CME Q4 2009 Earnings Call Transcript

123jump.com Staff
09 Feb, 2010
New York City

Revenues fell 4% to $667.5 million & net income rose 226% to $202.6 million or $3.04 a share. Operating expenses were up 6% from the prior quarter. Proforma operating income was $409 million the high water mark for 2009. During the quarter able to maintain a strong proforma operating margin of 61%.

CME Group, Inc. ((CME))
Q4 2009 Earnings Call Transcript
February 4, 2010 8:30 a.m. ET

Executives

John Peschier – Managing Director, Investor Relations
Craig S. Donohue – Chief Executive Officer
James E. Parisi – Managing Director and Chief Financial Officer
Terrence A. Duffy –Executive Chairman
Rick Redding – Managing Director, Products and Services
Phupinder S. Gill – President
Kimberly S. Taylor – Managing Director and President, Clearing House Division

Analysts

Roger Freeman – Barclays Capital
Michael Vinciquerra – BMO Capital Markets
Howard Chen – Credit Suisse
Richard Repetto – Sandler O''Neill and Partners
Niamh Alexander – Keefe, Bruyette & Woods
Daniel Fannon – Jefferies & Company
Michael Carrier – Deutsche Bank Securities
Kenneth Worthington – JPMorgan Chase & Company
Jonathan Casteleyn – Susquehanna Financial Group

Presentation

Operator

Good day, everyone and welcome to the CME Group Fourth Quarter 2009 Earnings Conference Call. As a reminder, today''s call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

John Peschier

Thanks. Thank you all for joining us today. Craig Donohue, our CEO and Jamie Parisi, our CFO will spend a few minutes outlining the highlights of the fourth quarter. Then we will open up the call for your questions. Also joining us for participation in Q&A today are Terry Duffy, our Executive Chairman, Rick Redding, our Head of Products and Service, Phupinder Gill, our President and Kim Taylor, our Head of Clearing.

Before they begin, I''ll read the Safe Harbor language. Statements made on this call and the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance that 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, including our most recent forms 10-K and 10-Q which are available on the CME website. During this call, we refer to GAAP and non-GAAP pro forma results. A reconciliation is available in the press release and there is an accompanying file on the Investor Relations portion of the site that provides detailed quarterly information on a GAAP and pro forma basis.

With that, I''d like to turn the call over to Craig.

Craig S. Donohue

Thanks, John and thank you for joining us this morning. There has been much said about the challenges of 2009 and CME Group certainly wasn''t exempt from those challenges. However, looking back at the year, we are pleased with the progress CME Group has made and the platform we built for the future. From the start of the year through the end, we sought opportunities amongst the challenges and we were steadfast in pursuing and executing on those opportunities. I''m tremendously excited about how CME is currently positioned to pursue future growth.

To highlight a few of our key accomplishments over the past year, we''ve successfully integrated NYMEX and COMEX into CME Group. In addition to the strong recent growth trends in energy and metals volumes, which I''ll discuss in greater detail in a moment, we''ve been working on several strategic fronts to leverage these businesses.

We''ve implemented global sales and marketing plans that include increased education and sales outreach to energy and metals customers, cross selling across asset classes and extending our international incentive programs to these customers. We''ve completed the clearing and technology integration of NYMEX and COMEX and achieved the full $60 million in run rate synergies. We''ve built on the success of the CME ClearPort platform by launching 332 new products in 2009 and we have plans under development to continue adding new asset classes.

We''ve also scaled our technology for future growth. While exercising great expense discipline, we continued our ongoing focus on providing best-in-class technology by bringing online a new state of the art data center. As part of this effort, we migrated the FX and equity complexes to new match engines and customers have benefited from significant performance improvement. We will migrate other asset classes over the next year. The flexibility of the new data center positions us well for future volume growth, ongoing performance improvements and enhanced customer services. We see technology as helping us deliver better performance to our existing customers as well as helping to attract new customers.

As we have identified in the past, we are actively pursuing a broader global customer base. Over 2009, we made progress on several fronts in moving toward this goal. We worked on extending our global relevance by increasing the breadth of products we offer on Globex and developing key relationships with local regulators and market participants in several emerging geographies around the world.

We continue to strengthen our BM&FBOVESPA partnership, launched the KOSPI 200 on Globex during non-Korean hours and signed an agreement with Bursa Malaysia to provide global order routing and matching services for their derivatives business, which will also provide with us a license to use their crude palm oil settlement prices for future product development.

We are very pleased with the success we''ve seen with these partnerships and we believe they provide us with a strong base to aggressively market the full suite of CME Group products in those geographies. We are focused on positioning ourselves around the world to serve the customers of today as well as the customers of tomorrow.

As a measure of our global penetration, we increased our non U.S. trading hours volume to 19% in the fourth quarter, up from 17% in the third quarter. While it is difficult to track precisely, we attribute much of this growth to targeted sales efforts in Europe and Asia.

Finally, on the over the counter front, we initiated the pre-launch of over the counter clear credit default swaps in December with eight dealer founding members and six buy-side founding members. We continue to actively work on several tracks to complete the steps necessary for our public launch targeted for the end of the first quarter. Most importantly, we see the progress there as a strong foundation for the long-term success of other over-the-counter offerings.

Beyond all that I''ve just described, we were also hard at work managing the core business and despite the difficult environment, saw significant improvements there. Total open interest at CME Group grew from 63 million at the start of 2009 to 78 million at year end, an improvement of 24%. January has seen continued growth to 85 million.

Interest rate volumes were the most heavily affected by the credit crisis. Over the course of the year, we saw volume growth of 14% from the first quarter to the fourth quarter. More recently, January 2010 interest rate average daily volume of 4.8 million contracts is up 33% from January 2009.

Several macroeconomic factors that drive interest rates have stabilized over the course of the year, including improvements in liquidity and credit spreads, but areas of weakness remain. The upcoming announced exit of the Fed from its mortgaged-back securities program and its winding down of several temporary liquidity facilities are both a vote of confidence in the metrics that indicate a recovery is underway and a welcome step from markets that are eager to function based on fundamentals. It is difficult to predict timing but these and other improving factors contribute to a more active interest-rate environment.

With macroeconomic factors beyond our control, we continue to work closely with customers on new product development and we are pleased with the success of our most recent launch, the Ultra T-Bond futures. This is the most successful new interest rate product launched in CME''s history in terms of volume and open interest growth since launch. Open interest currently exceeds 40,000 contracts and we have seen very good volume participation across multiple customer types using these products for a variety of needs. All of these factors bode well for our able to grow this product over the long term.

Equities volume showed strength early in 2009, as lack of liquidity in other asset classes of high volatility drove volume, but were challenged by declining volatility during the third and fourth quarters. A return of volatility over the last two weeks of January brought volumes to 3.5 million contracts during that time period, up 67% from volumes in the first half of January.

The fourth quarter was a record quarter for energy, FX and metals volumes, which were up 21%, 57% and 59% respectively from the third quarter. All of these product areas continued to show robust volumes in January as well. Beyond our core business and strategic growth initiatives, the other key focus for management in 2010 continues to be working with our regulators to ensure the derivatives markets retain their hallmarks of effective price discovery, safety and security.

Before concluding, I would like to touch briefly on the status of ELX''s attempt through a rule filing with the CFTC, to compel CBOT to create or liquidate open positions without any corresponding transaction permitted by CBOT rules. The CFTC has not required us to take any action or modify our rules. I want to make absolutely clear that CBOT''s rules remain in full force and effect and that CBOT and CME Clearing have not been directed to accept directions from ELX or any of its members to open, liquidate or transfer positions in accordance with ELX''s rule. We are engaged in a dialogue with the CFTC regarding CBOT''s rationale for its longstanding rules prohibiting these types of transactions.

As always, we are working closely with the commission staff. We have and continue to take these issues seriously and are confident that the CBOT is operating in strict compliance with its statutory self-regulatory responsibilities and the requirements of the Commodity Exchange Act.

Given the ongoing nature of our discussions with the CFTC, I do not intend to make any further comments on this issue at this time and we thank you in advance for respecting that. There are a variety of other additional regulatory issues under consideration at the moment. CME Group appreciates the significance of the financial market''s crisis and the ensuing focus on market regulation. We believe our politicians and elected officials and regulators fundamentally recognize the value of transparent centrally cleared markets and that this recognition is reflected in much of the proposed legislation currently outstanding.

In the aggregate, there are few areas of potential harm to our business and many areas that are potentially favorable for CME Group and other exchanges. As always, we continue to work to educate lawmakers and regulators on the forces that drive our markets and how we can best maintain secure, efficient markets.

In summary, in spite of all the challenges this past year, we successfully managed the aftermath of the credit crisis and are now emerging well positioned for future growth. With fundamental market drivers achieving sustained stability, our core products are showing improvements in volume and open interest. We have executed on the early stages of our over the counter clearing and global expansion strategies and we look forward to continuing to build these efforts for long-term success.

With that, I''d like to turn the call over to Jamie to discuss our financial results.

James E. Parisi

Thank you, Craig. CME Group turned in a strong fourth quarter financial performance, generating more revenue than any other quarter in 2009. Our GAAP results are summarized in the press release. Today, I''m going to focus on the details for Q4 on a pro forma basis.

During Q4, average daily volume was down 1% compared to the fourth quarter 2008 to 10.2 million contracts per day. We generated $667 million in revenue and operating expenses were up 6% from the prior quarter, slightly less than we guided to in our last call. This resulted in $409 million of operating income and diluted earnings per share of $3.37.

In terms of customer segmentation, we saw numbers for the fourth quarter remain largely in line with third quarter results. Proprietary buy-side traders contributed 43% of overall volume. Hedge funds accounted for 8% of volume showing a slight increase in contribution for the third quarter in a row.

Bank trading accounted for 13% of volume, other member activity 20% and nonmember activity 16%. This segmentation is for legacy CME CBOT products only. We will be providing more detail for the entire CME Group product suite beginning next quarter.

The overall pro forma rate per contracts for all CME Group volume decreased 2% to $0.849 compared with $0.866 in the fourth quarter 2008, primarily due to lower price interest rate volume increasing from 36% of total a year ago to 43% this quarter. Sequentially, the rate for contract increased $0.015 from $0.834 to $0.849 due to a 1% increase in the metals proportion of the product mix and a favorable pricing impact from changes implemented in August and September of 2009.

Market data revenue of $82 million for the quarter decreased 6% versus last year and was up 1% sequentially. At the end of the fourth quarter, users subscribed to 396,000 base devices across CME, CBOT and NYMEX, down 9% versus Q4 of last year and down 1% sequentially. During Q4, we had a benefit from a billing adjustment that resulted in a positive sequential revenue growth. We have announced a professional screen fee increase from $55 to $61 per month beginning in January of 2010.

I''ll now take a few minutes to review expenses. Total pro forma operating expenses were $258 million from Q4, down 2% versus Q4 last year, but up $14 million or 6% sequentially. Total expense for the year was $998 million, down 8% as we delivered the NYMEX related synergies and ratcheted down our discretionary expenses.

Drilling into Q4 expenses, compensation and benefits was up $4 million sequentially to $88.6 million, due primarily to higher stock-based compensation. Stock-based compensation was $9.9 million in the fourth quarter, up $3 million from Q3. We moved our stock option grant date from mid-June to mid September and some prior-year grants rolled-off to June, resulting in lower Q3 expense. Our combined headcount at the end of Q4 stood at 2,260, up slightly relative to the prior quarter.

Our fourth quarter bonus expense was $11.8 million and for the full year, the bonus expense totaled $39 million, down 13% versus 2008. Non-compensation expenses of $170 million were down $6 million versus last year and up $10 million sequentially. Comparing to last quarter, the primary increases were in the professional feed line, up $4.7 million due to fees associated with our strategic initiatives and miscellaneous litigation and in the other expense line of $4.4 million due to increased marketing costs, primarily related to sponsored conferences and currency fluctuations.

Q4 pro forma operating income was $409 million, the high water mark for 2009. During the fourth quarter, we were able to maintain a strong pro forma operating margin of 61% and we finished the full year with an operating margin of 62% compared to 64% in 2008. We viewed it as a significant achievement in light of the challenging environment throughout last year.

In the non-operating income and expense category, on the investment income line, we received a $5 million dividend from BM&FBOVESPA in line with Q3. During Q4, we paid down $225 million in debt and as of the end of December, we had $2.3 billion of debt outstanding and $303 million of cash and marketable securities. Interest expense totaled $30.7 million in Q4.

During the quarter, we continued to pay down our debt by rolling less commercial paper, which carried a rate of less than 0.3% in the quarter. We expect our interest expense to remain at a similar level to Q4 for the next two quarters.

After paying off $900 million of debt during the year, our debt to EBITDA ratio is down to 1.2. Looking forward, we have a $300 million payment due in August and we intend to pay off the remaining instruments on their maturity dates. The detail related to debt structure is included in our earnings slide presentation on the website.

For the quarter, our pro forma effective tax rate was 41.2%, bringing us to 41.1% for the year. Looking to 2010, we expect an effective tax rate of between 41 and 42%. Capital expenditures net of leasehold improvement allowances totaled $43 million in the fourth quarter and $137 million in 2009, driven primarily by data center, software, equipment and facilities costs.

At this point, I would like to provide some insight and guidance related to our plans for 2010.

First on operating expenses. Our normal growth rate from 2001 to 2007 was 8% to 10%. In 2008, our pro forma expenses dropped 2% followed by an 8% drop in 2009, during a period in which we benefited from the synergies captured on our recent mergers and we compressed discretionary spending as far as we could, including items which were onetime in nature.

As the economy shows signs of emerging from the recession, our outlook on growth is improving in 2010. We expect a return to more normal expense growth levels resulting in annual 2010 expense of approximately $1.1 billion. Within compensation, after holding salaries flat in 2009, we expect a 5% increase due to merit and promotion adjustments for employees and to the impact of new hires.

In terms of stock-based comp, we expect a similarly quarterly run rate as we saw in Q4 of approximately 10 million to $11 million per quarter. Lastly, our bonus expense totaled $39 million in 2009, down from $45 million in 2008.

Looking ahead to 2010, our target employee bonus is approximately $54 million based on reaching our internal 2010 cash earnings target. If our cash earnings for the year are 20% above our cash earnings target, employee bonuses would be approximately $82 million. If we are more than 20% below our target, the bonus will be a minimal amount for non-exempt employees. The non-comp expense increase from 2009 is expected to come in many of the technology oriented expenses as we are aggressively building out our new data center.

In addition, marketing and other expense is expected to rise during 2010 to roughly $23 million a quarter on average and it is likely to be more front-end loaded. The higher level is attributable to advertising, promotion and travel expenses, driven by our desire to expand both our global reach and our OTC capability. Licenses and fee sharing will likely rise based on contained growth in our energy and equity businesses.

As always, during 2010, we will continue to spend on growth. We anticipate deploying additional OTC products, bringing the European Clearinghouse online during the year and working with various other strategic initiatives.

Turning to capital expenditures, as I mentioned earlier, we spent $137 million in 2009, well below our original 2009 guidance and down from $205 million in 2008. In 2010, we anticipate between 180 million and $200 million of capital expenditures, driven by technology-related projects as we now populate our new data center.

In summary, we are proud of our results during a challenging year. We made incremental progress during 2009 after a fairly large shock to the financial system. We were very careful on expenses and at the same time, we continued to make investments in growth as reflected in our signing of various partnerships and laying the groundwork for significant OTC clearing opportunity.

And finally, we are optimistic about the strong start to 2010 with January volume averaging 11.2 million contracts a day, up 19% versus January 2009. We will now open up the call for your questions, but in order to get to everyone, we are limiting all of you to one question and one follow up and then please feel free to get back in the queue as time permits.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conduct electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure that your mute function is off to allow your signals to reach our equipment. Once again, it''s star one to pose a question.

We''ll go first to Roger Freeman of Barclays Capital.

Roger Freeman – Barclays Capital

Hi. Good morning. I guess, first on the proposed rules from the CFTC around positions. It sounds like it kind of came out in the range of what you had been arguing for. And I guess the question there is, do you have an estimate on -- if you kind of look at dealer prop trading, some large hedge funds that run regularly above the accountability limits today? What kind of volume impact do you think it will ultimately have given these actual numbers they put out?

Craig S. Donohue

Roger, it''s Craig. We''re still in the process of examining the CFTC''s proposal. I think that in general, the Commission has done a good job of taking feedback and input from a variety of sources within the industry from the time that they first had their hearings in the fall. There''s a lot of complexity in various aspects of their proposal which we and other market participants are still digesting. And I''m expecting that not only CME Group but certainly others will be taking the opportunity to comment rather extensively on those proposals.

In general at the moment, I do think that it''s not likely that the proposals as we understand them will have any kind of significant impact on trading volumes or open interests. And so from that perspective, we''re viewing that favorably. But as I mentioned, there''s a great deal of complexity in the proposals and we''re still digesting them.

Roger Freeman – Barclays Capital

Okay. Great. That''s helpful. And then I guess my second question, just be around CDF volumes. I know you''re sort of in a soft launch phase. There was an initial burst of activity sort of mid-December. It kind of looks like the dealers were trying to just check off the box to sort of meet the deadline. And there really hasn''t been much since. Are there still sort of issues outstanding with the dealers that need to be addressed from a clearing perspective to move the ball forward there?

Kimberly S. Taylor

This is Kim. We are in the middle of a stage as we mentioned. We are working with the dealers for plans for the launch scheduled to expand the set of product and the set of customers that would be able to participate. So I think we are on target for doing that within the first quarter. But we have not ramped up that process yet.

Roger Freeman – Barclays Capital

Okay. All right. Thanks.

Operator

We''ll go next to Mike Vinciquerra with BMO Capital Markets.

Michael Vinciquerra – BMO Capital Markets

Thank you. Good morning, guys.

Craig S. Donohue

Hi, Mike.

Michael Vinciquerra – BMO Capital Markets

First thing, just on the energy space, two things there, I guess. WTI has, I guess, been the weak contract in terms of looking at oil and nat gas and what not trading early this year. Any particular reason you guys feel like that product had a little less success than maybe Brent and some of the others? And then tied to that, there''s a lot of noise around the Argus Sour Crude contract and we haven''t heard any update. Is that contract out there in trading at all these days?

Rick Redding

Mike, this is Rick. WTI has actually been a fairly strong performer. I mean, if you look at the fourth quarter, even into January, it''s one of those areas with the macroeconomic conditions the way they are, people are trading that a lot. So just want to be careful with your statement. As far as the Argus Sour products, both CME and the ICE have launched product there not doing anything at this stage, because we''ve saying it will take a while for those benchmarks to gain some acceptance. What we have done, though, is some of the components within the Index actually are trading, the March product in particular. So pretty much what we said would happen is happening and we continue to look forward as the industry evolves or how it moves. I mean again, remember, Mike, that all this stuff is based off WTI pricing. So it actually is probably pretty favorable for our WTI business.

Michael Vinciquerra – BMO Capital Markets

Very good. We''ve got to look at those statistics again. Sorry if I''m looking at something wrong. And just your early success with the Ultra Bond future. Any sense for how broad the potential user base is there? Is it as broad as it is for all the other treasury products?

Rick Redding

Yeah. We have gotten off to a great start there. In three weeks -- in the histories of the futures world, you''re hard-pressed to find anything done this well. Part of it has been, obviously, we''ve listened to the marketplace. We''ve adopted our product development to the credit crisis. This is a product the market needed because the duration of all of these instruments has come in quite a bit given the rate environment. This has actually been broadly used by both buying and sell side at this point. And the other thing that is encouraging is, as we thought, we see people also spreading this against the 300-year Treasury Bond. So this has been a phenomenal uptake in the product. And one of the good things, as Craig mentioned, that 44,000 plus of open interest, over 5,000 of it is in the June contract. So you''re starting to see people already think about the future of what that contract would hold.

Michael Vinciquerra – BMO Capital Markets

Great. Congratulations, guys. Thanks, guys.

Craig S. Donohue

Thank you.

Operator

We''ll go next to Howard Chen of Credit Suisse.

Howard Chen – Credit Suisse

Good morning, everybody.

Craig S. Donohue

Hi, Howard.

Howard Chen – Credit Suisse

My first question is for Rick. Not sure if you have these stats handy, but I was curious if you could get any update on the current depth of book stats that you shared in the past, as clear the market tone and activity levels have improved a lot?

Rick Redding

Yeah. We have been looking at those, Howard. And in December, what you actually see across almost every product, even compares to September, you''ve seen depths of books increase anywhere from 10 to 60%. What you see is -- even in things like the Treasury Complex, which was really affected by the crisis, what you do see is the depth of the book actually coming back to pre-crisis levels. We''ve also seen the average bid-ask spread come in quite a bit. And especially in some of the financial products for large-size contracts, you actually again see these kind of pre-crisis levels. So we''re very encouraged where the liquidity is in the markets given the amount of destruction that occurred early in 2009.

Howard Chen – Credit Suisse

Great. Thanks. And then Jamie, my follow-up, just on the numbers. The commentary that interest expense levels stay near the current levels for the next two quarters. Does that imply you temporarily like stop the debt pay down and is the thought to just hoard a bit more cash now?

James E. Parisi

Howard, it''s really just a function of how the maturity is laid out. So there''s only a little bit left on the commercial paper to pay down and then we have a maturity in the third quarter in August that will be accumulating. So we''ll pay that down.

Howard Chen – Credit Suisse

Just to follow up on that briefly. Jamie, is there a prepayment penalty for what''s due in August?

James E. Parisi

What''s due in August is a public issue. So there is no prepayment clause on that. The only piece that does have a prepayment ability on it is the bank loan that I believe is due next August in 2011. So that''s the only piece that we are able to pre-pay and if we do pre-pay it, we do have hedges outstanding where we did fix the rates. So there is a cost associated with unwinding those hedges. So it doesn''t necessarily make sense for us to do that immediately. So it''s something that we continue to analyze as conditions change.

Howard Chen – Credit Suisse

Okay. Thanks.

Craig S. Donohue

Sure.

Operator

We''ll go next to Richard Repetto with Sandler O''Neill.

Richard Repetto – Sandler O''Neill and Partners

Yes. Good morning.

Craig S. Donohue

Hi, Rich.

Richard Repetto – Sandler O''Neill and Partners

I guess staying on the expense theme here a little bit. Jamie, your marketing and other expenses of 23 million average per quarter, so if you annualize that, it''s 92 million. And I guess it looks like a pretty big 35 to $0.37 increase year-over-year. I know ''09 had -- that line had some one times, so it''s not a fair -- totally fair comparison. But it is an uptick. So I guess -- I know you mentioned OTC, but can you give us a little bit more deeper color?

James E. Parisi

I think first, if you look at the overall picture, right, the marketing expense in ''08, a year where, prior or just leading into the price at the end of the year, the marketing expense in ''08 was about 22 a quarter. So it''s more reverting to that kind of more normalized level. And if you think about the projects or the strategy that we have outlined for everybody globalizing the business and going after the OTC markets, you can imagine that there''s quite a bit of marketing associated with that and a lot of -- as we globalize, there''s a lot of travel, so there''s a lot of expense -- additional expense associated with that. So it''s not just marketing. It''s marketing and other expense. The other thing to keep in mind is that, within that category, we enjoyed some for the year, in 2009. We enjoyed some favorable FX fluctuation which we assume we can''t assume for 2010.

Richard Repetto – Sandler O''Neill and Partners

Okay. Okay. And my follow up would be, I guess, for Terry and Craig. The Volcker plan, when it was announced, the stock, the exchange, at least yours and ICE got negatively impacted. Can you give us any update based on your discussions with the Congressmen or the administration on what you think the actual risk here is? Or maybe even your conversation with the dealers?

Craig S. Donohue

Terry, would you like to start?

Terrence A. Duffy

Craig, go ahead.

Craig S. Donohue

Rich, I think that it''s really premature for us to sort of speculate and comment on that in that. As you know, they''ve introduced, I guess, a broad concept but there is not yet any kind of specific proposal. So I think it''s awfully difficult for us to sort of project forward what the meaning and implications of that might be. So we''re going to be looking at that very carefully obviously if and when that advances. But for the moment, I think it''s difficult to speculate and it''s not clear to us at least at this point that it''s going to have a meaningful impact on us.

Terrence A. Duffy

And Rich, just to add a little bit to what Craig said, he said it in his prepared remarks earlier. There is a lot of pending legislation both out of the House bills on ag and financial services that we see that are potentially very favorable to us going forward. So we''re going to be out there a lot and we''re going to continue to work on the pending legislation and anything else that comes up.

Richard Repetto – Sandler O''Neill and Partners

I was just trying to see if you had any insight. I know you had strong relationships down there but I understand it is preliminary. So anyway, thank you.

James E. Parisi

Rich, this is Jamie. If you look at the revenue or the volume breakdown, right, we said that the banks were around 13% or so of the trading. When you look at it from a revenue perspective, it''s significantly less than that because they''re paying the lowest fees, right, in the way. But when you look at the revenue perspective, it''s in the 8 to 9% range. And then you look at it again and you say of that trading that they''re doing, how much is true speculative trading versus how much of it is hedging their books, so you haircut that yet again. So we don''t have specific numbers, but you can see the numbers get cut down pretty significantly as you start thinking through it.

Richard Repetto – Sandler O''Neill and Partners

Got it. That''s helpful. Thanks, guys.

Operator

We''ll go next to Niamh Alexander with Keefe, Bruyette & Woods.

Niamh Alexander – Keefe, Bruyette & Woods

Good morning. Thanks for taking my question. With regards to paying down the dealt and getting to like the 1.2 debt to EBITDA and then getting even lower later in the year, how should we think about all that cash that you''re generating? Would you maybe be looking to prioritize inorganic growth over maybe repurchases? Can you kind of update us on where your results are there?

James E. Parisi

I would just -- as you look out, we have maturities scheduled out over the next several years and we will be building cash in advance of the maturities to be able to pay down those maturities. I think, is a way to think about it for now. Of course, we continue to always be vigilant regarding our capital structure and we analyze it all the time.

Niamh Alexander – Keefe, Bruyette & Woods

So we should think about you can''t afford to carry the debt with the cash generating, but we should assume that you''re going to continue to just pay it down, right?

James E. Parisi

Yes.

Niamh Alexander – Keefe, Bruyette & Woods

Okay. Interesting. And then if I could, just on the second question. Operating margin -- is it feasible to think about CME getting back to like 65 to 66% operating margin as the volumes kind of grow? Could the open interest certainly pointing in the right direction? Is it maybe something that we need to see more of a step function? I don''t know like 2012 and you may not necessarily have to stay in New York anymore. How should we think about the operating margin potential?

James E. Parisi

First, I''d like to say I was really very proud of how the exchange operated in 2009 being able to hold the 62% margin given the environment that we''re operating in. Looking forward, as you look back at our history, as we''ve been able to add volumes to the platform certainly there is a lot of operating leverage in our model. I would expect that if we''re able to add those volumes that there would be potential margin expansion.

Niamh Alexander – Keefe, Bruyette & Woods

Okay. Thanks, Jamie. I appreciate taking the questions.

Craig S. Donohue

Niamh, I can just add to that, by the way, that obviously we''re committed to New York. I mean, it''s a significant place of business for us. We do plan to continue to maintain the open prior trading facilities there as long as they''re profitable and we have a significant employee base which we expect to remain there. So I just want to make that clarification.

Niamh Alexander – Keefe, Bruyette & Woods

Okay. That''s interesting. Thanks.

Operator

We''ll go to Dan Fannon of Jefferies.

Daniel Fannon – Jefferies & Company

Thanks. Good morning. Building on that question a little bit, can you guys prioritize where you see the most opportunity for growth? I mean, obviously you have your OTC initiatives, but are you also evaluating potential bolt-on acquisitions that are some of which are being rumored over the last couple of weeks in the news?

Craig S. Donohue

Well, obviously, we''ve got, I think, diverse and broad growth strategy, as you can tell from our discussion and the highlighting of our continued product innovation and enhancements with our technology and clearing capabilities. We''re continuing to focus very strongly on core growth in our core businesses. We obviously also have a number of very important non-core growth initiatives including as you mentioned the over-the-counter derivatives clearing services area. And then obviously globalization is an important part of that in both respects.

So, we have always a view toward how we can expand the range of products and services that we provide to our clients and to create value for customers. So non-organic growth opportunities are always going to be something that we look at. But beyond that, I have no specific comments.

Daniel Fannon – Jefferies & Company

Okay. Great. Thank you.

Operator

We''ll go to Michael Carrier, Deutsche Bank.

Michael Carrier – Deutsche Bank Securities

Thanks, guys. Jamie, just on the expenses. Obviously, investing in the business has given, I know you guys are working on the extent but when you think about the level of the 1.1 billion, I know it''s hard to say. But in terms of volumes and what you''re expecting where we''re at like currently and for the year, like how much flexibility if volumes were to slide or if you don''t get the increase in, say, the interest rate products?

James E. Parisi

Well, I think -- I''m not going to get specific around volumes, as you know. But if you look back at last year, I think that''s pretty instructive hopefully that we take to heart, we have some flexibility in there. When you look at if the business isn''t performing, the bonus expense naturally flexes and you''ve seen us pull back when we need to on the discretionary expenses. So I think we demonstrated that we''re capable of doing that.

Michael Carrier – Deutsche Bank Securities

Okay. Thanks. And then the follow up is just, any update in terms of timing for the European Clearinghouse and/or like an interest rate swap solution?

Kimberly S. Taylor

I''ll address the European Clearinghouse part of that question. We continue to work with the FSA, the regulator in the U.K. and moving through our recognition process. We are making progress with that process, but I can''t really give you a definitive timeframe on our regulatory process. We''ve made good progress on building out the team there and we look forward to being able to launch the services relative soon after achieving recognition.

James E. Parisi

On the interest-rate swaps, we continue to make good progress working with buy and sell side to provide a solution there. Obviously, the CDS initiative we have going on is helping us speed the products up if they come on. So we''re making good progress.

Michael Carrier – Deutsche Bank Securities

Okay. Thanks.

Operator

We''ll go next to Ken Worthington, JPMorgan.

Kenneth Worthington – JPMorgan Chase & Company

Hi. Good morning.

Craig S. Donohue

Hey, Ken.

Kenneth Worthington – JPMorgan Chase & Company

First, the Fed had announced the expiration of a number of lending guarantee and purchase programs over the next couple of months. Are there any programs that are ending that you think could have a meaningful impact on the business? And if so, could you kind of walk through how you see things play out?

Craig S. Donohue

I mean, what has been announced, Ken, is especially related to the mortgage back area and the mortgage area. It''s not 100% clear if they''re just going to stop or phase some other kind of program in. So I think it''s a little difficult to say how that''s going to unfold. However, what is positive for us is, as those kind of market rates come back into the environment, that''s probably a good catalyst for interest-rate movement and obviously the need for people to hedge. Also moving away from the government providing that backstop will force private industry, private banks to step up and be a bigger part of this as well as the GSE.

So in that, you''re probably looking a more volatile rate environment or rates that go back to where some people think they should be and that are not artificially depressed. So depending on how they do it, you could see a lot more activity for some of our clients.

Kenneth Worthington – JPMorgan Chase & Company

Great. Thank you. And then, I''ll try to walk the fine line here. With regard to competition, have your thoughts evolved on how you''re dealing with competition today versus maybe how CME and CBOT dealt with Liffe and Eurex in the past? The reason for my question, is it seems like defending your market position and being anticompetitive, the line between the two may have narrowed under the current administration and maybe -- well, just what are your thoughts there?

Craig S. Donohue

I don''t think anything is different. I mean, we''ve lived in a highly competitive innovative dynamic industry for certainly the last 30 to 40 years. We have a broad spate of competitors that trade very substantially identical products, similar products, products that are economic substitutes for our own, not just in exchange traded, but also over the counter markets. And so we continue to compete aggressively on the basis of the quality of our products and services and the strength of our customer relationships, the strength of our technology, the strength of our clearinghouse and on our innovation capabilities and I don''t think that''s different from the past. And I don''t think that will be different in the future.

Kenneth Worthington – JPMorgan Chase & Company

Can you think of aggressive competition presents longer-term risks? Or is it just good business?

Craig S. Donohue

Do I think what?

Kenneth Worthington – JPMorgan Chase & Company

Like aggressive tactics, do aggressive tactics present longer-term risks that may not have been present in the past?

Craig S. Donohue

I don''t remember any competitors in the past being particularly polite or passive. So I mean, if you look at the history of competition in this industry, it tends to be incredibly aggressive. And I think we''ve demonstrated over a long period of time that we are equally a very formidable and strong competitor. And the strength of our position is based on the fact that we''ve been very innovative. We offer extremely high quality liquidity and markets and services. And we''ve made very substantial investments that have been very valuable to us as we built our business.

Kenneth Worthington – JPMorgan Chase & Company

Great. Thank you very much.

Operator

We''ll go to Jonathan Casteleyn of Susquehanna Brokerage.

Jonathan Casteleyn – Susquehanna Financial Group

Yes. Thanks. Question for Rick. You just mentioned it briefly, but within the interest rates future complex, isn’t change in aftermarket yields, is it enough to really drive strong volume growth going forward? Or do we need the Fed to kind of move benchmark rates around?

Rick Redding

I think you have to look at it two ways, Jonathan. On the short end of the curve, clearly you need to get out of the zero interest rate policy to really change the dynamic there. You can look at the Fed from the futures markets to see where the market thinks those rates are going to substantially move before the end of the year.

On the longer end of the curve, though, outside of just the short race, there''s a lot that''s going on in the mortgage market, a lot that''s going on there, a lot of the government policies. A lot of that can move without having the zero interest rate policy change at all.

So I mean, the other thing to think about there, Jonathan, is as those relationships across the yield curve may change based on how the government exits this program. So it''s hard to do a point estimate of volatility, but the way we think about it is looking at it is the shape of the yield curve also may change as well.

Jonathan Casteleyn – Susquehanna Financial Group

Right. So longer-term contracts could benefit, but definitely the short end would benefit more so by a Fed underlying benchmark change?

Rick Redding

Yeah. I think, Jonathan, if you look at the increase in volume in Q4 and gains rate, what you see is the Treasury Complex having a greater rate of increase than the Eurodollar complex which I think is indicative of that. What you do see on the short end of curve end of the Eurodollar complex is the back 32 contracts or actually, year on year volumes are up quite significantly. But you''re starting to see people and have seen people position a little further out the curve on where they think rate movement will take place.

Jonathan Casteleyn – Susquehanna Financial Group

Great. That makes sense. And then, is there any way to talk about or to articulate any recent new product launches in ClearPort? What percentage of revenues they accounted for in the quarter or any percentage of volumes they accounted for?

Rick Redding

Jonathan, I don''t have that in front of me right now, but we can follow up with you.

Jonathan Casteleyn – Susquehanna Financial Group

Okay. Great. Thanks.

Operator

At this time, there are no further questions in the queue. I''ll turn the conference back over to management for any additional remarks.

Craig S. Donohue

It''s Craig. I just want to thank everybody for joining us this quarter and we look forward to talking to you next time. Thank you.

Operator

That concludes today''s conference call. Thank you for your participation.