CME Profit Gains 22% as Trading Soars in Currency, Interest Rate Contracts

CME Group Inc., the world’s largest futures market, said second-quarter earnings rose 22 percent as trading surged in contracts based on currencies and interest rates.

Net income climbed to $270.7 million, or $4.11 a share, from $221.8 million, or $3.33, a year earlier, Chicago-based CME said today in a statement. Excluding certain items, the company earned $4.43 a share. On that basis, CME was estimated to earn $4.36, according to a Bloomberg survey of 22 analysts.

The number of active trades in CME Group’s clearinghouse, or what’s known as open interest, is 25 percent higher than the bottom reached in 2008, Keefe Bruyette & Woods Inc. analysts led by Niamh Alexander said in a note to clients this month. Futures trading dropped after the credit crisis cut the amount of borrowed money used to trade while short-term interest rates near zero percent limited the need to hedge with the contracts.

“All in all, a solid performance relative to expectations,” Roger Freeman, an analyst with Barclays Capital, said in a note to clients today. Freeman expected the Chicago- based company to earn $4.41 a share.

In the near term, CME Group isn’t looking for mergers or acquisitions, Craig Donohue, chief executive officer, said on a conference call with analysts. The company recently completed a five-year strategy review and is focused on growing its existing business, he said.

‘Bullish View’

“We have a very bullish view of our growth opportunities organically,” he said. The exchange became the world’s largest with the purchase of the Chicago Board of Trade and the New York Mercantile Exchange in 2007 and 2008, respectively.

The comment may quell speculation about a buyout by CME Group of CBOE Holdings Inc., which analysts have said is a strong acquisition target.

CBOE, operator of the largest U.S. options exchange that went public last month, has no need for a merger partner, Chief Executive Officer William Brodsky said July 26.

“We’re not in need of someone else’s money,” Brodsky said. “We’ve shown we can run ourselves as an independent company, be profitable and produce a lot of cash.” Chicago- based CBOE has been a for-profit exchange since 2006.

Average daily trading volume at CME Group climbed 31 percent in the quarter, led by an 82 percent rise in currency futures and a 38 percent jump in interest-rate contracts, the company said July 2. Smaller gains came in energy and agricultural futures, for which the exchange earns a higher fee on the trades, according to Alexander in the July 9 note.

Rising Expenses

Revenue rose 26 percent to $814 million last quarter from $648 million a year earlier. CME Group controls 98 percent of U.S. futures trading. Expenses at the exchange rose 20 percent to $299 million from $249 million a year ago.

Average daily trading in July is 10.7 million contracts, down 21 percent from the average 13.5 million in the second quarter. “We’re experiencing normal seasonal patterns” in trading, which slows in the summer months, Donohue said.

CME Group shares have gained 5.3 percent in the past year through yesterday after tumbling from a high of $710.75 in December 2007 to a low of $156.55 in November 2008.

CME Group rose $5.64, or 2 percent, to $289.15 as of 10:56 a.m. in Nasdaq Stock Market composite trading.

Donohue was questioned several times on the call by analysts about whether the exchange was interested in expanding into offering trading services for contracts in the $615 trillion over-the-counter derivatives market. CME Group has teamed with the Eris Exchange to offer clearing for contracts that are economically equivalent to interest-rate swaps, the largest OTC derivatives asset class.

Effect of Law

Mandated clearing of standardized swaps as well as required execution services was also a major component of the financial overhaul signed into law earlier this month by President Barack Obama.

“We have no relationship with Eris other than as a provider of clearing services,” Donohue said. “That does not represent an effort on our part to get involved in an execution part of the market.” CME Group dropped its initial plan to offer execution for OTC credit-default swaps after Wall Street’s largest dealers rejected the idea, CME Group Chairman Emeritus Leo Melamed said last year.

The new financial rules mandate that swap execution facilities or exchanges such as CME Group be used by investors to trade clearable swaps. Donohue said the company welcomed the creation of such facilities that would use the exchange’s clearinghouse to back trades.

CDS Clearing

“We’re expecting it will be possible for swap dealers and inter-dealer brokers to structure their own SEFs to continue the business model they’ve historically had,” he said. “We have to respect that they’ll want to continue to do business as they have been doing.”

CME Group has cleared $195 million of credit-default swaps since beginning its service in December. Competitor Intercontinental Exchange Inc.’s two CDS clearinghouses in the U.S. and Europe have processed more than $10 trillion of the contracts since March 2009.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

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