Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 NYSE Euronext Earnings Conference Call. My name Chanel, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.
Thank you, Chanel. Good morning, and welcome to the NYSE Euronext Second Quarter 2011 Earnings Conference Call.
Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext's current expectations and involve risks and uncertainties that could cause NYSE Euronext's actual results to differ materially from those in the statements. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.
We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.
For the call today, Michael Geltzeiler, Chief Financial Officer will review the financial results for the quarter; Tom Callahan, CEO of NYSE Liffe U.S. will then provide an update on the launch of interest rate products on our U.S. futures exchange, Duncan Niederauer, Chief Executive Officer, will conclude with some comments on the businesses and provide an update on the business combination with Deutsche Boerse. We will then open the line for your questions. [Operator Instructions] We are incorporating slides for the call today which are available for viewing on our website, and Mike, Tom and Duncan will refer to these slides during their remarks.
With that, let me now turn the call over to Mike.
Good morning, everyone, and thank you for joining today's call. I'm pleased to share our second quarter 2011 results with you. Characterized by increasing revenue diversification, disciplined cost control and strong capital management.
For the quarter, we recorded EPS of $0.61 per share, a net revenue of $661 million, down from $0.64 per share on $664 million in net revenue in the prior year period.
You'll recall that Q2 2010 trading volumes benefited from a strong spike in volatility from the advent of the sovereign debt crisis in Europe, as well as the flash crash in the U.S. Strong non-volume-related revenues combined with the weakening of the dollar year-over-year increased our net revenue by $51 million, helping to more than offset the impact of declines in trading volumes across most of our venues.
Of particular note during the quarter, our Technology Services business increased revenue by 14% and registered operating margins of 30%. On the expense front, we continue to show cost managing discipline. Our expenses increased $12 million or 3% to $419 million. On a constant currency and portfolio basis, our expenses declined 3% or $14 million compared to the second quarter of 2010. Global headcount is below 3,000 despite completing several smaller deals since the middle of last year, including the acquisition of Corporate Board Member and the joint venture with APX to create NYSE Blue.
The strong free cash flow in the second quarter, we retired $200 million in commercial paper which reduced our debt to EBITDA leverage ratio to 1.7x, the lowest level since the merger of NYSE and Euronext.
A significant contributor to our free cash flow has been the reduction in capital expenditures, which were $31 million in Q2, down from $70 million in the prior year period.
So in summary, our results were solid year-over-year against the backdrop of an average of 17% decline in trading volumes across our 4 primary venues.
Slide 4 provides comparative GAAP results for the second quarter of 2011. For the quarter, net income and EPS were below prior year, but in line with the first quarter of 2011. Second quarter 2010 results benefited from a net $54 million pretax gain from disposal activities, principally the sale of our 5% stake in the National Stock Exchange of India.
This quarter, we reported an $18 million charge for merger expenses and exit costs, which included $12 million related to our pending business combination. Year-to-date, a total of $27 million has been spent on the pending merger.
My review of financial results from this point forward will exclude the impact of merger expenses and exit costs, gains from disposal activities and discrete tax items.
Slide 5 provides a more detailed look at our financial results for the quarter and year-to-date. Diluted EPS for the quarter was $0.61, down 5% versus the prior year's $0.64 and below the $0.68 in the first quarter of 2011. In the first half of 2011, EPS is $1.28, up 9% versus prior year. Volumes decreased dramatically last year following the second quarter volatility. We believe this presents a favorable backdrop for second half growth as the lower volume comparables will accompany continued strength in non-volume based revenues.
In June 29, we closed the sale of a 52.8% stake in the NYSE Amex Options business. For the quarter, we reported 100% of the profits from this business. Had the transaction closed on April 1 of the second quarter, our diluted EPS for the second quarter would have been $0.02 lower. This transaction provides a facility for the partners to require us to purchase a portion of their investments at specific intervals over a 5-year period. We expect to repurchase 10% of the partners' stake in the third quarter. We are extremely pleased with the performance of this venture, which has increased market share from about 6% at the time we acquired the American Stock Exchange, to 15% at the end of Q2.
Our diluted share count increased to 263 million shares in the second quarter as a result of the issuance of approximately 340,000 shares, to former Amex members, in connection with the sale of the former American Stock Exchange headquarters.
Slide 6 provides our consolidated and segment results on a currency-neutral basis. The U.S. dollar weakened this quarter versus prior year for both the euro and the pound. For the second quarter, 49% of our net revenue was denominated in either Euros or pounds, and 51% in U.S. dollars. Currency impact on net revenue was favorable $33 million versus prior year and a favorable $11 million versus the prior quarter.
On a currency-neutral basis, second quarter net revenues were down 4% and operating income declined 9% versus the second quarter 2010. Operationally, revenues for our Derivatives and Cash Trading and Listings segment were down 12% and 2%, respectively, and the Technology segment grew 9% versus Q2 prior year.
On Slide 7, we showed a positive impact of non-volume-related revenue, which reflects the increasing diversification of our model. The $18 million in incremental net revenue generated by non-volume-related activities helped dampen the impact of lower trading volumes across most of our venues.
Second quarter 2010 trading volumes benefited from much higher levels of volatility driven by the sovereign debt crisis and the flash crash. This incremental revenue came from a variety of stream including Technology Services, Listings and other revenues such as Corporate Board Member and NYSE Blue. When trading volumes do return to more historical norms, you will get the full benefit of our diversification efforts which helped us weather down volume cycles.
July volumes are already showing a more favorable trends. NYSE Euronext volumes for U.S. Options and European cash trading were each up over 15% on July 2010 levels while LIFFE CONNECT volumes were similar, and only U.S. cash was lower.
Slide 8 and 9 detail the financial performance for our Derivatives segment. Global Derivative volumes decreased 12% year-over-year, driven primarily by declines in trading volume in European Derivatives. European Derivative volumes were impacted by lower equity futures, reduced risk capital and lower volatility. Net revenues declined by 6% in the quarter. Derivatives accounted for 32% of our net revenues, 41% of our operating income in Q2. The increase in fixed operating expenses for the Derivatives segment is driven by the mitigation to the new data centers -- or the migration to the new data centers, from software upgrades being implemented this quarter and new business development spending.
The average net rate for contract for NYSE Liffe derivatives was $0.74 per contract in the second quarter, compared to $0.64 in the second quarter of 2010, and $0.69 in the first quarter of 2011. The increase versus the second quarter of last year was due to the weaker dollar. Including the favorable impact of currency fluctuations, cash share would have been $0.67 in the current quarter. Rate per contract in the U.S. Options was $0.165 per contract in the second quarter, in line with the prior year and first quarter.
Similarly, Slide 10 and 11 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings net revenue were $327 million in the second quarter of 2011, up 2% versus the prior year period and in line with the first quarter of 2010.
These results were achieved despite declines in U.S. and European cash trading ADV of 35% and 11%, respectively. Lackluster volumes were more than offset by positive currency moves and strong non-volume-related revenues, which included growth in listings revenues and new revenue streams from Corporate Board Member and NYSE Blue.
Market share was down slightly in Q2, above the U.S. cash in our 4 European markets compared to the prior year. Market share for both venues, however, increased versus the prior quarter. Day-to-day share in the U.S. was 35% and European cash share was 71%. Revenue capture for the U.S. cash trended up to $0.039 per 100 shares handled for Q2, well above the $0.030 recorded in the second quarter of 2010.
Since the second quarter of 2010, we have implemented dynamic tiers based on overall U.S. consolidated volumes and removed the inversion of the highest tier on Arca. These changes, combined with the higher client take-fees on NYSE, Q2 rebalances for some of the larger indexes and a favorable mix have been driving higher capture rates. While we are pleased with this development, we expect second half capture rates to soften somewhat from the Q2 levels.
Revenue capture for European cash of $0.74, increased 13% compared to the second quarter 2010. Including the positive impact of currency fluctuation, capture was basically flat year-over-year.
Slide 12 details the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions revenue was $122 million in the second quarter, an increase of $15 million or 14% from Q2 prior year. The increase is primarily driven by an increase in SFTI and co-location revenue and revenue growth from managed service sales from TSE, WSE and Sigma X.
Operating margin was 30%, compared to 19% in the second quarter of 2010. Adjusted EBITDA margin was 38%. We recently announced an agreement to acquire, Metabit, a Tokyo-based provider of market access services to the Asian market. The acquisition supports our growing focus on the Asian markets and strategic goal of building a global liquidity network. We expect to close this transaction around the end of August. Year-to-date revenues are running 10% above the prior year period. We continue to target a growth rate of 15% for full year 2011.
Slide 13 provides a harmonized view of fixed operating expenses. Second quarter operating expenses were up $12 million versus last year on a reported basis. 42% of our expenses in the second quarter were denominated in either Euros or pounds. And if adjusting for FX and the impact of transaction such as NYSE Blue JV and the acquisition of Corporate Board Member, fixed operating costs were down $14 million or 3% from the second quarter of 2010.
We continue to make good progress and are focused on efficiency and productivity improvements that will further reduce operating expenses. Year-to-date, our fixed costs are flat compared to prior year on a reported basis. Including the impact of currency and changes to our portfolio, our expenses are running 4% below prior year levels. As a result, we are confident of our ability to meet our full year cost guidance of expenses below $1.65 billion on a constant dollar and constant portfolio basis.
In the first half of 2011, we reported costs of $834 million. And if adjusting for $19 million of unfavorable FX variance versus prior year rate, an $8 million in incremental costs from the March 2011 NYSE Blue joint venture, first half constant dollar, constant portfolio costs were $807 million.
Slide 14 details our cash and debt position as of June 30, 2011. The company ended the quarter with a strong financial position for our combination with Deutsche Boerse. As a result of our strong free cash flow in the first half of 2011, we retired our remaining commercial paper during the quarter, leaving the company without any short-term debt as of June 30.
In the first half, we have repaid $366 million of short-term debt. Given the extremely low borrowing cost for commercial paper, this should have a minimal impact on recorded interest expense. With the retirement of our outstanding commercial paper, our debt-to-EBITDA leverage ratio was 1.7x, down from 2.2x at the end of 2010 and the lowest level since NYSE and Euronext merged.
Second quarter capital expenditures remain low at only $31 million, compared to $70 million in the prior year quarter. Year-to-date capital spending is $67 million. While we do expect capital spending to pick up in the second half, we are on track to be well below our full year guidance of less than $200 million. Last week, the board declared a $0.30 quarterly cash dividend for the third quarter of 2011, which is payable on September 30.
With that, let me turn the call over to Tom Callahan for an update on one of our most important new initiatives.
Thank you, Mike, and good morning, everyone. It's a pleasure to provide you with an update on the continued growth of our U.S. futures platform. We've already accomplished more than any other new exchange in the U.S. interest rate futures space, just a little over 5 months into the launch of our new interest rate products.
Before diving into our results to date, let me first level set the discussion with background on our strategy as shown on Slide 15. NYSE Liffe U.S. has 4 core pillars of its strategy, which closely relate to the NYX corporate strategy of building a capital markets community. That strategy is based on 4 key objectives known internally as the CODE: connect, operate, deliver, enable. These pillars strongly interrelate and it's always been our belief that without any one piece of the strategy, the others don't work.
Connect. Underpinning our execution plan is a strong technology platform that leverages existing connectivity for our core Liffe clients. Having NYX systems as the cornerstone to all aspects of our exchange, ensures that we bring a stable, globally distributed, high-performance platform to the market.
Operate. Our strong value proposition has provided a catalyst for a variety of customers to support our new platform. This helps create a diverse liquid market with open interest that's growing virtually every day. The most difficult hurdle for any new exchange is creating a consistent based liquidity and our customers are telling us that we have accomplished that.
Deliver. NYPC delivers one of the core value propositions for NYSE Liffe U.S., capital efficiency via a single-pot margining between cash and futures. At a time when capital efficiency has never been more important, this innovation is tremendously relevant.
Enable. NYSE Liffe U.S. has been built to a variety of partnerships. For example, the partnership with MSCI to power our equity index futures complex, which was recently expanded with the successful migration of MSCI EAFE and MSCI Emerging Markets indices from another exchange. The semi-mutualized structure of the exchange whereby NYX owns NYSE Liffe U.S. in partnership with 6 sophisticated market participants. And the joint venture between DTCC and NYX, which created New York Portfolio Clearing.
Turning to Slide 16, we highlight the progression of our interest rate products since launch. We launched interest rate futures on our platform starting with Eurodollars on March 21, 2011. We've had strong support in our Eurodollars since launch with approximately 65,000 lots of average daily volume.
Our U.S. Treasury futures were relaunched on July 7. ADV since our relaunch is 30,000 lots. Volume growth drivers include strong market support from a diverse set of market participants. Growing open interest of 29,000 lots as of July 29.
Open interest in both products is strong and is growing rapidly. Open interest for the rates complex is now over 700,000 contracts and our total exchange is rapidly approaching 1 million contracts with 805,000 as of July 29.
As evidenced by our growth of open interest, we have a diverse range of market participants transacting volume every day on our platform, with a geographically diverse group of market makers, banks and end-user customers.
Lastly on Slide 17, we provide you with the 5 key areas that will drive our future growth. Our strategy going forward starts with building on the existing success we've had on our platform. New customers are accessing our markets regularly and we are pleased to welcome ABN Amro and Citi as new NYPC clearing members just this week. We're excited to launch Eurodollar options in the first quarter of 2012. We're working to expand the capital efficiencies afforded to include customers in addition to the current clearing member house positions hopefully to go live in early 2012.
New products. We're working on a variety of innovative new product ideas. And finally, the MSCI expansion. We haven't really spent a lot of time on this asset class today, but we're optimistic about the potential for our equity index futures complex. We successfully migrated 70,000 lots in open interest from CME to our platform in June 2011 in the emerging markets and EAFE futures. Over $3 trillion in assets under management are benchmarked to MSCI indices globally, so we're quite optimistic for the development of futures of these futures markets.
So with that, let me turn the call over to Duncan.
All right, thanks a lot, Tom. Good morning and good afternoon everybody. Greetings from London. Just doing a quick tour through Europe so we thought we do the earnings from here today, and then my team and I will be in Frankfurt tomorrow doing some work on the merger.
But before I get to the combination with DB. I did want to take a minute on Slide 18 just to comment on several key developments in our segments, which I believe go a long way towards highlighting the fact that despite the tremendous efforts that we're all engaged in on the merger, we have tried to isolate these efforts within our organization so that our business people can stay focused and continue to execute. I'm personally very proud of what we've been able to accomplish in the first half of 2011 and I want to thank my colleagues for all of their hard work on behalf of all of our shareholders.
Now first on the Derivatives business, you just heard from Tom with regard to how we're doing on Liffe U.S. and NYPC and in addition, I'm very pleased to note that we successfully closed the sale of the stake in our NYSE Amex Options business that Michael alluded to earlier. Our partners in that venture will be integral in helping us implement new order types and market structure changes that will enhance our exchange and further grow our market share.
On the Cash Trading and Listings business, we continue to see growing momentum in our listings franchise. We were #1 globally for IPOs for the second consecutive quarter and I'm proud that NYSE has won 55% of the technology IPOs year-to-date, up from a previous record high of 44% in 2010. Our recent big tech wins include LinkedIn and Pandora.
Additionally, year-to-date, we continue to see transfers from other exchanges with a total of 8 transfers year-to-date, including Hudson Valley Holding Corp. which began trading on the NYSE today and Regency Energy Partners, which will begin trading at NYSE on August 9. There have been no transfers going the other way so far this year.
During the quarter and late last week, we experienced several outages in our European cash markets. We have identified the root cause of these outages. We have stabilized the environment and we are putting in place the infrastructure that will prevent these outages from occurring in the future.
Lastly on Slide 18, a bit about our Information Services and Technology Solutions business. I'm happy to report that we are on track for full year revenue growth of 15% and our goal of $1 billion in revenue by 2015. We will hit this target by continually expanding our global liquidity network through our hub expansion program and acquisitions like Metabit that we just announced just last week. We will also continue to embed ourselves in the trading fabric of our clients with initiatives like our cloud launch which creates the first Capital Markets Community Platform.
Shifting to Slide 19, I want to spend the next couple of slides talking a bit about the merger process with Deutsche Boerse. Slide 19 focuses on where we stand with regard to the integration planning. With the strong support of our shareholders behind us, we are moving beyond the votes and focusing on the various regulatory streams that we have to work through as well as our integration planning. On integration, we have already made some tough decisions together which have been laid out in the business combination agreement so the framework for operating NewCo is already in place and it is very clear who is responsible for what through the closing.
Next, a key list of integration planning topics was identified early in the process and resulted in an increase in our synergy targets as we found more similarities than originally assumed. For example, we were able to find more common ground than we expected on our future IT architecture. Already in the second quarter, we have formed a joint and dedicated integration planning team, named the senior managers in charge of running the integration planning effort and established full-fledged integration teams including divisional experts and project support personnel. The future management team is also working to set the goals and priorities for the integration planning process until closing, so we feel very confident as a team, that we have set ambitious and achievable targets. With the overwhelming support of the transaction provided by shareholders from both companies, management attention has shifted towards receiving the requisite non-objection declarations from regulators, as well as preparing the ground for a swift and effective integration post-closing.
Lastly, while the integration teams will continue to drill down into the synergy targets, we will also begin to focus on some of the softer aspects of the integration, including setting the foundation for the harmonization of our 2 cultures. This is a complex cross-border deal and our goal is to create a culture of performance that matches our leadership position in the global exchange space.
Given both companies' strong and rich histories of operating an international environments, as well as the specific examples of team work that I have just outlined as our teams begin to work together, a good example of which was winning overwhelming approval from the shareholders of both companies, I am confident that we will be successful in integrating our cultures.
Shifting to Slide 20, I wanted to spend a few minutes outlining the European Commission review process and the benefits of our combination for all customers, end-users and the markets. A particular focus for us is the European Commission review process, which really has been on going from sometime through pre-notification discussions after we announced our transaction and recently with our final competition filing, which we submitted in late June.
This week, the competition authorities in the EU are expected to complete the first phase of their investigation during which they have collected opinions from our peers, customers, competitors and other stakeholders. Some of the views of the commission has collected have already been disclosed publicly and it should not surprise any of us on this call that our competitors have been the most vocal about their concerns regarding our pending business combination. This was expected and we have absolute confidence that the commission will carefully consider the source of these objections.
Let's make it clear that we expect to be notified by the competition authorities later this week that we will embark on a Phase II process. For our part, we continue to run a very diligent and comprehensive process in close collaboration with our colleagues at DB to respond to request from the commission. Our deal is the right answer for the European capital markets. Putting our 2 companies together will create tremendous benefits for all customers and end-users in terms of capital efficiency and operational simplification and cost reduction.
Secondly, it will strengthen and improve efficiency of the EU capital markets in terms of liquidity, lower volatility and cost of capital. And it's important to note that any negative impact on competition is not significant given the global nature of derivative markets, the increasing competition between OTC-enlisted markets generally and in Derivatives specifically and the simple well-known fact that NYX and DB1 don't really compete against one another. The only area of overlapping our current business models is in some single name derivatives and, of course, we are only 2 of many players in those markets.
With respect to competition issues, we don't want to front run the regulators, but my guess is that their focus will be on what conditions may be placed on us not how to make or break the deal. This is a process that lends itself to speculation and we understand that. Not surprisingly, a lot of the speculation has been driven by our competitors, as I mentioned earlier, and much of it has focused on remedies in particular some who have opined on whether we would be asked to dispose of certain businesses like our NYSE LIFFE or Eurex Derivatives franchise.
Obviously, European Derivatives are critically important part of our combination providing synergies, capital efficiencies and other significant shareholder and customer benefits. And, of course, as in any deal, at some point the logic of the combination would not hold together, but we think the regulators are weighing the issues carefully and will provide a thoughtful and balanced approach.
So in short, we are giving them what they need to consider the issues presented, but we can't and won't predict the outcome of their deliberations, but we will continue to collaborate. We are confident that the benefits that our combination will provide to clients and the market overall do and will continue to resonate with the regulators and we look forward to continuing our constructive discussions with the commission and the case team in Brussels, still hopeful that we will be able to close our transaction in 2011.
Lastly, just some concluding remarks. In closing, our results for the quarter were solid and we are pleased with the progress we are making on our strategy to create a global capital markets community that will empower our clients to innovate and collaborate. As a result of our diversification efforts over the past several quarters, our business model is much better positioned to weather lackluster trading volumes cycles as we saw particularly in this quarter. We have additional drivers of growth gaining traction with interest rate futures on NYSE Liffe U.S. and NYPC. The clearing in post-trade businesses will continue to be a particular area of focus for us as a combined company and we have strong growth coming from our technology segment in 2011 and beyond. We continue to see momentum in our Listings franchise, securing the #1 position in global IPOs for the second consecutive quarter. And lastly, with our respective shareholder votes behind us, we are fully focused on the regulatory approval process targeting a close for our business combination with Deutsche Boerse in 2011.
With that, we'd be happy to open the line for your questions. Thanks for listening.
[Operator Instructions] And your first question comes from the line of Roger Freeman.
Roger Freeman - Barclays Capital
I guess my question would be around NYSE Liffe and NYPC in total, can you give us ballpark or quantify how much those businesses are in a negative profit position right now, in a lost position. And secondly, on NYPC, can you just talk to the growing open interest versus sort of stable volumes and market share. What's the nature of the open interest, is that sort of chunky block, can block rates come in?
I'll take the first part of that, the financials and then we'll turn it over to Tom. So what we have indicated in the last couple of years is that NYSE Liffe has been in investment mode and that we've put in about a $30 million operating loss for that business. I remember we own 58% and we have minority partners who have 42% of that business. So although we haven't -- we don't report the profitability each quarter, as the interest rate business is just starting, it's in its infancy. I think we're doing added a better than that $30 million loss that we reported last year, but we're still in a large investment position at this stage.
Sure. In terms of the growth of open interest, we said before we've even launched the platform that our success would be measured as much by our growth in OI as by our volumes it is because we made a strategic decision back in 2009 when we designed the platform to really have capital efficiencies as the centerpiece of the new exchange. So the fact that both our partners and our customers are recognizing that and are really making a long-term commitment to the platform by moving open interest is enormously gratifying and exciting for us. We're seeing new partners coming into our market virtually every single day. And as they do, the open interest, as you can see from the chart in the deck, is steadily increasing every single day. So 800,000 lots of open interest across the exchange, 700,000 lots at NYPC for a platform that is 5 months old is just great progress and great early momentum. And I think it validates the strategy of delivering operational and capital efficiencies through the NYPC platform.
Your next question comes from the line of Rich Repetto, Sandler O'Neill.
Richard Repetto - Sandler O'Neill + Partners, L.P.
I don't want to do this, but I'd stay on the topic of NYSE Liffe U.S. since we have Thomas. You talked about the number, I guess the loss, Michael, but we still have -- well, here's the question, we still have the free market-making or at least some liquidity providers are still free until I think 2012. And then so I'm just trying to see what type of volume do you need to breakeven either before '12 or once-- is it the fee once you start charging fees in March of '12 that could move it or how much volumes do we need? And then also, this relaunch of treasuries, I know there was an issue with the contract, and can you just remind us, how the capital efficiencies with Eurodollars as well as -- we know about the treasuries.
Sure, so I think there might be 3 questions in there Rich so I'll try to hit them one at a time. I think what you might have been referring to in terms of the fee holiday was the first 3 months of NYPC where there was a fee holiday on clearing fees that went from March 21 to June 21. So that has since expired. In terms of the profitability of the overall platform, it really comes down as you know to the ecosystem of different types of customers because, of course, you have market makers all the way to end-user customers. And the thing that we have been most gratified by outside of the growth in open interest that I discussed previously was the amount of end-user customers, the nonmembers that are coming into our platform, we have done over 300,000 lots of customer block trades from large U.S. asset managers. So the fact that we're seeing that kind of commitment from real end-user customers, really, I think is a great confidence in our new platform, but, of course, in terms of the rate per contract that helps us enormously as well. I think the final question was around capital efficiency and do Eurodollars benefit from the capital efficiencies of NYPC? The answer is absolutely the largest source of margin. And NYPC is actually their repo-clearing business and repos have a very high correlation with our Eurodollar contracts. So there's a terrific amount of capital efficiency there. And I think that helps explain the open interest growth that we've had and then in terms of the relaunch of the treasury complex, when we launched the platform on March 21, the big difference between treasury futures and Eurodollar futures is, of course, treasury futures are physically delivered. Customers wanted to see that NYPC could manage its first physical delivery, it did that successfully in June. And really more than anything, that helped build confidence once we got through that period into July for customers to really start increasing their level of activity, and that's why you saw when we relaunched the platform on July 7, our volume and open interest start to increase immediately.
Richard Repetto - Sandler O'Neill + Partners, L.P.
Yes, I think -- well, you're saying that all the trades were -- all the waivers for the trades were ended in June. I think on your website it still has approved -- trade fees waved for approved market makers until March 21, so?
I mean that's on the exchange side, Rich, not on the clearinghouse side. Of course, for people who make markets in our platform and sign market making agreements, there are fee waivers and that's very standard in the futures industry and that will, of course, continue because you always need market makers, but what I was referring to in terms of the end-user customers and the early adoption that we've seen, obviously, those are fee-paying customers and the more of those we get, the better the balance sheet of the business will look.
Your next question comes from the line of Alex Kramm of UBS.
Alex Kramm - UBS Investment Bank
Just wanted to quickly shift gears to the deal, in particular that slide where you highlight the benefits for end-users. Now when I look at the reduction in capital requirements in particular, that $3 billion, I mean looking at that and talking to some, the broker folks in the industry, it sounds like people are generally very excited about this and I think they made that case heard in their antitrust submissions. I think the big issue is to really have confidence with some of these numbers though. So hoping to see if there would be anything else that you can provide in the future? I mean if I look at that $3 billion number and look back what CME and CBO [ph] that in 2004, I mean, I probably can come up with a number like that myself. So I think what people struggle with in particular with on the dealer side is, can we put portfolios together, show them to you and you can tell us, "Hey this is really what we're getting," in particular given there are different regulatory frameworks between Euronext and Liffe and other challenges, but probably will take some time to put that together, so any comment will be great there.
Alex, this is Duncan. I'll take that one. So we certainly intend to be very transparent on that and as we get closer to closing or shortly after closing when we are talking about migration plans, combinations of clearinghouses and giving the clients a roadmap of when all that can happen, when we're one company, we'll be a lot easier to go a lot deeper. So far, obviously, we wanted to be cautious. We came up with that number that we've quoted by doing sort of what you suggested we went to a few big customers and we said, "Look, we can't really look at each other's positions right now. You know what positions you have in both places, why don't each of us give you the data and then let's run some correlations, let's run some analyses and let's see what we come up with." So we felt pretty good that EUR 2 billion or $3 billion was a fairly good number out of the gate based on some testing that we did, but I imagine we'll be able to put a much finer point to that as we get closer to the closing and into the operating as NewCo. And it's a great question because it's a significant benefit to the marketplace and it's obviously in our interest to be honest about it, but also be as clear with as many as we can if that that's a real savings, not an illusory one.
Alex Kramm - UBS Investment Bank
So do you think -- and this is the same question, so do you think there will be an opportunity to give more detail to the participants so that they can still comment or follow up in phase II during the antitrust?
Yes. I think we haven't approached it that way to date, but we can, it's a good suggestion. We have gone to several individuals and I think we'd be prepared to do that under the outline of the ground rules that I just went through, where we're not looking into each other's clearinghouses pretty materially, that's inappropriate, but certainly, the end user can see that for all of their clients and do that analysis.
Your next question comes from the line of Patrick O'Shaughnessy of Raymond James.
Patrick O'Shaughnessy - Raymond James & Associates, Inc.
So in June, CME Group announced that they are going to sort of offer the Euribor contract. I was wondering if you could comment on how you think you guys are currently competitively positioned to defend against that entry, as well as any implications that might have on the antitrust concerns with your merger?
It's Duncan, Patrick. I'll take that one. I'll answer the second half of that first. I would think that it's in terms of the impact on the merger, it's been duly noted by the competition authorities in Brussels that there have been a few competitive efforts in the last few months, either embarked upon or announced. So frankly, we think it's an example of -- like other examples that there is an opportunity to compete. At the same time, we think what we've learned in NYSE Liffe U.S. and in NYPC as Tom went through in his material and this really gets to the first part of your question, if you're going to compete, we certainly understood we have to bring in innovative solutions the marketplace. I think listing look-alike contracts and not really adding any value from the capital efficiency point of view, whatever it might be, we think are fairly easy to defend against. So when we were trying to be in an attacker in the U.S. jurisdiction, we spent a lot of time trying to think about what more it had to be than just listing Eurodollars and treasuries. We didn't think that was much of a competitive threat to the incumbent. So I think what you saw us do is spend a lot more time on something that was innovative, not just simply list a look-alike contract and attempt to compete. Tom, would you add anything to that from your point of view with your Derivatives hat on?
I would say, I mean, of course, CME is an incredibly powerful global competitor, so we're taking the threat very, very seriously. We thought it was interesting that they chose to clear the products in Chicago, which is an inverse of when Liffe unsuccessfully back in 2004 attempted to launch Eurodollars cleared in London, and that proved to be a challenge for us at the time. So it will be interesting to see how European customers react to a Chicago-cleared Euribor contract, but regardless, we're staying very close to our customers and we're taking the threat very, very seriously.
Your next question comes from the line of Johannes Thormann of HSBC.
Johannes Thormann - HSBC
One question concerning your balance sheet please. You have successfully reduced your debt-to-EBITDA ratio. What is an appropriate level for your company, and will you continue to decrease or at which point you think you will increase the dividend policy, also in the light of the merger with Deutsche Boerse?
Okay, I'll handle that. Johannes, we have a mentioned in the past that our comfort zone and our targeted leverage is around to 2 to 2.25x. So the 1.7x is below the norm and expectation for our business. We have announced a special dividend, so clearly, we are building balance sheet capacity, so that when we complete the merger, we'll have the necessary cash to pay the special dividend. So you shouldn't read into the strength and the balance sheet as being the way we would run our business necessarily on a stand-alone basis, but clearly, it's part of the plan, via the merger as I said.
Your next question comes from the line of Howard Chen of Credit Suisse.
Howard Chen - Crédit Suisse AG
Mike, just a quick one on the financials. Can you discuss the impact from the Amex transaction, assuming no changes in its profitability position, just what would have been earnings been if the deal had closed at the beginning of the June quarter?
Sure, yes. So I believe we mentioned that in our talking points. So we're saying had we closed the transaction April 1 instead of June 29, we would have reported a $0.02 less earnings per share. So the minority interest on the partners' portion of the profitability. So if volumes stayed the same, that's what you can expect in the third quarter and going forward.
Your next question comes from the line of Daniel Harris.
Daniel Harris - Goldman Sachs Group Inc.
Hey, Duncan, you talked a bit about the issues that you guys have been having with Euronext on the technology side with the sporadic outages and the index calculations. I was wondering if can dive a little bit deeper into what that was, but more so also, I think that as part of the merger entity, you're not going to be seeing UTP going forward. Can you talk about the decision process on that versus what the alternative is obviously with the Deutsche Boerse technology?
Sure. I know you guys are everywhere, but you clearly know some things about our merger that we don't know yet because we didn't know that, that decision has been made about UTP, but thanks for letting us know, we appreciate the heads up. Now, I think I'm going to let Dominique who's sitting here with me talk about how we've diagnosed these issues, what we think the root cause was, what we've done about it, et cetera, and now I'll have him kick it back to me and we'll talk a little bit about how that may be impacting the discussion we're having around a common trading and clearing architecture, okay? So, Dominique, why don't we start with you.
Yes, indeed we had on the European side, 4 incidents to be clear in June, July and that we take that very seriously. 3 of the incidents and the one you're mentioning are originating in a complex cause. We made -- since you're asking, we made an update on a quarter call that was mandatory on one of our software and it does created some packet loss, we have the best expert on our from the vendors to analyze that. And it is this change combined with higher market volume and some new behaviors enabled by the new capabilities that we're offering to members, that are causing some instability in some legacy software that we still run. So that's why that happened. I don't want to go deeper to the quite complex. Again we have analyzed the situation, we have taken mitigation actions in the short-term and maybe more importantly, we're running a task force and we expect results in the next 30 days to check whether or not we have other vulnerabilities in our system and make sure that we will come back to our best-of-breed stability.
Right. And to get to the second part of your question, I think we continue to have discussions about -- as I've said to some of you before at various analyst meetings, et cetera, we view the common trading and clearing architectures having many components starting with what we call the common customer gateway to the SFTI network, to the trading engines to back end systems, to the data dissemination tools, to the clearing platforms, et cetera, and we continue to have every healthy dialogue with our colleagues at DB. Some of the decisions about which pieces we'll be using have already been made. I think what we have said publicly is the system we end up using won't be UTP or what DB runs right now, it'll be probably an amalgam of all of the above, but I think on some of the components we've already made the decision. Larry, you want anything to that while you're -- since you're on the call too?
No, I think that's the right way to say it. We'll go into a comparing functionality. The considerations really are functionality points, pain of client migration and really that matters a lot. We don't want to put clients to a big migration here. And then ultimate cost savings and you can be guaranteed that this is going to be a best-of-breed and no matter what, best of technology on both sides. On the positive, we've been having in Europe really are related to not only microcode, but legacy systems. It had nothing to do with UTP and we haven't really colored this discussion, but I think it has really been a healthy discussion. Not just among the technologies, but also among the businesses because the businesses are really concerned that functionality gets preserved and that their clients are not disturbed in this process.
Your next question comes from the line of Niamh Alexander, KBW.
Niamh Alexander - Keefe, Bruyette, & Woods, Inc.
If I could just on the expenses because going back, this was officially the second quarter, it's officially the end of the integration phase for your Euronext and NYX, but I'm just wondering if it is kind of all of solely done and behind you now or if maybe there are still data centers, old ones that need to be run off, because your expense guidance was not changed, but clearly the FX is driving higher, just trying to get a sense of the run rate going forward or maybe opportunities to lower it from this level.
Yes, sure. This is Mike. Yes, I mean it's a challenge as we from time to time acquire a company or the euro or dollar fluctuate. We can keep updating the guidance. Our guidance was using 2010's average exchange rates where we reported 1,678 costs, and the portfolio we have that end of the year we are guiding our cost would come below 1,650 and as I indicated on call, adjusting for all that, we are 807 in the first half. So we're clearly below our guidance, and in line with our guidance. As Duncan mentioned, we continue to focus on opportunities to run our business more efficiently every day. To your question, there are still some legacy data centers and other assets that we are exiting and there is some savings that's not going to be as large as they were for the last couple of years, but there are some avenues for further cost reductions related to transition and integration, we'll start to see and an experience as we get down to the end of the year. So I think maybe at the end of the third quarter, and we'll have quarters under the belt, we can give a more precise expense number, but I think rather than trying to project which way the currency is going to move and/or we just added Metabit we might -- whether or not we make anymore acquisitions. I think it's fair way to do it as we were at the numbers as we do today and provide a reconciliation to our deck and how we're doing against our guidance.
All right, just to jump in for just one second here. I think it's really important that -- at certain point, it becomes hard to figure out what is the integration savings, meaning from Euronext, NYSE merger and what is just continued operating your business more effectively. And we continue to believe that we can continue to cut our costs as we move forward even when we have not done this DB deal. That's part of what you do as running your company properly and we think still have room to run, I think we continue to do that, among the backdrop of it investing on some new businesses and then making some new acquisitions.
Right, which is a great point as one more follow-up on what Larry said. Our technology, our Commercial Technology business is not a fixed cost business, so as we aspire to be -- have $1 billion of revenue there and we take on new managed services accounts, we are taking on costs. Our focus there is revenue growth and margins, it's not in keeping the costs fixed. So we've been able to absorb those incremental costs while continuing to bring down our overall expense base.
And your final question comes from the line of Chris Harris of Wells Fargo.
Christopher Harris - Wells Fargo Securities, LLC
Clearly, you've had some excellent success in Options with Amex re-mutualization and growth with make-or-take, but it looks like some of that momentum is slowing a little bit here and I'm just wondering if you could share with us what strategies you plan in implementing an option to kind of further your share growth? And as maybe as follow-up to that, will you ever consider selling a stake in Arca options given the success you have in Amex.
I think to the jump in there, this is Larry again. First, you're seeing the effect of options being very competitive and we have a lot of competitors out there will have varying models. What you are also seeing over time is a blending towards the middle between pure make-or-take or meaning the Arca model and pure directive flow like Amex. So you see them as a directed flow guides of adopted and some functionality that looks more make-or-take like and vice versa. So we're going to continue to see that and we all push to continue to try to differentiate our platforms. We think that we have some interesting development in works and we're going to continue to push on those. It's a competitive market, but it's also a growing market, so that's a good position to be in.
Ladies and gentlemen, that concludes the Q&A session. I would now like to turn it back over to management.
Stephen, why don't you call it a wrap since I'm off site.
Okay. Thank you, everyone, for listening this morning, and we'll speak to you next quarter. Enjoy the summer.
Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.
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