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Chicago Mercantile Exchange Holdings, Inc. (NASDAQ:CME)

Q2 2007 Earnings Call

July 24, 2007 8:30 am ET

Executives

John Peschier - Director, IR

Craig Donohue - CEO

Jamie Parisi - CFO

Rick Redding - Managing Director, Products & Services.

Analysts

Howard Chen - Credit Suisse

Rob Rutschow - Deutsche Bank

Niamh Alexander - CIBC World Markets

Chris Allen - Banc of America Securities

Donald Fandetti - Citigroup

Michael Vinciquerra - BMO Capital Markets

Richard Repetto - Sandler, O'Neill & Partners

Daniel Harris - Goldman Sachs

Jonathan Casteleyn - Wachovia Securities

Presentation

Operator

Good day, everyone, and welcome to the CME Group Q2 '07 earnings results conference call. As a reminder, today's call 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.

John Peschier

Thank you, and thank you all for joining us this morning. Craig Donohue, our CEO; and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the second quarter, and then we'll open up the call for your questions. Phupinder Gill, our President; and Rick Redding, our head of Products and Services have also joined us this morning and will participate in the Q&A session. Please note that all references we make during this call to trading volume and rate per contract exclude FXMarketSpace and Swapstream products and our low-priced TRAKRS products.

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

More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent quarterly report on form 10-Q which is available in the Investors Relations of the CME Group website. Also, we refer in this call to our cash earnings and non-GAAP member. The reconciliation to net income can be found on our website under Investors Relations earnings releases.

Additionally, in this call we exclude expenses relating to the merger and certain financial results as set forth in today's press release. In addition, we've posted slides associated with this earnings call on the IR portion of the site. Today, we will focus primarily on CME's Q2 results. We will talk briefly about CBOT's second quarter results which were included in this morning's press release. Since the merger closed on July 12, CME Group results for the third quarter ending September 30 will include CBOT results from July 13, the day following the closing of the merger. With that, I would like to turn the call over to Craig.

Craig Donohue

Thank you for joining us this morning as our first CME group earnings release conference call. Both CME and CBOT had strong second quarters. Combined, we generated more then $500 million in revenue in the second quarter and we are well positioned to build on that going forward. We are very excited that the merger is closed and we are confident that we will integrate the merger quickly and smoothly, which is important to both our investors and our customers. We will be able to leverage each Company's distinct product lines for the benefit of users around the world.

We will also continue to extend our broad global distribution and customer reach, particularly in Europe and Asia, where we already have a significant presence and where we see excellent growth potential. We will offer our respective customers significantly increased trading efficiencies and substantial continued capital and cross margin benefits. Many of our customers are focused on reducing their own operating costs and our consolidated trading platforms and trading floors will help them with that goal without any disruption to their business.

This quarter, in addition to finalizing our integration planning and closing the merger, we continued to successfully execute our long-term growth strategy; expanding globally, innovating and launching new products, increasing revenues from our third party transaction processing business, and launching new non-core businesses in the high growth over the counter markets.

In the second quarter, CME had revenue growth of 17% to $329 million. On a GAAP basis, operating income grew 15% to $192 million. And diluted earnings per share grew 14% to $3.57. Excluding merger-related expenses during the quarter of $7 million, CME's operating income would have been $199 million, up 19% and diluted EPS would have been $3.69 per share, up 18%.

CME reached its second highest quarterly average daily volume, while CBOT achieved his highest quarterly volume level ever. In June, both CME and CBOT set monthly volume records and on a combined basis we averaged 12.9 million contracts per day. The strong volume in June was widespread, with CME achieving records in interest rate, equity and FX products, and CBOT setting monthly records in interest rate, equity and agricultural products.

During the second quarter, CME saw continued growth in our options volume with record total options volume exceeding 1.4 million contracts per day. Our total electronic options volume averaged a record 193,000 contracts per day, up 47% from the same period a year ago. Electronic volume of CME Eurodollar options averaged a record 106,000 contracts per day, up 19% from second quarter '06, representing a 9% of overall CME Eurodollar options volume. This electronic percentage grew slightly from 8% in both Q4 '06 and Q1 '07.

We continue to focus on the growth of our electronic options volume through pricing programs, enhanced functionality and continued sales and education efforts. We also look forward to integrating CME's Eurodollar options with CBOT's treasury options on CME Globex. The CBOT electronic financial options averaged 100,000 contract per day in the second quarter which represented 25% of total CBOT financial options volume.

Moving onto our transaction processing business in energy and metals, NYMEX electronic volumes continued to grow which is a testament to our industry-leading platform. In total, for Q2, a record 710,000 NYMEX contracts traded per day on CME Globex setting quarterly records in electronic trading for both the energy and metals products, while our major competitors in these markets experienced a reduction in electronic volume from Q1 to Q2. Last week, on July 17, we set a daily volume record of 960,000 energy and metals contracts on CME Globex.

I would like to note that we have yet to make any decisions about CME group's future plans for the E-CBOT metals business, but now that the merger is closed, we will be evaluating our alternatives. Additionally, we continue to evaluate future transaction processing opportunities in Asia, South America, and possibly Europe. Since late March, when FXMarketSpace was launched, average daily volumes have grown significantly from $331 million of notional value in April, to $509 million in May, and most recently $993 million in June. So far in July, we have seen a decrease in average daily volume, yet we're seeing increased levels of customer onboarding.

Initially, most of our activity had been driven from users who were generally algorithmic traders with existing access to CME Globex. More recently, the proprietary trading groups at several banks have begun to utilize the platform. We expect the core users to continue to grow and the next step is to bring on more prime brokerage clients.

Finally, when liquidity expands we will begin marketing aggressively to medium and small bank users outside the top 20 banks and other FX traders. Typically, the summer months in FX are slow as European and U.S.-based traders go on holiday, so we would expect customer onboarding to moderate somewhat through August. We are pleased with the progress to date, given that FXMarketSpace has only been fully operational for just a few months and activity levels are consistent with our business plans.

CME has always viewed continued evolution in the FX markets as inevitable and our joint venture is well positioned to capitalize on the significant long-term growth opportunity in FX markets. We continue to expect FXMarketSpace to reach the break even point sometime in 2008 and to continue to grow from there.

Turning to our other significant OTC initiative, last week we announced our ability to compete in the $1 trillion per day interest rate swap market and announced plans to offer a cleared interest rate swap product through our subsidiary, Swapstream. CME swaps on Swapstream will be the first interest rate swap product to offer the OTC marketplace the full benefits of central counterparty clearing. The new offering will provide the balance sheet and operational efficiencies of central counterparty clearing and straight through processing to the interest rate swaps market.

Moving on to product innovation. We have been intensely focused on the execution of our small and mid-cap equity product strategy. We made an announcement this morning further elaborating on our plans and we believe that we are very well positioned to succeed with our strategy. Compared to the Russell 2000, the S&P small-cap index has had better performance. For example, as of June 30, the S&P 600 has averaged an 11.3% return annually over 10 years compared to 9.1% on the Russell 2000. And every time time period is favorable for the S&P small-cap product.

The S&P small-cap index is a more stable benchmark with lower turnover. In 2006, turnover was 12.9% for the S&P 600 and 18.6% for the Russell 2000. Furthermore, the S&P 600 is composed of more liquid stocks and has a superior construction methodology as it has a rolling reconstitution versus the annual reconstitution for the Russell 2000. Key advantages of our strategy include established distribution to, and customer relationships with, equity derivatives trading firms and market makers, capital and cross margining efficiencies with a full spectrum of equity index products, and significant brand recognition through CME and S&P.

It is important to note that CME members account for approximately 75% of the Russell 2000 volume, while traditional investment managers who are specifically benchmarked to the Russell 2000 are generally a subset of non-member volume making up less than 25% of CME's small-cap volume.

As our earlier announcement outlined, we will be launching our new E-mini S&P small-cap electronic product based on the S&P 600, and we will create a pit traded contract that is five times larger. Other plans include the following: As provided for in our contract, we will continue to list the Russell products through September 2008. We will intensely promote the E-mini MidCap 400 futures and options. We will structure a market maker program with seven to 10 firms who will provide continuous markets in both the mid-cap and small-cap products, and, finally, we will be waiving all fees through the end of the year for the small-cap products and we will examine our pricing strategy for the small-cap products for 2008 later in the year.

Lastly, let me provide a brief update on upcoming milestones related to our merger integration plans. First, we intend to finalize our staffing plans in mid-August. On the technology front, to facilitate the process of connecting third party trading applications to the CME Globex platform, we will be providing electronic customers with a dedicated testing environment beginning in mid-August, just one month after the close of our merger. The environment is designed to meet the development needs of E-CBOT electronic trading customers transitioning to CME Globex supporting straight through processing from CME Globex to clearing and connected to clearing tests environments so customers can test front-end and back-end systems simultaneously.

In terms of our CME Globex cutover, we now expect to complete that in January 2008, ahead of the prior schedule. And finally, we will be combining our trading floors in three phases between March and May of 2008. I want to take a moment to recognize the tremendous efforts of all of the employees of CME group, who not only helped us, deliver continued strong results in the second quarter, but who have also worked tirelessly on our integration.

The dedication and professionalism displayed by all of our employees is something that we are all very proud of and we look to our exciting future together. There is no doubt that the depth and talent of our team will be critical to our success and our ability to continue to lead the industry.

We're extremely pleased to begin operating as the largest and most diverse exchange in the world and CME Group is in a strong position within the the global financial markets to pursue a broad range of ambitious new growth opportunities. We will continue to execute on our long-term strategy, expanding globally, innovating and launching new products, increasing revenues from our third party transaction processing business, and launching new non-core businesses in the high growth OTC markets.

Now, I would like to turn the call over to Jamie to discuss the financials.

Jamie Parisi

Thank you, Craig. As John mentioned at the beginning of the call, my following comments refer to CME's Q2 results. I will talk briefly about CBOT's second quarter results at the end of my remarks. CME posted solid financial results in the second quarter driven by continued volume growth across all product lines. Our total revenue of $329 million for the second quarter was up 17% or $47 million compared with the same quarter last year. Our average rate per contract was $0.62.4 in Q2, down from $0.64.4 in Q1, and $0.63.2 during the same quarter last year.

The prime driver of the sequential drop in the RPC was member, non-member mix and a higher percentage of Eurodollar options as a percentage of the overall volume. Members, who received the lowest prices, accounted for 81.5% of volumes in Q2, up from 80.9% in Q1. Additionally, while the Eurodollar option volume on Globex improved in Q2 the Eurodollar option volume on the floor also improved. In Q2, lower-priced Eurodollar option floor volume represented 17.9% of the total CME volume, up from 16.6% in Q1.

Moving onto the processing services line, the Chicago Board of Trade reported volume of 4 million contracts per day, up 21% versus Q2 of 2006, which generated $23.6 million of processing revenue for the quarter. Revenue from the NYMEX agreement exceeded $13.5 million representing an average of $0.30 per contract.

Quotation data fees were $24 million for the quarter, up 18% from $21 million in Q2 of '06. At the end of the quarter, we had approximately 145,000 users paying for the base devices, down slightly from the first quarter.

I'll take a few minutes to review expenses. Total expenses for Q2 were $137 million, up 19%, versus $115 million for Q2 last year and up from $132 million last quarter. Excluding expenses related to the CBOT merger, the expenses would have been $130 million, up 12% compared to the prior year. This increase is consistent with our historical expense growth rates.

During Q2, we expensed $7 million of merger costs driven by legal, marketing, marketing and promotion, and integration consulting expenses. We also capitalized an additional $7.2 million for merger-related activity in Q2. In addition, we incurred expense of approximately $3.9 million for our FXMarketSpace and Swapstream initiatives.

Now, let's turn to further expense detail. First, compensation and benefits totaled $56.7 million for quarter, up $300,000 sequentially. There are three components of this expense; salaries and benefits, bonus, and stock-based compensation. Salaries and benefits totaled $43.8 million, up $400,000 sequentially. This increase was due to the full quarter impact of annual merit and promotion increases, as well as increased earnings on deferred compensation balances offset somewhat by lower employment taxes. The number of CME employees at end of the quarter was approximately 1,450.

Next our employee bonus accrual totaled $7.9 million down $500,000 sequentially. And finally, the stock-based portion of compensation was $5.1 million, up $600,000 from the the prior quarter due to our annual mid-June stock option grant to our employees. All other expenses totaled $80 million in the second quarter, up $4.7 million sequentially. Merger-related costs increased by $5.3 million from Q1 to Q2 with the other core expenses decreasing sequentially.

This resulted in an operating margin on a GAAP basis of 58% compared to 59% in Q2 last year. Excluding the merger-related costs, the operating margin would have been 61%. Moving on to the equity in losses of unconsolidated subsidiaries, our portion of the FXMarketSpace loss was approximately $3.2 million during the second quarter. Our pre-tax income was $209 million in the quarter, up 16% from the second quarter last year. Net income for the quarter was $126 million and diluted GAAP EPS was $3.57. Excluding merger-related expenses, the diluted EPS would have been $3.69.

Moving onto the balance sheet, at the end of the quarter, we had $1.4 billion in cash and marketable securities. Capital expenditures net of leasehold improvement allowances totaled $26 million in the second quarter driven by continued investment in our technology infrastructure. Cash earnings totaled $123 million for the second quarter, representing our second highest cash earnings quarter ever, up 15% compared to Q2 of 2006.

In our press release, we reported outstanding financial results for CBOT for the second quarter. CBOT revenue grew 33% driven by a 45% growth in exchange fees. This exchange fee increase resulted from a 23% growth in trading volume and a 17% increase in rate per contract compared to the second quarter of 2006. The CBOT average rate per contract increase was due to continued electronic migration within the agricultural product line and an increase in privately negotiated volumes primarily within the interest rate product line. CBOT operating margin, excluding merger-related costs, increased to 56% compared to 45% in Q2 of 2006 driven by increased revenue and curtailed spending in advance of the merger.

Lastly, CBOT's net income was $58 million on a GAAP basis, up 34%. Excluding merger-related costs, net income would have been $72 million, up 65% versus Q2 '06. CME Group, including volume from both exchanges starting July 2, is averaging 9.7 million contracts per day. That's up 21% compared to the same point in July last year.

I wanted to make a brief point about our plans for the fixed price tender offer which was part of our merger agreement with the CBOT. In accordance with the agreement, we will launch the program in the next week and we expect it to expire prior to the end of August. As we have previously stated, if the stock trades through the $560 level and there's no significant repurchase of shares, we're committed to returning excess capital to shareholders, and we'll discuss alternatives with our board at that time.

We will be providing historical pro forma volume, rate per contract, and income statement information in the next few weeks which should be helpful for modeling the CME Group going forward. In addition, at some point in the third quarter, likely in September, we'll update our ongoing guidance for CME Group.

We look forward to executing on our growth initiatives and delivering on our equipment of expense synergies of at least $150 million and revenue synergies of at least $75 million. As part of our pay-for-performance philosophy, we have modified our annual bonus program for our management team and managing directors to include the timely achievement of our expense synergies as a trigger for receiving a bonus in 2007 and 2008.

With that, we would now like to open up the call for your questions.

Questions-and-Answer Session

Operator

(Operator Instructions) We'll go first to Howard Chen of Credit Suisse.

Howard Chen - Credit Suisse

Good morning, everyone.

Craig Donohue

Hi, Howard.

Howard Chen - Credit Suisse

Congrats on a strong quarter for both franchises.

Craig Donohue

Thank you.

Howard Chen - Credit Suisse

Craig, in your prepared remarks you mentioned management's continued interest in pursuing third party transaction processing agreements. I was curious. Does the recognized overseas clearing house that you received in June provide you with any competitive lift that you didn't have before in pursuing things in Europe?

Craig Donohue

It certainly does, Howard. The point of our registered overseas clearing house designation in Europe is primarily to help facilitate our two OTC initiatives, both the FXMarketSpace, centrally cleared, FX products, as well as what we've just announced last week in terms of cleared interest rate swap activity.

Howard Chen - Credit Suisse

Okay, and then switching gears, on the merger integration front. One thing I didn't hear you mention, does a harmonization of the fee schedules have to take place, and if so, at what point would one think about doing that?

Craig Donohue

Well, let me just point out that we maintain a very diverse fee structure historically even in the context of CME Group. We have very different products, they're constructed differently.

Different users. Different competitive dynamics in terms of asset classes in terms of who we compete with and how we price our products.

We tend to have a high degree of differentiation across different kinds of customer segments within each product class, and so we've not chosen to harmonize the pricing strategy within CME and I don't think we'll likely do that either across the combined Company for the reasons I just gave, which is that we have highly different dynamics in each of these different product sets.

Howard Chen - Credit Suisse

Okay. That's helpful, and then, quick question on the CBOT pricing, this might be something better to follow up off line, so just stop me, Jamie, if it is, but they continue to see a positive lift in their rate per contract trends and the agricultural side makes sense to me, but I was curious if you have any thoughts of what is driving the higher RPC within their treasury complex, is it the electronic migration of treasury options or is there something else I'm missing?

Jamie Parisi

Yes. There's a higher percentage this quarter of EFPs, ex-pit transactions, in the financial sector and it has to do with yield curve plays. So you just see that little bit of a mix shift this quarter.

Howard Chen - Credit Suisse

Okay, great, and then final one, Jamie, I hear you with regards to kind of launching the tender and capital considerations, but was just curious if management had updated thoughts about just, now that you're a combined Company and you have a pro forma franchise that generates a lot of free cash, do you have thoughts about capital management and capital structure philosophy broadly, just over the longer period?

Jamie Parisi

In the very long run, I think it's going to make sense for us to have some portion of debt on our balance sheet and, obviously, return excess capital to our shareholders. Obviously, we've benefited from having the flexibility we've had in the recent past as we merged with the Board of Trade and went through that transaction. So we'll be taking all of that into consideration as we move forward.

Howard Chen - Credit Suisse

Very helpful. Thanks. Great quarter, again, guys.

Craig Donohue

Thanks, Howard.

Operator

We'll go next to Rob Rutschow with Deutsche Bank.

Rob Rutschow - Deutsche Bank

Good morning.

Craig Donohue

Hi, Rob.

Jamie Parisi

Hi, Rob.

Rob Rutschow - Deutsche Bank

I guess my first question would be related to the credit markets and some of the issues that are going on in the CDS markets and lack of liquidity there. I'm wondering if you're seeing any spillover and if there's any historical context that you could point to between the relationship between credit markets and rate markets, and also if you have any idea of what the overlap between your customer base would be and those traders who are using those CDS products.

Craig Donohue

Rob, I'm going to ask Rick Redding to address your question.

Rick Redding

The credit market opportunity is one we've always thought of as a large opportunity over the longer term period, Rob. One of the analogies that is probably appropo here is looking back to how Eurodollars started in the early 80s. You actually saw it start by a product that we traded certificate of deposits before that.

So, one of the things going on here is the marketplace is trying to figure out how to trade exchange-traded products in the CDS space and you've seen the Board of Trade's product and CME's product approach it from two different angels. I think where we are is the market's digesting what we have.

We're constantly out in the marketplace hearing what people want in this type of product, and we're hearing a lot of positive feedback from the buy side, especially in the hedge fund community as to where they think CDS products could go.

Rob Rutschow - Deutsche Bank

Okay. I guess my question was a little more near term. If there's been any spillover that you could see from reduced liquidity or reduced activity in the CDS market?

Rick Redding

I think that is more of a question of what's going on in the subprime market. Some of the fears and interest rate market. I think you'll seen that in strong performance in the treasury complex at the Board of Trade and in the Eurodollar complex here at the CME. I think that's where people have expressed their views.

Rob Rutschow - Deutsche Bank

Okay. I was just wondering if we could get a little more detail on the Eurodollar options and the uptake of the user-defined spread capability that you've added and sort of where you're seeing success and where you need to do some more work?

Craig Donohue

We continue to roll that out to the marketplace. We're still working with our ISV's and the proprietary systems at the firms. I think from the June results we're beginning to see some of the results of that education process.

We also see some of the fee concessions we made in May start to pay off and some of the technology enhancements we made at end of the first quarter. So we continue to push on that front.

As we've always said in the Eurodollar complex, it's a very complex option strategy-type market and we will continue to move forward with our channel partners to make that a success.

Rob Rutschow - Deutsche Bank

Okay, and one just nitpicky question here. The securities lending. Obviously, I don't have an average balance for that, but it looked like the net yield on those assets were up pretty substantially during the quarter. Is that just seasonal or is something else going on there?

Jamie Parisi

It was both the average balances were up and the net yield was up pretty significantly, as you noted. That's due with the peculiarities of the securities lending market and beyond that I can't comment.

Rob Rutschow - Deutsche Bank

Okay. So would it depend on sort of the short end of the yield curve and how that's shaped going forward?

Jamie Parisi

I would imagine so, yes.

Rob Rutschow - Deutsche Bank

Okay. Thank you.

Operator

We'll go next to Niamh Alexander, CIBC World Markets.

Niamh Alexander - CIBC World Markets

Thanks. Good morning. Just a question on the metals complex. Craig had mentioned you're evaluating your alternatives. Can you help me understand what these alternatives are, or share some of the thoughts on that process with us?

Craig Donohue

Well, I don't want to speculate on that. Obviously, we have a broad range of alternatives in terms of whether we choose to maintain that business or dispose of that business, or where we ultimately will look to trade those products if we were to retain them. I don't want to get too far into that, but we're evaluating all of our alternatives.

Niamh Alexander - CIBC World Markets

Okay, thanks for answering that one. And on the Eurodollar options, just to loop things, I know you've already had a question on it, but has there been any change in intentions to run the incentives for a little bit longer than the current plan?

Craig Donohue

We've said we would run those incentives till the end of the year, and we'll evaluate that plan at that time.

Niamh Alexander - CIBC World Markets

Okay, that's helpful. Thanks. And just, we've had some volatility in the market which should be good for business but the stock doesn't seem to reflecting this. Are you at all seeing a pullback in risk appetite just in the last couple of weeks and maybe less liquidity being put to work in trading given the weakness in the credit-related markets at all?

Craig Donohue

I think some of those issues in the credit market have been seen in the over-the-counter market. As I mentioned earlier, we're seeing a lot of that being reflected in our Eurodollar and in the treasury market.

If you -- also it's spilling over in the other markets, as well, in the equity markets you saw particularly strong June and now you're seeing a lot of concerns about the currency. The U.S. dollar is continuing to fall. We've actually benefited from this quite nicely.

Niamh Alexander - CIBC World Markets

That's helpful, thanks, and just finally, moving on to with the central counterparty clearing, which I think is quite exciting for the business. Can I just understand from a cost prospective is there anything we need to be factoring into our models for that for next year onward?

Jamie Parisi

There's nothing of a significant nature.

Niamh Alexander - CIBC World Markets

Okay. That's very helpful. Thanks for taking my questions.

Craig Donohue

Thank you.

Operator

We'll go next to Chris Allen, Banc of America Securities.

Chris Allen - Banc of America Securities

Hey, guys. How are you doing? Nice quarter.

Craig Donohue

Thank you, Chris, hi.

Chris Allen - Banc of America Securities

Just on the, you put the integration timeline a little bit, is there any change in terms of your expectations around accretion, dilution in the deal now?

Jamie Parisi

No. We're leaving those estimates as they had been previously stated.

Chris Allen - Banc of America Securities

Okay. And then just turning to the tender offer. Jamie, you mentioned returning excess capital to the shareholders. Are you guys committing to returning the full $3.5 billion even if the tender's not realized? Or how should we think about that if, let's just say your stock trades at $570 and no one tenders back to you guys?

Jamie Parisi

We're going to address that at the point where back, likely in September once the tender period closes.

Chris Allen - Banc of America Securities

Okay. And then just one final question. I mean, obviously, with the deal closing now you guys probably could talk a little bit more freely about revenue synergies and you guys have given us some examples in the past about treasury Eurodollar spreads.

Can you give us anything else to think about in terms of potential revenue synergies between the two platforms?

Rick Redding

Chris, this is Rick. No, in the interest rate side clearly there's synergies for plays along the yield curve. Clearly, in the commodity area we continue to see lots of interesting things we can do on a combined basis, and also just the interaction on some of those markets, especially on the agricultural side, we think are very, very beneficial.

And also we'll continue to do product innovations along this because some of the questions we've had have been along the lines of what do you see as innovative products in the interest rate area and I think shortly you'll see some more indications from us what we need there.

I think what's also important here is to think about when all of the products get onto the Globex platform and what we can do with technology. I think if you talk to a lot of lot of the algorithmic-type traders, I think they're looking forward to getting that entitled yield curve on one platform and to get those agricultural products onto one platform.

Chris Allen - Banc of America Securities

Great. Just one follow up on that. One question we've asked BOT management about in the past is the opportunity to sell treasury futures to Asian central governments and other big holders of cash treasury positions. Can you guys comment at all about that opportunity from your perspective?

Craig Donohue

One of the great synergies in this deal is the fact that they have some strengths in their product line on the treasury side that will play well whether it's Asia or South America, we will be able to cross sell products into those areas, but, Chris, your point's well taken and not one lost on management here.

Chris Allen - Banc of America Securities

Great, thanks a lot, guys.

Operator

We'll go next to Don Fandetti, Citigroup.

Donald Fandetti - Citigroup

Hi, quick question for Rick or Craig. Obviously, there's been a lot of talk about the investment banks being a little bit more nervous about the OTC market, post CBOT. Can you sort of give us an update on what you're hearing from the dealers and how you approach that balance in the over-the-counter market?

Craig Donohue

Sure, Don. I'll address that. You might have heard me mention in discussing FXMarketSpace, but more recently we have a number of the leading FX banks that are becoming more active on the platform.

And so, I think there are areas within the OTC market where we clearly have a value proposition in terms of either technology or our clearing capabilities and I think the investment banks in many cases are embracing that.

There are other areas of the OTC market where we will not be as competent or where they maybe more careful in terms of shifting business flows.

So there's that balance to be struck, but I think we've tried to target those areas of the OTC market, primarily, FX, and, obviously, more commoditized, standardized plain vanilla interest rate swaps as areas where we can add value and where we think we can gain the support of the OTC dealer community.

Donald Fandetti - Citigroup

Okay. Thank you very much.

Operator

We'll go next to Mike Vinciquerra, BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

Thank you. Good morning. One or two more questions on the RPC. Any explanation for the spike in volumes in the options in June? Is that simply related to the roll month or is that starting to show us some momentum that might carry into the second half of the year?

Rick Redding

Mike, this is Rick. Which are you -- are you talking just generically on all options, or is there a product line in specific?

Michael Vinciquerra - BMO Capital Markets

No, just generically. The graph you show with the 146,000 contracts per day in June. I think it was a huge spike over May.

Rick Redding

There's a lot going on there and some of this was driven by the interest rate markets. I think if you look in kind of that May/June, into the early July period, and a lot of people thinking by the end of the year there would be a rate cut, and I think in that May/June period I think a lot of people began to change their mind and say that's not going to happen. I think you saw a lot of people either unwind trades or express those trades in the options market.

You also saw a nice pickup in the Board of Trade agricultural options products. There's a lot going on in the Ag markets in the June time period and something I think it's important to note here, Mike, is if you look at the open interest right now in July and compare it to where it was in April at this same time, you'll see that on a combined basis we're about 9 million contracts higher then we were back then. A lot of that is being expressed in the options market. We've had a couple of bouts of volatility, little spikes of few days duration in those markets and that's really added to our open interest.

Michael Vinciquerra - BMO Capital Markets

Okay, and on the CME products, just to clarify, you do not currently charge for the electronic options trading, is that right?

Rick Redding

Yes.

Michael Vinciquerra - BMO Capital Markets

Where's the pricing incentive exactly, is it on all contracts or specific on Eurodollars?

Rick Redding

Most of the incentives are in the Eurodollar. However, we did implement in May a price holiday on some give-up-type transactions.

Michael Vinciquerra - BMO Capital Markets

And just taking that and looking at the S&P contracts that you are going to be introducing, and I think pushing pretty aggressively along with pricing incentives. It seems to us that you've actually got a loaded spring heading into the early part of 2008 as your options incentives roll off, and almost simultaneously, the S&P will roll off, so depending on your success there, we could actually see a nice pop in the March, April time frame as you ge to more reasonable pricing. Is that reasonable to expect?

Craig Donohue

You know, Mike, I think we'll have to judge that at the time. Obviously, the incentives are designed to promote greater utilization of the Globex platform in our options products, so I don't want to get too far ahead of ourselves on that. We'll have to evaluate that more closely at that time.

Michael Vinciquerra - BMO Capital Markets

Okay, fair enough.

Jamie Parisi

Mike, this is Jamie. You know on the options, on the Eurodollar, for example, there still is an electronic surcharge. It was decreased back starting May 1, I believe, for customers that surcharge is now $0.15 a side, or, I'm sorry, for members it's $0.15 a side and for customers it's $0.25 a side. So there still is that incremental charge on the Eurodollar side, so I think that the real focus now is getting that volume over to the electronic platform and the big pop will be getting that electronic surcharge.

Michael Vinciquerra - BMO Capital Markets

I see, okay. Thank you for that and just a follow-up on something someone else had asked. Are there any trading firms or any customers who were full members at one exchange but not the other that will now qualify for full member status under the combined entity, such that they will get member rates on both sides of the board or are they going to be kept separate?

Jamie Parisi

The way that works, Mike, is that with respect to existing products as of the date of the merger agreement, those are sort of ring fast, if you will, in that you have trading privileges and equity member fee entitlements that relate to those products.

New products that are listed, actually the large, new S&P 600 is a great example of that, are then eligible to be traded by both the full members of the CBOT as well as the CME division members at the CME and other divisions that might be designated by the board. On a going forward basis there's likely to be more member trading interest in new products that are designated but the existing products are grandfathered in that way.

Michael Vinciquerra - BMO Capital Markets

Very good. Thank you, guys.

Operator

We'll go to Richard Repetto, Sandler, O'Neill.

Richard Repetto - Sandler, O'Neill & Partners

Yes, hi, guys. Congrats on the double beat here.

Craig Donohue

Thank you, Rich.

Jamie Parisi

Hi, Rich.

Richard Repetto - Sandler, O'Neill & Partners

First question, Rick, you stole my thunder on the open interest but open interest in July, well, first, I got it up 14% from April, the highest open interest level other than a roll month and you did explain a little bit about it being options, but, I guess, can you give us any color then on what that might portend to predict? If that incremental increase is from options, do those options predominantly expire in the quarter? Do you think there will be a more direct correlation with volumes later on in this quarter?

Rick Redding

Open interest is something we do look at as one of the indicators of where potentially volumes can come from. You would have to look at the particulars of where those option contracts have open interest is. A lot of it is the nearby quarterly contract so, we think that portends good, well for volumes.

And not only that, as markets move it's also important because the underlying hedge is the futures contract and those traders will have a delta hedge using futures. It's not just the fact that the options unwind, it's if the markets move you get the underlying trade, as well.

Richard Repetto - Sandler, O'Neill & Partners

Got you, I think this is what you said in general, options would generally expire in the quarter, at least as a percentage, more than just general. The overall futures volume?

Rick Redding

Yes, you do see strategy-type trades that do go out multiple quarters, and Eurodollars is particularly one that has long-dated option trades on them. But things like equities, things like treasuries and some of the agricultural markets tend to be these front month markets, so you just have to look at it product by product.

Richard Repetto - Sandler, O'Neill & Partners

Okay, and then I want to tease Jamie here, again, on the equity losses in the unconsolidated subsidiaries, $3.4 million, I guess -- I still think you're sandbagging the guidance of $16 million to $18 million for FXMarketSpace. Can you break out what FXMarketSpace, because it seems like it's running ahead of plan here still?

Jamie Parisi

Yes, it does look like it's running ahead of plan, Rich, but we're still going to have the full quarter and effects of the some of the decisions that have been made in the prior quarters. As they continue to ramp up their staff and what not you'll see those expenses hit full force later in the year. But if we were to talk about the $16 million to $18 million guidance, I would say that we're probably closer to the lower end of that range.

Richard Repetto - Sandler, O'Neill & Partners

Well, you have Swapstream and I think One Chicago is still in there? Can you break out the losses in that line?

Jamie Parisi

One Chicago is only a couple hundred thousand dollars so it's really predominantly FXMarketSpace. Swapstream is not in that line. Swapstream is a fully consolidated entity.

Richard Repetto - Sandler, O'Neill & Partners

Got you, got you. Okay, and then the last question is, Craig, you didn't, last quarter was a fair amount of discussion on the Lehman Aggregate Index. I'm just trying to get an update on how we are progressing there?

Rick Redding

Rich, this is Rick. The Lehman Agg (ph) is still on track to come out this fall. We're doing our marketing at this time, going to the dealers and to the buy side. I mean, clearly, this is a product that has been coveted, especially by the buy side players for many years because they use it as a benchmark. We'll continue to do our marketing, and we'll look forward to the launch this fall.

Richard Repetto - Sandler, O'Neill & Partners

Okay. Thanks, guys.

Craig Donohue

Thanks, Rich.

Operator

We'll go next to Daniel Harris, Goldman Sachs.

Daniel Harris - Goldman Sachs

Hi, good morning, guys.

Craig Donohue

Good morning.

Daniel Harris - Goldman Sachs

CBOT volumes were really strong in the quarter. I just was wondering if you could put into context for us. How would you compare the distribution of Globex to E-CBOT geographically and any access to high volume algorithmic traders relative to what CBOT had in the past?

Craig Donohue

I will start with that. I think, obviously, both are reasonably well-distributed systems. I think the Globex system has more expansive distribution, not just globally in terms of access points, if you will, but also we tend to have a more diverse customer base because we offer liquidity in benchmarks across all of the different major asset classes.

And so I don't have any way to sort of give that to you in a quantitative answer, but qualitatively I think our distribution certainly overlaps with E-CBOT very favorably, but additionally would be more expansive just given our concentrated liquidity in equities, metals, energy, other asset classes. Interest rates would have a lot of overlap.

Daniel Harris - Goldman Sachs

Okay, and then just to remind me, did CBOT have the co-location in their data center similar to what you guys have for some of your hedge fund clients?

Craig Donohue

No, they were about to come up with it.

Daniel Harris - Goldman Sachs

Okay. Just going back to your comments on the Russell 2000. I think you mentioned that 75% of volume is from members and 25% from non-members and asset managers benchmark. How should I think about the member trading?

I would imagine it's largely reflective of their clients who are these asset managers, or were they sort of trading for their own book and they were index agnostic and they are just looking at the spread to the index on the underlying?

Craig Donohue

Go ahead, Rick, was going to start.

Rick Redding

Yes, I think what's important to look at in this product in particular is how many of the clients are really benchmark-driven versus people looking for trading opportunities. I think a lot of the member volumes were driven by, for example, proprietary trading groups and some hedge funds that are not necessarily driven by a benchmark, but they're looking for opportunities in the marketplace.

When Craig mentioned that some of the investment managers have a Russell 2000 mandate, for example. Those people tend to need to trade something that's very closely correlated with that index. But the bulk of that volume, at least from the analysis we've done, does not seem to be benchmark dependent.

If you actually look at the S&P 600, as well, the correlation is 0.992 or something, so it's actually very closely correlated, as well. But as Craig mentioned, it has tended to have better performance over the years and also doesn't suffer from the annual reconstitution issues.

Craig Donohue

Yes, just to add to that. I mean, I think, it's very much more the latter then the former in terms of your question. A lot of the large liquidity providers and providers of trading activity are index agnostic. They tend to be very focused on volatility or effective spreads, and for them, not only the sort of low-cost fees that we provide, but their existing connectivity, their existing business relationship with us.

The capital margin efficiencies, whether they qualify as clearing members or not in terms of the eligibility of different traders within the firm to avail themselves of our lowest fees tend to be significant factors in where they choose to trade. And I think the sort of branded money, if you will, is a very small segment of the overall Russell 2000 market liquidity.

Daniel Harris - Goldman Sachs

That's actually really helpful, and just lastly, just from an informational perspective, there's, obviously, been a lot of talk recently about deals following yours, specifically about some other U.S. exchanges, and this is just from your prospective, should NYMEX be involved in a transaction not with your firm, how does that impact the agreement that I think you guys have in place through 2011 for five years, and I think there was a five-year re-up at that point?

Craig Donohue

I don't think there's a lot more to add on that. We have a 10-year exclusive relationship with NYMEX, and in general terms a transaction should not affect the terms of our agreement with NYMEX if NYMEX were to engage in some kind of transaction. But that's difficult to get into the details of that in a phone call like this.

Daniel Harris - Goldman Sachs

Right. Thanks very much, guys, great quarter.

Craig Donohue

Thank you.

Operator

We'll go next to Jonathan Casteleyn, Wachovia Securities.

Jonathan Casteleyn - Wachovia Securities

Yes, good morning. Just curious as you put debt on the balance sheet for the first time what the appropriate debt-to-equity ratio could be going forward, Jamie?

Jamie Parisi

I'm not going to discuss that right now. It's something we're going to analyze as we move forward. We've said all along in the most recent tender offer that we were potentially putting somewhere in the neighborhood of $2.0 billion to $2.8 billion of debt on the balance sheet if the full tender was subscribed.

Jonathan Casteleyn - Wachovia Securities

Okay. And then just back to the Russell issue. I'm just curious if there's any historical precedent as to how these handoffs have happened and the potential uptake for the exchange? How much of the volume do you expect to over time to keep at the exchange versus sort of being parsed out the door with the branded traders, as you put it?

Jamie Parisi

I think it's difficult to give any sort of prediction on that, and I think also there's no directly applicable precedent to this, but I would say that we've talked about this before.

Back in 1997, when the Board of Trade first listed the Dow futures contract which was intended to be more of a retail-oriented product, we were then the incumbent liquidity provider in the large standard equity S&P 500 more institutionally-oriented contract, and so at that time we launched the E-mini S&P 500, five times smaller electronically traded fungible and we were very successful in taking our liquidity providers in the large institutionally-oriented equity contract and transferring them into the more retail-oriented E-mini S&P 500 futures contract quite successfully. And I think you've seen, obviously, the growth in the E-mini S&P 500 has been far greater then the growth in the Dow Jones contract.

So, not quite direct on all fours, but I think, obviously, very strong. We have a lot of, I think, natural advantages in terms of our technology, in terms of our customer relationships, in terms of having the institutional side of the market. Very happy doing business at the CME.

Obviously, with ICE's cost structure in the Russell 2000 with the $50 million up front fee and the annual minimums and very significant costs, they're going to have pass though through in some fashion to end users in a way that we don't have to. So I think in total, we have a really strong value proposition for retaining much of the liquidity and helping transition that liquidity into both the MidCap 400 and SmallCap 600 products.

Jonathan Casteleyn - Wachovia Securities

Right, but technically you lose exclusivity September '08, but can you list on-the-run contracts through September, I'm sorry, you lose exclusivity September 2007, but you can list on-the-run through September 2008, is that correct?

Jamie Parisi

Correct.

Jonathan Casteleyn - Wachovia Securities

Okay, understood. Thank you.

Jamie Parisi

And just to point out there it's been non-exclusive already. We've already had other licensees that have been trading the Russell 2000 contract.

Operator

And having no further questions I would like to turn the conference over to Craig Donohue for any additional or comments.

Craig Donohue

Thank you for joining us today for our first call as CME Group. This is our sixth analyst call in the last four months and we appreciate your continued emphasis and dedication to our Company, and look forward to talking to you again next quarter.

Operator

This does conclude today's conference. Thank you for your participation. You may now disconnect.

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