Home » CME Group Q3 2013 Earnings Conference Call Transcript

CME Group Q3 2013 Earnings Conference Call Transcript

Within market data, we recently announced to clients we are expanding our fees per professional screen from $70 per month to $85 per month, beginning in January 2014. We are making very good progress in the sale of our building in New York City. Contrary to some media reports, we have not yet closed the transaction, although we are working diligently to complete it by year end. Assuming we close it, we plan to include the net proceeds in our annual variable dividend. For modeling purposes, you should know our cost basis for tax purposes is fairly low, so apply our tax rate to whatever you assume we will sell the building for to arrive at estimated cash flow. In contrast, there will likely be a loss for GAAP purposes as the building had been re-valued on our balance sheet at the time we merged with NYMEX.

Lastly, we have made some great progress on the tax front. We had previously guided in the 38% to 39% range. At this point we expect 37% to 38% going forward in Q4 and beyond.

In summary, we continue to focus on investing for the future; in particular, we have positioned ourselves to fully take advantage of the changing regulatory and competitive landscape as well as the medium-term favorable cyclical trends. As always, while investing in our future, we also remain intensely focused on generating excess capital and returning it to our shareholders.

With that, we’d like to open up the call for your questions. As we have over the last few quarters, given the number of analysts who cover us, we ask that you limit yourself to one question. Please feel free to get back into the queue if you have further questions. Thank you.

Section II: Q&A Session

Operator

(Operator Instructions) Our first question comes from Rich Repetto with Sandler O’Neill.

Rich Repetto – Analyst, Sandler O’Neill

My question is on the OTC , Jamie. So it looks like in the quarter it was really the tale of whatever one month or it was improved overall but you are doing roughly $60 billion in the first two months and then $120 billion average in September. So I guess the question is on the rate – what was the rate exiting when you jumped the average clearing level up to $120 billion, was it above the 215 rate per million we calculate right now for the quarter?

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Jamie Parisi – CFO

Rich, yes hi, if you look at the interest rate swap rates for the quarter, excluding CDS, we’re around $2.07 per million for the quarter. And as I said in my remarks, there was a bigger increase in the high turnover players than there was in the real money players resulting in kind of that decrement versus the prior quarter. Also in the quarter we saw some of the shorter dated products like FRAs and OIS grow as a percentage of the volume . So they were about 22% of volume in Q1, they have grown to about 33% in in Q3 and we’ll continue to see that mix growth somewhat. And in September, it did grow versus August and we did see a growth in the higher turnover relative to the real money in September as well. So likely you would see a decrease in the September rate coming out of the quarter.

Rich Repetto – Analyst, Sandler O’Neill

And would that continue into — October is running at about $100 billion, so similar trend is that fair to say?

Jamie Parisi – CFO

I haven’t dived down into the October numbers yet. So hard for me to say exactly, but you think that those trends look like they were moving in that direction. So perhaps just overall we are very pleased with the business, pleased to see the growth that we are getting there. And as Gill mentioned, it’s really, I think, helping us in our core.

Operator

Thank you. Our next question comes from Howard Chen with Credit Suisse.

Howard Chen – Analyst, Credit Suisse

Question for Jamie as well, this one on the variable dividend. Jamie, cash continues to build up nicely. Can you just update us on how much cash and working capital you would like to hold for the business and tuck-in acquisitions? And should we think of the $128 million of proceeds from that August interest rate swap lock as eligible for this year’s variable dividend and something you also want to payback your shareholders?

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Jamie Parisi – CFO

Yes. Thanks Howard. Yes, on the proceeds from the interest lock that would just go in to the cash balance that we would consider for returns. We haven’t changed our guidance on the amount of cash we want to hold. Minimally we want to have $700 million on the balance sheet to cover our skin in the game and the various financial safeguards packages as well as to have a little bit of cushion there. So that hasn’t changed at all.

Operator

Thanks. Your next question comes from Alex Kramm with UBS.

Alex Kramm – Analyst, UBS

I guess a little bit more big picture. I think one of the things Gill highlighted was the excitement about the options and the really strong growth there. So maybe you can give us a little bit more detail what really this is driving? I mean, is it just a macro environment because you’ve talked about the low volatility environment a little bit but how much are you actually driving this to, I think a few years ago, there was a huge drive to get options a bit more electronic. Are you educating your customer base more and so I guess what I am getting is this more macro or is this — do you think this growth is sustainable and will continue even in a better, more volatile environment?

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