CME-2012.6.30 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
- OR -
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                
Commission file number 001-31553
CME GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware
 
36-4459170
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
20 South Wacker Drive, Chicago, Illinois
 
60606
(Address of principal executive offices)
 
(Zip Code)
(312) 930-1000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
 
  
Accelerated filer     o
 
 
 
 
Non-accelerated filer    o (Do not check if a smaller reporting company)
 
  
Smaller reporting company o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of each of the registrant’s classes of common stock as of July 18, 2012 was as follows: 332,511,277 shares (reflects a 5-for-1 stock split effective July 20, 2012) of Class A common stock, $0.01 par value; 625 shares of Class B common stock, Class B-1, $0.01 par value; 813 shares of Class B common stock, Class B-2, $0.01 par value; 1,287 shares of Class B common stock, Class B-3, $0.01 par value; and 413 shares of Class B common stock, Class B-4, $0.01 par value.

1



 CME GROUP INC.
FORM 10-Q
INDEX
 
 
 
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements
 
 
 
 
Consolidated Balance Sheets at June 30, 2012 and December 31, 2011
 
 
 
 
Consolidated Statements of Income for the Quarters and Six Months Ended June 30, 2012 and 2011
 
 
 
 
Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2012 and 2011
 
 
 
 
Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2012 and 2011
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2012 and 2011
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
SIGNATURES

2


PART I. FINANCIAL INFORMATION
Certain Terms
All references to “options” or “options contracts” in the text of this document refer to options on futures contracts.
Unless otherwise indicated, references to CME Group Inc. (CME Group) products include references to products on one of its regulated exchanges: Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX) and Commodity Exchange, Inc. (COMEX). Products listed on these exchanges are subject to the rules and regulations of the particular exchange and the applicable rulebook should be consulted. Unless otherwise indicated, references to NYMEX include its subsidiary, COMEX. Further information about CME Group and its products can be found at http://www.cmegroup.com. Information made available on our Web site does not constitute a part of this Quarterly Report on Form 10-Q.
Information about Contract Volume and Average Rate per Contract
Disclosed amounts of contract volume and average rate per contract exclude our TRAKRS, credit default swaps, interest rate swaps and CME Clearing Europe contracts.
Trademark Information
CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange, Globex and E-mini are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange, Inc. Dow Jones, Dow Jones Industrial Average, S&P 500, and S&P are service and/or trademarks of Dow Jones Trademark Holdings LLC, Standard & Poor's Financial Services LLC, and S&P/Dow Jones Indices LLC, as the case may be, and have been licensed for use by Chicago Mercantile Exchange Inc. Green Exchange, The Green Exchange and Design, and GreenX are trademarks of Green Exchange LLC. All other trademarks are the property of their respective owners.
Forward-Looking Statements
From time to time, in this Quarterly Report on Form 10-Q as well as in other written reports and verbal statements, we discuss our expectations regarding future performance. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “intend,” “may,” “plan,” “expect” and similar expressions, including references to assumptions. These forward-looking statements are based on currently available competitive, financial and economic data, current expectations, estimates, forecasts and projections about the industries in which we operate and management’s beliefs and assumptions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Among the factors that might affect our performance are:

•
increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities;
•
our ability to keep pace with rapid technological developments, including our ability to complete the development, implementation and maintenance of the enhanced functionality required by our customers;
•
our ability to continue introducing competitive new products and services on a timely, cost-effective basis, including through our electronic trading capabilities, and our ability to maintain the competitiveness of our existing products and services, including our ability to provide effective services to the over-the-counter market;
•
our ability to adjust our fixed costs and expenses if our revenues decline;
•
our ability to maintain existing customers, develop strategic relationships and attract new customers;
•
our ability to expand and offer our products outside the United States;
•
changes in domestic and non-U.S. regulations;
•
changes in government policy, including policies relating to common or directed clearing and changes as a result of legislation stemming from the implementation of the Dodd-Frank Act;
•
the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others;
•
our ability to generate revenue from our market data that may be reduced or eliminated by the growth of electronic trading, the state of the overall economy or declines in subscriptions;
•
changes in our average rate per contract due to shifts in the mix of the products traded, the trading venue and the mix of customers (whether the customer receives member or non-member fees or participates in one of our various

3


incentive programs) and the impact of our tiered pricing structure;
•
the ability of our financial safeguards package to adequately protect us from the credit risks of clearing members;
•
the ability of our compliance and risk management methods to effectively monitor and manage our risks, including our ability to prevent errors and misconduct and protect our infrastructure against security breaches and misappropriation of our intellectual property assets;
•
changes in price levels and volatility in the derivatives markets and in underlying fixed income, equity, foreign exchange, interest rate and commodities markets;
•
economic, political and market conditions, including the volatility of the capital and credit markets and the impact of economic conditions on the trading activity of our current and potential customers stemming from the continued uncertainty in the financial markets;
•
our ability to accommodate increases in trading volume and order transaction traffic without failure or degradation of the performance of our trading and clearing systems;
•
our ability to execute our growth strategy and maintain our growth effectively;
•
our ability to manage the risks and control the costs associated with our acquisition, investment and alliance strategy;
•
our ability to continue to generate funds and/or manage our indebtedness to allow us to continue to invest in our business;
•
industry and customer consolidation;
•
decreases in trading and clearing activity;
•
the imposition of a transaction tax or user fee on futures and options on futures transactions and/or repeal of the 60/40 tax treatment of such transactions;
•
the unfavorable resolution of material legal proceedings; and
•
the seasonality of the futures business.
For a detailed discussion of these and other factors that might affect our performance, see Item 1A. of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 27, 2012 and Item 1A. of this Report.

4


ITEM 1.
FINANCIAL STATEMENTS

CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except par value data; shares in thousands)
(unaudited)
 
 
June 30, 2012
 
December 31, 2011
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,293.2

 
$
1,042.3

Marketable securities
 
42.7

 
47.6

Accounts receivable, net of allowance of $0.8 and $1.3
 
336.9

 
289.4

Other current assets (includes $40.0 in restricted cash)
 
160.5

 
232.6

Cash performance bonds and guaranty fund contributions
 
6,407.6

 
9,333.9

Total current assets
 
8,240.9

 
10,945.8

Property, net of accumulated depreciation and amortization of $581.2 and $576.3
 
703.7

 
821.9

Intangible assets—trading products
 
17,040.5

 
17,040.5

Intangible assets—other, net
 
2,888.7

 
3,312.8

Goodwill
 
7,520.6

 
7,984.0

Other assets (includes $20.5 in restricted cash)
 
1,551.5

 
653.7

Total Assets
 
$
37,945.9

 
$
40,758.7

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
38.7

 
$
31.1

Other current liabilities
 
213.2

 
250.2

Cash performance bonds and guaranty fund contributions
 
6,407.6

 
9,333.9

Total current liabilities
 
6,659.5

 
9,615.2

Long-term debt
 
2,107.7

 
2,106.8

Deferred income tax liabilities, net
 
7,262.2

 
7,226.8

Other liabilities
 
218.1

 
187.6

Total Liabilities
 
16,247.5

 
19,136.4

 
 
 
 
 
Redeemable non-controlling interest
 
78.4

 
70.3

 
 
 
 
 
Shareholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 10,000 and 9,860 shares authorized as of June 30, 2012 and December 31, 2011; none issued or outstanding
 
—

 
—

Series A junior participating preferred stock, $0.01 par value, 0 and 140 shares authorized as of June 30, 2012 and December 31, 2011, respectively; none issued or outstanding
 
—

 
—

Class A common stock, $0.01 par value, 1,000,000 shares authorized; 331,252 and 330,653 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
 
3.3

 
3.3

Class B common stock, $0.01 par value, 3 shares authorized, issued and outstanding
 
—

 
—

Additional paid-in capital
 
17,162.1

 
17,112.5

Retained earnings
 
4,340.3

 
4,324.6

Accumulated other comprehensive income (loss)
 
114.3

 
111.6

Total Shareholders’ Equity
 
21,620.0

 
21,552.0

Total Liabilities and Shareholders’ Equity
 
$
37,945.9

 
$
40,758.7

See accompanying notes to unaudited consolidated financial statements.

5


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
 
Clearing and transaction fees
 
$
643.6

 
$
687.8

 
$
1,264.7

 
$
1,379.1

Market data and information services
 
110.8

 
107.9

 
225.0

 
214.9

Access and communication fees
 
22.6

 
11.3

 
42.3

 
22.8

Other
 
18.9

 
31.3

 
38.5

 
53.1

Total Revenues
 
795.9

 
838.3

 
1,570.5

 
1,669.9

Expenses
 
 
 
 
 
 
 
 
Compensation and benefits
 
131.1

 
117.5

 
266.2

 
239.8

Communications
 
10.7

 
10.8

 
21.0

 
20.7

Technology support services
 
12.1

 
13.4

 
24.9

 
25.4

Professional fees and outside services
 
40.3

 
30.7

 
72.5

 
61.4

Amortization of purchased intangibles
 
31.3

 
33.0

 
64.1

 
66.2

Depreciation and amortization
 
33.6

 
31.7

 
68.5

 
62.7

Occupancy and building operations
 
18.7

 
19.0

 
39.0

 
38.4

Licensing and other fee agreements
 
23.3

 
18.6

 
44.0

 
42.1

Other
 
25.6

 
29.1

 
49.9

 
54.6

Total Expenses
 
326.7

 
303.8

 
650.1

 
611.3

Operating Income
 
469.2

 
534.5

 
920.4

 
1,058.6

 
 
 
 
 
 
 
 
 
Non-Operating Income (Expense)
 
 
 
 
 
 
 
 
Investment income
 
6.1

 
4.6

 
18.2

 
23.4

Gains (losses) on derivative investments
 
—

 
—

 
—

 
(0.1
)
Interest and other borrowing costs
 
(28.9
)
 
(28.7
)
 
(58.0
)
 
(58.8
)
Equity in net losses of unconsolidated subsidiaries
 
(0.9
)
 
(1.1
)
 
(1.7
)
 
(2.2
)
Other non-operating income (expense)
 
65.2

 
—

 
65.2

 
—

Total Non-Operating
 
41.5

 
(25.2
)
 
23.7

 
(37.7
)
Income before Income Taxes
 
510.7

 
509.3

 
944.1

 
1,020.9

Income tax provision
 
257.3

 
213.7

 
424.4

 
268.2

Net Income
 
253.4

 
295.6

 
519.7

 
752.7

Less: net income (loss) attributable to redeemable non-controlling interest
 
8.5

 
1.9

 
8.2

 
2.4

Net Income Attributable to CME Group
 
$
244.9

 
$
293.7

 
$
511.5

 
$
750.3

 
 
 
 
 
 
 
 
 
Earnings per Common Share Attributable to CME Group:
 
 
 
 
 
 
 
 
Basic
 
$
0.74

 
$
0.88

 
$
1.55

 
$
2.25

Diluted
 
0.74

 
0.88

 
1.54

 
2.24

Weighted Average Number of Common Shares:
 
 
 
 
 
 
 
 
Basic
 
331,078

 
333,794

 
330,946

 
334,038

Diluted
 
332,162

 
334,871

 
332,009

 
335,090

See accompanying notes to unaudited consolidated financial statements.

6


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
253.4

 
$
295.6

 
$
519.7

 
$
752.7

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 
(124.2
)
 
(62.0
)
 
(25.1
)
 
310.6

Income tax benefit (expense)
 
63.3

 
23.8

 
15.1

 
(82.6
)
Investment securities, net
 
(60.9
)
 
(38.2
)
 
(10.0
)
 
228.0

Defined benefit plans:
 
 
 
 
 
 
 
 
Net change in defined benefit plans arising during the period
 
—

 
—

 
0.5

 
(3.4
)
Amortization of net actuarial (gains) losses included in pension expense
 
0.6

 
0.2

 
1.2

 
0.8

Income tax benefit (expense)
 
(0.2
)
 
(0.1
)
 
(0.6
)
 
1.0

Defined benefit plans, net
 
0.4

 
0.1

 
1.1

 
(1.6
)
Derivative instruments:
 
 
 
 
 
 
 
 
Net unrealized holding losses arising during the period
 
—

 
—

 
—

 
0.4

Amortization of effective portion of loss on cash flow hedge
 
0.2

 
0.1

 
0.4

 
0.2

Income tax benefit (expense)
 
(0.1
)
 
—

 
(0.2
)
 
(0.2
)
Derivative instruments, net
 
0.1

 
0.1

 
0.2

 
0.4

Foreign currency translation:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(2.8
)
 
2.3

 
(0.4
)
 
99.9

Reclassification adjustment for loss included in net income
 
18.4

 
—

 
18.4

 
—

Income tax benefit (expense)
 
(5.7
)
 
(0.9
)
 
(6.6
)
 
(14.3
)
Foreign currency translation, net
 
9.9

 
1.4

 
11.4

 
85.6

Other comprehensive income, net of tax
 
(50.5
)
 
(36.6
)
 
2.7

 
312.4

Comprehensive income
 
202.9

 
259.0

 
522.4

 
1,065.1

Less: comprehensive income attributable to redeemable non-controlling interest
 
8.5

 
1.9

 
8.2

 
2.4

Comprehensive income attributable to CME Group
 
$
194.4

 
$
257.1

 
$
514.2

 
$
1,062.7

See accompanying notes to unaudited consolidated financial statements.

7


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Class A
Common
Stock
(Shares)
 
Class B
Common
Stock
(Shares)
 
Common
Stock and
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Balance at December 31, 2011
 
330,653

 
3

 
$
17,115.8

 
$
4,324.6

 
$
111.6

 
$
21,552.0

Net income attributable to CME Group
 
 
 
 
 
 
 
511.5

 
 
 
511.5

Other comprehensive income attributable to CME Group
 
 
 
 
 
 
 
 
 
2.7

 
2.7

Dividends on common stock of $1.49 per share
 
 
 
 
 
 
 
(495.8
)
 
 
 
(495.8
)
Exercise of stock options
 
452

 
 
 
11.5

 
 
 
 
 
11.5

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
3.4

 
 
 
 
 
3.4

Vesting of issued restricted Class A common stock
 
94

 
 
 
(3.2
)
 
 
 
 
 
(3.2
)
Shares issued to Board of Directors
 
40

 
 
 
2.2

 
 
 
 
 
2.2

Shares issued under Employee Stock Purchase Plan
 
13

 
 
 
0.7

 
 
 
 
 
0.7

Stock-based compensation
 
 
 
 
 
35.0

 
 
 
 
 
35.0

Balance at June 30, 2012
 
331,252

 
3

 
$
17,165.4

 
$
4,340.3

 
$
114.3

 
$
21,620.0

See accompanying notes to unaudited consolidated financial statements.

8



CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Class A
Common
Stock
(Shares)
 
Class B
Common
Stock
(Shares)
 
Common
Stock and
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Balance at December 31, 2010
 
334,245

 
3

 
$
17,278.4

 
$
2,885.8

 
$
(104.1
)
 
$
20,060.1

Net income attributable to CME Group
 
 
 
 
 
 
 
750.3

 
 
 
750.3

Other comprehensive income attributable to CME Group
 
 
 
 
 
 
 
 
 
312.4

 
312.4

Dividends on common stock of $0.56 per share
 
 
 
 
 
 
 
(187.5
)
 
 
 
(187.5
)
Repurchase of Class A common stock
 
(1,100
)
 
 
 
(65.3
)
 
 
 
 
 
(65.3
)
Exercise of stock options
 
124

 
 
 
4.5

 
 
 
 
 
4.5

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
0.5

 
 
 
 
 
0.5

Vesting of issued restricted Class A common stock
 
23

 
 
 
(0.3
)
 
 
 
 
 
(0.3
)
Shares issued to Board of Directors
 
41

 
 
 
2.3

 
 
 
 
 
2.3

Shares issued under Employee Stock Purchase Plan
 
14

 
 
 
0.8

 
 
 
 
 
0.8

Stock-based compensation
 
 
 
 
 
24.7

 
 
 
 
 
24.7

Balance at June 30, 2011
 
333,347

 
3

 
$
17,245.6

 
$
3,448.6

 
$
208.3

 
$
20,902.5

See accompanying notes to unaudited consolidated financial statements.


9


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
 
 
Six Months Ended June 30,
 
 
2012
 
2011
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
519.7

 
$
752.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
35.0

 
24.7

Amortization of purchased intangibles
 
64.1

 
66.2

Depreciation and amortization
 
68.5

 
62.7

Amortization of debt financing costs and discount accretion
 
2.0

 
3.0

Gain on sale of Index Services assets
 
—

 
(9.8
)
Gain on contribution of Dow Jones Index asset group
 
(84.5
)
 
—

Loss on sale of Credit Market Analysis Ltd.
 
19.3

 
—

Equity in net losses of unconsolidated subsidiaries
 
1.7

 
2.2

Deferred income taxes
 
45.0

 
(151.7
)
Change in:
 
 
 
 
Accounts receivable
 
(73.6
)
 
(88.0
)
Other current assets
 
4.3

 
(28.5
)
Other assets
 
(2.3
)
 
(20.5
)
Accounts payable
 
8.5

 
(12.4
)
Income taxes payable
 
46.5

 
(6.9
)
Other current liabilities
 
(0.4
)
 
(24.1
)
Other liabilities
 
4.6

 
6.8

Other
 
(0.6
)
 
(0.3
)
Net Cash Provided by Operating Activities
 
657.8

 
576.1

 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
Proceeds from maturities of available-for-sale marketable securities
 
9.3

 
5.8

Purchases of available-for-sale marketable securities
 
—

 
(5.1
)
Purchases of property
 
(63.6
)
 
(88.4
)
Proceeds from sale of building property
 
151.5

 
—

Proceeds from sale of Credit Market Analysis Ltd., net of cash sold with business
 
42.4

 
—

Investment in S&P/Dow Jones Indices LLC
 
(45.0
)
 
—

Investment in DME Holdings Limited
 
(22.8
)
 
—

Proceeds from sale of Index Services assets
 
—

 
18.0

Other
 
—

 
(0.5
)
Net Cash Provided by (Used in) Investing Activities
 
71.8

 
(70.2
)
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
Repayment of other borrowings
 
—

 
(420.5
)
Cash dividends
 
(494.2
)
 
(187.5
)
Repurchase of Class A common stock, including costs
 
—

 
(65.3
)
Proceeds from exercise of stock options
 
11.5

 
4.5

Excess tax benefits related to employee option exercises and restricted stock vesting
 
3.4

 
0.5

Other
 
0.6

 
0.8

Net Cash Used in Financing Activities
 
(478.7
)
 
(667.5
)
See accompanying notes to unaudited consolidated financial statements.

10


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in millions)
(unaudited)
 
 
 
Six Months Ended June 30,
 
 
2012
 
2011
Net change in cash and cash equivalents
 
$
250.9

 
$
(161.6
)
Cash and cash equivalents, beginning of period
 
1,042.3

 
855.2

Cash and Cash Equivalents, End of Period
 
$
1,293.2

 
$
693.6

Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income taxes paid
 
$
329.1

 
$
411.1

Interest paid
 
55.3

 
56.6

Non-cash investing activities:
 
 
 
 
Investment in S&P/Dow Jones Indices LLC
 
878.4

 
—

Change in net unrealized securities gains
 
(25.1
)
 
310.6

See accompanying notes to unaudited consolidated financial statements.


11


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements consist of CME Group Inc. (CME Group) and its subsidiaries (collectively, the company), including Chicago Mercantile Exchange Inc. (CME), the Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX) and their respective subsidiaries (collectively, the exchange).
The accompanying interim consolidated financial statements have been prepared by CME Group without audit. Certain notes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position of the company at June 30, 2012 and December 31, 2011 and the results of operations and cash flows for the periods indicated. Quarterly results are not necessarily indicative of results for any subsequent period.
In June 2012, the company contributed certain Dow Jones Index assets and liabilities (DJI asset group) owned by CME Group Index Services LLC (Index Services) to a new business venture with The McGraw-Hill Companies Inc. (McGraw). Index Services was initially formed in March 2010 and Dow Jones & Company retains a 10% non-controlling interest in Index Services. As part of the agreement, the company also sold Credit Market Analysis Ltd. (CMA) to McGraw. Assets and liabilities contributed or sold as part of this transaction are excluded from the company's consolidated balance sheet as of June 30, 2012.
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in CME Group’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (SEC) on February 27, 2012.
2. Business Transactions
Formation of S&P/DJI Indices LLC
On June 29, 2012, CME Group, Index Services and McGraw completed the formation of a new index business venture, S&P/Dow Jones Indices LLC (the venture). In exchange for its contribution of the DJI asset group, Index Services received a 25.65% redeemable non-controlling interest in the venture. Dow Jones & Company (Dow Jones) retains a 10% redeemable non-controlling interest in Index Services. As a result of its contribution, Index Services derecognized the DJI asset group and recorded an $84.5 million gain included in other non-operating income on the consolidated statements of income. Index Services' retained interest in the venture was recorded at a fair value of $877.2 million.
Through one of its wholly-owned subsidiaries, CME Group purchased an additional interest in the venture of 1.35% which is valued at $46.2 million. On a consolidated basis, CME Group has a total interest of 27.0%, which is accounted for as an equity method investment. The investment is recorded at an aggregate fair value of $923.4 million and is included in other assets on the consolidated balance sheets. Fair value was estimated using market and income approaches based on significant unobservable inputs. Fair values derived using unobservable inputs are considered level 3 measurements under the classification hierarchy for fair value measurements. The unobservable inputs include future expected cash flows, short-term and long-term growth rates and a 10.75% discount rate. Excluding the ownership interest attributable to Dow Jones through its non-controlling interest in Index Services, CME Group has a 24.4% interest in the venture.
In connection with the transaction, the company has entered into a long-term exclusive licensing agreement with the venture to list products based on the S&P Indices. In addition, Index Services' has assigned its existing licensing agreement with CBOT to the venture. This agreement grants CBOT a long-term exclusive license to list products based on Dow Jones Indices.
Sale of Credit Market Analysis Ltd.
In conjunction with the formation of the venture, the company sold CMA to McGraw for $45.9 million and recognized a $19.3 million loss, which is included in other non-operating expense on the consolidated statements of income. The loss includes a previously unrecognized foreign currency translation adjustment of $18.4 million.
3. Property
In April 2012, CME Group sold the north and south towers of the CBOT building for $151.5 million resulting in a gain of $20.3 million. At the time of the sale, the company leased back a portion of the property. As a result of the leaseback, the company is required to recognize the gain as a reduction to operating expenses over the 15 year term of the lease.



12


4. Intangible Assets and Goodwill
Intangible assets consisted of the following at June 30, 2012 and December 31, 2011:
 
 
 
June 30, 2012
 
December 31, 2011
(in millions)
 
Assigned Value
 
Accumulated
Amortization
 
Net Book
Value
 
Assigned Value
 
Accumulated
Amortization
 
Net Book
Value
Amortizable Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Clearing firm, market data and other customer relationships
 
$
2,828.7

 
$
(419.5
)
 
$
2,409.2

 
$
3,071.9

 
$
(400.4
)
 
$
2,671.5

Lease-related intangibles
 
47.2

 
(28.7
)
 
18.5

 
83.2

 
(45.4
)
 
37.8

Technology-related intellectual property
 
22.4

 
(11.6
)
 
10.8

 
56.2

 
(28.4
)
 
27.8

Other(1)
 
9.8

 
(9.6
)
 
0.2

 
11.6

 
(10.6
)
 
1.0

 
 
2,908.1

 
(469.4
)
 
2,438.7

 
3,222.9

 
(484.8
)
 
2,738.1

Foreign currency translation adjustments
 
—

 
—

 
—

 
(8.8
)
 
5.9

 
(2.9
)
Total amortizable intangible assets
 
$
2,908.1

 
$
(469.4
)
 
2,438.7

 
$
3,214.1

 
$
(478.9
)
 
2,735.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-Lived Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
 
 
 
 
450.0

 
 
 
 
 
578.0

Foreign currency translation adjustments
 
 
 
 
 
—

 
 
 
 
 
(0.4
)
Total intangible assets – other, net
 
 
 
 
 
$
2,888.7

 
 
 
 
 
$
3,312.8

Trading products(2)
 
 
 
 
 
$
17,040.5

 
 
 
 
 
$
17,040.5

(1)
At June 30, 2012, other amortizable intangible assets consisted of market maker agreements and a definite-lived trade name. At December 31, 2011, other amortizable intangible assets consisted of service and market maker agreements and a definite-lived trade name.
(2)
Trading products represent futures and options products acquired in our business combinations with CBOT Holdings, Inc. (CBOT Holdings) and NYMEX Holdings, Inc. (NYMEX Holdings). Clearing and transaction fees revenues are generated through the trading of these products. These trading products, most of which have traded for decades, require authorization from the Commodity and Futures Trading Commission (CFTC). Product authorizations from the CFTC have no term limits.
As part of its sale of the CBOT building, the company sold the rights to lease agreements with tenants in the north and south towers. The lease agreements, which are included in lease-related intangibles, had a net book value of $14.4 million on the date of sale.
In the second quarter of 2012, the company contributed the DJI asset group to the venture with McGraw. Contributed intangible assets with an aggregate net book value of $336.3 million included rights to customer agreements, technology-related intellectual property and trade names. In addition, the company sold CMA-related intangible assets with a net book value of $9.4 million.
Total amortization expense for intangible assets was $31.3 million and $33.0 million for the quarters ended June 30, 2012 and 2011, respectively. Total amortization expense for intangible assets was $64.1 million and $66.2 million for the first six months of 2012 and 2011, respectively. As of June 30, 2012, the future estimated amortization expense related to amortizable intangible assets is expected to be as follows.
(in millions)
 Amortization Expense
Remainder of 2012
$
51.2

2013
100.9

2014
99.6

2015
99.4

2016
96.0

2017
96.0

Thereafter
1,895.6



13


Goodwill activity consisted of the following for the six months ended June 30, 2012 and the year ended December 31, 2011:
 
 
 
Balance at
 
 
 
Other
 
Balance at
(in millions)
 
December 31, 2011
 
Divestitures
 
Activity(3)
 
June 30, 2012
CBOT Holdings
 
$
5,035.7

 
$
—

 
$
—

 
$
5,035.7

NYMEX Holdings
 
2,462.2

 
—

 
—

 
2,462.2

Index Services
 
434.5

 
(434.5
)
 
—

 
—

Other
 
51.6

 
(28.9
)
 
—

 
22.7

Total goodwill
 
$
7,984.0

 
$
(463.4
)
 
$
—

 
$
7,520.6

 
 
 
Balance at
 
 
 
Other
 
Balance At
(in millions)
 
December 31, 2010
 
Divestitures
 
Activity(3)
 
December 31, 2011
CBOT Holdings
 
$
5,035.7

 
$
—

 
$
—

 
$
5,035.7

NYMEX Holdings
 
2,462.3

 
—

 
(0.1
)
 
2,462.2

Index Services
 
435.6

 
—

 
(1.1
)
 
434.5

Other
 
50.0

 
—

 
1.6

 
51.6

Total goodwill
 
$
7,983.6

 
$
—

 
$
0.4

 
$
7,984.0

(3)
Other activity includes adjustments to tax contingencies, the recognition of excess tax benefits upon exercise of stock options and foreign currency translation adjustments.
In conjunction with the formation of the index business venture with McGraw, the company divested the goodwill allocated to Index Services and CMA reporting units.
5. Debt
Long-term debt consisted of the following at June 30, 2012 and December 31, 2011: 
(in millions)
 
June 30, 2012
 
December 31, 2011
$750.0 million fixed rate notes due August 2013, interest equal to 5.40%
 
$
749.4

 
$
749.2

$750.0 million fixed rate notes due February 2014, interest equal to 5.75%
 
748.5

 
748.0

$612.5 million fixed rate notes due March 2018, interest equal to 4.40%(1)
 
609.8

 
609.6

Total long-term debt
 
$
2,107.7

 
$
2,106.8

(1)
In February 2010, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable effectively became fixed at a rate of 4.46% at issuance on March 18, 2010.
We maintain a commercial paper program under our senior credit facility. There was no commercial paper outstanding at June 30, 2012 or December 31, 2011. As of June 30, 2012, the most recent commercial paper issuance was in March 2011. During the first six months of 2011, the weighted average balance, at par value, of commercial paper outstanding was $61.8 million. In the first six months of 2011, the maximum month-end balance for commercial paper was $200.0 million in January.
Long-term debt maturities, at par value, were as follows as of June 30, 2012:  
(in millions)
Par Value
2013
$
750.0

2014
750.0

2015
—

2016
—

2017
—

Thereafter
612.5

The fair values of the fixed rate notes due 2013 and 2014 were estimated using quoted market prices and are considered level 2 liabilities under the classification hierarchy for fair value measurements. The fair value of the fixed rate notes due 2018 was derived using a standard valuation model with market-based observable inputs including U.S. Treasury yields and interest rate spreads, which is considered a level 3 liability. For further information on the three-level classification hierarchy of fair value

14


measurements, see note 8. At June 30, 2012, the fair values of the fixed rate notes were as follows:
(in millions)
Fair Value
$750.0 million fixed rate notes due August 2013
$
786.6

$750.0 million fixed rate notes due February 2014
807.7

$612.5 million fixed rate notes due March 2018
669.3

6. Contingencies
Legal and Regulatory Matters. In 2008, Fifth Market, Inc. (Fifth Market) filed a complaint against CME Group and CME seeking a permanent injunction against CME's Globex system and unquantified enhanced damages for what the plaintiff alleges is willful infringement of two U.S. patents, in addition to costs, expenses and attorneys' fees. In March 2012, the U.S. Patent and Trademark Office (USPTO) issued an Office Action that rejected all of the claims in the first patent in a reexamination proceeding. Fifth Market replied to the rejection and may appeal the decision from the USPTO. CME initiated a second reexamination against the second asserted patent. Based on its investigation to date and advice from legal counsel, the company believes this suit is without merit and intends to defend itself vigorously against these charges.
In 2009, CME and CBOT filed a complaint against Howard Garber seeking a declaratory judgment that neither CME nor CBOT infringed Mr. Garber's patent and that his patent is invalid and unenforceable. In 2009, Technology Research Group LLC (Technology Research), the current owner of the patent at issue, filed counterclaims alleging that CME and CBOT willfully infringe or induce or contribute to the infringement of its patent. Technology Research is seeking damages in an amount no less than a reasonable royalty. In March 2012, the USPTO issued an Office Action that rejected all of the claims in the patent. Mr. Garber replied and may appeal the decision from the USPTO. Based on its investigation to date and advice from legal counsel, the company believes this suit is without merit and intends to defend itself vigorously against these charges.
In 2009, Realtime Data LLC (Realtime) filed a complaint against CME Group and other exchanges alleging willful infringement of four patents which was later amended to add CBOT and NYMEX as defendants. Subsequently, two additional lawsuits have been filed each adding a claim for the infringement of an additional patent. Both of these lawsuits have been consolidated with the original action. Realtime is seeking a permanent injunction, enhanced damages, attorneys' fees and costs. Three of the six asserted patents in this case have been dropped due in part to the rejections of the patents in the reexaminations by the U.S. Patent and Trademark Office. In July 2012, the U.S. Patent and Trademark Office rejected all the claims in a fourth of the six patents. Based on its investigation to date and advice from legal counsel, the company believes this suit is without merit and intends to defend itself vigorously against these charges.
The foregoing legal matters involve alleged infringements of intellectual property, which due to their nature involve potential liability that is uncertain, difficult to quantify and involve a wide range of potential outcomes. The company believes that the matters are without merit and intends to defend itself vigorously against the claims. We expect the re-examinations by the USPTO in the Fifth Market, Realtime, and Garber matters and the potential appeals of its decisions to result in a determination of the validity of the patents at issue which we expect will have an impact on the merits of the matters.
CME has been named as a defendant in several lawsuits stemming from the MF Global Inc. (MF Global) matter. A number of suits have been filed in federal court in New York on behalf of all commodity account holders or customers of MF Global that had not received a return of 100% of their funds. CME is among the defendants in these actions. Claims against CME are for aiding and abetting breach of fiduciary duty and aiding and abetting tortious conduct. Unspecified damages along with treble and punitive damages are sought. These suits, along with several other lawsuits related to MF Global in which CME is not named as a defendant, have been consolidated in federal court in New York. Based on our analysis, we believe that we have strong legal and factual defenses to the claims. Given that these matters are in the very early stage, at this time the company is unable to estimate the reasonably possible loss or range of reasonably possible loss in the unlikely event it were found to be liable in these matters.
In the normal course of business, the company discusses matters with its regulators that either arise during regulatory examinations or are otherwise subject to the regulator's inquiry and oversight. These matters could result in censures, fines, penalties or other sanctions. Management believes the outcome of any resulting actions will not have a material impact on its consolidated financial position or results of operations. However, the company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential fines, penalties or injunctive or other equitable relief, if any, that may result from these matters.
In addition, the company is a defendant in, and has potential for, various other legal proceedings arising from its regular business activities. While the ultimate results of such proceedings against the company cannot be predicted with certainty, the company believes that the resolution of any of these matters on an individual basis will not have a material impact on its consolidated financial position or results of operations. At June 30, 2012 and December 31, 2011, the company had accrued $12.8 million for legal and regulatory matters that were probable and estimable.

15


Intellectual Property Indemnifications. Certain agreements with customers and other third parties related to accessing the CME Globex platform, the CME ClearPort platform, and/or the Clearing 21 platform; utilizing market data services; licensing CME SPAN software; and calculating indexes as a service provider and licensing indexes as the basis of financial products may contain indemnifications from intellectual property claims that may be made against them as a result of their use of the applicable products and/or services. The potential future claims relating to these indemnifications cannot be estimated and, therefore, no liability has been recorded.
7. Guarantees
Clearing House Contract Settlement. CME and CME Clearing Europe (CMECE) mark-to-market open positions for most products at least twice a day. Based on values derived from the mark-to-market process, CME and CMECE require payment from clearing firms whose positions have lost value and make payments to clearing firms whose positions have gained value. For select cleared-only markets, positions are marked-to-market once daily, with the capability to mark-to-market more frequently as market conditions warrant. Under the extremely unlikely scenario of simultaneous default by every clearing firm who have open positions with unrealized losses, the maximum exposure related to CME and CMECE’s guarantee would be one half day of changes in fair value of all open positions, before considering CME and CMECE’s ability to access defaulting clearing firms’ performance bond and guaranty fund balances as well as other available resources. During the second quarter of 2012, CME and CMECE transferred an average of approximately $2.5 billion a day through their clearing systems for settlement from clearing firms whose positions had lost value to clearing firms whose positions had gained value. CME and CMECE reduce the guarantee exposure through initial and maintenance performance bond requirements and mandatory guaranty fund contributions. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at June 30, 2012.
Mutual Offset Agreement. CME and Singapore Exchange Limited (SGX) have a mutual offset agreement with a current term through October 2012. The term of the agreement will automatically renew for a one-year period unless either party provides advance notice of their intent to terminate. CME can maintain collateral in the form of U.S. Treasury securities or irrevocable letters of credit. At June 30, 2012, CME was contingently liable to SGX on irrevocable letters of credit totaling $196.0 million. Regardless of the collateral, CME guarantees all cleared transactions submitted through SGX and would initiate procedures designed to satisfy these financial obligations in the event of a default, such as the use of performance bonds and guaranty fund contributions of the defaulting clearing firm.
Cross-Margin Agreements. CME and The Options Clearing Corporation (OCC) have a cross-margin arrangement, whereby a common clearing firm may maintain a cross-margin account in which the clearing firm's positions in certain CME futures and options on futures contracts are combined with certain positions cleared by OCC for purposes of calculating performance bond requirements. The performance bond deposits are held jointly by CME and OCC. If a participating firm defaults, the gain or loss on the liquidation of the firm's open position and the proceeds from the liquidation of the cross-margin account would be allocated 50% each to CME and OCC.
A cross-margin agreement exists with CME and Fixed Income Clearing Corp (FICC) whereby the clearing firms' offsetting positions with CME are subject to reduced margin requirements. Clearing firms maintain separate performance bond deposits with each clearing house, but depending on the net offsetting positions between CME and FICC, each clearing house may reduce the firm's performance bond requirement. In the event of a firm default, the total liquidation net gain or loss on the firm's offsetting open positions and the proceeds from the liquidation of the performance bond collateral held by each clearing house's supporting offsetting positions would be divided evenly between CME and FICC. Additionally, if, after liquidation of all the positions and collateral of the defaulting firm at each respective clearing organization, and taking into account any cross-margining loss sharing payments, any of the participating clearing organizations has a remaining liquidating surplus, and any other participating clearing organization has a remaining liquidating deficit, any additional surplus from the liquidation would be shared with the other clearing house to the extent that it has a remaining liquidating deficit. Any remaining surplus funds would be passed to the bankruptcy trustee.
MF Global Bankruptcy Guarantee. The company has provided a $550.0 million financial guarantee to the bankruptcy trustee of MF Global in order to accelerate the distribution of funds to MF Global customers. In the event that the trustee distributed more property than was permitted by the Bankruptcy Code and CFTC regulations to any former MF Global customer on or after November 16, 2011, the company will make a cash payment for the amount of the erroneous distribution up to $550.0 million to the trustee. A payment will only be made after the trustee makes reasonable efforts to collect the property erroneously distributed to the customer. If a payment is made by the company, the company may have the right to seek reimbursement of the erroneously distributed property from the applicable customer. The guarantee only applies to the second and third bulk distributions that were facilitated by the company. The guarantee does not cover future distributions made directly by the trustee to customers. The company believes that the likelihood of payment to the trustee is remote given the process in place to validate customer distributions. As a result, the guarantee liability is estimated to be immaterial at June 30, 2012.

16


Family Farmer and Rancher Protection Fund. In April 2012, the company established the Family Farmer and Rancher Protection Fund (the Fund) to provide further protection of customer segregated funds for U.S. family farmers and ranchers who use the company's products to hedge their crops and livestock. Under the terms of the Fund, farmers and ranchers using qualified products are eligible for up to $25,000 per participant in the case of losses resulting from the future insolvency of a clearing member or other market participant. Farming and ranching cooperatives are eligible for up to $100,000 per cooperative. If losses in a future failure total more than $100.0 million, participants will be eligible for a pro-rata share of the Fund, up to $100.0 million. Clearing members and customers must register in advance with the company and provide certain documentation in order to substantiate their eligibility. Based on the number of clearing members and customers registered with the Fund at June 30, 2012, the company believes that its guarantee liability is immaterial and therefore has not recorded any liability at June 30, 2012.
8. Fair Value Measurements
The company uses a three-level classification hierarchy of fair value measurements for disclosure purposes.
•
Level 1 inputs, which are considered the most reliable evidence of fair value, consist of quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 inputs consist of observable market data, other than level 1 inputs, such as quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are directly observable.
•
Level 3 inputs consist of unobservable inputs which are derived and cannot be corroborated by market data or other entity-specific inputs.
In general, the company uses quoted prices in active markets for identical assets to determine the fair value of marketable securities and equity investments. Level 1 assets generally include U.S. Treasury securities and exchange-traded mutual funds. If quoted prices are not available to determine fair value, the company uses other inputs that are observable either directly or indirectly. Assets included in level 2 generally consist of asset-backed securities. The level 2 securities were measured at fair value based on matrix pricing using prices of similar securities with similar inputs such as maturity dates, interest rates and credit ratings.
The company determined the fair value of its contingent consideration liabilities, considered level 3 liabilities, using a discounted cash flow model to calculate the present value of future payouts. The liabilities were included in level 3 because management used significant unobservable inputs, including a discount rate of 20% and probability of payout ranging from 86% to 100%. Significant increases or decreases in any of those inputs in isolation would result in a significantly higher or lower fair value.
Financial assets and liabilities recorded in the consolidated balance sheet as of June 30, 2012 were classified in their entirety based on the lowest level of input that was significant to each asset or liability's fair value measurement.
Financial Instruments Measured at Fair Value on a Recurring Basis:
 
 
June 30, 2012
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at Fair Value:
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
5.1

 
$
—

 
$
—

 
$
5.1

Mutual funds
 
37.0

 
—

 
—

 
37.0

Asset-backed securities
 
—

 
0.6

 
—

 
0.6

Total
 
42.1

 
0.6

 
—

 
42.7

Equity investments
 
528.5

 
—

 
—

 
528.5

Total Assets at Fair Value
 
$
570.6

 
$
0.6

 
$
—

 
$
571.2

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
—

 
$
—

 
$
12.3

 
$
12.3

Total Liabilities at Fair Value
 
$
—

 
$
—

 
$
12.3

 
$
12.3





17


There were no transfers of assets between level 1 and level 2 during the first six months of 2012. The following is a reconciliation of assets and liabilities valued at fair value on a recurring basis using significant unobservable inputs (level 3) during the first six months of 2012.
(in millions)
Contingent Consideration
Fair value of liability at December 31, 2011
$
10.3

Contingent obligation arising from acquisition
1.2

Unrealized changes in fair value:
 
Included in operating expense
0.8

Fair value of liability at June 30, 2012
$
12.3

There were no assets or liabilities valued at fair value on a nonrecurring basis using significant unobservable inputs during the first six months of 2012.
9. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to CME Group by the weighted average number of shares of all classes of common stock outstanding for each reporting period. Diluted earnings per share reflects the increase in shares using the treasury stock method to reflect the impact of an equivalent number of shares of common stock if stock options were exercised and restricted stock awards were converted into common stock. Outstanding stock options of approximately 5,184,000 were anti-dilutive for the quarter and six months ended June 30, 2012. Outstanding stock options of approximately 3,435,000 were anti-dilutive for the quarter and six months ended June 30, 2011. There were approximately 12,000 and 28,000 anti-dilutive restricted stock awards for the quarter and six months ended June 30, 2012, respectively. There were no anti-dilutive restricted stock awards for the quarter and six months ended June 30, 2011.
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(in millions, except shares and per share data)
 
2012
 
2011
 
2012
 
2011
Net Income Attributable to CME Group
 
$
244.9

 
$
293.7

 
$
511.5

 
$
750.3

Weighted Average Number of Common Shares (in thousands):
 
 
 
 
 
 
 
 
Basic
 
331,078

 
333,794

 
330,946

 
334,038

Effect of stock options and restricted stock awards
 
1,084

 
1,077

 
1,063

 
1,052

Diluted
 
332,162


334,871

 
332,009

 
335,090

Earnings per Common Share Attributable to CME Group:
 
 
 
 
 
 
 
 
Basic
 
$
0.74

 
$
0.88

 
$
1.55

 
$
2.25

Diluted
 
0.74

 
0.88

 
1.54

 
2.24

10. Subsequent Events
The company has evaluated subsequent events through the date the financial statements were issued and has determined that there are no subsequent events that require disclosure except for the following:
In May 2012, the company's board of directors declared a five-for-one split of its Class A common stock effected by way of a stock dividend to its Class A and Class B shareholders. The stock split was effective July 20, 2012 for all shareholders of record on July 10, 2012. As a result of the stock split, all amounts related to shares and earnings per share have been retroactively restated. Additionally, shares reserved under the CME Group Omnibus Stock Plan and Employee Stock Purchase Plan have been adjusted to reflect the stock split. Since the par value of the class A common stock remained at $0.01 per share, the recorded value for class A common stock was retroactively adjusted to reflect the par value of total outstanding shares.

18


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is provided as a supplement to, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2011.
References in this discussion and analysis to “we,” “us” and “our” are to CME Group and its consolidated subsidiaries, collectively. References to “exchange” are to Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), and New York Mercantile Exchange, Inc. (NYMEX), collectively.
RESULTS OF OPERATIONS
Financial Highlights
The following summarizes significant changes in our financial performance for the periods presented.
 
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(dollars in millions, except per share data)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Total revenues
 
$
795.9

 
$
838.3

 
(5
)%
 
$
1,570.5

 
$
1,669.9

 
(6
)%
Total expenses
 
326.7

 
303.8

 
8

 
650.1

 
611.3

 
6

Operating margin
 
59
%
 
64
%
 
 
 
59
%
 
63
%
 
 
Non-operating income (expense)
 
$
41.5

 
$
(25.2
)
 
n.m.

 
$
23.7

 
$
(37.7
)
 
n.m.

Effective tax rate
 
50
%
 
42
%
 
 
 
45
%
 
26
%
 
 
Net income attributable to CME Group
 
$
244.9

 
$
293.7

 
(17
)
 
$
511.5

 
$
750.3

 
(32
)
Diluted earnings per common share attributable to CME Group
 
0.74

 
0.88

 
(16
)
 
1.54

 
2.24

 
(31
)
Cash flows from operating activities
 
 
 
 
 
 
 
657.8

 
576.1

 
14

n.m. not meaningful
•
In the second quarter and first six months of 2012 when compared with the same periods in 2011, the decrease in revenues was attributable to a decline in clearing and transaction fees revenue due to lower contract volume.
•
The increase in overall expenses in the second quarter and first six months of 2012 compared with the same periods in 2011 was due to higher compensation and benefits resulting from salary increases and rising health care costs as well as an increase in headcount. Expenses associated with our business venture with The McGraw Hill Companies Inc. (McGraw), expense associated with the accelerated vesting of stock-based compensation related to our recent CEO transition and our voluntary exit incentive plan also contributed to a rise in overall expenses.
•
We recognized a gain of $65.2 million resulting from the de-consolidation of our business contributed into the business venture with McGraw, which resulted in an increase in non-operating income (expense) in the second quarter and first six months of 2012 when compared with the same periods in 2011.
•
The increase in the effective tax rate in the second quarter and first six months of 2012 is due to the establishment of deferred tax liabilities associated with the closing of our venture with McGraw, which resulted in a $132.0 million increase in our income tax provision. The increase was partially offset by non-recurring reductions to tax expense related to the closing of the business venture and the sale of Credit Market Analysis Ltd (CMA). In the first six months of 2011, a change in the state tax apportionment and a reduction in valuation allowances on other unrealized capital losses previously reserved contributed to a lower effective tax rate in the first six months of 2011 when compared with the same period in 2012.
Revenues
 
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(dollars in millions)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Clearing and transaction fees
 
$
643.6

 
$
687.8

 
(6
)%
 
$
1,264.7

 
$
1,379.1

 
(8
)%
Market data and information services
 
110.8

 
107.9

 
3

 
225.0

 
214.9

 
5
 %
Access and communication fees
 
22.6

 
11.3

 
99

 
42.3

 
22.8

 
85
 %
Other
 
18.9

 
31.3

 
(39
)
 
38.5

 
53.1

 
(28
)%
Total Revenues
 
$
795.9

 
$
838.3

 
(5
)
 
$
1,570.5

 
$
1,669.9

 
(6
)%

19


Clearing and Transaction Fees
The following table summarizes our total contract volume, revenue and average rate per contract. Total contract volume includes contracts that are traded on our exchange and cleared through our clearing house. Contract volume also includes cleared-only CME ClearPort contracts. Volume is measured in round turns, which is considered a completed transaction that involves a purchase and an offsetting sale of a contract. Average rate per contract is determined by dividing total clearing and transaction fee revenues by total contract volume. All amounts exclude our TRAKRS, credit default swap, interest rate swap and CME Clearing Europe contracts.
 
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Total volume (in millions)
 
792.1

 
852.2

 
(7
)%
 
1,555.1

 
1,707.5

 
(9
)%
Clearing and transaction fees (in millions)
 
$
642.9

 
$
687.8

 
(7
)
 
$
1,262.1

 
$
1,379.1

 
(8
)%
Average rate per contract
 
$
0.812

 
$
0.807

 
1

 
$
0.812

 
$
0.808

 
—

We estimate the following decreases in clearing and transaction fees based on change in total contract volume and change in average rate per contract during the second quarter and first six months of 2012 when compared with the same periods in 2011. 
(in millions)
 
Quarter Ended
 
Six Months Ended
Decrease due to change in total contract volume
 
$
(48.8
)
 
$
(123.6
)
Increase due to change in average rate per contract
 
3.9

 
6.6

Net decrease in clearing and transaction fees
 
$
(44.9
)
 
$
(117.0
)
Average rate per contract is impacted by our rate structure, including volume-based incentives; product mix; trading venue, and the percentage of volume executed by customers who are members compared with non-member customers. Due to the relationship between average rate per contract and volume, the change in revenues attributable to changes in each is only an approximation.
Contract Volume
The following table summarizes average daily contract volume. Contract volume can be influenced by many factors, including political and economic factors, the regulatory environment and market competition. 
 
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(amounts in thousands)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Average Daily Volume by Product Line:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
5,136

 
6,449

 
(20
)%
 
5,371

 
6,437

 
(17
)%
Equity
 
2,919

 
2,842

 
3

 
2,658

 
2,873

 
(7
)
Foreign exchange
 
920

 
918

 
—

 
884

 
939

 
(6
)
Agricultural commodity
 
1,288

 
1,156

 
11

 
1,205

 
1,154

 
4

Energy
 
1,741

 
1,760

 
(1
)
 
1,846

 
1,867

 
(1
)
Metal
 
372

 
403

 
(8
)
 
378

 
390

 
(3
)
Aggregate average daily volume
 
12,376

 
13,528

 
(9
)
 
12,342

 
13,660

 
(10
)
Average Daily Volume by Venue:
 
 
 
 
 
 
 
 
 
 
 
 
Electronic
 
10,595

 
11,454

 
(8
)
 
10,389

 
11,529

 
(10
)
Open outcry
 
1,109

 
1,393

 
(20
)
 
1,227

 
1,430

 
(14
)
Privately negotiated
 
238

 
242

 
(2
)
 
233

 
233

 
—

Total exchange-traded volume
 
11,942

 
13,089

 
(9
)
 
11,849

 
13,192

 
(10
)
Total CME ClearPort
 
434

 
439

 
(1
)
 
493

 
468

 
5

Aggregate average daily volume
 
12,376

 
13,528

 
(9
)
 
12,342

 
13,660

 
(10
)



20


Interest Rate Products
The following table summarizes average daily volume for our key interest rate products. Eurodollar front 8 contracts include contracts expiring within two years. Eurodollar back 32 contracts include contracts expiring within three to ten years.
  
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(amounts in thousands)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Eurodollar futures and options:
 
 
 
 
 
 
 
 
 
 
 
 
Front 8 futures
 
1,196

 
2,013

 
(41
)%
 
1,270

 
1,998

 
(36
)%
Back 32 futures
 
543

 
490

 
11

 
611

 
509

 
20

Options
 
577

 
752

 
(23
)
 
692

 
760

 
(9
)
U.S. Treasury futures and options:
 
 
 
 
 
 
 
 
 
 
 
 
10-Year
 
1,413

 
1,524

 
(7
)
 
1,383

 
1,513

 
(9
)
5-Year
 
569

 
768

 
(26
)
 
597

 
757

 
(21
)
Treasury bond
 
481

 
403

 
19

 
452

 
402

 
12

2-Year
 
225

 
341

 
(34
)
 
231

 
344

 
(33
)
Overall interest rate contract volume decreased in the second quarter and first six months of 2012 when compared with the same period in 2011 due to a decline in volume in certain interest rate products, including the Eurodollar front 8 futures contracts, Eurodollar options contracts and the 2-Year, 5-Year and 10-Year Treasury futures and options. This decline in volume was attributable to low short-term interest rate volatility caused by the Federal Reserve’s continued intent to maintain its zero interest rate policy through 2014. We believe the growth in the long-term interest rate products, including the Eurodollar back 32 futures and the Treasury bond futures and options contracts, was attributable to higher long-term interest rate volatility. The Federal Reserve's announcement to extend its zero interest rate policy shifted market expectations regarding long-term interest rates, which resulted in higher volatility.
Equity Products
The following table summarizes average daily volume for our key equity products.
  
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(amounts in thousands)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
E-mini S&P futures and options
 
2,310

 
2,265

 
2
%
 
2,111

 
2,283

 
(8
)%
E-mini NASDAQ futures and options
 
288

 
283

 
2

 
258

 
287

 
(10
)
Equity contract volume, driven primarily by E-mini S&P futures and options, increased in the second quarter of 2012 when compared with the same period in 2011 due to an increase in equity market volatility, as measured by the CBOE Volatility Index. Equity volatility was the result of continued financial and political uncertainty in the European Union.
The overall increase in the second quarter of 2012 when compared with the second quarter of 2011 were overshadowed by a sharp decrease in volume in the first quarter of 2012 when compared with the same period in 2011. The decrease in equity contract volume in the first quarter of 2012 when compared with the same period in 2011 was attributable to an overall decrease in volatility. We experienced periods of high volatility within the equity markets during the first quarter of 2011, which we believe was attributable to events in Asia and the Middle East. We also believe the decrease in volume was attributable to an outflow of investment in equity-based mutual funds beginning in mid-2011 due to the instability of the United States economy and the on-going credit crisis.
Foreign Exchange Products
The following table summarizes average daily volume for our key foreign exchange products. 
 
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(amounts in thousands)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Euro
 
319

 
352

 
(9
)%
 
313

 
359

 
(13
)%
Australian dollar
 
151

 
115

 
31

 
142

 
112

 
27

British pound
 
113

 
121

 
(7
)
 
107

 
127

 
(16
)
Canadian dollar
 
107

 
91

 
17

 
98

 
88

 
12

Japanese yen
 
92

 
121

 
(24
)
 
96

 
135

 
(29
)

21


The overall decrease in foreign exchange contract volume in the second quarter and first six months of 2012 when compared with the same period in 2011 was primarily attributable to a decline in euro contract volume. We believe trading activity in euro contracts has been impacted by the lack of a directional trend due to uncertainty related to the health of the European Union and concern over the possibility that the Federal Reserve will provide additional economic stimulus in the U.S. The lack of a trend has reduced trading in euro contracts among customers who trade based on medium- to long-term expectations. We believe that intervention by the Japanese central bank to control the yen foreign exchange rate caused the market to move to safe haven currencies, such as the Australian dollar and the Canadian dollar. This resulted in a decrease in Japanese yen contract volume and an increase in Australian dollar and Canadian dollar contract volume. We believe the decline in the British pound contract volume was due to lower volatility in the second quarter and first six months of 2012 when compared with the same periods in 2011.
Agricultural Commodity Products
The following table summarizes average daily volume for our key agricultural commodity products. 
 
 
Quarter Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(amounts in thousands)
 
2012