CME

Business Context and Reporting Period

Company: Chicago Mercantile Exchange Holdings Inc. (CME Holdings)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: CME is the largest futures exchange in the United States and the second largest globally by annual trading volume. It operates the CME Globex electronic trading platform and open outcry trading floors, offering derivatives on interest rates, equities, foreign exchange, and commodities. The company owns its clearing house, which guarantees all contracts traded on its exchange and provides clearing services to the Chicago Board of Trade (CBOT).

Key Financial Metrics

Trading Volume: Record annual volume of 1.3 billion contracts (28% increase over 2005).
Open Interest: 35.1 million contracts at year-end (Record high of 52.5 million set in September 2006).
Performance Bond Collateral: Custodian for approximately $47.4 billion.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22% to $1.09 billion, driven primarily by a 24% increase in clearing and transaction fees due to higher trading volumes across all product lines.
• Expense Increases: Total expenses rose 14% to $469.1 million. Key drivers included higher compensation and benefits (13% increase), increased technology support services (16% increase), and higher licensing fees (43% increase) due to renegotiated agreements with S&P and NASDAQ.
• Strategic Acquisitions: Completed the acquisition of Swapstream, a London-based electronic trading platform for interest rate swaps, in August 2006.
• Strategic Partnerships: Became the exclusive electronic trading service provider for NYMEX energy and metals products in April 2006, generating $14 million in processing revenue in 2006.
• Merger Announcement: Entered into a definitive merger agreement with CBOT Holdings in October 2006 to form CME Group Inc.

Guidance, Outlook, and Risks

Merger with CBOT: The proposed merger is expected to close in mid-2007, subject to regulatory and shareholder approvals. The company anticipates annual expense savings of over $125 million in the second year post-merger. Financing for the cash portion of the deal (up to $3.0 billion) may require incremental borrowings of up to $2.0 billion.

2007 Outlook:

• Operating Expenses: Expected to total $530.0 to $540.0 million, including merger-related planning costs and Swapstream expenditures.
• Capital Expenditures: Expected to total approximately $110.0 million, including data center build-out costs related to the CBOT integration.
• Dividends: Board declared a quarterly dividend of $0.86 per share (37% increase over prior quarter) in January 2007.

Key Risks:

• Regulatory & Antitrust: The merger faces antitrust review; the Department of Justice issued a "Second Request" for additional information in December 2006.
• Competition: Intensifying competition from other exchanges, OTC markets, and electronic trading platforms.
• Technology: Reliance on electronic systems; system failures could disrupt operations and damage reputation.
• Market Conditions: Trading volumes are sensitive to economic volatility, interest rate changes, and geopolitical events.

Investor Verification Checklist

• Merger Approval Status: Verify the progress of regulatory approvals (DOJ/FTC) and shareholder votes required for the CBOT merger.
• Financing Terms: Confirm the final structure and cost of debt financing required for the cash portion of the CBOT acquisition.
• Integration Costs: Monitor actual merger-related transaction and integration costs against the projected $62 million in transaction costs and expected synergies.
• Licensing Agreements: Review the terms and renewal status of critical index licenses (S&P 500, NASDAQ-100) which drive a significant portion of equity product revenue.
• Trading Volume Trends: Assess whether the 28% volume growth is sustainable or driven by temporary market volatility.
• Legal Proceedings: Track the status of the antitrust lawsuit filed by Eurex U.S. against CME and CBOT.