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CME Group Q3 2013 Earnings Conference Call Transcript

Jillian Miller – Analyst, BMO Capital Markets

And then just, could you update us on the London exchange? I think it’s been delayed a couple of times, I’m not sure exactly why and what the expectation is for that?

Phupinder Gill – Chief Executive Officer

Yes, hi. This is Gill. The delay has to do with technical issues surrounding the delivery of foreign exchange. So we are working very hard with the Bank of England and the FTA and we hope to have an announcement very soon here.

Operator

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Your next question comes from Rich Repetto with Sandler O’Neill.

Rich Repetto – Analyst, Sandler O’Neill

Just to follow up I guess on regulation for Terry. And it looks like the Eurex has put in some curbs there, very what you call it, far out curbs or high frequency trading on order trade ratios and usage fees. And I guess the question Terry, do you think this is just their response to pressure that was just geographical in Germany or do you think that this is a trend that you guys might look at? And I know the equity exchanges didn’t really follow through, but you do got the concept really, so I guess what do you think what the Eurex is doing in that area?

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Terry Duffy – Group Executive Chairman and President

Rich, I don’t have the detailed information of what Eurex did. I can only go up on what I have said publicly and what our business said probably. We think that HFT trading has deep pools of liquidity which benefits the participants to do their risk transfer at the lowest cost price. So we focus on the regulatory issues around HFT and make sure that we can show confidence in the marketplace that nothing nefarious is going on, that we’ve done a very good job doing that we’re going to continue to support that model. There is no reason for us to change our structure right now as it relates to HFTs because again we think they add deep pools of liquidity to our marketplace. So again I am not –others in the room might have a better idea what Eurex did.

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Jamie Parisi – CFO

I would just add to what the Chairman just stated that the main focus of what we’re looking at in the context of this whole topic is ensuring that you have the appropriate risk management mechanisms in place, many of which where we have been an industry leader in dealing with credit controls, dealing with appropriate level of order to trade ratios in terms of messaging policies to maintain the efficiency of the experience for all users on a platform. So from our perspective I think the Chairman indicated we’ve held a pretty firm line in that respect in terms of the benefit of this type of user base but ensuring that we have the appropriate protocols in place to ensure a consistent experience for our market users

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Phupinder Gill – Chief Executive Officer

Hey, let me just follow on real quick – what I will say is, as you know we’ve dealt a lot with over speculation in the energy markets over the last several years in Washington quite a bit, as you know. I do think that you will see a lot of headlines as it relates to HFTs like we have over the last several months that won’t go away. It doesn’t mean anything is going to change but the headlines will still remain to be there.

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Operator

And our final question comes from Niamh Alexander with KBW.

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Niamh Alexander – Analyst, Keefe, Bruyette, & Woods

I guess maybe if you could pick which one you want to answer or then maybe I’ll get both. And the access fees and co-location and things like that, and that has been something that you have been guiding to grow as you build out the data center and that was something kind of you have been investing in for some years. So can you help me there, Jamie, and think about the growth potential in that revenue line? And then you mentioned in your prepared remarks as well and I’m wondering if Sean might or Derek might address it just some anecdotal evidence of futures instead of swaps, I mean what data points are you looking at for evidence of this? You’re closest to it. We’re watching open interest as well, but what are the areas could you point to as the kind of lock up maybe some futures creep instead of swaps instead of just clearing swaps as a way of kind of new revenue growth?

Jamie Parisi – CFO

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On that first one Niamh, I will just say we are not prepared to give any updated guidance around co-lo. Certainly we saw kind of people rationalizing the space that they were taking in the facility. We had seen some customer growth there and you just keep in mind that it is still a very profitable business for us. And I want to say the margins this last quarter were over 50% in that business. So it is a very
good addition for us and it’s going to be market driven. So we will continue to wait to see where the demand comes from and look for new ways to leverage that slowly. Sean, you want to add any thoughts on that second point?

Sean Tully – Managing Director, Interest Rate Products

Sure, in terms of the move of people into our futures complex. We are seeing it in couple of different ways. We look at a cash penetration or a cash market penetration of our treasury futures. That is a metric that we’ve been following for a number of years. We recently reached a new peak, in that and although it’s fallen off a bit in the last couple of months we do remain around the peak level. So we did exceed the 2007 peak. Another way anecdotally that we look at this is we can look at EFRs or exchange for risk transactions which are spread trades between the CME treasury futures and interest rate swaps. In the traditional interest rate swap world a very popular trade is in interest rate swap spread or a transaction which is an interest rate swap traded as a spread to a cash treasury instrument.

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