the interest rate business in particular. Craig, I think you mentioned the end of Q2 and also the debt ceiling issues. Have you actually seen the market participants come back to the market? I think there was some discussions that after -- or during Q2, some people were sitting on the sidelines, the market was a little bit distorted by the fed being there and everything. So have you seen people coming back to the market at all? Or is it basically unchanged? And then I guess related to that, can you maybe make a comment on cyclical growth through new people coming to the markets in general? I think, historically, when you look at some of the GSEs, for example, I think one of them was not as active in the futures market. Now they are. I mean, do you still see people coming to the futures market? Do you think this is still a growth opportunity even domestically? Or do you think this is more global effort now?

Craig Donohue

Well, on the first part, I mean again, we did see very strong growth in June, in the interest rates market. I think as you're well aware, that the treasury was essentially purchasing 70% of the issuance that's out there. So we do think that, that has created incentive for market participants to come back into the market and be more participative and for people who need to hedge risks that are holding those cash treasury securities, whereas the fed obviously wouldn't be hedging those risks. So that has been positive. Our sales force is definitely getting very strong interest from clients in terms of using futures market, alternatives to the swap market as they're beginning to face the increased costs, not only in terms of capital but margin requirements to support their swap trading activities, as well as clearly a fairly large amount of uncertainty about the total range of impacts to them from using the swap market given the ongoing and delayed nature of the rule making process for implementing Dodd-Frank. When we go out to talk to people about the interest rate swaps, clearing at CME Group, they're as interested in talking to us about that as they are about using our products as substitutes or alternatives. I think it's very early, but that is the feedback that we are getting from a lot of the buy side institutions that we have relationships with.

Operator

Moving on, we'll take our next question from Howard Chen from Crédit Suisse.

Howard Chen - Crédit Suisse AG

Craig, just a follow-up on that topic of systemic importance, I'm not sure I heard you correctly. To refine the point, do you think that Fed and/or FSOC oversight the systemic utilities will ultimately mean anything different or additional from how the CFTC oversees their DCO designation?

Craig Donohue

That obviously remains to be seen as this whole process gets completed. But I would say, it's not likely that it will materially change how we function and how we operate. We already have a very extensive level of involvement with the Fed. I think that the Fed respects the primary jurisdiction of the CFTC, as well as their expertise in oversight derivatives clearing organizations. So I don't think this is going to have a material impact on how we operate and the success of our business or the way in which we manage risk due to the fact that we have worked so closely with the Fed for many, many years.

Howard Chen - Crédit Suisse AG

Okay. And separate topic, just totally different. Can you update us on what's going on with the Dow Jones joint venture? Maybe what are you all working on? How are things progressing versus original targets at formation? We don't have all the details but it does feel like things have slowed a bit from some of the historical growth rates that you all kind of touched on at the time that you formed it.

Craig Donohue

Sure. I mean, I'll just touch briefly on that. Since acquiring the Dow Jones Index services business, that has been performing very well and actually, above our expectations at the time of acquisition. We're continuing to work on new product development, but we're pleased with the direction of that business in terms of its revenue and profit growth and we're going to continue to look to our capabilities there to expand the range of not only indexes that are provided, but also the range of products that we can trade that are based upon those indexes.

James Parisi

And, Howard, I'd just like to add on the revenue side, on the Dow indexes, we're seeing revenue in the second quarter of 2011 of roughly $23 million. And if you look back a year ago, it was around $19 million. So I do think that we're seeing some decent growth.

Operator

Moving on, we'll take our next question from Chris Brendler from Stifel, Nicolaus.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Can you just give an update a little bit on the - a little more color on the competitive environment in the rate business. And you showed a nice slide on large holders in open interest. Can you give us a little color on what you're seeing in terms of the competitive conditions and your depth of book versus your competitors?

Bryan Durkin

Sure, this is Bryan Durkin. Obviously, we're very pleased with the performance overall of our interest rate complex, and I think it goes to the efficacy of the composition of market participants and diverse composition of those participants in our markets. Our open interest levels are at all-time highs. We're monitoring very closely the composition of the large holders of that open interest. We currently have in our Eurodollars alone, 282 large open interest holders, which is defined as positions of 3,000 contracts or more. Looking at the competition and seeing some of the build up in the open interest, we recognized that it must be fairly or significantly concentrated in that, it's less than 20 open interest holders at NYPC or ELX. None of that information has risen to the level of reporting in the commitment of traders' reports, which is indicative of the tight concentration. So we're continuing to build up obviously with the extensions of the products that we are introducing in our overall interest rate complex, we feel very strongly about the capital efficiencies associated with the broad swaps of products that we offer in that regard across the curve. We're continuing to heavily concentrate on the buildup of the back month liquidity, particularly longer-dated back month opportunities within our Eurodollar complex. And we're very pleased to see a very strong and significant growth in open interest towards the back end of the curve.

Howard Chen - Crédit Suisse AG

Yes, I agree. Second question, follow-up question, separate topic, on Dodd-Frank and swaps and clearing. Can you just give us an update on your views on the progress there and the timing, and when we might actually see a little more traction?

Craig Donohue

Well, I wish I could give you a very good answer to that. But like all other market participants, the implementation timeline and the sequencing of implementation is not really well established yet. Still, there's still tremendous amount of final rules to be brought forward to the commission for approval. We continue to urge the commission to prioritize the implementation of the clearing mandate and all of the ancillary rules pertaining to that, so that market participants will have greater clarity about not only the timeline but the requirements and cost as well. We think in the total scheme of all of the various rule makings that the CFTC is working on, that's the highest priority and I think most other market participants agree with that. But so far, they haven't really come to a consensus view on the sequencing of the rules that they would like to implement. So my guess is, we're probably talking about the end of the year.

Operator

Moving on, we'll take our next question from Chris Allen, Evercore Partners.

Christopher Allen - Evercore Partners Inc.

Jamie, just one question on -- you mentioned before that BM&F receives fixed and variable transaction fees about $8 million to $10 million moving forward. I'm just wondering, how that -- whether that's incremental to kind of the current run rates in terms of revenues you're seeing from BM&F or -- because I know you're getting almost like onetime development costs, revenues in this quarter. So I'm just wondering how that compares for a incremental basis.

James Parisi

On an incremental basis, for this year, probably we're in the neighborhood of -- in terms of the fixed payments, on the progress payments, we're probably in the neighborhood of $10 million to $15 million. So there's only $800,000 of that in the current quarter. So what we will be seeing, and as we're saying, these are kind of onetime payments, right? Going forward, this will be an ongoing revenue stream of the $8 million to $10 million, and it will be coming through the services line.

Operator

We will take our next question from Niamh Alexander from KBW.

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

If I could touch on the potential for U.S. downgrade and default, help me understand, what are the biggest risks that CME management cautioning against and you're working towards? Help me understand what's the worst case potential outcome for your company?

Craig Donohue

Well, I mean, obviously, Niamh, as we briefly addressed earlier, we want to make sure that we have sufficient margin on deposit to cover 99% of the risk of a given position in terms of the one-day price move. But we also want to make sure that we have sufficient collateral on deposit and that's the quality of that collateral and the manner in which we valued it allows us to meet all obligations to market participants. So we do have a very kind of realtime approach to risk management and risk coverage. We mentioned already that we've taken some affirmative steps to increase margin requirements, as well as to increase the haircuts that we apply to treasury notes and bonds, agency securities and foreign sovereign debt securities that we accept. We will continue to take a very realtime approach to managing those risks separately, where we to see significant increased volatility and market activity. We believe we're very well prepared to facilitate a more significant number of transactions here from a matching perspective. So on balance, I think we're well-prepared but we're working through that and watching very carefully what happens. I think you're aware that we have a very substantial financial safeguard system. We also have and continue to have a very substantial amount of excess margin on deposit with us, consistent with historical levels, and foreign access of what market participants actual requirements are with us. So we think we're in very strong shape.

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

Okay, that's helpful. And my follow-up, if I could touch back on the position limits and with the new commissioner coming on board, I understand some of his comments had been about making sure you have the correct data in place. And reading CME's comment letter to the CFTC's proposal, I think you've pointed out along with others that the CFTC needs to gather a lot of data and analyze it before the legislation requires them to do that, before they implement it. I know you can't tell me what you're thinking -- what the CFTC is thinking but you're in the business. How long do you think it would take to effectively analyze and gather that kind of data before, if they were to kind of wait to put rules into effect? How long could that take? I mean, could it be at least a year before you can really effectively make a decision?

Craig Donohue

Well, it's hard for me to speculate on that. But I can say that obviously, in order to accomplish that, first of all, we will have to have a final set of rules on position limits and a more precise definition of the requirements or the position limits regime. But as well, we'll have to have the updated data repository rules finalized and there'll have to be an implementation period for market participants to be able to adjust and to be able to submit that data, so that it is available to the commission and they have the data that enables them to determine what the right approach is in terms of aggregating positions that market participants are holding in the swap market, as well as the futures market. So I'm afraid that probably is a while away for those reasons. But I think you know that -- our view is -- first of all, we have hard position limits already during the exploration period in all of these products and we continue to be concerned about the position limits proposal in terms of how it might sort of artificially constrain legitimate market purchase spend activity, including bona fide hedging and risk management activity.

Operator

Moving on, we'll take our next question from Rob Rutschow from CLSA.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

I was interested in your comments on the shift in user base for rates out of OTC and to exchange-traded derivatives. Are there any changes going on with the way the futures contracts are being accounted for and are they -- have the accountants figured out a way to make them more easily qualified for hedge accounting? And then separately, are you guys innovating new products that sort of addressed that issue?

Craig Donohue

Sure, Rob, let me address that. First of all, I think If you just look at it historically in terms of the many distinctions and differences between the swap and the futures market, many of those historical distinctions are beginning to give way obviously as you see more consistent regulatory paradigms for swaps and futures, convergence of business systems in terms of either Central Counterparty Clearing or perhaps the so-called exchange trading or pre-imposed trade price transparency requirements for swaps. And obviously, the capital on margin aspects of supporting and financing transactions in the swap market versus the futures market. The accounting standards for hedge effectiveness have not yet materially changed but there is, as you know a convergence process now between U.S. accounting standards and international standards. The international standards we believe draw less of a distinction between the exchange-traded products and swap products in terms of their ability to satisfy hedge effectiveness types of rules. So those things are beginning to blur. We're continuing to work with the FASB folks to try to sort of influence that process, in part because, while you can make the argument that a tailored swap agreement might actually better meet the hedge effectiveness test, it's also predicated on the ability to liquefy that exposure in a liquid market, as well as predicated upon the performance of the counterparty. Both of those areas are areas where centrally-cleared products offer we think advantages. So we're working through that. I would expect over a period of time but not overnight, that some of those distinctions from the accounting perspective will likely blur as well for those reasons.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

Okay, that's very helpful. A separate unrelated question. Can you tell us how -- what percentage of your clients are in Asia? And then specifically, what percentage are in China and how that's changed over, say, last year or 2?

Bryan Durkin

So, this is Bryan Durkin. We've been more closely tracking the level of business that's coming out of the Asia region, and we are seeing a broad composition of the user base across Hong Kong, China, Korea, as well as within Singapore, where we have a large composition of our resources located. We are continuing to build upon, as you know, our efforts in further penetrating all of the Asia region. We are building out more of our resources within Hong Kong and Shanghai to better service and penetrate access to those locales. We're very pleased with the level of diversification from the user base within the Asia region, which is representing the broad swath of the products that we represent. We have a very strong representation across each of the client segments as part of our restructured organization, so that we can better target and penetrate each of those client segments with the goal of increasing class asset sales, as well as acquisition of new clients.

Operator

Moving on, we'll take our next question from Ken Worthington from JPMorgan.

Kenneth Worthington - JP Morgan Chase & Co

Perfect timing here to follow-up on that last question. Last quarter, you highlighted about 15% of Globex volume was executed outside of U.S. trading hours. And obviously it's a growth area for you guys. Is that continuing to build? Is it possible to get maybe an update on that number and any commentary about how the build outside of U.S. trading hours is going?

James Parisi

Yes, excuse me, this is Jamie. If you look at the percentage of trades that's been outside the U.S. trading hours, it did hold constant in Q2 versus Q1. You're going to see ups and downs, obviously, and when you look at Q2 in particular, when you think about April and Europe was on vacation for half the month, uncertain if that had some impact on the volumes coming to us from outside the U.S.

Craig Donohue

But as you've indicated, it is a significant portion of our strategy, which is underscored by the focus and level of resources that we have, both in Europe and within Asia. And to reinforce my earlier comments, that is going to be a significant area of focus for us in terms of growth.

Kenneth Worthington - JP Morgan Chase & Co

Excellent. and then in other, some old disclosure piece, you used to talk about your customer mix. You had a slide for many quarters, like hedge funds, proprietary trading firms, investment bank nonmembers, would you release where those stats are today, just so we can kind of gauge where things stand?

Craig Donohue

Well, we don't release those stats specifically anymore. But I will say they really haven't changed all that much from the last time that we had.

Operator

Moving on, we'll take our next question from Jillian Miller from BMO Capital Markets.

Jillian Miller - BMO Capital Markets U.S.

With regard to your plans towards the Euribor, I guess, contracts in the second half of the year. I guess, I'm curious why now? I'm not sure if like maybe you're hoping to take advantage of client disruption related to the life merger, the expected movement of the clearing from the U.K. to Germany. Are there some other consideration? Because it seems like the timing of this could potentially play into your competitors favor and their antitrust review?

Bryan Durkin

Actually, the timing of introducing this contract was very strategically focused in the context of the build up of our deep and liquid Eurodollar complex, particularly the strong interest and strength that we've been able to build up in the longer end of that curve. We have certainly prided ourselves in being very closely connected to the client base that utilizes these instruments, and we've had a strong interest in our ability to extend and introduce that product in the context of the spreading capabilities that we've been able to demonstrate. It certainly is also complementary to the sovereign yield spread products that we recently introduced. And so when you take the totality of interest rate products that we're currently offering, the liquidity associated with that, the capital efficiencies, it was a logical extension for us.

Craig Donohue

If I might just comment also, I think it's important to note that we are not trying to hurt or help the Deutsche Boerse transaction one way or the other. We are doing what's in the strategic interest of the CME Group that was outlined by Bryan. So whether it helps or hurts them with antitrust is not any part of our strategy.

Jillian Miller - BMO Capital Markets U.S.

Okay. That makes sense. And then, it seems like there's kind of a trend to listing products in non-U.S. dollars, and I just wanted to get a better idea for who these contracts appeal to? I mean, is it primarily like European and Asian investors? Or is it maybe U.S. traders, who are looking for a closer hedge or something else along those lines?

Craig Donohue

It really includes all of the above. Certainly, as we've intensified our local efforts within the European regime and within Asia proper, we want to be very responsive to addressing the risk management needs of the client base that do business on our markets and also those that don't, being able to encourage them to come to our marketplace by us providing them with tools and currencies that are most familiar to them in terms of the denomination and be able to provide both execution and clearing services to address those needs.

Operator

[Operator Instructions] Moving on, we'll take our next question from Jonathan Casteleyn with Susquehanna.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

I guess, S&P, the rating agency came back to you intra-quarter and did not downgrade the long-term rating. I just wondering what changed or if you have any idea of what changed from their perspective?

James Parisi

Yes, Jonathan, this is Jamie. We sat down with them obviously and walked through our business, talked to them about some of their concerns around the FXCM program, and I think as they learned more about what we're doing, it influenced their decision on to keep, to maintain our rating. We are on a negative outlook but so is the industry, generally speaking. And I think that's just tied to broader trends.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Okay. And then, can you remind us of your longer-term objective with the new BM&F investment. I think you're now 3 years into your initial 4-year holding period. And so I'm just wondering, what's the outlook beyond next year? And I believe you can write the investment up now, can't you? Within one year of the restriction being up?

Craig Donohue

Let me take the first part of that and let Jamie respond to the second portion of your question. We view our relationship with Brazil, which is reciprocal essentially as a long-term relationship. We are working together to increase flows into our respective markets from our respective customer bases and the different kind of geographies that we cover. We continue to have very strong growth and participation from Brazilian banks and asset managers and hedge funds into CME Group's core products, with south to north volumes increasing very substantially. As you know, we also have a revenue arrangement, where order flow that comes through the CME Globex network or customer base that is either routed there or facilitated through their co-location services, we participate in revenue growth associated with that activity. We are working together right now to develop their technology, and obviously Jamie talked about the per-contract royalties that we expect to achieve as they implement the platform. So it's a long-term arrangement. Obviously, we have, reciprocally the holding period for the stock. But we're always going to judge this on the basis of the value, ongoing value of the strategic partnership rather than simply the investment that we each have in each other.

James Parisi

And if I can add to that, on the -- if you look at the volumes that are coming to us sort of the Latin America incentive program, I think, which have been significantly influenced by our partnership with Brazil, as Craig was saying, up pretty significantly. They're about 39,000 sides last quarter, up about 60% versus last year. Generating revenue on just those sides of about $1.4 million. But if you consider that both sides are trading against the other volume potentially here in the U.S., the revenue is likely higher than that. On your question around the accounting for the BM&F stake, you will see, if you look at last quarter, we did write that back up -- or I'm sorry, so that will go through equity going forward. It's not something that's going to flow through the income statement unless there's another -- we review that and other assets like it for impairment. But that's not likely.

Operator

Moving on, we'll take our next question from Don Fandetti with Citi.

Donald Fandetti - Citigroup Inc

Craig, I was curious how you rank your growth opportunities today? And secondly, there's clearly been a lot of volatility and change and uncertainty in the capital markets and reg. Do you look at your company as having the same earnings or top line growth trajectory as it had historically or do you still remain positive on that front?

Craig Donohue

Well, on the first part of your question, I would say that as you've heard from us before, we believe we have very strong growth prospects in our core business. We are working very hard to expand our business on a global basis. A lot of the work that we're doing to expand access points in important developing and emerging markets, listing new products either in conjunction with strategic partners or those that we simply develop and innovate on our own that have appeal to foreign investors. We have very globally relevant products. So products like FX, metals, energy and commodities, we believe we have a lot of untapped demand for those products as we build out not only our distribution network and distribution partnerships but our own sales and marketing and education capabilities in Asia, in particular but other developing markets as well. So core business growth is probably the highest priority we have and then obviously, we're looking to growth in new areas like co-location services, expanding our clearing services on a global basis through CME Clearing Europe. We have a very robust OTC clearing business already. It's roughly 10% of our total revenues. We're expanding that very successfully beyond oil, power and gas into FX, metals and commodities and we see very substantial opportunities there. And then as well obviously, we're very focused on interest rate swaps and CME's credit default swap and clearing services. And then as we touched on very briefly earlier, index services as well. So we have a variety of growth initiatives beyond the core but we've got a lot of confidence in our ability to grow the core. And I think when we look at what's happening and the emergence of greater levels of capital markets and hedging and risk transfer activity on a global basis. We still think that this is a reasonably young industry and that there's substantial growth opportunities available to us now as the global exchange with global technology and distribution systems and customers. So we've said, we think that we can continue to generate the kind of growth that we've seen over the last 40 years.

Operator

Moving on, we will take our next question from Daniel Harris, Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

Just wanted to come back to the launch of the Euribor product set that you guys have. And obviously, a deep and liquid market in that product as well and as you guys have seen in the U.S., it's very difficult to attract liquidity and open interest. So I was wondering what is your strategy here going forward to attract new clients with market-making incentives or other strategic strategies to actually move that product up over the next few years?

Bryan Durkin

As I alluded to earlier, we really have strong confidence in our ability, both from a technical perspective and leveraging market client segments, particularly on the proprietary side of things to assist in the buildup of liquidity in new contracts. As you've alluded to, it is difficult when you're introducing a new contract and you have to have all of the components in place from a technical perspective to the user base perspective to the construct of the actual contract. This has been in the works for us for some time. We feel that again, strategically, from where we've been able to build up that depth of liquidity, as I alluded to earlier in the back months of the Eurodollar and across the entire curve, coupled with very strong interest from the proprietary trading group side, both within Europe proper itself, as well as in the U.S., that we have a nice mix I believe of participants that are going to work with us to help us in building up and establishing that contract.

Daniel Harris - Goldman Sachs Group Inc.

Okay. And then shifting gears here completely, smaller business for you guys now that the business diversified as much as it has, but the market data piece of the business, you guys historically used to have pricing power there, raised fees every year or 2. Just wondering what your thought there is in terms of the -- screen count seems like it's somewhat stabilized here after falling for a while. A, whether or not that grows? And B, whether or not you think there's any ability to actually raise fees at some point?

James Parisi

As you noted, we have been generally every other year still take price increase. The last one we took was just last year and as we took that price increase and you look at the revenues generated from the price increase swamps the loss in revenues from the shrinkage in terminals. So this is something that we analyze going -- on an ongoing basis and I can't really say too much about pricing going forward.

Operator

And we'll take our final question from Brian Bedell from ISI Group.

Brian Bedell - ISI Group Inc.

A question for Jamie to start, on the expense guidance. Does your reduced expense guidance take into account lower volume outlook for the second half? And I guess generally speaking, do you -- does the budget include lower volumes for the second half or is it stable with the first half?

James Parisi

I'd say generally no, it doesn't account for lower volumes in the second half. I guess, that's all I'm going to say on volumes.

Brian Bedell - ISI Group Inc.

And then, another question, more strategically on WTI and Brent. As you probably know WTI gains -- I'm sorry, Brent gained considerable share in June. You've gained some of that share or WTI's gained some of that market share back in July. Just maybe, if you can talk a bit about what the strategy there is in terms of developing new products or working with the market participants to use WTI more, given the gap that we're seeing in the WTI and Brent prices?

Craig Donohue

Sure, it's Craig. I mean, I'll tackle that. I think first of all, if you look at sort of relative market share in kind of the Brent and WTI markets over a multiyear period, you would see different fluctuations in that, mostly attributable to cyclical factors that come into play at different times in terms of each of those different markets. WTI continues to be the much stronger benchmark with volumes and open interest that are considerably greater than those in ICE Brent. And that continues to be very strongly the case. So we look at a lot of the current dynamics in terms of the spread differential between WTI and Brent as really kind of driven by just current kind of supply demand fundamentals and logistical issues that ultimately will solve themselves within the next year or 2. We continue to introduce, across all of our asset classes including energy, a wide range of product extensions. We have listed and made available both for trading and clearing different sour crude and index products with Argus. And I think for the long run, as you know, we believe there will be a number of important benchmarks in crude oil markets and we have a continued emphasis on developing an East of Suez benchmark through our investment in the Dubai Mercantile Exchange, where more recently, we've continued to see very strong volume performance in those products. That's a long-term market development initiative but with the macro shifts that are happening in the world, we think that there's the opportunity to develop that into a substantial benchmark. With that, I want to thank everybody. I think we're through with our questions. We appreciate you joining us this morning, and we certainly look forward to being with you again next quarter.

Operator

Thank you. That will conclude today's conference. We thank everyone for their participation.

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