CME Group's profit jumps as CEO rules out big M&A

CHICAGO/NEW YORK (Reuters) - CME Group Inc (CME.O) reported higher-than-expected quarterly profit on Thursday as heightened volatility in debt and stock markets boosted trading in the exchange operator's futures contracts.

CME Group's CEO also said that a recent trading slump will not spur it into a buying spree.

The company stands to benefit from sweeping U.S. rule changes that will drive far more derivatives through exchanges and clearinghouses.

Although Chief Executive Craig Donohue was quiet on when exactly it will begin clearing over-the-counter swaps -- seen as a key to the company's growth -- he said there was no need to catapult expansion with a big takeover.

"We have a very bullish view of our growth opportunity organically in our core business," he told analysts and media on conference call. "We do not foresee the need for additional large-scale M&A transactions to drive growth."

The CEO's comments mark a change in thinking for CME, which has bought two large exchanges -- the Chicago Board of Trade and the New York Mercantile Exchange -- since 2007. With those companies now fully integrated, CME will no longer be the driver of industry consolidation it once was.

The strong second-quarter results came as trading in CME contracts hit a record in May, helped by the stock market "flash crash" and by swings in interest rate expectations as Europe's escalating debt crisis prompted fears of a global economic slowdown.

CME handled an average 13.5 million contracts a day in the quarter, up 31 percent from last year. (For a graphic of stock trading volume and market volatility, please see: link.reuters.com/feq56m)

Analysts said the earnings beat was driven by revenue from CME's index business, which included its newly acquired Dow Jones industrial average indexes, and by lower expenses.

"There were strong volumes across the products, equity indexes in particular, because of the volatility in May," said Diego Perfumo, analyst at advisory firm Equity Research Desk, which specializes in exchanges. "Now the question is what will happen over the summer ... and so far the volumes are weak."

Trading in July has averaged about 10.7 million contracts a day as investors have scaled back expectations for a near-term interest rate hike by the Federal Reserve, reducing the need to use CME futures contracts to hedge against rate swings.

Donohue said he expects the static rate environment to weigh on trading of interest rate contracts -- CME's most active products -- in the near term. However, the "dynamic growth" in currency and energy trading should continue even if rate-contract trading softens, he said.

Chris Allen, analyst at Ticonderoga Securities, wrote in a note that "while the (earnings) beat is a clear positive, we are not sure the stock will reflect the news, given the current run-rate of activity we are seeing in the third quarter."

CME shares were up 0.8 percent at $285.67 in early afternoon on the Nasdaq after rising as much as 2.2 percent earlier in the session.

FOUR-CENT BEAT

Net income rose 22 percent to $271 million, or $4.11 per share, from $222 million, or $3.33 a share, a year earlier.

Excluding a writedown of goodwill on the company's Credit Market Analysis unit, earnings were $4.43 a share -- better than the expected $4.39, according to Thomson Reuters I/B/E/S.

Revenue jumped 26 percent to $814 million.

Traders use CME contracts to bet on or hedge against fluctuations in oil prices, the yield on a 10-year Treasury, and the level of the Standard & Poor's 500 Index.

CME earned less per contract compared with the previous and year-ago quarters, reflecting discounts the company gives as trading rises.

Donohue said the company, which generates $1 billion or more of cash each year, will start returning "significant" excess cash to shareholders through dividends, share buybacks and other means as early as next year.

U.S. President Barack Obama earlier this month signed into law sweeping financial reform mandating trading and clearing of most contracts in the $600 trillion OTC swaps market.

CME has said it expects to start clearing interest rate swaps -- the largest part of the OTC derivatives market -- by the end of the year. It will compete with London-based clearer LCH.Clearnet and the International Derivatives Clearing Group, which is majority-owned by Nasdaq OMX (NDAQ.O).

Explaining CME's timing on clearing the swaps, the CEO cited ongoing discussions with market participants and uncertainty over rules that must still be hammered out.

This week, CME began clearing trades for a new exchange, founded by several Chicago trading firms, which is offering interest-rate swaps futures. Donohue said he expects to provide clearing for other market entrants in the future.

(Reporting by Ann Saphir and Jonathan Spicer; Editing by Lisa Von Ahn, John Wallace and Matthew Lewis)