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Catherine Ngai/MEDILL

CME Group posted its highest quarterly profit since 2008 and  record daily trade volume of 11.5 million contracts, according to its most recent earnings report.


CME Group's profits soar; financial reform promises more business

by Catherine Ngai
April 29, 2010


In the midst of Washington's debate over financial reform legislation that could substantially benefit CME Group Inc., the Chicago-based exchange operator posted its highest quarterly profit since 2008, beating Wall Street’s expectations by 2 cents per diluted share.

The company, which is the world’s largest derivative exchange, posted a net income of $240.2 million or $3.62 per diluted share in the first quarter, up 21 percent from $199 million, or $3 per diluted share, in 2009.

Revenue increased 7 percent to $693 million from $647 million, thanks to increased trade volume and partnerships with international markets. The biggest revenue source, clearing and transaction fees, rose 9.5 percent to $578 million. 

“CME Group’s discipline and focus helped deliver a strong quarter, and we see ongoing opportunities domestically and internationally to improve on this performance,” said Terry Duffy, CME Group executive chairman, in a press release.

Analysts were pleased with the showing and predicted that the CME would emerge a beneficiary of financial reform provided the bill is passed.

“At the end of the day, I think CME will be a winner in the financial services reform, on a relative sense, compared to other financials,” said Christopher Allen, exchange analyst at Ticonderoga Securities LLC in New York. “This is barring the reformations don’t go overboard.”

If the reform legislation is passed, the benefit to CME Group and other derivatives exchanges will be the movement of the $450 trillion market in over-the-counter derivatives into the exchanges' clearinghouses. It's contended that controlled supervision by the clearinghouses will reduce risk. Over-the-counter derivatives, such as credit default swaps, a form of insurance against failures of bonds and other debt instruments, are widely seen as major causes of the financial meltdown.

A large part of CME's increased volume came from Brazil, India, Japan and Mexico. In a conference call, CEO Craig Donohue said the CME is "expanding our core businesses, and building deep liquidity in our products 24 hours a day."  

The exchange posted record trade volumes, up 12 percent, with an average daily volume of 11.5 million contracts.

The results included $6 million in non-operating income from the recovery on a bankruptcy claim and a $6 million reduction in tax reserves, offset by $10 million in professional fees related to a joint venture with Dow Jones.

“I think there’s a pretty bright outlook for the CME, given the leverage for a better interest-rate environment over the next one to three years,” Allen said.

CME already clears some OTC transactions, though in the first quarter contract volume traded at CME ClearPort, the clearinghouse established in 2002, fell approximately 20 percent from the same quarter last year.

“The outlook here remains quick favorable,” said Daniel Fannon, research analyst at Jeffries and Co. “Generally speaking, the CME is in a good position to benefit from the greater transparency that’s being set within the OTC market. It’s a natural fit for some of these products changing into a new format.”

The stock closed at $331.50 Thursday, up $1.19 or 0.31 percent.