CME

CME Group Inc. Q3 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine months ended on that date. The reporting period is significantly impacted by the merger of CBOT Holdings, Inc. into Chicago Mercantile Exchange Holdings Inc., effective July 12, 2007. The combined entity operates under the name CME Group Inc. Financial results for CBOT Holdings are included in the consolidated statements beginning July 13, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 106% in Q3 and 52% year-to-date (YTD) compared to 2006. This is primarily driven by the inclusion of CBOT Holdings operations and increased market volatility.
• Expense Increases: Total expenses rose 87% in Q3 and 41% YTD. Key drivers include higher compensation (due to headcount increases from the merger), amortization of purchased intangibles ($16.0 million in Q3 vs. $0.3 million in 2006), and restructuring costs ($4.5 million in Q3).
• Non-Operating Items: A significant non-operating expense of $28.5 million was recorded in Q3 and YTD related to the guarantee of Chicago Board Options Exchange (CBOE) exercise right privileges.
• Trading Volume: Average daily trading volume increased 54% in Q3 and 31% YTD. Electronic volume as a percentage of total volume rose to 77% in Q3 2007 from 71% in Q3 2006.

Guidance, Outlook, and Risks

• Merger Integration: Management is executing plans to eliminate redundant costs, including closing duplicate facilities and reducing the workforce by approximately 380 positions by June 2008. Total estimated restructuring costs are $33.1 million.
• Legal Contingencies:
  • CBOE Exercise Rights: The company guarantees a minimum payment of up to $250,000 per privilege to holders who do not tender their rights. As of September 30, 2007, the liability is estimated at $25.3 million, with a maximum potential aggregate payment of $293.0 million if the lawsuit results in no recovery.
  • Eurex Antitrust Suit: Ongoing litigation filed in 2003 alleging antitrust violations. The company intends to defend vigorously.
• Market Risks: Performance is sensitive to market volatility, trading volume, and regulatory changes. The company temporarily suspended its securities lending program in late August 2007 due to credit market volatility but resumed it in mid-September.
• Capital Allocation: The company repurchased 1.7 million shares of Class A common stock in September 2007 for approximately $950.6 million. A quarterly dividend of $0.86 per share was declared on November 7, 2007.

Investor Verification Checklist

• Merger Synergies: Verify the timeline and cost savings associated with the planned reduction of 380 positions and facility closures.
• CBOE Guarantee Liability: Monitor the status of the CBOE lawsuit and the quarterly adjustments to the $25.3 million liability, which could increase significantly if the lawsuit is unsuccessful.
• Amortization Impact: Assess the long-term impact of the $16.6 million in amortization of purchased intangibles on future earnings, as this is a non-cash expense resulting from the CBOT acquisition.
• Debt Utilization: Review the usage of the $750 million revolving credit facility and commercial paper program, currently holding $164.7 million in short-term debt.
• Volume Trends: Confirm if the 54% increase in trading volume is sustainable or driven by temporary market volatility (sub-prime concerns, inflation).