Executive Chairman’s Letter
We navigated our company successfully through challenges both domestic and international, achieving solid results that enable us to work diligently to benefit our customers and shareholders and preserve the integrity of our markets - our primary concerns as we move ahead.
Despite a very challenging environment, 2011 was another productive year for CME Group. We performed well despite the Eurozone crisis, political turmoil in the Middle East and northern Africa, the Fed’s zero interest rate policy, and the wave of Dodd-Frank rulemaking. Total company revenues in 2011 grew to $3.3 billion and net income to $1.8 billion, while volume increased to 3.4 billion contracts traded.
We generated more than $1.3 billion of cash from operations. Reflecting this strength, and consistent with the principles guiding our capital structure, we raised the regular first-quarter dividend 59 percent, to $2.23 per share – increasing our payout target from 35 percent to 50 percent of prior year’s cash earnings.
We are committed to returning excess cash to shareholders in an efficient way. As part of this initiative, the company established a plan to pay an additional dividend annually in the first quarter of each year to supplement the regular quarterly dividends. The amount will be determined based on excess cash available at year end, which in 2012 was $3.00 per share.
Also to benefit shareholders, I worked diligently with state lawmakers in Springfield, Ill., to remedy the company’s tax situation. Illinois responded to the unfair treatment of CME Group by amending the tax code to tax us at a rate that more nearly reflects the amount of business being done in Illinois. This in turn will reduce the company’s tax liability at the state level by $60 - $80 million annually once fully implemented in 2013.
Reflecting the rising global demand for commodities, we reached record volumes in our agricultural, energy and metals markets during 2011. We also posted records for clearing over-the-counter interest rate swaps and credit default swaps as we worked with clients to prepare for mandatory clearing. Given the importance of Asia, we hired an experienced executive, Julien LeNoble, to lead our efforts there. With China destined to become the largest economy in the world in five years, we expanded our Singapore office and began working with mainland FCMs on educational initiatives that showcase the value of our products for risk management. We also continued to enhance our partnerships with exchanges worldwide including BM&FBOVESPA, Bursa Malaysia and the Mexican Derivatives Exchange.
A defining event in 2011 was the failure of MF Global. We responded to the failure by vigorously acting to protect our customers. We successfully transferred all of the more than 30,000 customer accounts and $2.4 billion in customer funds held securely at CME Group to new clearing firms, so that our customers could continue to trade. Within two weeks of the bankruptcy, we also provided a guarantee to the MF Global trustee, helping him return 72 cents on the dollar for a total of $4 billion to customers.
Further, in February 2012 we established the Family Farmer and Rancher Protection Fund. This fund is designed to provide up to $25,000 to individual farmers and ranchers and $100,000 to co-ops that hedge their risk in CME Group futures markets in case a future insolvency of a clearing member or market participant were to cause customer losses based on a shortfall in segregated funds. We feel that this new protection will give family farmers and ranchers more security as they continue to use our products for their agricultural needs.
CME Group continues to work with the Commodity Futures Trading Commission (CFTC) and other industry experts and market participants to develop solutions to further shore up customer protections at the firm level. It is important to bear in mind that this is the first time that our customers suffered because their segregated funds had been unavailable. Efforts to enhance customer protections must be cost-effective and in the best interest of clients.
United States regulators are on track to finalize major rules ahead of other G-20 nations. The rules adopted under the Dodd-Frank Act will impact how we and our customers do business. Key among these was the CFTC’s final ruling on position limits. We worked closely with legislative and regulatory leaders to reduce disparity in limits for cash-settled and physically-settled contracts in the final rule, which will help to put all futures exchanges on equal regulatory footing.
In Europe, we are building our resources to manage the multiple regulatory reforms moving on different timelines that present both challenges and opportunities for expanding our presence in the European Union. As a company, we will continue to be an active voice in the United States and abroad to stress the importance of international coordination of new regulations that foster competition and innovation in our global industry.
I would like to recognize the important contribution of Craig Donohue, our Chief Executive Officer, who has decided to step down when his contract expires at the end of the year. He has served our company well for the past 23 years – eight of which were as CEO – and we appreciate all he has done to grow our exchange into the world leading position it occupies today. We are pleased that our President, Phupinder Gill, will succeed Craig as CEO, bringing his deep experience in all aspects of our business to further advance the successful execution of our global growth strategy.
All of our efforts, whether they are domestic or international, always have one mission: to insure the credibility of our markets and deliver benefits to our customers and shareholders.