NYMEX Holdings, Inc. Q1 2008 Earnings Call Transcript

NYMEX Holdings, Inc. (NMX)

Q1 FY08 Earnings Call

May 1, 2008, 08:00 AM ET

Executives

Keil Decker - VP, Corporate Communications & IR

Richard Schaeffer - Chairman

James E. Newsome - President and CEO

Kenneth Shifrin - CFO

Analysts

Richard Repetto - Sandler O'Neill & Partners L.P.

Howard Chen - Credit Suisse

Michael Vinciquerra - BMO Capital Markets

Edward Ditmire - Fox-Pitt, Kelton

Christopher Allen - Banc of America Securities

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the NYMEX Holdings Incorporated 2008 First Quarter Financial Results Conference Call. My name is Machida and I will be your operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the call over to Keil Decker, Vice President of Corporate Communications and Investor Relations. Please proceed, sir.

Keil Decker - Vice President, Corporate Communications & Investor Relations

Thank you, operator. Good morning and welcome to the NYMEX Holdings 2008 first quarter financial results conference call. To obtain a copy of our earnings release issued this morning, please visit our website, at www.nymex.com. Before we begin formal remarks this morning, be aware that statements made on this call 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 annual and quarterly reports on Form 10-K and 10-Q, which are available on our website. During this call, we will refer to GAAP and non-GAAP pro forma results. You can find a description of these measures in the reconciliation table in our press release.

With us this morning to discuss the highlights of the first quarter, are NYMEX Chairman, Richard Schaeffer; President and CEO, James Newsome; and CFO Ken Shifrin. At the conclusion of their remarks, we'll open up the call up for your questions.

I'll now turn the call over to our Chairman, Rich Schaeffer.

Richard Schaeffer - Chairman

Thank you, Keil. Good morning and thank you for joining us, ladies and gentlemen. The first quarter was significant for NYMEX, as we continued to strengthen our competitive position and product offerings, as well as our financial performance. Our outstanding financial performance is a result of growth in volume, strength in average rate per contract fees and the discipline we are applying to managing our expenses.

In the challenging economic environment that we are currently in, market participants value the credit risk mitigation, price discovery, and risk management that our trading and clearing give them even more, which contributes to the growing participation in our markets, and continued strength of our business.

For the first quarter, total operating revenues were up 27% to a record $208.9 million. Net income for the quarter was $78.6 million or $0.83 per diluted share, excluding merger-related expenses of $7.9 million. Including those expenses, our net income was up 27% to a record $71.2 million or $0.75 per diluted share.

Our pre-tax margin remains the best in the industry at 72 for the first quarter, excluding merger-related expenses. Excluding merger-related expenses, our current margin for the last quarter was 76%. In addition, yesterday the Board of Directors approved a regular quarterly dividend of $0.10 per share to shareholders of record as of June 6th and payable on June 27th.

As you are all aware, on March 17th we enhanced the strategic combination with CME Group. This combination allows us to take our business and growth to a much higher level, and create value for our customers and shareholders. We believe this combination serves the best interest of NYMEX investors, members, shareholders and all of those who participate in global commodities and derivatives markets. We are in the process of preparing a join proxy and registration statement, which will be filed with the SEC very shortly.

At the same time, we are proceeding with the review... the review process under the Hart-Scott-Rodino Act to obtain the necessary anti-trust clearance to proceed with this transaction. We expect to complete the deal before the end of 2008.

While we are working diligently towards closing the deal with the CME, we are also making great strides in executing key business initiatives. Work on our alliance with the LCH.Clearnet to offer contracts cleared in Europe is moving along very well. We are excited about being able to offer to the marketplace exactly what it has been asking for, to stay as a leading, proven and reliable European clearinghouse, while gaining significant capital efficiencies and other benefits by working with both of us.

In addition, we are making significant progress in developing the Green Exchange. The Exchange recently added four new founding members including Vitol, RNK, ICAP and Goldman Sachs, that was just last week.

Green Exchange counterparties transacted the first ever Exchange-traded Certified Emissions Reduction Options contracts. We expect, as reported in the press, that the Green Exchange will become the leading exchange for environmental market contracts. Jim will give you more details in a few moments.

To sum it up, we continue to deliver on our strong fundamentals of core business, while growing the business through the launch of new ventures and innovative products.

Now I would like to turn it over to my partner Jim Newsome.

James E. Newsome - President and Chief Executive Officer

Thank you Mr. Chairman. During the first quarter, we continued to build on the strong fundamentals of our core business. Our core benchmark energy and metals contracts continue to grow in volume and open interests. And we've set numerous daily volume records throughout the first quarter. In particular, we posted records for COMEX gold and other metals as well as record volume in natural gas, heating oil and overall electronic trading.

In March, as Richard mentioned, we announced an important alliance with LCH.Clearnet, which will offer significant capital and operational efficiencies to customers and market participants. NYMEX will offer a comprehensive slate of OTC and futures products for clearing through LCH.Clearnet, encompassing the global benchmark contracts with WTI, Brent, Gas Oil and key natural gas and electricity contracts. This alliance will allow market participants who currently clear through LCH.Clearnet to maintain their current clearing relationship in clearing systems while offering them the same contract that they use today.

Additionally and very importantly, this new initiative will offer cross margining and margin credit benefits to customers who clear at both NYMEX and LCH. We are currently meeting with customers and we will continue to provide the marketplace with regular updates as we prepare to launch in mid 2008. Also as Rich mentioned, the Green Exchange initiative is making great progress. The Exchange has established itself as the emerging leader in the environmental market space, with first ever contract such as Exchange-traded Certified Emissions Reduction or CER options contract in which counterparties transacted 1150 contracts representing 1.15 million tons of CO2 reductions. Green Ex has transacted a similar number of European Union allowance options as well.

Thus far, NYMEX has launched 15 environmental futures and options contracts for the European Union allowance, certified emission reduction, nitrogen oxides, and sulfur dioxide markets. These contracts will migrate from NYMEX to the Green Exchange when it receives approval from the CFTC to operate as a designated contract market, which we expect in early 2009. The emissions products complement NYMEX's energy complex and give market participants the flexibility to effectively manage risk and gain direct exposure to the emissions markets on the same strain where they manage their physical energy risk.

In addition to launching new contracts, the Green Exchange has brought on board a number of new founding members. This past quarter the Green Exchange welcomed Goldman Sachs, ICAP, Vitol and RNK Capital. These four industry leaders joined NYMEX evolution markets Morgan Stanley, Credit Suisse, JPMorgan, Merrill Lynch, Tudor Investment Corporation, and Constellation Energy as founding members to help build what we and many other believe will be world's premier environmental products exchange.

The Dubai Mercantile Exchange venture in the Middle East has been steadily growing open interest each month, currently reaching over 14000. Also, the DME was recently named New Exchange of the Year by Futures and Options World Magazine and we want to congratulate our partners on this honor.

We it comes to new innovative products, NYMEX continues to lead the way. During the first quarter, we launched more than 40 new contracts on CME Globex, the trading floor here in New York and NYMEX ClearPort. These new products range from energy to environmental risk to currency. Our new energy contracts include a physically-delivered ethanol contract, 15 EIA on-highway diesel and gas oil swaps, several new Brent crude oil options contracts, 8 additional electricity contracts that serve the Texas markets and two innovative crude oil futures indexes called the Crude Oil MACI and Backwardation/Contango Index Futures contracts. These two indexes that I'd just mentioned help market participants to reduce the burden of rolling their crude oil contracts forward each month.

This past quarter, NYMEX also launched a Colombian Peso Index Futures contract on NYMEX CleaPort, our first currency futures contract. We'd launched this contract in conjunction with Marco Polo network, the leading emerging markets electronic trading network providing access to exchanges and securities in more than 50 countries.

Finally, we are continually focusing on our technology to offer more features and better connectivity, an example of our average pricing system which will go into production this quarter. This capability enables an average priced bill on a number of transactions which reduces the amount of back-office work, which will be needed on multiple trades at different prices.

Overall, we continue to focus on our fundamental business and achieve our strategic goals. I will now turn it over to Ken, who will discuss our strong first quarter financial performance.

Kenneth Shifrin - Chief Financial Officer

Thank you, Jim. We turned in another strong performance in the first quarter, driven by solid average daily volumes and ongoing improvements in our operating expenses net of transaction costs. Let me recap our performance.

Total operating revenues for the first quarter rose 27% to a record $208.9 million compared to $164.2 million for the first quarter of 2007. Excluding the merger-related expenses, net income for the quarter ending March 31, 2008 was $78.6 million or $0.83 per diluted share. GAAP net income for the first quarter 2008 increased 27% to a record $71.2 million compared to $56.2 million for the first quarter 2007. Diluted earnings per share for the first quarter 2008 was $0.75 based on 95 million shares outstanding compared to $0.59 based on 94.8 shares outstanding for the first quarter 2007.

Included in the first quarter 2008 results are $7.9 million in merger-related expenses, of which approximately $6.7 million are considered non-deductible for income tax purposes. These expenses consists primarily of professional fees, incurred in connection with NYMEX's proposed merged with CME and can be found in the other expenses line on the P&L. You will find a reconciliation table on the press release, which details the effect of the merger-related expenses.

The effective tax rate for the first quarter of 2008 was 47.04% compared to 43.6% for the first quarter of 2007. This increased due to the following factors: first, an adjustment for non-detectable compensation in accordance with IRS Section 162M; next, a shift in our investment portfolio from tax-free munis to treasuries and reduction of overall investment income as a percentage of total revenue; and finally, the non-deductible merger-related expenses which were approximately $6.7 million of the total $7.9 million.

Non-equity merger-related expenses or effective tax in the first quarter was 44.87%. For the first quarter, gross average rate per contract across all venues was $1.57, while the net rate per contract net of transaction costs was $1.32. Against last year's first quarter, RPC is up from a gross average rate of $1.50 per contract and a net average rate of $1.27 per contract. We drive our business by volume, but each month rate per contract fluctuates based on product mix, incentive programs and member/non-member mix.

For the first quarter, clearing and transaction fees rose 30% to $179.1 million. Market data revenues increased 13% to $26.2 million, driven by 23% increase in number of units and a 10% increase in revenue per unit, of $146,235 and $55 respectively in the first quarter of 2008, compared to $118,861 and $50 per unit during the first quarter of 2007.

These results are due in part to a new fee schedule for each of the NYMEX and COMEX divisions that became effective on January 1, 2008, as well an increase in the market data fees that became effective February 1, 2008. So the operating expenses for the first quarter excluding to the transaction costs of $28.1 million and the merged-related cost of $77.9 million decreased 10% to $40 million, compared to $44.4 million in the first quarter of 2007. Total operating expenses for the fourth quarter of 2007 was $40.6 million. Total operating expenses continued to trend down compared to last year, as a result of our continued disciplined expense management.

Compensation expenses totaled approximately $20 million for the first quarter of 2008 including $3.7 million of management equity, compared to $21 million for the same period last year, which included $600,000 of severance and $2.3 million of management equity. Non-compensation expenses excluding direct transaction costs and merge-related costs were down 14% to $20 million in the first quarter of 2008.

Approximately $800,000 of Green Exchange expenses were included in our first quarter operating expenses. I'd like to point out some additional expenses year March for the second quarter. We approximate that $1.5 million of Green Exchange expenses will be included in our second quarter operating expenses. We expect the majority of the Green Exchange expenses will be refunded to NYMEX, when the equity structure of the new exchange is finalized.

If we go to our LCH.Clearnet venture, start-up costs for this recently announced initiatives are expected to be approximately $2.5 million for the second quarter. Now we move on to non-operating income and expenses. Investment income was $3.6 million for the first quarter of 2008. Our losses from unconsolidated subsidiaries were $2.2 million, which relates primarily to our Dubai venture. The increase in our volume growth, increase in RPC quarter-over-quarter and ongoing cost-cutting initiatives all contributed the increase to the pre-tax income of 35% to $134.4 million compared to $99.7 million in the first quarter 2007.

Pre-tax margin as defined in our press release was 72% for the first quarter 2008, compared to 68% in the first quarter of 2007. Excluding the merger-related costs our pre-tax margin was 76%. In closing, I will touch on a couple items from our balance sheet; as of the end of the quarter we had approximately $557 million in cash and marketable securities, and our working capital was $526 million. Capital expenditures were $4 million for the first quarter.

With that, I will turn it back over to Rich.

Richard Schaeffer - Chairman

Thank you very much Ken. Thank you everybody for being patient and listening today. Obviously we are very excited about where we are driving at. We are very excited about where our gross margins are going. Since we have started with at the beginning, going public we've come a long way. We recognize we still have a long way to go and we are working hard to increase investor value. Thank you and we will take question at this time.

Question And Answer

Operator

[Operator Instructions]. Your first question come from the line of Rich Repetto of Sandler O'Neill Please proceed sir.

Richard Schaeffer - Chairman

good morning, Rich.

Richard Repetto - Sandler O'Neill & Partners L.P.

Good morning guys. Can you hear me?

Richard Schaeffer - Chairman

Yes we can.

Richard Repetto - Sandler O'Neill & Partners L.P.

Sorry. Congrats on a solid quarter here. My first question Rich comes, have to do with 311G I believe about the revenue sharing with the Class A members. You released some, I guess it was a few weeks ago or a week two weeks ago more details. I am just trying to get the sentiment of the members. Does that help clarify in regards to going forward... did they help clarify and improve the sentiment or what is the sentiment with regard to that revenue sharing in the CME transaction in general?

James E. Newsome - President and Chief Executive Officer

Well, we've put out the information to begin to clarify the issue of course. We have a meeting scheduled in response to it a petition that was issued where a lot of the owners want clarification. So it didn't go out two weeks ago. It just went out actually 3, 4 days ago. So, although we haven't got a lot of questions, we anticipate a lot of questions and at our meeting on what's the day Rich? On June third, we of course will address all the issues. It's a pretty detail report. It gets into numbers. I am sure that we are going to continue to clarify. It's our opinion that we have done it the right way and we will educate all the members and tell them what we feel. So I wouldn't say it's clarified, although we haven't got many calls. I'd say we have put the information forthcoming, there is nothing that won't be given to the members before they feel, get to feel comfortable about the deal.

Richard Repetto - Sandler O'Neill & Partners L.P.

Understood, understood. Yes, I apologize it just seems... this is earning season for us, it seem like a long time ago. The next question would be on LCH.Clearnet. I heard Ken talk about $2.5 million in investment... or in spending in 2Q. Can you talk about what that's going to be spent on and could you give us an update possibly on the sentiment of, I guess, FCMs in regards to the venture?

Richard Schaeffer - Chairman

Sure, I will be happy to and then Jim can jump in afterwards. Ken, our very conservative CFO, says $2.5 million. I say it will be a lot less or less, but won't debate that now. But he is being conservative. A lot of it will be marketing, marketing technology, but we have in place the technology to get it going. And I guess, Ken?

Kenneth Shifrin - Chief Financial Officer

The majority off the bat is really professional fees, Rick, legacy fee, accounting fee, until we get it started up

Richard Schaeffer - Chairman

And legal fees as well.

Richard Repetto - Sandler O'Neill & Partners L.P.

Right.

Richard Schaeffer - Chairman

It is not the FCMs at the end of the day who make the decision where to put business, although the FCMs are surely influential in pushing their clients to do business on one or another. We've heard and met with a substantial number of actually users and clients of the exchange and we feel there is significant interest in keeping business on the LCH and our expenses will be, although we won't give forward projection, will be well exceeded at some point in the reasonable future by the income that we receive. We really excited about it and the initial response has been really, really wonderful. Jim, do you want to make a comment on that?

James E. Newsome - President and Chief Executive Officer

I'd just add a couple of points, Rich. Certainly in the market that we are all operating in, uncertainty is concurrent of everyone and our customers have been very excited that we're providing certainties for them with regard to keeping their clearing on the LCH and trading the products that they become accustomed to trading. So the enthusiasm has been overwhelming from customers. They are all looking for more details that we are working diligent to provide, but, Rich, we're extremely excited with where we are in the process right now.

Richard Repetto - Sandler O'Neill & Partners L.P.

Okay, great, guys. If I have more questions, I will get in the queue. Thank you.

Richard Schaeffer - Chairman

Thank you.

Operator

Your next question comes from the line of Howard Chen with Credit Suisse. Please proceed sir.

Howard Chen - Credit Suisse

Good morning everyone.

Richard Schaeffer - Chairman

Good morning.

James E. Newsome - President and Chief Executive Officer

Good morning, Howard.

Howard Chen - Credit Suisse

Congrats on the quarter, thanks for taking my questions.

Richard Schaeffer - Chairman

No problem, happy to do it.

Howard Chen - Credit Suisse

My first one, year-to-date you experienced a great pickup in ClearPort activity. I was curious can you speak some of the factors that you think are driving that increase in this tumultuous market, as I think you put it, Rich, and anecdotally are there any particular user groups that you see are more or less active during this kind of market environment?

Richard Schaeffer - Chairman

Okay. We won't mention the user groups for competitive reasons because some are with us and not our competitors, but clearly credit intermediation is almost on everybody's mind with some of these not only hedge funds having issues, but with all these companies that were looked once as great solid companies. Now some of them are in question.

In addition, our crude oil is starting to pick up quite extensively where previously with probably 85%, 90% natural gas is moving away from that. The natural gas is increasing of course in the busy times and high volatility, but this is a lot of crude oil starting to come out. We anticipate that to continue to grow. That's an area that's never... the people were comfortable trading with each other previously. The treasurers of the companies are now getting involved and deciding where to do business as opposed to the traders themselves. So we are seeing tremendous growth coming out of the treasury offices of these big trading companies.

Howard Chen - Credit Suisse

Okay, thanks, Rich. And then to follow-up on NYMEX LCH alliance, you all seem really excited about and it makes sense to me in terms of the continuity to the trading of these products, but can you give us an update on the estimated timing of launch with specific regulatory approvals you have or need? And then thoughts on what the outcome of FSA approval process.

Richard Schaeffer - Chairman

I am going to let Jim talk about FSA approval, but we are gearing to be up and running by July 1st of this year. Jim, why don't you go through the regulatory?

James E. Newsome - President and Chief Executive Officer

Yes, the regulatory approval process is going extremely well. In fact, we've got a team in London now for, I think, the third trip over working on finalizing the regulatory approval, but we are... the FSA has been a pleasure to work with and we are completely confident that we will the regulatory approval in place in time for the mid-08 launch.

Howard Chen - Credit Suisse

Okay, great. And then a real quick one, just to clarify comment that Rich, you made in the prepared remarks. Have you officially submitted for the first review of Hart-Scott-Rodino, are you now in the waiting period for the response from the DOJ?

Richard Schaeffer - Chairman

Yes, we have submitted.

Howard Chen - Credit Suisse

Great, thank you.

Operator

[Operator Instructions] Your next question comes from the line of Mike Vinciquerra of BMO Markets. Please proceed

Michael Vinciquerra - BMO Capital Markets

Thank you, good morning.

Richard Schaeffer - Chairman

Good morning, Mike.

James E. Newsome - President and Chief Executive Officer

Good morning.

Michael Vinciquerra - BMO Capital Markets

A follow-up on the ClearPort question, looking at the RPC, that has been trending a bit lower the last several months versus the, I guess, the run rate for '07. Is it just a product mix there, what you were talking about was more crude oil, Rich?

Richard Schaeffer - Chairman

Well, what it is is we are pretty dynamic in how we build our business. So when we have the chance to have special programs for certain competitors who can bring in tremendous amount of business, they are usually short-lived programs, but we do them in times where the economies of scale is such that we are not going to lose any money. So I think we won't disclose who they are or what they are, but as ClearPort comes up and it's given us more revenue as you see, our average rate [ph] contract was what?

Kenneth Shifrin - Chief Financial Officer

157

Richard Schaeffer - Chairman

157. Obviously last month... last quarter was 143 or so. We picked that 10% in our rate increase we are picking up in ClearPort because we are doing more ClearPort business. So that's the time to go out and try to take some business from our competitors by putting in some short-term programs.

Michael Vinciquerra - BMO Capital Markets

Okay. So you would categorize the last few months not necessarily as the long-term run rate in terms of RPC for that... for the ClearPort business alone?

Richard Schaeffer - Chairman

No. I would characterize it as the ClearPort bringing us up along with our increase, but in the long term, I think rates will stabilize. I am not looking for a downturn in rates.

Michael Vinciquerra - BMO Capital Markets

Okay, great, thank you. And then looking at the margin requirements for your clients, I mean, it's pretty consistent, just going to the website, it's been one margin increase after the other due to the volatility. Can you talk about how you are managing that process and at this point do you feel like the margins are at an appropriate place where we are not going to see continued rise going forward?

Richard Schaeffer - Chairman

Yes, we do feel comfortable where they are. We watch that very-very closely. We have a very large compliance staff. We have a very large financial compliance staff who is monitoring it, not on a daily basis, but on an hourly basis. On of the interesting things is we are providing with this LCH situation joint relationship is margin relief so that the customers who stay on LCH will actually have much more efficient margins because they have right products. Where they are paying fair margin on both sides, we anticipate great relief for our customers because they are in a lot less risky transactions.

Michael Vinciquerra - BMO Capital Markets

Okay.

James E. Newsome - President and Chief Executive Officer

Mike, just to add to that, I think it's important to note that the margin setting is a function of our compliance and research staff that is not determined by the business staff. We consider it a compliance function and it's done separately with the firewall between the business and compliance group. Our compliance and research group meets every day to look at volatility in the market, historic volatility and using those calculations determine what the margin should be and at the end of the day, it is what it is.

Michael Vinciquerra - BMO Capital Markets

And your volume would indicate that the higher margins have had zero negative impact on volume. Is that something you even consider when you look into the margin? It sounds like you are completely --

Richard Schaeffer - Chairman

No, because, as Jim said, it's a firewall. So that decision is made based on what's the right risk portfolio that we should be managing. And... but no, it has had no negative impact. The increase in margins has had no negative impact. You have to consider that the majority of traders are well-heeled commercial users of the market, probably 80% or more. So when you keep hearing all the stuff in Congress and stuff, they are looking at the speculator or the individual, but most of the business done here and other exchanges in these large contracts is by very well-heeled people. Right now the banks, a number of the banks are marginally financing these customers. So as the margins get... requirements get bigger, either the company puts it up themselves or the bank that's clearing them as the relationship with them on a banking side and cover those margins, cover those margin excesses at a fee to the customer.

Michael Vinciquerra - BMO Capital Markets

Okay, that's helpful, Rich, thank you. And then just lastly, just a follow up on the June 3rd meeting, is there a particular reason why it was said at that date and not maybe trying to address the questions sooner just to get it behind you and get a members comfortable with? Thanks.

Richard Schaeffer - Chairman

You know what, I have our General Counsel here. Do you want just make [indiscernible]. Okay. That's the date we were comfortable with picking. Obviously we have a lot on our plate here and it's not that far in the future.

Michael Vinciquerra - BMO Capital Markets

Understand, okay, thank you guys,

James E. Newsome - President and Chief Executive Officer

But I would add as well, Mike, that according to our bylaws that the members voted on, when the petition came in, we had a window of time between 60 and 90 days when we were required to set that meeting date.

Michael Vinciquerra - BMO Capital Markets

Okay, very good, thank you

Richard Schaeffer - Chairman

Thank you.

Operator

Your next question comes from the line of Edward Ditmire of Fox-Pitt, Kelton. Please proceed sir,

Edward Ditmire - Fox-Pitt, Kelton

Hi, good morning guys.

Richard Schaeffer - Chairman

Good morning.

James E. Newsome - President and Chief Executive Officer

Good morning, Ed.

Edward Ditmire - Fox-Pitt, Kelton

I have a question. I know that your... the proposed merger plan with CME, albeit it's the planned change in your headquarters, as outlined in the enterprise efficiency plan, have there been any modifications to the plans regarding other cost saves due to implications from the merger plan?

Richard Schaeffer - Chairman

We have quite... we are currently working on our integration plan. We are not prepared at this point in time to about it, but I can tell our integration plan with the CME considers substantially more savings in all areas that we've looked at before, but again, we are working on it not literally on a daily basis, and we are not at liberty to talk about it.

Edward Ditmire - Fox-Pitt, Kelton

Okay. And let me just ask and may be you have already addressed this, and if so, I apologize. Do you think that there is any overlap between the cost saves plan in that enterprise efficiency plan and the proposed merger synergies?

Richard Schaeffer - Chairman

I have to give you the same answer and we... there is substantial... not overlap, there is substantial benefit in there, but we are just not at liberty to talk about them at the current time.

Edward Ditmire - Fox-Pitt, Kelton

Thank you.

Richard Schaeffer - Chairman

Thank you, Ed.

Operator

And next question comes from the line of Chris Allen of Banc of America Securities. Please proceed, sir

Richard Schaeffer - Chairman

Good morning, Chris.

Christopher Allen - Banc of America Securities

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

Richard Schaeffer - Chairman

Thank you.

James E. Newsome - President and Chief Executive Officer

Thank you.

Christopher Allen - Banc of America Securities

Just want to clarify on the LCH agreement, you guys are talking like the traders make more decision based on margin, I have always understood it be the traders make decisions based on liquidity. How --

Richard Schaeffer - Chairman

Well, Chris, stop for a second. I never said the traders make decisions based on margin. What I said is the treasurers of the company, the CFOs, have over the last year gotten substantially more involved in where instrument is traded and in a lot of cases, particularly now, over the counter are less desirable than exchange traded instruments, which there is no direct party on the other side of, thereby driving more business to ClearPort. So it's not the traders, the traders are making less decisions on what exchange or where to put their business, be it in over the counter... and not exchange, but over the counter or ClearPort and that's driving a lot of new business to ClearPort.

Christopher Allen - Banc of America Securities

Okay. And then just on the LCH agreement, just to make that I think the real changeable opportunity, wouldn't you also have to be building some liquidity in Brent and some of the contracts to really be able to offer people an alternative to ICE?

Richard Schaeffer - Chairman

Without a doubt, and we are and we are being very aggressive about it. We have a... we also embrace the inter-dealer broker community quite activity and you... one would assume that be working very closely with them to provide a platform within which they can trade these products as easily as they could with ICE.

Christopher Allen - Banc of America Securities

Okay. Thanks a lot guys.

Operator

This concludes our Q&A session. I'd now turn the call over to Mr. Schaeffer for closing remark.

Richard Schaeffer - Chairman

Thank you again. We are going to get back to working, continue to drive our gross margins up and we thank you for your support and we hope to have a little help from the stock market itself. But thank you very much for being with us today.

Operator

Thank you for you participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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