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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 September 30, 2016
- 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)
Not Applicable
(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.
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 October 12, 2016 was as follows: 339,347,113 shares of Class A common stock, $0.01 par value; 625 shares of Class B-1 common stock, $0.01 par value; 813 shares of Class B-2 common stock, $0.01 par value; 1,287 shares of Class B-3 common stock, $0.01 par value; and 413 shares of Class B-4 common stock, $0.01 par value.

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 CME GROUP INC.
FORM 10-Q
INDEX
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 

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PART I. FINANCIAL INFORMATION
Certain Terms
Unless otherwise indicated, references to CME Group Inc. (CME Group or the company) products include references to products listed 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.
All references to “options” or “options contracts” in the text of this document refer to options on futures contracts.
Further information about CME Group and its products can be found at http://www.cmegroup.com. Information made available on our website does not constitute a part of this Quarterly Report on Form 10-Q.
Information about Contract Volume and Average Rate per Contract
All amounts regarding contract volume and average rate per contract exclude our interest rate swaps and credit default swaps 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, Chicago Board of Trade, KCBT and Kansas City 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. COMEX is a trademark of Commodity 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. 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 while maintaining reliability and ensuring that such technology is not vulnerable to security risks;
•
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 swaps 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, including the impact of any changes in domestic and foreign laws or government policy with respect to our industry, such as any changes to regulations and policies that require increased financial and operational resources from us or our customers;
•
the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others;
•
decreases in revenue from our market data as a result of decreased demand;

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•
changes in our 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 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 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;
•
our ability to accommodate increases in contract volume and order transaction traffic and to implement enhancements 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 strategy for acquisitions, investments and alliances;
•
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; and
•
the unfavorable resolution of material legal proceedings.
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 26, 2016 and Item 1A. of this Quarterly Report on Form 10-Q.

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ITEM 1.
FINANCIAL STATEMENTS

CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except par value data; shares in thousands)
(unaudited)
 
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,420.5

 
$
1,692.6

Marketable securities
 
83.3

 
72.5

Accounts receivable, net of allowance of $3.6 and $1.9
 
395.7

 
357.8

Other current assets (includes $29.5 and $32.0 in restricted cash)
 
269.4

 
228.6

Performance bonds and guaranty fund contributions
 
31,607.1

 
35,553.0

Total current assets
 
33,776.0

 
37,904.5

Property, net of accumulated depreciation and amortization of $577.4 and $788.6
 
426.7

 
491.7

Intangible assets—trading products
 
17,175.3

 
17,175.3

Intangible assets—other, net
 
2,465.9

 
2,537.9

Goodwill
 
7,569.0

 
7,569.0

Other assets (includes $64.4 and $70.5 in restricted cash)
 
1,838.4

 
1,681.0

Total Assets
 
$
63,251.3

 
$
67,359.4

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
34.5

 
$
28.7

Other current liabilities
 
247.0

 
1,242.8

Performance bonds and guaranty fund contributions
 
31,604.9

 
35,553.0

Total current liabilities
 
31,886.4

 
36,824.5

Long-term debt
 
2,230.7

 
2,229.3

Deferred income tax liabilities, net
 
7,317.7

 
7,358.3

Other liabilities
 
551.6

 
395.5

Total Liabilities
 
41,986.4

 
46,807.6

 
 
 
 
 
Shareholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized at September 30, 2016 and December 31, 2015; none issued
 
—

 
—

Class A common stock, $0.01 par value, 1,000,000 shares authorized at September 30, 2016 and December 31, 2015; 337,978 and 336,938 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
 
3.4

 
3.4

Class B common stock, $0.01 par value, 3 shares authorized, issued and outstanding as of September 30, 2016 and December 31, 2015
 
—

 
—

Additional paid-in capital
 
17,780.0

 
17,721.6

Retained earnings
 
3,458.6

 
2,907.6

Accumulated other comprehensive income (loss)
 
22.9

 
(80.8
)
Total shareholders’ equity
 
21,264.9

 
20,551.8

Total Liabilities and Equity
 
$
63,251.3

 
$
67,359.4


See accompanying notes to unaudited consolidated financial statements.

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CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Quarter Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Clearing and transaction fees
 
$
704.2

 
$
715.0

 
$
2,267.9

 
$
2,105.0

Market data and information services
 
101.1

 
99.5

 
306.4

 
300.3

Access and communication fees
 
23.8

 
21.6

 
67.7

 
64.4

Other
 
12.6

 
14.2

 
40.3

 
43.3

Total Revenues
 
841.7

 
850.3

 
2,682.3

 
2,513.0

Expenses
 
 
 
 
 
 
 
 
Compensation and benefits
 
130.6

 
136.4

 
394.2

 
419.2

Communications
 
6.9

 
7.1

 
19.9

 
21.3

Technology support services
 
17.3

 
15.4

 
52.4

 
47.1

Professional fees and outside services
 
33.5

 
33.8

 
104.2

 
90.6

Amortization of purchased intangibles
 
24.0

 
24.9

 
72.0

 
74.8

Depreciation and amortization
 
31.2

 
32.4

 
95.5

 
97.5

Occupancy and building operations
 
19.6

 
23.1

 
65.3

 
69.4

Licensing and other fee agreements
 
31.5

 
33.1

 
103.3

 
92.5

Other
 
21.8

 
27.7

 
113.0

 
81.8

Total Expenses
 
316.4

 
333.9

 
1,019.8

 
994.2

Operating Income
 
525.3

 
516.4

 
1,662.5

 
1,518.8

 
 
 
 
 
 
 
 
 
Non-Operating Income (Expense)
 
 
 
 
 
 
 
 
Investment income
 
36.5

 
2.5

 
71.3

 
26.7

Gains (losses) on derivative investments
 
—

 
—

 
—

 
(1.8
)
Interest and other borrowing costs
 
(31.1
)
 
(28.3
)
 
(91.9
)
 
(88.5
)
Equity in net earnings (losses) of unconsolidated subsidiaries
 
28.6

 
26.6

 
82.4

 
75.1

Other non-operating income (expense)
 
(10.5
)
 
(0.8
)
 
(30.9
)
 
(42.0
)
Total Non-Operating
 
23.5

 
—

 
30.9

 
(30.5
)
Income before Income Taxes
 
548.8

 
516.4

 
1,693.4

 
1,488.3

Income tax provision
 
76.0

 
156.5

 
532.7

 
533.0

Net Income
 
$
472.8

 
$
359.9

 
$
1,160.7

 
$
955.3

 
 
 
 
 
 
 
 
 
Earnings per Common Share:
 
 
 
 
 
 
 
 
Basic
 
$
1.40

 
$
1.07

 
$
3.44

 
$
2.84

Diluted
 
1.39

 
1.06

 
3.43

 
2.83

Weighted Average Number of Common Shares:
 
 
 
 
 
 
 
 
Basic
 
337,592

 
336,323

 
337,299

 
336,015

Diluted
 
339,143

 
338,139

 
338,834

 
337,804

See accompanying notes to unaudited consolidated financial statements.

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CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
 
Quarter Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
472.8

 
$
359.9

 
$
1,160.7

 
$
955.3

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 
(17.7
)
 
(100.2
)
 
177.7

 
(91.0
)
Reclassification of net (gains) losses on sales included in investment income
 
(6.3
)
 
2.6

 
(6.3
)
 
(3.4
)
Income tax benefit (expense)
 
(65.3
)
 
—

 
(65.9
)
 
1.2

Investment securities, net
 
(89.3
)
 
(97.6
)
 
105.5

 
(93.2
)
Defined benefit plans:
 
 
 
 
 
 
 
 
Net change in defined benefit plans arising during the period
 
—

 
—

 
3.1

 
(0.3
)
Amortization of net actuarial (gains) losses included in compensation and benefits expense
 
0.8

 
0.6

 
2.4

 
2.0

Income tax benefit (expense)
 
(0.3
)
 
(0.2
)
 
(2.1
)
 
(0.6
)
Defined benefit plans, net
 
0.5

 
0.4

 
3.4

 
1.1

Derivative investments:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 
—

 
—

 
—

 
(4.7
)
Ineffectiveness on cash flow hedges included in (gains) losses on derivative investments
 
—

 
—

 
—

 
1.8

Amortization of effective portion of net (gains) losses on cash flow hedges included in interest expense
 
(0.3
)
 
(0.3
)
 
(0.9
)
 
(0.9
)
Income tax benefit (expense)
 
0.1

 
0.1

 
0.3

 
1.5

Derivative investments, net
 
(0.2
)
 
(0.2
)
 
(0.6
)
 
(2.3
)
Foreign currency translation:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(0.6
)
 
(3.4
)
 
(5.6
)
 
(10.0
)
Income tax benefit (expense)
 
(0.8
)
 
1.1

 
1.0

 
3.6

Foreign currency translation, net
 
(1.4
)
 
(2.3
)
 
(4.6
)
 
(6.4
)
Other comprehensive income (loss), net of tax
 
(90.4
)
 
(99.7
)
 
103.7

 
(100.8
)
Comprehensive Income
 
$
382.4

 
$
260.2

 
$
1,264.4

 
$
854.5

See accompanying notes to unaudited consolidated financial statements.

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CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF 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, 2015
 
336,938

 
3

 
$
17,725.0

 
$
2,907.6

 
$
(80.8
)
 
$
20,551.8

Net income
 
 
 
 
 
 
 
1,160.7

 
 
 
1,160.7

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
103.7

 
103.7

Dividends on common stock of $1.80 per share
 
 
 
 
 
 
 
(609.7
)
 
 
 
(609.7
)
Exercise of stock options
 
434

 
 
 
29.5

 
 
 
 
 
29.5

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
10.0

 
 
 
 
 
10.0

Vesting of issued restricted Class A common stock
 
570

 
 
 
(26.8
)
 
 
 
 
 
(26.8
)
Shares issued to Board of Directors
 
26

 
 
 
2.5

 
 
 
 
 
2.5

Shares issued under Employee Stock Purchase Plan
 
10

 
 
 
0.9

 
 
 
 
 
0.9

Stock-based compensation
 
 
 
 
 
42.3

 
 
 
 
 
42.3

Balance at September 30, 2016
 
337,978

 
3

 
$
17,783.4

 
$
3,458.6

 
$
22.9

 
$
21,264.9

See accompanying notes to unaudited consolidated financial statements.

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CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF 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, 2014
335,452

 
3

 
$
17,600.0

 
$
3,317.3

 
$
6.2

 
$
20,923.5

Net income
 
 
 
 
 
 
955.3

 
 
 
955.3

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
(100.8
)
 
(100.8
)
Dividends on common stock of $1.50 per share
 
 
 
 
 
 
(500.8
)
 
 
 
(500.8
)
Tax effect and gain related to purchase of non-controlling interests
 
 
 
 
9.3

 
 
 
 
 
9.3

Exercise of stock options
798

 
 
 
51.8

 
 
 
 
 
51.8

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
6.7

 
 
 
 
 
6.7

Vesting of issued restricted Class A common stock
450

 
 
 
(16.8
)
 
 
 
 
 
(16.8
)
Shares issued to Board of Directors
26

 
 
 
2.4

 
 
 
 
 
2.4

Shares issued under Employee Stock Purchase Plan
10

 
 
 
1.0

 
 
 
 
 
1.0

Stock-based compensation
 
 
 
 
45.2

 
 
 
 
 
45.2

Balance at September 30, 2015
336,736

 
3

 
$
17,699.6

 
$
3,771.8

 
$
(94.6
)
 
$
21,376.8

See accompanying notes to unaudited consolidated financial statements.


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CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited) 
 
 
Nine Months Ended
September 30,
 
 
2016
 
2015
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
1,160.7

 
$
955.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
42.3

 
45.2

Amortization of purchased intangibles
 
72.0

 
74.8

Depreciation and amortization
 
95.5

 
97.5

Gain on sale of BM&FBOVESPA shares
 
(6.4
)
 
(3.4
)
Debt prepayment costs
 
—

 
61.8

Loss on datacenter
 
27.1

 
—

Undistributed earnings, net of losses, of unconsolidated subsidiaries
 
(29.3
)
 
(15.2
)
Deferred income taxes
 
(79.3
)
 
49.8

Change in:
 
 
 
 
Accounts receivable
 
(18.7
)
 
(22.3
)
Other current assets
 
(12.5
)
 
12.4

Other assets
 
9.5

 
(18.4
)
Accounts payable
 
5.7

 
1.3

Income taxes payable
 
21.3

 
(70.1
)
Other current liabilities
 
(67.3
)
 
(31.3
)
Other liabilities
 
(14.3
)
 
(0.5
)
Other
 
(0.7
)
 
4.3

Net Cash Provided by Operating Activities
 
1,205.6

 
1,141.2

 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
Proceeds from maturities of available-for-sale marketable securities
 
40.1

 
29.3

Purchases of available-for-sale marketable securities
 
(44.9
)
 
(29.3
)
Purchases of property, net
 
(62.9
)
 
(90.3
)
Investments in business ventures
 
(4.9
)
 
(7.0
)
Proceeds from sale of business venture
 
8.8

 
—

Proceeds from sale of BM&FBOVESPA shares
 
—

 
69.0

Settlement of derivative related to debt issuance
 
—

 
7.0

Net Cash Used in Investing Activities
 
(63.8
)
 
(21.3
)
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
Proceeds from debt, net of issuance costs
 
—

 
743.7

Repayment of debt
 
—

 
(673.0
)
Cash dividends
 
(1,584.3
)
 
(1,174.9
)
Proceeds from finance lease obligation
 
130.0

 
—

Proceeds from exercise of stock options
 
29.5

 
51.8

Excess tax benefits related to employee option exercises and restricted stock vesting
 
10.0

 
6.7

Settlement of contingent consideration
 
—

 
(7.0
)
Other
 
0.9

 
1.0

Net Cash Used in Financing Activities
 
(1,413.9
)
 
(1,051.7
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(272.1
)
 
68.2

Cash and cash equivalents, beginning of period
 
1,692.6

 
1,366.1

Cash and Cash Equivalents, End of Period
 
$
1,420.5

 
$
1,434.3

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income taxes paid
 
$
545.5

 
$
548.5

Interest paid
 
84.8

 
89.1

Non-cash investing activities:
 
 
 
 
Accrued proceeds from sale of BM&FBOVESPA shares
 
20.8

 
—

See accompanying notes to unaudited consolidated financial statements.

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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), Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX), Commodity Exchange, Inc. (COMEX), CME Clearing Europe Limited (CMECE) and CME Europe Limited (CME Europe). CME, CBOT, NYMEX, COMEX, CMECE and CME Europe and their subsidiaries are referred to collectively as “the exchange” in the notes to the consolidated financial statements. The clearing houses include CME Clearing, which is the U.S. clearing house and a division of CME, and CMECE.
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 September 30, 2016 and December 31, 2015 and the results of operations and cash flows for the periods indicated. Quarterly results are not necessarily indicative of results for any subsequent period.
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, 2015, filed with the Securities and Exchange Commission (SEC) on February 26, 2016.
2. Performance Bonds and Guaranty Fund Contributions
Performance Bonds and Guaranty Fund Contributions. At September 30, 2016, performance bonds and guaranty fund contribution assets on the consolidated balance sheets include cash as well as U.S. Treasury securities and U.S. government agency securities with maturity dates of 90 days or less. U.S. Treasury securities and U.S. government agency securities are purchased by CME, at its discretion, using cash collateral. The benefits, including interest earned, and risks of ownership accrue to CME. Interest earned is included in investment income on the consolidated statements of income. These securities are classified as available-for-sale. At September 30, 2016, the amortized cost and fair value of the U.S. Treasury securities were $4,198.9 million and $4,199.5 million, respectively. At September 30, 2016, the amortized cost and fair value of the U.S. government securities were both $3,682.6 million. The U.S. Treasury securities and U.S. government agency securities will mature in the fourth quarter of 2016. Performance bonds and guaranty fund contribution assets also include overnight reverse repurchase agreements that were purchased by CME, at its discretion, using cash collateral. The fair value of the overnight securities under the reverse repurchase agreements was $1,052.7 million at September 30, 2016.
CME has been designated as a systemically important financial market utility by the Financial Stability Oversight Council and is authorized to establish and maintain a cash account at the Federal Reserve Bank of Chicago. CME has received approval to establish this account at the Federal Reserve Bank of Chicago for clearing members' proprietary cash balances and is currently operationalizing the account, including testing.
Clearing House Contract Settlement. CME Clearing and CMECE mark-to-market open positions for all futures and options contracts twice a day (once a day for CME's cleared-only credit default swap and interest rate swap contracts). Based on values derived from the mark-to-market process, CME Clearing and CMECE require payments from clearing firms whose positions have lost value and make payments to clearing firms whose positions have gained value. Under the extremely unlikely scenario of simultaneous default by every clearing firm who has open positions with unrealized losses, the maximum exposure related to positions other than cleared-only credit default and interest rate swap contracts would be one half day of changes in fair value of all open positions, before considering the clearing houses' ability to access defaulting clearing firms' collateral deposits. For CME's cleared-only credit default swap and interest rate swap contracts, the maximum exposure related to CME Clearing's guarantee would be one full day of changes in fair value of all open positions, before considering CME Clearing's ability to access defaulting clearing firms' collateral. During the first nine months of 2016, CME Clearing and CMECE transferred an average of approximately $3.3 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 Clearing and CMECE reduce their 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 September 30, 2016.
3. Property

In March 2016, the company sold its datacenter in the Chicago area for $130.0 million. At the time of the sale, the company leased back a portion of the property. The sale-leaseback transaction was recognized under the financing method and not as a sale-leaseback arrangement under generally accepted accounting principles due to the company's participation in future revenues and development work, which constitutes continuing involvement in the datacenter. Under the financing method, the assets remain on the consolidated balance sheet throughout the term of the lease and the proceeds of $130.0 million from the

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transaction are recognized as a finance lease obligation within other liabilities and other current liabilities in the consolidated balance sheet. A portion of the lease payments will be recognized as a reduction of the finance lease obligation and a portion will be recognized as interest expense based on an imputed interest rate.
The net cost basis of the property and equipment legally sold was $153.1 million at the date of the sale. At March 31, 2016, the company wrote down the property and equipment to a fair value of $130.0 million based on qualitative indications of impairment and a quantitative analysis based on undiscounted cash flows. The company recognized a net loss on the transaction of $27.1 million through other expenses, which includes the write down to fair value and certain other transaction-related costs. The company recognized a total net loss and expenses of $28.6 million, which also includes $1.5 million of legal and other fees incurred. The property and equipment legally sold will continue to be recognized on the consolidated balance sheets and will continue to be depreciated on the consolidated statements of income over the term of the lease.
The lease has an initial lease term ending in March 2031 and contains two consecutive renewal options for five years. Future minimum lease payments under this non-cancellable lease will be payable as follows as of September 30, 2016 (in millions):
Year
 
Remainder of 2016
$
4.2

2017
16.7

2018
16.8

2019
16.8

2020
16.9

Thereafter
180.5

Total
$
251.9

4. Intangible Assets
Intangible assets consisted of the following at September 30, 2016 and December 31, 2015:
 
 
 
September 30, 2016
 
December 31, 2015
(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
 
$
2,838.8

 
$
(825.5
)
 
$
2,013.3

 
$
2,838.8

 
$
(754.5
)
 
$
2,084.3

Technology-related intellectual property
 
29.4

 
(28.2
)
 
1.2

 
29.4

 
(27.2
)
 
2.2

Other
 
2.4

 
(1.0
)
 
1.4

 
2.4

 
(1.0
)
 
1.4

Total amortizable intangible assets
 
$
2,870.6

 
$
(854.7
)
 
2,015.9

 
$
2,870.6

 
$
(782.7
)
 
2,087.9

 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-Lived Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
 
 
 
 
450.0

 
 
 
 
 
450.0

Total intangible assets – other, net
 
 
 
 
 
$
2,465.9

 
 
 
 
 
$
2,537.9

Trading products (1)
 
 
 
 
 
$
17,175.3

 
 
 
 
 
$
17,175.3

(1)
Trading products represent futures and options products acquired in our business combinations with CBOT Holdings, Inc., NYMEX Holdings, Inc. and The Board of Trade of Kansas City, Missouri, Inc. Clearing and transaction fees are generated through the trading of these products. These trading products, most of which have traded for decades, require authorization from the Commodity Futures Trading Commission (CFTC). Product authorizations from the CFTC have no term limits.






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Total amortization expense for intangible assets was $24.0 million and $24.9 million for the quarters ended September 30, 2016 and 2015, respectively. Total amortization expense for intangible assets was $72.0 million and $74.8 million for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, the future estimated amortization expense related to amortizable intangible assets is expected to be as follows:
(in millions)
 Amortization Expense
Remainder of 2016
$
24.0

2017
95.5

2018
94.7

2019
94.7

2020
94.7

2021
94.7

Thereafter
1,517.6

5. Long-Term Investments
In September 2016, the company sold approximately 4.0 million shares of BM&FBOVESPA S.A. (BM&FBOVESPA) and recognized a net gain of $6.4 million within investment income on the consolidated statements of income. As of September 30, 2016, the company owned an approximate 4% interest in BM&FBOVESPA. At September 30, 2016, the fair value and cost basis of the remaining investment in BM&FBOVESPA was $351.1 million and $243.9 million, respectively.
6. Debt
In the first quarter of 2016, the company adopted the Financial Accounting Standards Board's (FASB) standards update on changes to the presentation of debt issuance costs. The update requires debt issuance costs related to a recognized debt liability to be presented as a deduction from the carrying value of the debt liability. Previously, debt issuance costs were recognized as deferred charges within other assets in the consolidated balance sheets. The standards update was applied on a retrospective basis, adjusting all prior periods presented, as if the new accounting methodology was in effect during those periods. At December 31, 2015, $12.1 million of debt issuance costs were reclassified in the consolidated balance sheet from other assets to long-term debt compared with what was previously reported. At September 30, 2016, $11.4 million of debt issuance costs were deducted from long-term debt. The change in accounting policy has been reflected in the table below.
Long-term debt consisted of the following at September 30, 2016 and December 31, 2015: 
(in millions)
 
September 30, 2016
 
December 31, 2015
$750.0 million fixed rate notes due September 2022, stated rate of 3.00% (1)
 
$
745.0

 
$
744.4

$750.0 million fixed rate notes due March 2025, stated rate of 3.00% (2)
 
744.0

 
743.4

$750.0 million fixed rate notes due September 2043, stated rate of 5.30% (3)
 
741.7

 
741.5

Total long-term debt
 
$
2,230.7

 
$
2,229.3

(1)
In August 2012, 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 on the notes effectively became fixed at a rate of 3.32%.
(2)
In December 2014, 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 on the notes effectively became fixed at a rate of 3.11%.
(3)
In August 2012, 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 on the notes effectively became fixed at a rate of 4.73%.







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Long-term debt maturities, at par value, were as follows at September 30, 2016:  
(in millions)
Par Value
2017
$
—

2018
—

2019
—

2020
—

2021
—

Thereafter
2,250.0

7. Income Taxes
In the first quarter of 2016, the company adopted the FASB's standards update that simplifies the classification of deferred tax assets and liabilities. The update eliminates the current requirement to present deferred tax assets and liabilities as current and non-current in a classified balance sheet. Instead, all deferred tax assets, along with valuation allowances, and deferred tax liabilities are required to be classified as non-current. Companies are still required to offset deferred tax assets and liabilities for each taxpaying component within a tax jurisdiction. Beginning in the first quarter of 2016, the company adopted this standards update on a prospective basis and classified all deferred tax assets and liabilities as non-current. Prior period deferred tax assets and liabilities were not retrospectively adjusted.
A net current deferred tax asset of $27.9 million was included in other current assets at December 31, 2015. During the first quarter of 2016, net current deferred tax assets of $27.9 million were reclassified to net long-term liabilities. Total net current deferred tax assets are primarily attributable to stock-based compensation and accrued expenses.
Net long-term deferred tax liabilities were $7.3 billion and $7.4 billion at September 30, 2016 and December 31, 2015. Net deferred tax liabilities are principally the result of purchase accounting for intangible assets in our various mergers, including CBOT Holdings, Inc. and NYMEX Holdings, Inc.
Valuation allowances of $15.3 million and $122.3 million have been provided on deferred tax assets at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 and December 31, 2015, valuation allowances were related to certain domestic net operating losses, foreign net operating losses as well as built in capital losses for which we do not believe that we currently meet the more-likely-than-not-threshold for recognition. At September 30, 2016, the company released $106.3 million of valuation allowance on deferred tax assets relating to built-in losses on its investment in BM&FBOVESPA due to the implementation of a tax strategy to realize additional ordinary income tax losses on recent share sales and the remaining investment in BM&FBOVESPA.
8. Contingencies
Legal and Regulatory Matters. In 2013, the CFTC filed suit against NYMEX and two former employees alleging disclosure of confidential customer information in violation of the Commodity Exchange Act. NYMEX’s motion to dismiss was denied in 2014. Based on its investigation to date and advice from legal counsel, the company believes that it has strong factual and legal defenses to the claim.
In the normal course of business, the company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their 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 or aggregate basis will not have a material impact on its consolidated financial position or results of operations.
At December 31, 2015, the company had accrued $3.5 million for legal and regulatory matters that were probable and estimable. No accrual was required for legal and regulatory matters that were probable and estimable as of September 30, 2016.
Intellectual Property Indemnifications. Certain agreements with customers and other third parties related to accessing the CME platforms, utilizing market data services and licensing CME SPAN software 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.


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9. Guarantees
Mutual Offset Agreement. CME and Singapore Exchange Limited (SGX) have a mutual offset agreement with a current term through October 2017. This agreement enables market participants to open a futures position on one exchange and liquidate it on the other. 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 must maintain U.S. Treasury securities or irrevocable, standby letters of credit as collateral for this agreement. At September 30, 2016, CME was contingently liable to SGX on letters of credit totaling $760.0 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. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at September 30, 2016.
Family Farmer and Rancher Protection Fund. In 2012, the company established the Family Farmer and Rancher Protection Fund (the Fund). The Fund is designed to provide payments, up to certain maximum levels, to family farmers, ranchers and other agricultural industry participants who use the company's agricultural commodity products and who suffer losses to their segregated account balances due to their CME clearing member becoming insolvent. Under the terms of the Fund, farmers and ranchers are eligible for up to $25,000 per participant. Farming and ranching cooperatives are eligible for up to $100,000 per cooperative. The Fund was established with a maximum of $100.0 million available for distribution to participants. Since its establishment, the Fund has made payments of approximately $2.0 million, which leaves $98.0 million available for future claims. If, at any time, payments due to participants were to exceed the amount remaining in the fund, payments would be pro-rated. Clearing members and customers must register with the company in advance and provide certain documentation in order to substantiate their eligibility. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at September 30, 2016.
10. Accumulated Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss):
(in millions)
Investment Securities
 
Defined Benefit Plans
 
Derivative Investments
 
Foreign Currency Translation
 
Total
Balance at December 31, 2015
$
(95.0
)
 
$
(36.6
)
 
$
59.6

 
$
(8.8
)
 
$
(80.8
)
Other comprehensive income (loss) before reclassifications and income tax benefit (expense)
177.7

 
3.1

 
—

 
(5.6
)
 
175.2

Amounts reclassified from accumulated other comprehensive income (loss)
(6.3
)
 
2.4

 
(0.9
)
 
—

 
(4.8
)
Income tax benefit (expense)
(65.9
)
 
(2.1
)
 
0.3

 
1.0

 
(66.7
)
Net current period other comprehensive income (loss)
105.5

 
3.4

 
(0.6
)
 
(4.6
)
 
103.7

Balance at September 30, 2016
$
10.5

 
$
(33.2
)
 
$
59.0

 
$
(13.4
)
 
$
22.9

(in millions)
Investment Securities
 
Defined Benefit Plans
 
Derivative Investments
 
Foreign Currency Translation
 
Total
Balance at December 31, 2014
$
(22.9
)
 
$
(31.3
)
 
$
62.6

 
$
(2.2
)
 
$
6.2

Other comprehensive income (loss) before reclassifications and income tax benefit (expense)
(91.0
)
 
(0.3
)
 
(4.7
)
 
(10.0
)
 
(106.0
)
Amounts reclassified from accumulated other comprehensive income (loss)
(3.4
)
 
2.0

 
0.9

 
—

 
(0.5
)
Income tax benefit (expense)
1.2

 
(0.6
)
 
1.5

 
3.6

 
5.7

Net current period other comprehensive income (loss)
(93.2
)
 
1.1

 
(2.3
)
 
(6.4
)
 
(100.8
)
Balance at September 30, 2015
$
(116.1
)
 
$
(30.2
)
 
$
60.3

 
$
(8.6
)
 
$
(94.6
)


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11. 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, 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.
Level 1 assets generally include U.S. Treasury securities, U.S. government agency securities, investments in publicly traded mutual funds, equity securities and corporate debt securities with quoted market prices. In general, the company uses quoted prices in active markets for identical assets to determine the fair value of marketable securities and equity investments. If quoted prices are not available to determine fair value, the company uses other inputs that are directly observable.
Assets included in level 2 generally consist of asset-backed securities. Asset-backed 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.
Financial assets recorded in the consolidated balance sheet as of September 30, 2016 were classified in their entirety based on the lowest level of input that was significant to each asset's fair value measurement. There were no liabilities that were measured at fair value as of September 30, 2016. The following tables present financial instruments measured at fair value on a recurring basis:
 
 
September 30, 2016
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at Fair Value:
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
22.0

 
$
—

 
$
—

 
$
22.0

Mutual funds
 
60.9

 
—

 
—

 
60.9

Equity securities
 
0.1

 
—

 
—

 
0.1

Asset-backed securities
 
—

 
0.3

 
—

 
0.3

Total Marketable Securities
 
83.0

 
0.3

 
—

 
83.3

Performance bonds and guaranty fund contributions (1):
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
4,199.5

 
—

 
—

 
4,199.5

U.S. government agencies securities
 
3,682.6

 
—

 
—

 
3,682.6

Equity investments
 
369.7

 
—

 
—

 
369.7

Total Assets at Fair Value
 
$
8,334.8

 
$
0.3

 
$
—

 
$
8,335.1

(1) Performance bonds and guaranty fund contributions on the consolidated balance sheet at September 30, 2016 include U.S. Treasury securities and U.S. government agency securities purchased with cash collateral.
There were no transfers of assets or liabilities between level 1, level 2 and level 3 during the first nine months of 2016. There were no level 3 assets valued at fair value on a recurring basis during the first nine months of 2016. The following is a reconciliation of level 3 liabilities valued at fair value on a recurring basis during the first nine months of 2016.
(in millions)
Contingent Consideration
Fair value of liability at December 31, 2015
$
0.3

Realized and unrealized (gains) losses:
 
Included in other expenses
(0.3
)
Fair value of liability at September 30, 2016
$
—

In the first quarter of 2016, the company sold a datacenter and leased back a portion of the property. Under generally accepted accounting principles, the transaction has been recognized under the financing method instead of recognized as a sale-leaseback arrangement. As a result, the property and equipment legally sold will continue to be recognized on the consolidated balance sheets and was written down to a fair value of $130.0 million at March 31, 2016. In the second and third quarters of 2016, the

16
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company also recorded impairment charges totaling $5.5 million on one of its strategic investments. The fair value of the investment was estimated to be zero at September 30, 2016. Both assessments were based on qualitative indications of impairment and a quantitative analysis of undiscounted cash flows. The fair values of the datacenter and strategic investment are considered level 3 and nonrecurring. There were no other level 3 assets or liabilities valued at fair value on a nonrecurring basis during the first nine months of 2016.
The following presents the estimated fair values of long-term debt notes, which are carried at amortized cost on the consolidated balance sheets. The fair values, which are classified as level 2 under the fair value hierarchy, were estimated using quoted market prices. At September 30, 2016, the fair values were as follows:
(in millions)
Fair Value
$750.0 million fixed rate notes due September 2022, stated rate of 3.00% 
$
798.8

$750.0 million fixed rate notes due March 2025, stated rate of 3.00%
789.8

$750.0 million fixed rates notes due September 2043, stated rate of 5.30%
971.5

12. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to the company by the weighted average number of shares of all classes of CME Group 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. Anti-dilutive stock options, restricted stock and performance share awards were as follows for the periods presented:
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Stock options
311

 
432

 
315

 
432

Restricted stock and performance shares
530

 
—

 
530

 
538

Total
841

 
432

 
845

 
970

The following table presents the earnings per share calculation for the periods presented:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net Income (in millions)
 
$
472.8

 
$
359.9

 
$
1,160.7

 
$
955.3

Weighted Average Number of Common Shares (in thousands):
 
 
 
 
 
 
 
 
Basic
 
337,592

 
336,323

 
337,299

 
336,015

Effect of stock options, restricted stock and performance shares
 
1,551

 
1,816

 
1,535

 
1,789

Diluted
 
339,143


338,139

 
338,834

 
337,804

Earnings per Common Share:
 
 
 
 
 
 
 
 
Basic
 
$
1.40

 
$
1.07

 
$
3.44

 
$
2.84

Diluted
 
1.39

 
1.06

 
3.43

 
2.83

13. 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 the following:
In October 2016, the company sold approximately 24.0 million shares of BM&FBOVESPA and recognized a net gain of approximately $42.0 million within investment income on the consolidated statements of income during the fourth quarter. Following the sale, the company owned an approximate 2% interest in BM&FBOVESPA.




17
Table of Contents

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 Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015.
References in this discussion and analysis to “we,” “us” and “our” are to CME Group Inc. (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), New York Mercantile Exchange, Inc. (NYMEX), Commodity Exchange, Inc. (COMEX), CME Clearing Europe Limited (CMECE) and CME Europe Limited (CME Europe), collectively, unless otherwise noted. The clearing houses include CME Clearing, which is the U.S. clearing house and a division of CME, and CMECE.
RESULTS OF OPERATIONS
Financial Highlights
The following summarizes significant changes in our financial performance for the periods presented.
 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(dollars in millions, except per share data)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Total revenues
 
$
841.7

 
$
850.3

 
(1
)%
 
$
2,682.3

 
$
2,513.0

 
7
%
Total expenses
 
316.4

 
333.9

 
(5
)
 
1,019.8

 
994.2

 
3

Operating margin
 
62.4
%
 
60.7
%
 
 
 
62.0
%
 
60.4
%
 
 
Non-operating income (expense)
 
$
23.5

 
$
—

 
n.m.

 
$
30.9

 
$
(30.5
)
 
n.m.

Effective tax rate
 
13.8
%
 
30.3
%
 
 
 
31.5
%
 
35.8
%
 
 
Net income
 
$
472.8

 
$
359.9

 
31

 
$
1,160.7

 
$
955.3

 
21

Diluted earnings per common share
 
1.39

 
1.06

 
31

 
3.43

 
2.83

 
21

Cash flows from operating activities
 
 
 
 
 
 
 
1,205.6

 
1,141.2

 
6

n.m. not meaningful
Revenues
 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(dollars in millions)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Clearing and transaction fees
 
$
704.2

 
$
715.0

 
(2
)%
 
$
2,267.9

 
$
2,105.0

 
8
 %
Market data and information services
 
101.1

 
99.5

 
2

 
306.4

 
300.3

 
2

Access and communication fees
 
23.8

 
21.6

 
10

 
67.7

 
64.4

 
5

Other
 
12.6

 
14.2

 
(11
)
 
40.3

 
43.3

 
(7
)
Total Revenues
 
$
841.7

 
$
850.3

 
(1
)
 
$
2,682.3

 
$
2,513.0

 
7


Clearing and Transaction Fees
Futures and Options Contracts
The following table summarizes our total contract volume, revenue and average rate per contract for futures and options. Total contract volume includes contracts that are traded on our exchange and cleared through our clearing houses and certain cleared-only 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 fees by total contract volume. Contract volume and average rate per contract disclosures exclude interest rate swaps and credit default swaps. The interest rate swaps and credit default swaps are discussed in a later section.
 

18
Table of Contents

 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Total contract volume (in millions)
 
916.4

 
920.6

 
—
 %
 
2,915.2

 
2,689.1

 
8
%
Clearing and transaction fees (in millions)
 
$
687.2

 
$
698.7

 
(2
)
 
$
2,222.9

 
$
2,051.2

 
8

Average rate per contract
 
$
0.750

 
$
0.759

 
(1
)
 
$
0.763

 
$
0.763

 
—

We estimate the following increases (decreases) in clearing and transaction fees based on changes in total contract volumes and changes in average rate per contract for futures and options during the third quarter and first nine months of 2016 when compared with the same periods in 2015. 
(in millions)
 
Quarter Ended
 
Nine Months Ended
Increases (decreases) due to changes in total contract volume
 
$
(3.1
)
 
$
172.4

Decreases due to changes in average rate per contract
 
(8.4
)
 
(0.7
)
Increases (decreases) in clearing and transaction fees
 
$
(11.5
)
 
$
171.7

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 contract volume, the change in clearing and transaction fees 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 conditions, the regulatory environment and market competition. 
 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Average Daily Volume by Product Line:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
6,791

 
6,658

 
2
 %
 
7,255

 
6,930

 
5
 %
Equity
 
2,876

 
3,287

 
(12
)
 
3,123

 
2,808

 
11

Foreign exchange
 
771

 
855

 
(10
)
 
850

 
903

 
(6
)
Agricultural commodity
 
1,156

 
1,266

 
(9
)
 
1,364

 
1,287

 
6

Energy
 
2,294

 
1,965

 
17

 
2,381

 
1,949

 
22

Metal
 
431

 
353

 
22

 
451

 
351

 
29

Aggregate average daily volume
 
14,319

 
14,384

 
—

 
15,424

 
14,228

 
8

Average Daily Volume by Venue:
 
 
 
 
 
 
 
 
 
 
 
 
Electronic
 
12,672

 
12,620

 
—

 
13,562

 
12,444

 
9

Open outcry
 
982

 
1,111

 
(12
)
 
1,156

 
1,168

 
(1
)
Privately negotiated
 
665

 
653

 
2

 
706

 
616

 
15

Aggregate average daily volume
 
14,319

 
14,384

 
—

 
15,424

 
14,228

 
8

Electronic Volume as a Percentage of Total Volume
 
88
%
 
88
%
 
 
 
88
%
 
87
%
 
 
Overall contract volumes remained high in the first half of 2016 but tapered slightly in the third quarter of 2016 as overall market volatility declined slightly compared with previous quarters. We believe global market concerns, considerable uncertainty regarding the Federal Reserve's interest rate policy and the anticipation of the United Kingdom European Union membership referendum contributed to considerable volatility throughout early 2016, which generated overall volume growth in the first nine months of 2016. However, market volatility tapered slightly in the third quarter of 2016 from higher levels in early 2016 as uncertainty and global market concerns subsided.
Crude oil volumes continued to grow throughout the first nine months of 2016 as crude oil market volatility remained high throughout the year. The crude oil markets continued to show considerable uncertainty regarding the direction of future oil prices as global supplies continue to remain high.

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Table of Contents

Interest Rate Products
The following table summarizes average daily contract volume for our key interest rate products. Eurodollar Front 8 futures include contracts expiring in two years or less. Eurodollar Back 32 futures include contracts with expirations after two years through ten years.
  
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Eurodollar futures and options:
 
 
 
 
 
 
 
 
 
 
 
 
Front 8 futures
 
1,665

 
1,544

 
8
 %
 
1,773

 
1,640

 
8
 %
Back 32 futures
 
620

 
692

 
(10
)
 
647

 
760

 
(15
)
Options
 
1,052

 
959

 
10

 
1,200

 
926

 
30

U.S. Treasury futures and options:
 
 
 
 
 
 
 
 
 
 
 
 
10-Year
 
1,539

 
1,548

 
(1
)
 
1,664

 
1,701

 
(2
)
5-Year
 
808

 
829

 
(3
)
 
862

 
846

 
2

Treasury bond
 
326

 
362

 
(10
)
 
342

 
377

 
(9
)
2-Year
 
316

 
346

 
(9
)
 
324

 
358

 
(10
)
In the third quarter and first nine months of 2016 when compared with the same periods in 2015, overall interest rate contract volumes increased slightly due to growth in short-term interest rate contracts, including the Eurodollar Front 8 futures and Eurodollar options. We believe this resulted from volatility from the continued uncertainty around changes to the Federal Reserve's interest rate policy in the near-term. Longer-term interest rate contract volumes, including the Back 32 futures and the U.S. Treasury products, declined as participants became more focused on short-term interest rate uncertainty. In addition, electronic Eurodollar options volumes increased in the third quarter and first nine months of 2016 due to our continued investment in system enhancements and client education.
Equity Products
The following table summarizes average daily contract volume for our key equity products.
  
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
E-mini S&P 500 futures and options
 
2,347

 
2,593

 
(9
)%
 
2,492

 
2,208

 
13
%
E-mini NASDAQ 100 futures and options
 
236

 
315

 
(25
)
 
281

 
274

 
3

Overall equity contract volume decreased in the third quarter of 2016 when compared with the same period in 2015 due to overall lower market volatility, as measured by the CBOE Volatility Index. Equity price volatility declined in the third quarter compared with previous quarters as interest rate uncertainty and global market concerns subsided. In the third quarter of 2015, we believe the deceleration of the Chinese economy resulted in periods of high volatility within equity markets, which also contributed to a decrease in volume in the third quarter of 2016 when compared with the same period in 2015. Contract volume increased in the first nine months of 2016 when compared with the same period of 2015 due to periods of higher market volatility throughout early 2016, which we believe were due to continued concern surrounding the Federal Reserve's interest rate policy, uncertainty surrounding the United Kingdom European Union membership referendum and declining global crude oil prices.
Foreign Exchange Products
The following table summarizes average daily contract volume for our key foreign exchange products. 
 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Euro
 
184

 
279

 
(34
)%
 
225

 
319

 
(29
)%
Japanese yen
 
140

 
162

 
(14
)
 
159

 
159

 
—

British pound
 
114

 
101

 
13

 
122

 
112

 
9

Australian dollar
 
103

 
101

 
1

 
109

 
103

 
6

Canadian dollar
 
76

 
79

 
(4
)
 
82

 
76

 
7


20
Table of Contents

In the third quarter and first nine months of 2016 when compared with the same periods in 2015, overall foreign exchange contract volumes decreased largely due to declines in Euro contract volumes resulting from low volatility. We believe the lower volatility throughout 2016 resulted from a lack of global macroeconomic drivers affecting the Euro. Euro contract volumes were high throughout 2015 due to volatility caused by quantitative easing programs initiated by central banks throughout Europe in early 2015. Japanese yen contract volume decreased in the third quarter of 2016 due to uncertainty within the Japanese markets, which led market participants to seek safe haven currency alternatives.
Agricultural Commodity Products
The following table summarizes average daily contract volume for our key agricultural commodity products. 
 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Corn
 
374

 
448

 
(16
)%
 
452

 
436

 
4
%
Soybean
 
253