CME Group Class A Earnings Call Insights: Swap Data and Doubled OTC Clearing
CME Group, Inc. Class A (NASDAQ:CME) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Jillian Miller – BMO Capital Markets: So, there is this contentious issue, I guess, being debated currently on how the SDRs are going to handle swaps data, and you’ve applied for the CFTC to allow you basically to automatically report all the CME cleared swaps automatically through your SDR, but I guess competitors are kind of fighting hard against that. So, maybe you can just run through exactly what you’re hoping to achieve with respect to the swap data, how you might potentially monetize that data and how you think the CFTC is looking at the issue?
Phupinder Gill – CEO: This is Gill. I’ll take a shot at that. I’m sure there will be a lot of folks who want to talk, but ultimately the idea behind us applying approval of this rule is to make it as efficient as possible for our clients is that going to clear a swap at CME and do not do any more work than they have to and reported directly to our own SDR. Like I said a short while ago, it’s straight through processing and at its best. In terms of monetizing the venture that was not a priority for us when we launched the operational efficiencies was the main goal behind what we were doing.
Jillian Miller – BMO Capital Markets: So, is that data something that you would charge for or is it something that you’d just be collecting reporting to a central facility and you wouldn’t be direction keep the market data from it.
Phupinder Gill – CEO: No, we are going to keep the official record of the swap that we clear and we have announced that we will not charge at least for a while.
Jillian Miller – BMO Capital Markets: Then I guess moving on to another topic that’s also kind of regulatory. It sounds like some of the commissioners are considering whether the block levels that you guys have set for energy futures might be too low. I know that like virtually 100% of the ClearPort business is transacted off exchange in block transactions. So, just wanted to get an idea for what type of impact of larger block size would have on that business. If you could tell us what portion of your trades are coming from the smaller end of the block spectrum anything that could help us kind of quantify the potential revenue that would be at risk if block thresholds were moved higher?
Terrence A. Duffy – Executive Chairman and President: It’s Terry Duffy. I’ll start for a second. As you know, we transitioned our ESF business on ClearPort too with the smaller blocks in a very short period of time at the end of last year because of the CFTC mandate. While we did that, we had few issues with CFTC because they were supposed to address the swaps – the SEF rules before they reinforce to get to these ESF rules which they didn’t. They went out in reverse order and kind of caught us a little off the curve and our customers. So at the same time, now that we’ve transitioned to these smaller blocks, we have been working with the Commission on a day-to-day basis to say that we need – that market needs time to adjust and adapt to these new or smaller block thresholds versus an ESF system and for them to go and adjust block thresholds in the very near future could cause just as much harm as if they were not to give us the extends at the end of last year. So I do believe that the Commission understands that and they don’t want to be disruptive to the overall marketplace and they will give us more time to evaluate what the appropriate thresholds are for these block – for these products. Again, I think we are talking about a handful of these products that are the majority of the revenue. So, I don’t think we are going to have any impact as that relates to that even if the blocks were changed.
Doubled OTC Clearing
Richard Repetto – Sandler O’Neill: My question is, Gill, you mentioned that the OTC clearing has doubled literally quarter-over-quarter, but really it jumped December to January double. So, can you give us a color, is there any – certain clients or what’s – I’m sure then in anticipation of March, but the reason that it just doubled from December to January, and December was pretty much even that whole quarter?
Phupinder Gill – CEO: Yeah, Rich, I’ll start and I’ll ask Bryan and Derek to join in here. This is one of the major focus areas for us and what we have been seeing in the last quarter that has continued on to this last month has been an onboarding of both clearing members as well as accounts as more and more accounts on testing and more and more accounts in positions on live for us. And so, I think the mandate, the March 11 mandate is being taken very seriously by everyone and they are preparing for not just the March mandate, but the bigger push of clients coming into us will occur in June and we’re seeing a healthy mix of both of those sets of clients that are coming into us now.
Bryan T. Durkin – COO: Yeah, I was just going to – it’s Bryan. I was going to add to that point that as the March timeline comes up, it affects more so hedge funds, but we are seeing a nice mix across asset managers’ hedge funds, insurance companies, GSEs, proprietary trading firms, that have either come in clear trades or are well into the testing module, and so, that adds to, I think, the significant pick-up that we’ve seen this past month.
Richard Repetto – Sandler O’Neill: And just one follow-up on OTC as well, I guess initially, I think at least Terry you were more conservative about the clearing opportunity, but as we get closer to the mandate – the March mandate and the phase-in period, I guess, can you give us any view on what you think the (indiscernible) opportunity is especially with futurization and especially without the SEF rules and the clearing mandate is still looking like it’s going to go through?
Terrence A. Duffy – Executive Chairman and President: I’ll start and I’ll let Jamie take over more on the revenue side, but I think from – when we first put together our clearing offering for OTC we did it for all (sort of) different reasons; obviously to offer services that needed to be offered because of the new law, but also to help bolster and continually build on our existing core model, which is our futures trading risk. So, I do think when we put this into place, it wasn’t just for the revenue that we could derive from; it was more to enhance our core business and offer the services that our clients would need. So, I’ll let Jamie address the revenue, but I think we’ve addressed that in prior calls what the cost of it is going to be (declared per million).
Phupinder Gill – CEO: I can just add before Jamie talks about the financials. I think we are the only exchange that has the value proposition for the capital efficiencies across all six asset classes that we have. I mentioned a short while ago that the cross margin savings that we’ve seen in this very early stage has exceeded $1 billion up to this point in time. And so, I think some of our client base is taking advantage of those capital efficiencies. It is the most capital efficient solution anywhere out there among any of the exchanges or clearing houses that are providing this service.
James E. Parisi – CFO and Senior Managing Director, Finance and Corporate Development: Rich, it’s Jamie. Just from the financial perspective, remember that a good chunk of the expenses associated with us being able to perform this OTC clearing already embedded in our expense base. So, going forward the revenue coming is on the high margin revenue. Then the other thing to remember is that it’s very early in the game, obviously, hard to pick out any trends as yet, if you look this past quarter we generated about $2 million of OTC revenue from interest rate swap and CDS and that came in at a lower rate than the past quarters because of that incentive program that we got in place to attract some of those high turnover customers that we weren’t necessarily targeting previously. So, that’s new business as well. So, too early to give you any other information.
Richard Repetto – Sandler O’Neill: Quick last question on the (BlackRock’s) could go on defeated this season?
James E. Parisi – CFO and Senior Managing Director, Finance and Corporate Development: They are so far so good, Rich.