CME Group Net Income Falls 17 Percent as Rates Trading Drops

CME Group Inc., the world’s largest futures market, said second-quarter profit fell 17 percent from a year earlier as interest rates near zero reduced trading in the company’s biggest contract.

Net income fell to $245 million, or 74 cents a share, from $294 million, or 88 cents a share, a year earlier, Chicago-based CME said today in a statement. Excluding tax provision charges related to the company’s joint-venture S&P Dow Jones Indices and compensation costs, profit was 89 cents per share, exceeding the average estimate of 83 cents in a Bloomberg survey of analysts. CME Group split its stock five-for-one on July 20.

Daily futures and options volume in the quarter dropped 9 percent to average 12.4 million contracts, the company said earlier this month. The decline was led by CME Group’s most-actively traded contracts, interest rate futures, which fell 20 percent to an average 5.1 million trades a day from 6.4 million a year ago. The Fed’s target rate for overnight loans between banks has been locked in a range of zero to 0.25 percent since December 2008, reducing the need for investors to hedge with futures or speculate on rate movements.

“It has been a challenging year for the financial industry,” Terrence Duffy, executive chairman of CME Group, said in the statement.

Revenue Falls

Futures contracts at CME Group tied to equity indexes rose 3 percent in the quarter, the company said July 3. Energy trading, the largest revenue generator at the company, fell 1 percent.

Revenue fell 5.1 percent to $796 million last quarter, from $838 million a year ago, the company said.

CME Group rose 2.3 percent to $52.44 in New York. The shares have fallen 8 percent over the past year.

The futures industry has suffered two high-profile breaches of investor confidence within the last year, as the bankruptcies of MF Global Holdings Ltd. and Peregrine Financial Group Inc. led to the loss of about $1.8 billion in customer money held at the firms.

To allay concern, CME Group proposed a plan this week to house all excess customer funds at clearinghouses or other depositories. Duffy, testifying to Congress yesterday, said the plan “will be controversial and perhaps have disruptive consequences.”

Segregated Funds

Brokerages often hold excess collateral in customer accounts, which by law must be kept segregated from the firm’s own money, and which can be used by the brokerages to earn interest income. CME Group said July 23 when it introduced the idea of housing all customer money outside of brokerages that any interest earned would be returned to the firms to maintain a key source of revenue.

Duffy reiterated today on a conference call with analysts that the idea is not to disrupt how the futures industry works. “This would not be a profit generator at CME Group,” he said. “The last thing we want to do is have any notion of disintermediating” futures brokerages, he said.

Phupinder Gill, CME Group’s chief executive officer, said the plan “is very specifically to restore confidence in the marketplace” and in brokerages.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE