UPDATE 2-CME Group profit rises; interest-rate trading volume soars

Tue Feb 4, 2014 11:02am EST

By Tom Polansek

CHICAGO Feb 4 (Reuters) - Exchange-operator CME Group Inc reported higher quarterly earnings on Tuesday as trading in its flagship interest rate contracts surged 29 percent.

The quarterly profit still fell short of analysts' expectations due to unexpected expenses related to a cyber-attack and a drop in the average fee paid per contract to CME, which owns the Chicago Board of Trade and Chicago Mercantile Exchange.

Shares of the company dipped.

Interest-rate trading volume jumped in the fourth quarter as the U.S. Federal Reserve started to trim bond purchases in its extraordinary economic stimulus program.

The company will see volume gains as the Fed winds down the program since a "tremendous" number of traders are waiting for the Fed program to end before they re-enter markets, CME Executive Chairman Terry Duffy told analysts on a conference call.

"The Fed tapering has clearly been beneficial to volumes," Christopher Harris, a Wells Fargo Securities analyst who covers CME, said on the call.

Net profit rose to $193.1 million, or 58 cents a share, from $166.8 million a year earlier, or 50 cents a share. Adjusted earnings were 64 cents a share. Analysts expected 68 cents, according to Thomson Reuters I/B/E/S.

Revenue increased to $687 million from $660.9 million a year earlier.

CME spent $8 million in the fourth quarter in response to a cyber-attack in July, Chief Financial Officer James Parisi said. The company, which spent the same amount in the third quarter after the hacking, had not planned for the expenses, he told analysts on the call.

CME also reported a $27 million loss on the sale of the building that houses the New York Mercantile Exchange. Brookfield Office Properties Inc bought the building for $200 million in November.

Lower-than-expected earnings per share "could give investors some pause today, although expenses were likely elevated on one-time spending," said Alex Kramm, an analyst for UBS.

"CME is well positioned to thrive as several headwinds fade and could become tailwinds," he said. "Volume in CME's interest rate products has been subdued, but this has changed with the recent volatility in interest rates."

VOLUME INCREASES

Average daily trading volume was 11.3 million contracts, up 11 percent from a year earlier, according to CME data. The increase was led by a 29 percent jump in interest rate volume, to an average of 5.3 million contracts a day.

Trading volumes have benefited from government mandates on the clearing of over-the-counter swaps.

Last November Chicago-based CME received regulatory approval to operate a swap execution facility (SEF) that will allow customers to execute commodity swaps alongside listed futures.

SEFs are a new type of trading venue that came out of the post-crisis regulatory crackdown on over-the-counter derivatives. Swaps, typically traded in private transactions between banks and hedge funds, derive their value from interest rates, credit, foreign exchange, equities and commodities and estimated to be a $630 trillion market.

Overall, the average fee, or rate, per contract at CME was 78 cents during the quarter, down from 83.1 cents a year earlier but up from 76.2 cents in the third quarter. The increase from the previous quarter was "driven primarily by a higher proportion of total volume coming from energy and agricultural products, which have higher average fees," according to the company.

CME angered brokers and traders last year by announcing it would hike transaction and market-data fees for the first time since 2009.

The company expects revenues from transaction fees to rise 2 percent to 3 percent because of the recent increases, CFO Parisi said. He projected a "somewhat meaningful" increase from higher market-data fees, but declined to be more specific.

CME did not update the time line for the launch of its first overseas exchange in London, which has been delayed since last year, Chief Executive Phupinder Gill said. He told Reuters in December the launch could "very possibly" take place in the first quarter.

The stock was off 0.5 percent to $72.78 on Nasdaq. Shares are down about 7 percent so far this year but up nearly 30 percent from a year ago. Rival IntercontinentalExchange Group Inc is off about 8 percent in 2014 but up 45 percent from a year ago.

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