CME Group 2011 Annual Report

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CME Group 2011 Annual Report

  1. 1. Moving Ahead Togethercme group 2011 annual report
  2. 2. Financial Highlightsy e a r e n d e d o r at D ece m b e r 3 1(in millions, except per share data and notional value) 2011 2010 ChangeIncome Statement DataTotal revenues $ 3,281 $ 3,004 9%Operating income 2,021 1,831 10Income before income taxes 1,936 1,722 12Net income attributable to CME Group ¹ 1,812 951 90Earnings per share: Basic ¹ $ 27.23 $ 14.35 90% Diluted  ¹ 27.15 14.31 90Balance Sheet DataCurrent assets ² $ 1,612 $ 1,349 19%Total assets ² 31,425 31,008 1Current liabilities ² 281 743 -62Total liabilities ² 9,803 10,879 -10Shareholders’ equity 21,552 20,060 7Other DataTotal trading volume (round turn trades) 3,387 3,078 10%Total electronic volume (round turn trades) 2,860 2,560 12Open interest at year end (contracts) 78 85 -8Notional value of trading volume (in trillions) $ 1,068 $ 994 7¹ 2011 results include a $646 million non-cash benefit from a tax adjustment primarily due to a revaluation of our deferred tax liabilities.² Amounts exclude cash performance bonds and guaranty fund contributions. All references to volume, notional value and rate per contract information in the text of this document exclude our non-traditional TRAKRS, HuRLO, CME Clearing Europe, CDS and IRS products. See the 2011 Annual Report on Form 10-K for the companys forward-looking statements. 3,387 3,281 1,812 62 62 3,004 3,078 61 61 60 2,978 2,613 2,561 2,585 2,250 1,756 951 826 715 659 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 TOTAL TRADING VOLUME TOTAL REVENUES OPERATING MARGIN NET INCOME (in millions of round turn trades) (in millions of dollars) (in percentages) ATTRIBUTABLE TO CME GROUP (in millions of dollars)
  3. 3. At CME Group, we recognize that our business is built onrelationships with customers large and small, with partners,with investors and with many other constituents who inter-face with our markets. We also understand and respectthe legislative and regulatory process, and will continueto work with those in Washington, D.C. and overseas whoshare our common goal of protecting market participants.In 2011, marketplace events tested everyone, yet togetherwe navigated the uncertainty and delivered solid results andaccomplishments. We finished the year better positionedto serve the interests of our stakeholders and preserve theintegrity of our markets.
  4. 4. Terry Duffy Executive Chairman dear Shareholders:  Despite a very challenging environment, treatment of CME Group by amending 2011 was another productive year for the tax code to tax us at a rate that more CME Group. We performed well despite closely reflects the amount of business the Eurozone crisis, political turmoil in being done in Illinois. This in turn will re- the Middle East and northern Africa, duce the company’s income tax expense the Feds zero interest rate policy, and by $50 - $70 million annually once fully the wave of Dodd-Frank rulemaking. implemented in 2013. Total company revenues in 2011 grew to Reflecting the rising global demand $3.3 billion while volume increased to for commodities, we reached record 3.4 billion contracts traded. volumes in our agricultural, energy and metals markets during 2011. We also We generated more than $1.3 billion of posted records for clearing over-the- cash from operations. Reflecting this counter interest rate swaps and credit strength, and consistent with the prin- default swaps as we worked with clients ciples guiding our capital structure, we to prepare for mandatory clearing. raised the regular first-quarter dividend Given the importance of Asia, we 59 percent, to $2.23 per share – increas- hired an experienced executive, Julien ing our payout target from 35 percent to Le Noble, to lead our efforts there. With 50 percent of prior year’s cash earnings. China destined to become the larg- We are committed to returning ex- est economy in the world in five years, cess cash to shareholders in an effi- we expanded our Singapore office and cient way. As part of this initiative, the began working with mainland futures company established a plan to pay an commissions merchants on education- additional dividend annually in the first al initiatives that showcase the value of quarter of each year to supplement the our risk management products. We also regular quarterly dividends. The amount continued to enhance our partnerships will be determined based on excess cash with exchanges worldwide including available at year end, which in 2012 was BMFBOVESPA, Bursa Malaysia and $3.00 per share. the Mexican Derivatives Exchange. Also to benefit shareholders, I worked A defining event in 2011 was the fail- diligently with state lawmakers in Spring- ure of MF Global. We responded to the field, Ill., to remedy the company’s tax failure by vigorously acting to protect our situation. Illinois responded to the unfair customers. We successfully transferred
  5. 5. We navigated our company successfully throughchallenges both domestic and international, achievingsolid results that enable us to work diligently to benefitour customers and shareholders and preserve theintegrity of our markets – our primary concerns aswe move ahead.all of the more than 30,000 customer unavailable. Efforts to enhance customer eight of which were as CEO – and we ap-accounts and $2.4 billion in customer protections must be cost-effective and in preciate all he has done to grow our firmfunds held securely at CME Group to new the best interest of clients. into the world leading position it occupiesclearing firms, so that our customers U.S. regulators are on track to finalize today. We are pleased that our President,could continue to trade. Within two weeks major rules ahead of other G-20 nations. Phupinder Gill, will succeed Craig as CEO,of the bankruptcy, we also provided a The rules adopted under the Dodd-Frank bringing his deep experience in all as-guarantee to the MF Global trustee, help- Act will impact how we and our custom- pects of our business to further advanceing him return 72 cents on the dollar for a ers do business. Key among these was the successful execution of our globaltotal of $4 billion to customers. the CFTC’s final ruling on position limits. growth strategy. Further, we committed to establishing We worked closely with legislative and All of our efforts, whether they arethe Family Farmer and Rancher Protec- regulatory leaders to reduce disparity in domestic or international, always havetion Fund. For qualifying participants, limits for cash-settled and physically-set- one mission: to ensure the credibility ofthis fund will provide up to $25,000 to tled contracts in the final rule, which will our markets and deliver benefits to ourindividual farmers and ranchers and help to put all futures exchanges on equal customers and shareholders.$100,000 to co-ops that hedge their regulatory footing.risk in CME Group futures markets. This In Europe, we are building ouris in case a future insolvency of a clear- resources to manage the multiple reg-ing member or market participant were ulatory reforms moving on differentto cause customer losses based on a timelines that present both challengesshortfall in segregated funds. We feel and opportunities for expanding our terrence A. Duffythat this new protection will give family presence in the European Union. As Executive Chairmanfarmers and ranchers more security as a company, we will continue to be anthey continue to use our products for active voice in the United States and March 12, 2012their hedging needs. abroad to stress the importance of CME Group continues to work with international coordination of new regu-the Commodity Futures Trading Com- lations that foster competition andmission (CFTC) and other industry ex- innovation in our global industry.perts and market participants to develop I would like to recognize the importantsolutions to further shore up customer contribution of Craig Donohue, our Chiefprotections at the firm level. It is impor- Executive Officer, who has decided totant to bear in mind that this is the first step down when his contract expires attime that our customers suffered be- the end of the year. He has served ourcause their segregated funds had been company well for the past 23 years –
  6. 6. to our Shareholders: Through continued emphasis on innova- Growing the Core cent growth in our privately negotiatedtion and the successful execution of our Throughout the year, we continued to business in addition to a 10-fold increasegrowth strategy, CME Group realized launch new products, acquire more cus- in total FX product volume clearedvery positive financial results in 2011. Our tomers and realize our goal of expand- through CME ClearPort.10 percent increase in average daily vol- ing our business through cross-selling. In agricultural commodities, we suc-ume, which grew to 13.4 million contracts, These efforts helped build on our already cessfully introduced a broad range of newwas underscored by record annual aver- marked success in growing the core products including weekly, calendar andage daily volumes in our foreign exchange through new product offerings – since inter-commodity spread options. These(FX), agricultural commodity, energy and January 2010, new product launches new products provide our customersmetals businesses. And despite continued have accounted for 63 million contracts with tailored tools to manage risk aroundmacroeconomic challenges, the diversity in volume and more than 2 million con- USDA crop report releases or short-termof the business brought great stability tracts in open interest. growing season weather fluctuations atand value. Our interest rate and energy Within financial products, we had significantly reduced costs.products accounted for 22 percent and significant success growing our Eurodol- We also experienced growth in our21 percent of 2011 revenues, respectively. lar volumes and open interest further out energy products (average daily volumeEquities (18 percent), market data and the yield curve despite the zero interest increased 7 percent) and see significantinformation services (13 percent), agricul- rate policy in the United States. For exam- positives on the horizon. Our flagshiptural commodities (11 percent), FX (6 per- ple, trading volume in Eurodollar futures Henry Hub Natural Gas contracts havecent) and metals (5 percent) rounded out expiring in years 3 through 10 grew by set multiple volume and open interest re-revenue contributions, with the remaining 43 percent, and Eurodollar Mid-Curve cords so far in 2012. Also, our benchmark4 percent coming from other sources. options grew by 21 percent, driven large- waterborne WTI contracts will benefit ly by the new Blue Mid-Curve Options from the June 2012 reversal of the Sea-The progress made in executing our with 47,000 contracts in average daily way pipeline and TransCanada’s commit-growth strategy is also deserving of volumes in 2011. Also, our new Ultra Trea- ment to build the Cushing-to-Gulf Coastadditional detail. We made significant sury Bond futures increased by 101 per- leg of its Keystone project by 2013. Theseprogress in launching new products, cent in average daily volume to a total of two developments will allow more thandeepening relationships with our interna- 15.5 million contracts. one million barrels of oil per day to flowtional strategic partners, expanding par- Our emerging markets FX products from Cushing, Okla., to the Gulf of Mexico,ticipation in our over-the-counter (OTC) likewise experienced strong growth, which should result in a narrowing of theclearing offerings, and solidifying our with Brazilian Real futures increasing by WTI-Brent spread and strengthening ofposition as a leader in index services and 421 percent, Russian Ruble futures by WTI correlations with other crudes.information products, all of which have 188 percent and Mexican Peso futures In metals, we achieved impressivepaved the way toward a successful 2012. by 36 percent. We also achieved 60 per- growth in our Copper futures contracts,
  7. 7. In the face of challenges, CME Groupachieved strong 2011 results anddemonstrated the growing successof long-term initiatives that expandour core business and advance ourglobalization strategy. craig Donohue Chief Executive Officerwith an average daily volume of 53,000 2011, CME Globex volume during non-contracts in the fourth quarter – our U.S. hours grew by 16 percent versushighest quarterly average yet – and have 11 percent during U.S. trading hours. Thisseen continued growth into 2012, with resulted in record levels of non-U.S. elec-February average daily volume exceed- tronic trading revenues in 2011 of approx-ing 78,000 contracts. We further made imately $550 million.progress with our Virtual Steel Mill com- We also made progress with our link-plex, expanding into Iron Ore swaps and ages with leading exchanges around theoptions and Steel futures. Like Copper, world. In the Americas, we worked withwe expect these positive trends to con- our partner BMFBOVESPA to success-tinue into 2012. fully launch the derivatives segment of a new multi-asset class electronic trad-Globalizing Our Business ing platform and recently announced anUnderlying our globalization strategy agreement to cross-list key equity in-is our conviction to take advantage of dex, agricultural and energy benchmarksignificant growth opportunities in de- contracts. We also launched the secondveloping and emerging markets given phase of our order routing agreementmacroeconomic growth trends there with the Mexican Derivatives Exchange.versus the United States and Europe. In the Asia-Pacific region, we workedConsequently, we have taken the lead in with the Korea Exchange (KRX) to growour industry by fostering strategic part- our business in hosting KRX’s bench-nerships and making investments to mark KOSPI 200 futures during KRX’sexpand our global distribution network. overnight hours and saw a 300 per- In 2011, we continued to expand mar- cent increase in volume in KOSPI 200ket access through new telecommuni- futures on CME Globex. We workedcations hubs in Seoul, Kuala Lumpur, with our partners at Bursa MalaysiaSingapore, São Paulo and Mexico City. Derivatives and set an annual volumeThese hubs will provide foreign firms record in Crude Palm Oil futures, con-with direct connections that offer low- tributing to a 39 percent increase fromer latency, greater reliability and more 2010 in total derivatives annual dailyscalability. Demonstrating the effective- volume. We expanded our partnershipness of these efforts and the increas- with the Osaka Securities Exchange toingly global nature of our business, in include joint product development and
  8. 8. phupinder gill President marketing, with a view toward offering erational ease and the capital efficiency Japanese yen-denominated products to that comes with using a single clearing our global customer base. house. To capitalize on this, we have Moreover, our partners at the Nation- expanded the range of products that al Stock Exchange of India successfully can be cleared through CME ClearPort, launched SP 500 futures and options, launched interest rate and credit default as well as DJIA futures, denominated in swap clearing solutions, and launched rupee. In turn, we listed on CME Globex CME Clearing Europe. U.S. dollar denominated futures con- Specific to CME ClearPort, which tracts on the SP CNX Nifty Index (the generated 2011 revenues of $297 million, Nifty 50), India’s leading benchmark for we expanded our clearing offerings in large companies. Through all of these FX, agricultural commodities and metals efforts, we have opened access to our contracts. We also have taken an early markets and created a pathway for CME lead in OTC clearing in interest rate and Group customers to trade key bench- credit default swaps in the dealer-to-cus- marks of our partners. tomer segment. With more than 1,300 Finally, we worked hard in restruc- customer accounts with open positions, turing the Dubai Mercantile Exchange we have cleared more than $366 billion (DME). With our plan to double our own- of interest rate swaps and $50 billion of ership stake in DME to 50 percent, we credit default swaps transactions since will continue to promote DME’s Oman inception in 2010 through March 2012. Sour Crude contract as the benchmark Also, in May 2012, we will begin offer- oil contract for the East of Suez markets. ing portfolio margining of our Eurodollar and Treasury futures and cleared OTC Expanding OTC Capabilities interest rate swap positions for house In the aftermath of the financial crisis, the accounts, which will provide significant relative safety and soundness of central capital efficiencies of up to 85 percent to counter-party clearing for OTC instru- our customers. ments has become increasingly impor- We also have seen positive momen- tant. As a result, we have worked closely tum in CME Clearing Europe – our first with our customers and clearing firms to clearing house outside of the United provide a comprehensive multi-asset States. With our initial launch of 150 OTC class clearing solution that offers op- products in May 2011, we cleared nearly
  9. 9. Our ability to offer customers clearingsolutions across multiple asset classesboth on exchange and over-the-counteris one of our key strengths as worldmarkets become broader based andmore sophisticated.10,000 contracts by year end. This mo- we completed the development of our offer customers enhanced educationalmentum has continued, with 2012 year- co-location services, which went live in resources on our products and services.to-date volumes of more than 14,000 January 2012. With more than 100 firms Looking ahead, we believe CME Groupcontracts. Our next steps include broad- expected to be housed in the co-location is strategically positioned to maximizeening the range of energy and agricultural facility, we expect it to generate $40 - results no matter how the macroeco-commodity products we offer, and adding $45 million in new revenues in 2012. We nomic scenario plays out. Moreover, ourOTC financial derivatives. also anticipate starting the next phase plan to deliver significant free cash flow of the build in the second half of 2012, growth over the long term will continueBeing A Leader in Index Services which will allow us to expand capacity to be our focus through the recently an-and Information Products and, in time, reach our goal of more than nounced transition in our Office of theIn 2010, we expanded our index services $100 million in annual revenues. Chief Executive Officer. We have the peo-business through the formation of CME We also have continued to develop ple, products, services and processesGroup Index Services with Dow Jones. our technology offerings to fit customers’ needed to help customers manage theThis business contributed $91 million in OTC needs. In 2011, we acquired complete changing risks they face in an increas-revenue in 2011 and grew at more than ownership of ConfirmHub, LLC. With ingly interconnected world, and we look20 percent year-over-year. In November this, we are now offering our custom- forward to our continued success. 2011, we announced our agreement ers ConfirmHub technology to provideto combine portions of this business straight-through processing in OTC mar-with McGraw-Hill’s Standard Poor’s kets using a single connection and aIndices. Pending regulatory approvals, standard format. This valuable servicethe transaction will give CME Group a provides brokers with electronic trade24 percent ownership interest in the com- affirmation and confirmation sevices, as craig S. donohuebined business. It will further strengthen well as the ability to send trade confirma- Chief Executive Officerour position in index services and index tions directly into trading and risk sys-products, and allow us to continue to be tems, increasing accuracy and efficiency. innovative with product development Finally, to provide customers with theand co-branding across asset classes. most effective service, we restructured our global client development and sales phupinder S. gillFocusing on Customers organization. These efforts will better PresidentContributing to our success has been enable us to expand international salesour focus on providing customers with efforts in Asia and Europe, service new March 12, 2012innovative technology offerings and con- and existing customers across multipletinued human capital support. In 2011, asset classes and client segments, and
  10. 10. Company Achievements in 2011 • Traded 3.4 billion contracts worth more than $1 quadrillion in notional value, which included record average daily volume of 13.4 million contracts. • Achieved record annual average daily volume for foreign exchange (FX), agricultural commodities, energy and metals product lines. • Launched CME Clearing Europe, based in London, to serve non-U.S. clients. • Integrated London-based Elysian Systems to provide single interface for access to energy markets. 6 6 • Launched over-the-counter interest rate and credit default swap clearing solutions via CME ClearPort 13 27 12 27 and expanded in FX, agricultural commodities and metals contracts. • Broadened strategic partnerships with leading global firms including BMFBOVESPA, Bursa Malaysia, Dubai Mercantile Exchange and the Mexican Derivatives Exchange. 7 7 2011 2010 6 13,439 11,350 1,227 12,775 5.60 10,180 12,167 10,120 13 27 12 1,134 11,134 1,068 4.60 4.60 4.60 26 21 27 21 10,258 8,661 8,290 994 7 3.44 813 7 2011 26 21 27 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 Interest Rates 07 08 09 10 11 * Equities AVERAGE DAILY AVERAGE DAILY ELECTRONIC NOTIONAL VALUE DIVIDEND PAYOUT TRADING VOLUME TRADING VOLUME Energy (in trillions of dollars) (in dollars per share) (in thousands) (in thousands) Foreign Exchange Agricultural Commodities Metals 1,227 5.60 6 6 1,134 1,068 4.60 4.60 4.60 13 27 12 27 994 3.44 813 7 7 2011 2010 26 21 27 21 07 08 09 10 11 07 08 09 10 11 *RONIC NOTIONAL VALUE DIVIDEND PAYOUT PRODUCT LINE REVENUESE (in trillions of dollars) (in dollars per share) (as a percentage of total clearing and transaction fees) *Excludes $5 per share special dividend
  11. 11. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K(Mark One)È Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2011 OR‘ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-31553 CME GROUP INC. (Exact name of registrant as specified in its charter) Delaware 36-4459170 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 20 South Wacker Drive, Chicago, Illinois 60606 (Address of Principal Executive Offices) (Zip Code) Registrant’s telephone number, including area code: (312) 930-1000 Securities registered pursuant to Section 12(b) of the Act: Title Of Each Class Name Of Each Exchange On Which Registered Class A Common Stock $0.01 par value NASDAQ GLOBAL SELECT MARKET Securities 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 È Indicate 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 inPart III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate 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 (Check one):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 È The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2011, was approximately $19.3 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 15, 2012 was as follows: 66,439,943 shares of Class Acommon 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 parvalue. DOCUMENTS INCORPORATED BY REFERENCE: Documents Form 10-K Reference Portions of the CME Group Inc.’s Proxy Statement for the 2012 Annual Part III Meeting of Shareholders
  12. 12. CME GROUP INC. ANNUAL REPORT ON FORM 10-K INDEX Page PART I. 2Item 1. Business 2Item 1A. Risk Factors 15Item 1B. Unresolved Staff Comments 29Item 2. Properties 29Item 3. Legal Proceedings 30Item 4. Mine Safety Disclosures 30 PART II. 30Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30Item 6. Selected Financial Data 33Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34Item 7A. Quantitative and Qualitative Disclosures about Market Risk 57Item 8. Financial Statements and Supplementary Data 62Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 99Item 9A. Controls and Procedures 99Item 9B. Other Information 103 PART 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 Shareholder Matters 103Item 13. Certain Relationships, Related Transactions and Director Independence 103Item 14. Principal Accountant Fees and Services 103 PART IV. 104Item 15. Exhibits and Financial Statement Schedules 104 Signatures 112
  13. 13. PART I statements, we discuss our expectations regarding future performance. These forward-lookingCertain Terms statements are identified by their use of terms andAll references to “options” or “options contracts” in phrases such as “believe,” “anticipate,” “could,”the text of this document refer to options on futures “estimate,” “intend,” “may,” “plan,” “expect” andcontracts. similar expressions, including references to assumptions. These forward-looking statements areUnless otherwise indicated, references to CME based on currently available competitive, financialGroup Inc. (CME Group) products include references and economic data, current expectations, estimates,to exchange-traded products on one of its regulated forecasts and projections about the industries inexchanges: Chicago Mercantile Exchange Inc. which we operate and management’s beliefs and(CME), Board of Trade of the City of Chicago, Inc. assumptions. These statements are not guarantees of(CBOT), New York Mercantile Exchange, Inc. future performance and involve risks, uncertainties(NYMEX) and Commodity Exchange, Inc. and assumptions that are difficult to predict.(COMEX). Products listed on these exchanges are Therefore, actual outcomes and results may differsubject to the rules and regulations of the particular materially from what is expressed or implied in anyexchange and the applicable rulebook should be forward-looking statements. We want to caution youconsulted. Unless otherwise indicated, references to not to place undue reliance on any forward-lookingNYMEX include its subsidiary, COMEX. statements. We undertake no obligation to publicly update any forward-looking statements, whether as aFurther information about CME Group and its result of new information, future events or otherwise.products can be found at http://www.cmegroup.com. Among the factors that might affect our performanceInformation made available on our Web site does not are:constitute a part of this Annual Report on Form 10-K. • increasing competition by foreign and domestic entities, including increasedInformation about Trading Volume and Average competition from new entrants into ourRate per Contract markets and consolidation of existing entities;All amounts regarding trading volume and average • our ability to keep pace with rapidrate per contract exclude our TRAKRS, HuRLO, technological developments, including ourSwapstream, credit default swaps, interest rate swaps ability to complete the development,and CME Clearing Europe contracts. implementation and maintenance of the enhanced functionality required by our customers;Trademark Information • our ability to continue introducingCME Group is a trademark of CME Group Inc. The competitive new products and services on aGlobe logo, CME, Chicago Mercantile Exchange, timely, cost-effective basis, including throughGlobex and E-mini are trademarks of Chicago our electronic trading capabilities, and ourMercantile Exchange Inc. CBOT and Chicago Board ability to maintain the competitiveness of ourof Trade are trademarks of Board of Trade of the City existing products and services, including ourof Chicago, Inc. NYMEX, New York Mercantile ability to provide effective services to theExchange and ClearPort are trademarks of New York over-the-counter market;Mercantile Exchange, Inc. Dow Jones and Dow JonesIndexes are service marks of Dow Jones Trademark • our ability to adjust our fixed costs andHoldings, LLC, and have been licensed to CME expenses if our revenues decline;Index Services LLC. All other trademarks are the • our ability to maintain existing customers,property of their respective owners. develop strategic relationships and attract new customers, including end customers,FORWARD-LOOKING STATEMENTS intermediaries and clearing members;From time to time, in this Annual Report on Form • our ability to expand and offer our products in10-K as well as in other written reports and verbal non-U.S. jurisdictions; 1
  14. 14. • changes in domestic and non-U.S. • our ability to accommodate increases in regulations; trading volume and order transaction traffic without failure or degradation of the• changes in government policy, including performance of our trading and clearing policies relating to common or directed systems; clearing, changes as a result of legislation and regulation stemming from the implementation • our ability to execute our growth strategy and of the Dodd-Frank Act or changes stemming maintain our growth effectively; from the bankruptcy of MF Global on our ability to use customer collateral; • our ability to manage the risks and control the costs associated with our acquisition,• the costs associated with protecting our investment and alliance strategy; intellectual property rights and our ability to operate our business without violating the • our ability to continue to generate funds and/ intellectual property rights of others; or manage our indebtedness to allow us to continue to invest in our business;• our ability to generate revenue from our market data that may be reduced or • industry and customer consolidation; eliminated by the growth of electronic trading, the state of the overall economy or • decreases in trading and clearing activity; declines in subscriptions; • the imposition of a transaction tax or user fee• changes in our rate per contract due to shifts on futures and options on futures transactions in the mix of the products traded, the trading and/or repeal of the 60/40 tax treatment of venue and the mix of customers (whether the such transactions; customer receives member or non-member fees or participates in one of our various • the unfavorable resolution of material legal incentive programs) and the impact of our proceedings; and tiered pricing structure; • the seasonality of the futures business.• the ability of our financial safeguards package to adequately protect us from the credit risks of clearing members; For a detailed discussion of these and other factors that might affect our performance, see Item 1A. of• the ability of our compliance and risk this Report beginning on page 15. management methods to effectively monitor and manage our risks, including our ability to prevent errors and misconduct and protect our ITEM 1. BUSINESS infrastructure against security breaches and misappropriation of our intellectual property GENERAL DEVELOPMENT OF BUSINESS assets;• changes in price levels and volatility in the derivatives markets and in underlying equity, Building on the heritage of its futures exchanges foreign exchange, interest rate and (CME, CBOT, NYMEX and COMEX), CME Group commodities markets; serves the risk management and investment needs of customers around the globe.• economic, political and market conditions, including the volatility of the capital and credit markets and the impact of economic CME was founded in 1898 as a not-for-profit conditions on the trading activity of our corporation. In 2000, CME demutualized and became current and potential customers stemming a shareholder-owned corporation. As a consequence, from the financial crisis that began in 2008, we adopted a for-profit approach to our business, the Eurozone debt crisis and any other future including strategic initiatives aimed at optimizing crises; trading volume, efficiency and liquidity. In 2002, 2
  15. 15. Chicago Mercantile Exchange Holdings Inc. (CME the Financial Services Authority (FSA) based on ourHoldings) completed its initial public offering of its offering of various CME Group products andClass A common stock, which is listed on the services to European customers and the operation ofNASDAQ Global Select Market under the symbol CME Clearing Europe, and the Securities and“CME”. Exchange Commission (SEC) in connection with our offering of clearing services for security-basedIn 2007, CME Holdings merged with CBOT swaps.Holdings, Inc. and was renamed CME Group. Inconnection with the merger, we acquired the CBOT Our principal executive offices are located atexchange. CBOT is a leading marketplace for trading 20 South Wacker Drive, Chicago, Illinois 60606, andagricultural and U.S. Treasury futures as well as our telephone number is 312-930-1000.options on futures. In 2008, we acquired CreditMarket Analysis Limited and its three subsidiaries FINANCIAL INFORMATION ABOUT INDUSTRY(collectively, CMA). CMA is a provider of credit SEGMENTSderivatives market data. Also in 2008, we mergedwith NYMEX Holdings and acquired NYMEX and The company reports the results of its operations asCOMEX, its wholly-owned subsidiaries. On one reporting segment primarily comprised of theNYMEX, customers primarily trade energy futures CME, CBOT, NYMEX and COMEX exchanges. Theand options contracts, including contracts for crude remaining operations do not meet the thresholds foroil, natural gas, heating oil and gasoline, as well as reporting separate segment information.over-the-counter energy transactions cleared throughCME ClearPort. On COMEX, customers trade metal NARRATIVE DESCRIPTION OF BUSINESSfutures and options contracts, including contracts forgold, silver and copper. In 2010, CME Group entered We offer the widest range of global benchmarkinto a joint venture with Dow Jones to create CME products across all major asset classes based onGroup Index Services, in which we own a 90% stake interest rates, equity indexes, foreign exchange,and Dow Jones owns a 10% stake. CME Group Index energy, agricultural commodities, metals, weatherServices is the owner of the Dow Jones Indexes, and real estate. Our products include both exchangewhich includes The Dow Jones Industrial Average traded and over-the-counter derivatives. We bringand approximately 130,000 index properties. In buyers and sellers together through our CME GlobexNovember 2011, we announced our agreement with electronic trading platform across the globe and ourMcGraw-Hill to establish a new joint venture in open outcry trading facilities in Chicago and Newwhich McGraw-Hill will contribute its SP Indices York City and provide hosting, connectivity andbusiness and we will contribute a portion of the CME customer support for electronic trading through ourGroup Index Services business to create SP/Dow co-location services. We also provide clearing andJones Indices, a global leader in index services. As settlement services for exchange-traded contracts, aspart of the proposed transaction, McGraw-Hill will well as for cleared over-the-counter derivativesacquire our CMA business. We launched CME transactions. Finally, we offer a wide range of marketClearing Europe in 2011 to expand our European data services-including live quotes, delayed quotes,presence and further extend the geographical reach of market reports and a comprehensive historical dataour clearing services. In the beginning of 2012, we service and have expanded into the index serviceslaunched our co-location business which is business through CME Group Index Services.comprised of hosting, connectivity and customersupport services providing further diversification of Our Competitive Strengthsour revenue stream. CME Group offers a number of key differentiatingOur futures and clearing business has historically elements that set it apart from its competitors,been subject to the extensive regulation of the including:Commodity Futures Trading Commission (CFTC).As a result of our global operations, we are also Highly Liquid Markets-Our listed futures marketssubject to the rules and regulations of the local provide an effective forum for our customers tojurisdictions in which we conduct business, including manage their risk and meet their investment needs 3
  16. 16. relating to our markets. We believe that our revenue contributed by each trading venue is ascustomers choose to trade on our centralized market follows:due to its liquidity and price transparency. Marketliquidity, or the ability of a market to absorb the Trading Venue 2011 2010 2009execution of large purchases or sales quickly andefficiently whereby the market recovers quickly Electronic . . . . . . . . . . . . . . . . . . . 75% 74% 72%following the execution of large orders, is key to Open outcry . . . . . . . . . . . . . . . . . 9 10 11attracting customers and contributing to a market’s Privately negotiated . . . . . . . . . . . 5 5 5success. CME ClearPort (OTC) . . . . . . . . . 11 11 12Most Diverse Product Line-Our products provide a Our products generate valuable informationmeans for hedging, speculation and asset allocation regarding prices and trading activity. We distributerelating to the risks associated with, among other our market data over the CME market data platformthings, interest rate sensitive instruments, equity directly to our electronic trading customers as part ofownership, changes in the value of foreign currency, their access to our markets and to quote vendors whocredit risk and changes in the prices of agricultural, consolidate our market data with that from otherenergy and metal commodities. The estimated exchanges, other third-party data providers and newspercentage of clearing and transaction fees revenue sources, and then resell their consolidated data. Thecontributed by each product line is as follows: estimated contributions of our market data andProduct Line 2011 2010 2009 information services products, excluding our index market data offerings, based on percentage of totalInterest rate . . . . . . . . . . . . . . . . . . 27% 27% 26% revenue over the last three years were 10% in 2011,Equity . . . . . . . . . . . . . . . . . . . . . . 21 21 24 11% in 2010 and 13% in 2009.Foreign exchange . . . . . . . . . . . . . 7 7 6Agricultural commodity . . . . . . . . 13 12 10Energy . . . . . . . . . . . . . . . . . . . . . 26 27 29 In 2010, we expanded our index market dataMetal . . . . . . . . . . . . . . . . . . . . . . 6 6 5 offerings through our joint venture with Dow Jones, CME Group Index Services, which furtherThe breadth and diversity of each of our product lines diversified our revenue streams. We derived 3% ofand the variety of their underlying contracts is our revenues from the business acquired from Dowbeneficial to our overall performance when an Jones in 2011 and 2% in 2010.individual product line or individual product isimpacted by macroeconomic factors. For example,the impact to our interest rate product line due to the Safety and Soundness of our Markets-We understandcredit crisis and the Federal Reserve Bank’s zero the importance of ensuring that our customers are ableinterest rate policy was partially offset by trading to manage and contain their trading risks. As thevolume in our other product lines. Additionally, our markets and the economy have evolved, we haveproduct lines contain various products designed to worked to adapt our clearing services to meet theaddress differing risk management needs. For needs of our customers. We apply robust riskexample, our interest product suite includes both management standards and enforce and facilitateshort-term and long-term products. applicable CFTC customer protection standards for exchange-traded products and cleared over-the-counterOur products are traded through the CME Globex derivatives. Clearing member firms are continuallyelectronic trading platform, our open outcry auction monitored and audited for their outstanding risk,markets in Chicago and New York City and through capital adequacy and compliance with customerprivately negotiated transactions that we clear. The protection rules and regulations. We utilize aestimated percentage of clearing and transaction fees combination of risk management capabilities to assess clearing firm and their account exposure levels for all asset classes 24 hours a day throughout the trading week. Our U.S. clearing house is operated within our CME exchange and we also operate a UK clearing house in CME Clearing Europe. 4
  17. 17. Our integrated clearing function is designed to ensure houses our trading match engines for all productsthe safety and soundness of our markets. Our clearing traded on the CME Globex platform. The serviceservices are designed to protect the financial integrity provides the lowest latency connection for ourof our markets by serving as the counterparty to customers. The offering is made available to allevery trade, becoming the buyer to each seller and customers on equal terms.the seller to each buyer, and limiting credit risk. Theclearing house is responsible for settling tradingaccounts, clearing trades, collecting and maintaining Our Strategic Initiativesperformance bond funds, regulating delivery and The following is a description of our strategicreporting trading data. CME Clearing marks open initiatives:positions to market at least twice a day, and requirespayment from clearing firms whose positions havelost value and makes payments to clearing firms Leading Core Business Innovation-We arewhose positions have gained value. For select continuing to enhance our customer relations to allowcleared-only markets, positions are marked-to-market us to further cross-sell our products, expand on thedaily, with the capacity to mark-to-market more strength of our existing benchmark products andfrequently as market conditions warrant. We also launch new products. In 2010 and 2011, new productoffer clearing services through CME ClearPort, a launches included the Ultra-long Bond Treasurycomprehensive set of flexible clearing services for futures and options and Weekly Treasury options.the global over-the-counter market backed by CMEClearing. See “Item 7A. Quantitative and Qualitative Globalizing our Company and our Business-OurDisclosures About Market Risk,” beginning on page goal is to continue to expand and diversify our57 and “Item 1A. Risk Factors,” beginning on page customer base worldwide and offer customers around15, for more information on our financial safeguards the world the most broadly diversified portfolio ofpackage and the associated credit risks related to our benchmark products. We believe that we haveclearing services. significant opportunity to expand the participation of our non-U.S. customer base in our markets. We areSuperior Trading Technology and Distribution-We focusing on core growth in global markets becausestrive to provide the most flexible architecture in we believe that Asia, Latin America, and otherterms of bringing new technology, innovations and emerging markets will experience superior economicsolutions to the market. Our CME Globex electronic and financial markets growth over the next decadetrading platform is accessible on a global basis nearly compared with the more mature North American and24 hours a day throughout the trading week. In 2011, European markets. In particular, we plan to expand84% of our trading volume was conducted our presence in major financial centers in Asia, growelectronically. our commodities business with non-U.S. customers and products and penetrate historically closed andOur platform offers: semi-open markets such as China. We now have an agreement with Mysteel, China’s leading provider of • certainty of execution; ferrous price and indexing services, to develop risk • vast capabilities to facilitate complex and management products for the ferrous metals industry demanding trading; based on Mysteel’s market-leading price data • direct market access; services. • fairness, price transparency and anonymity; To further enhance our customers’ trading and opportunities, we have partnered with leading • global distribution, including connection exchanges around the world to make their products through high-speed international available on or through our CME Globex platform telecommunications hubs in key financial and network. These arrangements allow our centers in Europe, Asia and Latin America. customers to access many of the world’s most actively traded equity futures contracts-BrazilianIn January 2012, we launched our service offerings iBovespa index futures, Korean Kospi 200 indexfor co-location at our data center facility, which futures, Indian Nifty 50 index futures, Japanese 5
  18. 18. Nikkei 225 index futures and the Mexican IPC index. preserving the prevailing execution processes,In 2011, we extended our partnership with technology platforms and economic structuresBMFBOVESPA with the launch of the derivatives currently in use in the marketplace. We offer clearingsegment of a new multi-asset class electronic trading services for cleared over-the-counter derivatives,platform deployed by BMFBOVESPA. Our including credit default swaps, interest rate swapsstrategic relationships with Bursa Malaysia and for agricultural products and foreign exchange.Derivatives, Dubai Mercantile Exchange, We have worked closely with buy side and sell sideJohannesburg Stock Exchange and Singapore participants to build a multi-asset class, marketExchange allow us to accelerate our market leading OTC clearing solution. In the fourth quarterpenetration, expand our customer reach, and develop of 2011, we successfully launched interest rate swapsproduct sales channels with local brokers. These in Eurodollars, British pounds and Canadian dollars,relationships are also designed to allow the customers and we are targeting the launch of interest rate swapsof our partner exchanges to access our products and in Australian dollars, Swiss francs and Japanese Yenmarkets. in the first half of 2012. In 2011, we cleared over-the-counter transactions with a notional value ofIn May 2011, we launched CME Clearing Europe over $206.4 billion and open interest as ofand we have made steady progress building on our December 31, 2011 was $161.0 million. Our CMEEuropean presence to further extend the geographical ClearPort platform offers an array of clearingreach of our clearing services. We now clear more services that depend on the nature of the productthan 170 different energy, commodity, metal and traded. It has the capacity to clear and reportfreight contracts through CME Clearing Europe and transactions in multiple asset classes. In 2011, wewe continue to expand the range of eligible products. added more than 240 products to our CME ClearPortNext steps include the launch of additional metals system.contracts, the launch of interest rate swaps and cross-margining with our U.S. clearing house. Establishing Ourselves as the Leading Exchange Company Provider of Information Products andLeading our Industry in Customer Service, Index Services-We offer a variety of market dataEducation and Training, and Sales Support-To services for the futures, equities and theensure that we are providing our customers with over-the-counter markets. In 2010, we expanded oureffective service, we restructured our global client index services business through the formation ofdevelopment and sales organization to better target CME Group Index Services with Dow Jones. Thiscross asset sales across client segments, drive venture allows us to bring the Dow Jones’ brand andinternational sales (specifically in Asia and Europe) index creation and calculation capabilities to currentand to generate new client participation across all and prospective clients and exchange partners;regions. We continue to build upon our global team provides additional cross-listing opportunities andin key locations outside the United States to better new global opportunities for index creation,serve our customers on a global basis. We now have calculation and licensing in cash, derivatives andkey leaders in place in each business line, in our over-the-counter markets globally; allows us to cross-global sales function and in our Europe and Asia sell and co-brand products; and expand market dataoffices. To assist our customers in achieving their dissemination services to our global network oftrading and risk management goals, we also continue clients and exchange partners. In November 2011, weto enhance our educational resources on our products announced our agreement with McGraw-Hill toand services. establish a new joint venture in which McGraw-Hill will contribute its SP Indices business and we willExtending our Capabilities and Business in the contribute a portion of the CME Group IndexOver-the-Counter Markets-Our goal is to provide a Services business to create SP/Dow Jones Indices,comprehensive multi-asset class clearing solution to a global leader in index service. The new venture,the market for maximum operational ease and the which remains subject to regulatory approval andcapital efficiency that comes with connecting to a customary closing conditions, will create a leadingsingle clearing house. Our over-the-counter offerings index provider well-positioned to serve globalprovide the extensive counterparty risk reduction and institutional and retail customers and will allow us totransparency of our clearing services while continue to be innovative with product development 6
  19. 19. and co-branding across asset classes. As part of the As a result of the shortfall in customer segregatedagreement, we will acquire a long term, ownership- funds, the industry, its self-regulatory model and thelinked, exclusive license to list futures and options on segregation regime are under scrutiny. Severalfutures based on the Standard Poor’s (SP) Congressional hearings have been held to evaluateIndices. the situation and various policy suggestions have been made to ensure the protection of customer segregated funds. The adoption of such regulationsMF Global Matter will likely increase our costs of providing clearingIn October 2011, the Federal District Court for the services.Southern District of New York, upon petition by theSecurities Investor Protection Corporation, placed the Patents, Trademarks and Licensesfutures commission merchant/broker-dealer arm ofMF Global, one of our largest clearing firms at the We own the rights to a large number of trademarks,time, into Securities Investor Protection Act service marks, domain names and trade names in theliquidation. As of February 10, 2012, the trustee for United States, Europe and in other parts of the world.the liquidation of MF Global was estimating the We have registered many of our most importantshortfall in customer segregated funds as of that date trademarks in the United States and other countries.to be at least $900 million, and that there was an We hold the rights to a number of patents and haveadditional shortfall as of that date of at least $700 made a number of patent applications. Our patentsmillion in customer “secured” funds (funds related to cover match engine, trader user interface, tradingtrading on foreign exchanges). Since the bankruptcy, floor support, market data, general technology andwith the trustee’s permission, we transferred all of clearing house functionalities. We also own theour open positions in MF Global customer accounts copyright to a variety of materials. Those copyrights,to other futures commission merchants, and some of which are registered, include printed andfacilitated the transfer to other futures commission online publications, web sites, advertisements,merchants of cash representing roughly 72% of the educational material, graphic presentations and othersegregated account balances of public customers. We literature, both textual and electronic. We attempt tocontinue to take steps to work with the bankruptcy protect our intellectual property rights by relying ontrustee to facilitate the release of additional available trademarks, patents, copyrights, database rights, tradecustomer funds, including providing a financial secrets, restrictions on disclosure and other methods.guarantee of $550.0 million as described in moredetail on page 90. We offer equity index futures and options on key benchmarks, including SP, NASDAQ, Dow Jones andThere are ongoing investigations by the Department Nikkei indexes. We also have an agreement with theof Justice, the Federal Bureau of Investigations Chicago Board Options Exchange (CBOE) to allow us to(FBI), the CFTC, and the SEC into the events list futures and options on futures for volatility indexes onsurrounding the MF Global bankruptcy, including a variety of asset classes. With the exception of Dowefforts to locate the missing segregated customer Jones, these products are listed by us subject to licenseproperty and determining which individuals and agreements with the applicable owners of the indexes.entities may have civil or criminal liability for the We have exclusive arrangements with SP and Theshortfall. We were the designated self-regulatory NASDAQ OMX Group, Inc. (NASDAQ) andorganization for MF Global, meaning we were non-exclusive arrangements with the other third parties.responsible for conducting periodic audits of the Our rights to the Dow Jones indexes previously werefutures commission merchant pursuant to Joint Audit evidenced by an exclusive agreement but are now part ofCommittee standards. We believe that we carried out our ownership of the joint venture. Our SP license isour duties and responsibilities in accordance with exclusive through 2016 and non-exclusive from that datethese standards and procedures. We have been named until 2017 with some exceptions provided certain tradingin a number of lawsuits filed in connection with the volume is achieved. As previously discussed, ourMF Global matter. See “Legal Matters” in Note 13. proposed joint venture with McGraw-Hill will provide usContingencies to the Consolidated Financial with a long-term, ownership-linked exclusive license toStatements, beginning on page 88 for more the SP Indices. Our NASDAQ license is exclusiveinformation on these proceedings. through 2019. Copies of our SP and NASDAQ license 7
  20. 20. arrangements have been filed as material contracts. We volume in the third and fourth quarters. However,pay the applicable third party per trade fees based on such seasonality may also be impacted by generaltrading volume under the terms of these licensing market conditions, such as the 2008 economic crisisagreements. and the impact of the MF Global bankruptcy. During 2011, 25% of our consolidated revenues wereWe also have a licensing and membership agreement recognized in the first quarter, 26% in the secondwith BBA Enterprises Limited and the British quarter, 27% in the third quarter and 22% in theBankers’ Association (collectively, BBA) for the use fourth quarter.of its London Interbank Offered Rate (LIBOR) tosettle several of our interest rate products, including Working Capitalour Eurodollar contract. For the license, we paid anupfront fee and pay an annual fee. Numerous We generally meet our funding requirements withregulators including the SEC, CFTC and the FSA are internally generated funds supplemented from time toinvestigating whether there were attempts to time with public debt and commercial papermanipulate LIBOR rates. LIBOR rates play a offerings. For more information on our workingsignificant role in the financial system. To the extent capital needs, see “Management’s Discussion andthe investigation finds that the LIBOR rate was Analysis of Operations and Financial Condition-distorted or manipulated, it could have a negative Liquidity and Capital Resources,” beginning on pageimpact on our customers’ confidence in settlement 34, which section is incorporated herein by reference.prices dependent on LIBOR, including ourbenchmark Eurodollar contract. Customer BaseWe cannot assure you that we will be able to Our customer base includes professional traders,maintain the exclusivity of our licensing agreements financial institutions, institutional and individualwith SP and NASDAQ or be able to maintain our investors, major corporations, manufacturers,other existing licensing arrangements. In addition, we producers and governments. Our customers cancannot assure you that others will not succeed in access our CME Globex trading platform across thecreating stock index futures based on information globe. Customers may be members of one or more ofsimilar to that which we have obtained by license, or our exchanges. Rights to directly access our marketsthat market participants will not increasingly use will depend upon the nature of the customer, such asother instruments, including securities and options whether the individual is a member of one of ourbased on the SP, NASDAQ or Dow Jones indexes, exchanges or has executed an agreement with us forto manage or speculate on U.S. stock risks. Parties direct access.may also succeed in offering indexed products thatare similar to our licensed products without being Rights and privileges of membership are exchangerequired to obtain a license, or in countries that are specific. Trading on our open outcry trading floors isbeyond our jurisdictional reach and/or our licensors. conducted exclusively by our members. MembershipFor example, we are a party to a pending legal matter on one of our futures exchanges also enables aseeking a declaratory judgment that the opposing customer to trade specific products at reduced ratesparty is required to obtain a valid license in order to and lower fees. Under the terms of the organizationallist certain products based upon the Dow Jones and documents of our exchanges, our members haveSP indexes. While we have prevailed on a motion certain rights that relate primarily to trading rightfor summary judgment, the matter is currently protections, certain trading fee protections andpending appeal. A negative decision in the matter certain membership benefit protections. In 2011, 80%would have a negative impact on our ability to of our trading volume was conducted by ourgenerate revenues from our index services business. members. We bill a substantial portion of our clearing andSeasonality transaction fees to our clearing firms. The majority ofGenerally, we have historically experienced clearing and transaction fees received from clearingrelatively higher trading volume during the first and firms represent charges for trades executed andsecond quarters and sequentially lower trading cleared on behalf of their customers. One firm 8
  21. 21. represented 12% of our clearing and transaction fees • breadth of product offerings and rate andrevenue for 2011. In the event a clearing firm were to quality of new product development;withdraw, we believe that the customer portion of the • ability to position and expand upon existingfirm’s trading activity would likely transfer to products to address changing market needs;another clearing firm of the exchange. In 2011, MFGlobal, one of our largest clearing firms, was placed • transparency, reliability and anonymity ininto bankruptcy and we transferred all of their more transaction processing;than 30,000 customer accounts to other futurescommission merchants. • connectivity, accessibility and distribution; • technological capability and innovation;Competition • efficient and secure settlement, clearing and support services;The industry in which we operate is highly • regulatory environment; andcompetitive and we expect competition to continue tointensify, especially in light of the enactment of the • reputation.Dodd-Frank Act (Dodd-Frank) and other reforms ofthe financial services industry as discussed in the We believe that we compete favorably with respect tofollowing section. For example, Dodd-Frank these factors. Our deep, liquid markets; diverseprovides for central clearing of “clearable” product offerings; rate and quality of new productover-the-counter swaps and requires that swaps that development; and efficient, secure settlement,are cleared must be traded on exchanges or swap clearing and support services distinguish us from ourexecution facilities, unless no exchange or swap competitors. We believe that in order to maintain ourexecution facility makes the swap available for competitive position, we must continue to expandtrading. While these new requirements create globally; develop new and innovative products;opportunities for us to expand our over-the-counter enhance our technology infrastructure, including itsbusiness, a number of market participants and other reliability and functionality; maintain liquidity andexchanges have developed, and likely will develop in low transaction costs and adopt such additionalthe future, competing platforms and products. customer protections as the regulators and customers require as a result of the MF Global bankruptcy.We encounter competition in all aspects of ourbusiness, including from entities having substantially Our industry has continued to experience significantgreater capital and resources and offering a wider consolidation efforts. Many of these recent effortsrange of products and services, and some operating have failed due to lack of shareholder support orunder a different and possibly less stringent regulatory issues, including the NYSE Euronext/regulatory regime. We face competition from other Deutsche Bourse proposed merger; the London Stockfutures, securities and securities option exchanges; Exchange’s bid for the TMX Group and theover-the-counter markets; clearing organizations; Singapore Stock Exchange’s proposed acquisition ofconsortia formed by our members and large market the Australian Stock Exchange. At the end of 2011,participants; alternative trade execution facilities; there were approximately 60 futures exchangestechnology firms, including market data distributors located in approximately 30 countries. We expectand electronic trading system developers; and others. industry participants to continue to look for ways to grow their business despite the challenging regulatory environment and other exchanges mayCompetition in our Derivatives Business become the target of future consolidation efforts.We believe competition in the derivatives and Among our key competitors in our exchange-tradedsecurities business is based on a number of factors, business are New York Portfolio Clearing (NYPC)including, among others: and the Electronic Liquidity Exchange (ELX) in our • depth and liquidity of markets; interest rate product line and IntercontinentalExchange, Inc. (ICE) in our • transaction costs; agricultural commodities, currency, equity index and 9

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