CME profit disappoints; CEO to exit early

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CME Group Inc on Thursday posted a bigger decline in first-quarter profit than Wall Street had anticipated, hit by a drop in trading volume and a rise in expenses.

Separtely, CEO Craig Donohue said he would hand the reins of the biggest U.S. futures exchange operator to President Phupinder Gill in May, earlier than planned. CME Executive Chairman Terrence Duffy said the decision had "absolutely" nothing with the quarterly results. [ID: L2E8FQ695]

CME Group is still struggling with fallout from last October's collapse of broker MF Global. Some $1.6 billion of customer money is still missing in the aftermath of MF Global's demise, hurting confidence in futures markets.

The companies shares were down about 1 percent at $270.10 in afternoon trading.

In an interview, Duffy reiterated his assertion that MF Global violated CME and Commodity Futures Trading Commission rules, but he declined to comment on the possibility of any criminal charges.

CME and CFTC rules bar futures brokers from using customer funds for their own trading or collateral needs, and Duffy has said MF Global improperly transferred money from customer accounts to its own accounts as it faced a liquidity squeeze in its final days.

Duffy said a CFTC probe into the actions of CME, MF Global's first-line regulator, was merely part the agency's "regular course of business."

His focus, he said, is on restoring confidence in futures markets, in part by requiring top executives to sign off on large transfers of customer funds.

Jon Corzine, who ran MF Global until shortly after its collapse, said he did not know that customer funds may have been improperly transferred.


CME executives outlined new plans to reduce costs, cutting staff in the first quarter and rolling out a "voluntary exit incentive plan" to select employees this quarter to trim headcount further.

In another sign of the company's focus on expenses, CME is giving Gill a smaller pay package than outgoing CEO Donohue. [ID: L2E8FPEFM]

Donohue said he will hand his duties to Gill by the company's annual meeting on May 23. He had announced his exit last month after nine years at CME's helm, but at the time said he would leave by year's end.

"Our succession transition has been going extremely well," Donohue said in what will be the last of his quarterly earnings calls with investors.

Gill ran the rest of the call, with the aid of his chief financial officer, executive chairman Duffy and other officers.

"While concerns remain, there are some positive signs that an improving economy would bode well for our product set," Gill said, blaming last quarter's decline on low volatility.

He said the company will continue to focus on expanding internationally and with over-the-counter clearing, and signaled the company's co-location offering could add additional revenue, though he stopped short of saying how much.


CME's reported $4.02 per share quarterly profit was inflated by a one-time tax adjustment without which it missed the $4.00 per share Wall Street view, analysts said.

Trading fell 11 percent in the quarter, to an average of 12.3 million contracts a day, helping to push down revenue to $775 million from $831.6 million a year earlier. Analysts had expected revenue of $779 million.

Expenses also rose, reflecting higher compensation from severance costs.

An improving economy could fuel speculation over when the U.S. Federal Reserve may raise interest rates, boosting trading at CME's Chicago Board of Trade and Chicago Mercantile Exchange, Gill said.

On Wednesday, the Fed kept policy on hold, saying that while it expected a gradual improvement in the economy, it would still need to keep short-term interest rates near zero through late 2014.

Futures and options on short-term interest rates and Treasuries are CME's most active contracts, accounting for about 46 percent of its overall trade.

The company's reported first-quarter net income of $266.3 million, or $4.02 a share, was down from $456.6 million, or $6.83 a share, a year earlier.

A global regulatory push to subject more of the opaque OTC market to the light of regulated trading and clearing is already benefiting CME.

The exchange operator cleared $283 billion in interest rate swaps and credit default swaps in the first quarter, a quarterly record and more than it handled all year last year.

CME said it had $1.1 billion in cash on hand at the end of the quarter, and $2.1 billion in long-term debt.

The company has been in the running as a bidder on the London Metal Exchange, which is said to be valued at between $800 million and $2.4 billion.

Duffy declined to comment on the potential acquisition.

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