CME Group third-quarter profit drops, but beats Wall Street view

Thu Oct 25, 2012 8:26am EDT

(Reuters) - CME Group Inc (CME.O), the biggest operator of U.S. futures exchanges, reported a slide in third-quarter profit as investors used fewer futures and options, but it beat expectations by a penny per share due to lower expenses.

Net income fell to $218.9 million, or 66 cents a share, in the quarter, from $315 million, or 95 cents a share, a year earlier, CME said on Thursday.

Excluding a one-time tax hit, income would have been 70 cents per share, better than the 69 cents expected by analysts.

Revenue dropped 22 percent to $683 million, missing the Wall Street forecast of $693 million, as trading declined 26 percent.

With trading down, Phupinder Gill, who took over as chief executive in May, is setting the table for two largely untapped and potentially lucrative sources of business: the over-the-counter swaps market, and international expansion.

Wall Street reforms have tightened oversight of the vast OTC derivatives industry, forcing more swaps contracts into regulated clearinghouses. To take advantage, CME is beefing up its interest-rate swaps clearing business.

Alex Kramm, an analyst at UBS, has said he believes the clearing of interest rate swaps alone could add $500 million in revenue, or 25 percent, to earnings in the medium term.

CME's futures-trading business stands to benefit as well, as regulators phase in stricter capital requirements for swaps traders, prompting many swaps users to switch to lower-cost futures.

CME recently rolled out new contracts and new rules to make the switch easier.

Gill is also expanding CME's international footprint, and next year plans to open the company's first non-U.S. exchange, in London.

The new market would cater to European-based traders who may not otherwise use CME's U.S. contracts and who prefer to deal in a familiar regulatory environment rather than a foreign one.

CME is also expanding its stable of exchanges at home. It agreed earlier this month to buy the much smaller Kansas City Board of Trade, adding a popular variety of wheat to its grain lineup. It plans to fold Kansas City's clearinghouse into its own, reducing costs for traders.

CME already operates the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange.

Expenses of $287.2 million were slightly lower than expected in the quarter, Macquarie Securities analyst Ed Ditmire said.

Results were also helped by better-than-expected per-contract revenue, Sandler O'Neill analyst Richard Repetto said.

(Reporting by Ann Saphir; Editing by Jeffrey Benkoe and Lisa Von Ahn)