Good morning, ladies and gentlemen. Welcome to the CME Group Special Shareholders Meeting. I'm Terry Duffy, Chairman, CEO of CME Group. I'll be presiding at this meeting, which is now called to order at 10:05 A.M. Joining me on the dais is Kathleen Cronin, our General Counsel and Corporate Secretary. Kathleen will act as Secretary of the meeting. Today, we're going to conduct the official business of the meeting, present the proposal, and hold a Q&A period, then announce the preliminary voting results. As a reminder, audio, videotaping, and photography during the meeting is strictly prohibited, and you're requested to follow the rules of conduct that you received when you entered the meeting. Before I kick it to Kathleen, I want to just explain why we're doing this.
I think there's been a little bit of misinformation, and I'm not trying to change anyone's mind one way or another. I just think it's important that the communication of why we're doing this. We have had a real problem over the years, going back probably 6 to 8 years ago now, of getting quorums for people to run for the B directors. The voter apathy has been at an all-time high in the governance of the B directors. That's not a bad thing, and it's not a good thing. It's just a fact of the way things have progressed. We're really struggling year after year as we got forced into going to annual elections to put people through an annual cycle of constantly campaigning, calling people that they can't find, trying to get people to vote that don't want to vote.
People throw these things in the garbage, and it's wasted a lot of director's time. More importantly, it's badgered a lot of the B owners as they've tried to do their daily lives by getting calls from these people, which seems like on a daily basis. They're just trying to get through a process, which is the process that we all voted on. Some of us can remember back to 2000 when the vote on demutualization approved by 98% of the outstanding members of the seat holders back then, and we all knew what our core rights were, and one of them was governance. It was something that we all thought was important going forward. As time continued to evolve, it became less and less relevant.
I like to remind people all the time that we have restrictions or safe harbor language as it relates to the Commodity Futures Trading Commission, our direct oversight, as what the makeup of our board needs to look like to some extent. It always has to have representation of expertise in the marketplace. I think when you look historically, since the CME's demutualized and gone public in 2002, we've done the right thing as going forward, as evidenced by the growth of the business. That's really the true measuring stick of any business, is the growth of a business. I'm quite proud of the growth of the business. I'm quite proud of the directors that I've been able to serve with since taking the company public in 2002, and I think they've done a remarkable job.
At some point, we got to make a decision of what we want to do going forward. I felt it was important, along with the governance committee and the full board, to offer something to the membership in order to say, "Okay, listen, you're not electing to use this right anyway, so let's go ahead and give them some money for this right." As you recall, we tried to do it a few years ago with no dollars, and it almost passed. I think it's the right thing to do is to compensate people to some extent for not getting called six times a day for three months at a time. That gets old after a while, and I understand that. If we don't get something like this done, that's going to continue, and there's nothing I can do about it.
That being said, before I get into the formal part of the rest of the meeting, does anybody have any questions on what I just said on the proposal? I know I've heard from people historically, "Well, Terry, that makes sense as long as you stay there, and you understand how we are as members, and so you're there to make sure of that." Or Liz, Marty, Ron, or whoever else may be sitting at the table, they understand. What happens when the next person comes? That's a fear I actually have, is what happens when the next person comes? Because we have really good quality B share directors today. What happens when we get people that are doing it for the wrong reasons? That's my concern.
I am very concerned about this, and I'm not concerned to a point where the company's ever going to suffer because I will never let that happen. On that being said, if anybody has any questions on this? Otherwise, I'm going to proceed with the rest of the formal part of the business. Yes, sir.
One of the issues I have, it has really nothing to do with money. It has to do with There are still some of us who operate on the floor that have specific issues about what are member issues, member rights as we navigate the floor. The problem is that only the B, the Rons and all the guys that are in front of me understand what it's like for us to run a business. That's my representation. Recently, I have something I'm trying to straighten out, and everyone here understands what the problem is and what the issue is. I'm not sure that Who do I go to and try to explain, okay, this is something that's It's outdated, it needs to be changed. It's not good for a CME's business in general. It's not good for the individual membership.
Who do I go to that is a liaison? Some of that is really going to listen to, we're still a little Last of the Mohicans, but we're still bringing in
No, I'm aware. I think that historically, any business that's going to run properly would listen to its clients. Its clients don't have to be in a central location, or they don't have to be in another country. You need to listen to all your clients, and that's exactly what we do. It's the reason why our sales force has gone from seven to 70, because we distribute our business globally around the world, and every contract that comes into CME is critically important. No matter where the origination of that contract comes from, if it comes from a trading floor or a member, or it comes from a non-member out of Asia, same thing. That's what's important to the CME and the growth of this business.
We have people here that will listen to every single concern that you have, and if there's an instance where that's not happened, please let me know because it won't be tolerated for very long. I know that to be a fact because the one thing that clients have told me and told others around the world, this isn't just us, this is independently, the best customer service of any institution and exchange in the world is CME Group. That's how we look at this. It's not where you're located. It's not who you are. Everybody's a client, and we treat them all the same. To that point, we would deal with our sales force, we would deal with other people that are within the organization because you know what? Their livelihood's depending on you doing well also.
They're not going to avoid you, is my point. If there's 50 million contracts coming in from on the trading floor on an annualized basis, which is probably a little light, to be honest with you. It's just mine. Oh, your business? Mm-hmm. Okay. There's about a million a day, I think, coming off the trading floor in today's marketplace. Add up the number of trading days, a couple hundred million coming off the trading floor. Still, that's critically important business to CME. If you're bringing in 50 million of that on an annualized basis, I got to get to know you a little bit better than I do. Count me gone. Anyway, that's the proposal, and that's why we're doing it. I brought it once before. I thought it was important to bring, and I wanted to try it again.
With that being said, if there's no other questions on the proposal, I'll continue with the formal part of the business. Then if there's any other parts of the questions that you may have on the business as it relates to that or anything else, I'll be happy to address after we do the formal part. Mike?
Terry, by removing the six board members, what's to stop the exchange from, now that you'd get rid of our six representatives, what's to stop the exchange from saying, "You know what? We don't need seats anymore.
Well, we could do that. We'd have to pay for them, though.
There is something.
You just can't eliminate a membership.
There is a poison pill?
No, I don't know if it's a poison pill.
It's not a poison pill, but the memberships are a part of our business structure as laid out in our charter. You can't get rid of the memberships without doing something to either buy them out, or to get a consent from the members to approve it.
Okay. It's nice to know.
Yeah. That's not going to go away.
A lot of us still, we live off the leases on the seats and stuff, and that's my biggest concern.
Yeah. Mike, we couldn't just unilaterally say, "You know what? Poof, goodbye. See you later." We would have to hold a referendum vote or a shareholder vote like this, of which I believe the standard would be the same as this proposal, which is a majority of the outstanding of each class to make that decision to go away. If the majority of the outstanding voted in favor of eliminating their seats for zero, I'd say we've got a problem because that would be not very smart.
Yeah. I think the other point I'll make is that obviously our board has a fiduciary duty to all its shareholders, this issue has been raised several times, and frankly, things can change, but we can't justify purchasing the seats at the amount it would cost us at this point. There's no impetus to even offer to purchase the seats.
On that point, even though the justification might not be there's other reasons why we would not want to do that.
Yeah.
It doesn't make good business sense to do that. We have a good membership, of which is part of this organization. People get differential on rates. It's an opportunity for us to have loyalty to these products, which we've been able to achieve. It's one of the reasons why we didn't charge for market data for as many years as we did, and other exchanges did the whole time. It helped us create the entire wheel with the spoke, and the memberships were a big part of that. These are all things that are a huge part of the business model of the exchange, is memberships, not just the valuation thereof of what it would cost us to buy them out. We've seen what happens when NYSE and CBOT bought out theirs and kicked back rights.
It looks like a perpetual revenue stream forever, but I think that is a fool's errand. Jim?
Terry, the one thing I wanted to ask about was, that you brought up the valuation then of the seats if we don't have the members.
Yeah. Okay. If we don't have.
If we don't have a representation.
Yeah. First of all, the B directors don't have an effect on the valuation of the membership, as you know.
Right.
It's a function of the marketplace and who's trading and how much are they trading and what's the discount they're getting without having one or having one.
I guess what I was going at was dictating policy as far as, like you said, giving preferential rates, if you own a seat, a discounted rate versus clearing or non-clearing.
I think that's another thing that's been bantered around to a point of misunderstanding what that really means. A preferential rate under the DCM of the CBOT and the DCM of the NYMEX is they get a preferential rate versus a customer if they're a member. No one says what that preferential rate is. What are you really protecting, I guess would be the question.
I'm a member, and I get a discounted rate.
You get a discounted rate at every DCM that CME owns today. My point is, in the charter, it does not say that in CME's DCM, in its demutualization agreement. It says that nobody will ever be charged a higher rate for an electronic trade than they will for a floor trade. That's what we voted on in 2000, which I was referring to, which got approval of 98%. Subsequently, in the 2007 merger agreement with Chicago Board of Trade, the language reads that members will get a preferential rate to a client. Subsequently, in 2008, the agreement with the New York Mercantile Exchange reads very similar to that of the Chicago Board of Trade. The CME DCM, which you are a member of and voting on in this proposal today, does not carry that same language.
In practice, we have always done so because, again, it goes to the model of the business.
The valuation of the seat right there.
Well, it is the valuation of the seat, it also goes to the value of the model, as I described earlier, which is a big part of our business. The value of the seat is the rate difference. There's no question about it. Nobody's ever described what that rate difference needs to be to be in compliance with the language of 2007 and 2008 for CBOT and NYMEX respectively. It doesn't need to be very much. Go ahead.
There are 6 B directors, and they certainly provide advice and counsel to the board on various issues, but they don't dictate policy as it comes to members. It's a business decision that's long evidenced.
I think that the B directors, they not only consult and advise on membership issues, they consult and advise on all issues of this company. That's the important part of it. That's what I like about having them. I like the expertise. My concern is not with 6 B directors sitting up in the room today. My concern is 10 years down the road. If I don't think 10 years down the road, then I'm a bad Chairman and CEO of this company, because I've always thought that way, and hence Tom asked me how I'm doing. Am I having fun yet? I don't remember what happened between 2002 and today. That's not having fun because you're constantly looking at what's next. It's not pity on me. It's for doing the right thing. That's what I signed up to do.
I'm not looking about the directors that are sitting there today, Jim. I'm looking for 10 years down the road. I don't want to put this company in a bad spot. I don't want memberships in a bad spot. I want this company to continue to grow, leave it in a better place than what I found it. That's what I want to do. The only way you're going to do that is to set things in motion to make sure that can happen. That's the reason this proposal is being brought forward. Okay. Yes, sir. Thanks, Jim. Tom. Mike, thank you.
Hi, Terry. Andy Silvey. I'm an A and B holder, I don't have a bias here, just to clarify. Broadly, if management views the seats as a legacy issue, if possible, why wouldn't it be considered you just spin them off? I've mentioned this before to other people in the room. Just very broadly, again, if possible, in terms of the structure of the company, spin them off. You don't know what to do with it. You're perplexed by it. Allow it to sink or swim on its own merit.
I think, for the most part, spinning them off, I'm not quite sure what that means other than I know what a spin-off, what you're saying is. To spin them off, the business has changed dramatically since we were all on the floor back in the day. The clearing member firms today who are holding a majority of these memberships, as part of their requirement in order to be a clearing member of CME Group. They have separate requirements, all of which include memberships involved in that. To spin them off, would we be able to still control them owning those memberships to be in compliance with clearing, or would we have to use cash versus the memberships that they own today? I don't know the answer to any of those questions.
Even though a spin-off sounds like a simple solution, I think it's a little bit more complicated than you think. If you think that that's going to help the value versus hurt the value, if you take away the FCMs by owning membership requirements, I think we'd be mistaken because of where the seats are owned today. The guys like Mike and others who said that they rely on some of these rents to do that, it's because the firms are the ones that are renting a lot of these memberships to keep the value up in the rent market. I don't know if a spin-off would do that because I don't know the structure that you proposed to others. That would be my first blush thoughts.
Yeah, I think just to clarify, we don't see the memberships as a hangover or a legacy issue that we need to deal with, because as Terry's pointed out, we see a lot of value in the memberships in terms of the business model that we operate under. What we're asking to do is simply eliminate for all time the requirement that six directors be elected by the membership. It's a little different than having a concern with the memberships because, as Terry said, we benefit from the memberships.
I like having them. Lonnie.
Would you ever think of maybe reducing that number from six to four?
Yeah.
Six to two?
I think that's what the proposal kind of covers, Lonnie. If you look at the proposal, we said that if only two divisions passed, that would be fine. We would go with that, and we would not worry about the third division, which is the IOM division. As you know, a lot of those votes are individually held. There's 1,100 and I don't know.
Yeah.
1,287 by Liz's last count, which I don't think has changed much. I think that division we always thought is a hurdle. It's the other two division. That's why we drew the proposal the way we did. The only other thing we could have done is done it by division, we didn't think that would be the smart thing for us to do.
Just to emphasize, eliminating this requirement doesn't eliminate the commitment that Terry has to continuing to have representation from members on the board and our obligations under the CFTC regulations. Again, it comes back to the business driver. We feel it's beneficial to have member representation. We've also formally committed in the proposal to continuing to have the board nominating committee consider up to four individuals who would have otherwise been eligible to serve as the Class B directors for a period of time. There's a formal commitment as well as the history of our practice and the business drivers for it.
Lonnie, yes. The long answer is yes. We have considered that. We thought we drew it in a proposal. Sometimes these things get complicated because we all get lawyered up a little bit, and that's just the way life is.
Hey.
Anyway.
I do simple words.
I'll stay here. We did look at that, and I think the proposal does call for that, but that's where we're at today. Is there any more questions on the proposal? I'd like to proceed with the rest of the business of the meeting, and then I'll get into any other business that you would have as it relates to the company. Bill?
Terry, I have two questions.
Sure.
Were other ways to compensate us considered, like changing the requirements of clearing houses, adjust that somehow to compensate us? How do they arrive at these figures, $6,200 for the CME?
It was based on a three, two, one basis off a dollar amount in aggregate. We looked at the aggregate dollar amount, and then we went into a three, two, one payout. I don't have the exact figures in front of me.
I do.
6,000, 4,000, 2,000, whatever. It's something on that neighborhood, Bill. It was based off of an aggregate number of $15 million or $10 million.
Yeah, which we thought was the appropriate amount in aggregate to purchase the rights.
It was $10 million in aggregate, you just back into the simple math of three, two, one. That's how we did every other major vote around here, was based on three, two, one, not six, two, one, as historically was the case back pre-demutualization.
What about compensating us through changing the clearinghouse requirements?
Meaning?
Well, at a certain level, they have to have more than two seat CMEs, or they could figure something out to compensate.
Add additional burdens to the FCMs to be clearers? Is that what you're saying? I'm just not understanding what you're saying, Bill.
I guess that is what I'm saying.
Yeah, I think that would be a dramatic mistake for this company to try to add additional burdens in the most capital-intensive environment we've ever lived in. I think what we do right now is we have a good balance. It's one of the reasons our business has outpaced the rest of the exchanges globally. I think anytime you add additional cost to anybody that is controlling a major part of your business, you have to be very cautious of that, and I would not want to risk, and I won't risk, adding additional burdens to pay one group versus another. That's not what this is about because that's what I would be doing. I would be putting cost on one group at the benefit of another group.
Are we worried about competition, as far as other markets, we're the ones that have the liquidity.
We have the liquidity today, Bill, as you know, you've been around a long time. We've seen switches. I can get more into this in the general Q&A part of the meeting. To be competitive in today's world, just because you have the liquidity today doesn't mean you have it tomorrow. We have to work every single day, going back to the earlier question, why every contract matters. That's what we have to do because others are beating. They love what we have. Everybody would love to have what we have. You can't just sit back and say, "Well, I'll add additional burdens, and we'll still have what we have." That's not how things work. It hasn't worked that way since I've been the Chairman and CEO of this company, and I'm the only one who's been CEO since it's been public.
Nobody else has seen what I've seen in my 18 years here of doing this. You have to be mindful of that as you travel around the world, look at other institutions, talk to the clients, and see exactly where they're at because there's alternatives everywhere you look. You look at correlations among equities in Europe. You look at correlations amongst interest rates in Europe. There's high correlated products to ours all over the world. We only have intellectual property on two, three, and they're all in the index business, in the equity markets, S&P, Russell, Nasdaq. Everything else can be competed with. Okay. I'm going to go ahead and continue. Now, Kathleen, our Corporate Secretary, will establish that a meeting has been duly called and a quorum is present. Kathleen?
All shareholders of record at the close of business on September 6, 2018, are entitled to vote at this meeting. Notice of meeting and the proxy statement were furnished to all shareholders of record beginning on September 19, 2018. A list of registered shareholders entitled to vote is available for examination by any shareholder during the meeting from the Inspector of Election. I've also been advised by the Inspector that a quorum is present for the proposal for each class of shareholders entitled to vote. The meeting is duly constituted, and the business of the meeting may proceed.
Based on the secretary's report, I declare this meeting is duly convened. The polls for voting of all matters are hereby open. It is now 10:30 A.M. If you previously voted, there is no need to vote today unless you would like to change your vote. Your most recent vote is the one that is counted. If you still need to vote, please raise your hand and a ballot will be provided for you. Jimmy? Just wait.
Just wait.
Yeah, wait for them to submit their ballots. Sorry, this is a shareholder meeting. I overheard that. Yeah.
What's a quorum?
A quorum is A third of the outstanding shares of each class, so the outstanding memberships of each class.
Those are the people that are voting to vote?
Those are the people that are represented already at the meeting. Yeah.
There is a quorum, but the hurdle for the vote is a majority of the outstanding of each class. That's higher than a third.
Right.
As you know. I think Steve drew these up in 2000, the hurdles. Thanks, Jim. Anybody else still have a ballot that they would like to either vote or change?
Okay. Yeah.
Yeah. All right. The polls will close after the proposal has been presented and discussed. All votes submitted today during the meeting will be subject to final verification by the Inspector of Election. The next order of business is a description of the matter to be voted on at today's meeting. Kathleen, please present that proposal.
As I think everyone's aware, we're asking the shareholders to vote on a proposal to amend the company's restated certificate of incorporation to eliminate either all or some of the director election rights of the holders of the Class B-1, Class B-2, and Class B-3 common stock. The proposal is described in detail in the proxy statement. If approved, the shareholders of record would receive the consideration that's described in the proxy statement. The board of directors has recommended the shareholders vote for the proposal. I think we've already responded to questions.
That was mostly on the first.
Yeah. That is the question related to the proposal.
Okay. Sorry.
To complete the meeting.
That concludes the proposal as presented. The floor is now open for additional questions either on the proposal or anything else that you may have as it relates to the company. I'm happy to answer any of the questions that you may have. Yes, sir. Hey, Jim.
Yeah. Can you remind us how are the A share directors appointed?
The A share directors are appointed. They are put forth by a nominating committee of the board, and then they are put up by all shareholders of record, by A shareholders, in the.
Yeah. They're proposed by the nominating committee. The slate's approved by the board and endorsed by the board, and then the shareholders vote on the directors. We do have a diversity of participants on the nominating committee as well to consider who should be on the board going forward.
The roles of the nominating on the board, do they contact A shareholders or not?
No. I would say no, they do not. I would be surprised if they had access to contacting the Fidelity and Capital Group of the world who own a majority of this company. No, I don't believe they do. Those companies use Glass Lewis. They use other firms to advise them on directors who do work. They pay them and advise them on the institutional ownership of the company. Okay.
Yeah. The A directors don't call anyone at all. We may have the proxy solicitor follow up to make sure people have their proxies and have voted them. Generally, we don't have the same issue trying to drum up a quorum because the institutional shareholders vote on a regular basis for the A slate.
The standard is completely different on a quorum. It's just a majority. Correct?
No. The quorum's the same, a third of the outstanding. The approval is a majority of those that are present at the meeting, so it's a much lower standard. Which is the same standard for the B directors.
Okay. Questions? Other questions? Okay. Bill. Sure. Yeah. Sure, Bill. That's a good question. The question Bill asked is on the NEX acquisition. NEX, as it's referred to, was a company based out of London with businesses all around the world, from Tel Aviv to Stockholm, throughout parts of Asia, New York. The businesses consist of cash OTC trading of U.S. Treasuries and other European sovereign debt on the platform called BrokerTec. Then the cash FX trading called EBS, Electronic System, that they own. They also owned many different optimization businesses from compression services to messaging to regulatory assistance for different companies. A really dynamic company that was kind of diverse all over the map and do have a little bit more difficult time coming together as one company.
For us, we thought it was a really good complementary fit to have the OTC and the futures together. Again, going back to what I said earlier about creating efficiencies for the clients versus adding more cost, these compression services that they have do exactly that. They allow for more efficiencies in the marketplace by compressing lines of trading, things of that nature. Very interesting company. We're excited about it. It's closed now. The deal's done. As you saw, our market cap went up by roughly 17 million shares. We also had a nice rally even after the announcement, which was very well-received by shareholders to have that. We announced this at $1.58, $1.60, I believe.
It was when the announcement when NEX came out, and prior to its closing, the market traded up close to $1.80, which is a real vote of confidence by the shareholders. They like this transaction as well. I'm excited by it, and I think the team is. Bryan has done a really good job of leading the integration, along with John Pietrowicz, on the NEX transaction. It'll be a three-year process. We hope to achieve $50 million in synergies year one, $100 million year two, and $200 million by year three. It's extremely exciting, and again, it gives us a broader breadth of clients around the world again. Very interesting acquisition from our standpoint. Thanks, Bill. Steve.
Actually, on the NEX thing, I think it was fantastic. Many years ago, I was working on a project called Titan at ICE.
That project was to be able to have integrated Treasuries and futures, which was the matching engine. Now that the previous brokers at the top. Now that you have the access to BrokerTec, is that something that the exchange is going to look at? Because I think that would be a huge way to go with this.
As far as the exchange looking at BrokerTec, obviously that's the reason why we bought the company, because we like BrokerTec a lot. But you know as a user of BrokerTec, it's a limited participation in BrokerTec consisting of dealers and prop firms, and that's it. You have to go through a bank in order to get access to BrokerTec. The business model's critically important to us to maintain that. As you know, Nasdaq bought a company called eSpeed, which was a competitor of BrokerTec's, and they had a 50% market share along with BrokerTec. Their market share dipped to roughly under 30% once they tried to open that platform up, and the dealers didn't quite care for that, nor did some of the props. Again, this is a do no harm transaction as it relates to the BrokerTec component.
EBS, a little bit different, the optimization business is obviously completely different from the BrokerTec. I will say that I am very optimistic down the road when those things will be sitting on a single platform, and the technology that we can deploy that they do not have today, especially on the EBS platform, which has been quoted as a platform that's very interesting but very expensive to get on, and a little data technology. I'm really excited about when Bryan and the team can get EBS onto our platform and have a single platform. I think that's what'll enhance the business dramatically. Doesn't mean the market structure changes, but it does create more efficiencies. I remember Titan well, by the way. Any other questions or comments? Kathleen. You're going to do the results or no?
Yeah. The preliminary voting results, which remain subject to final verification by the inspector, show that despite a majority of the votes being cast in favor from each of the classes of shareholders, the company did not achieve the required support from a majority of the shares outstanding from such classes as required by Delaware law. Therefore, no changes will be made to the representation rights of the members to elect Class B directors.
Okay.
No consideration will be paid.
Yep. I would like to thank the shareholders who have come to participate in the voting process. This is one of those things, it's a high hurdle, and it's no surprise, but we wanted to, for the reasons I outlined, give it another opportunity. We were very close, but I'm not going to put my staff through calling people over the holidays, badgering them for their votes, to get this over the goal line. I could easily push this out another 20 days or so and try to get the balance of the votes in the two divisions, but I felt after analyzing where this was at, that it's not the proper thing to do.
That being said, we will deal with this, and we will make sure that this company is always run with the utmost professionalism, and we will continue to build on what we've been building on the last 170 plus years. That being said, we're going to adjourn this meeting, and I thank you all very much.