CME Group 2012 Annual Report


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CME Group 2012 Annual Report

  1. 1. The Power of Risk Management2012 Annual Report
  2. 2. 09 10 1108 12TOTAL CONTRACT VOLUME(in millions of round turn trades)TOTAL REVENUES(in millions of dollars)OPERATING MARGIN(in percentages)NET INCOMEATTRIBUTABLE TO CME GROUP1(in millions of dollars)09 10 1108 122,8903,3872,9782,5853,07809 10 1108 122,9152,5612,6133,0043,28109 10 1108 1262616162589511,812896826715¹2011 results include a $646 million non-cash benefit from a tax adjustment primarily due to a revaluation of our deferred tax liabilities.²Amounts exclude cash performance bonds and guaranty fund contributions.n.m. not meaningful All references to volume, notional value and rate per contract information in the text of this documentexclude our IRS, CDS, KCBT, CME Clearing Europe, TRAKRS and Swapstream contracts.See the 2012 Annual Report on Form 10-K for the companys forward-looking statements.Financial Highlightsyear ended or at December 31(in millions, except per share data and notional value) 2012 2011 ChangeIncome Statement DataTotal revenues $ 2,915 $ 3,281 -11%Operating income 1,692 2,021 -16Income before income taxes 1,693 1,936 -13Net income attributable to CME Group ¹ 896 1,812 -51Earnings per share: Basic ¹ $ 2.71 $ 5.45 -50% Diluted ¹ 2.70 5.43 -50Balance Sheet DataCurrent assets² $ 2,133 $ 1,612 32%Total assets² 32,278 31,425 3Current liabilities² 1,032 281 n.m.Total liabilities² 10,773 9,803 10CME Group shareholders’ equity 21,419 21,552 -1Other DataTotal contract volume (round turn trades) 2,890 3,387 -15%Total electronic volume (round turn trades) 2,464 2,860 -14Open interest at year end (contracts) 70 78 -11Notional value of trading volume (in trillions) $ 806 $ 1,068 -25
  3. 3. At CME Group, we believe that risk management empowerscustomers to move ahead regardless of economic and geo-political changes around the world. The year 2012 presentedfurther opportunities to deliver on that principle. As globalmarkets evolved, we took a number of bold new steps to ad-dressthe needs of existing and potential clients in the UnitedStates, Europe, Asia and Latin America. With our expandedglobal presence and increasing scale, we are providing evenmore ways to manage risk – giving businesses, institutionsand individuals the power to advance with confidence in aconstantly shifting marketplace.
  4. 4. If there is one thing that stands out asbusinesses begin to emerge from a dif-ficult economic environment globally,it’s that risk management is more im-portant than ever. Our focus has been toexpand ways to help customers world-wide succeed in handling their evolvingneeds as the demands of competitionand regulation intensify.Total company volume in 2012 wasnearly 3 billion contracts traded, whichgenerated more than $1.2 billion in cashfromoperations.Reflectingthisstrength,and consistent with the principles guid-ing our capital structure, we raised theregular quarterly dividend 59 percentin 2012. We increased our payout targetfrom approximately 35 percent to ap-proximately50percentoftheprioryear’scash earnings.During 2012, we returned $1.2 billionto our shareholders, representing anaggregate dividend yield of nearly 7 per-cent. This included an annual variabledividend of approximately $430 millionbased on 2012 results, which was accel-erated from first-quarter 2013 due touncertainty surrounding the future taxtreatment of dividends.As part of our global strategy, we an-nounced plans to launch a new London-based derivatives exchange in mid-2013to serve customers outside the UnitedStates. With more than 20 percent ofour electronic volume now originatingfrom Europe, Asia and Latin America,havinganexchangethatcanleverageourEuropean clearing house will provide ad-ditional opportunities to serve our grow-ing non-U.S. customer base.terrence A. Duffy Executive Chairman and PresidentDearShareholders 
  5. 5. Inaddition,weexpandedoureffortsinAsia by enhancing agreements with keypartners. This follows our global growthstrategy of serving local needs throughselective partnerships such as those wehave with other exchanges worldwide in-cludingBMFBOVESPA,BursaMalaysia,theDubaiMercantileExchangeandBolsaMexicana de Valores.Inglobalagriculturalmarkets,partici-pants in both established and emergingeconomies depend on liquid, transparentrisk management tools for price discov-ery. Our acquisition of the Kansas CityBoard of Trade (KCBT) serves this pur-pose.ItcombinesKCBTHardRedWinterWheat products with our deep and liquidCBOTSoftRedWinterWheatfuturesandoptions markets to provide new tradingopportunities for market participantsaround the world.Turning to the regulatory front, wecontinue to work closely with key con-gressional committees as well as theCommodityFuturesTradingCommissionand other futures industry participantsto strengthen customer protections andensure the integrity of futures markets.Furthermore, we are well positionedto provide clearing services to the OTCmarket as the Dodd-Frank clearing man­date is implemented. I believe the com-bination of our OTC clearing offering andour unparalleled range of futures prod-ucts provides the most comprehensiverisk management solutions available.We now clear the seven major inter-estrateswapcurrencies.Inaddition,wereceived regulatory approval to imple-ment portfolio margining for all marketparticipants.In all our efforts, we are committed toenabling customers worldwide to furtherleverage the power of risk managementtomeettheirchangingneeds–whenever,wherever and however they want.We continued to advance our global growth strategyby empowering customers through targeted riskmanagement tools and advanced clearing solutionsthat address macroeconomic and regulatory changes.terrence A. DuffyExecutive Chairman and PresidentMarch 15, 2013
  6. 6. Our offering of the broadest range ofproducts across all major asset classeswas instrumental in helping customersdeal with economic and geopolitical chal-lenges last year. Our interest rate and en-ergy products accounted for 20 percentand22percentof2012revenues,respec-tively. Equities (15 percent), market dataand information services (13 percent),agricultural commodities (13 percent),foreignexchange(6percent),andmetals(5 percent) rounded out revenue contri-butions, with the remaining 6 percentcoming from other sources.We also made significant progressacross several key areas. This includedlaunchingnewproducts,deepeningrela-tionships with our international strategicpartners, expanding our over-the-counter(OTC) clearing offering and solidifyingour position as a leader in index servicesandinformationproducts.Sofarin2013,we have seen higher volumes relative tolast year.Growing and Diversifying the CoreWesuccessfullycompletedtheacquisitionof the Kansas City Board of Trade, whichwill provide customers with greater capi-talefficiencies,newtradingopportunitiesand additional products to manage theirglobal wheat price risk. We also launchedCME Direct technology for online tradingofbothexchange-listedandOTCmarketsthrough a single application.We completed our joint venture withMcGraw-HilltocreateSPDowJonesIn-dices LLC. As a result, we secured a long-term exclusive license on SP futures,options and OTC swaps. This will furtherstrengthenourpositioninindexproductsand services and allow us to extend prod-uctdevelopmentandco-brandingacrossasset classes.Furthermore,wecompleteddevelop-ment of our co-location services, whichwent live in January 2012 and created anadditional revenue stream.Globalizing Our BusinessOur globalization strategy is based onserving the expanding needs of custom-ers in developing and emerging markets.As part of this effort, we launched a num-berofregionallyspecificproductsinclud-ing Black Sea Wheat and Chinese SteelRebarSwapFuturesaswellasU.S.DollarDenominated Ibovespa Futures, whichhelpusappealtoriskmanagementneedsunique to particular geographies.Our planned exchange in Europe,basedinLondon,isanimportantnextstepto meet the growing regional demandfrom our customers. The initial suite ofFX products will allow us to serve clientsin the $4-trillion-a-day OTC FX market,largely traded out of London, and we planto expand into additional asset classesover time.We also strengthened our internatio­nal partnerships, including implement-ing our cross-listing and cross-licensingarrangement with BMFBOVESPA andincreasing our stake in the Dubai Mer-cantile Exchange to 50 percent to helpbuild a new benchmark for crude oil eastof Suez. In addition, we advanced ourefforts in China, including helping to fa-cilitate operational readiness of ChineseFuturesCommissionMerchants(FCMs),renewing our Memorandum of Under­standing (MOU) with the Shanghai Fu-tures Exchange and signing an MOU withthe Bank of China.We are pleased with improving conditions so far in2013, and will build on this momentum as we continueto globalize the business by giving customers aroundthe world even more ways to manage their risk andadvance in challenging ourShareholders 
  7. 7. Adding OTC OfferingsThe relative safety and soundness ofcentral counterparty clearing for OTCinstruments has become increasinglyimportant. As a result, we have workedclosely with our customers and clear-ing firms to provide a comprehensive,multi-asset class clearing solution thatoffers operational ease and capitalefficiencies when combined with listedfutures products.To build on this, we have added buy-and sell-side firms for OTC clearing andfinalized long-term OTC clearing agree-ments with major sell-side banks forclearing both interest rate swaps (IRS)and credit default swaps (CDS). In addi-tion,wereceivedapprovalfromtheCom-modity Futures Trading Commission forCME Repository Service as a swaps datarepositoryforIRS,CDS,agriculturalcom-modities and FX asset classes.We also launched Deliverable InterestRate Swap Futures with strong supportfrom market participants. This productfills an important gap in the rates marketandbenefitsclientsbycombiningtheeco-nomic exposure of an interest rate swapwith the margin and liquidity benefitsof a futures contract. In addition, we areproviding portfolio margining to clearingmembers and customers based on riskoffsets between OTC IRS positions andEurodollar/Treasury futures positions.Achieving Operational ExcellenceOur best practices in clearing servicesprompted Risk Magazine to name CMEClearing as “Clearing House of the Year”inthemagazine’s2013RiskAwards.Thisachieve­ment, based on customer feed-back, validated the efforts of our globalteam to develop the most efficient OTCclearing solution available.We also completed significant en-hancements to the CME Globex electron-ic trading platform, which increased thecapacity,consistencyandpredictabilityof our system.Looking ahead, we will build on thepositive momentum so far in 2013 andcontinue to globalize the business toposition CME Group for success overthe long term.phupinder S. gillChief Executive OfficerMarch 15, 2013phupinder S. gill Chief Executive Officer
  8. 8. 1662519277 2012136272126720111662519277 2012132670.921.920.921.1209 10 1108 12(in dollars per share)DIVIDEND PAYOUT3.7009 10 1108 12AVERAGE DAILY ELECTRONICTRADING VOLUME(in thousands)(in trillions of dollars)NOTIONAL VALUEAVERAGE DAILYTRADING VOLUME(in thousands)09 10 1108 1209 10 1108 1211,42312,77510,25812,16713,43911,3509,73910,1808,29010,1201,0688061,2278139940.921.920.921.1209 10 1108 12(in dollars per share)DIVIDEND PAYOUT3.70RONICE(in trillions of dollars)NOTIONAL VALUE09 10 1108 121,0688061,227813994Interest RatesEquitiesEnergyForeign ExchangeAgricultural CommoditiesMetalsPRODUCT LINE REVENUES(as a percentage of total clearing and transaction fees)1362721267201212627212772011Company Achievements in 2012• Traded nearly 3 billion contracts worth approximately $1 quadrillion in notional value.• Returned $1.2 billion of dividends to shareholders.• Completed acquisition of Kansas City Board of Trade.• Completed joint venture to create SP Dow Jones Indices LLC.• Announced plans to create London-based derivatives exchange, CME Europe.• Launched regionally specific products in Europe, Asia and Latin America.• Enhanced over-the-counter clearing offering, attracting new participants while providingadditional choice through Deliverable Interest Rate Swap Futures.• Strengthened strategic partnerships with leading global exchanges including BMFBOVESPA,Bolsa Mexicana de Valores, Bursa Malaysia and Dubai Mercantile Exchange and expanded orestablished memoranda of understanding with Shanghai Futures Exchange and Bank of China.
  9. 9. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One)È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2012OR‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934Commission File Number 001-31553CME GROUP INC.(Exact name of registrant as specified in its charter)Delaware 36-4459170(State or Other Jurisdiction ofIncorporation or Organization)(IRS EmployerIdentification No.)20 South Wacker Drive, Chicago, Illinois 60606(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number, including area code: (312) 930-1000Securities registered pursuant to Section 12(b) of the Act:Title Of Each Class Name Of Each Exchange On Which RegisteredClass A Common Stock $0.01 par value NASDAQ GLOBAL SELECT MARKETSecurities registered pursuant to Section 12(g) of the Act: Class B common stock, Class B-1, $0.01 par value; Class B common stock, Class B-2, $0.01par value; Class B common stock, Class B-3, $0.01 par value; and Class B common stock, Class B-4, $0.01 par value.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No ÈIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes È No ‘Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes È No ‘Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ÈIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:Large accelerated filer È Accelerated filer ‘Non-accelerated filer ‘ (Do not check if a smaller reporting company) Smaller reporting company ‘Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No ÈThe aggregate market value of the voting stock held by non-affiliates of the registrant as of June 29 2012, was approximately $17.7 billion (basedon the closing price per share of CME Group Inc. Class A common stock on the NASDAQ Global Select Market (NASDAQ) on such date). Thenumber of shares outstanding of each of the registrant’s classes of common stock as of February 13, 2013 was as follows: 333,577,524 shares ofClass A common stock, $0.01 par value; 625 shares of Class B common stock, Class B-1, $0.01 par value; 813 shares of Class B common stock,Class B-2, $0.01 par value; 1,287 shares of Class B common stock, Class B-3, $0.01 par value; and 413 shares of Class B common stock, Class B-4,$0.01 par value.DOCUMENTS INCORPORATED BY REFERENCE:Documents Form 10-K ReferencePortions of the CME Group Inc.’s Proxy Statement for the2013 Annual Meeting of ShareholdersPart III
  10. 10. CME GROUP INC.ANNUAL REPORT ON FORM 10-KINDEXPagePART I. 1Item 1. Business 2Item 1A. Risk Factors 16Item 1B. Unresolved Staff Comments 31Item 2. Properties 31Item 3. Legal Proceedings 32Item 4. Mine Safety Disclosures 32PART II. 32Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities 32Item 6. Selected Financial Data 35Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36Item 7A. Quantitative and Qualitative Disclosures about Market Risk 58Item 8. Financial Statements and Supplementary Data 64Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 100Item 9A. Controls and Procedures 100Item 9B. Other Information 103PART III. 103Item 10. Directors, Executive Officers and Corporate Governance 103Item 11. Executive Compensation 103Item 12. Security Ownership of Certain Beneficial Owners and Management and Related ShareholderMatters 103Item 13. Certain Relationships, Related Transactions and Director Independence 104Item 14. Principal Accountant Fees and Services 104PART IV. 105Item 15. Exhibits and Financial Statement Schedules 105Signatures 112
  11. 11. PART ICertain TermsAll references to “options” or “options contracts” inthe text of this document refer to options on futurescontracts.Unless otherwise indicated, references to CMEGroup Inc. (CME Group) products include referencesto exchange-traded products on one of its regulatedexchanges: Chicago Mercantile Exchange Inc.(CME), Board of Trade of the City of Chicago, Inc.(CBOT), New York Mercantile Exchange, Inc.(NYMEX), Commodity Exchange, Inc. (COMEX)and The Board of Trade of Kansas City, Missouri,Inc. (KCBT). Products listed on these exchanges aresubject to the rules and regulations of the particularexchange and the applicable rulebook should beconsulted. Unless otherwise indicated, references toNYMEX include its subsidiary, COMEX.Further information about CME Group and itsproducts can be found at made available on our Web site does notconstitute a part of this Annual Report on Form 10-K.Information about Contract Volume and AverageRate per ContractAll amounts regarding contract volume and averagerate per contract exclude our TRAKRS, Swapstream,credit default swaps, interest rate swaps and CMEClearing Europe contracts.Trademark InformationCME Group is a trademark of CME Group Inc. TheGlobe logo, CME, Chicago Mercantile Exchange,Globex, E-mini, Green Exchange, The GreenExchange and Design, and GreenX are trademarks ofChicago Mercantile Exchange Inc. CBOT andChicago Board of Trade are trademarks of Board ofTrade of the City of Chicago, Inc. NYMEX, NewYork Mercantile Exchange and ClearPort aretrademarks of New York Mercantile Exchange, Inc.COMEX is a trademark of Commodity Exchange,Inc. KCBT and Kansas City Board of Trade aretrademarks of The Board of Trade of Kansas City,Missouri, Inc. Dow Jones, Dow Jones IndustrialAverage, SP 500, and SP are service and/ortrademarks of Dow Jones Trademark Holdings LLC,Standard Poor’s Financial Services LLC and SP/Dow Jones Indices LLC, as the case may be, andhave been licensed for use by Chicago MercantileExchange Inc. All other trademarks are the propertyof their respective owners.FORWARD-LOOKING STATEMENTSFrom time to time, in this Annual Report onForm 10-K as well as in other written reports andverbal statements, we discuss our expectationsregarding future performance. These forward-lookingstatements are identified by their use of terms andphrases such as “believe,” “anticipate,” “could,”“estimate,” “intend,” “may,” “plan,” “expect” andsimilar expressions, including references toassumptions. These forward-looking statements arebased on currently available competitive, financial andeconomic data, current expectations, estimates,forecasts and projections about the industries in whichwe operate and management’s beliefs andassumptions. These statements are not guarantees offuture performance and involve risks, uncertainties andassumptions that are difficult to predict. Therefore,actual outcomes and results may differ materially fromwhat is expressed or implied in any forward-lookingstatements. We want to caution you not to place unduereliance on any forward-looking statements. Weundertake no obligation to publicly update anyforward-looking statements, whether as a result of newinformation, future events or otherwise. Among thefactors that might affect our performance are:• increasing competition by foreign anddomestic entities, including increasedcompetition from new entrants into ourmarkets and consolidation of existing entities;• our ability to keep pace with rapidtechnological developments, including ourability to complete the development,implementation and maintenance of theenhanced functionality required by ourcustomers while ensuring that suchtechnology is not vulnerable to security risks;• our ability to continue introducingcompetitive new products and services on atimely, cost-effective basis, including throughour electronic trading capabilities, and ourability to maintain the competitiveness of ourexisting products and services, including ourability to provide effective services to theover-the-counter market;1
  12. 12. • our ability to adjust our fixed costs andexpenses if our revenues decline;• our ability to maintain existing customers,develop strategic relationships and attract newcustomers;• our ability to expand and offer our productsoutside the United States;• changes in domestic and non-U.S.regulations, including the impact of anychanges in domestic and foreign laws orgovernment policy with respect to ourindustry, including any changes to regulationsand policies that require increased financialand operational resources from us or ourcustomers;• the costs associated with protecting ourintellectual property rights and our ability tooperate our business without violating theintellectual property rights of others;• our ability to generate revenue from ourmarket data that may be reduced oreliminated by the growth of electronictrading, the state of the overall economy ordeclines in subscriptions;• changes in our rate per contract due to shiftsin the mix of the products traded, the tradingvenue and the mix of customers (whether thecustomer receives member or non-memberfees or participates in one of our variousincentive programs) and the impact of ourtiered pricing structure;• the ability of our financial safeguards packageto adequately protect us from the credit risksof clearing members;• the ability of our compliance and riskmanagement methods to effectively monitorand manage our risks, including our ability toprevent errors and misconduct and protect ourinfrastructure against security breaches andmisappropriation of our intellectual propertyassets;• changes in price levels and volatility in thederivatives markets and in underlying equity,foreign exchange, interest rate andcommodities markets;• economic, political and market conditions,including the volatility of the capital andcredit markets and the impact of economicconditions on the trading activity of ourcurrent and potential customers stemmingfrom the continued uncertainty in thefinancial markets;• our ability to accommodate increases incontract volume and order transaction trafficwithout failure or degradation of theperformance of our trading and clearingsystems;• our ability to execute our growth strategy andmaintain our growth effectively;• our ability to manage the risks and control thecosts associated with our acquisition,investment and alliance strategy;• our ability to continue to generate fundsand/or manage our indebtedness to allow usto continue to invest in our business;• industry and customer consolidation;• decreases in trading and clearing activity;• the imposition of a transaction tax or user feeon futures and options on futures transactionsand/or repeal of the 60/40 tax treatment ofsuch transactions;• the unfavorable resolution of material legalproceedings; and• the seasonality of the futures business.For a detailed discussion of these and other factorsthat might affect our performance, see Item 1A. ofthis Report beginning on page 16.ITEM 1. BUSINESSGENERAL DEVELOPMENT OF BUSINESSBuilding on the heritage of its futures exchanges(CME, CBOT, NYMEX, COMEX and KCBT), CMEGroup serves the risk management and investmentneeds of customers around the globe.CME was founded in 1898 as a not-for-profitcorporation. In 2000, CME demutualized and becamea shareholder-owned corporation. As a consequence,we adopted a for-profit approach to our business,including strategic initiatives aimed at optimizingcontract volume, efficiency and liquidity. In 2002,2
  13. 13. Chicago Mercantile Exchange Holdings Inc. (CMEHoldings) completed its initial public offering of itsClass A common stock, which is listed on theNASDAQ Global Select Market under the symbol“CME”. In 2007, CME Holdings merged with CBOTHoldings, Inc. and was renamed CME Group. Inconnection with the merger, we acquired the CBOTexchange. CBOT is a leading marketplace for tradingagricultural and U.S. Treasury futures as well asoptions on futures. In 2008, we merged withNYMEX Holdings and acquired NYMEX andCOMEX. On NYMEX, customers primarily tradeenergy futures and options contracts, includingcontracts for crude oil, natural gas, heating oil andgasoline, as well as over-the-counter energytransactions cleared through CME ClearPort. OnCOMEX, customers trade metal futures and optionscontracts, including contracts for gold, silver andcopper. We launched CME Clearing Europe in 2011to expand our European presence and further extendthe geographical reach of our clearing services. InJanuary 2012, we launched our co-location businesswhich is comprised of hosting, connectivity andcustomer support services providing furtherdiversification of our revenue stream. In June 2012,we established a new joint venture in whichMcGraw-Hill contributed its Standard Poor’s(SP) Indices business and we contributed a portionof our CME Group Index Services business to createSP/Dow Jones Indices LLC (SP/DJI), a globalleader in index services. Our CME Group IndexServices business was originally formed in 2010 aspart of a joint venture with Dow Jones Company.As part of the formation of the joint venture in 2012,McGraw-Hill acquired our credit derivatives marketdata business. In September 2012, we applied to theUnited Kingdom’s Financial Services Authority(FSA) to create a London-based derivativesexchange. Pending regulatory approval as aRecognized Investment Exchange, CME EuropeLimited will initially begin trading foreign exchangefutures products and is expected to launch mid-2013.In November 2012, we acquired KCBT, which is theleading futures market for hard red winter wheat. In2012, we began operating a registered swap datarepository service that supports credit, interest rates,commodities and foreign exchange asset classes.Our futures and clearing business has historicallybeen subject to the extensive regulation of theCommodity Futures Trading Commission (CFTC).As a result of our global operations, we are alsosubject to the rules and regulations of the localjurisdictions in which we conduct business. Thisincludes the FSA, based on our offering of variousCME Group products and services to Europeancustomers and the operation of CME ClearingEurope, and the Securities and ExchangeCommission (SEC), in connection with our offeringof clearing services for security-based swaps. In July2012, the Financial Stability Oversight Councildesignated our U.S. clearing house as a systemicallyimportant financial market utility which carries withit additional regulatory oversight of certain of ourrisk-management standards, clearing, and settlementactivities.Our principal executive offices are located at 20South Wacker Drive, Chicago, Illinois 60606, andour telephone number is 312-930-1000.FINANCIAL INFORMATION ABOUTINDUSTRY SEGMENTSThe company reports the results of its operations asone reporting segment primarily comprised of theCME, CBOT, NYMEX, COMEX and KCBTexchanges. The remaining operations do not meet thethresholds for reporting separate segmentinformation.NARRATIVE DESCRIPTION OF BUSINESSWe offer the widest range of global benchmarkproducts across all major asset classes based oninterest rates, equity indexes, foreign exchange,energy, agricultural commodities, metals, weatherand real estate. Our products include both exchange-traded and over-the-counter derivatives. We bringbuyers and sellers together through our CME Globexelectronic trading platform across the globe and ouropen outcry trading facilities in Chicago, New YorkCity and Kansas City, and provide hosting,connectivity and customer support for electronictrading through our co-location services. Our CMEDirect technology offers side-by-side trading ofexchange-listed and over-the-counter markets. Wealso provide clearing and settlement services forexchange-traded contracts, as well as for clearedover-the-counter derivatives transactions. Finally, weoffer a wide range of market data services —including live quotes, delayed quotes, market reportsand a comprehensive historical data service — andhave expanded into the index services business.3
  14. 14. Our Competitive StrengthsCME Group offers a number of key differentiatingelements that set it apart from its competitors,including:Highly Liquid Markets—Our listed futures marketsprovide an effective forum for our customers tomanage their risk and meet their investment needsrelating to our markets. We believe that ourcustomers choose to trade on our centralized marketdue to its liquidity and price transparency. Marketliquidity—or the ability of a market to absorb theexecution of large purchases or sales quickly andefficiently, whereby the market recovers quicklyfollowing the execution of large orders—is key toattracting customers and contributing to a market’ssuccess.Most Diverse Product Line—Our products provide ameans for hedging, speculation and asset allocationrelating to the risks associated with, among otherthings, interest rate sensitive instruments, equityownership, changes in the value of foreign currency,credit risk and changes in the prices of agricultural,energy and metal commodities. The estimatedpercentage of clearing and transaction fees revenuecontributed by each product line is as follows:Product Line 2012 2011 2010Interest rate . . . . . . . . . . . . . . . . . . 25% 27% 27%Equity . . . . . . . . . . . . . . . . . . . . . . 19 21 21Foreign exchange . . . . . . . . . . . . . 7 7 7Agricultural commodity . . . . . . . . 16 13 12Energy . . . . . . . . . . . . . . . . . . . . . 27 26 27Metal . . . . . . . . . . . . . . . . . . . . . . 6 6 6We believe that the breadth and diversity of ourproduct lines and the variety of their underlyingcontracts is beneficial to our overall performancewhen an individual product line or individual productis impacted by macroeconomic factors. Additionally,our asset classes contain various products designed toaddress differing risk management needs.Our products are traded through the CME Globexelectronic trading platform, our open outcry auctionmarkets in Chicago, New York City and Kansas City,and through privately negotiated transactions that weclear. The estimated percentage of clearing andtransaction fees revenue contributed by each tradingvenue is as follows:Trading Venue 2012 2011 2010Electronic . . . . . . . . . . . . . . . . . . . 76% 75% 74%Open outcry . . . . . . . . . . . . . . . . . 7 9 10Privately negotiated . . . . . . . . . . . 6 5 5CME ClearPort (OTC) . . . . . . . . . 11 11 11Our products generate valuable informationregarding prices and trading activity. We distributeour market data over the CME market data platformdirectly to our electronic trading customers as part oftheir access to our markets, as well as to quotevendors who consolidate our market data with thatfrom other exchanges, other third-party dataproviders and news sources, and then resell theirconsolidated data. The estimated contributions of ourmarket data and information services products,excluding our index market data offerings, based onpercentage of total revenue over the last three years,were 12% in 2012, 10% in 2011 and 11% in 2010.In 2010, we expanded our market data offeringsthrough our joint venture with Dow Jones—CMEGroup Index Services—which further diversified ourrevenue streams. In June 2012, we established ournew joint venture with McGraw-Hill and contributeda portion of our CME Group Index Services businessto create SP/DJI. We derived 2% of our revenuesfrom our index services business in 2012, 3% in 2011and 2% in 2010.Safety and Soundness of our Markets—Weunderstand the importance of ensuring that ourcustomers are able to manage and contain theirtrading risks. As the markets and the economy haveevolved, we have worked to adapt our clearingservices to meet the needs of our customers. Weapply robust risk management standards and enforceand facilitate applicable CFTC customer protectionstandards for exchange-traded products and clearedover-the-counter derivatives. Clearing member firmsare continually monitored and examined to assesstheir outstanding risk, capital adequacy andcompliance with customer protection rules andregulations. We utilize a combination of risk4
  15. 15. management capabilities to assess our clearing firmsand their account exposure levels for all asset classes24 hours a day throughout the trading week. Our U.S.clearing house is operated within our CME exchange.We also operate a UK clearing house—CMEClearing Europe. In connection with our acquisitionof KCBT, we acquired its clearing house. We expectto complete the integration of the KCBT clearinghouse with our U.S. clearing house in April 2013.Our integrated clearing function is designed to ensurethe safety and soundness of our markets. Our clearingservices are designed to protect the financial integrityof our markets by serving as the counterparty toevery trade, becoming the buyer to each seller andthe seller to each buyer, and limiting credit risk. Theclearing house is responsible for settling tradingaccounts, clearing trades, collecting and maintainingperformance bond funds, regulating delivery andreporting trading data. CME Clearing marks openpositions to market at least twice a day, and requirespayment from clearing firms whose positions havelost value and makes payments to clearing firmswhose positions have gained value. For selectcleared-only markets, positions are marked-to-marketdaily, with the capacity to mark-to-market morefrequently as market conditions warrant. We alsooffer clearing services through CME ClearPort, acomprehensive set of flexible clearing services forthe global over-the-counter market backed by CMEClearing. See “Item 7A. Quantitative and QualitativeDisclosures About Market Risk,” beginning on page59 and “Item 1A. Risk Factors,” beginning on page16, for more information on our financial safeguardspackage and the associated credit risks related to ourclearing services.Superior Trading Technology and Distribution—We strive to provide the most flexible architecture interms of bringing new technology, innovations andsolutions to the market. Our CME Globex electronictrading platform is accessible on a global basis nearly24 hours a day throughout the trading week. In 2012,we launched the next generation of CME Globexreducing order entry and market data latencyvariability along with increasing capacity and costefficiency.Our platform offers:• certainty of execution;• vast capabilities to facilitate complex anddemanding trading;• direct market access;• fairness, price transparency and anonymity;and• global distribution, including connectionthrough high-speed internationaltelecommunications hubs in key financialcenters in Europe, Asia and Latin America,and hosting or global order routing to ourglobal partner exchanges.In January 2012, we launched our service offeringsfor co-location at our data center facility, whichhouses our trading match engines for all productstraded on the CME Globex platform. The serviceprovides the lowest latency connection for ourcustomers. The offering is made available to allcustomers on equal terms. We derived 2% of ourrevenues from our co-location business in 2012. Wealso enhanced our trading technology with the launchof CME Direct, which offers on-line trading of bothexchange-traded and over-the-counter markets. In2012, 84% of our contract volume was conductedelectronically.Our Strategic InitiativesThe following is a description of our strategicinitiatives:Leading Core Business Innovation—We continue toenhance our customer relations to allow us to furthercross-sell our products, expand on the strength of ourexisting benchmark products and launch newproducts. Over the last three years, our key newproduct launches included the Ultra-long BondTreasury futures and options, Weekly Treasuryoptions and a deliverable interest rate swap futuresproduct. During the year, we also completed theacquisition of the KCBT, providing customers withgreater capital efficiencies, new trading opportunitiesand additional products to manage their global wheatprice risk. We also acquired the Green Exchange,LLC and integrated its products into our energyproduct suite which adds to our energy complex andexpands our reach into the environmental market.5
  16. 16. Globalizing our Company and our Business—Ourgoal is to continue to expand and diversify ourcustomer base worldwide and offer customers aroundthe world the most broadly diversified portfolio ofbenchmark products. We expanded our product suitewith the launch of a number of regionally specificproducts, including Black Sea Wheat, deliverablerenminbi futures and Chinese Steel Rebar swapfutures, which help us appeal to risk managementneeds unique to a particular geography. We continueto believe that we have significant opportunity toexpand the participation of our non-U.S. customerbase in our markets. We are focusing on core growthin global markets because we believe that Asia, LatinAmerica, and other emerging markets will experiencesuperior economic and financial markets growth overthe next decade compared with the more matureNorth American and European markets. In particular,we plan to expand our presence in major financialcenters in Asia, grow our commodities business withnon-U.S. customers and products and penetrateemerging markets, such as China and India.To further enhance our customers’ tradingopportunities, we have partnered with leadingexchanges around the world to make their productsavailable on or through our CME Globex platformand network. These arrangements allow ourcustomers to access many of the world’s mostactively traded equity futures contracts—BrazilianIBovespa index futures, Korean Kospi 200 indexfutures, Indian Nifty 50 index futures, JapaneseNikkei 225 index futures and the Mexican IPC index.These strategic relationships allow us to accelerateour market penetration, expand our customer reach,lower barriers of access to global benchmarks anddevelop product sales channels with local brokers.These relationships are also designed to allow thecustomers of our partner exchanges to access ourproducts and markets. During 2012, we strengthenedour international partnerships, includingimplementing our cross-listing and cross-licensingarrangement with BMFBOVESPA S.A.(BMFBOVESPA), and increasing our investmentin the Dubai Mercantile Exchange to help build thenew benchmark for crude oil East of Suez.In May 2011, we launched CME Clearing Europeand we have made steady progress building on ourEuropean presence to further extend the geographicalreach of our clearing services. We offer clearingservices on over-the-counter commodity derivativeproducts, including energy, agriculture, freight andprecious metals, through CME Clearing Europe, andwe continue to expand the range of eligible products.Next steps include the clearing of interest rate swaps.In September 2012, we applied to the FSA forapproval to create a London-based exchange that willinitially offer trading of foreign exchange futuresproducts and ultimately expand into other products.We believe establishing an exchange in the UnitedKingdom will leverage the central counterpartymodel of CME Clearing Europe and will allow us tomore closely align with our regional customers inboth listed and over-the-counter markets, and willprovide additional opportunities to our expandingnon-U.S. customer base.Expanding our Existing Customer Base andEnhancing our Product and Services Offerings toMeet their Risk Management Needs—We plan togrow our business by targeting cross asset salesacross client segments, driving international sales(specifically in Asia and Europe) and generating newclient participation across all regions. We have a longhistory of providing customer choice and flexibilityand believe that our products and services make uswell positioned to help our customers adapt andcomply with the new regulations, while enablingthem to manage their risks in as efficient a manner aspossible. With the continued implementation of theDodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank) and Basel III InterimCapital Framework (Basel III), we expect globalbanks to look for capital efficiencies and move tocentralized clearing on a futures exchange. Wecontinue to focus on new customer onboarding forswaps clearing services, expanding our over-the-counter product offerings and working with the buy-and sell-sides to meet their needs for real-timeclearing, risk management and data reporting.Extending our Capabilities and Business in theOver-the-Counter Markets—Our goal is to provide acomprehensive multi-asset class clearing solution tothe market for maximum operational ease and thecapital efficiency that comes with connecting to asingle clearing house. Our over-the-counter offeringsprovide participants the extensive counterparty creditrisk reduction and transparency of our clearingservices while preserving the prevailing executionprocesses, technology platforms and economicstructures currently in use in the marketplace. We6
  17. 17. have built a multi-asset class over-the-counterclearing solution. We offer clearing services forcleared over-the-counter derivatives in interest rateswaps, credit default swaps, foreign exchange andcommodities. In 2012, we strengthened thecapabilities of our over-the-counter product offeringwith the launch of portfolio margining of interest rateswaps and futures positions for all marketparticipants. We continue to collaborate with buy-and sell-side customers to provide the innovativeproducts and services they need to manage their riskeffectively in a continuously evolving marketplace.In 2012, we cleared over-the-counter transactionswith a notional value of over $1.1 trillion, and openinterest as of December 31, 2012 was $691.8 billion.Our CME ClearPort platform offers an array ofclearing services that depend on the nature of theproduct traded and has the capacity to clear andreport transactions in multiple asset classes.Establishing Ourselves as the Leading ExchangeCompany Provider of Information Products andIndex Services and Enhancing our IntellectualProperty Portfolio—We offer a variety of marketdata services for the futures, equities and the over-the-counter markets. In June 2012, we established anew joint venture in which McGraw-Hill contributedits SP Indices business and we contributed aportion of our CME Group Index Services businessto create SP/DJI, a global leader in index services.This new venture creates a leading index providerwell-positioned to serve global institutional and retailcustomers and will allow us to continue to beinnovative with product development and co-branding across asset classes. As part of theagreement, we acquired a long-term, ownership-linked, exclusive license to list futures and options onfutures based on the SP Indices. Our CME GroupIndex Services business was originally formed in2010 as part of a joint venture with Dow Jones Company. We also plan to expand our existingintellectual property portfolio for our technology andproduct and services offerings.Patents, Trademarks and LicensesWe own the rights to a large number of trademarks,service marks, domain names and trade names in theUnited States, Europe and in other parts of the world.We have registered many of our most importanttrademarks in the United States and other countries.We hold the rights to a number of patents and havemade a number of patent applications. Our patentscover match engine, trader user interface, tradingfloor support, market data, general technology andclearing house functionalities. We also own thecopyright to a variety of materials. Those copyrights,some of which are registered, include printed and on-line publications, web sites, advertisements,educational material, graphic presentations and otherliterature, both textual and electronic. We attempt toprotect our intellectual property rights by relying ontrademarks, patents, copyrights, database rights, tradesecrets, restrictions on disclosure and other methods.We offer equity index futures and options on keybenchmarks, including SP, NASDAQ, Dow Jonesand Nikkei indexes. We also have an agreement withthe Chicago Board Options Exchange (CBOE) to listfutures and options on futures for volatility indexeson a variety of asset classes. These products are listedby us subject to license agreements with theapplicable owners of the indexes. We have exclusivearrangements with Standard Poor’s (SP), TheNASDAQ OMX Group, Inc. (NASDAQ) and DowJones, and non-exclusive arrangements with the otherthird parties. In connection with our joint venturewith McGraw-Hill, we entered into a new licenseagreement with SP (SP License Agreement),which superseded our prior licensing arrangementsand was assigned to the joint venture. In accordancewith the terms and conditions of the SP LicenseAgreement, the joint venture granted CME a licenseto use certain SP stock indexes and the related tradenames, trademarks and service marks in connectionwith the creating, issuing, listing, trading, clearing,marketing and promoting of futures contracts,options on futures contracts, swaps and otherderivative contracts. CME’s license for the SP 500Index will be exclusive for futures and options onfutures until one year prior to the termination of theSP License Agreement, and non-exclusive for thelast year. The license for the other SP stock indexesis generally exclusive for futures and options onfutures. The term of the SP License Agreement willcontinue until the later of (i) December 31, 2017 or(ii) the date that is one year after the date that CMEGroup ceases to own at least five percent (accountingfor dilution) of the outstanding joint venture interests.Upon the occurrence of certain events, includingcertain terminations of the joint venture, the termmay be extended up to an additional ten years. TheSP License Agreement also provides CME withcertain rights to sublicense its rights under the7
  18. 18. agreement to any third-party exchange or otherorganized trading facility located outside of theUnited States. CBOT has a license agreement (DowJones License Agreement) with CME Group IndexServices LLC (CME Indexes), which has also beenassigned to the joint venture. The Dow Jones LicenseAgreement provides CBOT and certain of itsaffiliates a license to use certain Dow Jones stockindexes and the related trade names, trademarks andservice marks in connection with the creating, listing,trading, clearing, marketing and promoting of futurescontracts, options on futures contracts and otherfinancial products that are based upon such DowJones stock indexes. Indexes to which CBOT hasexclusive license rights include the Dow JonesComposite Index, the Dow Jones Industrial AverageIndex, the Dow Jones Transportation Average Indexand the Dow Jones Utility Average Index, amongothers. CBOT holds a non-exclusive license for theDow Jones Global Titans 50 Index, Dow Jones ItalyTitans 30 Index, Dow Jones Sector Titans Indexesand Dow Jones U.S. Real Estate Index, amongothers. CBOT also has certain rights to sublicense itsrights under the Dow Jones License Agreement toany other exchange for the trading of futurescontracts and options on futures contracts. The initialterm of the agreement is from July 1, 2011 throughJune 30, 2026. Following the initial term, the DowJones License Agreement shall automatically renewfor renewal terms of five years thereafter so long asthere is open interest in any of CBOT’s or itsaffiliates’ products based on one or more of the DowJones licensed indexes. In the event there is no openinterest in any such products, then CME Indexes mayterminate the agreement by providing written noticeof non-renewal to CBOT at least six months prior tothe end of the initial term or the then current renewalterm—provided that if any open interest arises duringsuch six-month period, the agreement shallautomatically renew. Our NASDAQ license isexclusive through 2019. Copies of our SP, DowJones and NASDAQ license arrangements have beenfiled as material contracts. We pay the applicablethird party per trade fees based on contract volumeunder the terms of these licensing agreements.Following the well-publicized issues relating to thecredibility of the London Interbank Offered Rate(LIBOR), numerous investigations were undertakenby regulators and an official study of the benchmarkwas commissioned to evaluate potential reforms. Wecurrently have a licensing and membershipagreement with BBA Enterprises Limited and theBritish Bankers’ Association (collectively, BBA) forthe use of LIBOR to settle several of our interest rateproducts, including our Eurodollar contract. For thelicense, we paid an upfront fee and pay an annual fee.Based on the ongoing review of LIBOR, we expectLIBOR to be reformed rather than replaced and tocontinue as a regulated benchmark. Depending uponthe outcome of the reform efforts, we may need toenter into a new license agreement with BBA or theorganization appointed to administer the benchmark.We cannot assure you that we will be able tomaintain the exclusivity of our licensing agreementswith SP, Dow Jones and NASDAQ or be able tomaintain our other existing licensing arrangements.In addition, we cannot assure you that others will notsucceed in creating stock index futures based oninformation similar to that which we have obtainedby license, or that market participants will notincreasingly use other instruments, includingsecurities and options based on the SP, Dow Jonesor NASDAQ indexes, to manage or speculate on U.S.stock risks. Parties may also succeed in offeringindexed products that are similar to our licensedproducts without being required to obtain a license,or in countries that are beyond our jurisdictionalreach and/or our licensors.SeasonalityGenerally, we have historically experiencedrelatively higher contract volume during the first andsecond quarters and sequentially lower contractvolume in the third and fourth quarters. However,such seasonality may also be impacted by generalmarket conditions or other events. During 2012, 27%of our consolidated revenues were recognized in thefirst quarter, 27% in the second quarter, 23% in thethird quarter and 23% in the fourth quarter.Working CapitalWe generally meet our funding requirements withinternally generated funds supplemented from time totime with public debt and commercial paperofferings. For more information on our workingcapital needs, see “Management’s Discussion andAnalysis of Operations and Financial Condition-Liquidity and Capital Resources,” beginning on page55, which section is incorporated herein by reference.8
  19. 19. Customer BaseOur customer base includes professional traders,financial institutions, institutional and individualinvestors, major corporations, manufacturers,producers and governments. Our customers canaccess our CME Globex trading platform across theglobe. Customers may be members of one or more ofour CME, CBOT, NYMEX or COMEX exchanges ora permit holder at KCBT. Rights to directly accessour markets will depend upon the nature of thecustomer, such as whether the individual is a memberor permit holder of one of our exchanges or hasexecuted an agreement with us for direct access.Trading rights and privileges are exchange specific.Trading on our open outcry trading floors isconducted exclusively by our members and permitholders. Membership on one of our futures exchangesor ownership of a KCBT permit also enables acustomer to trade specific products at reduced ratesand lower fees. Under the terms of the organizationaldocuments of our exchanges, our members/permitholders have certain rights that relate primarily totrading right protections, certain trading feeprotections and certain membership/permit holderbenefit protections. In 2012, 79% of our contractvolume was conducted by our members and permitholders.The majority of clearing and transaction feesreceived from clearing firms represent charges fortrades executed and cleared on behalf of theircustomers. Two firms each represented 12% of ourclearing and transaction fees revenue for 2012. In theevent a clearing firm were to withdraw, we believethat the customer portion of the firm’s tradingactivity would likely transfer to another clearing firmof the exchange. In 2011, one of our largest clearingfirms was placed into bankruptcy and we transferredall of their more than 30,000 customer accounts toother futures commission merchants.CompetitionThe industry in which we operate is highlycompetitive and we expect competition to continue tointensify, especially in light of the implementation ofDodd-Frank and other reforms of the financialservices industry. For example, Dodd-Frank gives theCFTC authority to require certain swaps to be clearedby central clearing houses and to require certain ofthose swaps mandated for clearing to be traded onexchanges or swap execution facilities, unless noexchange or swap execution facility makes the swapavailable for trading. While these new requirementscreate opportunities for us to expand our over-the-counter business, a number of market participantsand other exchanges and less regulated tradingplatforms have developed, and likely will develop inthe future, competing platforms and products.We encounter competition in all aspects of ourbusiness, including from entities having substantiallygreater capital and resources, offering a wide rangeof products and services and some operating under adifferent and possibly less stringent regulatoryregime. We face competition from other futures,securities and securities option exchanges; over-the-counter markets; clearing organizations; consortiaformed by our members and large marketparticipants; swap execution facilities; alternativetrade execution facilities; technology firms, includingmarket data distributors and electronic trading systemdevelopers; and others.Competition in our Derivatives BusinessWe believe competition in the derivatives andsecurities business is based on a number of factors,including, among others:• depth and liquidity of markets;• transaction costs;• breadth of product offerings and rate andquality of new product development;• ability to position and expand upon existingproducts to address changing market needs;• transparency, reliability and anonymity intransaction processing;• connectivity, accessibility and distribution;• technological capability and innovation;• efficient and secure settlement, clearing andsupport services;• regulatory environment; and• reputation.We believe that we compete favorably with respect tothese factors. Our deep, liquid markets; diverseproduct offerings; rate and quality of new product9
  20. 20. development; and efficient, secure settlement,clearing and support services, distinguish us from ourcompetitors. We believe that in order to maintain ourcompetitive position, we must continue to expandglobally; develop new and innovative products;enhance our technology infrastructure, including itsreliability and functionality; maintain liquidity andlow transaction costs, and adopt additional customerprotections designed to ensure the integrity of ourmarket and the confidence of our customers.Our principal competitors include other exchangessuch as NYSE Euronext (NYSE),IntercontinentalExchange, Inc. (ICE), the Hong KongExchanges and Clearing Limited (HKEX) and EurexGroup. In addition, recent industry developments andalliances, such as the Electronic Liquidity Exchange(ELX), have resulted in a growing number of well-capitalized trading service providers that competewith all or a portion of our business. We expectindustry participants to continue to look for ways togrow their business despite the challengingregulatory environment. For example, in December2012, NYSE and ICE entered into a mergeragreement pursuant to which ICE would acquireNYSE. HKEX completed its acquisition of theLondon Metal Exchange in 2012.We face competition from the over-the-countermarket with the trading of contracts similar to thosetraded or cleared on our exchanges, such as swaps,forward contracts and other exchange “look-alike”contracts, in which parties directly negotiate theterms of their contracts, as well as from spot markets,exchange-traded funds, contracts for difference andother substitutes for our products. Development ofswap execution facilities and the mandated clearingrequirement for certain products may createplatforms that promote competitive substitutes forour privately negotiated and exchange-tradedproducts. We primarily face competition from theLCH.Clearnet Group in interest rate swaps and ICEin credit default swaps.Competition in our Transaction ProcessingBusinessIn addition to the competition we face in ourderivatives business, we face a number ofcompetitors in our transaction processing and otherbusiness services. In the past few years, there hasbeen increased competition in the provision ofclearing services and we expect competition tocontinue to increase in connection with theimplementation of Dodd-Frank, which requires themandatory central clearing of standardized over-the-counter products.ICE has its own clearing operations which arecomprised of regulated clearing houses across theUnited States, Europe and Canada. The OptionsClearing Corporation clears U.S.-listed options andclears futures on a number of underlying financialassets including common stocks, currencies and stockindexes. New York Portfolio Clearing, a clearinghouse created by NYSE and The Depository Trust Clearing Corporation (DTCC), clears interest ratefutures contracts and cross-margins eligible positionsagainst U.S. Treasury and agency securities andrepurchase agreements cleared by DTCC’ssubsidiary, Fixed Income Clearing Corporation. Webelieve that other exchanges may also undertake toprovide clearing services, especially in light of Dodd-Frank’s clearing mandate.We believe competition in the transaction processingand business services market is based on, amongother things, the fees charged for the servicesprovided; quality and reliability of the services;creditworthiness of the clearing house; timelydelivery of the services; reputation; offering breadth;confidentiality of positions and information securityprotective measures; and the value of providingcustomers with capital efficiencies.Competition in our Market Data BusinessTechnology companies, market data and informationvendors and front-end software vendors alsorepresent potential competitors because, as purveyorsof market data or trading software systems, thesefirms typically have substantial distributioncapabilities. As technology firms, they also haveaccess to trading engines that can be connected totheir data and information networks. Additionally,technology and software firms that develop tradingsystems, hardware and networks that are otherwiseoutside of the financial services industry may beattracted to enter our markets. This may lead todecreased demand for our market data.10
  21. 21. Regulatory MattersOur operation of futures exchanges is subject toextensive regulation by the CFTC under a principles-based approach which requires that our exchangesubsidiaries satisfy the requirements of certain coreprinciples relating to the operation and oversight ofour markets and our clearing house, but also, as aresult of recent regulations, under a highlyprescriptive regulatory regime. The CFTC carries outthe regulation of the futures markets in accordancewith the provisions of the Commodity Exchange Actas amended by, among others, the CommodityFutures Modernization Act and Dodd-Frank. TheCFTC is subject to reauthorization every five yearsand is scheduled for reconsideration in 2013.In light of widespread financial and economicdifficulties in the U.S. and abroad, particularly acutein the latter half of 2008 and early 2009, there werecalls for a restructuring of the regulation of financialmarkets. Dodd-Frank, which was signed into law in2010, is a comprehensive banking and financialservices reform package that includes significantchanges to the oversight of the derivatives markets,both over-the-counter and exchange-traded. Dodd-Frank reinforces the core tenets of our markets:• price transparency,• liquid markets to minimize transaction cost,• market integrity,• customer protection, and• the safety and soundness of centralcounterparty clearing services.Since the adoption of Dodd-Frank, the CFTC, theSEC, the Department of Treasury and otherregulators have engaged in extensive rulemaking toimplement the legislation. CME Group and others inthe industry continue to actively participate in therulemaking process, with the goal that the finalregulations serve the public interest, fostercompetition and innovation and do not place the services sector at a competitivedisadvantage in the evolving global financialmarkets. Over the past two years, a number ofregulations implementing Dodd-Frank werefinalized, including rules relating to mandatoryclearing and the operation of a clearing house, anti-manipulation, large trader reporting, the definition ofagricultural commodity and certain provisions of therules applicable to designated contract markets.While we continue to believe that the new regulationsprovide opportunities for our business which weintend to explore, a significant portion of the Act,however, remains subject to further rulemaking, andsuch final regulations could include provisions thatnegatively impact our business. SeveralCongressional hearings have been held to evaluatethe situation and various policy suggestions havebeen made to ensure the protection of customersegregated funds. We have incurred and expect tocontinue to incur significant additional costs to makethe necessary changes to our business to comply withthe provisions of Dodd-Frank and any newregulations stemming from these events.Our key areas of focus in the regulatory environmentare:• Changes to the core principles for designatedcontract markets, including any changes tothe rules implementing the competitiveexecution requirements of Core Principle 9.Rules promulgated under this provision mayrequire us to make modifications to themanner in which certain of our contracts tradeand/or require that such products be de-listedas futures and re-listed as swaps after aspecified compliance period.• Changes to the self-regulatory model, which,if modified, could alter the manner in whichwe currently oversee our marketplace. Webelieve that we are best positioned to continueto conduct financial and market surveillanceof our clearing firms.• The implementation of the position limitrules, which could have a significant impacton our commodities business relative to suchmarkets abroad given that it does not appearthat foreign jurisdictions will impose positionlimits rules as stringent as those adopted bythe CFTC. Although the CFTC adopted newposition limits, they were subsequentlyvacated by the U.S. District Court for theDistrict of Columbia and remanded back tothe CFTC.• Concerns regarding the “one size fits all”rules for capital charges implementing BaselIII, as well as whether we will be deemed a11
  22. 22. “qualified” central counterparty, and the riskthat these new standards may impose overlyburdensome capital requirements on ourclearing members and customers, which mayeliminate the incentives to trade liquidexchange-traded derivatives instead of otherderivatives products with higher risk profiles.• The potential elimination of the 60/40 taxtreatment of certain of our derivativescontracts, which would impose a significantincrease in tax rates applicable to our marketparticipants, and could result in a decrease intheir trading activity.• The implementation of mechanisms to furtherprotect customer funds at the futurescommission merchant level, and to restoreconfidence in the derivatives markets.Pursuant to Dodd-Frank, in July 2012, the FinancialStability Oversight Council designated CME, due itsoperation of our U.S. clearing house, as asystemically important financial market utility whichcarries with it additional regulatory oversight ofcertain of our risk-management standards, clearingand settlement activities.In 2012, we began operating a registered swap datarepository service that is subject to the oversight ofthe CFTC and we must comply with certain coreprinciples under the Commodity Exchange Act.As a global company with operations and locationsaround the world, we are also subject to the laws andregulations in the locations in which we do business.The financial services industry outside of the UnitedStates is also undergoing similar significant change,particularly in Europe. For example, in the UnitedKingdom the government has proposed to reorganizeits regulatory framework, which would include thedissolution of the FSA with oversight to betransitioned in April 2013 to the Bank of England,the Financial Conduct Authority and the PrudentialRegulation Authority depending upon the status ofthe regulated entity. As a result, in the UnitedKingdom our operations could be subject to multipleregulators: CME Clearing Europe Limited (our U.K.clearing house) would be regulated by the Bank ofEngland, CME Europe Limited (our proposed would be regulated by the FinancialConduct Authority and CME (our U.S. clearinghouse) would be regulated by the EuropeanSecurities and Markets Authority (ESMA) as anoverseas clearing house. The European Union is alsoundergoing similar change with multiple supervisoryauthorities, such as ESMA established in 2011. Inaddition to the national regulators, ESMA has asupervisory and oversight role over Europeanclearing houses, non-European clearing houses, non-European exchanges, European trade repositories andnon-European trade repositories providing services inEurope. Multiple legislations such as the EuropeanMarket Infrastructure Regulation, the Markets inFinancial Instruments Directive, the CapitalRequirements Directive IV and the Market AbuseDirective, have been proposed with provisionssimilar to those contained in Dodd-Frank.Compliance with these new regulations may requireus and our customers to dedicate significant financialand operational resources which could result in someparticipants leaving our markets or decreasing theirtrading activity which would negatively affect ourprofitability. To the extent the regulatoryenvironment following the implementation of Dodd-Frank and other financial reform regulations is lessbeneficial for us or our customers, our business,financial condition and operating results could benegatively affected.If we fail to comply with applicable laws, rules orregulations, we may be subject to censure, fines,cease-and-desist orders, suspension of our business,removal of personnel or other sanctions, includingrevocation of our designations as a contract marketand derivatives clearing organization.In 2012, notifications from one of our market datadistributors made in accordance with therequirements of our market data license agreementincluded disclosures that such distributor haddisseminated our market data to the GovernmentTrading Corporation (GTC) and to a Europeansubsidiary of the National Iranian Oil Company(NIOC). In 2012, the gross revenues attributable tothese indirect subscriptions made through thedistributor were $3,150. The terms and conditions onwhich the market data was disseminated by thedistributor to GTC and NIOC are the same as wouldbe provided to any other indirect subscriber. Otherthan the execution of a uniform subscriber addendumthat is made available to all of our distributors for usewith their subscribers, we do not have any12
  23. 23. contractual or other relationship with GTC or NIOC.We believe that the distribution of our market data,which is otherwise publicly available in other formson our Web site on a real-time and delayed basis, isexempt from applicable U.S. sanctions programspursuant to a statutory and regulatory exemption forexports of information and informational materials.Nevertheless, we are in the process of requesting thatour market data distributors refrain from providingour market data to their subscribers that are located insanctioned countries or identified on the U.S.Treasury Department’s Specially DesignatedNationals and Blocked Persons List. The distributionof our market data to GTC and NIOC is subject todisclosure pursuant to Section 219 of the Iran ThreatReduction and Syria Human Rights Act of 2012(ITRSHR Act) and Section 13(r) of the SecuritiesExchange Act of 1934 (Exchange Act), whichrequires an issuer to disclose in its annual orquarterly reports, as applicable, whether it or any ofits affiliates knowingly engaged in certain activities,transactions or dealings relating to Iran or withdesignated natural persons or entities involved interrorism or the proliferation of weapons of massdestruction. Disclosure is required whether or not theactivities are sanctionable under U.S. law. Inconnection with these disclosures, we will berequired to separately file, concurrently with thisAnnual Report, a notice that such activities have beendisclosed in this report, which notice must alsocontain the information required by Section 13(r) ofthe Exchange Act.There continues to be significant focus among theCFTC, SEC and foreign regulators relating toperceived risks, level playing field considerations andpotential market abuses associated with algorithmictrading and high frequency trading following recenthighly publicized technical problems, including the2010 “flash crash” and the significant losses incurredby Knight Capital. Although not clearly defined, highfrequency trading typically refers to professionaltraders, acting in a proprietary capacity, that engagein strategies that generate a large number of trades ona daily basis. The CFTC has formed a subcommitteeto define high frequency trading within the context ofautomated trading systems, determine theappropriateness of creating multiple categories forhigh frequency traders, conduct an analysis of theoversight, surveillance and economic aspects, andidentify potential market disruptions that could beprovoked by such traders and possible mitigations.We believe, and there is considerable supportingevidence, that high frequency traders play animportant role in the marketplace by increasingliquidity, narrowing spreads and enhancing theefficiency of markets. At this time, however, it isunclear whether these inquires will result inrestrictions on the use of high frequency trading.In the United States and Europe, there are severalproposals to tax financial transactions or to assessuser fees for market participants. For example, in theUnited States, there is discussion of assessing a userfee to fund the CFTC, and in Europe, legislativebodies are considering a tax on all financialtransactions. In the past, efforts to implement atransaction tax or user fee have not been successful.The implementation of additional costs to use ourmarkets may discourage institutions and individualsfrom using our products to manage their risks, whichcould adversely impact our contract volumes,revenues and profits, and may also adversely impactour ability to compete on an international level. Atransaction tax or user fee in the U.S. may also causemarket participants to transition to, and/or increasetheir derivatives trading in, jurisdictions outside theU.S. which do not necessarily impose a comparablecost at this time.In addition, the U.S. Congress may propose toeliminate the favorable 60/40 tax treatment forfutures. The current tax treatment for futures tradingallows certain traders to pay a blend of taxes on theirgains and losses from trading futures and options,with 60% at capital gains rates and 40% at ordinarytax rates. Any repeal of 60/40 tax treatment wouldimpose a substantial increase in tax rates applicableto our market participants who are most responsiblefor creating liquid and efficient markets.13
  24. 24. EmployeesAs of December 31, 2012, we had approximately2,600 employees. We consider relations with ouremployees to be good.Executive OfficersThe following are our executive officers, including adescription of their business experience over the lastfive years. Ages are as of February 1, 2013. Effectiveas of April 2012, the titles for CME Group’sManagement Team were changed from ManagingDirector to Senior Managing Director. As the changewas not a substantive change in the individual’s roleat the Company, we have continued to reflect theoriginal date that the individuals assumed theircurrent roles.Terrence A. Duffy, 54Mr. Duffy has served as our Executive Chairman andPresident since May 2012. Mr. Duffy previouslyserved as our Executive Chairman from 2006 and hasbeen a member of our board of directors since 1995.He also served as President of TDA Trading, Inc.from 1981 to 2002 and has been a member of ourCME exchange since 1981.Phupinder S. Gill, 52Mr. Gill has served as our Chief Executive Officerand a member of our board of directors since May2012. Previously, he served as our President from2007 to May 2012. Mr. Gill joined us in 1988 andsince then has held various positions of increasingresponsibility within the organization, includingPresident and Chief Operating Officer, and ManagingDirector and President of CME Clearing and GFXCorporation. Mr. Gill also serves as ourrepresentative on the board of Bursa MalaysiaDerivatives Berhad.Kathleen M. Cronin, 49Ms. Cronin has served as our Senior ManagingDirector, General Counsel and Corporate Secretarysince 2003. Previously she served as CorporateSecretary and Acting General Counsel from 2002through 2003. Prior to joining us, Ms. Cronin was acorporate attorney at Skadden, Arps, Slate,Meagher Flom from 1989 through 1995 and from1997 through 2002.Bryan T. Durkin, 52Mr. Durkin has served as our Chief Operating Officersince 2007. He also held the title of ManagingDirector, Products and Services from 2010 to July2012. Mr. Durkin joined us in connection with theCBOT merger and he previously held a variety ofleadership roles with CBOT from 1982 to 2007, mostrecently as Executive Vice President and ChiefOperating Officer.Julie Holzrichter, 44Ms. Holzrichter has served as Senior ManagingDirector, Global Operations since 2007.Ms. Holzrichter rejoined us in 2006 as our ManagingDirector, CME Globex Services and TechnologyIntegration. Ms. Holzrichter previously held positionsof increasing responsibility in our organization from1986 to 2003 in trading operations.Kevin Kometer, 48Mr. Kometer has served as Senior Managing Directorand Chief Information Officer since 2008. Hepreviously served as Managing Director and DeputyChief Information Officer from 2007 to 2008. Sincejoining the company most recently in 1998, he hasheld senior leadership positions in the TechnologyDivision, including Managing Director, TradingExecution Systems and Director, AdvancedTechnology. Mr. Kometer was also with thecompany from 1994 to 1996.James E. Parisi, 48Mr. Parisi has served as our Chief Financial Officersince 2004. Mr. Parisi joined us in 1988 and has heldpositions of increasing responsibility within theorganization, including Managing Director Treasurer and Director, Planning Finance.Laurent Paulhac, 43Mr. Paulhac has served as Senior Managing Director,Financial and OTC Products Services since 2012and as Managing Director, OTC Products andServices from 2009 to 2012. Prior to joining thecompany, Mr. Paulhac most recently served as ChiefExecutive Officer of Credit Market Analysis from2005 to 2009.14
  25. 25. Hilda Harris Piell, 45Ms. Piell has served as Senior Managing Directorand Chief Human Resources Officer since 2007.Previously she served as Managing Director andSenior Associate General Counsel, as Director andAssociate General Counsel and as Associate Directorand Assistant General Counsel since joining us in2000.James V. Pieper, 46Mr. Pieper has served as our Managing Director andChief Accounting Officer since 2010. Previously,Mr. Pieper served as Director and Controller since2006 and as Associate Director and AssistantController from 2004 to 2006.John W. Pietrowicz, 48Mr. Pietrowicz has served as our Senior ManagingDirector, Business Development and CorporateFinance since 2010. Mr. Pietrowicz joined us in 2003and since then has held various positions ofincreasing responsibility, including his most recentposition of Managing Director and Deputy ChiefFinancial Officer from 2009 to 2010 and ManagingDirector, Corporate Finance and Treasury from 2006to 2009.Linda Rich, 49Ms. Rich has served as our Senior ManagingDirector, Government Relations and LegislativeAffairs since April 2012. Prior to assuming hercurrent role, Ms. Rich served as Managing Director,Government Relations and Legislative Affairs sincejoining us in 2010. Before joining the company,Ms. Rich served as Senior Vice President,Government Relations for NYSE Euronext. Herbackground also includes serving as senior counsel tothe U.S. House of Representatives Committee onFinancial Services and as counsel to the U.S. Houseof Representatives Committee on Commerce.Derek Sammann, 44Mr. Sammann has served as our Senior ManagingDirector, Financial Products and Services since 2009.He previously served as our Global Head of ForeignExchange Products since joining us in 2006. Prior tojoining us, Mr. Sammann served as ManagingDirector, Global Head of FX Options and StructuredProducts at Calyon Corporate and Investment Bankin London from 1997 to 2006.Kimberly S. Taylor, 51Ms. Taylor has served as our President, CMEClearing since 2004 and as Managing Director, RiskManagement in the Clearing House Division from1998 to 2003. Ms. Taylor has held a variety ofpositions in the Clearing House, including VicePresident and Senior Director. She joined us in 1989.Kendal Vroman, 41Mr. Vroman has served as our Senior ManagingDirector, Commodity and Information Products Services since 2010. Mr. Vroman previously servedas Managing Director and Chief CorporateDevelopment Officer from 2008 to 2010.Mr. Vroman joined us in 2001 and since then hasheld positions of increasing responsibility, includingmost recently as Managing Director, CorporateDevelopment and Managing Director, Informationand Technology Services.Scot E. Warren, 49Mr. Warren has served as our Senior ManagingDirector, Equity Index Products and Index Servicessince 2010. Mr. Warren previously served as ourManaging Director, Equity Products since joining usin 2007. Prior to that, Mr. Warren worked forGoldman Sachs as its Vice President, ManagerTrading and Business Analysis Team. Prior toGoldman Sachs, Mr. Warren managed equity andoption execution and clearing businesses for ABNAmro in Chicago and was a Senior Consultant forArthur Andersen Co. for financial services firms.Robert Zagotta, 48Mr. Zagotta has served as Senior Managing Director,Products and Services of CME Group since July2012. Prior to joining the company, Mr. Zagotta mostrecently served as Executive Vice President,Business Strategy and Execution for ProjectLeadership Associates (PLA) from 2007 to July2012, where he worked with CME Group on anumber of strategic consulting assignments. Beforejoining PLA, Mr. Zagotta was a Partner and Co-Founder of Fourth Floor Consulting, which wasacquired by PLA, and a Senior Manager atPricewaterhouseCoopers.15
  26. 26. FINANCIAL INFORMATION ABOUTGEOGRAPHIC AREASCME Group has not historically tracked revenuesbased upon geographic location. Beginning inSeptember 2011, we began tracking trading volumebased on the country of origin of the transaction asdisclosed to us by the customer. Prior to September2011, we tracked trading volume based on the time ofthe execution of the trade and whether it occurredduring traditional U.S. trading hours or through ourinternational telecommunication hubs.In 2012, we estimate that approximately 21% of ourelectronic trading volume originated from outside ofthe United States. The following table shows thepercentage of our total contract volume on ourGlobex electronic trading platform generated duringnon-U.S. hours and through our international hubsfor the last three years.2012 2011 2010Trading during non-U.S. hours . . 17% 16% 15%Trading throughtelecommunication hubs . . . . . 15% 8% 9%AVAILABLE INFORMATIONOur Web site is Informationmade available on our Web site does not constitutepart of this document. We make available on ourWeb site our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports onForm 8-K and amendments to those reports as soonas reasonably practicable after we electronically fileor furnish such materials to the SEC. Our corporategovernance materials, including our CorporateGovernance Principles, Director Conflict of InterestPolicy, Board of Directors Code of Ethics,Categorical Independence Standards, Employee Codeof Conduct and the charters for all the standingcommittees of our board, may also be found on ourWeb site. Copies of these materials are also availableto shareholders free of charge upon written request toShareholder Relations, Attention Ms. Beth Hausoul,CME Group Inc., 20 South Wacker Drive, Chicago,Illinois 60606.ITEM 1A. RISK FACTORSIn addition to the other information contained in thisAnnual Report on Form 10-K, you should carefullyconsider the factors discussed below, which are therisks that we believe are material at this time. Theserisks could materially and adversely affect ourbusiness, financial condition and results ofoperations. These risks and uncertainties are not theonly ones facing us. Additional risks anduncertainties not presently known to us or that wecurrently believe to be immaterial may also adverselyaffect our business.RISKS RELATING TO OUR INDUSTRYOur business is subject to the impact of domesticand international market, economic and politicalconditions which are beyond our control and whichcould significantly reduce our contract volumes andmake our financial results more volatile.Our revenue is substantially dependent on thecontract volume in our markets. Our contract volumeis directly affected by domestic and internationalfactors that are beyond our control, including:• economic, political and geopolitical marketconditions;• volatile weather patterns, droughts, naturaldisasters and other catastrophes;• broad trends in industry and finance;• changes in price levels, contract volumes andvolatility in the derivatives markets and inunderlying equity, foreign exchange, interestrate and commodity markets;• changes in global or regional demand orsupply shifts in commodities underlying ourproducts;• legislative and regulatory changes, includingany direct or indirect restrictions on orincreased costs associated with trading in ourmarkets;• competition;• changes in government monetary policies,especially central bank decisions related toquantitative easing;• availability of capital to our marketparticipants and their appetite for risk-taking;16
  27. 27. • levels of assets under management; and• consolidation in our customer base and withinour industry.Any one or more of these factors may contribute toreduced activity in our markets. Historically, ourtrading volume has tended to increase during periodsof heightened uncertainty due to increased hedgingactivity and the increased need to manage the risksassociated with, or speculate on, volatility in the U.S.equity markets, fluctuations in interest rates and pricechanges in the foreign exchange, commodity andother markets. However, as evidenced by ourperformance in recent years, in the period after amaterial market disturbance, there may persistextreme uncertainties which may lead to decreasedvolume due to factors such as reduced risk exposure,lower interest rates, central bank asset purchaseprograms, and lack of available capital. During 2012,the U.S. economy remained constrained due touncertainty surrounding the Presidential election, thepending fiscal cliff, and fears of globalrecession. Europe also continues to face uncertaintywith some euro-zone countries in recession. As aresult, period-to-period comparisons of our financialresults are not necessarily meaningful. The shifts inmarket trading patterns experienced since thefinancial disturbance of 2008 may or may not persist,and they will be affected by future economicuncertainties, including the pending decisionsregarding U.S. spending, central bank asset purchaseactivity and currency management policies aroundthe world. All of these uncertainties as well as newsurprises may result in continued decreased tradingvolume and a more difficult business environment forus. Material decreases in trading volume would havea material adverse effect on our financial conditionand operating results.We operate in a heavily regulated environment thatimposes significant costs and competitive burdenson our business and such environment is currentlyundergoing significant reform.Our business has been extensively regulated by theCFTC. In response to the economic crisis, the Dodd-Frank Act was signed into law in 2010. Thislegislation is a comprehensive banking and financialservices reform package that includes significantchanges to the oversight of the derivatives markets,both over-the-counter and exchange-traded. Inaccordance with Dodd-Frank, the CFTC’s authorityhas been significantly expanded to include over-the-counter derivatives.Since the adoption of Dodd-Frank, the CFTC, theSEC, the Department of Treasury and otherregulators have engaged in extensive rulemaking toimplement the legislation. CME Group and others inthe industry continue to actively participate in therulemaking process with the goal that the finalregulations serve the public interest, fostercompetition and innovation and do not place the services sector at a competitivedisadvantage in our evolving global financialmarkets. Over the past two years, a number ofregulations implementing Dodd-Frank werefinalized, including rules relating to mandatoryclearing and the operation of a clearing house, anti-manipulation, large trader reporting, the definition ofagricultural commodity and certain provisions of therules applicable to designated contract markets.While we continue to believe that the new regulationsprovide opportunities for our business which weintend to explore, a significant portion of the Act,however, remains subject to further rulemaking, andsuch final regulations could include provisions thatnegatively impact our business, including changes toCore Principle 9.The implementation of Basel III and its “one size fitsall” rules for capital charges, as well as greatercapital charges that will apply if we are not deemed a“qualified” central counterparty, may impose overlyburdensome capital requirements on our bank-affiliated clearing members and customers, whichcould eliminate the incentives to trade liquidexchange-traded derivatives instead of otherderivatives products with higher risk profiles. Thelocal rules implementing these internationalstandards have not been finalized. We will complywith CFTC regulations that will be issued, andtherefore we expect to be deemed a “qualified”central counterparty when those regulations areeffective. However, to the extent that we are notdeemed a “qualified” central counterparty during theinterim period or thereafter, it could result inincreased costs to our bank-affiliated clearingmembers and result in them electing to clear theirbusiness at another “qualified” central counterpartyor imposing increased costs on customers that preferto clear at CME.Additionally, the futures industry, its self-regulatorymodel and the segregation and customer protection17
  28. 28. regime are under scrutiny by the CFTC andCongress. Several Congressional hearings have beenheld to evaluate the situation and various policysuggestions have been made to ensure the protectionof customer segregated funds.Our operation of a registered swap data repositoryalso subjects us to additional oversight of the CFTCand we must comply with additional core principlesrelating to the operation of this newly formedregulated business.As a global company with operations around theworld, we are also subject to the laws and regulationsin the locations in which we do business. We cannotassure you that we and/or our directors, officers,employees and affiliates will be able to fully complywith these rules and regulations. We also cannotassure you that we will not be subject to claims oractions by any of these regulatory agencies. Oursubsidiaries, CME Clearing Europe, CME MarketingEurope and CME Europe Limited (subject toobtaining FSA approval), are also subject to thesupervision and oversight of the FSA (and in thefuture by the Bank of England and the FinancialConduct Authority which will replace the FSA). Theregulatory environment in the United Kingdom andthe European Union is undergoing significantreforms in connection with the oversight of thefinancial services industry. In response to theeconomic crisis, a number of financial servicelegislations covering issues similar to those includedin Dodd-Frank have also been proposed in Europe.As we continue to expand our operations in theUnited Kingdom with our UK clearing house andproposed UK exchange, changes in the European(including the UK) regulatory environment will havea greater impact on our business.Compliance with these new regulations may requireus and our customers to dedicate significant financialand operational resources, which could result in someparticipants leaving our markets or decreasing theirtrading activity, which would negatively affect ourprofitability. To the extent the regulatoryenvironment following the implementation of Dodd-Frank and other financial reform regulations is lessbeneficial for us or our customers, our business,financial condition and operating results could benegatively affected.If we fail to comply with applicable laws, rules orregulations, we may be subject to censure, fines,cease-and-desist orders, suspension of our business,removal of personnel or other sanctions, includingrevocation of our designations as a contract marketand derivatives clearing organization.In the United States and Europe, there are severalproposals to tax financial transactions or to assessuser fees for market participants. For example, in theUnited States, there is a discussion of assessing a userfee to fund the CFTC, and in Europe, legislativebodies are considering a tax on all financialtransactions. In the past, efforts to implement atransaction tax or user fee have not been successful.The implementation of additional costs to use ourmarkets may discourage institutions and individualsfrom using our products to manage their risks, whichcould adversely impact our contract volumes,revenues and profits and also adversely impact ourability to compete on an international level. Atransaction tax or user fee in the U.S. may also causemarket participants to transition and/or increase theirderivatives trading in jurisdictions outside the U.S.,which do not necessarily impose a comparable cost atthis time.In addition, the U.S. Congress may propose toeliminate the favorable 60/40 tax treatment forfutures. The current tax treatment for futures tradingallows certain traders to pay a blend of taxes on theirgains and losses from trading futures and options,with 60% at capital gains rates and 40% at ordinarytax rates. Any repeal of 60/40 tax treatment wouldimpose a substantial increase in tax rates applicableto our market participants who are responsible forcreating liquid and efficient markets.Some of our largest clearing firms have indicatedtheir belief that clearing facilities should not beowned or controlled by exchanges and should beoperated as utilities and not for profit. Theseclearing firms have sought, and may seek in thefuture, legislative or regulatory changes that would,if adopted, enable them to use alternative clearingservices for positions established on our exchangesor to freely move open positions among clearinghouses in order to take advantage of our liquidity.Even if they are not successful, these factors maycause them to limit the use of our markets.Some of our largest clearing firms, which aresignificant customers and intermediaries in ourproducts, have stressed the importance to them of18