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Executives

John Fucher - Investor Relations

Terrence A. Duffy - Chairman of the Board

Craig S. Donohue - Chief Executive Officer, Director

James E. Parisi - Chief Financial Officer, Managing Director

Rick Redding - Head of Products and Services

Analysts

Rich Repetto - Sandler O'Neill

Howard Chen - Credit Suisse

Niamh Alexander - KBW

Mike Vinciquerra - BMO

Chris Allen - Banc of America

Donald Fandetti - Citigroup

Jonathan Casteleyn - Wachovia Capital

Edward Ditmire - Fox-Pitt, Kelton

Rob Rutschow - Deutsche Bank

Ken Worthington - JP Morgan

CME Group Inc. (CME) Q3 2007 Earnings Call October 24, 2007 8:30 AM ET

Operator

Good day, everyone, and welcome to the CME Group Q307 earnings results. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. John [Fucher]. Please go ahead, sir.

John Fucher

Thank you and thank you all for joining us. Terry Duffy, our Executive Chairman; Craig Donohue, our CEO; and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the third quarter and then we will 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.

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

More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent quarterly report on Form 10-Q, which is available in the investor relations section of the CME Group website.

During this call, we will refer to GAAP and non-GAAP pro forma results. A reconciliation is available in our press release and there is an accompanying file on the investor relations portion of our website that provides detailed quarterly information on a GAAP and pro forma basis.

Now I would like to turn the call over to Terry.

Terrence A. Duffy

Thank you, John, and thank you all for joining us this morning. As you all know, we closed our merger with CBOT in mid-July and we proceeded to post the strongest quarter in our history, with records across the board.

Our success in the third quarter offered a glimpse of what our combined capabilities will be going forward. We are in the process of positioning ourselves to reap the benefits of the growing need for innovative risk management products available around the clock and delivered in a highly reliable and efficient way.

In August, the financial markets encountered turbulence and users increasingly turn to the CME Group to manage their risk. Overall, CME Group volumes in the third quarter rose by 49%, driven primarily by the strength in our financial products.

Our E-mini equity product line led the way, up 83% compared to the same quarter a year ago, followed by FX, up 50%, and interest rates up 43%. The energy and metals products we trade on behalf of our partners at , reached a record for the fifth quarter in a row, with volume quadrupling from a year ago. CME

Next, I want to update you on our integration planning. So far, the process is running very smoothly. We are on track for the cutover for CBOT products on to CME Globex, which will happen in two phases.

First, on January 13th, we will add CBOT commodity and equity products and on January 27th, we will add the CBOT interest rate products. We have provided a Globex certification testing environment for customers since mid-August, and we have been working with over two dozen front-ends and proprietary firms, as they test CBOT products on Globex. Mock trading is slated to begin on December 1st.

In terms of the trading floors, beginning in March we will move CME floor traded equity products to our CBOT location, followed by CME interest rate and FX products in April, and we will finish with our commodity products in May. Construction is underway on the expanded floors of the CBOT location.

In summary, the merger between these two great exchanges is progressing well, and while we are pleased with our Q3 results, we continue to look forward. Craig will update you on that progress. Craig.

Craig S. Donohue

Thank you, Terry. As you mentioned, our integration process is going very well. In addition, we said all along that our ability to combine the CME and CBOT quickly, based on the tremendous efforts of our teams, positions us to immediately pursue valuable growth opportunities, which were evidenced by our announcements yesterday.

We have discussed our long-term strategy extensively in the past. Our strategy is to innovate and launch new products, increase revenues from third-party transaction processing, launch new non-core businesses in the high growth, over-the-counter markets, and to expand globally.

Today, I am going to focus our efforts on global expansion. We announced yesterday that we have signed a non-binding letter of intent with respect to a proposed, pre-IPO equity investment in the Brazilian Mercantile and Futures Exchange, known as BM&F, the world’s fourth largest futures exchange.

CME Group will acquire a 10% equity stake in BM&F in exchange for approximately 2% of CME Group at the close of BM&F’s initial public offering, which is expected to occur later this year. The investment is subject to negotiation of definitive documents and BM&F regulatory and shareholder approval.

BM&F is the largest and most successful derivatives market in South America, with average daily volume on a year-to-date basis of $1.8 million. Through August, BM&F volume is up 69%, as you can see on slide 8 in our attached slides. On the next slide, you can see the product breakdown for BM&F. Their largest product line is interest rates, followed by foreign exchange, and equity index futures.

Like CME, BM&F is largely a pure play derivatives exchange and they are also vertically integrated with their own clearing house. Brazil has emerged as the world’s tenth largest economy and the ability to develop and link our markets creates significant opportunities for both our customers and our shareholders.

In addition to the cross equity investment, the letter of intent also contemplates the establishment of an order routing agreement in which CME Group would connect the CME Globex electronic distribution network to BM&F and BM&F would connect its distribution to CME Globex for the routing of order for electronic trading of the products of both exchanges.

CME Group and BM&F also expect to enter into a Memorandum of Understanding to consider additional commercial arrangements, which may include the following; we would connect the CME Globex electronic distribution network to BM&F; CME Group would provide offshore collateral management services to the BM&F clearing houses for non-Brazilian Real denominated collateral; BM&F would become a super clearing member of CME Group in order to facilitate access to CME Group products on behalf of BM&F market participants that lack independent arrangements with CME Group clearing members; and CME and BM&F would work together to develop and market new products for the Brazilian and South American markets to take advantage of the expertise, distribution, and resources of both organizations.

We are very impressed with the leadership team in place at BM&F and we look forward to working with them in the years to come. BM&F is currently in a quiet period associated with its IPO and, out of respect for that process, we are limited in terms of providing further details or projections, but we will provide you with additional information further down the road.

Also yesterday, we announced that CME Group and the Korea Exchange, a premier exchange in Northeast Asia, intend to enter into a processing agreement for the KOSPI 200 futures contract to be lifted on the CME Globex platform beginning in 2008. The five-year agreement would include the creation of a telecoms hub in Seoul and will be the first time KRX has entered into a processing agreement related to its popular KOSPI products. More than 32 million KOSPI 200 futures, based on the KOSPI 200 stock index of the largest Korean companies, have traded so far this year through August. CME will match the trades with KRX continuing to clear and settle their products. The contract would trade on the CME Globex platform from 2:00 a.m. to 3:00 p.m. Chicago time, or 5:00 p.m. to 6:00 a.m. Seoul time.

Asia is a vital area of long-term growth for both CME Group products and our transaction processing services, and we look forward to providing our world-class platform in this new partnership. We believe this agreement is an important step to expand our global reach.

These two developments illustrate the value CME Group can provide as a partner of choice for exchanges around the globe. From our perspective, the true globalization of the derivatives markets is in its infancy, and we intend to be a leader in this area. We have created the world’s fastest, most widely distributed and reliable derivatives trading platform, and we have the world’s leading clearing house.

Our goal is to offer world-class processing services to our partners, enhancing their ability to grow. We have two very good case studies of that with NYMEX and CBOT, which were large, important processing agreements which displayed our ability to leverage the scaleable infrastructure we have built.

In conclusion, we continue to execute on our business models on multiple fronts. As Terry mentioned, the August time period was extremely busy and we met the challenge greater uncertainty caused as institutional traders in this environment to turn to CME Group for their risk management needs. They demand deep pools of transparent, anonymous liquidity, and from a capital perspective, safety and efficiency.

Our regulated futures business is the beneficiary of these customer demands and while we are in the early stages of penetrating the larger OTC markets, we are nonetheless excited to deploy our existing capabilities in a meaningful way in that segment of the market.

Now I would like to turn the call over to Jamie to discuss our third quarter financial results.

James E. Parisi

By all measures, the third quarter was one of the greatest ever for CME Group. While handling record trading volumes, our rate for contracts was down only slightly, while we began to reap the benefits of our merger and continued to leverage our systems and distribution.

The GAAP results for the third quarter were outlined in detail in the press release. In summary, we delivered net income of $202 million, or $3.87 per share, including CBOT related results after July 12th. Included within these results were $20 million of merger related operating expenses and $28.5 million of merger related non-operating expenses.

Additionally, we made a few revisions to the presentation of the income statement. On the revenue side, we combined access fees with communication fees and building revenue with other revenue.

On expenses, we combined occupancy with building, marketing with other, and we added an amortization line and a restructuring line. We provided a reconciliation between GAAP and pro forma results in the back of the press release and we have also posted both GAAP and pro forma historical quarterly income statements on our website, starting with Q1 of 2006.

Pro forma results exclude merger related costs of $20 million in the third quarter. This can be broken into four components. First, we recorded a payment of $6 million for the settlement of the class action lawsuit between LAMPERS and CBOT. Second, we incurred integration and legal expenses of $6 million. Third, we had $4 million of restructuring expense, driven primarily by headcount reductions; and lastly, we booked $4 million of accelerated depreciation associated with decommissioning CBOT’s data centers.

In addition, we had $28.5 million of non-operating, merger-related expense related to the guarantee of the CBOT exercise right privileges.

The CBOT results from July 1st to July 12th were included in the pro forma numbers, which added $20 million of revenue, $9 million of operating expense, and $7.3 million of net income.

From this point forward, I am going to provide comparisons based on the pro forma results. Our total pro forma revenue rose 41% to $585 million for the third quarter, increasing $172 million compared with the same quarter last year, driven by strong CME Group and NYMEX trading volumes.

CME Group average daily volume was up 49% while the average rate per contract was down less than 2% compared to Q3 2006.

Our average rate per contract was $0.622 in Q3, down from $0.632 in Q3 last year and $0.639 in the second quarter of 2007. The primary driver of the sequential drop in the RPC was the impact of our volume discounts, particularly in foreign exchange products. In addition, growth in lower fee member volumes out-paced the growth in non-member volumes.

Quotation data fees were $49 million for the quarter, up 12% from $44 million in Q3 of 2006. At the end of the quarter, we had approximately 287,000 users paying for the base devices on a combined basis, up more than 1,000 compared to second quarter.

Beginning in January of 2008, we will be increasing our fee per market data screen from $50 to $55. This increase may be offset somewhat by decreased demand due to the price sensitivity of some customers and the impact of staffing declines on Wall Street.

Our processing services revenue, which is now driven primarily by our NYMEX agreement, was $15.3 million, tripling from $5.2 million in Q3 2006. During the third quarter, we handled more than 800,000 NYMEX contracts per day, up from 710,000 contracts in Q2 and 175,000 contracts per day in the third quarter of last year. During this quarter, we averaged $0.29 per contract based on our NYMEX agreement.

I’ll now take a few minutes to review expenses. Total pro forma operating expenses for Q3 were $211 million, up 7% versus $197 million for Q3 last year. Comparing to the second quarter of this year on a combined basis, expenses were virtually unchanged despite a revenue increase of $75 million sequentially.

Compensation expense was up $4.3 million, while non-compensation related items were down 4.3. Total compensation related expense increased sequentially from $76 million to $81 million. There are three components of this expense -- salaries and benefits, bonus, and stock-based compensation. Salaries and benefits totaled $56 million, down $4 million sequentially. This was driven by a reduction in headcount beginning in August, which reduced our workforce during the quarter by approximately 130 people.

As of September 30th, the CME Group headcount stands at 1,990.

Next, our employee bonus accrual totaled $18 million, up $8 million sequentially due to our superior performance during Q3. Our maximum bonus for the year is $47 million and through three quarters, we have expensed $34 million.

Finally, the stock-based portion of compensation was $7 million, up $1 million from the prior quarter.

All other expenses totaled $130 million in the third quarter, down $4.3 million sequentially. We saw an increase in the volume-related expenses, specifically license fees, which was offset by a reduction in discretionary expense, particularly in marketing and public relations, which we expect to return to normal levels in Q4.

Operating margin was 64% on a pro forma basis, our highest quarter ever.

Moving on to the equity and losses of unconsolidated subsidiaries, it totaled $3.7 million, basically at similar levels compared to the past two quarters. We expect the loss to come in at a similar level in the fourth quarter and we will update our 2008 guidance for FX market space when we report our 2007 year-end financial results.

Our pretax income was $393 million in the quarter, up 68% from the third quarter last year. Net income for the quarter was $236 million, and diluted pro forma EPS was $4.31.

Moving on to the balance sheet, at the end of the second quarter, we had $1.95 billion in cash and marketable securities. In the third quarter, we spent approximately $1.5 billion on the fixed tender, CBOT dividend and ERP payment. As of September 30th, we have $898 million of cash and marketable securities and short-term debt of $165 million, related to the fixed price tender offer, resulting in a net cash position of $733 million.

Capital expenditures net of leasehold improvement allowances totaled $39 million in the third quarter, driven by continued investment in our technology infrastructure and leasehold improvements. We previously gave guidance for second half CapEx of $95 million to $105 million, which we continue to expect, resulting in Q4 CapEx of about $55 million to $65 million.

Including yesterday’s volume, our average daily volume in October is approximately 9.2 million contracts, up 14% versus the same period a year ago.

The financial power inherent in our business model has never been more apparent than it was in this quarter. On a year-over-year basis, pro forma revenue grew by $172 million, while expenses rose only $13 million. This represented incremental margins in excess of 90%.

Our team is very focused on the opportunity to improve on our performance by delivering the merger-related synergies we outlined, while continuing to seek out and deliver on growth opportunities.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today will come from Rich Repetto with Sandler O'Neill.

Rich Repetto - Sandler O'Neill

Good morning, guys. I guess, Terry and Craig, the first question is on the arrangements or the agreements you recently signed. The first on is on Korea, what are the -- are the terms similar, sort of the processing that you have with NYMEX? And then, the follow-on to that is what are the big -- having just -- what are the big opportunities besides just Korea do you see in that region, which you acknowledge is important to the growth going forward?

Craig S. Donohue

Rich, let me start with that. Obviously this is a somewhat different arrangement than the NYMEX arrangement, in that we are essentially facilitating after-hours from a Korean time zone perspective, matching services in the KOSPI 200 futures contract, and so we look at this as primarily an opportunity to expand the Asian based products on the CME Globex platform, and as we mentioned, we’ll be installing a telecommunications hub in Seoul, Korea, so that we can actually make more efficient the connectivity between Korea-based investors and the CME Globex platform. Really not just for the KOSPI 200 after hours, but obviously for expanding participation in all of our other more liquid products on the CME Globex platform, so I would think of it in that fashion rather than as a close comparable to the NYMEX processing arrangement.

With respect to your second question, we are very broadly focused on Asia and there are a lot of different and discrete parts to Asia. I think you know that we’ve been very active in Japan, China, India, now Korea and we look at the opportunity set in each of those places as very different.

In addition to that, we have very established marketing capabilities in places like Singapore and Australia and Hong Kong, and we have an existing telecommunications hub in Singapore, with one coming on as part of our [CFETCH] arrangement in China in Shanghai. So we have a multitude of different growth initiatives throughout Asia.

Rich Repetto - Sandler O'Neill

And I guess -- is it fair to assume that since you are growing these after hour volumes on Globex and probably your profitability of the revenue capture is going to be greater than say NYMEX?

Craig S. Donohue

I’ll make one comment and ask Jamie to elaborate, but obviously growth in trading volumes during the Asian time zone is very attractive for us because we have invested in significant processing capability and capacity and since the vast majority of trade flows tend to occur during the North American and part of the European hours, that’s obviously very positive for us.

James E. Parisi

I’d agree with that. Clearly we’ve got excess capacity in our evening hours on our current Globex system. The one thing to keep in mind is that there is the up-front costs of establishing a hub and the ongoing cost of establishing a hub, which is relatively small in the grand scheme of things.

Rich Repetto - Sandler O'Neill

Okay, I can follow-up with you more after. Just one question on the financials, Jamie. If you back in, if you take your guidance just on operating non-GAAP expenses that you put out in September, and you back out what you did this quarter, 210.6, that would say that you have expenses -- and I bet you it’s your conservatism, but the midpoint would say you are up sequentially in the 4Q, and I just -- you just went through the employee bonuses. It looks like you are going to, at least on the bonus side, at least save $5 million if you max out there. So instead of 18, it would be 13. So I’m just trying to see -- is there a view that expenses could go up quarter to quarter? When you had a big buy in third quarter, or is it really just the conservatism that you always build in?

James E. Parisi

Rich, we are not updating that guidance, so when you back into it, it does imply a 214 to 219 for the fourth quarter, using the guidance we had provided last time. Some things to keep in mind, as I said, marketing expenses were lower in the third quarter. We do expect those to come back to more normalized levels in the fourth quarter. We are spending significant -- we are expecting to spend significantly on CapEx in the fourth quarter, if you look at our guidance there versus what we spent in the third quarter. There’s a significant amount yet to go, so that will impact depreciation. And then we do continue to have to spend on consultants and what not as we continue to examine various opportunities for the exchange, for example, like you just saw, like with Brazil and Korea.

Rich Repetto - Sandler O'Neill

Okay. That’s helpful, Jamie. Congrats, guys, on a good quarter.

Operator

Next we’ll move on to Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Good morning, everyone. Congratulations on all the announcements. Craig, in the past, management’s steered away from buying passive stakes in exchange just to own passive stakes. On the BM&F announcement, is it fair to say you gain cover with the merits and the opportunities of the commercial agreement alone, aside from the investment potential of the equity investment?

Craig S. Donohue

Howard, what we’ve said before is that we are certainly interested in equity stakes, as long as they are associated with a commercial arrangement that gives us growth opportunities and revenue opportunities over the long run, so we think this is a very effective way to partner with the leading South American exchange and to create growth opportunities for us, not just in new products or in processing services, for example, but to expand use of our current core product by South American and Latin American investors, and so we view the two things as inextricably intertwined, and I think that’s very consistent with comments we’ve made on this topic before.

Howard Chen - Credit Suisse

Right, and would you characterize these two agreement announcements last night as competitive process?

Craig S. Donohue

I don’t really have any particular comments on that, other than to say that we at CME Group have been working on the development of both relationships with the Korean Exchange, as well as the Brazilian Exchange for quite some time, and I’m not going to make any comments beyond that.

Howard Chen - Credit Suisse

And then, on the KOSPI 200 futures contract, any reason that CME would not want to also partner with KRX on a similar arrangement with the KOSPI 200 options contract?

Craig S. Donohue

No, there certainly is no reason why would not want to do that. We have really prided ourselves on establishing effective relationships that can be expanded over time, as we begin to work well with each other and earn each others trust and confidence, and we view this relationship certainly in that vein.

Howard Chen - Credit Suisse

And maybe a follow-up question on that for Rick, if he’s there. Would the Globex trading platform have to make any adjustments to take on the trading of an underlying cash product for KOSPI 200 like the -- rather than the --

Rick Redding

Howard, generally in the index option side, those products tend to trade a lot like the options on index products that we currently have, so in the grand scheme of things, no, there’s not that much, especially from a functionality standpoint, that will be different. Obviously you have some different connectivity due to help people in that part of the world connect to the system, but again that’s relatively small in the grand scheme.

Howard Chen - Credit Suisse

Thanks, and then a final one for you, Jamie; how do these agreements change management’s view on capital management and capital structure, if at all?

James E. Parisi

Howard, we talked about that a little bit before, that that’s the topic that we continue to review with our board on a regular basis. We want to maintain the flexibility in the capital structure and weight that against the desire on some investors’ part to have the capital returns, so we are constantly going through that equation.

Howard Chen - Credit Suisse

Maybe asked another way, I know intra-quarter, Jamie, you mentioned your desire to retain $200 million, $300 million of cash on hand for the working capital of the business and the safety and soundness of the clearing house. With these transaction announcements, does that change your views on the working capital needs of the company?

James E. Parisi

I don’t think that these add significantly to the working capital needs of the quarter, and as you point out, we do generate significant cash flow each quarter. So as I said, it’s something that is on the front of our minds and something we review on a regular basis.

Howard Chen - Credit Suisse

Okay. Thanks so much, everyone.

Operator

Next we’ll move to Niamh Alexander with KBW.

Niamh Alexander - KBW

Good morning. Thanks for taking my questions. Can I go back to the BM&F transaction? In the context of maybe the carbon markets, I guess I would love to get your perspective on the opportunity for CME. I guess the BM&F recently held the first auction for carbon markets, but there seems to be quite a lot of noise and excitement in the futures and the derivatives market, generally. Is this an opportunity for CME? Is it an OTC opportunity? Is it potentially a whole new product area for exchange trading?

Craig S. Donohue

I’ll answer that. I think it absolutely is. Our agreement with BM&F does call for joint product development in a number of different areas, but very much in particular, we are going to be focused on the agricultural and commodity markets, as well as the carbon market.

I should point out that BM&F is somewhat of an interesting exchange in that they trade what we would regard as listed products, standardized products, but they also have a significant capability and business in the over-the-counter derivatives and cash markets as well, and so we will be very focused on both carbon and commodities and agricultural products with BM&F.

Niamh Alexander - KBW

Thanks, that’s helpful. And is that something that could be traded in the U.S. as well, I assume?

Craig S. Donohue

Certainly, yes.

Niamh Alexander - KBW

And then, if I could go back to the domestic markets, can you give us an update on the progress at Swapstream? It’s still [inaudible] in the first quarter, although I think the last update, there were some operational efficiencies being offered. How has the reception been so far with customers when you are kind of introducing this product?

Craig S. Donohue

The product I think you are referring to is cleared swaps, which we will offer in the first quarter of 2008. It’s meeting with good receptivity from the clients, looking at a new way to put really interest rate swap products into a centralized clearing model, so we look forward to providing some more information on that right after the beginning of the year.

Niamh Alexander - KBW

Okay, that’s helpful. Thanks. I’ll get back in the queue. Thank you.

Operator

Next we’ll move on to Mike Vinciquerra with BMO Capital Markets.

Mike Vinciquerra - BMO

Thank you. Good morning. My congratulations on the deals in the quarter as well. I want to follow-up on Howard’s question on the KOSPI. Is there a particular reason why you started with the futures? It looks to me, if I’m reading the reports right, that 98% or so of the volume in the KOSPI is related to the options and not the futures. Can you just talk about why you started with the futures side and if I’m looking at this correctly?

Craig S. Donohue

I’ll address that. I mean obviously, this is the -- and I think we mentioned this in the release -- the first time that the Korean Exchange has actually entered into an arrangement like this whereby it’s core products will be traded on another platform as part of an arrangement like this. So this is the first step of what we hope ultimately will be many steps down the line that we can take with the Korean Exchange, and this is where we’ve chosen to start.

Mike Vinciquerra - BMO

Okay, so kind of a bite-sized portion up front and you’ll work on the operational side and once that goes smoothly, there’s a possibility for some expansion here?

Craig S. Donohue

That’s certainly something that we’ll be discussing with our partners at the Korean Exchange.

Mike Vinciquerra - BMO

Okay, and then I’m just a little confused on your purchase of BM&F. You mentioned in your prepared remarks that it’s at a pre-IPO price, but then in the release, it sounds like it closes after the IPO. What price -- I’m sure there’s an agreed-upon price, but is it at the IPO price that you are going to buy in, or how do we look at that?

James E. Parisi

It’s based on our internal analysis as to what it’s worth and there’s a current market that we put -- a current value that we put on it. It’s not necessarily the IPO price.

Mike Vinciquerra - BMO

Very good, and then just one other thing, I guess for Jamie as well; a lot of your clients hit volume thresholds during the quarter, which obviously gives them a better overall price, and you’ve talked a little bit in the past about the potential to reevaluate your pricing and where those thresholds will be because of how high volumes are now. Any thoughts as to where that’s going and are you going to offer some sort of combined volume pricing with the CBOT and CME products?

James E. Parisi

Pricing is something that we are keenly aware of and we’re looking at all the time, so it’s something that we’ll be analyzing in the future and we’ll get back to you when we have something concrete on that.

Mike Vinciquerra - BMO

I figured I’d try. Okay, thanks, guys.

Operator

Next we’ll move on to Chris Allen of Banc of America Securities.

Chris Allen - Banc of America

Hey, guys, nice quarter. Just on the BM&F agreement, it seems -- the way I read it is it seems to be exclusive between CME and BM&F. Am I reading that correctly in that there cannot be another cross investment by another exchange? And also, in terms of the distribution platform?

Craig S. Donohue

You are reading that correctly. We have negotiated for the exclusive right as an exchange to provide global order routing and distribution services into the BM&F exchange for electronic trading purposes. And then, similarly, BM&F has agreed that they will not issue shares to another exchange investor in their company.

Chris Allen - Banc of America

And then, just in terms of -- I know you guys don’t have specifics, but can you give us a general ballpark in terms of how much activity do you think is coming from Latin America on your platform right now?

Craig S. Donohue

I would say in keeping with past commentary on questions like that, Chris, it’s very difficult for us to actually capture higher reliable information in that way in that, as you know, orders flow into the exchange through a multitude of sources, many of which it’s very difficult for us to determine the origin of a particular order. So unfortunately, I can’t provide you with very much information in that way.

I would say that I think anecdotally and generally, that the vast majority of our business is obviously concentrated in North America, Europe, and then Asia, and Latin America is really I think a developing market in terms of current business growth, and that’s part of what we find very exciting about the BM&F arrangement, is that there’s obviously a lot of business that we could capture there as those markets are developing and opening and maturing.

Chris Allen - Banc of America

Two quick questions for Jamie; Jamie, just in terms of the tax rate, should there be any changes in terms of what we’re looking at right now going forward?

James E. Parisi

Nothing of significance.

Chris Allen - Banc of America

Okay, and then just on the CapEx, obviously it’s going up this quarter. I think you mentioned before as to the telecom build-out, some integration issues. How do we think about a run-rate for ’08 in terms of the CapEx spend?

James E. Parisi

We’ll be providing further guidance on the 2008 CapEx when we give the final 2007 results. You can look historically what our CapEx has been. It’s grown steadily over time but it’s come down, actually, as a percent of revenues. So you can look at that and it’s probably likely to fluctuate in the 5% to 10% range annually in terms of revenues, but we’ll give you further guidance on that.

Chris Allen - Banc of America

Great. Thanks a lot, guys.

Operator

Next we’ll move on to Donald Fandetti with Citigroup.

Donald Fandetti - Citigroup

Craig or Rick, quick question; are you seeing any new opportunities or feeling better about opportunities in the OTC market over the last six to nine months, whether it’s credit or other areas?

Craig S. Donohue

I’ll start with that and then turn it over to Rick. I think in very general terms, as we’ve seen the credit market situation recently, I think that it has reinforced the strength of our capabilities in terms of being able to access immediate liquidity with a transparent pricing mechanism, opposite a multitude of counter-parties versus the single counter-party. And certainly in an environment where people are increasingly concerned about credit liquidity and credit risks, counter-party risks, I think in general terms, market environments like that tend to be very favorable for us and our business, not just in terms of the core business but also in reinforcing the merits of some of the OTC initiatives that we have, like FX market space and Swapstream.

So in very general and broad terms, I think it’s an overall positive for us in terms of the requirement that we’ve been working in.

Donald Fandetti - Citigroup

And then just lastly, Rick, I just want to talk briefly about open interest. Is that still the best indicator of future volumes? I mean, you’ve been obviously doing a lot of algo trading. How should we think about that going forward?

Rick Redding

You know, I think that’s one of the indicators we look at. It’s not necessarily the best but it is something that we do look at. It doesn’t necessarily help you get any insight into a lot of the algorithmic traders, because they typically don’t hold much open interest, but for things that people can observe, it is one thing that we continue to look at, to see what people are doing.

I mean, it gives you some sort of indication about what the hedgers of the world are out there doing.

Donald Fandetti - Citigroup

Thank you.

Operator

Next we’ll move to Jonathan Casteleyn with Wachovia.

Jonathan Casteleyn - Wachovia Capital

Good morning. I was trying to understand the potential trading mix at BM&F between electronic and floor-based trading. Is there any way to understand that?

Craig S. Donohue

I can make some limited and I think fact-based comments on that. I mentioned during the call earlier that, out of respect for their quiet period, I’d be somewhat limited in that. But I believe that right now, they are in excess of 60% electronic, without what we call side-by-side trading, meaning that they have different floor-based and separate electronic trading sessions in their core products throughout the course of the day and I think roughly 60%-plus of total transactions are electronic, and I believe they are in the process of implementing, starting with their interest rate products what we call side-by-side trading, where there would be electronic matching and the same products happening while they are also trading on the trading floor.

Jonathan Casteleyn - Wachovia Capital

Understood. Okay, that’s very helpful. Thank you. Just a question for Jamie -- will that investment sit on the books in marketable securities? If so, is it -- will it be based on cost or will you mark it to market?

James E. Parisi

It will be based on cost and it will be measured for impairment on a regular basis.

Jonathan Casteleyn - Wachovia Capital

Okay, and then, I was thinking about the economic consequence of the ERP rights that you bought from some of the BOT members. Does that effectively give you potential equity in the BOT -- I’m sorry, the CBOE if they go public? If those have been retired and you hold them in-house at the exchange, do you have a potential equity stake in CBOE?

Craig S. Donohue

I’ll answer that. None of that is certain, in that the class of plaintiffs has not yet been certified and in general terms, that’s not really why we did what we did. We intended to obviously have that structure be part of solving the various shareholder issues we were trying to solve as part of our merger agreement with the CBOT, and secondly, we’ve made a commitment to fund that litigation and to try to be helpful to the class plaintiffs, who are people who hold, generally speaking, the CBOT stock are now CME Group stock, along with their memberships and along with their ERP interests. I think we said consistently that our intention would be to help facilitate the assembly of all the component parts that may be necessary at some point to participate in any litigation or settlement outcome of the case.

Jonathan Casteleyn - Wachovia Capital

Understood. Okay, that’s interesting. And I’m going to be blunt about this but I just -- I wanted to ask anyway and I’m hoping that maybe Rick can think out loud. I’m just wondering, do we expect a volume bump with the Globex consolidation? I’m just hoping maybe you can just think out loud as to why or why not.

Rick Redding

I think one thing is clear about Globex, is the performance of Globex is something that I think most of our clients view as superior, especially when you look to the algorithmic traders. Any kind of speed and performance definitely helps their volume and their strategies, because if they can get market data back faster out of the system, it helps drive their bottles to send them more signals to trade.

Jonathan Casteleyn - Wachovia Capital

Okay, that makes sense. And then my last question, again for Rick, is we all have our methodologies for trying to understand de-levering in the market. There is dislocation out there, especially in our business on Wall Street. I’m just wondering, outside of seg funds and open interest, what do you look at to try to understand what CME traders, if they are walking away, if they are getting more active or not as far as addressing the potential impact of de-levering in the credit markets?

Rick Redding

I think whenever you have market dislocations like this, I think it makes people really think about liquidity and the safety of where they are trading, so one of the things that we observe and a lot of the people do on sales calls is a lot more questions about how the CCP and how the -- really the safeguards of the system work. That is something I think that we’ve seen a lot more in the last couple of weeks, or last couple of months, sorry, than we’ve seen in quite some time, because people really do focus on that.

The second piece of that though that’s a little more subtle is because people crave liquidity at these times, as Craig mentioned earlier, that anonymity on the front-end of the trading becomes even more important to them because they really want to move in these markets pretty nimbly.

Jonathan Casteleyn - Wachovia Capital

Understood. Excellent. Thank you very much.

Operator

Next we’ll move on to Edward Ditmire with Fox-Pitt, Kelton.

Edward Ditmire - Fox-Pitt, Kelton

Good morning, guys. This question is for Jamie -- have you kind of updated any thoughts on what you think in the longer term is an appropriate kind of debt equity mix at CME? And are kind of in the shorter term, developments in the credit markets influencing the discussions around capital management?

James E. Parisi

As I said, it’s an ongoing discussion. I think in the very long run, a business like CME could potentially have a very thin sliver of debt on its balance sheets, and I’ve said that all along. I don’t know what else to add there for you, Ed. Sorry.

Edward Ditmire - Fox-Pitt, Kelton

Okay, thanks.

Operator

Next we’ll move on to Rob Rutschow with Deutsche Bank.

Rob Rutschow - Deutsche Bank

Good morning, guys. I’m wondering if you can elaborate on your capacity to increase the rates per contract going forward, and if you have any changes in your thoughts there?

Craig S. Donohue

I think the most that I would say there is that obviously we’ve been very focused on keeping the cost of trading very low for customers and we think that that’s been very helpful in actually stimulating more trading activity, increased volumes and revenue and earnings growth. So that’s point number one.

I think point number two is that we just don’t really manage the business that way, in the sense that we have very highly differentiated pricing across all of our different asset classes and products and customers and different kinds of incentives, and so we just don’t look at it and say periodically, we ought to raise the rate for contracts just because we can. We are always looking at the competitive circumstances of each of our products, whether that’s with regard to cash markets or options markets or OTC markets or other futures market products that might be highly correlated. And it’s driven by that competitive assessment and obviously overall market conditions.

James E. Parisi

You know, the other thing to think about too is just in terms of the average rate, some favorable factors for us are the continued electronification of the AG market and the potentially higher mix of FX in the overall business, and then migration of the Euro dollar options gets us a higher rate per contract.

Rob Rutschow - Deutsche Bank

Okay, and is there any reason to believe that the year-end trends might be a little different this year versus historically? Do you have any new, big algorithmic traders coming on the system, or any other factors that might drive volumes higher in November and December?

Rick Redding

Volumes are always hard to forecast and --

Craig S. Donohue

Rick is thinking out loud right now.

Rick Redding

Market conditions also play a part. I mean, the one thing is typically in the fourth quarter, you do have some holiday activity that affects the volumes, but typically look at our third quarter this year. Typically August volumes slowed down because of holidays and Europeans going on vacation, but that’s just very difficult to look at and generalize about.

Rob Rutschow - Deutsche Bank

Okay. Can you give us a little bit more detail on what happens to the share count with the BM&F purchase or investment, and whether you have any sort of accretion or dilution estimates from that?

James E. Parisi

As we said in the press release, it’s about a 2% -- they’re taking about a 2% stake, so if it’s a stock-for-stock, it’s basically a 2% increase, roughly, in the share count.

Rob Rutschow - Deutsche Bank

And no estimates on accretion or dilution?

James E. Parisi

Just on the purchase itself, it’s going to -- the investment will be booked and we are not going to recognize any income in the -- unless there’s a dividend from them, but other than that, there won’t be any income recognized from the investment in the interim period, so purely on an accounting standpoint from the investment itself, it would be dilutive but there’s also the commercial arrangements and other potential there, so we haven’t put any numbers out on that yet.

Rob Rutschow - Deutsche Bank

Okay, and if I could ask one more; could you size the increase in depreciation that you are looking for? And I missed it, if you can just tell us what the cost saves were again this quarter, related to CBOT?

James E. Parisi

Sorry, the increase in depreciation resulting from?

Rob Rutschow - Deutsche Bank

I think you said that you were going to make some CapEx investments going forward and that that would drive a higher depreciation.

James E. Parisi

I was just commenting that depreciation is likely to be higher in the fourth quarter, because of the increased CapEx. We haven’t provided any specific guidance on that.

Rob Rutschow - Deutsche Bank

Okay, and I’m sorry, what were the cost saves this quarter?

James E. Parisi

Synergies were somewhere in the neighborhood of $10 million. That means we’ve got another $140 million to go.

Rob Rutschow - Deutsche Bank

Okay, great. Thank you.

Operator

And our final question today will come from Ken Worthington with JP Morgan.

Ken Worthington - JP Morgan

Good morning. Some thoughts on BM&F. Is order routing a first step to order processing?

Craig S. Donohue

You know, Ken, I think that remains to be seen. I mean, the BM&F exchange, as I mentioned already, is already significantly electronic. They are also developing the next generation electronic trading platform for their business and so, I can’t really say that I think that that will be an outcome of our agreement. We certainly are in that business but right now, we are focused on the other areas that I mentioned, which are global order routing and distribution, collateral management, joint product development, et cetera.

Ken Worthington - JP Morgan

And some of BM&F, their products are complementary and some of them are competing. How does your agreement, or does your agreement account for areas where they have products that are similar to yours?

Craig S. Donohue

First of all, let me just point out that for the most part, there isn’t a lot of product overlap in the directly competitive or substitute sense, so there is a tremendous amount of complementarities, in fact, between their products and ours. Obviously because we are going to be collaborating in the way that we are with our respective customer bases and distribution from them to us and from us to them, there are certain provisions of our agreement that restrict our ability to lift each other’s current products. But for the most part, we are going to be looking to collaborate in the development of new products that will hopefully expand customer activity in both of our markets.

Ken Worthington - JP Morgan

Lastly, they’ve got a small FX spot business. Any connection to FX market space?

Craig S. Donohue

None yet that we’ve discussed. They are obviously a very significant cash market and settlement facility in foreign exchange with the Brazilian Real opposite other currencies, so that’s an area for future discussion.

Ken Worthington - JP Morgan

Great. Thank you very much.

Operator

That will conclude the question-and-answer session. At this time, I would like to turn the call back over to Craig Donohue for any additional or closing remarks.

Craig S. Donohue

Thank you very much. On behalf of all of my colleagues here, we appreciate your joining us this morning and we look forward to talking with you next quarter.

Operator

That will conclude today’s conference. We thank you for your participation.

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Source: CME Group Q3 2007 Earnings Call Transcript
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