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Executives

Stephen Davidson - Vice President of Investor Relations

Duncan L. Niederauer - Chief Executive Officer and Director

Michael S. Geltzeiler - Chief Financial Officer and Group Executive Vice President

Lawrence E. Leibowitz - Chief Operating Officer

Analysts

Alex Kramm - UBS Investment Bank, Research Division

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

Jillian Miller - BMO Capital Markets U.S.

Brian Bedell - ISI Group Inc., Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

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

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

NYSE Euronext (NYX) Q3 2012 Earnings Call November 6, 2012 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 NYSE Euronext Earnings Conference Call. My name is Caris, and I will be your operator today. [Operator Instructions]

I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.

Stephen Davidson

Thanks, Caris. Good morning, and welcome to the NYSE Euronext Third Quarter 2012 Earnings Conference Call.

Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext's current expectations and involve risks and uncertainties that could cause NYSE Euronext's actual results to differ materially from those in the statements. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.

Duncan Niederauer, our Chief Executive Officer, will review the highlights for the quarter, update you on key business developments in our businesses and conclude with his outlook on various regulatory and macro issues. Michael Geltzeiler, our Chief Financial Officer, will then review the financial results for the quarter. We will then open the line for your questions. Also in the room for the Q&A session is Larry Leibowitz, Chief Operating Officer.

We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to the slides during their remarks.

With that, let me now turn the call over to Duncan.

Duncan L. Niederauer

Thanks, Stephen. Good morning, everybody. Thanks for joining today's call on such an important day in the U.S. here, Election Day. Do try to get out and vote. Our town doesn't have any power so I guess we're going to be doing it old-school today, but we'll -- it -- we're going to make sure we do that tonight.

Before I get into the results, I do want to take a few minutes to talk about Hurricane Sandy. It was a pretty challenging week for our community here at NYSE Euronext and many of the communities in and around the East Coast. However, I couldn't be more proud of our teams that worked here nonstop over really the last week or 10 days. As usual, we led the industry from the front in helping to build a consensus to close the markets last Monday and Tuesday, which I firmly believe was the right thing to do. And with Wednesday's historic reopening, I can attribute that to the result of truly heroic efforts on the part of many of our key people. Not only did we reopen the market smoothly when the entire surrounding area was still in darkness but we had 3 IPOs come to market last Friday, which is a testament to the resiliency of the U.S. markets.

So now let me focus on the third quarter. During the quarter, we made significant progress with new product development and our key initiatives that will drive future growth, and we'll highlight those throughout the presentation that Mike and I will do. We're focusing on those levers of our business model that are in our control and that we can influence to deliver value for our shareholders over the long term, well beyond the current lackluster trading environment. As you know, we've made a lot of headway over the last few years in diversifying our business model, a large portion of our -- although we've made a lot of headway, a large portion of our revenues remain linked to trading, and our derivatives franchise in Europe has been especially impacted by macro conditions and deleveraging, driving lower levels of hedging and speculation. But contrary to what many are saying today, this is not a structural shift in the market in my opinion, and we see the current climate as an opportunity to focus the company for growth when macro conditions return to normal. At the same time, we need to remain focused on further diversification into our technology, data and post-trade businesses.

In some respects, I feel about NYSE Euronext the way I do about the U.S. economy, well positioned to grow under the right conditions. But for the moment, we are still facing strong macroeconomic headwinds and our results for the third quarter reflect this. We reported $0.44 for the quarter and $559 million in revenue compared to $0.71 on $704 million in revenue in the prior year third quarter.

Please turn to Slide 4. On Slide 4, I thought we'd share some year-on-year comparisons of the past 2 third quarters. The third quarter of 2011 was characterized by event-driven volatility in the U.S. and Europe, which drove strong trading volumes across all of our venues, setting new records for orders and executions. Fast forward to the third quarter of 2012 and we were at multiyear lows in terms of volatility.

In conjunction with this decline in volatility, off-exchange trading has increased more than 4% as the orders internalized more client flow in these lower-volatility markets. We continue to be frustrated with this trend and are troubled that the U.S. equity markets have gotten more opaque while the value of the public markets continues to be diminished.

Moving to the upper-right quadrant, we illustrate the decreased need to manage risk on the short end of the curve, with rates at or near 0 and no indication from central banks that rates will be going up before 2014. Open interest is down in the front 4 quarterly tax [ph] compared to 18 months ago, but as you move out on the curve, we see more favorable trends in open interest.

Lastly, on the lower-right quadrant. While our principal trading venues have faced challenging operating conditions, our market share across U.S. equity options, European cash and U.S. cash has actually remained fairly stable and, in the case of European cash, has even increased. U.S. equities market share is also relatively strong given the aforementioned increase in off-exchange trading. So in summary, market share in our primary venues has remained stable or improved, but this has been overshadowed by deleveraging in a more typically seasonally slow summer quarter.

Please turn to Slide 5 for me. At the same time, there's plenty within our control, and Slide 5 illustrates the progress that we are making in executing against our strategy. First of all, we need to find areas for growth and diversification. We have several new product development and growth initiatives underway that should improve the company's position in the near future. We're working to launch a full-service CCP by June of 2013. More on that in another slide or 2. Our listings franchise continues to build momentum especially in terms of technology market share.

We are in the process of revamping our global data agreements, which we expect will result in additional revenue beginning in 2013. The Bank of China agreement that we recently signed is not just another MOU but a wide-ranging partnership that will, among other things, make Bank of China a general clearing member of NYSE Liffe. We are continuing to launch new products and expand participation on NYSE Liffe U.S. with the onboarding of 2 new clearing members. And lastly, we are continuing to roll out new futures products like the Russell Europe SMID 300 Index, the new mini MSCI contracts and 3-year mid-curve options on Sterling and Euribor which we launched in July.

Second, we need to enhance our operating leverage. We continue to show cost discipline, as illustrated by our results, which Mike will outline in more detail later. Additionally, having unwound NYSE Blue previously, we have now agreed with our partner Caisse des Dépôts in France to unwind our 60-40 joint venture BlueNext. We are also moving ahead with our shoring initiative, which will lead to opportunities to rationalize our global real estate footprint.

Thirdly, we remain committed to deploying capital in a shareholder-friendly way. In addition to the 2012 dividend and buyback that Mike will touch on, we are continuing to look at opportunities to shift things in businesses that do not support our strategic objectives. We will be looking to divest all or at least a portion of our stakes in LCH.Clearnet and MCX at the appropriate time.

Please turn to Slide 6 for me. On Slide 6, we go a little deeper into our Derivatives business. On the top half of the slide, we show the development of the MSCI index futures on Bclear. Year-to-date average daily volume is around 7,000 contracts a day, which is 82% above last year, and open interest is over 200,000 contracts, up 91% versus the prior year.

On the bottom half of the slide, we highlighted selected trends in our fixed income businesses where we are beginning to see some semblance of improvement while the market remains challenging. STIR futures open interest is showing good growth of 35% since the lows of December of 2011. The long-term growth trend in Long Gilt futures volume continues, with ADV up 6% year-over-year. And trading in Short Gilt futures is also picking up, with ADV in the third quarter up 29% sequentially. Turning to our Swapnote product: Our new market-maker program is fueling growth with strong volumes in Q3. ADV is up 30% quarter-over-quarter and is up 26% year-over-year, with open interest up 9% versus the third quarter of 2011.

We also launched 3-year mid-curve options on Euribor and Sterling in July, as I mentioned a minute ago. The Euribor 3-year mid-curve option is one of the fastest-growing new products for NYSE Liffe on record. In the first few months of trading, open interest is approaching 385,000 contracts, and ADV of 23,000 contracts.

Lastly, I thought I'd give you an update on NYSE Liffe here in the U.S. where we're launching new products and expanding the number of clearing members on NYPC.

Our mini MSCI futures continue to be a strong growth story since NYSE Liffe U.S. was granted the exclusive license. Volume and open interest in the products have more than doubled since last year, and new end users are participating in our emerging and EAFE products as a result of the increased liquidity. Due to customer demand, we launched new futures on the MSCI World index, MSCI Emerging Markets Latin America index and the MSCI Canada index all in Q3. In July, we launched futures on the DTCC GCF Repo Index, which continues to gain momentum with a diverse range of new market participants. ADV since launch is just over 3,000 contracts a day and more recently has grown to over 5,000 contracts a day, and open interest is rapidly approaching 50,000 contracts.

Finally, as I alluded to earlier, JPMorgan and BNP went live as NYPC clearing members during the third quarter of 2012. As members of NYPC, they will be able to realize savings through the innovative single-pot cross-margining model that is unique to NYPC and its numbers.

Please turn to Slide 7. On Slide 7, we provide you with an update on our NYSE Clearing initiative. We filed the application for our new London clearing house with the FSA and are well into the build phase for a fully in-source clearinghouse, with a targeted completion date of June of next year. This will generate cost savings from June and revenue synergies from early 2014.

With EMIR's new regulatory guidelines in place, all CCPs within the EU are put in a challenging position in terms of financial resources and operational requirements. In addition to anticipating a consolidation of existing CCPs, a key differentiator for NYSE Clearing is that our full-service CCP will be "new to market." We are building our clearinghouse from the bottom up, so from the start, it will reflect the new EMIR guidelines. With all CCPs working to change their current systems to the revised principles, we certainly believe that building our CCP with all the initial requirements from the very beginning gives us certain advantages and flexibility over the competition. In the future, our newly built platform should allow us to innovate faster our new products as well.

In the second quarter, we selected and established third-party risk and collateral system provider. This third party has consistently been recognized as a leader in derivative software development, risk management and processing for both CCPs as well as investment banks and end users. We are now working on system integration with them.

We also completed the delivery schedule of key IP releases. This sets a time line which our clearing and technology teams are working diligently to meet.

Lastly, before year end, we will be engaging with all the clearing members of NYSE Liffe Clearing. We have already circulated a detailed service subscription of our CCP and the proposed business model. Once we've completed the in-sourcing, we can then extend our clearing offering, which will include migrating our continental derivatives markets in early 2014 and launching OTC clearing services in late 2013. Expanding the clearing offering will generate incremental clearing fees for us but will also provide significant offsets and capital savings for our customers as well. The single pan-European clearing platform will be able to deliver considerable operational benefits for all of our clients.

Please turn to Slide 8. I'm going to shift here to the IPO market. And on this slide, you'll see that the IPO market continues to be strong, with NYSE Euronext leading the way in capital raising. The Listings franchise has continued to strengthen, with a great showing in the number of IPOs and a pipeline which continuously builds momentum. We are proud of how our brand has been able to extend its footprint both in the U.S. and into the global community.

I'd like to share with you some of the noteworthy accomplishments that we've had recently. We're #1 in global IPOs and follow-on proceeds, with over 30% more IPO proceeds and nearly 4x more follow-on proceeds than our nearest competitor. In the third quarter, we priced 19 IPOs, raising almost $10 billion collectively, while our U.S. competitor priced 17 IPOs, with a little less than $2 billion collectively. Year-to-date through October, we have captured 55% of the U.S. technology IPO market share. We welcomed 2 new technology IPOs in the third quarter of 2012 and 4 new tech IPOs in the month of October.

The IPO market has slowed after the Facebook debut, but it has picked up again quite nicely. October was the most active month for IPOs in the U.S. so far this year, and we want -- we won more than 2/3 of the deals. These included some of the biggest and most successful IPOs of the year, Workday and Realogy.

We are also the leading exchange for international offerings year-to-date, with $6.3 billion in proceeds raised. Some of the largest international players are choosing our market in addition to their own local market, including Santander Mexico and Banco BTG Pactual.

Please turn to Slide 9. On this slide, we have an update on our technology services business. Over the last few years, we have assembled a superior portfolio of assets, and the long-term strategic plan has been to evolve the commercial technology business from a product and service provider to a client-focused solutions provider. Unfortunately during this transition, we hit a period of compression in financial technology spending as clients' cost containment initiatives were prioritized over technology innovation and footprint expansion. Our commercial technology business has been making slow incremental progress but are underperforming relative to our expectations. However, we do have enough visibility into the business that we expect to return to top and bottom line growth in 2013. These plans notwithstanding, however, the challenges this year have taken us offtrack for the $1 billion revenue target which we previously announced as being a 2015 goal.

Given the softness in revenue generation, we have been focused on managing our costs effectively, a silver lining if the clients are in a transitional state, which will eventually result in moving their model to an outsourced solution. We expect this to create a much greater opportunity that we are well positioned to capture. With the new leadership of Jon Robson, I am confident that we have the right person in the seat and one who shares our vision for the future of the business. In the meantime, Jon and the team are working on a detailed plan to return us to growth. And Jon will be joining us on the earnings call in February to provide you with his insights as to the future of the business.

In the third quarter, we signed a landmark deal with Russell Investments to fully manage Russell's Tick platform, content and distribution. More recently, we have begun revising global data agreements which we anticipate will result in more data products and higher market data revenue. And lastly, we announced yesterday that we have formed a new company with the Americas Trading Group in Brazil to develop a new liquidity center targeting the Brazilian market. NYSE Technologies will provide the technology for the company on commercial terms, and we will have an equity share in the venture. But contrary to reports overnight, we will not be contributing capital.

Lastly, on Slide 10, before I turn it over to Mike. I wanted to update you on a few regulatory and macro issues that are affecting our industries and many of our issuers. As always, we are leading our industry from the front on these issues. I won't address everything on this slide, but let me touch on a few important highlights.

First, in Europe, with regard to MiFid and MiFIR. While there are many more milestones ahead in the process, we are pleased with where things currently stand in the European Parliament. Of particular note, Articles 28 and 29 have been restricted to the cash markets only, which makes sense given where the cash markets are in terms of maturation.

In terms of the financial transaction tax, the proposed EU-wide tax was rejected in June. However, 11 member states have since expressed an agreement to work together on a potential FTT. Scope, territorial reach and technical characteristics of that proposal are not yet known, but we are continuing to make our voice heard on the issue. In France, an FTT was implemented on August 1, and while we have seen some reduction in volumes, it has been manageable but we continue to monitor it.

Turning to the right side of the slide and the U.S. As you know, U.S. market structure has become a widely debated topic in recent months. In my view, this is an appropriate conversation to have as investor confidence remains at record-low levels. This is in part due to macro uncertainty, which has caused a lot of investors to move to the sidelines, but it's also at least partially driven by a lack of confidence in the underlying market structure. Markets appear too complex and fragmented for individual investors, and there has been a dramatic rise in off-exchange trading which we believe harms the price and scheduling process. We believe the right thing to do is to engage in a holistic review of market structure with all participants to more closely examine some of the unintended consequences of the framework under which we operate.

At the same time, we remain committed to demonstrating leadership in the industry. One example of this was the industry's response to Knight Capital this past summer, which we helped spearhead. But in a letter to the SEC dated September 28, we outlined the collaboratively designed concept of the kill switch that would allow an exchange to suspend or drop order flow from a member firm or trading partner whose trades exceeded a preset risk limit.

The second more recent and obvious example of our industry leadership that we demonstrated was in response to Hurricane Sandy.

Finally, we are continuing to use our platform to advocate on important issues like the fiscal health of the United States and job creation, the latter of which we think is really about access to capital for small- and medium-sized companies.

With that, let me turn the call over to Mike for a review of the quarter's financial results. Mike?

Michael S. Geltzeiler

Thanks, Duncan, and good morning.

Slide 11 provides comparative GAAP results for the third quarter of 2012. Our GAAP EPS of $0.44 per share was the same as our non-GAAP for the quarter. In the quarter, we reported an $18 million charge from merger expenses and exit costs also related to P 14 efficiency initiatives. This was mitigated by some discrete tax benefits related to the reduction in the U.K. tax rates from 25% to 23%.

Our review of our financial results from this point forward will exclude the impact of merger expenses and exit costs and discrete tax items.

Slide 12 provides a more detailed look at our financial results for the quarter. Our financial results were impacted by the dramatic decline in trading volumes compared to the third quarter of 2011 which benefited from a spike in volatility, as Duncan discussed earlier. Net revenues on a reported basis were down 21% year-over-year and were 14% lower year-to-date. Transaction or volume-based revenues declined 35% year-over-year, which was somewhat offset by the late Q2 acquisition of Corpedia and slightly higher listing revenues. Costs were lower by $28 million or 7% for the quarter and are 5% lower year-to-date on a constant dollar, constant portfolio basis. For the third quarter, 38% of our other operating expenses were denominated in either euros or pounds, 61% in U.S. dollars and another 1% in other currencies.

Based on the current projections for profits and changes to U.K. tax rates, we now expect our non-GAAP tax rate to be 24% for the full year 2012, so the 21% effective tax rate in the quarter was the result of a tax rate true-up to adjust the year-to-date tax rate to 24% from 25%, adding $0.02 in EPS to our Q3 results.

Diluted share count was reduced by 16 million shares to 247 million this quarter.

Slide 13 provides our consolidated and segment results on a currency neutral basis. The U.S. dollar strengthened this quarter versus prior year for both the euro and the British pound by 12% and 2%, respectively. For the third quarter, 43% of our net revenues were denominated in either euros or pounds. Currency impact on net revenue for the quarter was a negative $20 million versus prior year and unfavorable by $4 million versus the previous quarter. Foreign exchange contributed an unfavorable $10 million to operating income this quarter versus prior year.

On a currency neutral basis, third quarter net revenues were down 18% and operating income decreased 37% versus the third quarter of 2011. Operationally, revenues for our Derivatives and Cash Trading and Listings businesses decreased 26% and 17%, respectively, while our commercial technology revenues were down 6%.

Slides 14 to 15 detail the financial performance for our Derivatives segment. Derivatives revenue in the third quarter of $164 million was lower by 27% year-over-year and down 10% sequentially, mostly attributable to lower trading volumes. Expenses, on a reported basis, were essentially flat but were actually lower when you adjust for the investment we are making in our U.K. clearing initiative. Derivatives accounted for 29% of our consolidated net revenues and 35% of our operating income.

Revenue capture for NYSE Liffe was lower both year-over-year and quarter-over-quarter. The decline year-over-year was primarily due to modified pricing in fourth quarter of 2011 for the trading of individual equity options and index futures in Amsterdam and Belgium. The decrease compared to Q2 was principally due to declines in single-stock futures Bclear revenue, which is seasonally stronger in the second quarter due to the dividend arbitrage trades. These revenues are included in the revenue capture calculation, but the Bclear volumes are not.

Capture for the U.S. options business is also lower. The decline in capture was principally due to the Penny Pilot pricing changes on Arca this quarter. The decline quarter-over-quarter was principally due to the Penny Pilot pricing changes and a mix shift weighted by higher market maker participation on Amex which has cap fees. We have eliminated caps on dividend trades beginning November 1.

Similarly, Slides 16 and 17 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings accounted for 50% of our consolidated net revenues and 53% of our operating income in the third quarter. Cash Trading and Listings net revenues was $282 million, down 20% versus the prior year period and down 6% compared to the second quarter of 2012. European cash market share across our 4 primary markets, which excludes off-exchange trading volume, increased to 68% in the third quarter, up from 66% in the prior year and the second quarter of 2012.

In U.S. cash equities, our market share across all tapes increased slightly sequentially but is down 200 basis points year-over-year. Non-exchange traded share or TRF share remains elevated at 32% of the U.S. equities market, up from 28% in the prior year. In response to the growth in off-exchange trading, we have launched the Retail Liquidity Provider program in Q3, which currently trades about 6 million shares a day and has shown promise.

Revenue capture for U.S. cash decreased to $0.04 per 100 shares traded and -- for Q3, favorable to the $0.038 recorded in the third quarter of 2011 but below the $0.043 cents in Q3 2011 (sic) [Q2 2012]. The increase year-over-year was driven by a favorable mix and selected pricing changes. The decrease quarter-over-quarter was due to client mix, with certain large clients hitting volume tiers with favorable pricing.

Strong second quarter also benefited from the Russell rebalancing in June. We are implementing several initiatives, which should increase the capture for Q4.

Revenue capture for European cash on a per-transaction basis decreased to $0.54 from $0.64 in the third quarter of 2011 but increased from $0.52 in the third (sic) [second] quarter of 2012. Decline year-over-year was primarily driven by foreign exchange and declines in average daily value traded and average trade sizes, which has resulted in an increase in the number of transactions per day, artificially depressing our revenue capture on a per-transaction basis. The increase compared to the second quarter of 2012 was driven by a favorable mix over the platform.

Slide 18 details the financial performance for our Information Services and Technology Solutions segment. This segment accounted for 20% of our net revenues and 12% of our operating income in the third quarter of 2012. Segment revenue was $113 million in the third quarter, a decrease of $12 million from Q3 prior year. At constant exchange rates, revenues were down $7 million or 6% on the prior year. Prior year third quarter did benefit from $5 million in onetime platform sales to Warsaw and Tokyo Stock Exchanges. As expected, technology expenses were below second quarter and prior year levels as a result of proactive efforts to manage costs given the macro headwinds.

The top line growth in this segment, as Duncan discussed earlier, has been below our expectations due to the constricted technology spending environment. While we do not expect real growth this year, we do expect Q4 revenue and operating margins will be nicely above Q3 levels and look optimistically towards 2013.

Slide 19 illustrates the progress we've made toward the Project 14 efficiency stream. Costs are below $400 million for the first time in years. Current period expenses of $388 million are down 7% year-over-year and down $8 million quarter-over-quarter. Year-to-date, we have saved $82 million of our Project 14 efficiency goal, representing 33% of the $250 million in annualized savings. We continue to be disciplined and diligent with costs by reviewing our portfolio, streamlining our business model and simplifying our technology architecture.

Looking forward, we have received regulatory approval to consolidate and redefine our market operations, functions and teams. The new approach is aimed to utilize our expertise in multi-market operations in trading, product oversight, as a competitive advantage in our business model.

We have planned to integrate Corporate Board Member and Corpedia into a unified corporate services offerings. We are unwinding BlueNext and evaluating other nonperforming products in the portfolio.

In the IT area, we continue to explore shoring opportunities, system architecture harmonization and ways to more efficiently utilize our data center capacity. And lastly, we are also exploring a series of initiatives to rationalize our global real estate footprint.

Slide 20 provides a reconciliation of our underlying cost base and updates our 2012 cost guidance. Q3 reported expenses of $388 million, which -- at the P 14 currency rates resulted in a rebased cost of $383 million in Q3 and $1.2 billion year-to-date. We spent a total of $11 million on growth initiatives during the quarter and $31 million year-to-date. This translates into third quarter core expenses of $382 million and $1.169 billion year-to-date.

Expenses in the quarter included $5 million related to our settlement with the SEC on issues related to exchange market data. We also had several onetime expense benefits, which mitigated the impact.

We are updating our full year expense guidance for strategic initiatives as follows. As our clearinghouse bid -- build begins to take shape and accelerate, it has become clear that we will be incurring higher-than-anticipated costs for the build out of our London clearinghouse. This is due in part to the complexity of the build, more regulations on client separation and the new EMIR standards and preparing for the OTC opportunity. We now expect to spend $20 million of operating expense this year on our clearing efforts. Capital spending will pick up significantly in Q4 as we are now well into the build out phase of this initiative.

Corpedia is a 2012 acquisition, and our second half spending is all incremental to pre-acquisition guidance. Of course, this acquisition also contributes incremental revenues. And with NYSE's second half growth curtailed, we have taken actions to ensure that costs are also reduced to levels below last year. As a result, we expect no incremental variable spending for NYSE beyond what was reported in the first half.

As we move to the end of the year, we will also begin to incur some transitional costs in concert with our IT shoring activities. These transitional costs will be segregated and reported separately particularly as efforts accelerate into 2013. We will provide more quantification in February on our Fourth Quarter Earnings Call.

We are revising downward our full year 2012 guidance to between 1-6-0-3 million and 1-6-1-2 million on a constant dollar basis, using rates of $1.35 to EUR 1 and $1.60 to GBP 1. We also expect our core expense base to be between $1,559 million and $1,568 million, which is about $100 million below our 2011 expense base of $1,666 million.

Slide 21 details our cash and deposition as of September 30, 2012. Gross debt at September 30 was $2.5 billion, and we had about $350 million in cash. Our debt-to-EBITDA leverage ratio increased to 2.4x, reflecting weak EBITDA generation, share buybacks and the traditional weak Q3 cash flows driven by the biannual Section 31 fee reimbursement.

We are pleased with the outcome of our recent refinancing. In total, we raised $850 million in a new 5-year note, with a 2% coupon. This is comprised of refinancing of our $750 million U.S. bond and $80 million of our Eurobond that was tendered during the refinancing process. This will result in approximately $15 million and $24 million in interest expense in 2013 and 2014, respectively.

Capital expenditures were $41 million in the quarter and $125 million year-to-date. Despite this low level of 9-month spending versus our prior full year guidance of $200 million, we do expect a significantly higher level of capital spending in Q4 as we accelerate the build out of our clearing facility and complete the redesign of our New York trading floor.

We executed $120 million of stock repurchases in the third quarter, retiring 4.7 million shares at an average price of $25.46. Year-to-date, we have retired 15.9 million shares.

Last week, the board declared a $0.30 quarterly cash dividend for the fourth quarter of 2012, which is payable on December 28.

Now I'd like to turn the call back to Duncan for closing remarks.

Duncan L. Niederauer

Thanks, Mike.

So just before we open it up for your questions, just a quick review of what we've talked about. So a very tough macro environment for us, but we remain proud of the progress we've made during the quarter and year-to-date against the Project 14 commitments. We have launched several new products, we'll continue to launch more. And we will continue to execute on other ongoing initiatives that will drive our future growth. We also remain focused and disciplined with regard to our cost base. And as Mike just articulated, we are well ahead of our savings commitment for 2012. And finally, we will continue to look at opportunities to redeploy capital through the divestment of non-strategic stakes.

In summary, we're doing everything within our control to set the table for a return to growth, and I am extremely optimistic about the future.

And with that, we'll turn it over to you guys for a few questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Alex Kramm with UBS.

Alex Kramm - UBS Investment Bank, Research Division

Just a real quick one, I'll start on the capital return. Obviously, you've been buying back stock, you had a pretty aggressive rate. And from the -- I guess from -- with the $128 million remaining here, I guess it looks like you could be done at the end of this quarter. So just curious how you think about, going to next year, your recommendations for the board, when the board is meeting again in terms of timing and any sort of capital return or buybacks move for next year.

Michael S. Geltzeiler

Hey, Alex, I'll take that. So really at this stage, we're focused on the $550 million authorization. We're not in the position to report on any future uses of free cash flow. Given that our leverage is also at 2.4x now, we are likely to delever a little. And as Duncan mentioned, we also, as we prepare for clearing, we'll be putting a little more capital on hand in -- consistent with the requirements for clearing. So I -- this type of guidance we'll give on our February call, but I would expect us to -- once we complete this repurchase, to be delevering a bit.

Duncan L. Niederauer

Right. And the February call, Alex, just to be clear, will follow a end-of-January board meeting that we have where I'm sure the topic will be discussed because remember the $550 million is the end of a $1 billion authorization that was initially done. So I'm sure we'll be discussing it at the late January meeting, and then we will reflect the board's desires at that time on the February call.

Operator

And your next question comes from the line of Rich Repetto with Sandler O'Neill.

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

First, Duncan, I want to congratulate you making a tough decision to close Monday and Tuesday but then having to stand up and taking full accountability for the decision as well. Anyway, so my question is on expenses, Michael. So you appear well ahead of the Project 14 expense targets for not only -- well, for 2012. If you look at your guidance here, it looks like you got a pretty -- a nice uptick in 4Q expenses to the number of above $14 million at the midpoint. So I guess the question is, can we expect incremental savings beyond what you've laid out in Project 14? And can you -- I know you've talked about the 4Q run rate, but is that all just from sort of the extra clearing cost being built in?

Michael S. Geltzeiler

Yes, I mean, at this stage, we are sticking with our guidance of $250 million over the 3 years. We've laid out the timing of which we are definitely ahead of the plan as we speak. We're in that time of the year where we're also doing our budgets and sitting down with management and going through our initiatives. You're accurate in your assessment of the fourth quarter, we expect the savings to continue. And as I indicated, we expect to be about $100 million favorable for the year against the $250 million. So again, I think we'd like to defer that to the February call where we provide a little more guidance about the upcoming year. But I think the goal that's always been here is to aggressively go after the costs and to reduce them as we are able to do it. We're not just trying to adhere to the plan or...

Duncan L. Niederauer

And if we're going to change the guidance or accelerate the timing, Rich, we'll be fully transparent on that in the next call if we plan to do that.

Operator

And your next question comes from the line of Jillian Miller with BMO Capital Markets.

Jillian Miller - BMO Capital Markets U.S.

You guys mentioned that you're currently revamping the global data agreements and it should result in higher market data revenue. Just wanted to get some more detail there, like what products are you repricing? When in 2013 does the new pricing come into effect? And if you could give us an idea for potential magnitude of the revenue impact we're looking at.

Lawrence E. Leibowitz

Sure. This is Larry. I'll take that one. First, it's important to remember that our market data revenues consist of a bunch of things mushed together. There's the consolidated tape revenue. There's the proprietary data. There's U.S. versus Europe. And we don't actually break down where those individual pieces are. So part of the reason is for our market data weakness has been that TTA [ph] is down and as volumes have been weak and more goes to TRF. What we're looking at is some consistency with what our competitors are charging, particularly for example, in Europe, for some non-display things. Remember, in Europe, the tradition has been you charge by terminals. The terminal numbers have gone down as investments sank and our customers in general have decreased the number of terminals. But a lot of our competitors are charging for non-display, which is meaning direct data feeds, sort of more consistent with what happens in the U.S. But some of this is just consistency. Some of it is enforcing of compliance, which I think has been a challenge particularly in Europe due to ambiguous policies that we are cleaning up. And some of it is for things that we don't charge for that our clients do charge -- that our competitors do charge for. So we expect that some of those fees will go into effect very shortly. In fact, I think some of them went in, in November, so you'll start to see partial results in the fourth quarter. I don't know, Mike, but we're not giving -- going to give specific granular guidance.

Michael S. Geltzeiler

And a lot of this upside will show up in the technology segment because it's proprietary nature, so I think when we have Jon on in February and talk about guidance for the technology segment in February, that will be the appropriate time to talk a little more about market data expectation spend.

Lawrence E. Leibowitz

And we also have some new products that we've just recently rolled out, like the global index feed, the Arca integrated feed. And we have some distribution agreements like Xignite where there's going to be some white label distribution. So I think we actually have a lot of initiatives going on in market data. A lot of it is around consistency, better compliance, charging for things that we may not have charged for in the past where we probably have lagged our competitors. But I think you're going to start to see the catch-up, and I think Jon will give better guidance in the first quarter.

Duncan L. Niederauer

And one more thing. It's Duncan. We haven't probably lagged our competitors. We've lagged our competitors, right? I mean, we are -- we know we've been behind the curve on this so we're -- so part of this is just catching up and level-setting. And we will give a lot more granularity on that, as Mike and Larry have indicated, in the February call.

Operator

And your next question comes from the line of Brian Bedell with ISI Group.

Brian Bedell - ISI Group Inc., Research Division

Just following on that question. I know we'll get a lot more detail on it in February in the technology business. But I think, Duncan, you mentioned that you're going to be off-track on the $1 billion revenue goal in 2015. I guess, if you can talk a little bit about sort of the long-term vision of whether that goal is appropriate to keep and whether you think acquisitions obviously will be a bigger part to get to that goal if you're extending it more into the future. And then also a little bit about the market data impact on technology, is that most of the balance that you're talking about in the fourth quarter from third quarter levels?

Duncan L. Niederauer

I'll try to take the first part of it, Brian, and then I'll let Larry and Mike articulate a little more on the market data piece of that. So first, to start at the 30,000-foot level, I think the long-term vision hasn't changed in terms of what the business can be. Secondly, I do honestly believe that as so many of the clients are in a state of their own transition as they reinvent their own business models, and they think about managing their own expense bases, obviously the complexity of their infrastructure continues to be something that we hear regularly about from them. That is something they would like to manage more efficiently and more cost effectively. So I think we are well positioned to do that. What's a little more difficult to predict is when the decision-making at some of the potential target customers will take place. As we alluded to in our remarks, the reason we're backing away from the previously stated objective that we thought we could achieve by 2015 is that, when we made that statement, we did not anticipate capital market spending for technology being down 15% to 20% this year, well, like it is. So I think we have to reevaluate that. Jon and his team, Jon Robson and his team, are going through all of that. We do believe in a long-term vision. We've said from the beginning that it would probably be augmented by some acquisition, so we're not going to hesitate to look at a few things like that, and we'll be thoughtful about that. So I think we'll give a more detailed outlook for what we think that business can be in the next call. In the meantime, in terms of some of the immediate impact, anything you want to add to what you said to the previous question about kind of when some of this will start showing up in our result [indiscernible]?

Michael S. Geltzeiler

I think it -- yes, I could jump in, yes. So we did indicate that the Q4 we expect the results to be higher for this segment than was the case in Q3. I mean, that's mostly the ATG sale we discussed, the Russell sale which Duncan discussed earlier, some higher software sales. So the market data opportunity is more 2013. In fact, a lot of it -- these pricing changes and other changes are being filed as we speak, so they will not be effective until 2013. So it's more than managed services that's driving the better fourth quarter.

Operator

And your next question comes from the line of Dan Fannon with Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I guess, just in terms of capital, if you could talk about your cash balances today kind of what is earmarked for regulatory capital and then, as you -- what your estimate as you think about the clearing requirements in the U.K., what you might need to -- if you could quantify that as well, please.

Duncan L. Niederauer

So I will. Dan, thanks for the question. Mike will take the front end of that, then I'll take the back end of that, with the specificity on the London clearinghouse side. So Mike, why don't you start?

Michael S. Geltzeiler

So traditionally, if you look at our results over time, we keep -- we've kept about $400 million of cash on hand, $350 million to $400 million. We've got $350 million at the end of this quarter. The regulatory-required piece is probably about 2/3 of that, and most of it is in Europe. And sometimes, it's the Section 31 fees that we're collecting, on behalf of the SEC, from clients. So that has been historically what we need for our business today pre sort of moving into clearing. And Duncan will talk about the incremental piece that we think will be required above and beyond that for clearing.

Duncan L. Niederauer

And to be very clear, I mean, I know everyone on the call knows this already, but we are already viewed by the regulators in the U.K. as a self-clearing registered exchange because we do clear our own products now. The piece that we're building for June of 2013 is the treasury and risk management piece but we already provide clearing services for the products that we trade now in the U.K. So we -- because of that status, we already have a good bit of capital set aside. It's roughly USD 180 million, about 1/3 of which is for clearing activities and 2/3 of which is for exchange activities. Having worked with the FSA and having interpreted the new requirements that will be in place as we add the functionality in the clearinghouse and the rules change around that, our expectation is that $180 million number will go to something that looks like $350 million. And of that increase of $170 million, the majority of that will come on the clearing side. So if today it's $180 million and it's 1/3, 2/3 clearing exchange, it -- we expect it will be around $350 million by this time next year and it would be a little more than 50% of that dedicated to the clearing side and a little less than 50% dedicated to the exchange side. So if you thought that the capital we set aside that is specific to the expansion of our clearing services, if you thought that, that went up by USD 100 million to USD 150 million, that would be correct.

Operator

And your next question comes from the line of Niamh Alexander with GBW (sic) [KBW].

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

On the high-frequency trading, we've had some first round of votes on the MiFID 2. And some of it came -- I think it was net-net more positive than negatives getting through, but there's still some kind of negatives for potentially high-frequency trading volume. And some of your competitors have helped us kind of quantify maybe the portion of the revenue and the earnings coming from that business, not just trading but in terms of access fees and market data. Is that something you could help us quantify too at NYX, like what portion of your business is coming from that group? And even better, what's Europe versus the U.S.?

Lawrence E. Leibowitz

Sure. We haven't broken it out. We actually think that those analyses are very tough to do because there's an interaction between the high-frequency side, for example, and the other side. So for example, we actually write checks to most of the high-frequency traders because of the rebate model. So we actually lose money on the transaction side with those guys. And then we have sort of market data fees and co-lo and other things like that. But that's not different than almost any of other big broker participants because they also use co-lo in direct feeds. So we're somewhat skeptical about these numbers. And we've seen these studies that are actually not consistent even between -- among themselves. So what we do believe is that any of the proposed rules that we have seen would not have material effect on our finances. In summary, Mike, I don't know if you have anything to add to that.

Michael S. Geltzeiler

I think to echo those points, and one thing we will continue to try to emphasize deeply: all of our U.S. cash trading in aggregate is only 7% of our revenue. That's all of our trading, not just high frequency, so -- and as Larry said, it's not just the volumes, it's what the revenue capture is, which of course those clients are getting the best pricing as well. And when you look at it from a P&L point of view, they're also driving up messaging and technology spend. So when you look at it from a profitability point of view, it -- we don't think it would have a significant impact.

Lawrence E. Leibowitz

Right, [indiscernible] the emphasis is just to make sure that the mix of different types of clients on the platform is well diversified because the market takes investors of all different duration in their horizons to have a healthy market quality. And so we just want to make sure that we don't use punitive measures that actually end up in worse market quality or, even worse, driving even more high-frequency activity into the dark pools which is where they seem to be going right now.

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

Okay, fair enough. I guess that's the U.S. side we're seeing a bit more now, with -- so essentially, I hear from what you're saying then, in Europe, it's the rules kind of as the second round proceeds then it wouldn't really have much of an impact on your business, so it's minimum exposure times, and the restrictions kind of that survived the first round, that wouldn't impact your business.

Lawrence E. Leibowitz

Yes, that's correct. And to be honest, we're skeptical about whether the minimum exposure times are actually going to make it through because they actually are asymmetrical in the way they apply, even to high-frequency. There are high-frequency firms that are takers not just providers, and all you're really doing is penalizing the providers. I think that'd be very damaging to the market. It's not clear that, that will make it through, anyway.

Operator

And your next question comes from the line of Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

I just wanted to follow up on the capital question. To what extent, I guess, do potential divestitures play into your capital plans for next year? So you talked about the potential online, the BlueNext; there's MCX; there's a couple of other things. So maybe you could help us, I guess, a, size, if you kind of put all of these things together, how much that would potentially add to your capital position? And b, what's the appetite to divest some of these things next year given the fact that it feels like there's going to be a little more cash that you need to set aside for a U.K. clearing?

Michael S. Geltzeiler

Sure, yes, I'll take that. I mean, the unwindings of BlueNext and things are not going to generate capital. It will save us operating expenses because these are businesses that are in a loss position. I think what Duncan alluded to is the potential dispositions that could generate capital are the sale of our stake in MCX; as well as we have a 9% stake in LCH and as part of the LSE transaction, we've agreed to tender a portion of that. So that, if that transaction was completed, we would get cash back for that. So these are not significant numbers, probably aggregating about a little more than $100 million of capital. So we generate a lot of our free cash flow in the first 2 quarters of each year, so I think it's appropriate, as Duncan mentioned, for us to allow our board to thoroughly discuss the budgets and the business plans for next year and decide what we're going to do with the excess cash above and beyond what we pay out for our dividend. We are saying that, clearly, one of the things we have to factor in there is a little more cash for going live with our clearing.

Duncan L. Niederauer

Great. And I think, to provide -- to put a little finer point on it, if I can: We get asked a lot, when people are reading about some of the new rules, in terms of how much more we have to set aside for the additional clearing services in the U.K. If you listen to my answer to Ed's question earlier -- I think it was Ed's question -- or Dan's question, rather, sorry. The -- it's $100 million to $150 million. The sale of MCX, the scale-down of the LCH position and the money that we will not be putting into the cutter [ph] investment by having reduced that stake from 20 to 12, collectively, more than cover the additional monies we have to set aside for clearing. We expect to be able to -- we've already made the cutter [ph] decision and we expect to be able to divest those other 2 positions early in 2013. So if you add all that up, by the time we have to set more capital aside, we will have had -- we will have more than accounted for that capital, so it shouldn't necessitate a change in other -- it shouldn't make any harder decision to think about other shareholder-friendly deployments of capital, I think, is the easiest way to say it.

Operator

And your next question comes from the line of Patrick O'Shaughnessy with Raymond James.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

So how do you guys view the competitive landscape in European derivatives right now? You've had a few folks try to launch trading in some of the fixed income products. And I think at the equity derivative side of things, The Order Machine seems like it's been stepping up the competition. So where do you see the landscape there right now?

Duncan L. Niederauer

I'll take that one. It's Duncan. And then we'll thank all of you for participating today. If you didn't get to ask a question, Mike and team will follow up with you guys throughout the day. So thank you for your attention on the call this morning. Further to the competitive landscape, let me start with the derivatives -- with the interest rate derivatives first. As we've learned firsthand, it's pretty difficult to dislodge an incumbent's liquidity. And I think we're trying to do that here in the U.S. And we're not just competing on price or technology alone, we're -- we actually think we have a pretty unique value proposition given the capitally efficient clearing model. And in spite of that, it has proven difficult to dislodge the incumbent's liquidity. Having said that, you -- we take all of these approaches seriously, and we pay close attention to them, we monitor them closely, we listen to what the clients are looking for. And -- but the experience in the industry tells us that competing only on price or technology tends to be a losing proposition. In terms of The Order Machine, with some of the equity options on the continent, we have been in dialogue with some of the other market participants. I think there are different ways we can approach that one. We have responded earlier this year by adjusting fees on some of those products. And I think that is an initiative that needs to be taken seriously. And we -- you can safely assume we are in dialogue with market participants and the purveyors of that alternative as well as we try to find ways perhaps to work together instead of against one another. So more to come on that at a future date, and hopefully, that addresses the question.

Okay, so thanks, everybody, for dialing in this morning. We're going to let you all get back to work, and we're going to do the same here. And as I said, Mike and Stephen and the team will follow up with any of you who want the one-on-ones throughout the day.

Thanks again. And I hope everyone is -- in this area at least, is slowly but surely recovering from Sandy. Thanks a lot. Bye.

Operator

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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