CME

CME Group Inc. 2003 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2003, for Chicago Mercantile Exchange Holdings Inc. (CME Holdings) and its subsidiary, Chicago Mercantile Exchange Inc. (CME). CME is the world's largest futures exchange by notional dollar value traded ($333.7 trillion in 2003) and holds the largest open interest globally. The company operates a hybrid trading model utilizing both open outcry floors and the GLOBEX electronic platform. In 2003, CME posted record trading volume of 640.2 million contracts, a 14.6% increase over 2002.

Key Financial Metrics

Revenue and Profitability (CME Holdings Consolidated):

• Net Income: $122.1 million for 2003 (up from $94.1 million in 2002).
• Revenue Composition: While consolidated revenue figures for the operating subsidiary are incorporated by reference, the filing details that 80.0% of net revenues ($430.6 million) were derived from trading and clearing fees, and 9.9% ($53.2 million) from market data products.
• Dividends: The company paid quarterly dividends totaling $0.63 per share in 2003 ($0.14, $0.14, $0.14, and $0.21). On February 5, 2004, a quarterly dividend of $0.26 per share was declared.

Liquidity and Balance Sheet (CME Holdings):

• Cash and Cash Equivalents: $99.9 million (down from $120.9 million in 2002).
• Marketable Securities: $176.7 million (new category in 2003).
• Total Assets: $563.8 million.
• Debt: CME Holdings reported no long-term liabilities. The operating subsidiary (CME) maintains a secured, committed $750.0 million line of credit for clearing house liquidity.

Operational Metrics:

• Trading Volume: 640.2 million contracts (14.6% increase YoY).
• Electronic Trading: 282.4 million contracts (42.6% increase YoY), representing 44.1% of total volume.
• Open Interest: Record high of 35.4 million contracts (excluding CBOT contracts managed for CBOT).
• Clearing Capacity: Average of 531,000 transactions per day; capacity to clear over 2.5 million per day.

Material Changes vs. Prior Period

• Volume Growth: Total trading volume increased 14.6% to a record 640.2 million contracts. Equity products saw a 31.6% volume increase, while foreign exchange volume rose 40.2%.
• Electronic Shift: Electronic trading volume grew 42.6%, surpassing open outcry in revenue contribution for the first time (47% of clearing/transaction fees vs. 44% for open outcry).
• CBOT Clearing Agreement: In April 2003, CME entered an agreement to provide clearing services for the Chicago Board of Trade (CBOT). CME began clearing some CBOT products in November 2003 and all CBOT products on January 2, 2004.
• Product Launches: Introduced TRAKRS (Total Return Asset Contracts) and expanded weather products. Launched the CME$INDEX in March 2003.
• Acquisitions: Acquired technology assets from Liquidity Direct in January 2004 to enhance options and spread trading on GLOBEX.

Outlook, Risks, and Management Commentary

Strategy and Outlook: Management focuses on four strategies: expanding the core business, adding new products, providing transaction processing services to third parties (e.g., CBOT), and pursuing alliances/acquisitions. The company plans to expand global reach with new telecommunications hubs in Europe in 2004.

Key Risks and Contingencies:

• Competition: Intensifying competition from electronic trading systems, OTC markets, and new entrants like Eurex U.S. (launched Feb 2004) and Euronext.liffe (planning Eurodollar listing).
• Regulatory Environment: The Commodity Futures Modernization Act (CFMA) has eroded barriers to entry, allowing OTC markets to use electronic systems and permitting banks to offer foreign exchange futures to retail customers.
• Technology Dependence: Reliance on GLOBEX and clearing systems; system failures could lead to liability and loss of customers.
• Member Influence: Members owning trading rights hold approximately 69% of Class A common stock and elect 15 of 20 directors, potentially influencing business decisions to favor trading rights over shareholder value.
• Legal Proceedings: Facing an antitrust suit from U.S. Futures Exchange (Eurex U.S.) regarding the CBOT clearing agreement and a former employee's discrimination/retaliation claims.

Investor Verification Checklist

• Revenue Attribution: Verify the exact consolidated net revenue figure for CME Holdings, as the 10-K incorporates the detailed financial statements by reference from the Annual Report to Shareholders (Exhibit 13.1).
• CBOT Clearing Impact: Monitor the financial performance and integration of the CBOT clearing services, which began full operation in January 2004.
• Electronic Migration: Track the continued shift from open outcry to electronic trading, particularly for Eurodollar contracts, to ensure revenue stability as floor trading declines.
• Competitive Response: Assess the impact of new competitors (Eurex U.S., Euronext.liffe) on CME's market share in key products like Eurodollars and Treasury futures.
• Legal Outcomes: Review the status of the antitrust litigation filed by Eurex U.S. and the employment discrimination suit, as these could result in significant damages or operational restrictions.