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Executives

Craig Steven Donohue - Chief Executive Officer and Member of Strategic Steering Committee

Bryan T. Durkin - Chief Operating officer and Managing Director of Products & Services

John C. Peschier - Managing Director of Investor Relations

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

Analysts

Brian Bedell - ISI Group Inc., Research Division

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

Michael Carrier - Deutsche Bank AG, Research Division

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

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

Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division

Jillian Miller - BMO Capital Markets U.S.

Alex Kramm - UBS Investment Bank, Research Division

Roger A. Freeman - Barclays Capital, Research Division

CME Group (CME) Q3 2011 Earnings Call November 1, 2011 8:30 AM ET

Operator

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

John C. Peschier

Thank you, and thank you, all, for joining us this morning. Craig Donohue and Jamie Parisi will spend a few minutes outlining the highlights of the third quarter, and then we will open up the call for your questions. Terry Duffy and Bryan Durkin are on the call as well.

Before they begin, I'll read the Safe Harbor language. Statements made on this call and 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, they'd be found in our filings with the SEC, including our most recent Forms 10-K and 10-Q, which are available on the Investor Relations portion of our website.

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

Craig Steven Donohue

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

During the third quarter, we delivered record top line results with revenue up $874 million, driven primarily by strong trading volume. Average daily volume was 14.7 million contracts, up 27% compared to the prior year. In addition, we delivered another highly profitable quarter with earnings per share of $4.74, our highest quarter ever, excluding quarters with extraordinary items.

Heightened expense focus contributed to our success and is reflected in today's results, along with our commitment to maintain expense growth below 5% in 2012 and into the future. Interest rate volume was strong in the third quarter, up 30% compared with third quarter 2010. This includes growth of 40% in Eurodollars and growth of 21% in treasuries.

Interest rate traders have moved more of their trading activity out the curve to the 3- to 5-year area, as the front end has been less active since the 0 interest rate policy began nearly 3 years ago. In addition, we have record quarterly metals volume, up 77%, along with record quarterly equity index volume, up 44%. Overall, commodities volume remained impressive of during the third quarter.

Turning to other company initiatives. We continue to position ourselves for future growth through technology and product innovation. Examples include the initial rollout of the derivatives component of our multi-asset class platform through our partner in Brazil; our recent speed enhancements in our interest rate match engines, which reduced average response times by 50% to 75%; and the expected launch of our co-location services early next year. These serve as great catalyst to meet the growing demand from our customers. We went through several examples of product and technology innovations at our Analyst Day earlier this month, so let me update you on a few other areas.

We have begun to gain momentum in OTC clearing, as we have achieved record levels for clearing OTC interest rate swaps and credit default swaps, including a daily record set on October 18 for interest rate swaps of $8 billion in U.S. customer volume cleared. To date, since launching our OTC clearing services, we have cleared over $83 billion in OTC customer volume, including $72.7 billion in interest rate swaps and $10.6 billion in credit default swaps, making us the leading OTC clearing services provider by U.S. customer volume.

While some clients remain in testing mode, others have moved to production mode and other potential users of either our OTC offerings or exchange-traded offerings have taken notice. Recently, we began clearing euro-denominated interest rate swaps. The new euro-denominated clearing offering expands our existing U.S.-dollar-denominated interest rate swap clearing service, providing OTC risk management opportunities or interest rate maturities in both currencies extending out to 50 years. We will continue to further expand our IRS clearing service by year end, with the addition of the British pound, Japanese yen, Swiss franc and Canadian dollar. According to data from the Bank for International Settlements, these 6 currencies account for 94% of the plain vanilla interest rate swap market.

Looking ahead, we are pleased to have 15 clearing members, with approximately 500 customer accounts actively clearing trades ahead of the Dodd-Frank clearing mandate, along with an additional 2,500 customer accounts in the pipeline.

Next, I will briefly touch on the regulatory front. In general, we are pleased to have the position limits rule-making process behind us. While we still have concerns about certain provisions of the rules and the cost of industry compliance, as well as the risk that market participants will seek less burdensome alternatives and shift price discovery offshore, we do believe the CFTC made significant improvements in the final rule based on industry comment.

In particular, we publicly commended the commission on staff of the CFTC for recognizing the need to establish equivalent position limits in the important spot month for physically-settled futures and cash-settled futures and swaps, which are based on the daily and final settlement prices of the primary physically-delivered price discovery contracts.

With the lone exception of natural gas, the CFTC's interim final rule will appropriately limit the risk of inter-market manipulation. We believe the risks mentioned earlier can be alleviated by updating deliverable supply calculations and appropriately revising spot month position limits in affected commodies. Some of which, for example, NYMEX WTI and Henry Hub futures are approximately 5 and 15 years old, respectively. We are working with commercial market participants and the CFTC staff to appropriately revise existing limits to better reflect current market conditions.

Going forward, we believe our success will continue to be driven by our ability to foster innovation, improve our technology footprint, manage risk in our clearing hub and ultimately, to manage and to maximize free cash flow. As we navigate through this period of uncertainty, we remain steadfast in our approach and have a long history of success that we can build off of to allow us to maintain our position as the leading derivatives exchange. In addition to the strong recent performance of our core business, we are gaining momentum on the OTC clearing front and making progress in terms of clarity related to Dodd-Frank.

In closing, I'd like to briefly touch on where things stand with MF Global. Yesterday morning, CME's emergency financial committee took emergency action under CME Rule 975 to limit all trading for customers of MF Global to liquidation only. MF Global has also been subjected to a bankruptcy petition by a SIPA trustee. Consequently, CME Group will no longer recognize MF Global or any of its divisions as a guarantor for purposes of floor trading privileges. Additionally, floor brokers and traders guaranteed by MF Global or its division may not access the trading floors. We also agreed to facilitate the transfer of open positions of the last settlement price at the request of customers and the re-margining of such positions at the transferee firm.

Throughout the day yesterday, our team worked closely with the firm, public customers and exchange members to assist customers in establishing new accounts and dealing with open positions and market exposures. We recognize that yesterday was a very difficult day for all concerned. As is nearly always the case in matters like this, this is a very fluid situation involving complex legal, regulatory and bankruptcy-related issues.

Yesterday, MF Global Holdings Ltd., the parent company of our clearing member firm and our clearing member firm, MF Global Finance USA Inc., each filed bankruptcy. Additionally, CME has determined that MF Global is not in compliance with CFTC and CME customer segregation requirements. While we are unable to determine the precise scope of the firm's violation at this time, we are investigating the circumstances of the firm's failure. We are working with the CFTC, and we'll be contacting the trustee to facilitate the transfer of customer position and a portion of the supporting collateral. We continue to work with MF Global customers and members. All other CME clearing member firms also remain in good standing.

Given the ongoing regulatory and bankruptcy issues involved, we will refrain from making any additional comments or answering questions on this matter. I would ask that you please respect that during the Q&A session at the end of our call.

And at this point, I'd like to turn the call over to Jamie, who will touch on our third quarter financial highlights.

James E. Parisi

Thank you, Craig, and good morning, everyone. We posted record revenue of $874 million during the third quarter, up 19% versus last year, while effectively controlling expenses, which were up 4% versus last year and down $2 million sequentially.

Third quarter average daily volume was 14.7 million contracts, up 27% compared to the third quarter of last year. This significant revenue generation, coupled with effective expense management, drove a 29% increase in operating income to $572 million.

Operating margin of 65.4% was the second highest quarterly margin ever and the highest on a GAAP basis, and was 5 percentage points higher than Q3 last year. The third quarter average rate per contract was $0.779, down 4% from third quarter 2010. The rate per contract was also lower on a sequential basis due primarily to a 3% product mix shift towards financial products, which have lower RPCs than commodity-related products. In addition, we saw a negative sequential impact of higher volume discount, as Q3 volume increased 9% from Q2.

Market data and information services revenue increased over 5% compared to the third quarter 2010. This was driven by the Dow Index business and to a $1.9 million vendor audit assessment during the quarter. As a reminder, we previously announced that we have increased pricing for our market data by nearly 15% beginning in January, which result in approximately $25 million of additional revenue in 2012.

Turning to compensation and benefits expense. This line item was $120 million, up over $2 million on a sequential basis. We saw an increase in our incentive bonus based on strong results during the quarter. We also increased staffing during the quarter, and as of September 30, our total global headcount stands at 2,735.

Additionally, based on the equity market dropping more than 10% during the third quarter, we saw a fairly significant reduction in our deferred comp balances of $4.6 million, which reduced compensation expense. There is no bottom line earnings impact to this, however, as there's a corresponding $4.6 million reduction in investment income.

Non-compensation expense of $182 million in Q3 was up slightly from a year ago but down $4 million from Q2, mainly due to reduced marketing expense. Our team is very focused on expense discipline, while we also continue to invest in future revenue-generating opportunities.

In terms of our full year guidance for 2011, we expect 2011 operating expense to total between $1.23 billion and $1.235 billion. Without the deferred compensation impact I mentioned, our operating expense in Q3 would've been $4.6 million higher.

In terms of the higher Q4 expense, our guidance implies marketing-related expense is likely to be $5 million higher due to 2 significant customer-oriented marketing event in Q4. Also, we will see the full quarter impact of recent hires in our mid-September stock grant.

Lastly, we expect higher professional fees based on OTC initiatives and ongoing regulatory work. Of course, deferred compensation continued to be a wildcard but is offset by interest income. Certainly, the equity market has appreciated nicely since the beginning of the fourth quarter, which could result in higher comp expense in Q4.

Our Q3 effective tax rate was 42.3%. And for the fourth quarter, we continue to estimate our effective tax rate will be approximately 42.5%. In addition, as many of you know, we have been working closely with the State of Illinois, as well as other states related to our significant state tax burden. While we are hopeful we will be successful in reducing our state taxes, we will not be providing any guidance on our expectations until we make a decision about our course of action.

Capital expenditures, net of leasehold improvement allowances totaled $34 million in the third quarter, driven primarily by $12 million of data center buildout and equipment and spending related to our new London office space. This brings us to $117 million of CapEx for the first 9 months of the year. We continue to expect total capital expenditures to be $165 million for 2011.

During the quarter, we repurchased 590,000 shares at an average price of $263 a share, and we have purchased over 800,000 shares since we received our board authorization in May of this year.

In summary, as you can see from our results, we continue to generate significant revenue and remain focused on expense discipline, while investing in growth avenues and returning capital to our shareholders.

We will now take your questions. [Operator Instructions] Given the number of analysts on the call, please expect us to strictly enforce this rule this quarter.

Question-and-Answer Session

Operator

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

Roger A. Freeman - Barclays Capital, Research Division

I guess, first question. Just in terms of the open interest in the rate complex -- still seems to be somewhat lower than we would've expected by now, given the seasonal weakness in September. Just curious, your updated thoughts around what's going on there.

Bryan T. Durkin

This is Bryan Durkin speaking. And while you're correct that there -- that you may not have seen quite the uptake that you might have been expecting, we are tracking very consistent with historical performance over the past few years. If you look quarter by quarter and on prior-month performance, a lot of the activity that we were seeing in terms of the drop off was the result of recent explorations. I think a stronger indicator is the continued strong performance and uptick in the deferred contract months, particularly in the Eurodollar complex. That is again, a consistent trend that we have been reporting in terms of the concentration and the uptake in the volume in the deferred month and is very consistent with the activity that we're seeing in the U.S. Treasury side of the complex as well. We're definitely seeing an increased trend in terms of the convertibility of activity that is typically seen on the OTC side of the market, being able to replicate strategies into our exchange-traded products, and that's a positive trend. I think by the complement -- the full complement of what we're offering across the curve from the very shortest-end and to the very long-end duration, we're pleased with the continuity of performance that we're seeing across the curve. The other thing, I think, you have to keep in mind is that we have seen low volatility in October, in particular. We've also certainly seen an impact from the European crisis. There's definitely been some pull back, in terms of assessing where that was all going to shake out. But all in all, the performance in the trends that we're seeing in October continue to be positive.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And I guess, my follow-up question -- my second question would just be around the OTC swaps and the pipeline it's building. You threw out a pretty big pipeline, which sounds great. Just curious what the sort of conversion rate is. Is the -- is this building -- do you have enough capacity even to bring this all on? Or is this -- are these indication of interest -- how real is it?

Bryan T. Durkin

Very real. I mean, we're very confident, first of all, in terms of the scalability of our systems and the performance of our infrastructure to be able to handle and be flexible and nimble to be able to bring on these instruments, some of which are very esoteric, to respond to the clients' needs. So as we're out there, as part of our sales force suffers, we have definitely the original complement of the interest rate swaps product base and CDNS that we are offering to the markets. We're having good trend, in terms of customer participation, to handle that on an OTC clearing basis to be able to extend that to other currencies and be able to support that need is definitely, I think, a value-added service that we're able to represent and to do it in a very quickened fashion. So we're very confident.

Operator

And we'll go next to Ken Worthington, JPMorgan.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

In terms of the technology partnership with Bovespa, I believe you started collecting additional fees this quarter as the new technology was rolled out. Does this ramp from the current levels? And maybe can you tell us where the revenue was booked?

James E. Parisi

This is Jamie. The revenue this past quarter was in the neighborhood of $2 million. But that was mostly tied to progress payment recognition. So that will ramp up going forward. We expect that next year a conservative estimate would be in the $4 million to $5 million range for the per-click fee from Bovespa. And it'll beam at Bovespa, and it'll come through the other revenue line.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Great. And in past, you've broken out kind of trading volume outside of the U.S. hours. Any update you can provide there? Does the trend continue to play out? I'm sure U.S. volatility is probably skewing the stats a little bit. But some color there would be helpful.

James E. Parisi

If you look at the ETH trading as a percentage of our Globex volume, it's picked up nicely in the third quarter, represented about 16.5% of our overall Globex volume. That was up from 15% in Q2. And also, as another data point, if you look at our country of origin, information was about 22% of our volume was coming from outside the U.S. and approximately 25% to 27% of our revenues.

Operator

And we'll take our next question from Rick Repetto, Sandler O'Neill.

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

I guess, my first question, Craig, is on energy. If you look at your volumes, at least from the prior month anyway, there's a little uptick. But I guess, even more indicative is the price of WTI that sort of divergence has sort of narrowed. And I guess, you've spent some time at the Analyst Day talking about -- could you give us an update? Are you seeing some of the issues in Cushing resolve themselves? Or are these numbers just too small to really indicate that?

Craig Steven Donohue

Well, Rich, and I think as you pointed out already, I think we've seen some very positive developments in the WTI markets and the Brent-WTI spread. That spread has narrowed now to less than $17 from $27 in September and even higher earlier than that. And I think that reflects a number of different factors. Certainly, we're seeing logistical solutions being put in place. We have less tight conditions in Cushing, in terms of deliverable supply. We've had people developing their own rail transport and other solutions to get crude to the Gulf Coast. As I think you're aware, the State Department took a first and, I think, very significant step in determining that they were not significant environmental issues with the proposed TransCanada Keystone pipeline project. And then conversely, we have seen tighter conditions in the Brent market, as well as I think an increased recognition that there are just fundamental production and supply issues in the Brent market. And obviously, we watch this very carefully and we'll continue to do so. But I would say these are very healthy indicators for the WTI market.

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

Okay. And then my one follow-up would be on Dodd-Frank, Terry or Craig. You got to balance all indications a balanced sort of rules when it comes to position limits when they -- like you said, the cash and the physical equivalent, but they did give you the exception on natural gas. But I guess, the other part, the stuff that's coming up, or another portion of the Dodd-Frank, is this $50 million capital requirement for clearing members. And I guess the question, how do you think you would implement that. I know ICE has done some things to modify their OTC clearing, but how would you adapt that? Is it a similar requirement if the rules stay like it's proposed?

Craig Steven Donohue

Well, Rich, I'll take that. I mean, I think, obviously, we're working with clearing member firms and with the CFTC on those issues. And I guess, I would just say that it's been our view that it's not strictly a function of minimum capital. We do believe that the people who are taking on the risk, really need to be able to support the default management process. And in the event that we were to have a failure in the OTC clearing area, we want to be sure that the firms not only have the financial capacity in terms of their guarantee fund contributions, but that they also have the financial capacity and expertise to take on transferred positions and to deal with them effectively. So we're still working through that process. But, I mean, we fundamentally believe that it's important that we have a balance. We do want to promote openness and competitiveness in OTC clearing. But we also have to be mindful of the risk management aspects of what it takes for clearing members to actually support the default management procedures of the clearinghouse for OTC products.

Operator

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

Howard Chen - Crédit Suisse AG, Research Division

Just following up on the strong activity in the OTC clearing and specific in October. Was there anything specific to what you all did that drove the big ramp up in October? And while I know we're still in the buildup phase, can you speak to any contribution to revenues and earnings?

Craig Steven Donohue

I think a lot of credit should be given to the intensified sales effort and customer outreach. You're well aware of how we've restructured our organization to more effectively align ourselves with our client segments. And having our team out there and meeting with our clients and helping them understand the offerings and the capabilities that we have, and being out there, I think in the context of providing them with very efficient testing capabilities and making it fairly seamless for them to be able to test their portfolios, resonated with the client base and truly had them establish a comfort level to bring that customer business and to clear it with us. So I do think that, that was a great motivating factor.

James E. Parisi

On the revenue side, Howard, we're still -- it's still early in the game, so we're -- fees are being waived as we build this business, so I'd anticipate that to continue as we continue to build.

Howard Chen - Crédit Suisse AG, Research Division

Okay. And Jamie, on capital management, it looks like dividends and share repurchase totaled about 80% of net income this quarter. Is there anything in particular to this quarter that would've made that number lower or higher than you'd like to see it? I'm just kind of gauge a sense of whether this is an okay run rate.

James E. Parisi

Yes. I'm not going too much into specifics, Howard, on how we approach this, other than to say, as you know, we are very committed to returning our excess capital to shareholders. We put kind of the guidepost out there with $700 million of cash flow maintained on the balance sheet. But that doesn't mean we're going to manage it right down to the $700 million every quarter. So it's going to fluctuate around, but we will -- we are committed, as I said, to return that -- return capital whether through buybacks or dividends.

Operator

And we'll go next to Alex Kramm, UBS.

Alex Kramm - UBS Investment Bank, Research Division

Jamie, just wanted to come back on the tax story here with Illinois. I mean, obviously, you said what you can say, I guess, at this point. But I think, I asked you a couple of quarters ago already, if this is the start of something big. So now that you've done a lot of work, I assume, internally, with your team, and obviously, you're tracking a lot more of the volume that's coming from internationally and so forth. Just wondering if there are opportunities to take over the next few months, years to also reduce the federal rate by sourcing it differently? I mean, if you look at some of the other exchanges, obviously, their tax rates are a lot lower.

James E. Parisi

Yes. We're in little bit different situation with regard to our international exposure and that they purchased -- most of the exchanges purchased operations overseas. And so it is an area that we are certainly studying and we'll be continuing to work on in the coming couple of years. Right now, our focus is very much on the state tax side, but we're not -- we continue to study the federal side.

Alex Kramm - UBS Investment Bank, Research Division

Okay. Good. And then, I guess, just going back to the position limit, maybe for you Craig or Terry. Obviously, it seems like you're somewhat happy with it, but when we talked to a couple of folks in, D.C. towards this rulemaking and listening to some of the comments by the commissioners that were not in favor, it sounds like -- or some people are saying that there could actually be some legal challenges to the rule. So just wondering if you're looking at this the same way? You think something could happen at this point if you actually would prefer to just have it done with. You like the rule how it is. And might as well, move on instead of trying to throw this over or benefit if somebody else challenges it and this continues for a few more months or year.

Craig Steven Donohue

Well, I think I'll just repeat what I already said, which is I think there are still areas of real concern with the positions limit rules at the highest level. I mean, of course, we're continuing to be very concerned that the U.S. is really the only major financial center that seems to be adopting hard position limits and types of constraints on legitimate participation in the market by commercial bona fide hedgers. And so there's always a very real risk that large, global multinational customers will look for risk management solutions outside the U.S and there's nothing that has changed that fundamental concern. I think we were trying to be balanced in our assessment of the final rule, and certainly wanted to get recognition to the fact that the CFTC staff and commissioners worked very hard to respond to industry comments that make we think are very substantial improvements in the rule . So I wouldn't go so far as to say we're happy with the rule, but we're certainly happy that many of the fundamental defects in the rule, as it was initially proposed, were improved. And then as I mentioned, in particular, we were very concerned about the sort of increased risk of inter-market manipulation that might have occurred through what we think are false incentives to essentially shift people into second-order, cash-settled swap or features, which really sort of priced off of the actual physical delivery price discovery contract, and that was certainly with the exception of nat gas. And I think a very important improvement to preserve market integrity. In terms of litigation, I'm sure that like us, everyone will be looking at the final rule. As you know, even though the commission took affirmative action to adopt the final rule, we have yet to get through an exhaustive examination of it. We will do that. My hope is that this is behind us and that as we get through, looking at the final rule more closely, we'll determine that while it's not perfect, it's best to move forward. And I hope that will be the outcome, but I can't say yet.

Operator

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

Michael Carrier - Deutsche Bank AG, Research Division

If we look over the past 12, 18 months, there's been quite a bit of innovation on the product side. Do you guys have any stats, or do you track how much the volume is coming from the product innovation versus in the last 5 years? Just trying to see how much of that catches on. And then even from time spent, just the reward or the return from spending the time on the product innovation side.

James E. Parisi

This is Jamie, Michael. I think if you look over the last few years, probably 2% to 3% of our volume comes from new product innovation. We've seen some really great success over the past year like I've never seen before in new product innovation like the Ultra contract, our weekly treasury options and others. So I think we're on a good trend here.

Michael Carrier - Deutsche Bank AG, Research Division

Okay. And then just as a followup -- maybe just an update on the European clearinghouse? And then just on the balance sheet, it looks like the guaranteed fund went from like $4.2 billion to $7.7 billion. Assuming that's related either to Europe OTC, but just wanted to get a sense or understand what the increase there was?

James E. Parisi

Yes. The most significant piece of that increase of the cash performance bond is tied to the OTC market.

Craig Steven Donohue

It's Craig. On the first part of your question, we're really pleased with the continued building of open interest at CME Clearing Europe. We have clearing activity on a daily basis now. We have approximately more than 100 trading firms and brokers that are now eligible to clear through CME CE. We are continuing to expand the product set and seen good progress in European bio-diesel and diesel contracts. And we're looking forward to filing with the CFTC and the FSA to cross-margin CME Clearing Europe positions, with positions at CME Clearing here in the United States. So we're pleased with the progress. We have a long way to go. But I think the number of clearing firms and customers that are now accessing those services clearing product almost everyday is a sign that there's potential for CME CE to become a significant player in the European market.

Operator

And we'll take our next question from Niamh Alexander, KBW.

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

If I could, just on the performance bond again. you're saying it's mostly related to the OTC, given there's $70 billion and a whole lot more out there in terms of notional value, I mean, I'm just trying to understand how should we think about the growth there, as maybe you load more in. And then part of that, is the $7.6 billion -- does that include $2 billion effective kind of guarantee fund that typically stands in front of the clearing house with all the brokers' funds, in the event of losses or something like that from a customer and other FCM?

James E. Parisi

Yes. The -- what you see on the balance sheet is just the cash -- what's put up as cash, whether it be for performance bond or for the security -- the mutualized security deposit pool. I think in the early -- going in the OTC markets, people are just using cash. But as time goes on, I believe that they'll start to look to use more some of the other vehicles available like treasuries and some of the IEF funds that we provide. So you may see that number fluctuate up a little bit in the beginning and then taper back down, as people use investments.

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

Just fair enough. And then just to clarify, understanding the structure here, I'm trying to respect your request from earlier. But typically, we understand in most day-to-day situations, customer collateral doesn't cover our customer loss and FSCM's on the hook for it as the guarantor. But then in front of that, before the exchange, through the member guaranty fund, which is around $2 billion or so, and then there's various lines of protections for the clearinghouse. Am I thinking about that correctly still?

James E. Parisi

Yes, as far as I -- I think so. In front of the mutualized pool fits the exchanges again and again.

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

And that was -- was it like $100 million or something like that or...

James E. Parisi

Yes, on the regular futures and options. Yes.

Operator

And we'll go next with Daniel Harris, Goldman Sachs.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

I was wondering in the last few months of conversations, especially as the OTC Clearing businesses picked up a little bit, have you guys had any dialogue with typically OTC swap participants that are more interested in looking at the exchange-traded futures business versus where they were 3 and 6 months ago?

Craig Steven Donohue

Yes. Indeed, I think one of the major value propositions that we offer in addition to our clearing facilities is the broad complement of asset classes that we represent across the curve. And so, as we're in there meeting with the various client segments -- and I think you'll see a particular interest or awareness coming from the asset management community, in particular, being able to be introduced to the exchange-traded futures products, where some of these entities have strictly traded on the OTC side are now availing themselves and able to replicate their risk management needs, utilizing our exchange-traded products. So it's definitely tangible in terms of being able to identify new users coming in to the exchange-traded products that we haven't seen before, which I think underscores the efficacy of the program that we put in place.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Okay. Great. And then just want to come back to your comment about waiving the fees, Jamie, for the interest rate swap, given that we are in the early days here of that product At what point or at what size of that business do you think that you would start to implement fees? And then how do we actually think about how those fees will be assessed to the different size of transactions?

James E. Parisi

I think we're still -- as we said, still in the early going here. It's hard for me to give you a great answer there. I would expect that it's going to be sometime as the book builds before we start charging. In terms, we'll likely charge a transaction fee associated with these rights, that'll be a per-transaction fee associated.

Operator

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

Jillian Miller - BMO Capital Markets U.S.

So as we try to make sense of the market right now and figure out what 2012 might look like from a volume perspective, I was hoping you might be able to discuss some of the leading indicators you're seeing in your market, just in terms of the activity and engagement. And then how they might be similar or different from the picture you guys are seeing in late 2008 kind of heading into 2009.

Craig Steven Donohue

I definitely think that if you look at some of the fundamentals we've been operating in a 0 interest rate situation now for the better part of 3 years, however, the performance of our contracts have indicated, from our perspective, a strong flight to quality in terms of dealing with uncertainties in the marketplace. Volatility can change at a whim and having a place to come that has a deep liquidity that we represent across our asset classes, I think definitely resonates. And performance has demonstrated that over what one might expect to be a slow market time, just given the general market fundamentals and where that looks to be in terms of holding rates constant. We're definitely seeing the effects in a positive basis across our interest rates, as well as our metals complex and our energies, as well. The other thing that I would note is there was definitely a pullback in asset from 2008 through, I would say, the beginning of 2010. We're seeing more bad activity coming back into the marketplace, and particularly, as it pertains to our interest rate and equity quadrants.

James E. Parisi

And I'd say too, when you think about it on the expense side, as you've seen, we're taking a very hard stance on expenses and indicating that we're targeting growth no higher than 5% a year going forward, which should also add some leverage to that exit equation.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

I think that's really helpful. My second question would just be on the regulatory front. With respect to the 85-15 rule, it seems like ClearPort products don't currently meet the requirement of having, I guess, at least 85% traded via central limit order book. Just want to get your thoughts on how you see that rule kind of shaking out. And if it were passed in its current form, is it something that could potentially harm ClearPort, just in the sense that if you have to process these contracts for swaps, there could be higher capital requirements involved and some of your participant might lose the 60-40 tax treatment?

Craig Steven Donohue

Well, let me just say at the outset that I think this is a rule that has really major defects in it, not just for ClearPort contracts, but just more broadly. As it relates to ClearPort, I mean, first of all, obviously, we can clear products as swaps and we do. We've talked a lot on this call about the success that we're having in interest rate swaps and credit default swaps. I don't think that it's likely that it will be more expensive, even if we're required to clear those instruments as swaps rather than futures. The CFTC has determined to apply one-day margin to commodity and energy swap contracts. So in fact, that will not be sort of a negative factor as it relates to ClearPort. I think the other thing to sort of focus on there is that the fact that we have recharacterized ClearPort contracts as swaps will serve no useful purpose, because it's not necessarily clear that people will continue to clear those contracts. And so from the CFTC's perspective, I think at least many of the commissioners that we've talked to are sympathetic to the view that ClearPort serves a very valuable purpose. It certainly has helped bring stability to the energy market, has mitigated bilateral kind of a credit risk in a very substantial way. And I don't believe that the majority of the commissioners are really convinced that recharacterizing those contracts as swaps will serve any useful purpose. So we'll work through that process with them and -- but I'm expecting that ClearPort will continue to be a really important service for customers.

Operator

Operator Instructions] We'll go next to Chris Allen.

Christopher J. Allen - Evercore Partners Inc., Research Division

I just wanted to kind of come back. I know you guys can't specifically comment on MF. But in the situation where there's a segregation issue and customer accounts would not be whole, who's on the hook for that? Is that -- the customers just lose out because their FCM failed? Is it specific issue, or is this -- is there actually clearinghouse issue here?

Craig Steven Donohue

Well, let me try to answer that as best I can. And I'm going to really limit any commentary on MF Global. But just in general, when you have a combined broker-dealer FCM, then you're dealing with the complexities of 2 different customer protection and bankruptcy regimes, and so SIPA and sort of segregation are both coming into play, it's always the case that customers have the risk of other customer losses in the customer-segregated pool. And there's always the risk as well that customer funds are not properly protected. I already commented on that in my remarks earlier, and I'm not going to elaborate further on that. But this issue doesn't really present a issue at the clearinghouse level.

Operator

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

Brian Bedell - ISI Group Inc., Research Division

Craig, if you could just comment a little bit more on the sort of intermediate- to long-term strategy in Europe, given some of the rules that are coming out with MISA2 [ph], in terms of potentially interoperability of clearing and how your European clearinghouse fits in with that in the launch of these -- your futures products and the -- your LIBOR and the sovereign credit spreads and other initiatives that you might be thinking about?

Craig Steven Donohue

Well, sure. I mean, first of all, we have, obviously, a very significant customer base in our core business. In Europe, we have a very significant amount of average daily volume that comes from Europe and from the U.K. We think there's substantial upside for us to continue to expand our existing core businesses and core products and services in Europe. Obviously, CME CE is a reflection of our commitment to broaden the range of clearing services that we'd provide and to do that, in the U.K. for European customers versus just offering a U.S. domicile clearing solution. In terms of sort of the future regulatory environment in Europe and the U.K., I think it's very premature to sort of prognosticate what the outcomes will be right there. But what I would say is, on the topic of interoperability, I mean, I think as you could see, Congress has the wisdom. And just recently visiting the topics of market structure and competition and adopting Dodd-Frank, they choose -- they chose to make it clear that clearinghouses should not be required or forced to accept the counter-party credit risk of another clearinghouse, and of course, interoperability, effectively, does raise those kinds of issues. And I think in the U.S. anyway, the Congress is very concerned about the domino effect of counter-party credit risk between clearinghouses that have different credit profiles, different risk management in margining methodologies and different operational features. So it remains to be seen what will happen in Europe. But we're certainly strongly on record as being concerned about counter-party credit risk at the clearinghouse level. So we'll see how that plays out. But our strategy is really to focus on our core business, increasing customer use and attracting new customers in our current core businesses. As we go forward, as a global exchange, we certainly also focus on innovation, globally, so product development for us is not just U.S.-centric, it certainly includes the European market and the Asian market as well.

Operator

And we'll take our next question from Jonathan Casteleyn with Susquehanna.

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

Just had a longer-term question about your pricing volume dynamics. So if volume on average increases 15% per year, as your CAGR has suggested, what kind of pricing decline would you expect, knowing what you know about your volume tiers, et cetera?

James E. Parisi

This is Jamie, Jonathan. I don't have an amount in front of me. I would say it's probably in a couple of percent area, but that assumes a static fee schedule and volume tier regime, right? So over time, we do look at those tier levels and assess whether they're appropriate still and have in the past raised some of those levels. So that's the best I can give you at this point.

Operator

And we'll go next to Matthew Heinz, Stifel, Nicolaus.

Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division

Just wondering if you can give us a sense of the $83 billion that's been cleared so far in the swaps clearinghouse. Of that, how much is a real sort of Dodd-Frank compliant SEF-traded business on a voluntary basis? And then, I guess, just as an extension to that, how do you view the sort of robustness of the current SEF infrastructure, as it sits today?

Craig Steven Donohue

Did you say the current -- the robustness of the current SEF infrastructure?

Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division

Yes.

Craig Steven Donohue

Well, first of all, I'm not exactly sure, and we might not be able to get too far to this on this call, but I'm not sure by what you mean by CFTC compliance. I mean, what we're seeing right now in advance of the mandate is market participants electing and demonstrating their ability and willingness to move towards central counter-party clearing. I think, primarily, given the increase sort of sovereign risk concerns in Europe and just the overall concerns about bilateral credit risk issues in the marketplace, so people are electing to migrate, because they can, and because they're ready. Obviously, as more time goes by, and we see the CFTC-adopted definitions of swaps and determine what swaps are subject to the mandatory clearing requirement likely to include, most of the things that we're already clearing. In terms of the SEF infrastructure, that's really premature to try to answer. Obviously, people are in the process of determining whether they're going to be a operating SEF and what the requirements will be and what the infrastructure requirement also will be. So I don't really have a comment on that, other than the industry is eagerly awaiting the final rules on SEF trading requirements and exchange trading requirement.

Operator

And we'll take our next question from Rob Rotschow with CLSA.

Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division

I have a two-part question. I guess, the first part would be, in terms of the clearinghouse, how much of a view do you have into an FCM's end-user account? And without speaking to MF specifically, what are -- I guess, how do you make the determination that they're not in compliance with customer segmentation rules? And then separately, the second part of the question would be if I look at October OI data, it's negative in most areas except for equity. Is there anything besides seasonality that might explain that?

Craig Steven Donohue

All right. Rob, I'm going to be very limited in my response to your first question and just say that on the regulatory side, we do provide audit and capital supervision for our clearing member firms. And so pursuant to our designated self-regulatory responsibility, we do have access to detailed customer account level information. And I think that's the extent of what I'm going to say on the first part of your question.

Operator

And we'll take our next question from Gaston Ceron with MorningStar.

Gaston F. Ceron - Morningstar Inc., Research Division

Just a real quick question, actually, just going back to clean up a thing on expenses. Jamie, I think you said something during your opening remarks about increased staffing levels. I know you guys have this target of keeping operating expenses under growth, under 5% per year. Just kind of wondering where the increased staffing is coming from, and how that kind of -- where do you see that kind of going forward, as you pursue this 5% goal?

James E. Parisi

Yes. it's good question. It's -- right now, it's mostly driven by the investments in our growth opportunities. So you're seeing increased staffing in our clearinghouse, for example, tied to over-the-counter markets, you've seen some increased staffing. In technology, tied to some of our ASP arrangements and that sort of thing. I would imagine that over time, that staffing level will level off to some extent, so we can meet those 5% goals. But it's definitely driven by the growth side of the equation.

Craig Steven Donohue

Rob, I want to apologize, because I think you had a second part of your question. The moderator jumped to the next question. So if you don't mind, I'm going to ask Brian to respond to your question so you get an answer.

Bryan T. Durkin

Sure, Rob, I apologize. As I mentioned earlier, we've been dealing with some low volatility in the context of the overall market fundamentals, right? But as we're looking at the trend for our interest rate products, in particular, we're very pleased with the overall performance, particularly in the longer-dated end of the yield curve. That trend has been very consistent, and I think is in alignment with what's happening in the general marketplace with respect to the macroeconomic factors that are driving the activity. I think you are very astute to point out that there's definitely seasonality impacts associated with the decline in the open interest. And as I alluded to earlier, as we're tracking this basis, our overall performance, looking at the cycles year-on-year, the trend there has been fairly consistent. Also, when you look at the European market, we're seeing very similar trends. So we take a holistic picture at how the overall performance of the contract's trending in terms of the volume, both across the front end to the back end of these contracts. How are we looking vis-à-vis the competition that's out there? How are we trending with respect to the overall macroeconomic factors? I think another thing to note is that the mix is still over 30, and we're seeing a very nice uptick occurring with respect to the performance of our equity index products as well.

Operator

And Mr. Donohue, with no other questions remaining in the queue, I'd like to turn the conference over to you for any additional or closing remarks.

Craig Steven Donohue

Thank you very much. I want to thank everybody for joining us this morning to discuss our record performance in the third quarter. And we look forward to talking with you next quarter.

Operator

And again, that does conclude today's conference call. Thank you for your participation.

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