CME Group Inc (NASDAQ:CME) Q3 2013 Earnings Conference Call
Event Held on November 4, 2013 9:00 a.m. Eastern Time
Section I: Management Presentation
Operator
Welcome to the CME Group Third Quarter 2013 Earnings Call. Your lines have been placed on listen-only until the question and answer session. (Operator Instructions) At this time I will turn the call over to Mr. John Peschier . You may begin sir
John Peschier – Investor Relations
Thank you and thank all of you for joining us this morning. Bill and Jamie will spend a few minutes outlining the highlights of the quarter and then we will open up the call for your questions. Terry, Bryan, Kim and Bob Zagotta, Head of Products and Services are on the call, along with Sean Tully, our Head of Rates and OTC, Derek Sammann who is in charge Options, FX and Metals.
Before they begin, I’ll read the Safe Harbor Language. Statements made on the call and in the slides on the website 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, which are available on the Investor Relations section of our website.
Now I’d like to turn the call over to Gill.
Phupinder Gill – Chief Executive Officer
Good morning and thank you for joining us this morning. I am going to highlight CME Group’s third quarter and then turn it over to Jamie to review our financials. Our focus this morning is about what’s new and relevant during the quarter. We’ve made some good traction since our last earnings call, in terms of the core business and expanding our OTC clearing activity. Within our core futures complex, third quarter average daily volume was up 11% compared to the same period last year, driven primarily by continued strong growth in interest rates and metals. We drove strong growth in electronic trading volumes outside the U.S. in our entire business.
For the third quarter, Latin America volumes were up 23%. Asia volumes were up 22%, and in Europe, activity rose 15% compared to third-quarter 2012. We have been investing considerable time and effort in these areas, and I am glad to see it driving volume and revenue growth. In addition, we are making a concerted effort to drive growth in our options business globally. This business increased by 31% in third-quarter 2013 versus last year. Both interest rate and equity options were up 54%, and FX options rose 32%. In September, our treasury options reached an all-time high of 57% electronically traded on CME Globex.
Overall, in October, approximately 48% of our total options volume traded electronically, compared to 35% in all of 2012. Additionally, options trading from European clients jumped by more than 100% in Q3 to more than 100,000 contracts per day. Asia and Latin America were each up over 70%.
Lastly, within Natural Gas Options, our market share jumped above 70% in September, compared to a range of 50% to 60% for most of the year. As I mentioned, one of the main drivers of the top line growth this quarter was interest rates. Average daily volume was 5.8 million contracts per day in Q3, up 29% versus Q3 2012, and OI to date through October is up more than 60% since the beginning of the year. All four of the major components of our rates business, Eurodollar futures and options, and treasury futures and options, were up more than 20% in Q3. Eurodollar options volume had particular strength, up 56%, with volume rebounding in the front month of the curve during September, which we haven’t seen in a long time. That is illustrated on slide 10 in our earnings deck.
Turning to interest rate OTC clearing, we continue to see a dramatic increase in our cleared swaps business. Our market share in the dealer to client business has grown from 5% in Q1, to 14% in Q2, 31% in Q3, and 33% so far in Q4. We averaged $81 billion per day in the third quarter, doubling the activity from the second-quarter 2013. So far, the fourth quarter is up 26% sequentially to $102 billion.
Now that the three waves of the Dodd-Frank clearing mandate are behind us, the market is shifting from a compliance phase to an optimization phase. This is a common theme we hear from market participants in our meetings. With increasing client demand for greater capital efficiencies, we now have six clearing members live with portfolio margining of cleared OTC interest rate swaps and interest rate futures, including a few who started offering this solution to customers within the last month.
In addition, product expansion has also played a key role in market share gains. During the third-quarter 2013, we launched the Singapore Dollar, which is our 17th interest rate swap currency and puts us in line with our competitor. Open interest within OTC is something we and market participants are monitoring closely, as we move closer to 50% market share. Interest rate swap open interest is currently north of $7.4 trillion, and has increased by more than $3.2 trillion since our last earnings call. During this time, our main competitor has added about $500 billion. Clearly, we have done extremely well attracting phase 2 clients, made up primarily of asset managers, insurance companies, and GSE’s, and we are pulling in more high turnover customers as well.
The bottom line is winning the dealer-to-customer OTC business strengthens our overall franchise, and opens up avenues for core revenue growth. Although it is very difficult to quantify and is still in the early stages, we are seeing evidence that our interest rate complex is benefitting from a migration of activity from OTC into futures. Since May, we have seen a more than 20% growth in our interest rate complex each month when compared to the same month of the prior year. This year, we have seen a significant shift in the use of treasury futures versus cash treasuries as evidenced by cash market penetration, which you can see on slide 13. Our interest rate non-member percentage, which tends to be driven by the so called real money clients, rose nicely from Q2 to Q3, which helped the rate per contract.
In addition, if you look at the CFTC commitment of traders report on our website, it shows a noticeable increase in asset manager participation within Eurodollars increasing from 11% of the open interest to more than 15%.
Lastly, our deliverable swap futures activity continues to grow. We had the strongest roll month in September. Building on that, in October, we had the strongest non-roll month to date. During the turbulence of October, we performed relatively well, despite the market uncertainty related to the debt ceiling and the government shutdown. During several weeks, economic data was not readily available, and in some cases the market adopted a wait-and-see approach as the situation developed. Nonetheless, we did what we do best, which is to continue to provide an avenue for our clients to manage risk and express their views.
In October, our total average daily volume was up 12%, with rates up as well as equities, which benefitted from heightened volatility during an interesting month. I am very excited about the growth trajectory of the company and our entire employee base has done a tremendous job focusing on execution in the midst of a challenging macro backdrop and low interest rate environment.
Now, I will turn the call over to Jamie to discuss the financials.
Jamie Parisi – CFO
Thank you, Gill, and good morning everyone. Q3 was a solid quarter in many respects. Average daily volume was up 11% compared to the third quarter last year, outperforming our major peers. Adjusted EPS came in at $0.75, excluding FX related benefits and several tax impacts. We have seen a drop in our overall tax rate this quarter, and the benefit will be ongoing, which I’ll touch on later.
Now let’s get into some of the details; starting with revenue. The rate per contract for the third quarter was $0.762, up from $0.748 last quarter. The main driver was strong non-member participation during Q3, relative to Q2, particularly in interest rates and energy. OTC swaps revenue for the quarter was up almost $5 million sequentially, to $11.5 million, driven by a 100% jump in interest rate swap clearing activity. In addition to our success in attracting real-money clients, we have also been successful in executing our strategy to attract high-turnover clients, primarily large hedge funds, which on a sequential basis led to a contraction in the average rate per million. I want to clarify that although the rate we capture has declined due to an increase in the mix of higher turnover participants, we have been able to substantially grow the higher paying customer base as well, which includes asset managers and insurance companies.
During the third quarter, the total notional amount cleared by this customer segment was up 115% sequentially, with revenue up 94%. In comparison, during the same timeframe, the total notional amount cleared by the high turnover participant base was up 138% and revenue was up 125%. Overall, as Gill noted, we are pleased to see IRS dealer-to-client market share jump from 5% in Q1 to 33% so far in Q4.
Our Q3 interest rate product line revenue was up 32% to $181 million, and if you add the incremental interest rate swap revenue, the total rates related revenue was up 40%. That is how we’re thinking about this business — the OTC clearing business is strengthening our overall interest rate franchise.
Moving on, total third-quarter operating expense was $314 million, which included a foreign exchange benefit of $12 million, reversing the Q1 FX expense of the same amount. Excluding the FX benefit, as well as other items noted in the reconciliation, expenses would have been $325 million. As you recall, I guided to a higher expense level for the second half, and that is playing out.
A couple different areas impacted us this quarter. The primary contributor to the sequential increase was in professional fees, which tends to have more variability than other expense lines from quarter to quarter. This was up $7.7 million versus prior quarter due to an increase in IT and legal consulting fees, higher market studies expense, and higher public relations and brand consulting fees.
Within the compensation line, we had $3.2 million of deferred comp expense based on the strength of the equity market during the quarter. Keep in mind that this expense is offset 100% in the interest income line. Lastly, in Q3, license fees did not fall as much as would be expected from the seasonal decrease in equity volumes, as we are now recording our OTC revenue share expense in this line item.
Turning to non-operating income, the main thing to point out is interest expense dropped from $39 million to $35 million based on the pay down of $750 million of debt in August. We expect that to increase back to $40 million in Q4, based on the full quarter impact of the debt we took on in early September, and an increase in our clearing house credit facility. The total interest expense and borrowing costs line is expected to drop by $30 million in 2014 to approximately $123 million from $153 million this year.
We had put in place an interest rate lock in August of 2012, which generated $128 million, which is included in our current cash balance, and which also reduces the all-in accounting effective rate on our recent 30 year bond issuance by 50 basis points to 4.8% per year.
With respect to taxes, excluding the FX impact and non-cash deferred tax items, as well as other prior year tax benefits, the effective tax rate was 35.6% this quarter.
Turning to the balance sheet, we had almost $1.4 billion of cash and marketable securities along with an additional $750 million held in cash for the February 2014 debt paydown. During the third quarter, capital expenditures net of leasehold improvement allowances totaled $36 million, bringing us to $91 million so far this year.
In terms of guidance, I said last quarter we expected 2013 expenses to range from $1.25 billion to $1.26 billion, and I anticipate that expenses in Q4 will be close to $325 million, which means we expect to be near $1.26 billion, including $6 million of deferred compensation expense year-to-date. In terms of CapEx, I expect between $130 million and $140 million for the year, which is down from my prior estimate.
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?
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?
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?
Phupinder Gill – Chief Executive Officer
Alex, this is Gill. I am going to start and I am going to ask Mr. Sean Tully and Derek Sammann to add in their particular asset classes. I think on both of those notes that you mentioned there is a big macro effect where the direction is clear but the timing of the direction is not clear. So, in times of uncertainty such as those options become a very valuable tool. Regarding the electronification of options, it has been an effort of ours, particularly I would say in the last nine months or so and you’re seeing the results there across all the asset classes. Sean or Derek would you like to add to that?
Sean Tully – Managing Director, Interest Rate Products
Sure. I can jump in on the rate side. I think the question was in terms of the macro picture as well as driving the volumes. In terms of driving the volumes over the last few years, we have been in a number of new interest rate options products. We added the weekly treasury options, the long green Eurodollar options, the blue mid curve options, the gold mid curve options, the purple mid curve options. So we have been driving with increased product relative to the macro environment. There is no question the macro environment has been very helpful. While the eurodollar options in Q3 of this year versus Q3 of last year was up 54%. We had Red Mid-Curves, for example, up 265% and Green Mid-Curves, these are again mid-curves on the eurodollar options up 262%. But in addition to that, if we look at new products on the interest rate side, mostly options based over the last three years, they’ve contributed 315,000 ADV in Q3.
Derek Sammann – Senior Managing Director of FX, Metals and Options Solutions
Just adding to that I think taking a step back in terms of the broader options business, we transacted a little over 2.2 million contracts in our options across the board, cross asset classes. And what we’re recognizing is the scale and the scope of our cross asset options is unique to this business and it’s also unique in that volumes on the option side drives income from volumes for the delta hedgers into our futures business as well. So that incremental increase of electronification from 43%, from 35% last year is significant and very intentional in the part of our sales teams and our effort to approach the market with a broader options sales pitch and the core capabilities that CME Group has across asset classes. You’ll see, hear more from us on our overall options business going forward.
Operator
Thank you. The next question comes from Jillian Miller with BMO Capital Markets.
Jillian Miller – Analyst, BMO Capital Markets
So you guys, from what I recall, haven’t changed your pricing tiers and rate products since, I want to say, 2008 and more recently you’ve had some really strong volume periods and particularly in the long end of the curve I think you are tracking about pre crisis volume levels for 2013. So I just wanted to — can say what your thoughts are on potential opportunities for raising volumes tiers and especially in the treasury products, just given the more positive volume outlook?
Jamie Parisi – CFO
Yes, this is Jamie Jillian. I think you are absolutely right. Before the crisis hit roughly every 18 months or so because of the way the volumes were growing, we were adjusting our tiers particularly on the interest rate product. We pulled back from that obviously during the crisis as our customers were suffering as well. But as we come out and as we see sustained growth in those volumes we’ll certainly be taking a look at that.
Operator
Thank you. Your next question comes from Dan Fannon with Jefferies. You may ask your question.
Dan Fannon – Analyst, Jefferies & Company
I guess Jamie, just thinking about expenses, maybe even into next year and your budgeting, if we look at kind of the last few years in the revenue environment, I assume that continues through the next year. Is there any either step up, step down or movement in expenses that you would highlight given kind of the investments you guys have been making and potentially need to make going forward?
Jamie Parisi – CFO
I think what you’ve heard us say before is over the long run we would anticipate our expenses to grow in the mid single digits, I don’t anticipate being too different than that in the coming year. Certainly we have been making investments over the last several years in growth opportunities, so many of those are already built into our base, although there are obviously incremental expenses as we grow those offerings further. So I don’t see any giant moves. I mean one other things that I highlighted in my comments was, while overall interest expense is lower, there is a higher expense next year because we have a significant increase in our clearing house credit facility going into next year. That will be one thing I’ll add as an example but we’ll look for other ways to control expenses.
Operator
Thank you. Our next question comes from Niamh Alexander with KBW. You may ask your question.
Niamh Alexander – Analyst, Keefe, Bruyette, & Woods
Residual interest rate, I guess the CFTC just passed last week the various consumer protections but one of the issues that’s been kind of a big discussion topic among all the FCMs has been residual interest rate requirement and how that’s going to significantly increase the capital rate if you would be required to keep. We think it’s going to be really tough for some of the smaller FCMs to stay in the business. How do you think about how this impacts your business? Because I’ve heard how your term [ph] was presented to regulators, their thoughts on it and it didn’t seem very positive. So help me think about okay, it’s been passed, what’s next and how to think about potential impact?
Phupinder Gill – Chief Executive Officer
Terry Duffy is on the line. Terry, are you there?
Terry Duffy – Group Executive Chairman and President
On that residual interest, as you know we felt it was a very flawed proposal from the beginning. We worked very closely with the smaller FCMs and with the agricultural community. I testified just as well as two weeks ago with the agricultural community and other participants and it was the first time in my 20 year history that I have seen all sides, both sides of the aisle agree that this rule was not to – it was fraud with all kind of dangers and it was obviously the CFTC took notice and they switched to the rule which was originally an FIA proposal, which is nothing for the first next year, so it will stay as the same as it is. And then it will go to the Tier 1 at 6 PM the following day and then five years from now if you go to 9 AM. So that’s five years away that could happen. We’re going to continually work with the Ag groups and with the CFTC and with the folks on the Hill to make sure they will get the five year piece removed from this. It makes no sense if it made any sense at all, it would have been posted on day one not five years down the road. So we feel fairly confident that this residual interest rule is basically dead.
Phupinder Gill – Chief Executive Officer
Niamh, if I can add, I think the CFTC to the Chairman’s point has also committed to complete an analysis in like two and half years or so. And I think the experience that the FCM community shares in the next two and a half years is going to be important with respect to what the CFTC would decide. So it’s the compromised solution that they came up with was to extend the time and I think the next few years is going to be very important here.
Operator
Thank you. Your next question comes from Ken Worthington with JPMC.
Ken Worthington – JP Morgan Chase
Just on the interest rate swap volume. It still seems pretty tepid versus original investor and also market participant expectations. I guess first you share this view. Second, is there an explanation, I guess this just could this be early days and there’s more volume to come or maybe there is something that we’ve all just been missing? And then third, given the size of the OTC market there would still seem to be the potential for meaningful upside like orders of magnitude, better volumes than we are seeing today. Is that potential still realistic or based on what we have seen and maybe now know is that really off the table?
Sean Tully – Managing Director, Interest Rate Products
I think we have seen very good growth, if you look at our market share, this year went from 5% in Q1 to 14% in Q2 to 31% in Q3 and 33% so far in Q4. So we have seen a very good growth. That 33% market share is of the dealer to customer business. And obviously that’s being driven out of the Dodd-Frank regulations where we have seen category 1, category 2, category 3 phases this year. We do expect further growth. We do expect increased — hope for increased market share but in addition to that we will see increasing product. As Mr. Gill mentioned earlier, we’re now clearing 17 different currencies but we will continue to increase our product scope with increases, we will be adding emerging some additional emerging market currencies in the near future. And there will be other OTC products that we’ll be adding.
In addition to that, you have to look for Europe. The mandate to clear has not yet hit Europe and we expect to mandate to hit Europe probably end of 2014 or sometime in 2015. So with increased product scope, increased market share as well as increased requirements to clear, we think there is a lot of runaway.
Ken Worthington – JP Morgan Chase
Okay, Europe is about half the market though. We are clearing 100 billion a day, that doesn’t — still didn’t get to the orders of magnitude that the size of the market might have originally suggested. Any thoughts there?
Sean Tully – Managing Director, Interest Rate Products
Yes, we have been focused on the dealer to customer business. Obviously the dealer to customer [ph] business is quite large as well. And we believe with our portfolio margin we have a unique value proposition where people can portfolio margin between CME’s interest rates futures and the swaps cleared at CME Group. We believe that we will be able to penetrate other parts of the markets as well.
Operator
Your next question comes from Chris Harris with Wells Fargo Securities.
Chris Harris – Analyst, Wells Fargo Securities
Just a numbers question here. The fee increase, you’re going to be expecting market data beginning next year. What kind of impact do you expect that to have on revenue?
Jamie Parisi – CFO
If you were just to hold terminals constant which you have to make your own estimates about that — but if you held terminals constant I want to say it’s roughly a $50 million impact on revenues next year, again assuming that you don’t see decrement in terminals as a result.
Operator
Thank you. Our next question comes from Chris Allen with Evercore. You may ask your question.
Chris Allen – Analyst, Evercore Partners
Actually if I could just follow up on that question a little bit. The fee increase per screen, it’s about 21% this time versus rough about 12% increase the last two times you have increased it. Just wondering a), what’s driven the magnitude of the increase here and also if you could give us any sense in terms of what’s been the usual screen decline when you’ve seen the revenue — I am sorry the rate increases before?
Jamie Parisi – CFO
When you look at the rate that we’re putting in, the new rate that we’re putting in place, it’s I’d say very competitive. In fact, I want to say below of what some of key competitors have out there now or what they’ve announced. So we feel very comfortable around that. If we look at what’s happened in the past around terminals, it very much depends on the environment that we’re in. If you went back several rate increases ago, you wouldn’t really have seen much of an impact on the number of terminals. The last one you probably did see more of an impact but it’s also coupled with some legacy issues around some legacy incentives that we have in place. And we are taking a look at those as well.
Operator
Thank you. Your next question comes from Howard Chen with Credit Suisse. You may ask your question.
Howard Chen – Analyst, Credit Suisse
Thanks for taking the follow-up. Just a broad regulatory question. We’ve seen some stops and starts with the CFTC mandate, with I think the expiration of the no action last week I was just hoping if you could talk about what you are seeing in the market and what you are hearing from customers?
Phupinder Gill – Chief Executive Officer
Howard, this is Gill. I will start and then I’ll ask Kim to add as she has been working with a lot of them. I think on the cess front they are still in the very early stages a lot of FCMs in particular are little bit concerned about the lack of consistent rules and a lot of these so called SEFs have. The SEFs are working very closely with both their clients as well the FCMs to try and get these trades done. There’s some confusion when trade’s coming from a SEF versus from some other, then it doesn’t get the FCMs, particularly the large FCMs enough time to accept that type of trade, that’s one example. So, there’s a lot of call early stage claim that both FCMs as well as clients and SEFs are going through and those things will shake themselves out in the coming weeks.
Kimberly Taylor – President, CME Clearing
The only thing that I would add as another example of the ways that the SEF mandate is changing the way business is done. And actually we’re very well positioned to benefit from this change in this particular respect with regards to bunch orders, the execution of very large orders and then the allocation of those orders out to multiple accounts. The way that the workflow for that occurred prior to the SEF mandate, is very different from the way that customers wanted to occur going forward. And we’ve already been able to accommodate the ability to do what I will call post clearing allocations of bunch orders which is a new service and being very well received.
Howard Chen – Analyst, Credit Suisse
And my second follow up Gill. You highlighted the global expansion. I was hoping you could just dig a little bit deeper into Brazil specifically and your various partnerships with BM&FBOVESPA and give us a deeper update there?
Phupinder Gill – Chief Executive Officer
Sure, Howard. The growth rate for Latin America is very high. The days fall volume that we are working off is still low, it’s about 60 million. I think we are going to get in for the year. The Brazilian environment as you know continues to be a challenging one. And we are working with both the exchange as well as the various regulators there to talk about the timing of the change, changes or some tech laws that has to take place before the Brazilians can take advantage of what we are offering. I am also going to ask Bryan to chatter a little bit on what he is seeing there?
Bryan Durkin – Chief Operating Officer
In anticipation of change occurring from the macro environment, we’ve really intensified our efforts in developing Central Bank programs. So we’ve got foots on the ground where we’re intensifying the educational efforts and to draw our business into our panoply of products. So we’re very pleased to see the growth trends given the fairly unique environment that we’re working under and just positioning ourselves for that change.
Operator
Your next question comes from with Alex Kramm with UBS.
Alex Kramm – Analyst, UBS
Couple of follow ups from me too. First of all, Jamie, on the licensing fees you talked about the OTC revenue sharing there. But in general, can you just maybe remind us what’s in there and maybe magnitude of the different pieces in terms of the equities, fees with S&P, the ClearPort OTC fees and then also I guess on the clearing side or whatever else, how that’s been trending?
Jamie Parisi – CFO
Sure. You hit all the main components as the equity license fees from S&P, NASDAQ, Dow, et cetera are in there. You’ve got a ClearPort fee sharing and you have got this now the OTC revenue sharing. So, generally I would say the equity — license fees are the largest components followed by the energy component and then followed by the OTC share. Just to be clear in this quarter the OTC revenue share amount that we booked in there included some catch up for prior quarters as well.
Alex Kramm – Analyst, UBS
Okay, but you can’t give us the exact number or anything close in percentages?
Jamie Parisi – CFO
No.
Alex Kramm – Analyst, UBS
And then secondly, just coming back to I think Howard’s residual question on the dividends and the appetite there. I mean it looks like you have – significant cash you now have built up and there will be more by the time you want to pay this dividend. So if I think about the variable dividends, you really still think or does the board when you talk to them still view this as a true variable one-time or could you make an argument where you showed should bring it up a nice amount from last quarter? And then may be or from last year and then maybe start thinking about repurchase of a little bit more again or is this really just what it’s going to be and expect most of this is to be paid out?
Jamie Parisi – CFO
I would say that the philosophical bend is absolutely towards dividend, so I wouldn’t expect any buyback of any significant nature going forward, at least in the near term. And as you said one time around that dividend but it is really an annual variable recurring dividend. So I think it’s a bit of a unique structures we have discussed before and I think also the board and the management is very comfortable with the way that’s been working out.
Operator
Your next question comes from Chris Harris with Wells Fargo Securities.
Chris Harris – Analyst, Wells Fargo Securities
Broader finance question, how should we expect your capital needs to change as your swaps business gets larger?
Jamie Parisi – CFO
The amount of you mean our the capital requirement on the organization? I don’t see them changing all that significantly. The capital requirements tend to be for the most part tied to the size of the annual expense for the business. So I don’t see large increases there. And then we also size our contribution to the financial safeguards package in a very conservative fashion. So we feel very comfortable with the amount that we’ve got there as well.
Operator
Thank you. Our next question comes from Jillian Miller with BMO Capital Markets.
Jillian Miller – Analyst, BMO Capital Markets
On portfolio margin I know you said 6 clearing members are alive, but I just wanted to get an idea for what percentage of your business that represents. Are we talking about 10% or 15% of your cleared interest rate swaps that’s benefiting from that now or is it 50% or more?
Phupinder Gill – Chief Executive Officer
Hi, this is Gill. That’s the clearing numbers and their participation is yielding about a $1 billion worth of margin savings and it’s currently a small percentage of the overall business. So firms are still coming up to speed there.
Jillian Miller – Analyst, BMO Capital Markets
Does the rollout of that I guess to larger percentage of your business, does that mean that you are going to gain more shares as expectations or do you think that everybody’s kind of already baking that eventuality into where they are doing their business right now?
Phupinder Gill – Chief Executive Officer
I think from an anticipation point of view, a lot of firms have started to test how this would actually work because it can be unless you’ve automated the process, it can be very manually intensive. So what a lot of firms have been doing over the last six months or so is making sure they have the process to automate those trades. The opportunity beyond the existing open interest on the rate side against the OTC open interest is on a going forward basis as firms then puts on, our clients can put on positions that are risk minimizing or risk neutral on a going forward basis and eventually get to an optimized state where they can use some portion of their business for being futures and options and some portions would be in swaps.
So, there are two ways to look at this opportunity, one with respect to the existing open interest in the futures side and secondly, on a going forward basis with the deliverable swap huge futures, the clearing of the swaps and more development on the future side would be the opportunities that our firms would have.
Jamie Parisi – CFO
And just to add on to that I mean I think we have to keep in mind that we are just off the heels of the mandates themselves and so in our interactions through our sales calls the firms are saying look first and foremost, we need to make sure that we just got compliant. Now we really spending our time on how to most effectively utilize our capital and any opportunities that you have specifically from a margin savings perspective. We’re very keen to be able to test and see how that benefits our firms. So we’re going through that optimization phase now.
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
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?
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.
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
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.
Operator
And our final question comes from Niamh Alexander with KBW.
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
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.
In the new world it is far more efficient to represent that trade as CME cleared interest rates swap against the CME interest rate future. So our way of representing it represents nearly the same risk, but you can get up to 85% margin savings relative to the portfolio margin that we talked about earlier. In terms of EFRs, if you look at volumes in 2013 overall year to date volumes in 2013 versus 2012, average daily volume in 2012 was about 19,000 a day and 2013 was about 48,000 a day so far. So we are seeing a very large increase in people beginning to look at ways to use our unique value proposition I think for the portfolio margin with interest rates swaps, plus our interest complex to represent strategies that have been in place for a long time but a much more efficient manner.
Jamie Parisi – CFO
Just a couple of things to add that, the member, non-member mix has trended positively over the last few months. In interest rates we have seen a pick up of about 1% non-member mix there in this quarter versus last year. And then finally as we noted in the prepared remarks the interest rate revenue was up 40% in total versus last year. So I think all those are supportive of what Sean was pointing out.
Operator
Thank you. I think at this time I will turn the call back over to the speakers.
Phupinder Gill – Chief Executive Officer
Thank you everyone for joining us this morning. And we look forward to talking to you in the next quarter. Thanks very much.
Operator
Thank you. And this does conclude today’s conference. We thank you for your participation. At this time you may disconnect your lines.
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