CME-2012.9.30 10Q
Table of Contents

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, 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 October 17, 2012 was as follows: 333,384,469 shares 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.


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Table of Contents

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

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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

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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 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, 2012
 
December 31, 2011
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
2,016.9

 
$
1,042.3

Marketable securities
 
62.0

 
47.6

Accounts receivable, net of allowance of $1.7 and $1.3
 
296.9

 
289.4

Other current assets (includes $40.0 in restricted cash)
 
245.7

 
232.6

Cash performance bonds and guaranty fund contributions
 
7,395.3

 
9,333.9

Total current assets
 
10,016.8

 
10,945.8

Property, net of accumulated depreciation and amortization of $611.5 and $576.3
 
705.4

 
821.9

Intangible assets—trading products
 
17,040.5

 
17,040.5

Intangible assets—other, net
 
2,879.5

 
3,312.8

Goodwill
 
7,538.3

 
7,984.0

Other assets (includes $20.5 in restricted cash)
 
1,677.5

 
653.7

Total Assets
 
$
39,858.0

 
$
40,758.7

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
44.5

 
$
31.1

Short-term debt
 
749.6

 

Other current liabilities
 
200.1

 
250.2

Cash performance bonds and guaranty fund contributions
 
7,395.3

 
9,333.9

Total current liabilities
 
8,389.5

 
9,615.2

Long-term debt
 
2,106.4

 
2,106.8

Deferred income tax liabilities, net
 
7,319.8

 
7,226.8

Other liabilities
 
254.1

 
187.6

Total Liabilities
 
18,069.8

 
19,136.4

 
 
 
 
 
Redeemable non-controlling interest
 
79.4

 
70.3

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

 

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

 

Class A common stock, $0.01 par value, 1,000,000 shares authorized; 331,686 and 330,653 shares issued and outstanding as of September 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
 
17,177.2

 
17,112.5

Retained earnings
 
4,408.6

 
4,324.6

Accumulated other comprehensive income (loss)
 
119.7

 
111.6

Total Shareholders’ Equity
 
21,708.8

 
21,552.0

Total Liabilities and Shareholders’ Equity
 
$
39,858.0

 
$
40,758.7

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,
 
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
 
Clearing and transaction fees
 
$
562.2

 
$
732.7

 
$
1,826.9

 
$
2,111.8

Market data and information services
 
82.8

 
107.0

 
307.8

 
321.9

Access and communication fees
 
23.2

 
12.0

 
65.5

 
34.8

Other
 
15.0

 
22.5

 
53.5

 
75.6

Total Revenues
 
683.2

 
874.2

 
2,253.7

 
2,544.1

Expenses
 
 
 
 
 
 
 
 
Compensation and benefits
 
117.5

 
119.9

 
383.7

 
359.7

Communications
 
9.8

 
11.0

 
30.8

 
31.7

Technology support services
 
11.8

 
13.3

 
36.7

 
38.7

Professional fees and outside services
 
26.7

 
29.0

 
99.2

 
90.4

Amortization of purchased intangibles
 
26.2

 
33.0

 
90.3

 
99.2

Depreciation and amortization
 
34.5

 
32.4

 
103.0

 
95.1

Occupancy and building operations
 
18.8

 
18.5

 
57.8

 
56.9

Licensing and other fee agreements
 
19.2

 
22.6

 
63.2

 
64.7

Other
 
22.7

 
22.4

 
72.6

 
77.0

Total Expenses
 
287.2

 
302.1

 
937.3

 
913.4

Operating Income
 
396.0

 
572.1

 
1,316.4

 
1,630.7

 
 
 
 
 
 
 
 
 
Non-Operating Income (Expense)
 
 
 
 
 
 
 
 
Investment income
 
13.1

 
3.7

 
31.3

 
27.1

Gains (losses) on derivative investments
 

 

 

 
(0.1
)
Interest and other borrowing costs
 
(30.2
)
 
(29.0
)
 
(88.2
)
 
(87.8
)
Equity in net gains (losses) of unconsolidated subsidiaries
 
16.5

 
(0.9
)
 
14.8

 
(3.1
)
Other non-operating income (expense)
 
0.4

 

 
65.6

 

Total Non-Operating
 
(0.2
)
 
(26.2
)
 
23.5

 
(63.9
)
Income before Income Taxes
 
395.8

 
545.9

 
1,339.9

 
1,566.8

Income tax provision
 
176.9

 
230.9

 
601.3

 
499.1

Net Income
 
218.9

 
315.0

 
738.6

 
1,067.7

Less: net income (loss) attributable to redeemable non-controlling interest
 
0.9

 
(1.1
)
 
9.1

 
1.3

Net Income Attributable to CME Group
 
$
218.0

 
$
316.1

 
$
729.5

 
$
1,066.4

 
 
 
 
 
 
 
 
 
Earnings per Common Share Attributable to CME Group:
 
 
 
 
 
 
 
 
Basic
 
$
0.66

 
$
0.95

 
$
2.20

 
$
3.20

Diluted
 
0.66

 
0.95

 
2.20

 
3.19

Weighted Average Number of Common Shares:
 
 
 
 
 
 
 
 
Basic
 
331,377

 
332,289

 
331,091

 
333,449

Diluted
 
332,458

 
333,337

 
332,147

 
334,507

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,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
218.9

 
$
315.0

 
$
738.6

 
$
1,067.7

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 
109.5

 
(188.0
)
 
84.4

 
122.6

Income tax benefit (expense)
 
(73.9
)
 
73.5

 
(58.8
)
 
(9.1
)
Investment securities, net
 
35.6

 
(114.5
)
 
25.6

 
113.5

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
 
0.7

 
0.5

 
1.9

 
1.3

Income tax benefit (expense)
 
(0.3
)
 
(0.3
)
 
(0.9
)
 
0.8

Defined benefit plans, net
 
0.4

 
0.2

 
1.5

 
(1.3
)
Derivative instruments:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 
(54.4
)
 

 
(54.4
)
 

Amortization of effective portion of loss on cash flow hedges
 
0.2

 
0.2

 
0.4

 
0.8

Income tax benefit (expense)
 
19.8

 
(0.1
)
 
19.8

 
(0.3
)
Derivative instruments, net
 
(34.4
)
 
0.1

 
(34.2
)
 
0.5

Foreign currency translation:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
5.9

 
(3.8
)
 
5.5

 
96.1

Reclassification adjustment for loss included in net income
 

 

 
18.4

 

Income tax benefit (expense)
 
(2.1
)
 
1.5

 
(8.7
)
 
(12.8
)
Foreign currency translation, net
 
3.8

 
(2.3
)
 
15.2

 
83.3

Other comprehensive income, net of tax
 
5.4

 
(116.5
)
 
8.1

 
196.0

Comprehensive income
 
224.3

 
198.5

 
746.7

 
1,263.7

Less: comprehensive income (loss) attributable to redeemable non-controlling interest
 
0.9

 
(1.1
)
 
9.1

 
1.3

Comprehensive income attributable to CME Group
 
$
223.4

 
$
199.6

 
$
737.6

 
$
1,262.4

See accompanying notes to unaudited consolidated financial statements.

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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
 
 
 
 
 
 
 
729.5

 
 
 
729.5

Other comprehensive income attributable to CME Group
 
 
 
 
 
 
 
 
 
8.1

 
8.1

Dividends on common stock of $1.94 per share
 
 
 
 
 
 
 
(645.5
)
 
 
 
(645.5
)
Exercise of stock options
 
632

 
 
 
19.2

 
 
 
 
 
19.2

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
3.7

 
 
 
 
 
3.7

Vesting of issued restricted Class A common stock
 
348

 
 
 
(9.8
)
 
 
 
 
 
(9.8
)
Shares issued to Board of Directors
 
40

 
 
 
2.1

 
 
 
 
 
2.1

Shares issued under Employee Stock Purchase Plan
 
13

 
 
 
0.7

 
 
 
 
 
0.7

Stock-based compensation
 
 
 
 
 
48.8

 
 
 
 
 
48.8

Balance at September 30, 2012
 
331,686

 
3

 
$
17,180.5

 
$
4,408.6

 
$
119.7

 
$
21,708.8

See accompanying notes to unaudited consolidated financial statements.

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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
 
 
 
 
 
 
 
1,066.4

 
 
 
1,066.4

Other comprehensive income attributable to CME Group
 
 
 
 
 
 
 
 
 
196.0

 
196.0

Dividends on common stock of $0.56 per share
 
 
 
 
 
 
 
(280.6
)
 
 
 
(280.6
)
Repurchase of Class A common stock
 
(4,048
)
 
 
 
(220.4
)
 
 
 
 
 
(220.4
)
Exercise of stock options
 
154

 
 
 
5.2

 
 
 
 
 
5.2

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
0.7

 
 
 
 
 
0.7

Vesting of issued restricted Class A common stock
 
201

 
 
 
(3.7
)
 
 
 
 
 
(3.7
)
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
 
 
 
 
 
37.5

 
 
 
 
 
37.5

Balance at September 30, 2011
 
330,607

 
3

 
$
17,100.8

 
$
3,671.6

 
$
91.9

 
$
20,864.3

See accompanying notes to unaudited consolidated financial statements.


9

CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited) 


 
 
Nine Months Ended
September 30,
 
 
2012
 
2011
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
738.6

 
$
1,067.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
48.8

 
37.5

Amortization of purchased intangibles
 
90.3

 
99.2

Depreciation and amortization
 
103.0

 
95.1

Amortization of debt financing costs and discount accretion
 
3.3

 
3.9

Gain on sale of Index Services assets
 

 
(9.8
)
Gain on contribution of Dow Jones Index asset group
 
(79.8
)
 

Loss on sale of Credit Market Analysis Ltd.
 
19.9

 

Equity in net (gains) losses of unconsolidated subsidiaries
 
(14.8
)
 
3.1

Deferred income taxes
 
67.6

 
(130.8
)
Change in:
 
 
 
 
Accounts receivable
 
(32.4
)
 
(72.5
)
Other current assets
 
(36.1
)
 
(15.1
)
Other assets
 
(19.2
)
 
(10.9
)
Accounts payable
 
14.0

 
(11.3
)
Income taxes payable
 
23.3

 
(16.1
)
Other current liabilities
 
(41.7
)
 
(55.5
)
Other liabilities
 
12.0

 
14.7

Other
 
0.4

 
0.6

Net Cash Provided by Operating Activities
 
897.2

 
999.8

 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
Proceeds from maturities of available-for-sale marketable securities
 
15.4

 
6.0

Purchases of available-for-sale marketable securities
 
(23.5
)
 
(5.1
)
Purchases of property
 
(103.9
)
 
(129.4
)
Proceeds from sale of building property
 
151.5

 

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

 

Investments in business ventures
 
(107.1
)
 

Settlement of derivative related to debt issuance
 
(24.4
)
 

Proceeds from sale of Index Services assets
 

 
18.0

Other
 

 
(0.5
)
Net Cash Used in Investing Activities
 
(49.6
)
 
(111.0
)
Cash Flows from Financing Activities
 
 
 
 
Proceeds from other borrowings, net of issuance costs
 
747.7

 

Repayment of other borrowings
 

 
(420.5
)
Cash dividends
 
(644.3
)
 
(280.6
)
Repurchase of Class A common stock, including costs
 

 
(220.4
)
Proceeds from exercise of stock options
 
19.2

 
5.2

Excess tax benefits related to employee option exercises and restricted stock vesting
 
3.7

 
0.7

Other
 
0.7

 
0.9

Net Cash Provided by (Used in) Financing Activities
 
127.0

 
(914.7
)
Net change in cash and cash equivalents
 
974.6

 
(25.9
)
Cash and cash equivalents, beginning of period
 
1,042.3

 
855.2

Cash and Cash Equivalents, End of Period
 
$
2,016.9

 
$
829.3

Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income taxes paid
 
$
517.1

 
$
612.1

Interest paid
 
110.6

 
111.9

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

 

Change in net unrealized securities gains
 
84.4

 
122.6

Change in net unrealized derivative gains (losses)
 
(30.1
)
 
0.4



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), 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 September 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 (Dow Jones) 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 financial statements and accompanying notes beginning 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) and contributed the DJI asset group to the venture. On a consolidated basis, CME Group has a total interest of 27.0% in the venture. 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. As a result of its contribution, Index Services derecognized the DJI asset group and recorded a $79.8 million gain included in other non-operating income on the consolidated statements of income. At September 30, 2012, the carrying value of the investment was $940.8 million and is recorded in other assets in the consolidated balance sheet as an equity method investment.
Sale of Credit Market Analysis Ltd.
On June 29, 2012, the company sold CMA to McGraw for $45.9 million in conjunction with the formation of the venture. As a result, the company recognized a $19.9 million loss, which was included in other non-operating expense in the consolidated statements of income. The loss includes a previously unrecognized foreign currency translation adjustment of $18.4 million.

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3. Intangible Assets and Goodwill
Intangible assets consisted of the following at September 30, 2012 and December 31, 2011:
 
 
 
September 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
 
$
2,838.7

 
$
(443.4
)
 
$
2,395.3

 
$
3,071.9

 
$
(400.4
)
 
$
2,671.5

Lease-related intangibles
 
47.2

 
(29.5
)
 
17.7

 
83.2

 
(45.4
)
 
37.8

Technology-related intellectual property
 
29.4

 
(12.9
)
 
16.5

 
56.2

 
(28.4
)
 
27.8

Other(1)
 
9.8

 
(9.8
)
 

 
11.6

 
(10.6
)
 
1.0

 
 
2,925.1

 
(495.6
)
 
2,429.5

 
3,222.9

 
(484.8
)
 
2,738.1

Foreign currency translation adjustments
 

 

 

 
(8.8
)
 
5.9

 
(2.9
)
Total amortizable intangible assets
 
$
2,925.1

 
$
(495.6
)
 
2,429.5

 
$
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
 
 
 
 
 
$
2,879.5

 
 
 
 
 
$
3,312.8

Trading products(2)
 
 
 
 
 
$
17,040.5

 
 
 
 
 
$
17,040.5

(1)
At September 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. The decrease was offset by an increase of $17.0 million of intangible assets related to the acquisition of Pivot Inc., including customer relationships and technology-related intellectual property.
In the second quarter of 2012, the company contributed the DJI asset group to its new 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 $26.2 million and $33.0 million for the quarters ended September 30, 2012 and 2011, respectively. Total amortization expense for intangible assets was $90.3 million and $99.2 million for the first nine months of 2012 and 2011, respectively. As of September 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
$
25.8

2013
102.8

2014
101.5

2015
101.3

2016
97.9

2017
97.3

Thereafter
1,902.9


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Goodwill activity consisted of the following for the nine months ended September 30, 2012 and the year ended December 31, 2011:
 
 
 
Balance at
 
Business
 
 
 
Other
 
Balance at
(in millions)
 
December 31, 2011
 
Combinations
 
Divestitures
 
Activity(3)
 
September 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

 
17.7

 
(28.9
)
 

 
40.4

Total goodwill
 
$
7,984.0

 
$
17.7

 
$
(463.4
)
 
$

 
$
7,538.3

 
 
 
Balance at
 
Business
 
 
 
Other
 
Balance At
(in millions)
 
December 31, 2010
 
Combinations
 
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.
4. Debt
On September 10, 2012, the company completed an offering of $750.0 million of 3.00% fixed rate notes due September 2022. The company intends to use the net proceeds from the offering, together with cash on hand, to retire its outstanding 5.40% notes due August 2013 upon maturity.
Short-term debt consisted of the following at September 30, 2012 and December 31, 2011:
(in millions)
 
September 30, 2012
 
December 31, 2011
$750.0 million fixed rate notes due August 2013, interest equal to 5.40%
 
$
749.6

 
$

Total short-term debt
 
$
749.6

 
$

Long-term debt consisted of the following at September 30, 2012 and December 31, 2011: 
(in millions)
 
September 30, 2012
 
December 31, 2011
$750.0 million fixed rate notes due August 2013, interest equal to 5.40%
 
$

 
$
749.2

$750.0 million fixed rate notes due February 2014, interest equal to 5.75%
 
748.7

 
748.0

$612.5 million fixed rate notes due March 2018, interest equal to 4.40%(1)
 
610.0

 
609.6

$750.0 million fixed rate notes due September 2022, interest equal to 3.00% (2)
 
747.7

 

Total long-term debt
 
$
2,106.4

 
$
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.
(2)
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 effectively became fixed at a rate of 3.32% at issuance on September 10, 2012.
We maintain a commercial paper program under our senior credit facility. There was no commercial paper outstanding at September 30, 2012 or December 31, 2011. As of September 30, 2012, the most recent commercial paper issuance was in March 2011. During the first nine months of 2011, the weighted average balance, at par value, of commercial paper outstanding was $41.0 million. In the first nine months of 2011, the maximum month-end balance for commercial paper was $200.0 million

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in January.
Long-term debt maturities, at par value, were as follows as of September 30, 2012:  
(in millions)
Par Value
2013
$

2014
750.0

2015

2016

2017

Thereafter
1,362.5

The fair values of the fixed rate notes due 2013, 2014 and 2022 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, which is considered a level 3 liability, was derived using a standard valuation model with market-based observable inputs including U.S. Treasury yields and interest rate spreads. For further information on the three-level classification hierarchy of fair value measurements, see note 8. At September 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
$
781.8

$750.0 million fixed rate notes due February 2014
803.7

$612.5 million fixed rate notes due March 2018
690.6

$750.0 million fixed rate notes due September 2022
759.4

5. Derivative Instruments
The company mitigates certain financial exposures to interest rate risk through the use of derivative financial instruments as part of its risk management program. The company does not use derivative instruments for trading purposes. All derivatives have been designated as cash flow hedges.
In August 2012, the company entered into two forward-starting interest rate swap contracts, with an aggregate notional value of $1.5 billion, to hedge the risk of changes in underlying benchmark interest rates associated with the expected issuances of fixed-rate debt. One of these swap contracts was settled in conjunction with the issuance of fixed-rate debt in September 2012.
The fair value and location of outstanding derivative instruments in the consolidated balance sheet as of September 30, 2012 were as follows.
(in millions)
 
Balance Sheet Location
 
Fair Value
Interest rate contract
 
Other liabilities
 
$
30.1

There were no derivative instruments outstanding at December 31, 2011.
The effect of derivative instruments on the consolidated statements of income as well as accumulated other comprehensive income (OCI) within the consolidated statements of comprehensive income and consolidated statements of shareholders' equity for the nine months ended September 30, 2012 and 2011 were as follows.
 
 
Gains (Losses)
 Recognized in OCI
(Effective Portion)
 
Gains (Losses) Reclassified from
Accumulated OCI
(Effective Portion)
 
Gains (Losses)
Recognized in Income
(Ineffective Portion)
(in millions)
 
2012
2011
 
Location
 
2012
2011
 
Location
 
2012
2011
Interest rate contracts
 
$
(54.4
)

 
Interest and other borrowing costs
 
$
(0.4
)
(0.8
)
 
Gains (losses) on derivative investments
 
$

$
(0.1
)
At September 30, 2012, the company expects to reclassify $2.8 million of net gains (losses) on derivative instruments from accumulated other comprehensive income to net income as additional interest expense during the next twelve months due to the payment of interest associated with the issuance of fixed-rate debt.

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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. The USPTO confirmed some claims and rejected others. 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. The case is stayed pending the outcome of the reexamination of his patent at the USPTO. In response to CME's reexamination request, the USPTO issued a Final Office Action that rejected all of the claims in the patent in October 2012. Mr. Garber may appeal this decision with the Board of Patent Appeals and Interferences. 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 dismissed due in part to the rejections of the patents in the reexaminations by the USPTO. In July 2012, the USPTO rejected all the claims in a fourth of the six patents. In September 2012, the federal court in the Southern District of New York ruled in the company's favor on a number of grounds of non-infringement relating to the Realtime Data patents. We expect that Realtime Data will appeal this decision. The USPTO will continue to review the patents in parallel. 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. The USPTO's determination of validity of the patents in the Fifth Market, Realtime, and Garber matters may have an impact on the merits of the cases.
A number of lawsuits were filed in federal court in New York on behalf of all commodity account holders or customers of MF Global who had not received a return of 100% of their funds. These matters have been consolidated into a single action in federal court in New York, and a consolidated amended class action complaint was filed on November 5, 2012.  The class action complaint alleges that CME violated the Commodity Exchange Act (CEA), aided and abetted violations of the CEA by other defendants, and aided and abetted a breach of fiduciary duty by certain officers and directors of MF Global.  The class complaint also alleges that CME Group aided and abetted CME's violation of the CEA.  The complaint does not allege the amount of damages sought, but rather seeks compensatory and exemplary damages to be determined at trial.  Based on the initial analysis of the class complaint, the company believes that they have strong legal and factual defenses to the claims.  In addition to the class complaint, the company is aware of two plaintiffs who intend to pursue their claims individually.  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 September 30, 2012 and December 31, 2011, the company had accrued $13.3 million and $12.8 million, respectively, for legal and regulatory matters that were probable and estimable.
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

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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 has 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 first nine months 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 September 30, 2012.
Mutual Offset Agreement. CME and Singapore Exchange Limited (SGX) have a mutual offset agreement with a current term through October 2013. 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 September 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 September 30, 2012.
Family Farmer and Rancher Protection Fund. In April 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 CME Group agricultural products and who suffer losses to their

16

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segregated account balances when their CME clearing member becomes 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 has an aggregate maximum payment amount of $100.0 million. If payments to participants were to exceed this amount, payments would be pro-rated. Clearing members and customers must register in advance with the company and provide certain documentation in order to substantiate their eligibility.
Peregrine Financial Group, Inc. (PFG) filed for bankruptcy protection on July 10, 2012.  PFG was not a CME clearing member and its customers had not registered for the Fund.  Accordingly, they were not technically eligible for payments. However, because the Fund was newly implemented and because PFG's customers included many agricultural industry participants for whom the program was designed, the company decided to waive certain terms and conditions of the Fund, solely in connection with the PFG bankruptcy, so that otherwise eligible family farmers, ranchers and agricultural cooperatives could apply for and receive benefits from CME.  Based on the number of such PFG customers who applied and the estimated size of their claims, the company has recorded a liability in the amount of $2.2 million at September 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 and interest rate swap contracts. 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. The company determined the fair value of its interest rate swap contracts using standard valuation models with market-based observable inputs including forward and spot exchange rates and interest rate curves.
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 September 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.

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Financial Instruments Measured at Fair Value on a Recurring Basis:
 
 
September 30, 2012
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at Fair Value:
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
22.6

 
$

 
$

 
$
22.6

Mutual funds
 
39.1

 

 

 
39.1

Asset-backed securities
 

 
0.3

 

 
0.3

Total Marketable Securities
 
61.7

 
0.3

 

 
62.0

Equity investments
 
633.3

 

 

 
633.3

Total Assets at Fair Value
 
$
695.0

 
$
0.3

 
$

 
$
695.3

 
 
 
 
 
 
 
 
 
Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$

 
$
30.1

 
$

 
$
30.1

Contingent consideration
 

 

 
12.7

 
12.7

Total Liabilities at Fair Value
 
$

 
$
30.1

 
$
12.7

 
$
42.8

There were no transfers of assets between level 1 and level 2 during the first nine 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 nine 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
1.2

Fair value of liability at September 30, 2012
$
12.7

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 4,855,000 and 4,922,000 were anti-dilutive for the quarter and nine months ended September 30, 2012, respectively. Outstanding stock options of approximately 5,420,000 and 4,705,000 were anti-dilutive for the quarter and nine months ended September 30, 2011. There were approximately 838,000 and 850,000 anti-dilutive restricted stock awards for the quarter and nine months ended September 30, 2012, respectively. There were no anti-dilutive restricted stock awards for the quarter and nine months ended September 30, 2011.
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2012
 
2011
 
2012
 
2011
Net Income Attributable to CME Group (in millions)
 
$
218.0

 
$
316.1

 
$
729.5

 
$
1,066.4

Weighted Average Number of Common Shares (in thousands):
 
 
 
 
 
 
 
 
Basic
 
331,377

 
332,289

 
331,091

 
333,449

Effect of stock options and restricted stock awards
 
1,081

 
1,048

 
1,056

 
1,058

Diluted
 
332,458


333,337

 
332,147

 
334,507

Earnings per Common Share Attributable to CME Group:
 
 
 
 
 
 
 
 
Basic
 
$
0.66

 
$
0.95

 
$
2.20

 
$
3.20

Diluted
 
0.66

 
0.95

 
2.20

 
3.19


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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 October 2012, the company entered into a definitive agreement to acquire the Kansas City Board of Trade. The transaction is subject to regulatory approval and customary closing conditions.

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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 in 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
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(dollars in millions, except per share data)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Total revenues
 
$
683.2

 
$
874.2

 
(22
)%
 
$
2,253.7

 
$
2,544.1

 
(11
)%
Total expenses
 
287.2

 
302.1

 
(5
)
 
937.3

 
913.4

 
3

Operating margin
 
58
%
 
65
%
 
 
 
58
%
 
64
%
 
 
Non-operating income (expense)
 
$
(0.2
)
 
$
(26.2
)
 
(99
)
 
$
23.5

 
$
(63.9
)
 
(137
)
Effective tax rate
 
45
%
 
42
%
 
 
 
45
%
 
32
%
 
 
Net income attributable to CME Group
 
$
218.0

 
$
316.1

 
(31
)
 
$
729.5

 
$
1,066.4

 
(32
)
Diluted earnings per common share attributable to CME Group
 
0.66

 
0.95

 
(31
)
 
2.20

 
3.19

 
(31
)
Cash flows from operating activities
 
 
 
 
 
 
 
897.2

 
999.8

 
(10
)
In the third quarter and first nine months of 2012, when compared with the same periods in 2011, the decreases in total revenues were attributable largely to declines in clearing and transaction fees revenue resulting from lower contract volumes.
Total expenses decreased in the third quarter of 2012 when compared with the same period in 2011 due to a decrease in amortization of purchased intangibles as a result of the contribution of certain Dow Jones Index assets and liabilities (the DJI asset group) to a new venture with The McGraw Hill Companies Inc. (McGraw) and to the sale of Credit Market Analysis Ltd (CMA). There was also a decline in compensation and benefits expense due to lower accrued bonuses and a decrease in average headcount. The decrease in average headcount was attributable to the contribution of the DJI asset group and the sale of CMA. The declines in bonus expense and average headcount were partially offset by annual salary increases and rising healthcare costs. The increase in total expenses in the first nine months of 2012 compared with the same period in 2011 was due to higher compensation and benefits expense resulting from additional stock-based compensation and employee separation costs, partially offset by a decline in accrued bonus expense. Expenses associated with S&P/Dow Jones Indices LLC (the McGraw venture), our new venture with McGraw, also contributed to the rise in total year-to-date expenses. The impact of these increases on total year-to-date expenses was partially offset by a decrease in expense from the amortization of purchased intangibles.
We recognized a gain of $59.9 million resulting from the contribution of the DJI asset group to the McGraw venture and the sale of CMA, and a gain relating to a recovery of an impairment loss on a corporate debt security, which resulted in an increase in non-operating income (expense) in the first nine months of 2012 when compared with the same period in 2011.
In the third quarter of 2012 when compared with the same period in 2011, the increase in the effective tax rate was attributable to adjustments to the deferred tax liabilities associated with the McGraw venture. The increase in the effective tax rate in the first nine months of 2012 was due to the establishment of deferred tax liabilities associated with the McGraw venture. The increase was partially offset by non-recurring reductions to tax expense related to the McGraw venture and the sale of CMA in the first nine months of 2012 as well as a change in the state tax apportionment in the first nine months of 2011.


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Revenues
 
 
Quarter Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(dollars in millions)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Clearing and transaction fees
 
$
562.2

 
$
732.7

 
(23
)%
 
$
1,826.9

 
$
2,111.8

 
(13
)%
Market data and information services
 
82.8

 
107.0

 
(23
)
 
307.8

 
321.9

 
(4
)%
Access and communication fees
 
23.2

 
12.0

 
93

 
65.5

 
34.8

 
88
 %
Other
 
15.0

 
22.5

 
(33
)
 
53.5

 
75.6

 
(29
)%
Total Revenues
 
$
683.2

 
$
874.2

 
(22
)
 
$
2,253.7

 
$
2,544.1

 
(11
)%
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
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Total contract volume (in millions)
 
682.8

 
940.9

 
(27
)%
 
2,238.1

 
2,648.4

 
(16
)%
Clearing and transaction fees (in millions)
 
$
561.3

 
$
732.7

 
(23
)
 
$
1,823.9

 
$
2,111.8

 
(14
)%
Average rate per contract
 
$
0.822

 
$
0.779

 
6

 
$
0.815

 
$
0.797

 
2

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 third quarter and first nine months of 2012 when compared with the same periods in 2011. 
(in millions)
 
Quarter Ended
 
Nine Months Ended
Decrease due to change in total contract volume
 
$
(212.1
)
 
$
(334.4
)
Increase due to change in average rate per contract
 
40.7

 
46.5

Net decrease in clearing and transaction fees
 
$
(171.4
)
 
$
(287.9
)
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.

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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
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Average Daily Volume by Product Line:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
4,514

 
6,518

 
(31
)%
 
5,085

 
6,464

 
(21
)%
Equity
 
2,391

 
4,040

 
(41
)
 
2,569

 
3,269

 
(21
)
Foreign exchange
 
846

 
988

 
(14
)
 
871

 
956

 
(9
)
Agricultural commodity
 
1,171

 
1,029

 
14

 
1,194

 
1,111

 
7

Energy
 
1,590

 
1,673

 
(5
)
 
1,761

 
1,801

 
(2
)
Metal
 
327

 
454

 
(28
)
 
361

 
412

 
(12
)
Aggregate average daily volume
 
10,839

 
14,702

 
(26
)
 
11,841

 
14,013

 
(15
)
Average Daily Volume by Venue:
 
 
 
 
 
 
 
 
 
 
 
 
Electronic
 
9,293

 
12,462

 
(25
)
 
10,024

 
11,845

 
(15
)
Open outcry
 
979

 
1,557

 
(37
)
 
1,144

 
1,473

 
(22
)
Privately negotiated
 
209

 
257

 
(19
)
 
225

 
241

 
(7
)
Total exchange-traded volume
 
10,481

 
14,276

 
(27
)
 
11,393

 
13,559

 
(16
)
Total CME ClearPort
 
358

 
426

 
(16
)
 
448

 
454

 
(1
)
Aggregate average daily volume
 
10,839

 
14,702

 
(26
)
 
11,841

 
14,013

 
(15
)
Interest Rate Products
The following table summarizes average daily contract 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
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(amounts in thousands)
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Eurodollar futures and options:
 
 
 
 
 
 
 
 
 
 
 
 
Front 8 futures
 
1,020

 
1,686

 
(40
)%
 
1,187

 
1,892

 
(37
)%
Back 32 futures
 
554

 
598

 
(7
)
 
592

 
539

 
10

Options
 
364

 
908

 
(60
)
 
453

 
810

 
(44
)
U.S. Treasury futures and options:
 
 
 
 
 
 
 
 
 
 
 
 
10-Year
 
1,156

 
1,603

 
(28
)
 
1,308

 
1,544

 
(15
)
5-Year
 
529

 
773

 
(32
)
 
575

 
762

 
(25
)
Treasury bond
 
404

 
475

 
(15
)
 
436

 
426

 
2

2-Year
 
243

 
297

 
(18
)
 
235

 
328

 
(28
)
Overall interest rate contract volume decreased in the third quarter and first nine months of 2012 when compared with the same periods in 2011 due to low interest rate volat