* 4Q EPS was 63 cents, excluding one-time items; Street view
also 63 cents
* Revenue falls to $660.9 mln from $736.5 mln as trading
* CEO Gill sees opportunity in OTC clearing, better economic
By Ann Saphir
Feb 5 CME Group Inc fourth-quarter
profit fell sharply from a year ago as trading sagged, a
decline Wall Street had anticipated given muted market
volatility and the U.S. Federal Reserve's renewed commitment to
low U.S. interest rates.
The Chicago-based exchange operator said on Tuesday its net
income tumbled to $167 million, or 50 cents a share, from $745.9
million a year earlier, or $2.25 a share. Revenue fell to $660.9
million from $736.5 million.
Stripping out a one-time tax expense of $43.5 million and
increases in deferred tax liabilities, earnings in the fourth
quarter were 63 cents a share, in line with analyst expectations
as tracked by Thomson Reuters I/B/E/S.
CME CEO Phupinder Gill, who took the reins as chief
executive in May, sought to reassure investors in a conference
call following the release of the results, saying better
economic prospects this year should help boost trading.
"We remain cautiously optimistic about the trading
environment," he said. He and other CME officials declined to
forecast future trading activity. CFO James Parisi predicted a
rise in expenses tied in part to an uptick in trading volumes.
Gill also said CME could benefit from new mandates forcing
the giant swaps industry to funnel most contracts to
clearinghouses such as those run by CME. Customers already are
testing and using CME's rate-swap and credit-default swap
clearing services, he said, with volumes doubling January since
In addition to swap clearing, he said, CME stands to win
business from an expected shift from swaps to futures and new
regulations making over-the-counter contracts more expensive to
use. The company, which runs the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Mercantile
Exchange, also expects interest in new CME contracts launched
specifically to bridge the gap between swaps and futures, Gill
One such contract, interest-rate futures that convert to
swaps when they mature, have gotten "off to a great start," Gill
said, with 65,000 contracts traded since the December launch.
Brand-new futures contracts generally are slow to gain traction.
Trading in the fourth quarter fell 13 percent to an average
of 10.2 million contracts per day. The view that short-term
borrowing costs will stay near zero until mid-2015 muted
interest in contracts tied to lending rates, like futures on
Treasuries and fed funds. Trading in contracts tied to stock
indexes also fell.
But as economic prospects strengthen, fueled by the very
low-rate environment that has hurt CME's rate-linked trading,
CME officials expect traders to return to the futures market.
Trading in January was down 2 percent from a year earlier,
but activity in rate futures and contracts tied to energy rose.
U.S. regulators will start requiring dealers to clear most
swaps starting next month, and apply similar mandates to hedge
funds starting in June.
The new clearing requirements stem from the Dodd-Frank Wall
Street reform act, and are designed to make the opaque OTC
derivatives market more transparent and less vulnerable to
As one of the biggest global clearinghouses, CME stands to
benefit, both by clearing swaps directly and by handling an
increase in futures trading if current swaps users hit by
clearing mandates decide to switch to futures, as many analysts
CME officials declined to predict profit from swaps
clearing, but said that customers have an extra incentive to use
CME compared with rivals IntercontinentalExchange Inc or
LCH.Clearnet because of "capital efficiencies."
Clients using CME rate swaps clearing have saved more than
$1 billion, Gill said, by offsetting the margins they put up to
back their swaps against other margins they have up at the CME
clearinghouse to back related contracts, like Eurodollar
"It's the most capital-efficient solution out there," Gill
He also defended the requirement that swaps traders put up
higher margins than futures traders, saying that the
clearinghouse needs a bigger cushion for swaps because they can
take longer to unwind in the event of a default.
Wall Street banks that have long profited from the swaps
trade have sought changes from regulators, complaining that the
difference creates an uneven "playing field."
Traders have trimmed their "footprint" for CME colocation
services, CME officials said, suggesting high-frequency traders
see less opportunity at CME's exchanges than they did a year
CME also tacitly acknowledged the pressure the industry has
been under since the high profile collapse of two brokers in
2011 and 2012 left customers short hundreds of millions of
dollars, saying it plans a $10 million marketing campaign this
year to restore confidence in the futures industry.
MF Global failed in 2011, but it was only a few days ago
that the parent firm's liquidating trustee assured customers
they can expect to receive back all $1.6 billion lost in the
Last week Peregrine Financial CEO Russell Wasendorf was
sentenced to 50 years in prison for stealing more than $200
million from his customers, who likely never will see most of