CME Group Annual Report 2007

Plain-text annual report

Elevate CME GROUP 2007 ANNUAL REPORT Elevating the Role of Derivatives in the Global Economy Higher performance. Larger presence. Greater value. Th ese milestones marked our achievements in . Formed by the historic merger of the Chicago Mercantile Exchange and the Chicago Board of Trade, CME Group is the world’s largest and most diverse exchange, oﬀ ering customers globally the widest array of benchmark derivatives products across all major asset classes. Th is report shows how our continued innovation, technological advances and strategic partnerships elevate our leadership position in the ﬁ nancial marketplace – enabling us to improve risk management opportunities for customers in developed and emerging economies alike. TABLE OF CONTENTS 1 Financial Highlights 2 Executive Chairman’s Message 4 Letter from CEO and President 8 Introductory Overview 10 Strategic Proﬁ les 26 Interview with CFO 100 Board of Directors 103 Management 28 Breakthrough Performance 105 Share Information 29 Financial Information 106 Company Information FINANCIAL HIGHLIGHTS (in millions, except per share data and notional value) INCOME S TATEMENT DATA Total revenues Operating income Income before income taxes Net income Earnings per share: Basic Diluted BALANCE SHEET DATA Current assets ¹ Total assets ¹ Current liabilities ¹ Total liabilities ¹ Shareholders’ equity OTHER DATA Total trading volume (round turn trades) Total electronic trading volume (round turn trades) Open interest at year end (contracts) Notional value of trading volume (in trillions) 2007 $ 1,756 1,050 1,096 659 $ 15.05 14.93 $ 1,292 16,611 381 4,305 12,306 2,250 1,739 54 $ 1,134 Y E AR ENDED O R AT DEC EMB ER 31 2006 Change $ 1,090 621 672 407 $ 11.74 11.60 $ 1,398 1,655 104 136 1,519 1,341 956 35 $ 824 61% 69 63 62 28 29 68% 82 54 38 ¹ Amounts exclude cash performance bonds and security deposits, as well as securities lending transactions. All references to volume, notional value and rate per contract information in the text of this document exclude our non-traditional TRAKRS, Swapstream and auction-traded products. All references to options in the text of this document refer to options on futures contracts. All CME Group data in this report reﬂ ects the combined information of CME Holdings and CBOT Holdings beginning on July 13, 2007. 6 5 7 , 1 0 9 0 , 1 % 0 % 6 7 % 5 4 5 % 9 4 % 8 3 0 9 8 2 2 7 1 3 5 9 5 6 7 0 4 3 9 . 4 1 0 6 . 1 1 1 8 . 8 7 0 3 0 2 2 2 2 1 8 3 . 6 0 6 . 3 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 TOTAL REVENUES (in millions of dollars) OPERATING MARGIN (in percentages) NET INCOME (in millions of dollars) DILUTED EARNINGS PER SHARE (in dollars) We completed our historic merger in 2007 to create the world’s largest and most diverse exchange. CME Group delivered breakthrough performance across the board by serving the risk management needs of a broader range of customers around the globe. DEAR SHAREHOLDERS: Th e year 2007 was one of unprecedented success for our company and our industry. Th e historic merger of the Chicago Mercantile Exchange and the Chicago Board of Trade in July created CME Group Inc. – elevating the signiﬁ cant role risk management plays in the broader ﬁ nancial services arena and strengthening the ability of the United States to remain competitive in the global ﬁ nancial marketplace. Customers everywhere now can access the most liquid markets of innovative benchmark derivatives products across all major asset classes – from a single electronic plat- form and, soon, a single trading ﬂ oor. As a combined company, CME Group has been able to create compelling eﬃ ciencies and trading opportunities for our customers as well as deliver new value to our shareholders. During 2007, we marked the seventh consecutive year in which we achieved record-setting ﬁ nancial results driven by signiﬁ cant volume growth. Our total revenues of $1.8 billion were up 61 percent from 2006 and net income was up 62 percent to $659 million. CME Group trading volume soared to an all-time high of 2.2 billion contracts, and open interest set a year-end record at 54 million contracts. Further, we achieved double-digit volume growth in each of our major product lines. Fueling this impressive growth was a signiﬁ cant increase in electronic trading over 2006. Th e number of contracts traded electronically in 2007 exceeded 1.7 billion – representing more than 75 percent of our total volume as more traders around the globe are able to access our markets via the CME Globex platform. Because technology is core to our business, we continue to invest signiﬁ cant resources toward improving the speed, functionality and reliability of CME Globex. In 2007, this included upgrades that enabled customers to obtain market data more eﬃ ciently. During 2007, we broadened our global reach by laying the groundwork to partner with exchanges in emerging markets, such as Asia, Latin America and the Middle East. In the coming year, we expect to continue seeking innovative opportunities to bring the beneﬁ ts of our products and trading technologies to these impor- tant markets. Our performance throughout the year was truly extraordinary. We are especially pleased to have successfully managed the integra- tion of the largest merger in the history of the derivatives industry and, at the same time, expanded our business eﬀ ectively as demon- strated by our record volume and revenue growth. Just as our company has grown, so too has our competition. Th e pressure to deliver innovative new products to meet ever- changing customer needs, create faster and even more eﬃ cient technology solutions and expand into new markets is increasing. New participants continue to enter the exchange-traded derivatives space. And we continue to compete with similar product oﬀ erings available in the much larger over-the-counter marketplace. As we move forward, it is critical that we continue to drive innovation while maintaining our focus on operational excellence and entrepreneurial zeal. To do that, we will continue to rely on the leadership and support of our board of directors, as well as the knowledge, ability and commitment of our management team and employees, to execute our growth strategy successfully. As shown by our outstanding 2007 performance, we have the best team in the industry, the right strategy, and a proven business model. Looking ahead, our priority must be to continue to leverage those strengths as well as our leading position in the industry to further beneﬁ t our customers and shareholders worldwide. February ,  TERRENCE A. DUFFY Executive Chairman 2 CME GROUP 2007 ANNUAL REPORT TERRENCE DUFFY Executive Chairman in Chicago CRAIG DONOHUE Chief Executive Oﬃ cer in São Paulo CME Group achieved record volume growth in 2007, handled 2.2 billion contracts and delivered record revenues and earnings. Expanding globally to serve customers in emerging as well as developed markets, the company established landmark partnerships in Brazil and China. TO OUR SHAREHOLDERS: In all respects,  was a year of historic achievement for our company. We completed the merger of CME and CBOT in July and began delivering new trading opportunities and increased value for our combined customer base. We continued to surpass previously established records, with total revenues growing  percent to $. billion, net income rising  percent to $ million and diluted earnings per share increasing  percent to $.. We expanded our core business organically, created innovative new products to meet the diverse needs of our customers, focused on the over-the-counter market, enhanced our technology, provided transaction processing services, broadened our global reach and ex- plored new business opportunities. In short, we made signiﬁ cant progress toward achieving our long-term strategic goals. For the seventh consecutive year, CME Group achieved record volume growth, handling nearly . billion contracts, a  percent increase over the prior year. Furthermore, total electronic trad- ing grew  percent – from . billion to . billion contracts – as customers around the globe expanded their use of CME Group products. Th is impressive growth demonstrates the burgeoning need for the risk management and hedging tools we oﬀ er. Today, CME Group oﬀ ers the widest array of benchmark products across all major asset classes – from a single electronic platform. Further, we continue to provide a choice of trading ven- ues for our customers. In , we will combine our trading ﬂ oors in Chicago at our landmark  W. Jackson building. As evidenced by our results in , our products and services are increasingly important for portfolio managers, commercial and investment banks, chief ﬁ nancial oﬃ cers and corporate treasurers who are seeking tools for managing risk. In addition, our markets provide innumerable opportunities for customers willing to as- sume price risk for possible gain – all with the safety, soundness and capital eﬃ ciencies provided by CME Clearing. Given the cur- rent unrest in credit and capital markets, CME Clearing continues to beneﬁ t our customers by virtually eliminating counterparty risk. FOSTERING GROWTH IN OUR CORE BUSINESS For the third year in a row, all CME Group product lines achieved more than  percent year-over-year growth: (cid:129) Interest rate products volume averaged . million contracts per day. (cid:129) Equity index products volume averaged . million contracts per day. (cid:129) Foreign exchange products volume averaged , contracts per day, representing a notional value of $ billion. (cid:129) Commodity and alternative investment products volume averaged , contracts per day. In addition, CME Group electronic options averaged , contracts per day. While we still have a long way to go in growing this component of our business, we are very proud of the progress we have made to date and look forward to realizing the full potential of this business in the coming years. MEETING CUSTOMER NEEDS WITH INNOVATIVE NEW PRODUCTS ACROSS ALL MAJOR ASSET CLASSES In , we introduced innovative pro- ducts with global appeal in every major asset class: (cid:129) CME Lehman U.S. Aggregate Index futures, based on the pre- eminent benchmark debt index for U.S. investment grade ﬁ xed income investments, were launched as the ﬁ rst exchange-traded contracts on a broad-based, ﬁ xed income index. (cid:129) E-mini S&P SmallCap  Index futures, S&P SmallCap  Index futures, and options on the E-mini S&P MidCap  Index futures were added to our already-established suite of equity products. (cid:129) E-mini futures on the MSCI Emerging Markets Index – one of the most recognized benchmarks for emerging markets in the world – were introduced in an agreement with MSCI Barra. CME GROUP 2007 ANNUAL REPORT 5 (cid:129) E-mini futures on the FTSE/Xinhua China  index debuted in , making CME Group the ﬁ rst U.S. exchange to list futures on the Chinese equity market. (cid:129) Dry whey and wood pulp futures were introduced, as well as options on ethanol futures, giving customers new tools for man- aging risk in the energy industry. (cid:129) New real estate products – such as the Dow Jones U.S. Real Estate Index – were launched, along with weather-based prod- ucts such as futures and options on hurricanes. (cid:129) Plans to oﬀ er new trading opportunities in , such as volatility-quoted options, were announced. TARGETING THE OTC MARKET Ramping up our eﬀ orts to serve the over-the-counter (OTC) market, we launched ethanol swaps and continued our focus on FXMarketSpace – our centrally cleared OTC foreign exchange joint venture serving the $ trillion per day OTC FX market. We also introduced new dealer-to-client and enhanced dealer-to-dealer platforms through Swapstream, a subsidiary of CME Group that provides a global trading platform in the interest rate swaps trading community. In addition, CME Swaps on Swapstream launched in , becoming the ﬁ rst centrally cleared interest rate swap available to all OTC market participants, with the full beneﬁ ts of central counterparty clearing. ENHANCING OUR TECHNOLOGY Our CME Globex electronic platform handled record volume in . Th is was achieved during a period that included months of integration planning to bring e-CBOT products onto CME Globex. In January , we fully integrated e-CBOT products on CME Globex – producing greater eﬃ ciencies for our customers around the world. In addition, we launched the FIX/FAST market data format, enabling customers to receive market data more eﬃ ciently. We also introduced a number of speed and reliability upgrades in  that reduced the processing time of our match engine for options prod- ucts to less than ﬁ ve milliseconds. In , we plan to reduce the match engine processing time for our futures products by  percent. services to market participants in the United Kingdom and serve a wider range of U.K. customers’ risk management needs. We believe that our integrated clearing model continues to create eﬃ ciencies and conﬁ dence in our markets that have pro- duced tremendous long-term growth. Customer beneﬁ ts include improved market eﬃ ciencies through reduced capital requirements, margining and ﬁ nancial costs. BROADENING OUR GLOBAL REACH As we extend our business, we seek opportunities to develop globally relevant products and serve new customers in emerging markets. For example, in February  we acquired a  percent stake in the Brazilian Mercantile & Futures Exchange S.A. (BM&F), the world’s fourth largest futures exchange and the largest derivatives exchange in Latin America. In return, BM&F has taken a . percent stake in CME Group. Th is partnership, which will enable worldwide distribution of BM&F products through CME Globex, will provide our customers greater access to BM&F products as well as easier access to CME Group’s product suite for traders located in Brazil. Longer term, we are po- sitioned to pursue joint product development, oﬀ -shore collateral management services and clearing access arrangements. Our proposed relationship with the Korean Exchange (KRX), a premier capital marketplace for Northeast Asia, marks the ﬁ rst time KRX has embarked on a third-party agreement for its popular KOSPI  product. We also are working to accelerate the distribution of our products in China, in collabo- ration with the China Foreign Exchange Trading System and the People’s Bank of China. Further, we were granted status as a recognized body by the Dubai Financial Services Authority, enabling us to expand our global reach to serve the fast growing Middle Eastern marketplace. As part of these signiﬁ cant initiatives, we plan to establish regional telecommunication hubs in São Paulo, Seoul, Shanghai and Dubai to provide customers in these regions with more eﬃ cient and cost-eﬀ ective access to our markets. Th is will bring our total number of telecommunication hubs to nine. DELIVERING TRANSACTION PROCESSING SERVICES As a key element of our growth strategy, providing third-party transaction process- ing services continues to contribute greatly to our success. Th e second year of our relationship with the New York Mercantile Ex- change (NYMEX) resulted in $. million in revenues. NYMEX energy and metals volume on CME Globex increased more than  percent from , averaging , contracts per day. CME Group was granted status as a recognized overseas clearing house by the United Kingdom’s Financial Services Authority in . Th is will enable us to provide global clearing EXPLORING NEW BUSINESS OPPORTUNITIES Unquestionably,  was a watershed year. Our historic accomplishments were based on the collective strength and action of our employees, manage- ment team and board of directors. As we elevate our position in the global ﬁ nancial marketplace, however, we will face increasing competition. So we must continue to build relationships and seize opportunities that result in broader customer oﬀ erings, enhanced eﬃ ciencies and increased shareholder value. As we move forward, our mission and strategy remain intact – to improve the way mar- kets work for the beneﬁ t of all of our constituents. February ,  CRAIG S. DONOHUE Chief Executive Oﬃ cer PHUPINDER S. GILL President 6 CME GROUP 2007 ANNUAL REPORT PHUPINDER GILL President in New York From greater innovation to better execution to stronger growth, we have consistently elevated the importance of derivatives. 8 CME GROUP 2007 ANNUAL REPORT Th e formation of CME Group in  created a new and larger enterprise to beneﬁ t customers and shareholders. We continued to execute our long-term growth strategy – expanding our core business, entering new markets and broadening our global reach to serve the evolving needs of customers worldwide. Th e following pages illustrate the success of these initiatives by showcasing examples from Asia, Europe, Latin America and the United States. World Trade ONE-STOP AGRICULTURAL RISK MANAGEMENT CME Group boasts a wide array of commodity derivatives based on products such as corn, wheat, soybeans, livestock and dairy. Adding to the diversity of the agricultural complex, CME Group extended global trading hours for electronic mini-sized corn, soybean and wheat futures and launched futures on dry whey and wood pulp in . Our benchmark commodity products are now available on the CME Globex electronic trading platform, and accessible for trading around the clock. Th is enables organi- zations such as ZEN-NOH, Japan’s federation of agricultural co-operatives, to use CME Group markets to accommodate their portfolio management strategies, whether in Asia, Europe, Latin America or the United States. Photo in Tokyo, Japan. 10 CME GROUP 2007 ANNUAL REPORT ROBERT RAY Managing Director, International Sales and Commodity/Equity Products CME Group YOSHIHIRO SUGIYAMA Deputy General Manager, Livestock Production Department ZEN-NOH C. F. WONG Managing Director, Asia CME Group Energy Source NEW OPPORTUNITY IN OVER-THE-COUNTER MARKETS Given the growing importance of ethanol, made from corn and other products, in  CME Group launched Ethanol Basis Swaps, transactions that take place over the counter in private negotiations between counterparties, with completed transactions submitted to CME Clearing for processing. Companies such as FCStone, a recognized innovator in commodity risk intelligence, appreciate how CME Clearing protects the ﬁ nancial integrity of markets by serving as the counterparty to every transaction and virtually eliminating credit risk. CME Group has been authorized to provide global clearing services in the U.K. and extend the beneﬁ ts of central counterparty clear- ing to OTC market participants. Th e company also introduced new dealer-to-dealer and dealer-to-client platforms through its Swapstream subsidiary, to provide greater operational and cost eﬃ ciencies in trading OTC products. Photo at Hawkeye Renewables ethanol plant in Iowa Falls, Iowa. ERIC BOWLES Senior Vıce President FCStone Trading LLC DALE MICHAELS Managing Director, Credit and Market Risk Management CME Group CME GROUP 2007 ANNUAL REPORT 13 Foreign Exchange FAST, LIQUID, ANONYMOUS TRADING IN CRITICAL FX MARKETS CME Group oﬀ ers the world’s largest regulated FX trading complex, providing users with transparent pricing in a centralized marketplace while delivering equal access to  futures contracts and  options contracts based on  currencies. Th ese products oﬀ er risk management as well as investment opportunities to a broad array of sophisticated market participants such as Citigroup, a leading corporate and investment bank. To better serve its global customer base, CME Group has strengthened its presence in London – the heart of the global FX market – as well as in Singapore, resulting in increased trading opportunities during European and Asian trading hours. In ,  million contracts changed hands, of which more than  percent traded electronically, representing a notional value of $ trillion. Photo in Greenwich, England. ANDREW DURRANT Director, Head of Europe, Middle East and Africa FX Sales CME Group GAVIN WELLS Global Head of FX G-10 E-Commerce Citigroup CME GROUP 2007 ANNUAL REPORT 15 Integration Edge BENEFITS FROM A SINGLE ELECTRONIC PLATFORM AND TRADING FLOOR In January , CME Group successfully completed a key integration milestone, bringing e-CBOT products onto the CME Globex electronic trad- ing platform. Having access to the broadest array of benchmark products produces greater eﬃ ciencies for customers such as Allston Trading, a premier market maker on ﬁ nancial exchanges worldwide. Allston trades hundreds of stocks, bonds, currencies, futures, commodities, options and other ﬁ nancial instruments. CME Group also is on target to consolidate its open-outcry operations onto a single trading ﬂ oor at the historic CBOT building in Chicago in second-quarter . Photo in Chicago, Illinois. 16 CME GROUP 2007 ANNUAL REPORT BRYAN DURKIN Chief Operating Oﬃ cer CME Group JULIE HOLZRICHTER Managing Director, Operations CME Group ROBERT JORDAN President Allston Trading CÍCERO AUGUSTO VIEIRA NETO Chief Clearinghouse Oﬃ cer BM&F NEAL BRADY Managing Director, Business Development CME Group MARCO AURÉLIO TEIXEIRA Chief Financial Oﬃ cer BM&F New Markets STRATEGY TO SERVE LATIN AMERICAN CUSTOMERS To better serve customers in the expanding Latin American market, CME Group acquired a  percent stake in the Brazilian Mercantile & Futures Exchange (BM&F), the fourth largest futures exchange in the world. In return, BM&F has a . percent stake in CME Group, approved by BM&F shareholders February , . Th e partnership will provide world-wide distribution of BM&F products through the CME Globex electronic trading platform and enable BM&F customers to access CME Group products. In addition, CME Group customers will gain access to BM&F products. Th rough its open outcry, electronic and internet trading systems, BM&F – headquartered in São Paulo, Brazil – trades derivatives based on interest rates, foreign exchange, eq- uity indexes and agricultural commodities, as well as environmental products. Photo in São Paulo, Brazil. CME GROUP 2007 ANNUAL REPORT 19 Capital Gains WORLDWIDE ACCESS TO MAJOR EQUITY INDEXES CME Group equity products provide hedging and investment tools that are globally accessible and relevant to customers around the world. Th ese products cover the spectrum of small-, medium- and large-cap equity indexes that provide a proxy for the entire U.S. and global equity markets. By listing futures and options based on benchmark indexes from S&P, Dow Jones, NASDAQ, Nikkei, MSCI and FTSE, CME Group enables customers such as the Texas Permanent School Fund – which manages $ billion in as sets – to synthetically replicate exposure to the world’s most important benchmarks on a cost-eﬀ ective basis for their beneﬁ ciaries. Photo in Austin, Texas. KARIM HIRANI Director of Equities Texas Permanent School Fund 20 CME GROUP 2007 ANNUAL REPORT HOLLAND TIMMINS, CFA Chief Investment Oﬃ cer Texas Permanent School Fund CARLOS CASTRO Portfolio Manager Texas Permanent School Fund SCOT WARREN Managing Director, Equity Products CME Group Yield Curve TOOLS TO MANAGE INTEREST RATE CHANGE CME Group interest rate products span the entire U.S. dollar-denominated yield curve. Investment ﬁ rms such as T. Rowe Price can use CME Group products to manage short-, medium- and long-term interest rate risk with products based on Fed Funds, LIBOR, interest rate swaps, ﬁ xed income indices, credit default swaps and U.S. Treasuries. CME Globex facilitates greater eﬃ ciencies and new trading opportunities, and our U.S. Treasury futures and options contracts provide clients with the most transparent, liquid and eﬃ cient means for managing long-term U.S. interest rate risk. In , these contracts averaged . million traded per day. Photo at T. Rowe Price headquarters in Baltimore, Maryland. 22 CME GROUP 2007 ANNUAL REPORT DAN SHACKELFORD Vice President T. Rowe Price Group JONATHAN KRONSTEIN Associate Director, Treasuries and Index Products CME Group Global Services CUSTOMIZED SOLUTIONS FOR RISK-MANAGEMENT NEEDS CME Group’s deep, liquid markets and state-of-the-art electronic trading platform are increasingly attractive to global hedge funds such as Barep Asset Management, which specializes in alternative asset management. Since , CME Group has ﬁ elded a team focused on the needs of hedge funds and broker services providers around the globe, bringing large investment pools together with CME Group’s liquid markets. CME Group continues to oﬀ er innovative opportunities for funds, such as equity clearing member- ships, family of funds memberships, corporate memberships and other pricing beneﬁ ts and incentives. By expanding services to hedge funds globally, CME Group enables them to manage their risk-and-return objectives successfully. Photo in Paris, France. THIERRY DE RYCKE Head–International Funds Barep Asset Management RENAUD HUCK Associate Director, Sales and Marketing, Europe, Middle East, Africa CME Group CME GROUP 2007 ANNUAL REPORT 25 JAMES E. PARISI Chief Financial Oﬃ cer in Chicago With a net cash position of nearly $ million, our goal is to remain ﬂ exible in order to pursue attractive opportunities in our dynamic marketplace. Cash earnings – the company’s primary metric for measuring free cash ﬂ ow – grew 60 percent in 2007 to $644 million. INTERVIEW WITH CFO JAMIE PARISI WITH THE THREAT OF A POTENTIAL RECESSION IN 2008, HOW WOULD YOU DESCRIBE CME GROUP’S POSITION TO INVESTORS? Our position is strong relative to other ﬁ nancial services compa- nies. Since last August, our business has been running above the normal volume growth trend line. Many of the positive trends we have highlighted in the past continue, including increasingly so- phisticated investment strategies, greater activity from high-velocity traders, growth in the number of global participants, and deeper appreciation of the exchange-traded markets’ beneﬁ ts versus over- the-counter derivatives markets. We have seen greater uncertainty and volatility in the market- place, which has stressed many ﬁ nancial services companies. CME Group, on the other hand, thrives in this type of environment, as demonstrated by upward trends in both our volume and open interest levels. Our products allow market participants to manage risk across a broad array of asset classes, so when economic and geopolitical risks escalate, our volumes tend to elevate. All of this growth requires investment – investment in people, infrastructure and innovative ideas. We are undertaking this invest- ment in a very disciplined fashion. At the same time, one of the beneﬁ ts of our merger will be signiﬁ cant expense savings, which we expect to exceed $ million annually by the end of . HOW WOULD YOU DESCRIBE YOUR BALANCE SHEET, AND WHAT KIND OF CAPACITY DO YOU HAVE TO TAKE ON DEBT? I would describe our balance sheet with two words: rock solid. Currently, our net cash position is approximately $ million, deﬁ ned as cash plus marketable securities less short-term debt. We generate a signiﬁ cant amount of free cash ﬂ ow in our business, giving us the ability to invest in future organic growth and strategic assets while continuing to pay out dividends tied to our growing cash earnings. Following the CBOT merger, we spent approximately $ billion to repurchase our own shares. In the short term, our goal is to remain ﬂ exible, so that we can pursue attractive opportunities that arise in our dynamic market. In the medium to long run, CME Group has the ability to adjust its capital structure and take on a prudent amount of debt. Th is can enhance shareholder value so long as it is well managed, with an eye to maintaining a high degree of creditworthiness and the ﬁ nancial strength of our company and our clearing house. WHICH FINANCIAL METRIC IS MOST IMPORTANT FOR CME GROUP? We continue to be focused on generating free cash ﬂ ow. In , we generated $ million in cash earnings, which is the primary metric we use to measure cash ﬂ ow. Th is represented a  percent increase from . We calculate cash earnings as net income ($ million) plus depreciation ($ million) plus after-tax amortization of purchased intangibles ($ million) plus after-tax stock-based compensation ($ million) minus capital expenditures ($ million). By measuring cash earnings, we help align employee and share- holder interests. Under our current dividend policy, for instance, we pay a dividend of approximately  percent of prior year’s cash earn- ings, while our employee incentive bonuses are based on achieving progressively higher annual cash earnings targets, which means our team is focused on growth and expense discipline. YOU MENTIONED INVESTMENT IN PEOPLE. CAN YOU EXPOUND ON THAT? As CME Group has evolved over time, we have been able to attract the best and the brightest talent. Th is is true across the entire exchange, and our ﬁ nance team is a great example. Our team has several important characteristics in common, including integrity, ﬁ nancial discipline, exchange and domain knowledge, and an in- credible work ethic. Our accounting group has done a great job of integrating the ﬁ nancial controls following the merger. Th ey also have helped to foster the transparency that you ﬁ nd in our ﬁ nancial statements. Th e corporate ﬁ nance team works in a dis- ciplined, collaborative way with all other divisions as we analyze the growth opportunities which are available, whether organic, by partnership or through M&A. Th e strategic sourcing group has been instrumental in negotiating with major technology vendors as they strive for expense discipline throughout the compa- ny. Finally, our investor relations group provides world-class com- munications in a timely and insightful way. CME GROUP 2007 ANNUAL REPORT 27 BREAKTHROUGH PERFORMANCE IN 2007 0 5 2 , 2 9 3 7 , 1 4 3 1 , 1 4 5 1 4 3 , 1 8 4 0 , 1 7 8 7 0 2 6 6 5 9 0 3 7 2 5 4 3 6 2 4 2 8 8 3 6 3 6 4 4 3 3 5 3 0 3 2 2 6 1 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 TOTAL TRADING VOLUME (in millions of round turn trades) TOTAL ELECTRONIC TRADING VOLUME (in millions of round turn trades) NOTIONAL VALUE (in trillions of dollars) YEAR-END OPEN INTEREST (in millions of contracts) INTEREST RATE PRODUCTS (average daily volume in thousands) EQUITY PRODUCTS (average daily volume in thousands) FOREIGN EXCHANGE COMMODITY AND ALTERNATIVE PRODUCTS (average daily volume in thousands) INVESTMENT PRODUCTS (average daily volume in thousands) 3 9 0 7, 4 4 7 , 2 9 6 5 8 2 7 4 3 7 , 1 9 8 3 , 1 1 6 1 , 1 5 5 0 , 1 3 5 4 4 3 3 2 0 2 5 3 1 , 8 7 0 0 3 8 3 5 2 0 7 , , 1 4 3 2 , 1 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 ELECTRONIC OPEN OUTCRY ELECTRONIC OPEN OUTCRY ELECTRONIC OPEN OUTCRY ELECTRONIC OPEN OUTCRY PRIVATELY NEGOTIATED PRIVATELY NEGOTIATED PRIVATELY NEGOTIATED PRIVATELY NEGOTIATED 8 5 7 3 5 4 7 3 Average daily volumes reﬂ ect the combined information of CME Holdings and CBOT Holdings beginning on July 13, 2007 28 CME GROUP 2007 ANNUAL REPORT BREAKTHROUGH PERFORMANCE IN 2007 Record Financial Results Total revenues of $1.8 billion, up 61 percent Net income of $659 million, up 62 percent Record Volume Total volume of 2.2 billion Interest rate products Foreign exchange products Commodity and alternative contracts average daily volume of average daily volume of investment products 7.1 million contracts 569,000 contracts average daily volume of 728,000 contracts Record Electronic Growth Electronic trading volume Electronically traded E-mini equity products Electronically traded of 1.7 billion contracts, Eurodollar futures contracts average daily volume of FX products average up 82 percent average daily volume of 2.6 million contracts, daily volume of 524,000 2.2 million, representing up 62 percent contracts, up 32 percent 92 percent of Eurodollar futures volume Other Records Notional value traded Open interest of 75 million $1.1 quadrillion, up 38 percent in futures and options contracts in August FINANCIAL INFORMATION 30 Selected Financial Data 59 Management’s Annual Report 63 Consolidated Statements of Income 31 Management’s Discussion and on Internal Control Over 64 Consolidated Statements of Analysis of Financial Condition Financial Reporting Shareholders’ Equity and Results of Operations 60 Reports of the Independent 65 Consolidated Statements of Cash Flows 57 Quantitative and Qualitative Registered Public Accounting Firm 66 Notes to Consolidated Disclosures About Market Risk 62 Consolidated Balance Sheets Financial Statements CME GROUP 2007 ANNUAL REPORT 29 Selected Financial Data Effective July 12, 2007, CBOT Holdings, Inc. (CBOT Holdings) merged with Chicago Mercantile Exchange Holdings Inc. (CME Holdings) to become CME Group Inc. (CME Group). The following table includes the consolidated results of CME Holdings and its subsidiaries for 2003, 2004, 2005, 2006 and January 1, 2007 through July 12, 2007. The ﬁ nancial results of CME Holdings and CBOT Holdings are combined in the consolidated ﬁ nancial results of CME Group for 2007 beginning on July 13, 2007. The following selected income statement and balance sheet data should be read in conjunction with the audited ﬁ nancial statements, related notes and other ﬁ nancial information included elsewhere herein. (in millions, except per share data) Income Statement Data: Total revenues Operating income Non-operating income and expense Income before income tax Net income Earnings per common share: Basic Diluted Cash dividends per share Balance Sheet Data: Total assets Shareholders’ equity 2007 2006 2005 2004 2003 YE AR EN D ED O R AT D ECEMBER 31 $ 1,756.1 1,050.5 45.3 1,095.8 658.5 $ 15.05 14.93 3.44 $ 1,089.9 621.1 50.6 671.7 407.3 $ 11.74 11.60 2.52 $ 889.8 477.9 30.5 508.4 306.9 $ 8.94 8.81 1.84 $ 721.6 355.8 11.8 367.7 219.6 $ 6.55 6.38 1.04 $ 20,306.2 12,305.6 $ 4,306.5 1,519.1 $ 3,969.4 1,118.7 $ 2,857.5 812.6 $ 531.0 201.7 4.4 206.1 122.1 $ 3.74 3.60 0.63 $ 4,872.6 563.0 The following table presents key statistical information on the volume of contracts traded, expressed in round turn trades, and notional value of contracts traded. The 2007 volume data includes average daily volume for CBOT products for the period July 13, 2007 through December 31, 2007. All amounts exclude our TRAKRS, Swapstream and auction-traded products. (in thousands, except notional value) 2007 2006 2005 2004 2003 YE AR EN D ED O R AT D ECEMBER 31 Average Daily Volume: Product Lines: Interest rates Equities Foreign exchange Commodity and alternative investment Total Average Daily Volume Method of Trade: Open outcry Electronic Privately negotiated Total Average Daily Volume Other Data: 7,093 2,744 569 728 11,134 2,276 8,661 197 11,134 3,078 1,734 453 78 5,343 1,483 3,808 52 5,343 2,380 1,389 334 55 4,158 1,214 2,895 49 4,158 1,705 1,161 202 43 3,111 1,281 1,786 44 3,111 1,234 1,055 135 37 2,461 1,382 1,041 38 2,461 Total Notional Value (in trillions) $ 1,134 $ 824 $ 638 $ 463 $ 334 Total Trading Volume (round turn trades) 2,249,632 1,341,111 Open Interest at Year End (contracts) 53,981 35,107 1,047,909 30,083 787,186 22,478 620,289 16,301 30 CME GROUP 2007 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows: Overview: Includes a discussion of our business structure; current economic and industry-wide trends relevant to our business; our current strategy to address opportunities, challenges and risks; and our primary sources of operating and non-operating revenues and expenditures. Critical Accounting Policies: Provides an explanation of accounting policies, estimates and assumptions material to our ﬁ nancial results. Recent Accounting Pronouncements: Includes an evaluation of recent accounting pronouncements and the potential impact of their future adoption on our ﬁ nancial results. Results of Operations for 2007 Compared with 2006. Results of Operations for 2006 Compared with 2005. Liquidity and Capital Resources: Includes a discussion of our future cash requirements, capital resources and expenditures, and ﬁ nancing arrangements. Effective July 12, 2007, CBOT Holdings, Inc. (CBOT Holdings) merged with Chicago Mercantile Exchange Holdings Inc. (CME Holdings) to become CME Group Inc. (CME Group). The following discussion and analysis includes only the consolidated results of CME Holdings and its subsidiaries for 2005, 2006 and for January 1, 2007 through July 12, 2007. The ﬁ nancial results of CME Holdings and CBOT Holdings are included in the consolidated ﬁ nancial results of CME Group beginning on July 13, 2007. References in this discussion and analysis to “we” and “our” are to CME Group and its consolidated subsidiaries, collectively. References to our “exchange” are to Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT) and their subsidiaries, collectively. Overview BUSINESS STRUCTURE CME Group, a Delaware stock corporation, is the holding company for CME, CBOT and their subsidiaries. The holding company structure is designed to provide strategic and operational ﬂ exibility. CME Group’s Class A common stock is listed on the New York Stock Exchange and The Nasdaq Global Select Market under the ticker symbol “CME.” CME and CBOT are designated contract markets for the trading of futures and options on futures contracts. Futures contracts and options on futures contracts provide investors with vehicles for protecting against, and potentially proﬁ ting from, price changes in ﬁ nancial instruments and physical commodities. Futures contracts are legally binding standardized agreements to buy or sell a ﬁ nancial instrument or commodity, specifying quantity and quality at a set price on a future date. Certain futures contracts, such as commodities and foreign exchange products, may result in physical delivery of the product traded. Other futures contracts, including those for equity index and interest rate products, are cash settled and do not involve physical delivery. To provide additional ﬂ exibility to the investment community, we also offer trading in options on futures contracts. These contracts offer the customer the right, but not the obligation, to buy or sell an underlying futures contract at a particular price by a particular time. We are a global exchange with customer access available all over the world. Our customers consist of professional traders, ﬁ nancial institutions, individual and institutional investors, major corporations, manufacturers, producers and governments. Customers include both members of the exchange and non-members. CME GROUP 2007 ANNUAL REPORT 31 We offer our customers the opportunity to trade futures contracts and options on futures contracts on a range of products including those based on interest rates, equities, foreign exchange, commodities and alternative investments. Our products provide a means for hedging, speculating and allocating assets. We identify new products by monitoring economic trends and their impact on the risk management and speculative needs of our existing and prospective customers. Our major product lines are traded through our electronic trading platforms and our open outcry trading ﬂ oors. These execution facilities offer our customers immediate trade execution and price transparency. As of January 2008, all products, with the exception of CBOT metals products, are traded on the CME Globex platform. CBOT metals products continue to be traded on the e-CBOT platform. We plan to consolidate our trading ﬂ oors in the second quarter of 2008. In addition, trades can be executed through privately negotiated transactions that are cleared and settled through our clearing house. We also offer trading in medium- and long-term interest rate swaps denominated in euros, Swiss francs, pounds sterling and U.S. dollars, which are traded on the Swapstream platform. Our clearing house clears, settles and guarantees every futures and options contract traded through our exchange. Ownership and control of our own clearing house enables us to capture the revenue associated with both the trading and clearing of our products. Ownership also enables us to more quickly and efﬁ ciently bring new products to market through coordination of our clearing functions with our product development, technology, market regulation and risk management activities. Our clearing house performance guarantee is an important function of our business. Because of this guarantee, our customers do not need to evaluate the credit of each potential counterparty or limit themselves to a selected set of counterparties. This ﬂ exibility increases the potential liquidity available for each trade. Additionally, the substitution of our clearing house as the counterparty to every transaction allows our customers to establish a position with one party and then to offset the position with another party. This contract offsetting process provides our customers with ﬂ exibility in establishing and adjusting positions and provides for performance bond efﬁ ciencies. To ensure performance of counterparties, we establish and monitor ﬁ nancial requirements for our clearing ﬁ rms and mark-to-market their positions at least twice a day. We also set minimum performance bond requirements for our traded products. In the unlikely event of a payment default by a clearing ﬁ rm, we would ﬁ rst apply assets of that clearing ﬁ rm to cover its payment obligation. These assets include security deposits, performance bonds and any other available assets, such as the proceeds from the sale of pledged Class A and Class B common stock and associated trading rights of the clearing ﬁ rm at our exchange that are owned by or assigned to the clearing ﬁ rm. In addition, we would make a demand for payment pursuant to any applicable guarantee provided to the exchange by the parent company of a clearing ﬁ rm. Thereafter, if the payment default remains unsatisﬁ ed, we would use, in order, CME’s surplus funds, security deposits of other clearing ﬁ rms and funds collected through an assessment against all other solvent clearing ﬁ rms to satisfy the deﬁ cit. 32 CME GROUP 2007 ANNUAL REPORT INDUSTRY TRENDS Derivatives exchanges that provide markets for futures and options have become a global growth industry, with a compound annual growth rate of 36% from 2002 through June 2007, based on notional value. By comparison, the over-the-counter derivatives market has grown at a compound annual growth rate of 35% during the same period. There are a number of trends that we believe will continue to drive growth and innovation in our industry. They include: (cid:129) A greater need for risk management and hedging tools in an increasingly uncertain geopolitical and economic climate; (cid:129) Growing investor sophistication regarding derivatives and risk transfer markets; (cid:129) A shift in asset management strategies away from passive buy-and-hold equity investment strategies toward more active strategies including those involving alternative investments and asset classes; and (cid:129) Growth in hedge funds and managed funds as alternative investment vehicles designed to generate more trading-based returns than other investment strategies. These types of alternative investment vehicles often utilize exchange-traded derivatives contracts. Changing market dynamics also have led to increasing competition in all aspects of our business from both domestic and international sources. We face competition from other futures, securities and securities option exchanges; over-the-counter markets and clearing organizations; consortia formed by our members and large market participants; alternative trade execution facilities; and technology ﬁ rms, including market data distributors and electronic trading system developers. We expect competition to continue to intensify, particularly as a result of technological advances and reductions in the regulatory requirements for the development of products and markets that are competitive with our own. Additional factors that may intensify competition in the future include: (cid:129) The growth of recently-formed for-proﬁ t exchanges; (cid:129) The consolidation of exchanges, customers or intermediaries; (cid:129) An increased demand for electronic trading and electronic order routing services; and (cid:129) The increased ability of other exchanges to leverage their technology investment and electronic distribution to enter new markets and list products that compete with our own. STRATEGY Our current strategy speciﬁ cally focuses on leveraging our benchmark products, scalable infrastructure and clearing and trade matching technologies to beneﬁ t customers. This strategy will enable us to continue to evolve into a more broadly diversiﬁ ed ﬁ nancial exchange that offers trading and clearing solutions across additional products and asset classes. Our strategy includes coordinated efforts to: (cid:129) Grow organically by broadening our product range by extending our current product lines and introducing innovative new products in both the exchange and over-the counter markets; (cid:129) Provide third-party transaction processing, clearing and other trading related services; (cid:129) Leverage our technology by expanding customer access to our markets and services, enhancing and offering additional trade execution choices, and improving our market data products; (cid:129) Explore new business opportunities such as joint ventures, alliances and selective business combinations; and (cid:129) Expand and diversify our customer base worldwide. CME GROUP 2007 ANNUAL REPORT 33 PRIMARY SOURCES OF OPERATING REVENUE CLEARING AND TRANSACTION FEES A majority of our revenue is derived from clearing and transaction fees, which include electronic trading fees, surcharges for privately-negotiated transactions and other volume-related charges for contracts executed through our trading venues. Because clearing and transaction fees are assessed on a per-contract basis, revenues and proﬁ tability ﬂ uctuate with volume changes. In addition to the trends noted earlier, our revenues and trading volume tend to increase during periods of economic and geopolitical uncertainty. This is because our customers seek to manage their exposure to, or speculate on, the market volatility resulting from uncertainty. In addition, our volume can be seasonal, and historically, we have experienced higher sequential volume during the ﬁ rst and second quarters followed by decreases in the third and fourth quarters of the calendar year. However, these patterns may be altered by the impact of economic and political events, the launch of new products, mergers and acquisitions as well as other factors. While volume has the most signiﬁ cant impact on our clearing and transaction fees revenue, there are four other factors that also inﬂ uence this source of revenue: • Rate structure; • Mix of products traded; • Trading venue; and • The percentage of trades executed by customers who are members compared with non-member customers. Rate structure Customers beneﬁ t from volume discounts and limits on fees as part of our effort to increase liquidity in certain products. We may periodically change fees, volume discounts, limits on fees and member discounts, perhaps signiﬁ cantly, based on our review of operations and the business environment. As a result of their rate structure, Total Return Asset Contracts (TRAKRS), Swapstream products and auction-traded products are excluded from disclosures of trading volume and average rate per contract in this discussion and analysis. Clearing and transaction fees on these products are immaterial relative to our other products. TRAKRS are exchange-traded non-traditional futures contracts that trade electronically on the CME Globex electronic platform. Swapstream offers interest rate swap products through its inter- dealer electronic trading platform. Auction-traded products, which included CME economic derivatives, were previously traded on the CME Auction Markets platform through July 2007. Product mix We offer trading of futures and options on futures contracts on a wide-ranging set of products based on interest rates, equities, foreign exchange, commodities and alternative investments. Rates are varied by product in order to optimize revenue on existing products and support introduction of new products to encourage trading volume. Trading venue Our exchange is an international marketplace that brings together buyers and sellers mainly through our electronic trading platforms as well as through open outcry trading on our trading ﬂ oors and privately negotiated transactions. Any customer guaranteed by a clearing ﬁ rm is able to obtain direct access to our electronic platforms. Open outcry trading is conducted exclusively by our members, who may execute trades on behalf of customers or for themselves. Typically, customers executing trades through our electronic platforms are charged fees for using the platform in addition to the fees assessed on all transactions executed on our exchange. Customers entering into privately negotiated transactions also incur additional charges beyond the fees assessed on all transactions. Member/non-member mix Generally, member customers are charged lower fees than our non-member customers. Holding all other factors constant, revenue decreases if the percentage of trades executed by members increases, and increases if the percentage of non-member trades increases. 34 CME GROUP 2007 ANNUAL REPORT QUOTATION DATA FEES We receive quotation data fees from the dissemination of our market data to subscribers. Our market data services are provided primarily through third-party distributors. Subscribers can obtain access to real-time, delayed and end-of-day quotation, trade and summary market data for our products. Users of our basic service receive real-time quotes and pay a ﬂ at monthly fee for each screen, or device, displaying our market data. Alternatively, customers can subscribe to market data provided on a limited group of products. The fee for this service is also a ﬂ at rate per month. Pricing for our market data services is based on the value of the service provided, our cost structure for the service and the price of comparable services offered by our competitors. Increases or decreases in our quotation data fees revenue is inﬂ uenced by changes in our price structure for existing market data offerings, introduction of new market data services and changes in the number of devices in use. General economic factors that affect the ﬁ nancial services industry, which constitutes our primary customer base, also inﬂ uence revenue from our market data fees. PROCESSING SERVICES To further diversify the range of services we offer, we have entered into clearing and transaction processing agreements with other exchanges. This revenue will ﬂ uctuate as the trading volume of these exchanges ﬂ uctuates. This revenue includes fees for listing energy and metal futures products on the CME Globex platform for the New York Mercantile Exchange (NYMEX). Although trading under a prior agreement with NYMEX ended in November 2005, trading under a new 10-year agreement began in June 2006. Additionally, in 2007, we began providing clearing and risk management services for trades executed at FXMarketSpace Limited (FXMS), our joint venture with Reuters Group PLC (Reuters), which offers centrally-cleared over-the-counter trading of foreign exchange spot contracts. We also collect fees for processing trades for certain CME clearing ﬁ rms that execute trades at OneChicago, LLC (OneChicago), our joint venture in single stock futures and futures on narrow-based stock indexes. Our agreement with CBOT to provide clearing and related services for CBOT products was terminated upon consummation of the merger. Processing services revenue includes fees from this agreement in 2005, 2006 and for the period January 1 through July 12, 2007. OTHER SOURCES Other sources of revenue include access and communication fees and revenue from various services related to our operations. Access and communication fees are the connectivity charges to customers of the CME Globex and e-CBOT platforms, to our market data vendors and to direct market data customers as well as charges to members and clearing ﬁ rms that utilize our various telecommunications networks and communications services. Access fee revenue varies depending on the type of connection provided to customers. Revenue from communication fees is largely dependent on open outcry trading, as a signiﬁ cant portion relates to telecommunications on our trading ﬂ oors. Other revenues include rent charged to third party tenants as well as ancillary charges for utilities, parking and miscellaneous services provided to tenants. As part of our merger with CBOT Holdings, we acquired three buildings with over 1.5 million square feet of commercial space in Chicago’s central business district. The retail and ofﬁ ce space is rented primarily to third party tenants, including company shareholders and exchange customers. All tenants pay market rates for rent. The majority of tenant leases have terms of three to ﬁ ve years, with larger tenants having leases for up to nineteen years. These revenues are generally affected by market rental rates, lease renewals and business conditions in the ﬁ nancial services industry in which most of our tenants operate. Other revenues also includes fees for administering our Interest Earning Facility (IEF) program, trade order routing, and various services to members and clearing ﬁ rms. We offer clearing ﬁ rms the opportunity to invest cash performance bonds in our various IEF offerings. These clearing ﬁ rms receive interest income, and we receive a fee based on total funds on deposit. In addition, other revenues includes trading gains and losses generated by GFX Corporation (GFX), our wholly-owned subsidiary that trades primarily in foreign exchange futures contracts to enhance liquidity in our electronic markets for these products. CME GROUP 2007 ANNUAL REPORT 35 PRIMARY OPERATING EXPENSES With the exception of license fees paid for the trading of our equity index contracts and a component of our trading facility rent that is related to open outcry trading volume, most of our expenses do not vary directly with changes in our trading volume. COMPENSATION AND BENEFITS Compensation and beneﬁ ts expense is our most signiﬁ cant expense and includes employee wages, bonuses, stock-based compensation, beneﬁ ts and employer taxes. Changes in this expense are driven by ﬂ uctuations in the number of employees, increases in wages as a result of inﬂ ation or labor market conditions, rates for employer taxes and other cost increases affecting beneﬁ t plans. In addition, this expense is affected by the composition of our work force, which includes a growing percentage of technology-related employees. The expense associated with our bonus and stock-based compensation plans can also have a signiﬁ cant impact on this expense category and may vary from year to year. The bonus component of our compensation and beneﬁ ts expense is based on our ﬁ nancial performance. Under the performance criteria of our annual incentive plan, the bonus funded under the plan would be the “target” level if we achieve the cash earnings target established by the Compensation Committee of our Board of Directors. Cash earnings are deﬁ ned as net income excluding tax-effected amortization of purchased intangibles, depreciation and amortization expense, and tax-effected stock-based compensation expense less capital expenditures. Under the plan, if our actual cash earnings equal 80% of the established target for a given year, the bonus will be reduced by approximately 50% of the target bonus amount. There will be no bonus if our cash earnings are less than 80% of the cash earnings target, other than for non-exempt employees who may receive a bonus under our discretionary bonus program. If our actual cash earnings equal 120% of the target or higher, the bonus would be increased by approximately 50% from the targeted bonus amount, which is the maximum amount established by the Compensation Committee. If our performance is between the threshold performance level of 80% of the cash earnings target and the maximum performance level of 120% of the cash earnings target, the bonus will be calculated based on the level of performance achieved. The Compensation Committee may adjust the cash earnings calculation and the target level of performance for material, unplanned revenue, expense or capital expenditures to meet intermediate to long-term growth opportunities. Beginning in 2007, the cash earnings calculation for bonus purposes excludes investment income and interest expense as well as expense resulting from the guarantee of the Chicago Board Options Exchange, Inc. (CBOE) exercise right privileges. Targeted cash levels have been adjusted accordingly for these changes in the cash earnings calculation. Stock-based compensation is a non-cash expense related to stock options and restricted stock grants. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires the use of the fair value method of accounting for share-based payments, which we previously adopted in 2002 under SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) also requires that we estimate expected forfeitures of stock grants instead of the previous practice of accounting for forfeitures as they occurred. Stock-based compensation varies depending on the quantity and fair value of options granted. Fair value is derived using the Black-Scholes model with assumptions about our dividend yield, the expected volatility of our stock price based on an analysis of implied and historical volatility, the risk-free interest rate and the expected life of the options granted. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense results from the depreciation of long-lived assets purchased, as well as the amortization of purchased and internally developed software. This expense has increased consistently from year to year due to signiﬁ cant technology investments in equipment and software. Depreciable useful lives have remained relatively consistent since January 1, 2004. As a result of our merger with CBOT Holdings, we acquired three commercial buildings. We utilize space in these buildings as ofﬁ ces and a trading ﬂ oor. Depreciation and amortization on the building and building improvements as well as other furniture, ﬁ xtures and equipment acquired in the merger has been recorded since the merger closed on July 12, 2007. OTHER EXPENSES We incur additional ongoing expenses for communications, technology support services and various other activities necessary to support our operations. • Communications expense consists primarily of costs for network connections to our electronic trading platforms and some market data customers; telecommunications costs of our exchange; and fees paid for access to external market data. This expense is affected primarily by the growth of electronic trading, our capacity requirements and by changes in the number of telecommunications hubs and connections which allow customers outside the United States access to our electronic trading platforms directly. 36 CME GROUP 2007 ANNUAL REPORT (cid:129) Technology support services consist of costs related to maintenance of the hardware and software required to support our technology. Our technology support services costs are driven by system capacity, functionality and redundancy requirements. (cid:129) Professional fees and outside services expense includes costs of consulting services provided for major strategic and technology initiatives as well as legal and accounting fees. This expense ﬂ uctuates primarily as a result of changes in services required to complete initiatives. (cid:129) Amortization of purchased intangibles includes amortization of intangibles obtained in our merger with CBOT Holdings as well as other asset and business acquisitions. These intangible assets consist mainly of customer relationships, the Dow Jones & Company, Inc. (Dow Jones) licensing agreement, and lease-related intangible assets. (cid:129) Occupancy and building operations expense consists of costs related to leased and owned property including rent, maintenance, real estate taxes, utilities and other related costs. Our ofﬁ ce space is located primarily in Chicago with smaller ofﬁ ces located in Washington, D.C., London, Hong Kong, Sydney and Tokyo. Additionally, we have trading facilities in Chicago as well as data centers in various U.S. locations. Occupancy costs are relatively stable, although our CME trading ﬂ oor rent ﬂ uctuates to a limited extent based on open outcry trading volume. (cid:129) Licensing and other fee arrangements expense consists primarily of license fees paid as a result of trading volume in equity index products. This expense ﬂ uctuates with changes in equity index product trading volume and fee structure changes in the licensing agreements. Subsequent to the merger with CBOT Holdings, this expense includes licensing fees for trading volume in Dow Jones products. During 2005 and 2006, under a prior agreement with Singapore Exchange Limited (SGX), revenue sharing expense ﬂ uctuated based on our percentage of electronically traded CME Eurodollar contracts up to a maximum expense of $0.3 million per month. We recently renewed this agreement, and effective February 2007, the revenue sharing provisions of the agreement terminated and the expense was eliminated. (cid:129) Other expense includes marketing-related as well as general administrative costs. Marketing, advertising and public relations expense consists primarily of media, print and other advertising expenses, expenses incurred as part of various brand campaigns as well as the promotion of new and existing products and services. NON-OPERATING INCOME AND EXPENSE Non-operating income and expense includes investment income, securities lending interest income and expense, interest expense, expense related to the guarantee of exercise right privileges and equity in losses of unconsolidated subsidiaries. (cid:129) Investment income represents income generated by the short-term investment of our excess cash balances and clearing ﬁ rms’ cash performance bonds and security deposits; interest income and net realized gains and losses from our marketable securities and long-term equity method investments as well as gains and losses on trading securities in our non-qualiﬁ ed deferred compensation plans. The investment results of our non-qualiﬁ ed deferred compensation plans do not affect our net income as there is an equal and offsetting impact in our compensation and beneﬁ ts expense. Investment income is inﬂ uenced by the availability of funds generated by operations, market interest rates and changes in the levels of cash performance bonds deposited by clearing ﬁ rms. (cid:129) Securities lending transactions utilize a portion of the securities that clearing ﬁ rms deposit to satisfy their proprietary performance bond requirements. Substantial interest expense is also incurred as part of this securities lending activity. Net interest income from securities lending is impacted by changes in short-term interest rates and the level of demand for the securities available for loan. (cid:129) Interest expense is due primarily to a commercial paper program with various ﬁ nancial institutions initiated in September 2007 in conjunction with a tender offer to repurchase Class A common stock. Under the program, we may sell unsecured short-term promissory notes. (cid:129) Expense related to our guarantee of exercise right privileges (ERPs) is a result of our merger with CBOT Holdings. Under the terms of the merger agreement, eligible holders of CBOE ERPs could elect to sell us their ERP for $250,000 per privilege. Eligible holders that did not elect to sell their ERPs are entitled to a maximum guaranteed payment of $250,000 from us upon resolution of the lawsuit between CBOT and CBOE. This expense represents the estimated fair value of our guarantee as of the end of the period, which is based in part on the expected outcome of the litigation. Periodic expense is impacted by changes in the fair value of the ERP. (cid:129) Equity in losses of unconsolidated subsidiaries includes losses from our investments in FXMS and OneChicago. CME GROUP 2007 ANNUAL REPORT 37 Critical Accounting Policies The notes to our consolidated ﬁ nancial statements include disclosure of our signiﬁ cant accounting policies. In establishing these policies within the framework of accounting principles generally accepted in the United States, management must make certain assessments, estimates and choices that will result in the application of these principles in a manner that appropriately reﬂ ects our ﬁ nancial condition and results of operations. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to affect our ﬁ nancial position and operating results. While all decisions regarding accounting policies are important, there are certain accounting policies that we consider to be critical. These critical policies, which are presented in detail in the notes to our consolidated ﬁ nancial statements, relate to goodwill and intangible assets, revenue recognition, income taxes, internal use software costs and stock-based compensation. GOODWILL AND INTANGIBLE ASSETS In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we review goodwill and intangible assets with indeﬁ nite lives for impairment on an annual basis and whenever events or circumstances indicate the carrying value may not be recoverable. The provisions of SFAS No. 142 require that a two-step impairment test be performed on goodwill. In the ﬁ rst step, the fair value of each reporting unit is compared to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount, no impairment exists and we are not required to perform further testing. If the carrying amount exceeds its fair value, the second step must be performed to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss is recorded in an amount equal to that excess. Determining the fair value of a reporting unit is judgmental in nature and involves the use of signiﬁ cant estimates and assumptions. Indeﬁ nite-lived intangible assets are assessed for impairment by comparing their fair values to their carrying values. If the carrying value of an indeﬁ nite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the difference. Intangible assets subject to amortization are also evaluated for impairment, when indicated by a change in circumstances, pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The impairment testing requires management to estimate the fair value of the assets and record an impairment loss for the excess of the carrying value over the fair value. The estimate of the fair value of all intangible assets is generally determined on the basis of discounted future cash ﬂ ows. In estimating the fair value, management must make assumptions and projections regarding such items as future cash ﬂ ows, future revenues, future earnings and other factors. Such assumptions are subject to change as a result of changing economic and competitive conditions. REVENUE RECOGNITION Our revenue recognition policies comply with Staff Accounting Bulletin No. 101 on revenue recognition. Our revenue is derived primarily from the clearing and transaction fees we assess on each contract executed through our trading venues and cleared through our clearing house. Clearing and transaction fees are recognized as revenue when a buy and sell order are matched and when the trade is cleared. On occasion, the customer’s exchange trading privileges may not be properly entered by the clearing ﬁ rm and incorrect fees are charged for the transactions in the affected accounts. When this information is corrected within the time period allowed by the exchange, a fee adjustment is provided to the clearing ﬁ rm. An accrual is established for estimated fee adjustments to reﬂ ect corrections to customer exchange trading privileges. The accrual is based on the historical pattern of adjustments processed as well as speciﬁ c adjustment requests. Occasionally, market data customers will pay for services in a lump sum payment. When these circumstances occur, revenue is recognized as services are provided. 38 CME GROUP 2007 ANNUAL REPORT INCOME TAXES Calculation of the income tax provision includes an estimate of the income taxes that will be paid for the current year as well as an estimate of income tax liabilities or beneﬁ ts deferred into future years, as determined in accordance with SFAS No. 109, “Accounting for Income Taxes” and Financial Interpretation (FIN) No. 48, “Accounting for Uncertain Tax Positions.” As required, our deferred tax assets are reviewed to determine if all assets will be realized in future periods. To the extent it is determined that some deferred tax assets may not be fully realized, the assets must be reduced by a valuation allowance. The calculation of our tax provision involves dealing with uncertainties in the application of complex tax regulations. We recognize potential liabilities for anticipated tax audit issues in the United States and other applicable tax jurisdictions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken or expected to be taken. If payment of these amounts varies from our estimate, our income tax provision would be reduced or increased at the time that determination is made. This determination may not be known for several years. Past tax audits have not resulted in tax adjustments that would result in a material change to the income tax provision in the year the audit was completed. The effective tax rate, deﬁ ned as the income tax provision as a percentage of income before income taxes, will vary from year to year based on changes to tax rates and regulations. In addition, the effective tax rate will vary with changes to income that are not subject to income tax, such as municipal interest income, and changes in expenses or losses that are not deductible, such as the utilization of foreign net operating losses. INTERNAL USE SOFTWARE COSTS Certain costs for employees and consultants that are incurred in connection with work on development or implementation of software for our internal use are capitalized in accordance with the American Institute of Certiﬁ ed Public Accountants Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Costs capitalized are for application development or implementation, as required by SOP 98-1, for software projects that will result in signiﬁ cant new functionality and that are generally expected to cost in excess of $0.5 million. The amount capitalized is determined based on the time spent by the individuals completing the eligible software-related activity and the compensation and beneﬁ ts or consulting fees incurred for these activities. Projects are monitored during the development cycle to assure that they continue to meet the capitalization criteria of SOP 98-1 and that the project will be completed and placed in service as intended. Any previously capitalized costs are expensed at the time a decision is made to abandon a software project. Completed internal use software projects, as well as work-in-progress projects, are included as part of property in the consolidated balance sheets. Once completed, the accumulated costs for a particular software project are amortized over the anticipated life of the software, generally three years. Costs capitalized for internal use software will vary from year to year based on our technology-related business requirements. STOCK-BASED COMPENSATION We expense stock options using the fair value method under the provisions of SFAS No. 123(R), “Share- Based Payment.” We have elected the accelerated method for recognizing the expense related to stock grants. Due to this election and the vesting provisions of our stock grants, a greater percentage of the total expense is recognized in the ﬁ rst and second years of the vesting period than would be recorded if we used the straight-line method. Upon adoption of SFAS No. 123(R) on January 1, 2006, we began to include an estimate of expected forfeitures of stock grants in our expense recognition calculations instead of the previous practice of accounting for forfeitures as they occurred. CME GROUP 2007 ANNUAL REPORT 39 Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements,” which provides guidance for using fair value to measure assets and liabilities by deﬁ ning fair value, establishing a framework for measuring fair value, and expanding disclosures about fair value measurements. The provisions of this statement are effective for ﬁ scal years beginning after November 15, 2007. Adoption of this standard will not have a material impact on our consolidated ﬁ nancial statements, but will require additional disclosures beginning in the ﬁ rst quarter of 2008. The FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” in February 2007. SFAS No. 159 permits entities to choose to measure many ﬁ nancial instruments and certain other items at fair value. The provisions of this statement are effective for ﬁ scal years beginning after November 15, 2007. The impact of the adoption will be dependent on the extent to which we elect to measure eligible items at fair value. We did not elect to measure any items at fair value upon our initial adoption of the standard. SFAS No. 141(R), “Business Combinations,” was issued in December 2007 to replace SFAS No. 141, “Business Combinations.” SFAS No. 141(R) requires that an acquirer recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This new statement also changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies, restructuring liabilities and acquisition costs. The provisions of this statement are applied prospectively to business combinations for which the acquisition date is on or after the beginning of the ﬁ rst annual reporting period beginning on or after December 15, 2008. We are currently assessing the impact of this standard’s future adoption on our ﬁ nancial statements. In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements,” which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clariﬁ es that a non-controlling interest in a subsidiary be reported as equity in the consolidated ﬁ nancial statements. The provisions require consolidated net income to be reported at the total amount attributable to both the parent and non-controlling interest, with disclosure of the amount attributable to the parent and non-controlling interest on the face of the statement of income. The statement also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement is effective for ﬁ scal years beginning on or after December 15, 2008 and is applied prospectively as of the beginning of the ﬁ scal year in which the statement is initially applied. We are currently assessing the impact of this standard’s future adoption on our ﬁ nancial statements. Results of Operations for  Compared with  2007 FINANCIAL HIGHLIGHTS The comparability of our operating results for 2007 compared with 2006 is signiﬁ cantly impacted by our merger with CBOT Holdings. In our discussion and analysis of comparative periods, we have quantiﬁ ed the contribution of additional revenue or expense resulting from the merger wherever such amounts were material and identiﬁ able. While identiﬁ ed amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts. (cid:129) Total operating revenues grew by 61% in 2007 with the most signiﬁ cant increase in clearing and transaction fees revenue and quotation data fees. (cid:129) Total operating expenses increased by 50% due primarily to higher compensation and beneﬁ ts costs, amortization of purchased intangibles and additional technology expenses incurred to maintain the e-CBOT electronic trading platform. Legal proceedings resulting from our merger with CBOT Holdings, including settlement costs paid in relation to a claim ﬁ led by the Louisiana Municipal Police Employees’ Retirement System (LAMPERS), and other merger-related costs also contributed to increased expenses in 2007 During the third quarter of 2007, we began the process of restructuring our stafﬁ ng, technology and facilities as a result of the merger. At that time, we began incurring restructuring charges and will continue to incur additional expense in 2008. (cid:129) Operating margin, which we deﬁ ne as operating income expressed as a percentage of total revenues, increased to 60% in 2007 compared with 57% in 2006 as the growth in operating revenues outpaced increases in operating expenses. 40 CME GROUP 2007 ANNUAL REPORT (cid:129) The increase in non-operating expense was due primarily to the guarantee we provided to eligible holders of the CBOE’s ERPs. The increase in non-operating expense was partially offset by an increase in investment income due primarily to an increase in average operating funds available for investment. (cid:129) Cash earnings increased by $241.0 million to $643.8 million for 2007 compared with 2006 due primarily to an increase in net income. We have included a reconciliation of cash earnings, a non-GAAP measure, in Liquidity and Capital Resources. OPERATING REVENUES (dollars in millions) Clearing and transaction fees Quotation data fees Processing services Access and communication fees Other Total Revenues 2007 $ 1,427.3 2006 $ 866.1 Change 65% 145.1 106.4 35.8 41.5 80.8 90.2 28.7 24.1 $ 1,756.1 $ 1,089.9 79 18 25 72 61 CLEARING AND TRANSACTION FEES Revenue increased primarily due to growth in trading volume partially offset by a decrease in average rate per contract. Volume The addition of the CBOT product line contributed signiﬁ cantly to an increase in overall trading volume during 2007. We also believe that a signiﬁ cant increase in volatility, generated in part from uncertainty surrounding the sub-prime debt market during 2007, added to an increase in volume across all product lines. The following table summarizes average daily trading volume. For comparative purposes, CME and CBOT products have been presented separately and average daily volume for CBOT products has been calculated for the period from July 13, 2007 through December 31, 2007. All amounts exclude TRAKRS, Swapstream and auction-traded products. (in thousands) Product Line Average Daily Volume: Interest rate: CME CBOT Equity: CME CBOT Foreign exchange: CME Commodity and alternative investment: CME CBOT Average Daily Volume of Total Products: CME CBOT Electronic Volume: CME CBOT Electronic Volume as a Percentage of Total Average Daily Volume n.m. not meaningful 2007 2006 Change 3,701 3,392 2,549 195 569 81 647 6,900 4,234 5,288 3,373 78% 3,078 — 1,734 — 453 78 — 5,343 — 3,808 — 71% 20% n.m . 47% n.m . 26% 5% n.m . 29% n.m . 39% n.m . CME GROUP 2007 ANNUAL REPORT 41 Interest Rate Products The increase in interest rate trading volume is due primarily to the addition of CBOT interest rate products subsequent to the merger. CBOT interest rate products volume is attributable primarily to 10-year and 5-year U.S. Treasury note futures and options, which had average daily volume of 1.7 million and 0.8 million contracts, respectively, from July 13, 2007 through the end of the year. Average daily volume for 10-year and 5-year U.S. Treasury note futures and options was 1.3 million and 0.5 million contracts, respectively, for the last six months of 2006. CBOT product volume for 2006 is provided for comparative purposes only and does not relate to revenues recognized by CME Group. Overall trading volume growth in interest rate products also resulted from uncertainty surrounding inﬂ ation and market interest rates as well as concerns about the sub-prime debt market, which generated additional market volatility. CME Eurodollar futures traded electronically increased to an average of 2.2 million contracts per day in 2007, an increase of 30% when compared with 2006. Additionally, volume for CME Eurodollar options traded via open outcry increased 14% to an average of 1.1 million contracts per day in 2007. Equity Products Trading volume for equity products increased for the year due primarily to a sharp rise in volatility in the equity markets resulting from sub-prime debt market and inﬂ ationary concerns, especially during the second half of 2007. Average volatility, as measured by the CBOE Volatility Index, increased by 77% in the last six months of 2007 compared with the same period in 2006. Average daily volume of our E-mini equity products increased by 50% to 2.4 million contracts in 2007 compared with 2006. This included an increase in average daily volume for E-mini S&P 500 futures and options contracts of 60% to 1.7 million contracts in 2007. As announced in June 2007, our license to list Russell-based contracts will terminate in September 2008 when the last contracts currently traded expire. Average daily volume for the Russell-based contracts was 252,000 for 2007. On June 19, 2007, we launched new E-mini S&P small cap futures and options contracts, based on the S&P 600 Index, to offer a comparable alternative to the Russell-based contracts. In August 2007, we renewed our licensing agreement with Dow Jones. The agreement enables us to continue to exclusively offer futures and options on futures products based on the Dow Jones Industrial Average (DJIA) and other Dow Jones indexes. The new agreement is effective January 1, 2008 through December 31, 2014 and also includes a provision for a ﬁ ve-year renewal term and successive annual renewal terms thereafter. Foreign Exchange Products The increase in trading of foreign exchange products was fueled in part by the decline of the U.S. dollar relative to other major currencies. We believe that market reactions to events in the ﬁ xed income market also contributed to volume growth during the year. In 2007, 92% of our foreign exchange volume traded electronically compared with 88% during 2006. Commodity and Alternative Investment Products Trading volume growth during 2007 resulted primarily from the additional volume generated from CBOT commodities subsequent to the merger. CBOT commodities consist primarily of corn and soybean futures and options. Average Rate Per Contract The increase in average daily volume in 2007 was partially offset by a decrease in the average rate, or revenue, per contract. All amounts in the following table exclude TRAKRS, Swapstream and auction-traded products. Total Volume (in millions) Clearing and Transaction Fees (in millions) Average Rate per Contract 2007 2,249.6 $ 1,426.2 $ 0.634 2006 Change 1,341.1 $ 864.4 $ 0.645 68% 65 (2) 42 CME GROUP 2007 ANNUAL REPORT The average rate per contract decreased in 2007 due primarily to growth in member trading when compared with 2006. Member trading volume increased faster than non-member trading in 2007. We believe that higher volumes by automated trading systems, which typically receive member rates, contributed to this increase in member trading. In addition, the average rate per contract of the E-mini S&P 500 futures and options contracts decreased due to incremental volume reaching the CME Globex surcharge cap, resulting in a decrease in the overall average rate per contract. The decrease in average rate per contract was partially offset by the addition of CBOT products to our existing product lines. The average rate per contract for CBOT products was $0.657 for the period July 13 through December 31, 2007. The increase in average rate per contract is attributable primarily to an increase in commodities volume, which has a higher average rate per contract, during the fourth quarter of 2007. Additionally, the percentage of total volume by product line shifted during the year from CME interest rate products to E-mini equity products, which have a higher rate per contract. As a percentage of total volume, E-mini equity volume increased by 5% in 2007 when compared with 2006 while interest rate product volume decreased by 4%. Concentration of Revenue We bill a substantial portion of our clearing and transaction fees to our clearing ﬁ rms. The majority of clearing and transaction fees received from clearing ﬁ rms represent charges for trades executed on behalf of their customers. We currently have approximately 120 clearing ﬁ rms. The increase in the number of clearing ﬁ rms compared with the prior year is due to the addition of CBOT-only clearing ﬁ rms as a result of our merger. One ﬁ rm represented approximately 11% of our clearing and transaction fee revenue for 2007. Should a clearing ﬁ rm discontinue operations, we believe the customer portion of that ﬁ rm’s trading activity would likely transfer to another clearing ﬁ rm of the exchange. Therefore, we do not believe this concentration exposes us to signiﬁ cant risk from the loss of revenue earned from the particular ﬁ rm. QUOTATION DATA FEES Quotation data fees revenue increased mostly due to additional revenue of approximately $44.1 million contributed by market data services provided to existing CBOT customers subsequent to the merger. In addition, a fee increase in CME market data fees on January 1, 2007 also contributed to growth in revenue. Users of CME’s basic service paid $50 per month in 2007 for each market data screen, or device, compared with $40 per month in 2006. The higher rate combined with increases in other quotation data services contributed to additional revenue of $19.2 million in 2007 compared with 2006. Effective January 1, 2008, all users of our basic services will pay $55 per month for each market data screen, or device. The two largest resellers of our market data generated approximately 67% of our quotation data fees revenue in 2007. However, we consider exposure to signiﬁ cant risk of revenue loss to be minimal despite this concentration. In the event one of these vendors no longer subscribes to our market data, we believe the majority of that vendor’s customers would likely subscribe to our market data through another reseller. PROCESSING SERVICES The increase in revenues is attributable primarily to an increase in NYMEX volume. Revenues generated from trade matching services provided to NYMEX, which began at the end of the second quarter of 2006, increased by $42.1 million in 2007 when compared with 2006. The total volume of NYMEX products available on the CME Globex platform increased to 191.5 million contracts in 2007 from 35.6 million contracts in 2006. This increase was partially offset by a decrease in revenue resulting from the elimination of fees generated by the clearing agreement with CBOT, which terminated as a result of our merger with CBOT Holdings. The decrease in processing services revenue resulting from this termination was $27.6 million in 2007 when compared with 2006. ACCESS AND COMMUNICATION FEES The telecommunications services provided to CBOT customers as well as connectivity charges for the e-CBOT trading platform contributed incremental revenue of approximately $4.8 million in 2007. In addition, revenue growth in 2007 was also attributable to customers upgrading to higher bandwidth connections and expansion of our server co-location program. The co-location program allows customers to connect their trading applications directly to the CME Globex electronic platform by housing certain customer systems in a CME-speciﬁ ed data facility. CME GROUP 2007 ANNUAL REPORT 43 OTHER REVENUES Rental income and associated revenues from building operations acquired as a result of the merger with CBOT Holdings totaled $11.2 million in 2007. Other incremental revenues from CBOT totaled $2.3 million. Additionally, the increase in other revenues is also attributable to a $2.6 million increase in GFX trading gains in 2007 when compared with 2006. OPERATING EXPENSES (dollars in millions) Compensation and benefits Communications Technology support services Professional fees and outside services Amortization of purchased intangibles Depreciation and amortization Occupancy and building operations Licensing and other fee agreements Restructuring Other Total Expenses n.m. not meaningful 2007 $ 263.3 43.5 50.5 53.1 33.9 105.7 48.2 35.6 8.9 62.9 2006 $ 203.0 31.6 31.2 33.2 1.3 72.8 29.6 25.7 — 40.5 $ 705.6 $ 468.9 Change 30% 38 62 60 n.m . 45 63 39 n.m . 55 50 COMPENSATION AND BENEFITS The increase in compensation and beneﬁ ts expense during 2007 compared with 2006 consisted primarily of the following: (in millions) Average headcount Bonus Stock-based compensation Change in average salaries, benefits and employer taxes Increases $ 37.2 11.9 6.5 3.8 (cid:129) Average headcount increased by 23%, or about 320 employees, in 2007. This increase resulted primarily from the addition of approximately 690 employees as a result of our merger with CBOT Holdings and was offset by a workforce reduction of about 180 employees during the third and fourth quarters of 2007. As of December 31, 2007 and 2006, we had approximately 1,970 and 1,430 employees, respectively. (cid:129) Bonus expense accrued under the provisions of our annual incentive plan increased in 2007 mostly as a result of a larger target pool due to growth in headcount; improved performance of our company when compared with the cash earnings target, and increased salary levels. (cid:129) Stock-based compensation increased primarily due to the full impact in 2007 of the expense related to the options granted in June 2006 and additional expense related to the June 2007 grant. In addition, we recognized additional expense for the unvested stock options previously granted to CBOT Holdings’ employees. Subsequent to our merger, we approved and initiated a plan to close duplicate facilities and reduce our workforce in order to improve operating efﬁ ciencies. In addition to the positions we have eliminated through December 2007, we expect to eliminate approximately 200 positions by June 2008. We expect these reductions to contribute to a decrease in compensation and beneﬁ ts expense relative to the current period. COMMUNICATIONS This expense increased primarily as a result of our merger with CBOT Holdings. Costs incurred to support e-CBOT operations and customer connectivity resulted in incremental expense in 2007. Continued growth in existing customer and data center connections and bandwidth upgrades also contributed to the increase in expense in 2007. 44 CME GROUP 2007 ANNUAL REPORT TECHNOLOGY SUPPORT SERVICES There was an increase of approximately $15.1 million due primarily to the integration and support of the e-CBOT electronic trading platform in 2007. Additional investments in technology, including an upgrade to our network and mainframe system in 2006, led to increased ongoing maintenance costs as part of a planned system expansion to increase capacity for peak volumes of transactions processed electronically. PROFESSIONAL FEES AND OUTSIDE SERVICES Technology-related and other professional fees, net of amounts capitalized for internally developed software, increased by $11.2 million in 2007 compared with 2006. The increase was due primarily to consulting services used to supplement our merger integration efforts as well as non-capitalizable software development costs and expenses incurred to support our strategic initiatives. Additionally, legal fees increased $6.3 million in 2007 due to litigation costs related to the LAMPERS and CBOE proceedings resulting from our merger with CBOT Holdings, as well as the ongoing antitrust suit ﬁ led by Eurex U.S. In total, this expense category includes $8.9 million in merger-related costs in 2007. AMORTIZATION OF PURCHASED INTANGIBLES The increase in expense during 2007 is attributable to intangible assets obtained in our merger with CBOT Holdings. Intangible assets subject to amortization consist primarily of clearing ﬁ rm relationships, market data customer relationships, the Dow Jones licensing agreement and lease-related intangibles. Amortization of purchased intangibles in 2006 relates to intangible assets obtained as a result of our business acquisition of Swapstream and our acquisition of assets from Liquidity Direct Technology, LLC. DEPRECIATION AND AMORTIZATION The increase in expense is related primarily to additional assets obtained in our recent merger with CBOT Holdings. Depreciation and amortization expense attributable to the addition of these assets was estimated as $18.6 million in 2007. This amount includes the impact of purchase accounting valuation adjustments. In addition, we have shortened the useful lives of various technology-related and trading ﬂ oor assets due to our plans to consolidate some electronic trading systems and trading ﬂ oor operations. This resulted in incremental expense of $7.9 million in 2007. We expect this acceleration of depreciation to result in $8.0 million of expense in 2008. In addition, depreciation and amortization of 2007 and 2006 property additions exceeded the depreciation and amortization of assets that have become fully depreciated or retired since January 1, 2006, contributing to the increase in depreciation and amortization expense for 2007. Property additions, excluding merger-related additions, for 2007 and 2006 are summarized below. Technology-related assets include purchases of computers and related equipment, software, the cost of developing internal use software and the build-out of our data centers. While total property additions increased in 2007, technology-related spending decreased as a percentage of total additions due to an increase in spending for the development of our newly-leased Chicago ofﬁ ce space. (dollars in millions) Total property additions, including landlord-funded leasehold improvements Technology-related assets as a percentage of total additions 2007 $ 163.7 77% 2006 $ 88.2 90% Change 86% OCCUPANCY AND BUILDING OPERATIONS The addition of three commercial real estate properties as a result of our recent merger resulted in incremental expense of $8.4 million in 2007 relating primarily to utilities, maintenance and real estate tax expense. In addition, we entered into two leases for additional ofﬁ ce space in Chicago and London during the third quarter of 2006. These new leases contributed to an increase of $10.2 million in rent, utilities and real estate tax expense in 2007. In August 2007, we renegotiated the leases for ofﬁ ce space and trading ﬂ oor facilities at our headquarters. Under the terms of our new lease, which extends our occupancy through 2022, we will be reducing our rented space after November 2008. LICENSING AND OTHER FEE AGREEMENTS Higher trading volume for licensed products, particularly E-mini S&P products, resulted in $8.8 million of additional expense in 2007. Also contributing to an increase in this expense were licensing and market maker fees of approximately CME GROUP 2007 ANNUAL REPORT 45 $4.1 million resulting from our recent merger with CBOT Holdings. These increases were partially offset by a $2.7 million reduction in costs incurred under a fee sharing arrangement with SGX, which ceased in February 2007 under the terms of our renewed agreement. We renewed our exclusive product licensing agreement with Dow Jones in September 2007. The new agreement is effective from January 2008 through December 2014 and includes an upfront payment as well as minimum annual payments. The upfront payment, which was negotiated in exchange for a reduced rate per contract, will be recognized in equal amounts each month over the term of the agreement. RESTRUCTURING This expense consists primarily of severance to transitional CBOT employees, severance to CME employees, retention bonuses and associated payroll taxes as well as outplacement costs and post-employment healthcare subsidies. Approximately $3.5 million of additional restructuring expense will be incurred in 2008. OTHER EXPENSE The increase in expense for 2007 is attributable primarily to $8.0 million of marketing, advertising and public relations costs incurred as part of our global brand campaign and efforts to redesign and expand our customer education programs. Included in the $8.0 million increase for 2007 was $3.9 million of merger-related re-branding and print advertising costs. Also contributing to the increase in other expense for the year was $6.3 million of settlement costs related to the LAMPERS class action lawsuit. Finally, a higher level of operating expenses associated with the combined company resulted in an increase in this expense for the year. NON-OPERATING INCOME AND EXPENSE (dollars in millions) Investment income Securities lending interest income Securities lending interest expense Interest expense Guarantee of exercise right privileges Equity in losses of unconsolidated subsidiaries Total Non-Operating n.m. not meaningful 2007 $ 73.1 121.5 (114.5) (3.6) (17.2) (14.0) 2006 $ 55.8 94.0 (92.1) (0.2) — (6.9) $ 45.3 $ 50.6 Change 31% 29 24 n.m . n.m . n.m . (10) INVESTMENT INCOME The increase in investment income in 2007 when compared with 2006 is attributable primarily to the investment of additional cash generated from operations during the year as well as rising short-term interest rates. In late 2007, cash was utilized for a share repurchase and interest rates began to decline resulting in a decline in the investment income growth rate we had experienced earlier in the year. Funds from maturing investments have been reinvested in liquid, short-term investments due to the uncertainty surrounding long-term interest rates and to provide ﬂ exibility in pursuing strategic opportunities. Annualized average rates of return and average investment balances indicated in the table below include short-term investments classiﬁ ed as cash and cash equivalents, marketable securities and a portion of clearing ﬁ rms’ cash performance bonds and security deposits, but exclude the impact of our non-qualiﬁ ed deferred compensation plan and insurance contracts. We exclude the impact of our non-qualiﬁ ed deferred compensation plan from this analysis because earnings from the plan are offset by an equal amount of expense in compensation and beneﬁ ts expense. (dollars in millions) Annualized average rate of return Average investment balance Increase in income due to balance Increase in income due to rate 46 CME GROUP 2007 ANNUAL REPORT 2007 4.46% 2006 4.16% $ 1,563.9 $ 1,294.1 Change 0.30% $ 269.8 $ 11.3 4.7 SECURITIES LENDING During 2007, we expanded lending relationships to include additional banks, which led to an increase in the number of eligible securities available for lending. Beginning in late August 2007, we temporarily suspended our securities lending program due to high volatility in the credit markets and extreme market demand for U.S. Treasury securities, resulting in a decline of the revenue and expense growth rate we had experienced earlier in the year. We resumed the program in mid-September once market volatility subsided. Despite the temporary suspension of the program in 2007, the expansion of lending relationships resulted in an increase in the average daily balance of funds invested when compared with 2006. The spread between the average rate earned and the average rate paid increased during 2007 due to the combined effect of changes in the federal discount rate, which correlates closely with the interest expense, and an increase in market demand for the securities we had available to lend through this program. (dollars in billions) Average daily balance of funds invested Annualized average rate earned Annualized average rate paid Net earned from securities lending 2007 $ 2.3 5.27% 4.96 0.31 2006 $ 1.9 5.01% 4.91 0.10 Change $ 0.4 0.26% 0.05 0.21 INTEREST EXPENSE In September 2007, we initiated a commercial paper program with various institutions under which we may issue and sell unsecured short-term promissory notes. During 2007, we issued $1.2 billion in par value of commercial paper notes. At December 31, 2007, $164.4 million of debt remained outstanding. The weighted average balance of notes outstanding for the full year was $64.2 million. Interest rates on notes issued ranged from 4.50% to 5.38%. GUARANTEE OF EXERCISE RIGHT PRIVILEGES Under the terms of the merger with CBOT Holdings, eligible holders of CBOE ERPs had until August 24, 2007 to elect to sell us their ERPs for $250,000 per privilege. Upon resolution of the lawsuit between CBOT and CBOE, qualiﬁ ed holders that did not elect to sell are entitled to a maximum guaranteed payment of $250,000 per privilege. If the value received by the ERP holder upon resolution of the lawsuit is less than $250,000, we will pay the difference. We recorded expense equal to the estimated fair value of the guarantee on 1,331 ERPs outstanding at the close of the merger. In August 2007, 159 ERPs were tendered for sale to us. We have reﬂ ected changes in the estimated fair value of the guarantee on the ERPs that remain outstanding and adjusted our expense accordingly. We will continue to recognize changes in the fair value of the outstanding guarantee as income or expense on a quarterly basis until the lawsuit is resolved. Subsequent to the tendering of these rights, the maximum potential aggregate payment to the remaining holders under the guarantee is $293.0 million. EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES The increase resulted primarily from incremental losses of $7.1 million from our investment in FXMS for 2007. FXMS, our joint venture with Reuters, was established in the second half of 2006 and began operations in February 2007. INCOME TAX PROVISION The effective tax rate increased to 39.9% in 2007 from 39.4% in 2006. The increase was due primarily to the inability to recognize the beneﬁ t of the net operating losses generated by our Swapstream operations, which we acquired in August 2006. The valuation allowance recorded against Swapstream’s accumulated net operating losses will not be derecognized until there is a pattern of operating income from these operations. The increase in the effective tax rate was partially offset by an increase in tax-advantaged securities. CME GROUP 2007 ANNUAL REPORT 47 Results of Operations for  Compared with  2006 FINANCIAL HIGHLIGHTS (cid:129) Total operating revenues grew by 22% in 2006 primarily as a result of increased clearing and transaction fees revenue, and to a lesser extent, processing services and quotation data fees. (cid:129) Total operating expenses increased by 14% in 2006 when compared with 2005. The increase was due primarily to higher compensation and beneﬁ ts costs as well as increased technology spending resulting from capacity expansion and processing speed enhancements. Higher rates on licensed S&P and NASDAQ products and increased professional and outside services fees also contributed to the increase in expenses. (cid:129) Operating margin, which we deﬁ ne as operating income expressed as a percentage of total revenues, increased to 57% in 2006 from 54% in 2005 as the growth of operating revenues outpaced increases in operating expenses. (cid:129) The increase in non-operating income was due primarily to an increase in investment income, which resulted from a rise in average operating funds available for investment and increases in market interest rates. (cid:129) Cash earnings increased by approximately $111.0 million to $402.8 million for 2006 compared with 2005. We have included a reconciliation of cash earnings, a non-GAAP measure, in Liquidity and Capital Resources. OPERATING REVENUES (dollars in millions) Clearing and transaction fees Quotation data fees Processing services Access and communication fees Other Total Revenues 2006 $ 866.1 80.8 90.2 28.7 24.1 2005 $ 696.2 71.8 68.7 27.8 25.3 $ 1,089.9 $ 889.8 Change 24% 13 31 3 (4) 22 CLEARING AND TRANSACTION FEES The increase was due to trading volume growth partially offset by a decrease in the average rate per contract. Volume In 2006, our volume surpassed one billion contracts traded for the second consecutive year driven by growth of 25% or more in all product lines. Technology enhancements, including the migration of our CME Globex trading platform to new Hewlett Packard Integrity NonStop servers that incorporate Intel Itanium processors, signiﬁ cantly increased trade-matching speed which reduced our average response time on transactions and resulted in increased usage by automated trading systems. Growth in hedge funds, interest rate uncertainty and occasional daily volatility in equity markets also contributed to trading volume growth. The following table summarizes average daily trading volume. All amounts exclude TRAKRS, Swapstream and auction-traded products. (in thousands) Product Line Average Daily Volume: Interest rate Equity Foreign exchange Commodity and alternative investment Average Daily Volume of Total Products Electronic Volume Electronic Volume as a Percentage of Total Average Daily Volume 2006 2005 Change 3,078 1,734 453 78 5,343 3,808 71% 2,380 1,389 334 55 4,158 2,895 70% 29% 25 35 41 28 31 48 CME GROUP 2007 ANNUAL REPORT Interest Rate Products Interest rate product volume increased in 2006 due primarily to uncertain market expectations surrounding interest rates, including those created by changes in Federal Reserve monetary policy, expansion in the use of our electronic trading platform as a result of technological enhancement and increased use of automated trading systems. The volume of interest rate products traded electronically increased by 34% to 1.8 million contracts per day in 2006. Trends favoring the trading of derivative products also contributed to the increase in volume. The average daily volume of CME Eurodollar options, which are traded predominantly through open outcry, increased by 44% to 1.1 million contracts in 2006. In conjunction with the increase in Eurodollar options volume, the average daily volume of CME Eurodollar options traded electronically also increased to 77,000 contracts in 2006 from 28,000 contracts in 2005. In April 2006, we launched a new incentive program to increase electronic trading of CME Eurodollar options. The program, which was initially effective through December 2006, was extended through June 2007. The program provided a reduced fee schedule for customers meeting percentage thresholds for electronic trading of CME Eurodollar options. Equity Products The increase in equity product volume for the year was due primarily to technological enhancements, increased usage of equity option products, occasional signiﬁ cant daily ﬂ uctuations in stock market volatility, as measured by the CBOE Volatility Index, and efforts to attract new customers. Average daily volume of our E-mini equity products increased by 25% to 1.6 million contracts in 2006 compared with 2005. In particular, E-mini S&P 500 volume increased 27% to 1.1 million contracts. Volume for our electronically traded E-mini equity options increased to 45,000 contracts per day in 2006 from 18,000 contracts per day in 2005. Foreign Exchange Products In December 2006, foreign exchange volume set a monthly volume record with 621,000 contracts traded per day. The increase in trading of foreign exchange products resulted from the previously mentioned technological enhancements which facilitated faster execution of trades, additional liquidity and fee incentive programs, including those speciﬁ cally targeted to attract commodity trading advisors and large hedge funds. In 2006, 88% of our foreign exchange volume traded through the CME Globex platform compared with 81% during 2005. Commodity and Alternative Investment Products Trading in commodity and alternative investment products increased as a result of the growing appeal of commodities as an asset class, which has attracted additional trading activity in live cattle and lean hog products. Average Rate Per Contract The impact of the 28% increase in average daily trading volume during 2006 was partially offset by a decrease in the average rate, or revenue, per contract. All amounts in the following table exclude TRAKRS, Swapstream and auction-traded products. Total Volume (in millions) Clearing and Transaction Fees (in millions) Average Rate per Contract 2006 1,341.1 $ 864.4 $ 0.645 2005 Change 1,047.9 $ 695.7 $ 0.664 28% 24 (3) CME GROUP 2007 ANNUAL REPORT 49 In 2006, the average rate per contract decreased when compared with 2005 due primarily to the following factors: (cid:129) Incentives and discounts increased as a result of volume growth, reducing the average rate per contract by $0.021; (cid:129) The number of inactive clearing ﬁ rms and trading volume from automated trading systems that receive lower-priced member rates increased resulting in a slight rise in the percentage of trades executed by member customers to 80% of total volume from 79% in 2005; (cid:129) Higher-priced privately negotiated trades, as a percentage of total volume, decreased to 1.0% during 2006 compared with 1.2% in 2005; and (cid:129) The average daily volume of CME Eurodollar options traded through open outcry, one of our lowest priced products, increased by 38%. This represented 19% of total volume in 2006 compared with 17% in 2005. Clearing and transaction fees from CME Eurodollar options traded through open outcry averaged $0.33 per contract in 2006 and 2005. These decreases were partially offset by broad-based pricing increases implemented in August 2005, which contributed incremental revenue of approximately $13.0 million when compared with 2005. Additionally, the rate per contract was favorably impacted by a higher percentage of trades executed through the CME Globex platform for which additional fees are assessed. QUOTATION DATA FEES The growth in revenue resulted primarily from a fee increase that was implemented on January 1, 2006. Users of our basic service paid $40 per month for each market data screen, or device, in 2006. The monthly charge in effect during 2005 was $35. This higher rate contributed to a $10.4 million increase in subscriber fees for 2006 compared with 2005 and was partially offset by a $1.5 million decrease in assessments, which result from our periodic audits of usage data previously provided by our customers. PROCESSING SERVICES Revenue increased primarily as a result of increased trading volume at CBOT and higher volume executed on the CME Globex platform under our agreement with NYMEX. CBOT’s average daily trading volume was 3.2 million contracts for 2006, an increase of 20% over the 2.7 million contracts traded in 2005. This increased volume at CBOT generated incremental revenue of $11.6 million in 2006. Revenue from services provided to NYMEX increased by $9.8 million in 2006 when compared with 2005. Our prior agreement with NYMEX ended in November 2005. Trading under our new 10-year agreement began in June 2006. The new agreement added metals futures products and expanded the number of energy futures products, including the addition of physically delivered WTI futures products, which we now list for NYMEX on the CME Globex platform. As a result, the average daily volume of NYMEX electronic trading increased signiﬁ cantly on our platform during 2006. ACCESS FEES Growth in revenue resulted from the expiration, in July 2006, of an incentive program to encourage our customers to switch to a higher bandwidth connection. OPERATING EXPENSES (dollars in millions) Compensation and benefits Communications Technology support services Professional fees and outside services Amortization of purchased intangibles Depreciation and amortization Occupancy and building operations Licensing and other fee agreements Other Total Expenses 50 CME GROUP 2007 ANNUAL REPORT 2006 $ 203.0 2005 $ 179.6 Change 13% 31.6 31.2 33.2 1.3 72.8 29.6 25.7 40.5 31.1 26.9 26.1 0.7 64.9 28.5 18.0 36.0 $ 468.9 $ 411.8 2 16 27 73 12 4 43 13 14 COMPENSATION AND BENEFITS The increase in compensation and beneﬁ ts expense during 2006 relative to 2005 consisted primarily of the following: (in millions) Average headcount Change in average salaries, benefits and employer taxes Bonus Stock-based compensation Capitalization for software development and reimbursable costs Increases $ 9.8 7.4 4.3 3.8 (3.6) • Average headcount increased by 7%, or approximately 90 employees, in 2006 compared with 2005 primarily as a result of increased hiring to support technology initiatives. Our acquisition of Swapstream, which was completed in August 2006, also contributed to the increase in average headcount for the year. At December 31, 2006 and 2005, we had approximately 1,430 and 1,320 employees, respectively. • Bonus expense accrued under the provisions of our annual incentive plan increased due primarily to growth in our employee headcount and salary increases for existing employees. • Stock-based compensation increased primarily as a result of additional expense from options granted in June 2006 and the full impact in 2006 of the expense related to the June 2005 grant. In addition, the fair value per share of options granted in June 2006 increased when compared with the fair value of options granted in June 2005. • Increases were partially offset by increased capitalization of compensation and beneﬁ ts expense relating to software development. The increase in capitalized software costs resulted primarily from development needed to provide trading and other services to FXMS. TECHNOLOGY SUPPORT SERVICES We experienced growth of 20% in the average number of transactions processed electronically during 2006 when compared with 2005. As a result of the continued growth in transactions processed, additional maintenance and service contracts were required to support increases in hardware and software purchases. PROFESSIONAL FEES AND OUTSIDE SERVICES Legal fees increased $4.1 million in 2006 when compared with 2005 due primarily to the structuring and establishment of FXMS and litigation costs related to the ongoing antitrust lawsuit ﬁ led by Eurex U.S. in 2003. In addition, other professional fees increased $3.4 million in 2006 due primarily to the use of consulting services to support several clearing and trading systems projects as well as enhancements to the CME Globex platform’s functionality, including the ability to execute complex options trading strategies. During the fourth quarter, merger-related integration planning also contributed to an increase in professional fees. DEPRECIATION AND AMORTIZATION During the second quarter of 2006, we began an 18-month process of migrating the electronic trading of products to new Hewlett Packard Integrity NonStop servers that incorporate Intel Itanium processors. As a result of the migration, we reassessed and shortened the estimated useful lives on our existing processors which resulted in additional depreciation expense of $1.9 million in 2006 when compared with 2005. In addition, depreciation and amortization of 2005 and 2006 property additions exceeded the depreciation and amortization of assets that have become fully depreciated or retired since January 1, 2005, resulting in an increase in 2006 depreciation and amortization expense. Property additions for 2006 and 2005 are summarized below. Technology-related assets include purchases of computers and related equipment, software, the cost of developing internal use software and costs associated with the expansion of our data centers. (dollars in millions) Total property additions, including landlord-funded leasehold improvements Technology-related assets as a percentage of total additions 2006 $ 88.2 90% 2005 $ 87.6 91% CME GROUP 2007 ANNUAL REPORT 51 OCCUPANCY AND BUILDING OPERATIONS We entered into two new leases for additional space in Chicago and London during 2006. The Chicago lease, which began in August 2006, provides us with an opportunity to reorganize and maximize the utilization of our facilities in the downtown area. The London lease, which began in November 2006, allowed us to consolidate our existing London ofﬁ ce with Swapstream’s facilities. The new leases resulted in additional rent expense of $1.1 million in 2006. LICENSING AND OTHER FEE AGREEMENTS A large portion of the increase in this expense was attributable to an increase in licensing rates for S&P E-mini products and, to a lesser extent, NASDAQ E-mini products. Rate increases went into effect in June 2005 for NASDAQ products and September 2005 for S&P products in return for extending our exclusive rights to offer these products. Renegotiated licensing rates resulted in $6.5 million of incremental expense compared with 2005. Also, higher average daily trading volume for licensed products resulted in additional expense of $2.4 million in 2006. Higher volumes were attributable primarily to E-mini products based on the S&P 500 and NASDAQ-100. These increases in expense were partially offset by a $0.9 million decrease in fees paid to market maker program participants. The reduction in market maker fees was due primarily to the expiration of the Russell 1000 program in December 2005. OTHER EXPENSE In 2006, this expense increased primarily as a result of the preparation for and launch of a new global brand advertising campaign. The promotion of new products and production of CME’s quarterly magazine, which launched in the third quarter of 2005, also contributed to an increase in expense. NON-OPERATING INCOME AND EXPENSE (dollars in millions) Investment income Securities lending interest income Securities lending interest expense Interest expense Equity in losses of unconsolidated subsidiaries Total Non-Operating 2006 $ 55.8 94.0 (92.1) (0.2) (6.9) $ 50.6 2005 $ 31.4 58.7 (56.8) (0.3) (2.6) $ 30.4 Change 77% 60 62 (30) 162 66 INVESTMENT INCOME Rising market interest rates as well as increased funds available for investment resulted in increased investment income in 2006 when compared with 2005. Increases in investment income were partially offset by an increase in tax-advantaged investments, as a percentage of the total portfolio, during 2006. The annualized average rate of return and average investment balance indicated in the table below include short-term investments classiﬁ ed as cash and cash equivalents, marketable securities and clearing ﬁ rms’ cash performance bonds and security deposits, but exclude the ﬁ rst IEFs and our non-qualiﬁ ed deferred compensation plan. Non-qualiﬁ ed deferred compensation plan earnings are excluded from this analysis as there is an equal and offsetting amount in compensation and beneﬁ ts expense. (dollars in millions) Annualized average rate of return Average investment balance Increase in income due to balance Increase in income due to rate 2006 4.16% 2005 2.99% $ 1,294.1 $ 951.6 Change 1.17% $ 342.5 $ 15.1 10.3 Increases due to rate and balance changes were partially offset by a decrease of $1.9 million resulting from the discontinuance of our investment in the ﬁ rst IEFs as of December 2005. SECURITIES LENDING INTEREST INCOME AND EXPENSE The average daily balance of funds available for lending increased during 2006 relative to 2005. This was primarily the result of a policy change effective October 1, 2005 that increased the amount of securities available for lending to 70% from 50% of total eligible securities. 52 CME GROUP 2007 ANNUAL REPORT (dollars in billions) Average daily balance of funds invested Annualized average rate earned Annualized average rate paid Net earned from securities lending 2006 $ 1.9 5.01% 4.91 0.10 2005 $ 1.8 3.34% 3.23 0.11 Change $ 0.1 1.67% 1.68 (0.01) EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES This includes $6.1 million of losses from our investment in FXMS, which was formed in July 2006, as well as our proportionate share of losses from OneChicago. INCOME TAX PROVISION In 2006, the effective tax rate decreased from 39.6% to 39.4% when compared with 2005. The decrease is due primarily to increased investments in tax-advantaged securities, the impact of which was partially offset by the non-deductibility of net operating losses generated by our Swapstream operations subsequent to our acquisition of this business in August 2006. Liquidity and Capital Resources CASH REQUIREMENTS Historically, we have met our operational funding requirements with cash generated by operations. If operations do not provide sufﬁ cient funds to meet short-term and long-term capital expenditure requirements, cash and cash equivalents or marketable securities can be reduced to provide the needed funds, assets can be acquired through capital leases, or we can borrow using public or private debt facilities. In addition, we believe we can fund any pending or potential future acquisitions with internally available cash, debt ﬁ nancing or the issuance of equity securities. On February 26, 2008, we completed our transaction with Brazilian Mercantile & Futures Exchange S.A. (BM&F). We issued 1.2 million shares of Class A common stock (approximately a 2% equity interest in the company) in exchange for 101.1 million shares of BM&F (an equity interest of approximately 10%). Neither CME Group nor BM&F may sell its equity interest in the other until February 2012 under the provisions of the agreement. Our investment in BM&F is recorded at a cost of $631.4 million based on our stock price of $531.00 at close on February 25, 2008. Cash will also be required for operating leases and non-cancelable purchase obligations as well as commitments reﬂ ected as liabilities in our consolidated balance sheet at December 31, 2007. These commitments are as follows (in thousands): Year 2008 2009-2010 2011-2012 Thereafter Total Operating Leases $ 17,731 32,970 33,719 147,922 $ 232,342 Purchase Obligations $ 66,640 17,996 12,356 8,000 Other Liabilities $ 21,651 — — — $ 104,992 $ 21,651 Total(a) $ 106,022 50,966 46,075 155,922 $ 358,985 (a) Gross unrecognized tax liabilities of $9.7 million determined under FIN No. 48 are not included in the commitments table due to uncertainty about the date of their settlement. Future capital expenditures for technology are anticipated as we continue to support our growth through investment in increased system capacity and performance and through technological initiatives on our electronic trading platforms. Each year capital expenditures are incurred for improvements to and expansion of our trading ﬂ oor facilities, ofﬁ ces, remote data centers, telecommunications capabilities and other operating equipment. We expect 2008 capital expenditures to total between $225.0 million and $235.0 million, excluding leasehold improvements for our new ofﬁ ce space that will be funded with landlord allowances. Anticipated capital expenditures for 2008 include approximately $77.0 million of data center build-out costs related primarily to our new data center. CME GROUP 2007 ANNUAL REPORT 53 We intend to continue to pay a regular quarterly dividend to our shareholders. The decision to pay a dividend, however, remains within the discretion of our Board of Directors and may be affected by various factors, including our earnings, ﬁ nancial condition, capital requirements, level of indebtedness and other considerations our Board of Directors deems relevant. In 2007, our annual dividend target remained at approximately 30% of the prior year’s cash earnings. For 2008, our annual dividend target will remain at approximately 30% of 2007 cash earnings calculated as if the merger with CBOT Holdings had occurred on January 1, 2007. On January 30, 2008, the Board of Directors declared a regular quarterly dividend of $1.15 per share payable on March 25, 2008 to shareholders of record on March 10, 2008. Assuming no changes in the number of shares outstanding other than the issuance of 1.2 million shares to BM&F, the March 2008 dividend payment will total approximately $62.6 million. SOURCES AND USES OF CASH Net cash provided by operating activities was $814.4 million in 2007 compared with $471.7 million in 2006. Net cash provided by operating activities increased due primarily to the increase in net income during 2007. In 2007, net cash provided by operating activities was $155.8 million higher than net income. Adjustments to net income consisted primarily of $105.7 million in depreciation and amortization, $33.9 million of amortization of purchased intangibles, and a $31.2 million increase in other current liabilities, partially offset by a $50.6 million increase in deferred income taxes and a $49.9 million increase in accounts receivable. The increase in depreciation and amortization expense is due primarily to additional assets obtained in our recent merger with CBOT Holdings. Accounts receivable in any period result primarily from the clearing and transaction fees billed in the last month of the reporting period. Cash used in investing activities was $78.6 million in 2007 compared with $85.9 million in 2006. The decrease in cash used compared with 2006 was due primarily to $116.0 million of cash acquired in our merger with CBOT Holdings and a $30.7 million increase in proceeds from maturities of marketable securities, net of purchases. These increases in cash were partially offset by a $75.8 million increase in property and equipment purchases, $39.8 million used to purchase exercise right privileges, and an increase of $37.2 million in merger-related transaction costs. Cash used in ﬁ nancing activities was $859.9 million in 2007 compared with $27.2 million for 2006. The increase in cash used was due primarily to $949.3 million paid to repurchase common stock and a $64.0 million increase in cash dividends to shareholders. This increase in cash used was partially offset by proceeds of debt issuances, net of maturities and debt issuance costs, of $162.9 million. DEBT INSTRUMENTS We maintain a 364-day revolving loan facility, with various ﬁ nancial institutions, which provides for loans of up to $750.0 million. This revolving loan facility serves as a back-up facility for our commercial paper program. Proceeds from the program were used to partially fund our recent tender offer stock repurchase and related fees. On September 5, 2007, we purchased 1.7 million shares of our Class A common stock at a purchase price of $560 per share for a total cost of approximately $950.6 million, including related fees and expenses. Under the terms of the facility, proceeds can also be used to ﬁ nance the BM&F investment transaction and to pay general corporate purposes of up to $300.0 million. Our clearing house maintains an $800.0 million 364-day line of credit with a consortium of banks to be used in certain situations. The line of credit, which was renewed on October 12, 2007, continues to be collateralized by clearing ﬁ rm security deposits held by us in the form of U.S. Treasury or agency securities, as well as security deposit funds in the Interest Earning Facilities and any performance bond deposits of a clearing ﬁ rm that has defaulted on its obligation. The line of credit can only be drawn on to the extent it is collateralized. Security deposit collateral was $1.4 billion at December 31, 2007. To satisfy our performance bond obligations with SGX, we pledge CME-owned U.S. Treasury securities in lieu of, or in combination with, irrevocable letters of credit. At December 31, 2007, the letters of credit totaled $113.0 million. In addition, we had pledged securities with a fair value of $100.1 million at December 31, 2007. CME also guarantees a $5.0 million standby letter of credit for GFX. The beneﬁ ciary of the letter of credit is the clearing ﬁ rm that is used by GFX to execute and maintain its futures positions. The letter of credit will be utilized in the event GFX defaults in meeting performance bond requirements to its clearing ﬁ rm. 54 CME GROUP 2007 ANNUAL REPORT OFF-BALANCE SHEET ARRANGEMENTS As of December 31, 2007, we did not have any signiﬁ cant off-balance sheet arrangements as deﬁ ned by the regulations of the Securities and Exchange Commission. LIQUIDITY AND CASH MANAGEMENT Cash and cash equivalents totaled $845.3 million at December 31, 2007 compared with $969.5 million at December 31, 2006. The balance retained in cash and cash equivalents was a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy, alternative investment choices and any dividends that we pay. Current net deferred tax assets of $18.4 million and $7.2 million are included in other current assets at December 31, 2007 and December 31, 2006, respectively. Current net deferred tax assets result primarily from stock-based compensation and restructuring liabilities. At December 31, 2006, non-current net deferred tax assets were $30.9 million consisting primarily of depreciation and amortization, software development costs, stock-based compensation and deferred compensation. At December 31, 2007, non-current net deferred tax liabilities were $3.8 billion. Net deferred tax liabilities are primarily the result of purchase accounting for intangible assets in our merger with CBOT Holdings. Non-current net deferred tax liabilities also include an $11.2 million deferred tax asset for acquired and accumulated net operating losses related to Swapstream. Since Swapstream has not yet developed a pattern of operating income, our assessment at December 31, 2007 is that we do not believe that we currently meet the more-likely-than-not threshold that would allow us to realize the value of acquired and accumulated foreign net operating losses in the future. As a result, the deferred tax beneﬁ t arising from these net operating losses has been fully reserved. Each clearing ﬁ rm is required to deposit and maintain a speciﬁ ed performance bond balance, which is determined by parameters established by the risk management department of the clearing house and may ﬂ uctuate over time. Performance bond requirements can be satisﬁ ed with a variety of approved investments and cash. Cash performance bonds and security deposits are included in our consolidated balance sheets. With the exception of the portion of securities deposited that are utilized in our securities lending program, clearing ﬁ rm deposits, other than those retained in the form of cash, are not included in our consolidated balance sheets. Securities lending transactions utilize a portion of the securities that clearing ﬁ rms have deposited to satisfy their proprietary performance bond requirements. Securities lending activity ﬂ uctuates based on the amount of securities that clearing ﬁ rms have deposited and the demand for securities lending activity in the particular securities available to us. As a result of these factors, the balances in cash performance bonds and security deposits, as well as the balances in our securities lending program, may ﬂ uctuate signiﬁ cantly over time. CME GROUP 2007 ANNUAL REPORT 55 Cash performance bonds and security deposits and collateral from securities lending consisted of the following at December 31: (in millions) Cash performance bonds Cash security deposits Cross-margin arrangements Performance collateral for delivery Total Cash Performance Bonds and Security Deposits Collateral from securities lending activities and payable under securities lending agreements Total 2007 2006 $ 799.1 $ 506.0 18.6 — 15.3 833.0 15.1 0.1 — 521.2 2,862.0 $ 3,695.0 2,130.2 $ 2,651.4 We are required under the Commodity Exchange Act to segregate cash and securities deposited by clearing ﬁ rms on behalf of customers. In addition, our exchange rules require a segregation of all funds and securities deposited by clearing ﬁ rms from exchange operating funds and marketable securities. As with cash performance bonds and security deposits, these balances will ﬂ uctuate due to the investment choices available to clearing ﬁ rms and the change in total deposits required. Securities, at fair value, and IEF funds were deposited for the following purposes at December 31: (in millions) Performance bonds Security deposits Cross-margin arrangements Performance collateral for delivery Total CASH EARNINGS 2007 2006 $ 57,165.5 $ 47,270.6 1,440.0 486.2 49.9 1,250.5 273.7 — $ 59,141.6 $ 48,794.8 Cash earnings, a non-GAAP measure, is the primary metric used by us to measure our ﬁ nancial performance. It is the basis for calculating dividends to shareholders. It is calculated as net income plus depreciation and amortization expense (excluding amortization of landlord- funded amounts), plus tax-effected stock-based compensation, plus tax-effected amortization of purchased intangibles, less capital expenditures excluding landlord-funded amounts. For 2008, our annual dividend target will be based on 2007 cash earnings calculated as if the merger with CBOT Holdings had occurred on January 1, 2007. The cash earnings amount is calculated as follows: (in millions) Net income Depreciation and amortization Stock-based compensation, net of tax Amortization of purchased intangibles, net of tax Capital expenditures Cash Earnings CBOT Holdings’ cash earnings (a) Pro Forma Cash Earnings 2007 $ 658.5 104.4 13.7 20.4 (153.2) 643.8 192.5 $ 836.3 2006 $ 407.3 72.8 10.0 — (87.3) 402.8 — $ 402.8 (a) CBOT Holdings’ cash earnings reﬂ ect CBOT Holdings’ consolidated net income for the period January 1 through July 12, 2007, plus depreciation and amortization expense, plus tax- eﬀ ected stock-based compensation, less capital expenditures. All adjustments to net income were calculated for the period January 1 through July 12, 2007. The cash earnings calculation, with some modiﬁ cations, is also used as the basis for determining annual incentive payments to employees. 56 CME GROUP 2007 ANNUAL REPORT Quantitative and Qualitative Disclosures About Market Risk We are subject to various market risks, including those caused by changes in interest rates and foreign currency exchange rates. INTEREST RATE RISK Our investment policy is to preserve principal and liquidity while maximizing return through the investment of available funds. Investments typically include money market mutual funds, municipal securities, and U.S. Treasury and government agency securities with ﬁ xed or variable rate terms. Under our investment policy, we monitor interest rate risk by completing regular reviews of our marketable securities portfolio and its sensitivity to changes in the general level of interest rates, commonly referred to as a portfolio’s duration. We control the duration of the portfolio primarily through the purchase of individual marketable securities having duration consistent with our overall investment policy. In addition, we will generally hold marketable securities to maturity, which will act as a further mitigating factor to interest rate risk. Under our investment policy, the aggregate portfolio duration cannot exceed 24 months. A change in market interest rates would affect interest income as well as the fair value of investments. All of our investments are carried at fair value. For purposes of this analysis, marketable securities exclude the investments of our non-qualiﬁ ed deferred compensation plan. Interest income from short-term cash investments, marketable securities, and cash performance bonds and security deposits was $69.8 million and $53.8 million in 2007 and 2006, respectively. Our marketable securities portfolio experienced a net unrealized gain of $3.1 million in 2007 and a net unrealized gain of $2.1 million in 2006. There were no material realized gains or losses from sales of marketable securities in either period. Expected maturities and interest coupon rates for marketable securities, all of which were ﬁ xed-rate securities, were as follows at December 31, 2007 (dollars in thousands): Year 2008 Fair Value Principal Weighted Average Interest Rate Cash Flows $ 180,410 $ 180,242 3.08% The 2008 expected maturities include $26.7 million in principal amount of zero coupon marketable securities. Excluding zero coupon securities, the 2008 weighted average interest rate would be 3.61%. We maintain a 364-day revolving loan facility of up to $750.0 million with various ﬁ nancial institutions. This loan facility serves as a back-up facility for our commercial paper program. As of December 31, 2007, we have not utilized this facility. During 2007, commercial paper notes with an aggregate par value of $1.2 billion and maturities ranging from one to 97 days were issued. We believe the short-term nature of these borrowings and the availability of funds from operations mitigates our interest rate risk exposure. FOREIGN EXCHANGE RISK GFX engages primarily in the purchase and sale of our foreign exchange futures contracts on the CME Globex platform to provide additional liquidity in these products. GFX subsequently enters into offsetting transactions using futures contracts or spot foreign exchange transactions with approved counterparties in the interbank market to limit its market risk. Any potential impact on the GFX earnings from a change in foreign exchange rates would not be signiﬁ cant. Net intraday position limits, which are established for each trader, totaled $12.0 million in aggregate notional value as of December 31, 2007. At December 31, 2007, GFX held futures positions with a notional value of $131.7 million, offset by a similar amount of spot foreign exchange positions. The notional value of futures positions at December 31, 2006 totaled $111.8 million. All positions are marked to market on a daily basis using our foreign exchange settlement prices, with resulting gain or loss reﬂ ected in other revenues. Net trading gains were $9.2 million and $7.0 million for the years ended December 31, 2007 and 2006, respectively. The third-party contract relating to our e-CBOT electronic trading platform obligates us to make payments denominated in pounds sterling. As a result, we are exposed to movements in foreign currency exchange rates. CME GROUP 2007 ANNUAL REPORT 57 We engage in foreign currency hedging activities in order to reduce our risk from movements in foreign currency exchange rates where practicable to do so. However, where we are not able to enter into foreign currency hedging transactions on terms satisfactory to us, we retain risk associated with movements in foreign currency exchange rates. The primary purpose of our foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials and services and liabilities created in the normal course of our business. We do not rely on economic hedges to manage risk. We currently utilize foreign currency forward contracts that we have identiﬁ ed as fair value hedges. These are intended to offset the effect of exchange rate ﬂ uctuations on ﬁ rm commitments for purchases of ﬁ xed annual and quarterly services denominated in pounds sterling. Forward contracts designated as hedges had a notional amount of approximating $13.3 million (£6.7 million) at December 31, 2007. Certain forward contracts previously designated as hedges have been undesignated as a result of negotiations with vendors which reduced the ﬁ rm commitments previously hedged. Forward contracts which were undesignated had a notional value of approximately $6.0 million (£3.0 million) at December 31, 2007. The fair value of hedging contracts and non-hedging contracts was $1.8 million and $0.8 million, respectively, at December 31, 2007. Losses related to contracts that no longer qualify for hedge accounting totaled $0.1 million in 2007. 58 CME GROUP 2007 ANNUAL REPORT Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting. Our internal control system has been designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of published ﬁ nancial statements. Management assessed the effectiveness of our internal control over ﬁ nancial reporting as of December 31, 2007. The scope of this assessment included the combined operations of CME Group which includes the operations of the former CBOT Holdings. Management based this assessment on criteria for effective internal control over ﬁ nancial reporting described in Internal Control-Integrated Framework Issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluating the design of our internal control over ﬁ nancial reporting and testing the operational effectiveness of our internal control over ﬁ nancial reporting. The results of its assessment were reviewed with the Audit Committee of the Board of Directors. Based on this assessment, management believes that, as of December 31, 2007, our internal control over ﬁ nancial reporting is effective. The effectiveness of our internal control over ﬁ nancial reporting as of December 31, 2007 has been audited by Ernst & Young LLP, an independent registered public accounting ﬁ rm, as stated in the following report. CME GROUP 2007 ANNUAL REPORT 59 Reports of the Independent Registered Public Accounting Firm TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CME GROUP INC. We have audited CME Group Inc.’s internal control over ﬁ nancial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CME Group Inc.’s management is responsible for maintaining effective internal control over ﬁ nancial reporting, and for its assessment of the effectiveness of internal control over ﬁ nancial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over ﬁ nancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁ nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁ nancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over ﬁ nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁ nancial statements. Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, CME Group Inc. maintained, in all material respects, effective internal control over ﬁ nancial reporting as of December 31, 2007, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash ﬂ ows for each of the three years in the period ended December 31, 2007 of CME Group Inc. and our report dated February 26, 2008 expressed an unqualiﬁ ed opinion thereon. Chicago, Illinois February 26, 2008 60 CME GROUP 2007 ANNUAL REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CME GROUP INC. We have audited the accompanying consolidated balance sheets of CME Group Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash ﬂ ows for each of the three years in the period ended December 31, 2007. Our audit also included the ﬁ nancial statement schedule listed in the Index at Item 15(a). These ﬁ nancial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁ nancial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the ﬁ nancial statements referred to above present fairly, in all material respects, the consolidated ﬁ nancial position of CME Group Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash ﬂ ows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related ﬁ nancial statement schedule, when considered in relation to the basic ﬁ nancial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CME Group Inc.’s internal control over ﬁ nancial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2008 expressed an unqualiﬁ ed opinion thereon. Chicago, Illinois February 26, 2008 CME GROUP 2007 ANNUAL REPORT 61 CME Group Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share data) Assets Current Assets: Cash and cash equivalents Collateral from securities lending Marketable securities available for sale, including pledged securities of $100,061 and $100,729 Accounts receivable, net of allowance of $1,392 and $552 Other current assets Cash performance bonds and security deposits Total current assets Property, net of accumulated depreciation and amortization Intangible assets – trading products Intangible assets – other, net of accumulated amortization Goodwill Other assets Total Assets Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable Payable under securities lending agreements Short-term debt Other current liabilities Cash performance bonds and security deposits Total current liabilities Deferred tax liabilities Other liabilities Total Liabilities Shareholders’ Equity: Preferred stock, $0.01 par value, 9,860 shares authorized, none issued or outstanding Series A junior participating preferred stock, $0.01 par value, 140 shares authorized, none issued or outstanding Class A common stock, $0.01 par value, 1,000,000 shares authorized, 53,278 and 34,836 shares issued and outstanding as of December 31, 2007 and 2006, respectively Class B common stock, $0.01 par value, 3 shares authorized, issued and outstanding Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity See accompanying notes to consolidated financial statements. 62 CME GROUP 2007 ANNUAL REPORT AT D ECEMBER 31 2007 2006 $ 845,312 2,862,026 $ 969,504 2,130,156 203,308 187,487 55,900 833,022 4,987,055 377,452 7,987,000 1,796,789 5,049,211 108,690 269,516 121,128 37,566 521,180 4,049,050 168,755 — 12,776 11,496 64,428 $ 20,306,197 $ 4,306,505 $ 58,965 2,862,026 $ 25,552 2,130,156 164,435 157,615 833,022 4,076,063 3,848,240 76,257 8,000,560 — — 533 — — 78,466 521,180 2,755,354 — 32,059 2,787,413 — — 348 — 10,688,766 1,619,440 (3,102) 12,305,637 $ 20,306,197 405,514 1,116,209 (2,979) 1,519,092 $ 4,306,505 CME Group Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data) Revenues Clearing and transaction fees Quotation data fees Processing services Access and communication fees Other Total Revenues Expenses Compensation and benefits Communications Technology support services Professional fees and outside services Amortization of purchased intangibles Depreciation and amortization Occupancy and building operations Licensing and other fee agreements Restructuring Other Total Expenses Operating Income Non-Operating Income and Expense Investment income Securities lending interest income Securities lending interest expense Interest expense Guarantee of exercise right privileges Equity in losses of unconsolidated subsidiaries Total Non-Operating Income Before Income Taxes Income tax provision Net Income Earnings per Common Share: Basic Diluted Weighted Average Number of Common Shares: Basic Diluted See accompanying notes to consolidated financial statements. 2007 2006 2005 YE AR EN D ED D ECEMBER 31 $ 1,427,320 $ 866,089 $ 696,201 145,054 106,404 35,804 41,519 80,836 90,148 28,742 24,132 1,756,101 1,089,947 71,741 68,730 27,830 25,264 889,766 263,347 43,471 50,480 53,142 33,878 105,653 48,202 35,651 8,892 62,892 705,608 202,966 179,594 31,580 31,226 33,184 1,267 72,783 29,614 25,728 — 40,521 468,869 31,098 26,837 26,118 732 64,917 28,529 17,982 — 36,013 411,820 1,050,493 621,078 477,946 73,059 121,494 (114,453) (3,629) (17,167) (13,995) 45,309 1,095,802 437,269 55,792 94,028 (92,103) (223) — (6,915) 50,579 671,657 264,309 31,441 58,725 (56,778) (319) — (2,636) 30,433 508,379 201,522 $ 658,533 $ 407,348 $ 306,857 $ 15.05 14.93 $ 11.74 11.60 43,754 44,107 34,696 35,124 $ 8.94 8.81 34,315 34,839 CME GROUP 2007 ANNUAL REPORT 63 CME Group Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity Class A Common Stock (Shares) 34,099 418 25 2 1 279 7 3 2 34,836 34,836 19,816 (1,695) 309 6 4 2 (in thousands, except per share data) Balance at December 31, 2004 Comprehensive income: Net income Change in net unrealized loss on securities, net of tax of $833 Total comprehensive income Cash dividends on common stock of $1.84 per share Exercise of stock options Excess tax benefits from option exercises and restricted stock vesting Vesting of issued restricted Class A common stock Shares issued to Board of Directors Shares issued under the Employee Stock Purchase Plan Stock-based compensation Balance at December 31, 2005 Comprehensive income: Net income Change in net unrealized loss on securities, net of tax of $842 Change in foreign currency translation adjustment, net of tax of $284 Total comprehensive income Adjustment to initially adopt SFAS No. 158, net of tax of $1,174 Sale of membership shares by OneChicago, LLC, net of tax of $1,717 Cash dividends on common stock of $2.52 per share Exercise of stock options Excess tax benefits from option exercises and restricted stock vesting Vesting of issued restricted Class A common stock Shares issued to Board of Directors Shares issued under the Employee Stock Purchase Plan Stock-based compensation Balance at December 31, 2006 Cumulative effect of adopting FIN No. 48 Balance at January 1, 2007 Comprehensive income: Net income Change in net unrealized loss on securities, net of tax of $1,232 Change in net actuarial loss on defined benefit plans, net of tax of $1,570 Change in foreign currency translation adjustment, net of tax of $259 Total comprehensive income Cash dividends on common stock of $3.44 per share Common stock and stock options issued to complete merger, including stock issuance costs Repurchase of Class A common stock Exercise of stock options Excess tax benefits from option exercises and restricted stock vesting Vesting of issued restricted Class A common stock Shares issued to Board of Directors Shares issued under the Employee Stock Purchase Plan Stock-based compensation Balance at December 31, 2007 See accompanying notes to consolidated financial statements. 64 CME GROUP 2007 ANNUAL REPORT Class B Common Stock Common Stock and Additional (Shares) Paid-In Capital 261,391 $ 3 Retained Earnings $ 552,801 306,857 (63,260) Accumulated Other Comprehensive Income (Loss) $ (1,595) Total Shareholders’ Equity 812,597 $ (1,312) 306,857 (1,312) 305,545 (63,260) 6,956 43,361 476 373 12,636 $ 1,118,684 407,348 2,603 (87,537) 15,422 43,882 1,393 1,010 16,359 $ 1,519,092 (3,720) 1,515,372 6,956 43,361 476 373 12,636 325,193 2,603 15,422 43,882 1,393 34,545 3 $ $ 796,398 $ (2,907) 407,348 1,276 1,276 431 431 409,055 (1,779) (1,779) (87,537) 1,010 16,359 $ 405,862 405,862 3 3 $ 1,116,209 (3,720) 1,112,489 $ (2,979) (2,979) 658,533 658,533 1,854 1,854 (2,363) (2,363) 386 386 658,410 (151,582) (151,582) 11,126,141 (950,642) 39,113 42,541 2,143 1,295 22,846 $ 10,689,299 11,126,141 (950,642) 39,113 42,541 2,143 1,295 22,846 $ 12,305,637 $ 1,619,440 $ (3,102) 53,278 3 CME Group Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation Amortization of shares issued to Board of Directors Amortization of purchased intangibles Depreciation and amortization Loss on disposal of fixed assets Non-cash restructuring Allowance for doubtful accounts Net amortization (accretion) of premiums and discounts on marketable securities Amortization of debt issue costs and discount on commercial paper issued Guarantee of exercise right privileges Equity in losses of unconsolidated subsidiaries Deferred income taxes Change in assets and liabilities, net of effects from merger with CBOT Holdings: Accounts receivable Other current assets Other assets Accounts payable Other current liabilities Other liabilities Net Cash Provided by Operating Activities Cash Flows from Investing Activities: Proceeds from maturities of marketable securities Purchases of marketable securities Purchases of property, net Purchase of CBOE exercise right privileges Cash acquired in merger with CBOT Holdings Acquisition of Swapstream, net of cash received Merger-related transaction costs Capital contributions to FXMarketSpace Limited Contingent consideration for Liquidity Direct Technology, LLC assets Capital contributions to OneChicago, LLC Net Cash Used in Investing Activities Cash Flows from Financing Activities: Proceeds from short-term debt, net of debt issuance costs Repayment of short-term debt Cash dividends Stock issuance costs in merger with CBOT Holdings Payments for repurchase of common stock, including costs Proceeds from exercise of stock options Excess tax benefits related to employee option exercises and restricted stock vesting Proceeds from Employee Stock Purchase Plan Net Cash Used in Financing Activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and Cash Equivalents, End of Period Supplemental Disclosure of Cash Flow Information: Income taxes paid Interest paid (excluding securities lending program) Non-cash financing activities: Fair value of stock options and stock issued in connection with merger Non-cash investing activities: Net unrealized securities gains (losses) Change in foreign currency translation adjustment Sale of membership shares by OneChicago, LLC Merger-related transaction costs See accompanying notes to consolidated financial statements. 2007 2006 2005 YE AR EN D ED D ECEMBER 31 $ 658,533 $ 407,348 $ 306,857 22,846 1,733 33,878 105,653 — 6,472 375 (1,152) 1,431 17,167 13,995 (50,583) (49,926) 8,021 (1,256) 4,594 31,233 11,360 814,374 203,801 (129,125) (163,644) (39,750) 116,010 — (43,898) (18,973) (3,059) — (78,638) 1,160,836 (997,983) (151,582) (15,991) (949,340) 39,113 53,724 1,295 (859,928) (124,192) 969,504 845,312 413,697 2,017 $ $ 11,144,835 3,087 641 — 977 16,359 998 1,267 72,783 — — (276) 275 — — 6,915 (24,847) (35,878) 6,001 (10,275) 1,621 18,129 11,276 471,696 73,668 (29,681) (87,810) — — (17,651) (6,715) (13,876) (2,580) (1,215) (85,860) — — (87,537) — — 15,422 43,882 1,010 (27,223) 358,613 610,891 $ 969,504 $ 235,886 — — 2,118 715 4,320 5,924 12,636 318 732 64,917 676 — (261) 2,254 — — 2,636 (3,245) (11,634) (13,727) (5,239) 508 (9,368) 172 348,232 75,231 (70,063) (85,627) — — — — — (1,030) (844) (82,333) — — (63,260) — — 6,956 43,361 373 (12,570) 253,329 357,562 $ 610,891 $ 169,375 717 — (2,145) — — — CME GROUP 2007 ANNUAL REPORT 65 CME Group Inc. and Subsidiaries Notes to Consolidated Financial Statements . Summary of Significant Accounting Policies DESCRIPTION OF BUSINESS Effective July 12, 2007, Chicago Mercantile Exchange Holdings Inc. (CME Holdings) merged with CBOT Holdings, Inc. (CBOT Holdings). In connection with the merger, the combined company was renamed CME Group Inc. (CME Group). CME Group and its subsidiaries are referred to collectively as “the company” in the notes to the consolidated ﬁ nancial statements. Chicago Mercantile Exchange Inc. (CME) and the Board of Trade of the City of Chicago, Inc. (CBOT), wholly-owned subsidiaries of CME Group, are designated contract markets for the trading of futures and options on futures contracts. CME Group offers a wide range of products including those based on interest rates, equities, foreign exchange, commodities and alternative investments. Trades are executed through CME Group’s electronic trading platforms, open outcry and privately negotiated transactions. Through its in-house Clearing Division, CME Group clears, settles, nets and guarantees performance of all matched transactions in its products and products for which it provides third-party clearing services. CME, CBOT and their subsidiaries are referred to collectively as “the exchange” in the notes to the consolidated ﬁ nancial statements. PRINCIPLES OF CONSOLIDATION The ﬁ nancial statements and accompanying notes presented in this report include the consolidated ﬁ nancial results of the former CME Holdings and its subsidiaries for the years ended December 31, 2005 and 2006, and for the period January 1, 2007 through July 12, 2007. The ﬁ nancial results of the former CME Holdings and CBOT Holdings are included in the consolidated ﬁ nancial results of CME Group beginning on July 13, 2007. All intercompany transactions have been eliminated in consolidation. The assets of CME Group consist primarily of cash, marketable securities, investments in its subsidiaries, and exercise right privileges with the Chicago Board Options Exchange, Inc. (CBOE). CME Group’s liabilities consist primarily of commercial paper liabilities and a liability associated with the guaranteed value of outstanding exercise right privileges to eligible holders. RECLASSIFICATIONS Certain reclassiﬁ cations have been made to the prior years’ ﬁ nancial statements to conform to the presentation in 2007. USE OF ESTIMATES The preparation of ﬁ nancial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the ﬁ nancial statements, as well as the amounts of revenues and expenses reported during the period, and to disclose contingent assets and liabilities as of the date of the ﬁ nancial statements. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash equivalents consist of money market mutual funds and highly liquid investments with maturities of three months or less at the time of purchase. MARKETABLE SECURITIES Certain marketable securities have been classiﬁ ed as available for sale and are carried at fair value based on quoted market prices, with net unrealized gains and losses reported net of tax in accumulated other comprehensive income (loss). Interest on marketable securities is recognized as income when earned and includes accreted discount less amortized premium. Realized gains and losses are calculated using speciﬁ c identiﬁ cation. Additional securities held in connection with non-qualiﬁ ed deferred compensation plans have been classiﬁ ed as trading securities. These securities are included in marketable securities in the accompanying consolidated balance sheets at fair value, and net realized and unrealized gains and losses as well as dividend income are reﬂ ected in investment income. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of ﬁ nancial instruments. The carrying values of ﬁ nancial instruments included in assets and liabilities in the accompanying consolidated balance sheets are reasonable estimates of their fair values. ACCOUNTS RECEIVABLE In the ordinary course of business, a signiﬁ cant portion of accounts receivable and revenues are from clearing ﬁ rms that are also required to be shareholders of the company. Exposure to losses on receivables for clearing and transaction fees and other amounts owed by clearing ﬁ rms is dependent on each clearing ﬁ rm’s ﬁ nancial condition as well as the Class A and Class B shares that collateralize fees owed to the exchange. The exchange retains the right to liquidate shares to satisfy a clearing ﬁ rm’s receivable. 66 CME GROUP 2007 ANNUAL REPORT PERFORMANCE BONDS AND SECURITY DEPOSITS Performance bonds and security deposits held by the exchange for clearing ﬁ rms may be in the form of cash, securities or deposits in one of the Interest Earning Facilities (IEFs). Cash performance bonds and security deposits are reﬂ ected in the consolidated balance sheets. Cash received may be invested by CME. These investments are primarily overnight transactions in U.S. Government securities acquired through and held by a broker-dealer subsidiary of a bank or through CME’s IEF program. Any interest earned on these investments accrues to CME and is included in investment income in the consolidated statements of income. Securities deposited by clearing ﬁ rms consist primarily of short-term U.S. Treasury and U.S. Government agency securities and are not reﬂ ected in the accompanying consolidated balance sheets. These securities are held in safekeeping, although a portion of the clearing ﬁ rms’ proprietary performance bond deposits may be utilized in securities lending transactions. Interest and gain or loss on securities deposited to satisfy performance bond and security deposit requirements accrues to the clearing ﬁ rm. PROPERTY Property and equipment, excluding land, are reported at historical cost, net of accumulated depreciation and amortization. Land is reported at cost. As a result of its recent merger with CBOT Holdings, the company acquired three buildings with over 1.5 million square feet of commercial space. Building and improvements are recorded at cost less accumulated depreciation and amortization since acquisition. Computer software and systems include purchased software and systems, external costs speciﬁ cally identiﬁ able to the implementation of new systems and certain payroll and payroll-related costs for employees who are directly associated with and devote time to developing computer software for internal use. Depreciation and amortization expense results from the depreciation of property purchased, as well as the amortization of purchased and internally developed software. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, as follows: Land improvements Buildings Building improvements and equipment Furniture and fixtures Computer hardware and software 20 years 40 years 3 to 7 years 7 years 2 to 4 years Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases. Leasehold improvements funded by landlord allowances are capitalized in the consolidated balance sheets. Maintenance and repair items as well as certain minor purchases are charged to expense as incurred. All leases in which the company is the tenant are accounted for as operating leases under SFAS No. 13 “Accounting for Leases.” Landlord allowances are recorded as a reduction to rent expense on a straight-line basis over the term of the lease. SOFTWARE The company capitalizes certain costs of developing internal use software in accordance with the American Institute of Certiﬁ ed Public Accountants Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized costs generally are amortized over three years, commencing when the software is placed in service. Purchased software is amortized over four years. Multi-year software licenses are amortized over the life of the contract, which can range from three to seven years. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS The company reviews its long-lived assets and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable based on an examination of undiscounted cash ﬂ ows. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Goodwill and indeﬁ nite-lived intangible assets are reviewed for impairment on an annual basis and whenever events or circumstances indicate that their carrying values may not be recoverable. Impairment is recorded if the carrying amount exceeds fair value. CME GROUP 2007 ANNUAL REPORT 67 ACQUISITIONS The company accounts for acquisitions using the purchase method as required by SFAS No. 141, “Business Combinations.” Under SFAS No. 141, the acquiring company allocates the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition, including identiﬁ able intangible assets. The purchase price in excess of the fair value of the net assets and liabilities is recorded as goodwill. Among other sources, the company uses independent valuation services to assist in determining the estimated fair values of the assets and liabilities. EMPLOYEE BENEFIT PLANS SFAS No. 158, “Employers’ Accounting for Deﬁ ned Beneﬁ t Pension and Other Postretirement Plans” requires that the funded status of a deﬁ ned beneﬁ t postretirement plan be recognized in the consolidated balance sheets and changes in that funded status be recognized in the year of change in other comprehensive income. SFAS No. 158 also requires that plan assets and obligations be measured at year end. CME recognized the funded status of its pension plan as an asset in its consolidated balance sheets and recorded a one-time adjustment to accumulated other comprehensive income at December 31, 2006. The exchange recognizes future changes in actuarial gains and losses and prior service costs in the year in which the changes occur through other comprehensive income (loss). FOREIGN CURRENCY TRANSLATION Revenues and expenses of foreign subsidiaries are translated from their functional currencies into U.S. dollars using weighted-average exchange rates while their assets and liabilities are translated into U.S. dollars using period-end exchange rates. Gains or losses resulting from foreign currency translations are charged or credited to other comprehensive income (loss). REVENUE RECOGNITION The company’s revenue recognition policies comply with Staff Accounting Bulletin No. 101 on revenue recognition. On occasion, customers will pay for services in a lump sum payment. When these circumstances occur, revenue is recognized as services are provided. Revenue recognition policies for speciﬁ c sources of revenue are discussed below. Clearing and Transaction Fees Clearing and transaction fees include per contract charges for trade execution, clearing, trading on the electronic trading platforms and other fees. Fees are charged at various rates based on the product traded, the method of trade and the exchange trading privileges of the customer making the trade. Clearing and transaction fees are recognized as revenue when a buy and sell order are matched and the trade is cleared. Therefore, unﬁ lled or cancelled buy and sell orders have no impact on revenue. On occasion, the customer’s exchange trading privileges may not be properly entered by the clearing ﬁ rm and incorrect fees are charged for the transactions. When this information is corrected within the time period allowed by the exchange, a fee adjustment is provided to the clearing ﬁ rm. A reserve is established for estimated fee adjustments to reﬂ ect corrections to customer exchange trading privileges. The reserve is based on the historical pattern of adjustments processed as well as speciﬁ c adjustment requests. The company believes the allowances are adequate to cover estimated adjustments. Quotation Data Fees Quotation data fees represent revenue earned for the dissemination of market information. Revenues are accrued each month based on the number of devices reported by vendors. The exchange conducts periodic audits of the number of devices reported and assesses additional fees as necessary. An allowance is established to cover uncollectible receivables from market data vendors. Processing Services Processing services includes primarily revenues from clearing and settlement services provided to the CBOT through the closing of the merger on July 12, 2007 and electronic trading on CME Globex for the New York Mercantile Exchange (NYMEX). Although trading under the prior agreement with NYMEX ended in November 2005, trading under a new 10-year agreement began in June 2006. Access and Communication Fees Access fees are the connectivity charges to customers of the company’s electronic trading platform that are also used by market data vendors and customers. They include line charges, access fees for electronic trading platforms and hardware rental charges. The fees vary depending on the type of connection provided. An additional installation fee may be charged depending on the type of service requested and a disconnection fee may also be charged if certain conditions are met. Revenue is recognized monthly as the service is provided. An allowance is established to cover uncollectible receivables relating to access fees. 68 CME GROUP 2007 ANNUAL REPORT Communication fees consist of equipment rental and usage charges to customers and ﬁ rms that utilize the various telecommunications networks and services in the Chicago facilities. Revenue is billed and recognized on a monthly basis. Building Revenue Revenues from the rental of commercial space are recognized over the lease term, using the straight-line method as required under SFAS No. 13 “Accounting for Leases.” Under this method, revenue is recorded evenly over the entire term of occupancy for leases with scheduled rent increases or rent abatements. Also included in revenue are ancillary charges for parking, utilities, and miscellaneous services provided to tenants. Allowances for construction and other tenant costs are considered lease incentives and are recorded as a reduction to rental income on a straight-line basis over the term of the lease. Concentration of Revenue At December 31, 2007, there were approximately 120 clearing ﬁ rms. In 2007, one ﬁ rm represented approximately 11% of clearing and transaction fees revenue. No one ﬁ rm represented more than 10% of our clearing and transaction fees revenue in 2006 or 2005. Should a clearing ﬁ rm withdraw from either exchange, management believes the customer portion of that ﬁ rm’s trading activity would likely transfer to another clearing ﬁ rm. Therefore, management does not believe the company is exposed to signiﬁ cant risk from the loss of revenue received from a particular clearing ﬁ rm. The two largest resellers of market data represented approximately 67% of quotation data fees revenue in 2007, 55% in 2006, and 53% in 2005. Should one of these vendors no longer subscribe to the company’s market data, management believes the majority of that ﬁ rm’s customers would likely subscribe to the market data through another reseller. Therefore, management does not believe the company is exposed to signiﬁ cant risk from a loss of revenue received from any particular market data reseller. STOCK-BASED PAYMENTS The company accounts for stock-based payments under the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment.” All periods presented reﬂ ect stock-based compensation expense in accordance with the provisions of the effective guidance applied to all options granted or vested during the periods presented. The company recognizes expense relating to stock-based compensation on an accelerated basis. As a result, the expense associated with each vesting date within a stock grant is recognized over the period of time that each portion of that grant vests. Effective January 1, 2006, SFAS No. 123(R) required the company to estimate expected forfeitures of stock grants instead of the previous practice of accounting for forfeitures as they occur. MARKETING COSTS Marketing costs are incurred for the production and communication of advertising as well as other marketing activities. These costs are expensed when incurred, except for costs related to the production of broadcast advertising, which are expensed when the ﬁ rst broadcast occurs. INCOME TAXES Deferred income taxes are determined in accordance with SFAS No. 109, “Accounting for Income Taxes,” and arise from temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” which clariﬁ es the accounting for uncertainty in income taxes recognized in a company’s ﬁ nancial statements and prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken or expected to be taken. The interpretation provides guidance on recognition, classiﬁ cation, interest and penalties, accounting in interim periods, disclosure and transition. As of January 1, 2007, the company adopted FIN No. 48 and recorded an increase to current liabilities and a corresponding decrease to retained earnings as a result of a reassessment of its tax positions. The company classiﬁ es interest and penalties related to uncertain tax positions in income tax expense. SEGMENT REPORTING Based on materiality, GFX Corporation (GFX), a subsidiary of CME, Swapstream and the company’s real estate operations are not reportable segments and, as a result, there is no disclosure of segment information. CME GROUP 2007 ANNUAL REPORT 69 . Merger with CBOT Holdings Effective July 12, 2007, pursuant to the merger agreement dated October 17, 2006, as amended, CME Holdings completed its merger with CBOT Holdings. The company entered into this merger primarily as a means to diversify and expand its existing product base, further leverage its existing operating model, and better position itself to compete against other U.S. and foreign exchanges as well as the over- the-counter market. These factors are the primary drivers behind the excess of purchase price over the value of the assets acquired and liabilities assumed. Under purchase accounting, CME Holdings is considered the acquirer of CBOT Holdings. The preliminary purchase price consists of the following (in thousands, except per share data): Acquisition of outstanding common stock in exchange for CME Holdings’ common stock (52,843 CBOT Holdings shares x 0.375 exchange ratio x $560.24 per CME share) Acquisition of CBOT Holdings’ common stock prior to merger Fair value of CBOT Holdings’ stock options assumed Merger-related transaction costs Total Preliminary Purchase Price $ 11,101,928 19 42,907 50,237 $ 11,195,091 Acquisition of common stock Pursuant to the merger agreement, CBOT Holdings’ shareholders received 0.375 shares of Class A common stock of CME Group for each share of Class A common stock of CBOT Holdings issued and outstanding immediately prior to the effective time of the merger. This resulted in the issuance of 19.8 million shares of CME Group Class A common stock. The share price of $560.24 used to calculate the fair value of stock issued was based on the average closing price of CME Holdings Class A common stock for the ﬁ ve-day period beginning two trading days before and ending two trading days after July 6, 2007 (the merger agreement’s last amendment date). In addition, the company acquired 100 shares of CBOT Holdings Class A common stock in early 2007 for cash of $19,000. Fair value of stock options assumed At the close of the merger, CBOT Holdings had 291,800 stock options outstanding. Each stock option was converted using the 0.375 exchange ratio designated by the merger agreement. The preliminary fair value of stock options assumed was determined using a share price of $587.80, the closing price of the CME Holdings’ Class A common stock on July 12, 2007. The preliminary fair values of stock options were calculated using a Black-Scholes valuation model with the following assumptions: expected lives of 0.1 to 4.7 years; risk-free interest rate of 5.0%; expected volatility of 29%; and a dividend yield of 0.6%. The portion of estimated fair value of unvested stock options related to future service has been allocated to deferred stock-based compensation and is being amortized over the remaining vesting period. Merger-related transaction costs These include costs incurred by CME Holdings for investment banking fees, legal and accounting fees, and other external costs directly related to the merger. 70 CME GROUP 2007 ANNUAL REPORT Preliminary purchase price allocation In accordance with SFAS No. 141, “Business Combinations,” the preliminary purchase was allocated to CBOT Holdings’ net tangible and identiﬁ able intangible assets based on their estimated fair values as of July 12, 2007 as set forth below. (in thousands) Cash and cash equivalents Other current assets Property and equipment Intangible assets Other non-current assets Accounts payable and other current liabilities Long-term deferred tax liabilities, net Other non-current liabilities Restructuring liabilities Deferred stock-based compensation Net tangible and intangible assets Goodwill Total Preliminary Purchase Price $ 116,010 37,054 154,138 9,802,076 41,363 (50,093) (3,924,126) (11,422) (21,112) 2,704 6,146,592 5,048,499 $ 11,195,091 The excess of the purchase price over the net tangible and identiﬁ able intangible assets was recorded as goodwill. Intangible assets and goodwill are not deductible for tax purposes except for an immaterial portion of goodwill attributable to tax-deductible merger-related transaction costs. The allocation of the purchase price was based on certain preliminary valuations and the estimates and assumptions are subject to change. The company expects to ﬁ nalize its purchase price allocation within the next six months. Intangible assets In performing the preliminary purchase price allocation, the company considered many factors including its intentions for the future use of acquired assets, analyses of historical ﬁ nancial performance and estimates of future performance. The preliminary fair value of the trade name was estimated using the relief from royalty method. The preliminary fair values for components of lease-related intangibles were derived from income capitalization and sale comparison approaches. The preliminary fair values for all other intangible assets were estimated using a multi-period excess earnings method. The following table sets forth the intangible assets identiﬁ ed in the merger at their preliminary fair values as of July 12, 2007: (in thousands) Trading products (a) Clearing firm relationships (b) Market data customer relationships (b) Trade name Dow Jones licensing agreement Real estate lease relationships Market rate and above market leases Products in development (c) Open interest Total Intangible Assets Fair Value $ 7,987,000 1,154,000 325,000 215,000 74,000 23,411 18,765 2,600 2,300 $ 9,802,076 Estimated Useful Life Indefinite 30 years 30 years Indefinite 11 years 14 years 5 years Indefinite 0.5 year (a) Trading products include agricultural, ﬁ nancial and other trading product lines. Th e majority of these products have traded at CBOT for decades (and in some cases for more than 120 years) and authorizations by the U.S. Commodity Futures Trading Commission to trade these products are perpetual. (b) Clearing ﬁ rm and market data customer relationships represent the underlying relationships with CBOT’s current clearing ﬁ rm and market data customer base. Due to their historically insigniﬁ cant attrition rates, the amortization of clearing ﬁ rm and market data customer relationships has been calculated on a straight-line basis. Th is method best reﬂ ects the estimated pattern in which the economic beneﬁ ts from these relationships will be realized. (c) Products in development include products that have reached technological feasibility. CME GROUP 2007 ANNUAL REPORT 71 Pre-merger contingencies The company has not identiﬁ ed any material unrecorded pre-merger contingencies that were both probable and reasonably estimable. If prior to the end of the one-year purchase price allocation period, information becomes available which indicates that it is probable that such events had occurred and the amounts can be reasonably estimated, adjustments will be made to the purchase price allocation. Pro forma results The following unaudited condensed pro forma consolidated income statements assume that the merger was completed as of January 1, 2006. (in thousands, except per share data) Total Revenues Total Expenses Total Non-Operating Income (Expense) Net Income Earnings per Common Share – Basic Earnings per Common Share – Diluted YE AR EN D ED D ECEMBER 31 2007 2006 $ 2,123,491 $ 1,634,981 940,779 47,088 717,597 13.23 13.14 $ 803,707 42,742 525,853 $ 9.65 9.57 This pro forma information has been prepared for comparative purposes only and is not intended to be indicative of past or future results. The pro forma information for all periods presented includes purchase accounting effects on historical CBOT Holdings’ operating results, amortization of purchased intangibles, stock-based compensation expense for unvested stock options assumed, and the impact on investment income of CBOT Holdings’ special dividend, which was paid under the terms of the merger agreement. Pro forma results for the years ended December 31, 2007 and 2006 include CBOT Holdings’ merger-related transaction costs of approximately $63.0 million and $11.0 million, respectively. . Securities Lending Securities lending transactions utilize a portion of the securities that clearing ﬁ rms have deposited to satisfy their proprietary performance bond requirements. At December 31, 2007, the securities lending program utilized some of the securities deposited by 19 clearing ﬁ rms. At December 31, 2007 and 2006, the par value of securities available totaled $7.3 billion and $7.6 billion, respectively. Under its securities lending program, CME lends a security to a third party on an overnight basis and receives collateral in the form of cash. The cash is then invested on an overnight basis to generate interest income. At December 31, 2007, collateral from securities lending was invested in either a bank money market mutual fund or overnight repurchase agreement. The related interest expense represents payment to the borrower of the security for the cash collateral retained during the duration of the lending transaction. Securities on loan are marked to market daily and compared to collateral received. CME’s policy allows lending of up to 70% of total securities available from clearing ﬁ rms. At December 31, 2007 and 2006, the fair value of securities on loan was $2.9 billion and $2.1 billion, respectively. The average daily balance of securities on loan for the years ended December 31, 2007, 2006 and 2005 was $2.3 billion, $1.9 billion and $1.8 billion, respectively. 72 CME GROUP 2007 ANNUAL REPORT . Marketable Securities AVAILABLE-FOR-SALE SECURITIES Certain marketable securities have been classiﬁ ed as available for sale. The amortized cost and fair value of these securities at December 31 were as follows: (in thousands) U.S. Treasury U.S. Government agency State and municipal Equity Total 2007 Amortized Cost Fair Value Amortized Cost Fair Value 2006 $ 165,355 $ 165,765 $ 205,552 $ 203,419 1,325 13,190 12 1,324 13,153 19 20,596 27,278 20,322 26,977 — — $ 179,882 $ 180,261 $ 253,426 $ 250,718 Net unrealized gains (losses) on marketable securities classiﬁ ed as available for sale are reported as a component of comprehensive income (loss) and included in the accompanying consolidated statements of shareholders’ equity. The fair value and the continuous duration of gross unrealized losses on marketable securities with unrealized losses that are not deemed to be other-than-temporarily impaired, at December 31 were as follows: (in thousands) U.S. Treasury U.S. Government agency State and municipal Total (in thousands) U.S. Treasury U.S. Government agency State and municipal Total Less than 12 Months Unrealized Losses Fair Value $ — — — $ — $ — — — $ — Less than 12 Months Unrealized Losses Fair Value $ — — — $ — $ — — — $ — 2007 12 Months or Greater Unrealized Losses Fair Value $ 34,271 1,324 11,391 $ 46,986 $ 49 1 43 $ 93 2006 12 Months or Greater Unrealized Losses Fair Value $ 173,550 $ 2,146 20,322 21,869 274 327 $ 215,741 $ 2,747 Total Unrealized Losses $ 49 1 43 $ 93 Total Unrealized Losses $ 2,146 274 327 $ 2,747 Fair Value $ 34,271 1,324 11,391 $ 46,986 Fair Value $ 173,550 20,322 21,869 $ 215,741 These unrealized losses were caused by increases in interest rates that occurred after the marketable securities were purchased. The company has the ability and intent to hold these marketable securities until a recovery of fair value, which may be maturity, and therefore does not consider these investments to be other-than-temporarily impaired at December 31, 2007 or 2006. Unrealized gains on marketable securities totaled $472,000 at December 31, 2007 and $38,000 at December 31, 2006. At December 31, 2007, all marketable securities with a contractual maturity date were scheduled to mature within one year or less. The amortized cost and the fair value of these securities were $179.9 million and $180.2 million, respectively, at December 31, 2007. CME’s policy allows it to pledge U.S. Treasury securities as performance bond collateral in lieu of, or in combination with, irrevocable letters of credit for the mutual offset agreement with Singapore Exchange Limited (SGX) (note 19). CME may pledge up to a maximum of $100.0 million measured as the aggregate fair value at the time of any collateral adjustment. CME retains the earnings on the securities and may substitute letters of credit for these securities at its discretion. The aggregate fair value of pledged securities was $100.1 million and $100.7 million at December 31, 2007 and 2006, respectively. Pledged securities are included within marketable securities in the consolidated balance sheets. CME GROUP 2007 ANNUAL REPORT 73 TRADING SECURITIES CME maintains additional investments in a diverse portfolio of mutual funds related to its non-qualiﬁ ed deferred compensation plan (note 16). The fair value of these securities was $23.0 million and $18.8 million at December 31, 2007 and 2006, respectively. . Other Current Assets Other current assets consisted of the following at December 31: (in thousands) Net deferred income taxes (note 15) Prepaid technology license and maintenance contracts Other prepaid expenses Prepaid insurance Accrued interest receivable Due from broker Forward contract receivable (note 20) Other Total . Performance Bonds and Security Deposits 2007 $ 18,399 12,595 6,191 5,464 4,580 3,595 2,660 2,416 $ 55,900 2006 $ 7,196 10,072 3,592 3,444 4,523 6,074 — 2,665 $ 37,566 CME clears and guarantees the settlement of CME, CBOT and FXMarketSpace Limited (FXMS) contracts traded in their respective markets. In its guarantor role, CME has precisely equal and offsetting claims to and from clearing ﬁ rms on opposite sides of each contract, standing as an intermediary on every contract cleared. Clearing ﬁ rm positions are combined to create a single portfolio for each clearing ﬁ rm’s regulated and non-regulated accounts with CME for which performance bond and security deposit requirements are calculated. To the extent that funds are not otherwise available to CME to satisfy an obligation under the applicable contract, CME bears counterparty credit risk in the event that future market movements create conditions that could lead to clearing ﬁ rms failing to meet their obligations to CME. CME reduces its exposure through a risk management program that includes initial and ongoing ﬁ nancial standards for designation as a clearing ﬁ rm, initial and maintenance performance bond requirements and mandatory security deposits. Each clearing ﬁ rm is required to deposit and maintain balances in the form of cash, U.S. Government securities, bank letters of credit or other approved investments to satisfy security deposit and performance bond requirements. All obligations and non-cash deposits are marked to market on a daily basis. In addition, the rules and regulations of CBOT require certain minimum ﬁ nancial requirements for delivery of physical commodities, maintenance of capital requirements and deposits on pending arbitration matters. To satisfy these requirements, CBOT clearing ﬁ rms have deposited cash and U.S. Treasury securities. Beginning in February 2007, CME began clearing the over-the-counter foreign exchange products for FXMS. CME requires the deposit and maintenance of performance bonds and security deposits for these products. The cash portion of these performance bonds and security deposits are reﬂ ected in the consolidated balance sheet as of December 31, 2007. Cash performance bonds and security deposits are included in the consolidated balance sheets, and these balances may ﬂ uctuate signiﬁ cantly over time due to the investment choices available to clearing ﬁ rms and any change in the amount of deposits required. Securities deposited are not reﬂ ected in the consolidated ﬁ nancial statements and CME does not earn any interest on these deposits. Clearing ﬁ rms, at their option, may instruct CME to deposit the cash held by CME into one of four IEF programs. The total principal in all IEF programs was $19.2 billion at December 31, 2007 and $15.8 billion at December 31, 2006. The security deposits held in the 74 CME GROUP 2007 ANNUAL REPORT IEF2 program may be used as collateral for CME’s $800.0 million revolving line of credit. The consolidated statements of income reﬂ ect management fees earned under the IEF programs of $8.4 million, $8.4 million and $8.6 million during 2007, 2006 and 2005, respectively. These fees are included in other revenues. CME and the Options Clearing Corporation (OCC) have a cross-margin arrangement, whereby a common clearing ﬁ rm may maintain a cross- margin account in which the clearing ﬁ rm’s positions in certain CME futures and options 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 (note 19). Cross-margin cash, securities and letters of credit jointly held with OCC under the cross-margin agreement are reﬂ ected at 50% of the total, or CME’s proportionate share per that agreement. In addition, CME has cross-margin agreements with LCH.Clearnet Group (LCH), the Fixed Income Clearing Corporation (FICC) and NYMEX whereby the clearing ﬁ rms’ offsetting positions with CME and LCH, CME and FICC, or CME and NYMEX, as applicable, are subject to reduced performance bond requirements. Clearing ﬁ rms maintain separate performance bond deposits with each clearing house, but depending on the net offsetting positions between CME and LCH, CME and FICC, or CME and NYMEX, as applicable, each clearing house may reduce that ﬁ rm’s performance bond requirements. Each clearing ﬁ rm is also required to deposit and maintain speciﬁ ed security deposits in the form of cash or approved securities. In the event that performance bonds, security deposits, and other assets required to support clearing membership of a defaulting clearing ﬁ rm are inadequate to fulﬁ ll that clearing ﬁ rm’s outstanding ﬁ nancial obligation, the entire security deposit fund is available to cover potential losses after ﬁ rst utilizing operating funds of CME in excess of amounts needed for normal operations (surplus funds). Surplus funds totaled $190.9 million at December 31, 2007. CME maintains a secured line of credit with a consortium of banks to provide liquidity and capacity to pay settlement variation to all clearing ﬁ rms, even if a clearing ﬁ rm may have failed to meet its ﬁ nancial obligations to CME, or in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between the CME and the clearing ﬁ rms (note 12). The amount available under the line of credit totaled $800.0 million at December 31, 2007. Additionally, CME has an option to request an increase in the credit facility to $1.0 billion. Clearing ﬁ rm security deposits received in the form of U.S. Treasury or Government agency securities, or in money market mutual funds purchased through IEF2, as well as the performance bond assets of any ﬁ rm that may default on its obligations to CME, can be used to collateralize the secured line of credit. CME is required under the Commodity Exchange Act to segregate cash and securities deposited by clearing ﬁ rms on behalf of their customers. In addition, CME rules require a segregation of all funds deposited by clearing ﬁ rms from its operating funds. Cash and securities held as performance bonds and security deposits at fair value at December 31 were as follows: (in thousands) Performance bonds Security deposits Cross-margin arrangements Performance collateral for delivery Total 2007 2006 Securities and IEF Funds $ 57,165,539 1,440,034 486,157 49,840 Cash $ 505,964 15,148 68 — Securities and IEF Funds $ 47,270,561 1,250,497 273,726 — $ 59,141,570 $ 521,180 $ 48,794,784 Cash $ 799,078 18,623 — 15,321 $ 833,022 Cash performance bonds may include intraday settlement, if any, that is owed to the clearing ﬁ rms and paid the following business day. The balance of intraday settlements was $137.5 million at December 31, 2007 and $42.0 million at December 31, 2006. These amounts are invested on an overnight basis and are offset by an equal liability owed to clearing ﬁ rms. CME GROUP 2007 ANNUAL REPORT 75 In addition to cash and securities, irrevocable letters of credit may be used as performance bond deposits and security deposits. At December 31, these letters of credit, which are not included in the accompanying consolidated balance sheets, were as follows: (in thousands) Performance bonds Security deposits Total Letters of Credit 2007 2006 $ 2,751,900 $ 1,453,070 45,000 30,000 $ 2,796,900 $ 1,483,070 All cash, securities and letters of credit are only available to meet the ﬁ nancial obligations of that clearing ﬁ rm to CME. . Property A summary of the property accounts at December 31 is presented below: (in thousands) Land and land improvements Building and building improvements Equipment, furniture and fixtures Leasehold improvements Software and software development costs Total property Accumulated depreciation and amortization Property, net . Goodwill and Intangible Assets 2007 $ 58,538 82,198 283,004 207,000 181,833 812,573 (435,121) $ 377,452 $ 2006 — — 222,111 154,546 138,629 515,286 (346,531) $ 168,755 During July 2007, the company merged with CBOT Holdings. In connection with the merger, the company recorded goodwill and identiﬁ able intangible assets. Indeﬁ nite-lived intangibles consist primarily of trading products. Acquired amortizable intangible assets included primarily customer relationships, the Dow Jones & Company, Inc. (Dow Jones) licensing agreement and real estate intangibles. The values of goodwill and identiﬁ able intangible assets are based on a preliminary purchase price allocation as of December 31, 2007. During 2006, the company acquired Swapstream. In connection with the acquisition, the company recorded goodwill and identiﬁ able intangible assets. Intangible assets consisted primarily of customer relationships and technology-related intellectual property. Additionally, during 2004, the company acquired a contractual market making and non-compete agreement from Liquidity Direct Technology, LLC, a private trading technology ﬁ rm whose assets were acquired in 2004. The ﬁ rm developed technology to facilitate the trading of complex combinations and spreads typically used with options. Goodwill activity for the years ended December 31, 2007 and 2006 consisted of the following: Balance at December 31, 2005 Acquisition Other Activity(a) Balance at December 31, 2006 Acquisition Other Activity(a) Balance at December 31, 2007 $ — — $ — $ 10,982 $ 514 $ 11,496 $ — $ 399 $ 11,895 — — — 5,048,499 (11,183) 5,037,316 $ 10,982 $ 514 $ 11,496 $ 5,048,499 $ (10,784) $ 5,049,211 (in thousands) Swapstream CBOT Holdings Total Goodwill (a) Other activity includes a foreign currency translation adjustment for Swapstream and the recognition of excess tax beneﬁ ts upon exercise of stock options assumed from CBOT Holdings. 76 CME GROUP 2007 ANNUAL REPORT Intangible assets consisted of the following at December 31, 2007 and 2006: (in thousands) Intangible Assets with Finite Lives: Clearing firm, market data and 2007 Accumulated Amortization Cost Net Book Value 2006 Accumulated Amortization Cost Net Book Value other customer relationships $ 1,480,700 $ (23,415) $ 1,457,285 $ 1,700 $ (113) $ 1,587 Dow Jones licensing agreement Lease-related intangibles Market maker agreement Technology-related intellectual property Other (b) 74,000 42,176 9,682 4,100 5,300 (3,147) (2,526) (2,898) (908) (3,875) 70,853 39,650 6,784 3,192 1,425 — — — — — — 7,282 (1,595) 5,687 4,100 2,296 (245) (649) 3,855 1,647 Total Amortizable Intangible Assets $ 1,615,958 $ (36,769) $ 1,579,189 $ 15,378 $ (2,602) $ 12,776 Intangible Assets with Indefinite Lives: Trading products Trade name Products in development $ 7,987,000 $ 215,000 2,600 Total Indefinite-Lived Intangible Assets 8,204,600 — — — — $ 7,987,000 $ 215,000 2,600 8,204,600 — — — — $ — $ — — — — — — — Total Intangible Assets $ 9,820,558 $ (36,769) $ 9,783,789 $ 15,378 $ (2,602) $ 12,776 (b) Other intangible assets consist primarily of open interest, non-compete agreements, trade names and foreign currency translation adjustments. Total amortization expense for intangible assets was $33.9 million, $1.3 million and $0.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, the future estimated amortization expense related to amortizable intangible assets is expected to be (in thousands): Year 2008 2009 2010 2011 2012 $ 64,505 64,356 64,077 63,689 61,554 . Investments in Joint Ventures and Related Party Transactions In May 2006, the company entered into an agreement with Reuters Group PLC and its wholly-owned subsidiaries, Reuters Holdings Limited and Reuters Limited (Reuters, collectively), to create FXMS, the world’s ﬁ rst centrally-cleared, global foreign exchange marketplace, through a joint venture owned 50% each by CME Group and Reuters. The company’s investment in FXMS is recorded using the equity method of accounting and is not a variable interest entity under FIN No. 46(R), “Consolidation of Variable Interest Entities.” The investment balance of $13.6 million at December 31, 2007 includes $32.9 million of cumulative capital contributions of which $19.0 million was contributed in 2007. Capital contributions are reduced by the company’s proportionate share of FXMS’ periodic operating results. Net losses are included in equity in losses of unconsolidated subsidiaries in the consolidated statements of income and totaled $13.2 million and $6.1 million for the years ended December 31, 2007 and 2006, respectively. CME GROUP 2007 ANNUAL REPORT 77 CME provides trading, clearing, regulatory, and billing services to FXMS pursuant to the terms of servicing and licensing agreements. Deferred revenue related to future services totaled $9.5 million and $10.2 million as of December 31, 2007 and 2006, respectively, and is included in other current liabilities and other liabilities. Deferred revenue is recognized on a straight-line basis over the term of service, which began in February 2007. Deferred revenue related to trading, clearing and regulatory services is recognized over ﬁ ve years. Deferred revenue related to billing services is recognized over three years. Recognition of deferred revenue and monthly fees earned for ongoing trading, clearing, regulatory, and billing services totaled $2.6 million for the year ended December 31, 2007. CME has also entered into a sublease agreement to lease a portion of its ofﬁ ce space in London to FXMS (note 18). The company accounts for its interest in OneChicago, a joint venture, under the equity method of accounting. OneChicago is not a variable interest entity as deﬁ ned under FIN No. 46(R). On March 15, 2006, Interactive Brokers Group LLC made an investment for a 40% interest in OneChicago. As a result, CME’s ownership decreased from approximately 40% to 24%. During 2007, as a result of the merger with CBOT Holdings, the company acquired an additional 5% ownership interest which totaled $0.9 million at December 31, 2007. The company’s total investment balance of $5.0 million at December 31, 2007 also includes capital contributions of $15.7 million and an increase in the investment of $4.3 million resulting from Interactive Brokers Group LLC’s investment, reduced by the company’s proportionate share of the joint venture’s periodic net losses. Net losses are included in equity in losses of unconsolidated subsidiaries in the consolidated statements of income and totaled $0.8 million, $0.8 million, and $2.6 million for the years ended December 31, 2007, 2006 and 2005, respectively. CME provides certain communications and regulatory services to OneChicago, fees from which are included in other revenues, and earned $0.5 million, $0.9 million and $2.2 million in revenue for these services in 2007, 2006 and 2005, respectively. . Building Leases As a result of the 2007 merger with CBOT Holdings, the company acquired three buildings with over 1.5 million square feet of commercial space. A portion of the space is utilized by the company as ofﬁ ce space and a trading ﬂ oor. The remaining space is leased by third party tenants, including customers and shareholders, over terms ranging from one to nineteen years. The terms of the leases with customers and shareholders are consistent with terms for other third-party tenants. Minimum future cash ﬂ ows from rental revenue are as follows (in thousands): Year 2008 2009 2010 2011 2012 $ 20,096 18,945 16,092 14,772 12,841 78 CME GROUP 2007 ANNUAL REPORT . Other Assets Other assets consisted of the following at December 31: (in thousands) CBOE exercise right privileges Deferred rental income Investment in FXMS (note 9) Cash surrender value of executive life insurance policies Prepaid defined benefit plan assets (note 16) Investment in OneChicago (note 9) FXMS deferred development costs (note 9) Net deferred income taxes (note 15) Merger-related transaction costs Other Total 2007 $ 36,566 $ 15,364 13,605 10,954 7,906 4,988 2,659 — — 16,648 $ 108,690 2006 — 73 7,796 — — 4,826 3,204 30,941 12,639 4,949 $ 64,428 Under the terms of the merger agreement, eligible CBOT members who hold CBOE exercise right privileges (ERPs) were each given the choice of tendering their ERP to the company for $250,000 payable after the closing or to participate as a class member in the CBOE lawsuit with a guaranteed payment of up to $250,000 if the lawsuit results in a recovery of less than that amount. At closing, there were 1,331 ERPs outstanding. In August 2007, 159 ERPs were tendered to the company. The cost of the exercise rights acquired was reduced by the fair value of the guarantee liability for the ERPs tendered at the date of tender. The acquired ERPs are recorded at the lower of cost or market value and are assessed for other-than-temporary impairment on a quarterly basis. Executive life insurance policies are carried at their cash surrender values at December 31, 2007. Other consists primarily of prepaid software and hardware maintenance, prepaid insurance and deferred rental brokerage. . Short-Term Debt At December 31, 2007, CME Group maintained a 364-day revolving loan facility, with various ﬁ nancial institutions, which provides for loans of up to $750.0 million. At its option, the company may borrow under the facility at either LIBOR plus 0.13% per annum or the base rate, which is deﬁ ned as the greater of the U.S. federal funds effective rate plus 0.5% per annum or the prime rate. The company pays a fee of 0.02% per year to maintain the revolving loan. The facility will expire on July 25, 2008. As of December 31, 2007, the company has not borrowed any funds against the revolving loan facility. This revolving loan facility serves as a back-up facility for a commercial paper program. Proceeds from the program were used to fund the company’s recent tender offer stock repurchase and related fees. Under the terms of the facility, proceeds can also be used to ﬁ nance the planned transaction with Brazilian Mercantile & Futures Exchange (BM&F) and to pay general corporate purposes of up to $300.0 million. Commercial paper notes with an aggregate par value of $1.2 billion and maturities ranging from one to 97 days were issued during the year. At December 31, 2007, $164.4 million remained outstanding. The weighted average interest rate of commercial paper outstanding at December 31, 2007 was 4.59%. The weighted average balance of all notes outstanding during the year was $64.2 million. Interest rates for notes outstanding during the year ranged from 4.50% to 5.38%. On October 12, 2007, CME renewed its $800.0 million secured committed line of credit with a consortium of banks. The secured credit agreement, which expires on October 10, 2008, is collateralized by clearing ﬁ rm security deposits held by the clearing house in the form of U.S. Treasury or agency securities, security deposit funds in Interest Earning Facilities and performance bond deposits of the clearing CME GROUP 2007 ANNUAL REPORT 79 ﬁ rm that defaulted on its obligation, if any. The amount held as available collateral at December 31, 2007 was $1.4 billion. The line of credit can only be drawn on to the extent that it is collateralized and may be utilized in certain situations, such as a temporary disruption of the domestic payments system that would delay settlement between the exchange and its clearing ﬁ rms, or in the event of a clearing ﬁ rm default. As of December 31, 2007, the company has not borrowed any funds against the revolving loan facility. Under the terms of the credit agreement, there are a number of covenants with which CME must comply. Among these covenants, CME is required to maintain at all times a consolidated tangible net worth of not less than $96.0 million. Interest on amounts borrowed before maturity is calculated at the U.S. federal funds rate plus 0.45% per annum and after maturity at the U.S. federal funds rate plus 2.40% per annum. Commitment and agency fees for the line of credit totaled $0.8 million for the year ended December 31, 2007 and $0.6 million for each of the years ended December 31, 2006 and 2005. Under the terms of the 2007 agreement, CME has the option to request an increase in the facility from $800.0 million to $1.0 billion at the time of a draw, subject to the approval of the participating banks. . Restructuring In August 2007, subsequent to its recent merger with CBOT Holdings, the company approved and initiated plans to restructure its operations in order to eliminate redundant costs and improve operational efﬁ ciencies. Restructuring efforts include reductions in employee positions, the closure of duplicate facilities and consolidation of trading and other technologies. Total estimated restructuring costs of $33.6 million consist primarily of severance and transitional payments and contract termination penalties. Payments for restructuring cost will be substantially complete by July 2008. Costs of $21.1 million were recognized as a liability in the preliminary allocation of CBOT Holdings’ purchase price, and accordingly, have resulted in an increase to goodwill. Restructuring expense may change as the company executes its approved plans. Future increases in estimates will be recorded as an adjustment to goodwill during the purchase accounting allocation period and as an adjustment to operating expenses thereafter. Future decreases in estimates will be recorded as an adjustment to goodwill regardless of the date of the decrease. In addition to costs recognized in purchase accounting, costs of $11.9 million, excluding interest expense and foreign currency translation adjustments, are expected to be recognized as restructuring expense over the future service period required from transitional employees. Through December 31, 2007, the company has recorded restructuring expense of $8.9 million. Interest expense resulting from the deferral of restructuring payments is included in interest expense in the consolidated statements of income. The following is a summary of restructuring activity: (in thousands) Severance and associated costs Contract terminations Total Restructuring 2007 Restructuring Costs Interest on Deferred Payments $ 19,553 10,447 $ 30,000 $ 138 253 $ 391 Total Accrued to Date $ 19,691 10,700 $ 30,391 Cash Payments $ (7,948) — $ (7,948) Liability at December 31, 2007 $ 11,743 10,700 $ 22,443 Total Expected Payments $ 22,744 10,816 $ 33,560 80 CME GROUP 2007 ANNUAL REPORT . Other Curent Liabilities Other current liabilities consisted of the following at December 31: (in thousands) Accrued employee bonus Accrued income taxes Accrued operating expenses Accrued restructuring (note 13) Accrued salaries and benefits Accrued real estate taxes Unearned revenue Other Total . Income Taxes The provision for income taxes is composed of the following: (in thousands) Current: Federal State Total Deferred: Federal State Total 2007 $ 45,725 30,494 28,905 22,443 12,737 8,497 2,872 5,942 2006 $ 33,974 6,852 18,582 — 8,228 320 4,068 6,442 $ 157,615 $ 78,466 2007 2006 2005 $ 396,310 91,542 487,852 (40,703) (9,880) (50,583) $ 236,542 52,614 289,156 (21,253) (3,594) (24,847) $ 166,617 38,150 204,767 (2,016) (1,229) (3,245) Total Provision for Income Taxes $ 437,269 $ 264,309 $ 201,522 Reconciliation of the statutory U.S. federal income tax rate to the effective tax rate is as follows: Statutory U.S. federal tax rate State taxes, net of federal benefit Federal tax-exempt interest income Non-deductible expenses Valuation reserve for Swapstream losses Other, net Effective Tax Rate 2007 35.0% 4.8 (0.5) 0.1 0.3 0.2 39.9% 2006 35.0% 4.7 (0.6) 0.1 0.2 — 39.4% 2005 35.0% 4.7 (0.3) 0.1 — 0.1 39.6% CME GROUP 2007 ANNUAL REPORT 81 At December 31, 2007 and 2006, deferred tax assets (liabilities) consisted of the following: (in thousands) Net Current Deferred Tax Assets (Liabilities): Stock-based compensation Restructuring Accrued expenses and other Total current deferred tax assets Total current deferred tax liabilities Net Current Deferred Tax Assets Net Non-Current Deferred Tax Assets: Depreciation and amortization Fair value adjustment on real estate Stock-based compensation Foreign net operating losses Deferred compensation Guarantee of CBOE exercise right privileges Deferred rent Other Subtotal Valuation allowance Total non-current deferred tax assets Non-Current Deferred Tax Liabilities: Purchased intangible assets Software development costs Other Total non-current deferred tax liabilities Net Non-Current Deferred Tax Assets (Liabilities) 2007 2006 $ 4,629 4,203 9,718 18,550 (151) $ 4,921 — 3,256 8,177 (981) $ 18,399 $ 7,196 $ 30,472 $ 25,758 16,090 12,377 11,235 8,878 6,824 6,404 9,326 101,606 (11,235) 90,371 (3,915,155) (13,384) (10,072) (3,938,611) $ (3,848,240) — 6,523 9,203 6,356 — 1,748 2,893 52,481 (9,203) 43,278 — (10,825) (1,512) (12,337) $ 30,941 A valuation allowance is recorded when it is more-likely-than-not that some portion or all of the deferred tax assets may not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufﬁ cient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. A valuation allowance has been provided as of December 31, 2007 and 2006 for net operating loss carryforwards obtained through the acquisition of Swapstream and for net operating losses generated by those operations subsequent to the acquisition. These foreign net operating losses do not expire. Subsequent reversal of the valuation allowance for acquired net operating losses will reduce goodwill and not income tax expense. If reversed, goodwill would be reduced by $7.9 million. As of January 1, 2007, the company adopted the provisions of FIN No. 48, “Accounting for Uncertain Tax Positions.” At adoption, the company recorded a cumulative effect adjustment that reduced the balance of retained earnings as of January 1, 2007. At adoption, the company had gross unrecognized tax beneﬁ ts of $5.4 million. Net of the tax impact in other jurisdictions, these unrecognized tax beneﬁ ts were $3.8 million and would be recorded as a net reduction to income tax expense if recognized in the future. As part of the merger with CBOT Holdings, the company assumed unrecognized tax beneﬁ ts of $2.3 million. At December 31, 2007, the company had gross unrecognized tax beneﬁ ts of $9.7 million. Net of the tax impact in other jurisdictions, these unrecognized tax beneﬁ ts were $7.5 million and would be recorded as a net reduction to income tax expense if recognized in the future. The company classiﬁ es interest and penalties related to uncertain tax positions in income tax expense. Total interest and penalties related to the unrecognized tax beneﬁ ts were $1.3 million and $2.3 million at adoption and at December 31, 2007, respectively. The company does not expect these unrecognized tax beneﬁ ts to signiﬁ cantly increase or decrease during 2008. 82 CME GROUP 2007 ANNUAL REPORT A reconciliation of the beginning and ending amount of unrecognized tax beneﬁ ts is as follows (in thousands): Balance at January 1, 2007 CBOT Holdings unrecognized tax benefits at date of merger Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Balance at December 31, 2007 $ 5,369 2,280 2,457 569 (971) $ 9,704 The company is subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. For CME Holdings, substantially all federal and state income tax matters have been concluded through 2005 and 2002, respectively. For CBOT Holdings, substantially all federal and state income tax matters have been concluded through 2003 and 2005, respectively. . Employee Benefit Plans PENSION PLANS The exchange maintains non-contributory deﬁ ned beneﬁ t cash balance pension plans for eligible employees. CME’s plan provides for a contribution to the cash balance account based on age and earnings and includes salary and cash bonuses in the deﬁ nition of earnings. Employees who have completed a continuous 12-month period of employment and have reached the age of 21 are eligible to participate. Participant cash balance accounts receive an interest credit equal to the greater of the one-year constant maturity yield for U.S. Treasury notes or 4.0%. Participants become vested in their accounts after three years of service. As a result of the merger, CME Group assumed the obligation related to the non-contributory deﬁ ned beneﬁ t pension plan for the former CBOT employees. The beneﬁ ts payable under the CBOT pension plan are based primarily on years of service and the employees’ average compensation levels. CBOT employees hired on or after January 1, 2006 were not eligible to participate in the plan. Beginning January 1, 2008, CBOT employees became eligible to participate in CME’s plan. The measurement date used for both plans is December 31. Information regarding the aggregate status and activity of the plans, including the CBOT activity from July 13, 2007 through December 31, 2007, is indicated below. (in thousands) Change in Projected Benefit Obligation: Benefit obligation at beginning of year CBOT’s benefit obligation at July 12, 2007 Service cost Interest cost Actuarial gain Benefits paid Curtailments Plan amendments 2007 2006 $ 49,917 $ 44,102 35,151 6,878 4,325 (108) (5,889) (294) — — 5,671 2,665 (1,194) (1,518) — 191 Projected Benefit Obligation at End of Year $ 89,980 $ 49,917 CME GROUP 2007 ANNUAL REPORT 83 The aggregate accumulated beneﬁ t obligation at December 31, 2007 and 2006 was $77.1 million and $38.9 million, respectively. (in thousands) Change in Plan Assets: Fair value of plan assets at beginning of year Fair value of CBOT’s plan assets at July 12, 2007 Actual return on plan assets Employer contributions Benefits paid Fair Value of Plan Assets at End of Year 2007 2006 2005 $ 50,467 43,370 688 9,250 (5,889) $ 97,886 $ 44,645 $ 36,712 — 4,740 2,600 (1,518) — 2,045 7,500 (1,612) $ 50,467 $ 44,645 At December 31, 2007 and 2006, the fair value of pension plan assets exceeded the projected beneﬁ t obligation by $7.9 million and $0.6 million, respectively. This excess is recorded as a non-current pension asset due to the adoption of SFAS No. 158. The funding goal for the exchange is to have its pension plans 100% funded at each year end on a projected beneﬁ t obligation basis, while also satisfying any minimum required contribution and obtaining the maximum tax deduction. Year-end 2007 assumptions have been used to project the liabilities and assets from December 31, 2007 to December 31, 2008. The result of this projection is that estimated liabilities would exceed the fair value of plan assets at December 31, 2008 by approximately $8.0 million. Accordingly, it is estimated that an $8.0 million contribution in 2008 will allow the company to meet its funding goal. The exchange expects to merge the two pension plans by December 31, 2008 and will make one contribution to the new combined plan during 2008. The components of net pension expense and the assumptions used to determine end-of-year projected beneﬁ t obligation and net pension expense in aggregate are indicated below: (in thousands) Components of Net Pension Expense: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial loss Curtailment loss Net Pension Expense Assumptions Used to Determine End-of-Year Benefit Obligations: Discount rate Rate of compensation increase Cash balance interest crediting rate Assumptions Used to Determine Net Pension Expense: Discount rate Rate of compensation increase Expected return on plan assets Interest crediting rate 2007 2006 2005 $ 4,960 2,344 (2,586) 6 97 — $ 4,821 $ 6,878 4,325 (5,199) 22 100 16 $ 6,142 2007 6.10% 5.00 4.10 $ 5,671 2,665 (3,162) 6 206 — $ 5,386 2006 5.80% 5.00 4.00 2007 2006 2005 6.20% 5.00 8.00 4.10 5.50% 5.00 7.50 4.00 5.75% 5.00 7.50 4.00 The discount rate for both plans is determined based on an interest rate yield curve pursuant to Emerging Issues Task Force Topic No. D-36, “Selection of Discount Rates Used for Measuring Deﬁ ned Beneﬁ t Pension Obligations and Obligations of Post Retirement Beneﬁ t Plans Other Than Pensions.” The yield curve is comprised of bonds with a rating of Aaa and Aa and maturities between zero and thirty 84 CME GROUP 2007 ANNUAL REPORT years. The expected annual beneﬁ t cash ﬂ ows for the exchange’s pension plans are discounted to develop a single-point discount rate by matching the plan’s expected payout structure to such yield curve. The basis for determining the expected rate of return on plan assets for each plan is comprised of three components: historical returns, industry peers and forecasted returns. The plan’s total return is expected to equal the composite performance of the security markets over the long term. The security markets are represented by the returns on various domestic and international stock, bond and commodity indexes. These returns are weighted according to the allocation of plan assets to each market and measured individually. The component of the investment policy for each plan that has the most signiﬁ cant impact on returns is the asset mix. The asset mix has a minimum and maximum range depending on asset class. The plan assets are diversiﬁ ed to minimize the risk of large losses by any one or more individual assets. Such diversiﬁ cation is accomplished, in part, through the selection of asset mix and investment management. The asset allocation for CME’s plan, by asset category, at December 31 was as follows: Equity securities Debt securities Other investments The asset allocation for CBOT’s plan, by asset category, at December 31 was as follows: Equity securities Debt securities Cash and cash equivalents 2006 59% 36 5 2007 57% 38 5 2007 37% 25 38 The target asset allocation for the plans will remain unchanged in 2008. During 2006, the exchange adopted SFAS No. 158, “Employers’ Accounting for Deﬁ ned Beneﬁ t Pension and Other Postretirement Plans.” Under SFAS No. 158, the funded status of the pension plan was recognized as an asset in the consolidated balance sheet and a one-time adjustment to accumulated other comprehensive income was recorded. The incremental effect on the consolidated balance sheet of adopting SFAS No. 158 as of December 31, 2006 is as follows: (in thousands) Current prepaid pension asset Non-current pension asset Deferred income tax asset (liability) Total assets Accumulated other comprehensive loss Total shareholders’ equity Before Adoption of SFAS No. 158 $ 3,503 — (1,393) 4,308,284 (1,200) 1,520,871 Adjustments After Adoption of SFAS No. 158 $ (3,503) $ 550 1,174 (1,779) (1,779) (1,779) — 550 (219) 4,306,505 (2,979) 1,519,092 Due to the adoption of SFAS No. 158, prior service costs of $0.2 million and actuarial losses of $2.7 million were recognized in accumulated other comprehensive loss as of December 31, 2006. CME GROUP 2007 ANNUAL REPORT 85 The balance and activity of the prior service costs and actuarial losses, which are included in accumulated other comprehensive income, are as follows: (in thousands) Balance at January 1, 2007 Unrecognized loss Recognized as a component of net pension expense Curtailment gain Balance at December 31, 2007 Prior Service Costs $ 241 — (16) (22) $ 203 Actuarial Loss $ 2,712 4,365 (100) (294) $ 6,683 The company expects to amortize $402,000 of actuarial loss and $22,000 of prior service costs from accumulated other comprehensive loss into net periodic beneﬁ t cost in 2008. At December 31, 2007, anticipated beneﬁ t payments from the plans in future years are as follows (in thousands): Year 2008 2009 2010 2011 2012 2013-2017 $ 11,428 6,090 7,178 7,750 8,487 53,796 OTHER POST-RETIREMENT BENEFIT PLAN As part of the merger, CME Group also assumed the obligation for the post-retirement beneﬁ t plan for legacy and former CBOT employees. Employees retiring from CBOT Holdings on or after age 55, who have at least ten years of services, or after 65 with ﬁ ve years of service, are entitled to post-retirement medical beneﬁ ts. Effective January 1, 2008, the plan has been closed to new participants. The exchange will fund beneﬁ t costs as payments become due. The measurement date of plan obligations is December 31. At December 31, 2007, the projected beneﬁ t obligation of the plan was $5.4 million The plan’s net periodic beneﬁ t cost for July 13, 2007 through December 31, 2007 was $0.2 million. SAVINGS PLAN CME maintains a savings plan pursuant to Section 401(k) of the Internal Revenue Code, whereby all U.S. employees are participants and have the option to contribute to this plan. CME matches employee contributions up to 3% of the employee’s base salary and may make additional discretionary contributions of up to 2% of base salary. In conjunction with various changes to its retirement beneﬁ ts strategy, the exchange has not made a discretionary contribution since 2005. CBOT maintained a qualiﬁ ed savings plan pursuant to Section 401(k) of the Internal Revenue Code for former CBOT Holdings employees during 2007. Prior to January 1, 2008, CBOT made matching contributions of up to 4% to eligible employees. The cost of these matching contributions totaled $0.5 million for the period July 13 through December 31, 2007. As of January 1, 2008, CBOT’s plan was merged with CME’s plan for U.S. employees. No further contributions will be made to the CBOT plan after this date. Aggregate expense for savings plans amounted to $3.7 million, $3.0 million and $4.5 million in 2007, 2006 and 2005, respectively. CME London-based employees are eligible to participate in a deﬁ ned contribution plan. The plan provides for age-based earnings contributions and does not have any vesting requirements. Salary and cash bonuses paid are included in the deﬁ nition of earnings. Effective January 1, 2008, the company contribution will change to a ﬂ at 10% of earnings in order to comply with the Employment Equality Regulations released in 2006. Total expense for the London deﬁ ned contribution beneﬁ t plan was $0.6 million, $0.3 million and $0.2 million in 2007, 2006 and 2005, respectively. 86 CME GROUP 2007 ANNUAL REPORT CME NON-QUALIFIED PLANS The following non-qualiﬁ ed plans, under which participants may make assumed investment choices with respect to amounts contributed on their behalf, are maintained by CME. Although not required to do so, CME invests such contributions in assets that mirror the assumed investment choices. The balances in these plans are subject to the claims of general creditors of the exchange and totaled $23.0 million and $18.8 million at December 31, 2007 and 2006, respectively. Although the value of the plans is recorded as an asset in the consolidated balance sheets, there is an equal and offsetting liability. The investment results of these plans have no impact on net income as the investment results are recorded in equal amounts to both investment income and compensation and beneﬁ ts expense. Supplemental Savings Plan CME maintains a supplemental plan to provide beneﬁ ts for employees who have been impacted by statutory limits under the provisions of the qualiﬁ ed pension and savings plans. All CME employees hired prior to January 1, 2007 are immediately vested in their supplemental plan beneﬁ ts. All CME employees hired on or after January 1, 2007 are subject to the vesting requirements of the underlying qualiﬁ ed plans. Total expense for the supplemental plan was $0.9 million, $0.8 million and $0.7 million in 2007, 2006 and 2005, respectively. Deferred Compensation Plan A deferred compensation plan is maintained by CME, under which eligible ofﬁ cers and members of the Board of Directors may contribute a percentage of their compensation and defer income taxes thereon until the time of distribution. Supplemental Executive Retirement Plan CME maintains a deﬁ ned contribution plan for senior ofﬁ cers. Under this plan prior to 2006, CME made an annual contribution of a percentage of salary and bonus for eligible employees. The Supplemental Executive Retirement Plan was frozen to new entrants on December 31, 2005 and further contributions for current participants were suspended. Contributions made in 2003 through 2005 vest after ﬁ ve years of service from the ofﬁ cer’s date of hire. Unvested contributions are returned to the exchange if a participant leaves the employment of CME. Total expense for the plan, reduced by any forfeitures, was $0.2 million in 2005. CBOT OFFICER PENSION PLAN As part of the merger, the company assumed the liability for CBOT’s non-qualiﬁ ed supplemental pension plan for former ofﬁ cers of CBOT Holdings who elected to participate in the plan. The liability for this non-qualiﬁ ed plan, which amounted to $1.6 million as of December 31, 2007, is funded by life insurance policies on the lives of the participating employees. There is a trust established for the purpose of administering this non-qualiﬁ ed plan. . Other Liabilities Other liabilities consisted of the following at December 31: (in thousands) Non-qualified deferred compensation plans (note 16) Deferred rent Guarantee of exercise right privileges (note 11) Unearned revenue Post-retirement and non-qualified benefit plans (note 16) Other Total 2007 $ 23,047 21,724 13,983 7,109 6,936 3,458 $ 76,257 2006 $ 18,798 4,608 — 7,465 — 1,188 $ 32,059 CME GROUP 2007 ANNUAL REPORT 87 . Commitments OPERATING LEASES CME Group has commitments under operating leases for certain facilities that are accounted for in accordance with SFAS No. 13, “Accounting for Leases.” On August 24, 2007, the company renegotiated the operating lease for its headquarters at 20 South Wacker Drive in Chicago. The lease, which has an initial term ending on November 30, 2022, contains two consecutive renewal options for seven and ten years and a contraction option which allows the company to reduce its occupied space after November 30, 2018. Annual minimum payments under the headquarters operating lease now range from $6.9 million to $11.1 million. This operating lease also includes CME’s trading facilities, which were previously leased from CME Trust and were sold by CME Trust to the building’s new owner during 2007. CME established CME Trust in 1969 but does not maintain any residual interest in any of its assets. In August 2006, CME Group entered into an operating lease for additional ofﬁ ce space in Chicago. The initial lease term, which became effective on August 10, 2006, terminates on November 30, 2023. The lease contains two 5-year renewal options beginning in 2023. Annual minimum rentals for this lease range from $1.5 million to $5.6 million. CME Group also maintains an operating lease for ofﬁ ce space in London which became effective on November 3, 2006. The lease will terminate on March 1, 2019. However, CME Group has an option to terminate the lease without penalty on December 25, 2011. Annual minimum rentals range from $1.1 million to $1.3 million. If CME Group does not exercise the option to terminate the lease on December 25, 2011, annual minimum rental payments will be $1.3 million after 2011. In conjunction with this lease, CME Group entered into an agreement to sublease a portion of this space to FXMS. Annual minimum rent revenues from the sublease, which terminates on February 26, 2019, range from $0.5 million to $0.6 million. The sublease will terminate if CME Group exercises the option to terminate the lease between itself and the landlord on December 25, 2011. Leases for other locations where CME Group maintains space expire at various times from 2012 to 2014 with annual minimum rentals that will not exceed $4.9 million in any year. Total rental expense, including equipment rental, was $31.4 million in 2007, $24.7 million in 2006 and $23.3 million in 2005. OTHER COMMITMENTS Commitments include long-term liabilities as well as contractual obligations that are non-cancelable. These contractual obligations totaled $105.0 million at December 31, 2007 and relate primarily to software licenses, hardware and maintenance as well as telecommunication services that are expensed as the related services are used. Future minimum obligations under non-cancelable operating leases, purchase obligations and other liabilities in effect at December 31, 2007 are payable as follows (in thousands): Year 2008 2009 2010 2011 2012 Thereafter Total Operating Leases $ 17,731 16,338 16,632 17,120 16,599 147,922 Purchase Obligations $ 66,640 Other Liabilities $ 21,651 9,408 8,588 6,356 6,000 8,000 — — — — — Total $ 106,022 25,746 25,220 23,476 22,599 155,922 $ 232,342 $ 104,992 $ 21,651 $ 358,985 Licensing Agreements CME Group has various licensing agreements including agreements with The Nasdaq Stock Market (NASDAQ) and Dow Jones relating to certain equity index products. The license agreement with NASDAQ is exclusive with respect to futures and options on futures contracts based on certain NASDAQ indexes through October 9, 2012. On September 11, 2007, CME Group renewed its product licensing agreement with Dow Jones. The agreement enables the exchange to continue to exclusively offer futures and options on futures products based on the Dow Jones Industrial Average and other Dow 88 CME GROUP 2007 ANNUAL REPORT Jones Indexes. The new agreement is effective January 1, 2008 through December 31, 2014 and includes an upfront payment as well as minimum annual payments. The agreement also includes a provision for a ﬁ ve year renewal term and successive annual renewal terms after the initial ﬁ ve year renewal term. The upfront payment will be recognized over the initial term of the agreement. The licensing agreement CME Group maintained with the Frank Russell Company to license the Russell 2000 Index expires in September 2008 and will not be renewed. Managed Service Agreement As a result of its recent merger with CBOT Holdings, the company has assumed a managed service agreement with Atos Euronext Market Solutions for use of the e-CBOT trading platform. Initially set to expire on December 31, 2008, the agreement is now scheduled to terminate on July 17, 2008. These agreements are included in the preceding contractual obligations table. . Contingencies and Guarantees LEGAL MATTERS On October 14, 2003, the U.S. Futures Exchange, L.L.C. (Eurex U.S.) and U.S. Exchange Holdings, Inc., ﬁ led suit against CBOT and CME in the United States District Court for the District of Columbia. The suit alleges that CBOT and CME violated the antitrust laws and tortiously interfered with the business relationship and contract between Eurex U.S. and The Clearing Corporation. Eurex U.S. and U.S. Exchange Holdings, Inc. are seeking a preliminary injunction and treble damages. On December 12, 2003, CBOT and CME ﬁ led separate motions to dismiss or, in the event the motion to dismiss is denied, to move the venue to the United States District Court for the Northern District of Illinois. On September 2, 2004, the judge granted CBOT’s and CME’s motion to transfer venue to the Northern District of Illinois. In light of that decision, the judge did not rule on the motions to dismiss. On March 25, 2005, Eurex U.S. ﬁ led a second amended complaint in the United States District Court for the Northern District of Illinois. On June 6, 2005, CME and CBOT ﬁ led a motion to dismiss the complaint. On August 25, 2005, the judge denied the joint CME/CBOT motion to dismiss. The parties are currently engaged in discovery. On April 9, 2007, CME and CBOT ﬁ led two joint motions for summary judgment. 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. On August 23, 2006, CBOT Holdings and CBOT, along with a class consisting of certain CBOT full members, ﬁ led a lawsuit in the Court of Chancery of the State of Delaware against the CBOE. The lawsuit seeks to enforce and protect the ERPs. The lawsuit alleges that these ERPs allow CBOT’s full members who hold them to become full members of CBOE and to participate on an equal basis with other members of CBOE in CBOE’s announced plans to demutualize. On January 4, 2007, the plaintiffs ﬁ led a Second Amended Complaint, in which they added a count seeking a declaration that, contrary to the position taken by the CBOE before the Securities and Exchange Commission (SEC), the merger between CBOT Holdings and CME Holdings would not result in the termination of the ERPs. The lawsuit seeks declaratory and injunctive relief as well as recovery of attorneys’ fees. On January 11, 2007, the plaintiffs ﬁ led a motion for partial summary judgment. On January 16, 2007, the defendants ﬁ led a motion to dismiss the Second Amended Complaint. On January 15, 2008, the SEC approved CBOE’s rule interpretation that no person qualiﬁ es to become or remain a CBOE exerciser member following the merger. All parties to the litigation and the judge have agreed that the stay previously granted in August 2007, which was implemented pending the SEC’s decision, is no longer in effect and CBOT has ﬁ led a motion seeking to amend its complaint to reﬂ ect current circumstances. 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 will not have a material adverse effect on its consolidated ﬁ nancial position or results of operations. CBOE EXERCISE RIGHT PRIVILEGES Under the terms of the merger agreement, eligible CBOT members who hold ERPs were each given the choice of tendering their ERP to the company for $250,000 payable after the closing or to participate as a class member in the CBOE lawsuit with a guaranteed payment of up to $250,000 from the company if the lawsuit results in a recovery of less than that amount. At the close of the merger, there were 1,331 ERPs outstanding. In August 2007, 159 ERPs were tendered to the company. As of December 31, 2007, there were 1,172 outstanding ERPs that could seek recovery from CME Group under the guarantee election. The maximum possible CME GROUP 2007 ANNUAL REPORT 89 aggregate payment under the guarantee is $293.0 million. At December 31, 2007, the company’s liability under the guarantee, which is recorded at fair value and included in other liabilities in its consolidated balance sheet, was estimated as $14.0 million. The fair value of the outstanding guarantee will continue to be adjusted on a quarterly basis until the lawsuit is resolved. EMPLOYMENT-RELATED AGREEMENTS The exchange has employment agreements and other retention arrangements with Terrence A. Duffy, Executive Chairman and Craig S. Donohue, Chief Executive Ofﬁ cer. Effective November 1, 2006, Mr. Duffy became the Executive Chairman, an executive ofﬁ cer of the company. For his service, Mr. Duffy receives as annual base salary of $1.0 million. Pursuant to a resolution approved by the Compensation Committee and the Board of Directors, Mr. Duffy is entitled to a retention payment in the amount of his annual base salary, if at the end of his term as Executive Chairman he is willing and able to serve another term as Executive Chairman and is not nominated for re-election to the Board and/or is not re-elected to the position of Executive Chairman by the members of the Board, if he is eligible to serve on the Board, subject to certain conditions. The Compensation Committee also authorized management, subject to annual review by the Committee, to self-insure the supplemental life and long-term disability coverage amounts necessary to provide Mr. Duffy with the same level of life and long-term disability coverage generally provided to employees under the Company’s group life and long-term disability policies. Additionally, the Committee authorized the Company to gross up the self-insured supplemental life insurance amount to account for any taxes on such amount owed by Mr. Duffy’s beneﬁ ciaries. Pursuant to this agreement, Mr. Duffy would be entitled to disability insurance beneﬁ ts based on two-thirds of base pay and life insurance beneﬁ ts based on three times base pay. Mr. Donohue’s agreement is through January 1, 2009, subject to renewal by mutual written agreement. Under the terms of the agreement, Mr. Donohue’s annual base salary will be at least $0.9 million. In the event of a termination without cause, as deﬁ ned in the agreement, Mr. Donohue is entitled to a one-time lump sum severance payment equal to two times his current base salary and will automatically vest in any outstanding equity awards that would have vested during the remaining term of the agreement. In the event Mr. Donohue voluntarily terminates the agreement for good reason, as deﬁ ned in the agreement, Mr. Donohue is entitled to a one-time lump sum severance payment equal to two times his current base salary and will automatically vest in any outstanding equity awards. The employment agreements also provide that these executive ofﬁ cers are eligible to participate in CME’s beneﬁ t plans and programs, including the equity program and annual incentive plan, commensurate with their position in accordance with CME’s policies for executives in effect from time to time. MUTUAL OFFSET AGREEMENT CME and SGX have a mutual offset agreement that has been extended through October 2009. When a clearing ﬁ rm of CME chooses to execute an after-hours trade in an eligible product at SGX, the resulting trade can be transferred from SGX to CME, and CME assumes the ﬁ nancial obligation to SGX for the transferred trade. A similar obligation can occur when a clearing ﬁ rm of SGX chooses to execute a trade in an eligible product at CME. The net position of each exchange to the other is marked-to-market daily based on the settlement prices of the applicable exchange, and settlement is made between the exchanges in cash. Since settlement prices at each exchange may differ at the end of any given day and Singapore and Chicago operate in different time zones, there may be a difference between the two settlement amounts and there will be a difference in the timing of the settlement. To allow for adequate and timely funding of the settlement and in the unlikely event of a payment default by a clearing ﬁ rm, CME and SGX each maintain collateral payable to the other exchange. CME can maintain collateral in the form of U.S. Treasury securities or irrevocable letters of credit. At December 31, 2007, CME was contingently liable to SGX on irrevocable letters of credit totaling $113.0 million and had pledged securities with a fair value of $100.1 million. Regardless of the collateral, CME guarantees all cleared transactions submitted through SGX and would initiate procedures designed to satisfy these ﬁ nancial obligations in the event of a default, such as the use of security deposits and performance bonds of the defaulting clearing ﬁ rm. CROSS -MARGIN AGREEMENTS CME and OCC have a cross-margin arrangement, whereby a common clearing ﬁ rm may maintain a cross- margin account in which the clearing ﬁ rm’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 ﬁ rm defaults, the gain or loss on the liquidation of the ﬁ rm’s open position and the proceeds from the liquidation of the cross-margin account are split 50% each to CME and OCC. 90 CME GROUP 2007 ANNUAL REPORT A cross-margin agreement with LCH became effective in March 2000, whereby clearing ﬁ rms’ offsetting positions with CME and LCH are subject to reduced margin requirements. Similar cross-margin agreements exist with FICC and NYMEX whereby clearing ﬁ rms’ offsetting positions with CME and FICC or CME and NYMEX are subject to reduced margin requirements. Clearing ﬁ rms maintain separate performance bond deposits with each clearing house, but depending on the net offsetting positions between CME and LCH, CME and FICC, or CME and NYMEX, as applicable, each clearing house may reduce the ﬁ rm’s performance bond requirement. In the event of a ﬁ rm default, the total liquidation net gain or loss on the ﬁ rm’s offsetting open positions and the proceeds from the liquidation of the performance bond collateral held by each clearing house’s supporting offsetting positions are split evenly between CME and the applicable clearing house. Additionally, for the LCH, FICC, and NYMEX cross-margin agreements, if, after liquidation of all the positions and collateral of the defaulting ﬁ rm 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 deﬁ cit, any additional surplus from the liquidation will be shared with the other clearing houses to the extent that they have a remaining liquidating deﬁ cit. Any remaining surplus funds will be passed to the bankruptcy trustee. GFX LETTER OF CREDIT CME guarantees a $5.0 million standby letter of credit for GFX. The beneﬁ ciary of the letter of credit is the clearing ﬁ rm that is used by GFX to execute and maintain its futures positions. Per exchange requirements, GFX is required to place performance bond deposits with its clearing ﬁ rm. The letter of credit, utilized as performance bond, will be drawn on in the event that GFX defaults in meeting requirements to its clearing ﬁ rm. In the unlikely event of a payment default by GFX, if GFX’s performance bond is not sufﬁ cient to cover the deﬁ cit, CME would guarantee the remaining deﬁ cit, if any. SWAPSTREAM ACQUISITION On August 25, 2006, CME Holdings completed its acquisition of Swapstream. Additional cash purchase consideration of up to $20.2 million is payable contingent upon meeting speciﬁ c performance conditions during the ﬁ rst ﬁ ve years of operations. Contingent consideration will be recorded as additional purchase price and will increase goodwill. To date, no contingent consideration obligations have been incurred under this arrangement. INTELLECTUAL PROPERTY INDEMNIFICATIONS Some agreements with customers accessing the Swapstream electronic trading platform, the Clearing 21 platform or the CME Globex platform; utilizing market data services; and licensing CME SPAN software contain indemniﬁ cations from intellectual property claims that may be made against them as a result of their use of these products and services. The potential future claims relating to these indemniﬁ cations cannot be estimated and, therefore, in accordance with FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others,” no liability has been recorded. . Derivatives Transactions GFX engages in the trading of certain CME futures contracts, primarily in foreign exchange products. GFX posts bids and offers in these products on the CME Globex electronic trading platform to maintain a market and promote additional liquidity in these contracts. GFX limits risk from these transactions through offsetting transactions using futures contracts or spot foreign exchange transactions with approved counterparties in the interbank market. Formal trading limits have been established. Futures transactions are cleared by an independent clearing ﬁ rm. Any residual open positions are marked-to-market on a daily basis and all realized and unrealized gains and losses are included in other revenues in the accompanying consolidated statements of income. Net trading gains totaled $9.2 million in 2007, $7.0 million in 2006 and $7.6 million in 2005. At December 31, 2007, futures positions held by GFX had a notional value of $131.7 million, offset by a similar amount of spot foreign exchange positions, resulting in a zero net position. As a result of the merger with CBOT Holdings, CME Group assumed foreign currency forward contracts accounted for as fair value hedges. These contracts are intended to offset the effect of foreign exchange rate ﬂ uctuations on ﬁ rm commitments for purchases of ﬁ xed annual and quarterly services denominated in pounds sterling. Forward contracts designated as hedges had a notional value of $13.3 million (£6.7 million) and a fair value of $1.8 million at December 31, 2007. No gains or losses were excluded from the assessment of hedge effectiveness in 2007. Certain forward contracts previously designated as hedges have been undesignated as a result of negotiations with vendors which resulted in a reduction of liabilities previously hedged. Forward contracts which were undesignated had a notional value of $6.0 million (£3.0 million) and a fair value of $0.8 million at December 31, 2007. The fair value of forward contracts is recorded CME GROUP 2007 ANNUAL REPORT 91 in other current assets in the consolidated balance sheets. Losses related to contracts that no longer qualify for hedge accounting totaled $0.1 million in 2007. Gains and losses on hedging contracts and the underlying hedged items are recorded in investment income in the consolidated statements of income to the extent that the hedges are effective. Gains and losses on non-hedging contracts are also recorded in investment income. . Capital Stock SHARES OUTSTANDING As of December 31, 2007, 53.3 million shares of Class A common stock, 625 shares of Class B-1 common stock, 813 shares of Class B-2 common stock, 1,287 shares of Class B-3 common stock and 413 shares of Class B-4 common stock were issued and outstanding. CME Group has no shares of preferred stock issued and outstanding. In connection with its merger with CBOT Holdings, CME Group amended its certiﬁ cate of incorporation to increase the number of authorized shares of Class A common stock to 1.0 billion shares from 138 million shares. On August 1, 2007, CME Group commenced a ﬁ xed price tender offer for up to 6,250,000 shares of its Class A common stock (including the associated preferred stock purchase rights) at a price of $560. The tender offer was completed on September 5, 2007 and CME Group accepted for purchase 1,695,250 shares of its Class A common stock (including the associated preferred stock purchase rights), representing approximately 3.1% of the Class A common stock outstanding at the time of purchase. ASSOCIATED TRADING RIGHTS CME Group operates two separate self-regulatory organizations through its wholly owned subsidiaries, CME and CBOT. Members of the particular exchange own or lease trading rights which entitle them to access to the trading ﬂ oors and to discounts on trading fees as provided for by the rules of the particular exchange. Each class of CME Group Class B common stock is associated with a membership in a speciﬁ c division for trading at CME. A CME trading right is a separate asset that is not part of or evidenced by the associated share of Class B common stock of CME Group. The Class B common stock of CME Group is intended only to ensure that the Class B shareholders of CME Group retain rights with respect to representation on the Board of Directors and approval rights with respect to the core rights described below. Trading rights at CBOT are evidenced by Class B memberships in CBOT. Class B members of CBOT do not have any rights to elect members of the Board of Directors and are not entitled to receive dividends or other distributions on their Class B memberships in CBOT. CORE RIGHTS Holders of CME Group Class B common shares have the right to approve changes in speciﬁ ed rights relating to the trading privileges at CME associated with those shares. These core rights include allocation of products that a holder of trading rights is permitted to trade through the exchange; the trading ﬂ oor access rights and privileges of members; the number of memberships in each membership class and the number of authorized and issued shares of Class B common stock associated with that class; and eligibility requirements to exercise trading rights associated with Class B shares. Votes on changes to these core rights are weighted by class. Each class of Class B common stock has the following number of votes on matters relating to core rights: Class B-1, six votes per share; Class B-2, two votes per share; Class B-3, one vote per share; and Class B-4, 1/6th of one vote per share. The approval of a majority of the votes cast by the holders of shares of Class B common stock is required in order to approve any changes to core rights. Holders of shares of Class A common stock do not have the right to vote on changes to core rights. VOTING RIGHTS With the exception of the matters reserved to holders of CME Group Class B common stock, holders of common stock vote together on all matters for which a vote of common shareholders is required. In these votes, each holder of shares of Class A or Class B common stock of CME Group has one vote per share. TRANSFER RESTRICTIONS Each class of CME Group Class B common stock is subject to transfer restrictions contained in the Certiﬁ cate of Incorporation of CME Group. These transfer restrictions prohibit the sale or transfer of any shares of Class B common stock separate from the sale of the associated trading rights. 92 CME GROUP 2007 ANNUAL REPORT ELECTION OF DIRECTORS The CME Group Board of Directors is composed of 30 members, consisting of 20 directors from CME Holdings and 10 directors from CBOT Holdings. Holders of Class A and Class B common stock have the right to vote together in the election of 24 directors. Until 2012, at least ten of these 24 directors must be CBOT directors as deﬁ ned by our bylaws. Holders of Class B-1, Class B-2 and Class B-3 common stock have the right to elect the remaining six directors, of which three are elected by Class B-1 shareholders, two are elected by Class B-2 shareholders and one is elected by Class B-3 shareholders. DIVIDENDS Holders of Class A and Class B common stock of CME Group are entitled to receive proportionately such dividends, if any, as may be declared by the CME Group Board of Directors. OWNERSHIP REQUIREMENTS As of December 31, 2007, each clearing ﬁ rm clearing only CME or CBOT products was required to own 8,000 shares of Class A common stock in addition to either the Class B common stock of CME Group or the associated CBOT trading privileges, as applicable. For ﬁ rms clearing products at both CME and CBOT, the Class A common stock ownership requirement is increased to 12,000 shares. The total Class A common stock held by our clearing ﬁ rms pursuant to this requirement was 1.1 million shares at December 31, 2007. SHAREHOLDER RIGHTS PROVISIONS The Board of Directors of CME Group has adopted a plan creating rights that entitle CME Group’s shareholders to purchase shares of CME Group stock in the event that a third party initiates a transaction designed to take over the company. This rights plan is intended to encourage persons seeking to acquire control of CME Group to engage in arms-length negotiations with the Board of Directors and management. The rights are attached to all outstanding shares of CME Group common stock, and each right entitles the shareholder to purchase one one-thousandth of a share of Series A junior participating preferred stock at a purchase price of $1,000 per unit. The rights should not interfere with any merger or other business combination approved by the Board of Directors since the rights may be amended to permit such acquisition or redeemed by the company under the terms of the plan. In the event the rights become exercisable, each holder of a right shall receive, upon exercise, Class A common stock having a value equal to two times the exercise price of the right. OMNIBUS STOCK PLAN CME Group has adopted an Omnibus Stock Plan under which stock-based awards may be made to employees. A total of 4.0 million Class A shares have been reserved for awards under the plan. Awards totaling 3.2 million shares have been granted and are outstanding or have been exercised under this plan at December 31, 2007 (note 22). LONG-TERM EQUITY INCENTIVE PLAN In connection with the merger, CME Group assumed CBOT Holdings’ Long-Term Equity Incentive Plan. Under the plan stock-based awards may be made to certain directors, ofﬁ cers and other key employees or individuals. A total of 0.4 million shares have been reserved for awards under the plan. No awards have been granted under this plan subsequent to the merger and approximately 0.3 million shares remain available for future awards (note 22). DIRECTOR STOCK PLAN CME Group has adopted a Director Stock Plan under which awards are made to non-executive directors as part of their annual compensation. A total of 25,000 Class A shares have been reserved under this plan, and approximately 9,500 shares have been awarded through December 31, 2007 (note 22). EMPLOYEE STOCK PURCHASE PLAN CME Group has adopted an Employee Stock Purchase Plan (ESPP) under which employees may purchase Class A shares at 90% of the market value of the shares using after-tax payroll deductions. A total of 40,000 Class A shares have been reserved under this plan, of which approximately 5,300 shares have been purchased through December 31, 2007 (note 22). CME GROUP 2007 ANNUAL REPORT 93 . Stock-Based Payments For all periods presented, the company has utilized the fair value method of accounting for share-based payments, as provided in SFAS No. 123(R), “Share-Based Payment.” Effective January 1, 2006, the company began to estimate expected forfeitures of stock grants, as required by SFAS No. 123(R), instead of the previous practice of accounting for forfeitures as they occur. EMPLOYEE OPTIONS AND RESTRICTED STOCK AWARDS CME Group adopted an Omnibus Stock Plan under which stock-based awards may be made to employees. A total of 4.0 million Class A shares have been reserved for awards under the plan. Awards totaling 3.2 million shares have been granted and are outstanding or have been exercised under the plan as of December 31, 2007. Awards granted since 2003 generally vest over a ﬁ ve-year period, with 20% vesting one year after the grant date and on that same date in each of the following four years. In connection with the merger with CBOT Holdings, CME Group assumed stock options available or outstanding under CBOT Holdings’ Long-Term Equity Incentive Plan. A total of 0.4 million shares have been reserved for awards under the plan. Awards totaling 109,422 shares were outstanding under this plan at the time the merger closed and CME Group assumed the plan. No options have been awarded under this plan subsequent to the merger. Total compensation expense for stock-based payments was $22.9 million for the year ended December 31, 2007, $16.4 million for the year ended December 31, 2006, and $12.6 million for the year ended December 31, 2005. The total income tax beneﬁ t recognized in the consolidated statements of income for stock-based payment arrangements was $9.1 million, $6.5 million and $5.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. Excluding estimates of future forfeitures, at December 31, 2007, there was $43.7 million of total unrecognized compensation expense related to employee stock-based compensation arrangements that had not yet vested. That expense is expected to be recognized over a weighted average period of 2.4 years. Employee Options In 2007, the company granted employees stock options totaling 133,790 shares under the Omnibus Stock Plan. The options have a ten-year term with exercise prices ranging from $533 to $699, the closing market prices on the day of grant. The fair value of these options totaled $26.4 million, measured at the grant dates using the Black-Scholes valuation model. The Black-Scholes fair value of each option grant was calculated using the following assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life Year of Grant 2007 2006 2005 0.5% – 0.7 % 0.5% – 0.6 % 0.5% – 0.9 % 25.4% – 32.9 % 31.8% – 37.9 % 33.6% – 42.8 % 3.9% – 5.1 % 4.5% – 5.0 % 3.9% – 4.4 % 6.5 years 6.5 years 6 – 6.5 years The dividend yield was calculated by dividing that year’s expected dividend by the market price of the stock at the date of grant. Expected volatility was determined using a weighted-average implied volatility of traded options on the company’s stock. Historical volatility was evaluated, but it was determined that implied volatility was a better measure of expected future volatility. The risk-free rate was based on the U.S. Treasury yield in effect at the time of the grant. Since 2005, the expected life of options granted has been determined using the simpliﬁ ed method as outlined in guidance from the SEC. 94 CME GROUP 2007 ANNUAL REPORT The following table summarizes stock option activity for the year ended December 31, 2007: Outstanding at December 31, 2006 Granted Assumed in connection with merger (note 2) Exercised Cancelled Outstanding at December 31, 2007 Exercisable at December 31, 2007 Number of Shares 910,173 133,790 109,422 (308,745) (40,612) 804,028 283,210 Weighted Average Exercise Price $ 169 553 212 127 258 251 138 The weighted average grant date fair value of options granted during the years 2007, 2006, and 2005 was $197, $196 and $100 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005, was $140.9 million, $113.2 million and $107.8 million, respectively. Stock options outstanding at December 31, 2007 had a weighted average remaining contractual life of 7 years and an aggregate intrinsic value of $350 million. Stock options exercisable at December 31, 2007 had a weighted average remaining contractual life of 6 years and an aggregate intrinsic value of $155 million. Employee Restricted Stock In 2007, the company also granted 12,015 shares of restricted Class A common stock which generally have a vesting period of 2 to 5 years. The fair value related to these grants is $6.6 million, which will be recognized as compensation expense on an accelerated basis over the vesting period. The following table summarizes restricted stock activity for the period: Outstanding at December 31, 2006 Granted Vested Cancelled Outstanding at December 31, 2007 Number of Shares 19,250 12,015 (6,562) (1,988) 22,715 Weighted Average Grant Date Fair Value $ 210 551 176 252 396 The total fair value of restricted stock that vested during the years ended December 31, 2007, 2006 and 2005, was $3.8 million, $3.2 million and $5.9 million, respectively. EMPLOYEE STOCK PURCHASE PLAN Eligible employees may acquire shares of CME Group’s Class A common stock using after-tax payroll deductions made during consecutive offering periods of approximately six months in duration. Shares are purchased at the end of each offering period at a price of 90% of the closing price of the Class A common stock as reported on the New York Stock Exchange. Compensation expense is recognized on the date of purchase for the discount from the closing price. In 2007, 2006 and 2005, a total of 2,103, 2,089 and 1,124 shares, respectively, of Class A common stock were issued to participating employees. These shares are subject to a six-month holding period. Expense of $129,000, $101,000 and $42,000 for the purchase discount was recognized in 2007, 2006 and 2005, respectively. CME GROUP 2007 ANNUAL REPORT 95 DIRECTOR STOCK PLAN In 2005, CME Holdings added an equity component to its compensation for non-executive members of the Board of Directors. Under the original terms of the 2005 Director Stock Plan, non-executive directors received 100 shares of Class A common stock annually. Directors were also permitted to elect to receive some or all of the $17,500 cash portion of their annual stipend in shares of stock based on the closing price at the date of distribution. In August 2006, the cash portion of the annual stipend increased to $25,000. Non-executive directors may continue to elect to receive some or all of the cash portion of their annual stipend in shares of stock based on the closing price at the date of distribution. Additionally, each non-executive director now receives an annual award of Class A common stock with a value equal to $75,000. As a result, 4,072, 3,187 and 2,233 shares of Class A common stock were issued to non-executive directors during 2007, 2006 and 2005, respectively. These shares are not subject to any vesting restrictions. Expense of $1.7 million, $1.0 million and $0.3 million related to these stock-based payments was recognized for the years ended December 31, 2007, 2006 and 2005, respectively. . Accumulated Other Comprehensive Income (Loss) The following table sets forth the changes in each component of accumulated other comprehensive income (loss), net of tax: (in thousands) Net Unrealized Gain(Loss) on Securities Actuarial Gain(Loss) on Deﬁ ned Benefit Plans Balance at December 31, 2004 $ (1,595) $ Foreign Currency Translation Adjustment $ — Accumulated Other Comprehensive Income (Loss) $ (1,595) — — — 431 431 386 (1,312) (2,907) (1,779) 1,707 (2,979) (123) $ 817 $ (3,102) — — — (1,779) — (1,779) (2,363) $ (4,142) Change Balance at December 31, 2005 Adjustment to initially adopt SFAS No. 158 Change Balance at December 31, 2006 Change Balance at December 31, 2007 (1,312) (2,907) — 1,276 (1,631) 1,854 $ 223 96 CME GROUP 2007 ANNUAL REPORT . Earnings per Share Basic earnings per share is computed by dividing net income by the weighted average number of all classes of common stock outstanding during each year. Diluted earnings per share reﬂ ects the increase in shares using the treasury stock method to reﬂ ect 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. There were 134,100, 137,300 and 218,900 outstanding stock options at December 31, 2007, 2006 and 2005, respectively, which were anti-dilutive. (in thousands, except per share data) Net Income Weighted Average Common Shares Outstanding: Basic Effect of stock options Effect of restricted stock awards Diluted Earnings per Common Share: Basic Diluted 2007 $ 658,533 2006 2005 $ 407,348 $ 306,857 43,754 34,696 34,315 342 11 418 10 509 15 44,107 35,124 34,839 $ 15.05 14.93 $ 11.74 $ 11.60 8.94 8.81 CME GROUP 2007 ANNUAL REPORT 97 . Quarterly Information (unaudited) (in thousands, except per share data) Year Ended December 31, 2007: Total revenues Operating income Non-operating income (expense) Income before income taxes Net income Earnings per common share: Basic Diluted Year Ended December 31, 2006: Total revenues Operating income Non-operating income Income before income taxes Net income Earnings per common share: Basic Diluted . Subsequent Event First Quarter Second Quarter Third Quarter Fourth Quarter Total $ 332,331 $ 329,009 $ 565,222 $ 529,539 $ 1,756,101 200,583 192,269 345,015 312,626 1,050,493 14,774 17,164 (10,695) 24,066 45,309 215,357 209,433 334,320 336,692 1,095,802 130,028 125,875 201,572 201,058 658,533 $ 3.73 3.69 $ 3.61 3.57 $ 3.90 3.87 $ 3.78 3.75 $ 15.05 14.93 $ 251,717 $ 282,209 $ 274,705 $ 281,316 $ 1,089,947 138,888 166,842 157,037 11,613 13,052 13,477 150,501 179,894 170,514 91,413 109,533 103,800 158,311 12,437 170,748 102,602 621,078 50,579 671,657 407,348 $ 2.64 2.61 $ 3.16 3.12 $ 2.99 2.95 $ 2.95 2.91 $ 11.74 11.60 CME Group completed its transaction with BM&F on February 26, 2008. CME Group issued 1.2 million shares of Class A common stock (approximately a 2% equity interest in the company) at a cost of $631.4 million in exchange for 101.1 million shares in BM&F, which represents an equity interest of approximately 10%. Under the terms of the agreement, neither CME Group nor BM&F may sell its equity interest in the other until February 2012. 98 CME GROUP 2007 ANNUAL REPORT Forward-Looking Statements From time to time, in written reports and oral statements, we discuss our expectations regarding future performance. Forward-looking statements are based on currently available competitive, ﬁ nancial 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 difﬁ cult 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: our ability to successfully integrate the businesses of CME Holdings and CBOT Holdings, including the fact that such integration may be more difﬁ cult, time consuming or costly than expected and revenues following the merger may be lower than expected; 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 and implementation 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; our ability to adjust our ﬁ xed costs and expenses if our revenues decline; our ability to continue to generate revenues from our processing services; our ability to maintain existing customers and attract new ones; our ability to expand and offer our products in foreign jurisdictions; changes in domestic and foreign regulations; changes in government policy, including policies relating to common or directed clearing; 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 decreased demand or the growth of electronic trading; changes in our 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 incentive programs) and the impact of our tiered pricing structure; the ability of our ﬁ nancial safeguards package to adequately protect us from the credit risks of clearing members; changes in price levels and volatility in the derivatives markets and in underlying ﬁ xed income, equity, foreign exchange and commodities markets; economic, political and geopolitical market conditions; natural disasters and other catastrophes; our ability to accommodate increases in trading volume and order transaction trafﬁ c without failure or degradation of the performance of our 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; and the imposition of a transaction tax on futures and options on futures transactions. More detailed information about factors that may affect our performance may be found in our ﬁ lings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, which is available in the Investor Relations section of our Web site. CME GROUP 2007 ANNUAL REPORT 99 Board of Directors TERRENCE A. DUFFY Executive Chairman CHARLES P. CAREY Vice Chairman CRAIG S. DONOHUE Chief Executive Oﬃ cer JOHN F. SANDNER Retired Chairman of the Board Chairman, E*Trade Futures, LLC, Chicago, Ill. LEO MELAMED Chairman Emeritus Chairman and Chief Executive Oﬃ cer, Melamed and Associates, Inc., Chicago, Ill. Vice Chairman, HuaMei Capital Company, Chicago, Ill. and Beijing, China Co-Chairman, Stevenson, Melamed & Associates, Chicago, Ill. 100 CME GROUP 2007 ANNUAL REPORT Board of Directors MARK E. CERMAK Director, Execution Services, Fortis Clearing Americas, Chicago, Ill. DENNIS H. CHOOKASZIAN Financial Accounting Standards Advisory JACKIE CLEGG Managing Partner, ROBERT F. CORVINO Independent Trader, Chicago, Ill. Council Chairman, Washington, D.C. Clegg International Consultants, Former Chairman and Chief Executive LLC, Washington, D.C. Oﬃ cer, CNA Insurance Companies, Chicago, Ill JAMES A. DONALDSON Independent Trader, Chicago, Ill. MARTIN J. GEPSMAN Independent Broker and Trader, LARRY G. GERDES Chairman, President and Chief DANIEL R. GLICKMAN Chairman and Chief Executive Oﬃ cer, Chicago, Ill. Executive Oﬃ cer, Transcend Services, Motion Picture Association of Inc., Atlanta, Ga. America, Inc., Washington, D.C. General Partner, Gerdes Huﬀ Invest- U.S. Secretary of Agriculture (1995–2001) ments, Atlanta, Ga. Member of Congress, Kansas (1977–1995) ELIZABETH HARRINGTON President and Chief Executive Oﬃ cer, BRUCE F. JOHNSON Independent Trader, Chicago, Ill. E. Harrington Global, Chicago, Ill. Retired Partner, Global Strategy and China Practices, PricewaterhouseCoopers, LLP, Chicago, Ill. GARY M. KATLER Vice President, Fortis Clearing Americas, Chicago, Ill. PATRICK B. LYNCH Independent Trader, Chicago, Ill. CME GROUP 2007 ANNUAL REPORT 101 Board of Directors WILLIAM P. MILLER II Senior Investment Oﬃ cer, Fund JOSEPH NICIFORO Chairman, Twinﬁ elds Capital C.C. ODOM II Independent Member/Trader, JAMES E. OLIFF President, FILO Corp., Chicago, Ill. Management for the Ohio Public Employees Retirement System, Columbus, Ohio Management, Greenwich, Conn. Sole Proprietor, Odom Investments and Argent Venture Capital, San Antonio, Texas JOHN L. PIETRZAK Managing Partner, Longwood Partners, ALEX J. POLLOCK Resident Fellow, American Enterprise WILLIAM G. SALATICH, JR. Independent Broker and Trader, TERRY L. SAVAGE Financial Journalist and Author Chicago, Ill. Institute, Washington, D.C. Chicago, Ill. President, Terry Savage Productions, Ltd., General Partner, Sparta Group, Chicago, Ill. Chicago, Ill. HOWARD J. SIEGEL Independent Trader, Chicago, Ill. CHRISTOPHER STEWART Chief Executive Oﬃ cer, DAVID J. WESCOTT President, Th e Wescott Group Ltd., Gelber Group, LLC, Chicago, Ill. Chicago, Ill. Vice President, MF Global, Chicago, Ill. MYRON S. SCHOLES Chairman, Platinum Grove Asset Management, LP, Rye Brook, N.Y. Frank E. Buck Professor of Finance, Emeritus, Stanford Graduate School of Business, Stanford, Calif. Nobel Laureate–Economics (1977) WILLIAM R. SHEPARD (not pictured) President and Founder, Shepard International, Inc., Chicago, Ill. 102 CME GROUP 2007 ANNUAL REPORT Management Management Team CRAIG S. DONOHUE Chief Executive Oﬃ cer PHUPINDER S. GILL President KATHLEEN M. CRONIN Managing Director, General Counsel and Corporate Secretary TIMOTHY J. DOAR Managing Director, Risk Management PHILIP J. PAPESH Managing Director, Exchange Business Systems Development ARMAN FALSAFI Managing Director, Europe, Middle East and Africa JAMES W. FARRELL Managing Director, Match Engine Development NANCY W. GOBLE Managing Director and Chief Accounting Oﬃ cer DEAN P. PAYTON Managing Director and Chief Regulatory Oﬃ cer JOHN C. PESCHIER Managing Director, Investor Relations JOHN W. PIETROWICZ Managing Director, Corporate Finance and Treasury ROBERT D. RAY Managing Director, International Sales and Commodity/Equity Products JOHN P. DAVIDSON III Managing Director and Chief Corporate EDWARD M. GOGOL Managing Director, Clearing Solutions Development Oﬃ cer JOHN K. HART Managing Director, Technology Engineering BRYAN T. DURKIN Managing Director and Chief Operating Oﬃ cer JULIE HOLZRICHTER Managing Director, Operations JAMES R. KRAUSE Managing Director and Chief Information Oﬃ cer SCOTT R. KAUFMAN Managing Director, Enterprise Architecture ROBIN S. ROSS Managing Director, Interest Rate Products RICHARD J. KOKOSZKA Managing Director, Internal Audit DEREK L. SAMMANN Managing Director, Foreign Exchange Products JAMES E. PARISI Managing Director and Chief Financial Oﬃ cer KEVIN KOMETER Managing Director and Deputy Chief Information Oﬃ cer HILDA HARRIS PIELL Managing Director and Chief Human Resources Oﬃ cer JOHN W. LABUSZEWSKI Managing Director, Research and Product Development RICHARD H. REDDING Managing Director, Products and Services RICHARD H. LAMM Managing Director, Regulatory Counsel KIMBERLY S. TAYLOR Managing Director and President, CME Clearing TINA F. LEMIEUX Managing Director, Hedge Funds Managing Directors ANNE E. BAGAN Managing Director, Audits NEAL B. BRADY Managing Director, Business Development and Broker Services ANITA S. LISKEY Managing Director, Corporate Marketing and Communications DALE A. MICHAELS Managing Director, Credit and Market Risk Management JOHN F. CURRAN Managing Director, Product Strategy JOSEPH A. PANFIL Managing Director, Enterprise Technology Services JOHN L. SANTANA Managing Director, Front End Systems Technology DONALD D. SERPICO Managing Director, Facilities and Business Continuity Planning ANN K. SHUMAN Managing Director and Deputy General Counsel KENDAL L. VROMAN Managing Director, Information and Technology Services SCOT E. WARREN Managing Director, Equity Products JULIE M. WINKLER Managing Director, Research and Product Development C. F. WONG Managing Director, Asia CME GROUP 2007 ANNUAL REPORT 103 Performance Graph The following graph compares the cumulative ﬁ ve-year total return provided shareholders on our Class A common stock relative to the cumulative total returns of the S&P 500 index, and our new and former peer groups described below as of the end of the year. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Class A common stock, in each of the peer groups, and the index on December 31, 2002 and its relative performance is tracked through December 31, 2007. We compiled the new peer group to more closely reﬂ ect our competitors in our industry. We believe the new peer group provides a more meaningful basis for comparison of our stock performance. New Peer Group: Former Peer Group: • IntercontinentalExchange, Inc. • IntercontinentalExchange, Inc. • Nasdaq Stock Market, Inc. • Nasdaq Stock Market, Inc. • NYMEX Holdings, Inc. • NYSE Euronext • NYSE Euronext • International Securities Exchange Holdings, Inc. CUMULATIVE TOTAL RETURN $2,000 1,600 1,200 800 400 0 02 03 04 05 06 07 C H I CAG O M E R C AN T I L E E XC H AN G E H O L D I N G S I N C. S & P 5 0 0 N E W PE E R G R O U P F O R ME R PE E R G R O U P *$100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending December 31. Copyright © 2007, Standard & Poor’s, a division of Th e McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm 104 CME GROUP 2007 ANNUAL REPORT Share Information CLASS A COMMON STOCK Our Class A common stock is listed on the NYSE and the NASDAQ Global Select Market Inc. under the ticker symbol “CME.” As of February 20, 2008, there were 1,830 holders of record of our Class A common stock. The following table sets forth the high and low sales prices per share of our Class A common stock on a quarterly basis, as reported on the NYSE. 2007 First Quarter Second Quarter Third Quarter Fourth Quarter High Low 2006 $ 596.26 $ 510.00 First Quarter 565.00 609.92 714.48 497.00 Second Quarter 506.50 Third Quarter 593.58 Fourth Quarter High Low $ 457.50 $ 354.51 503.94 508.78 557.97 417.90 425.79 464.70 CLASS B COMMON STOCK Our Class B common stock is not listed on a national securities exchange or traded in an organized over-the-counter market. Each class of our Class B common stock is associated with a membership in a speciﬁ c division of our CME exchange. CME’s rules provide exchange members with trading rights and the ability to use or lease these trading rights. Each share of our Class B common stock can be transferred only in connection with the transfer of the associated trading rights. The memberships by class are CME (Chicago Mercantile Exchange), IMM (International Monetary Market), IOM (Index and Option Market) and GEM (Growth and Emerging Markets). Class B shares and the associated trading rights are bought and sold through our Shareholder Relations and Membership Services Department. In addition, trading rights may be leased through the department. Trading rights sales are reported on our Web site at www.cmegroup.com. Although our Class B shareholders have special voting rights, because our Class B shares have the same equitable interest in our earnings and the same dividend payments as our Class A shares, we expect that the market price of our Class B common stock, if reported separately from the associated trading rights, would be determined by the value of our Class A common stock. As of February 20, 2008, there were 1,890 holders of record of our Class B common stock. DIVIDENDS The following table sets forth the dividends we paid on our Class A and Class B common stock in the last two years: Record Date March 9, 2007 June 8, 2007 September 10, 2007 December 10, 2007 Dividend per Share Record Date Dividend per Share $ 0.86 March 10, 2006 0.86 0.86 0.86 June 9, 2006 September 8, 2006 December 8, 2006 $ 0.63 0.63 0.63 0.63 We intend to pay regular quarterly dividends to our shareholders. The decision to pay a dividend, however, remains within the discretion of our Board of Directors and may be affected by various factors, including our earnings, ﬁ nancial condition, capital requirements, level of indebtedness and other considerations our Board of Directors deems relevant. Our existing credit facility as well as future credit facilities, other future debt obligations and statutory provisions may limit our ability to pay dividends. On January 30, 2008, the Board of Directors declared a regular quarterly dividend of $1.15 per share, representing a 34% increase over the prior quarter, to be paid on March 25, 2008, to shareholders of record on March 10, 2008. CME GROUP 2007 ANNUAL REPORT 105 Company Information HEADQUARTERS CME Group Inc. 20 South Wacker Drive Chicago, Illinois 60606-7499 312.930.1000 tel 312.466.4410 fax www.cmegroup.com info@cmegroup.com INVESTOR RELATIONS CME Group Inc. 20 South Wacker Drive Chicago, Illinois 60606-7499 312.930.8491 SHAREHOLDER RELATIONS AND MEMBERSHIP SERVICES CME Group Inc. 20 South Wacker Drive Chicago, Illinois 60606-7499 312.930.3409 FINANCIAL REPORTS Copies of the CME Group 2007 Annual Report to Shareholders, as well as its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K ﬁ led with the Securities and Exchange Commi– ssion, are available online at www.cmegroup.com, or to shareholders upon written request to Shareholder Relations and Membership Services at the above address. The company is required to ﬁ le as an exhibit to its 2007 Annual Report on Form 10-K a certiﬁ cation under Section 302 of the Sarbanes-Oxley Act of 2002 signed by the chief executive ofﬁ cer and the chief ﬁ nancial ofﬁ cer. In addition, the company is required to submit a certiﬁ cation, signed by the chief executive ofﬁ cer, to the New York Stock Exchange within 30 days following the company’s annual meeting of shareholders. Copies of these certiﬁ cations are available to shareholders upon written request to Share- holder Relations and Membership Services at the above address. STOCK LISTING CME Group Class A common stock is listed on the New York Stock Exchange and The NASDAQ Global Select Market under the ticker symbol “CME.” As of February 27, 2008, there were approximately 2,000 holders of record of the company’s Class A common stock. CME Group Class B common stock is not listed on a national securities exchange or traded in an organized over- the-counter market. Each class of Class B common stock is associated with membership in a speciﬁ c division of the exchange. DIVIDENDS The company’s current dividend policy, subject to the discretion of the board of directors, is to pay out approximately 30 percent of the prior year’s cash earnings as dividends to shareholders. Quarterly dividends are generally paid in March, June, September and December. TRANSFER AGENT Computershare Investor Services Stock Transfer Department 2 North LaSalle Street Chicago, Illinois 60602 312.360.5104 (Automated interactive voice response systems are available 24 hours a day. Press zero for live customer support 8:00 a.m. to 5:00 p.m. Central Time on any day the New York Stock Exchange is open.) www.computershare.com (For information regarding your account or a speciﬁ c company, click on INVESTORS and follow the instructions on the screen.) 106 CME GROUP 2007 ANNUAL REPORT ANNUAL MEETING The 2008 Annual Meeting of Shareholders will be held at 10:00 a.m., Central Time, on Wednesday, May 7, 2008, at the University of Chicago Gleacher Center, located at 450 N. Citifront Plaza Drive in Chicago. All shareholders are cordially invited to attend. A formal notice of meeting, proxy statement and proxy have been sent to shareholders. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP Sears Tower 233 South Wacker Drive Chicago, Illinois 60606 CORPORATE COMMUNICATIONS CME Group Inc. 20 South Wacker Drive Chicago, Illinois 60606-7499 312.930.3434 CUSTOMER SERVICE For customer service assistance, call 800.331.3332. Outside the United States, please call 312.930.2316. To provide feedback on customer service at CME Group, please call 866.652.1132 or e-mail customerfeedback@cmegroup.com. CORPORATE GOVERNANCE On the corporate governance Web page at www.cmegroup.com, shareholders can view the company’s corporate governance principles, charters of all board level committees, the independence standards, board of directors code of ethics, employee code of conduct and the director conﬂ ict of interest policy. Copies of these documents are avail- able to shareholders without charge upon written request to Shareholder Relations and Membership Services at the address listed above. ADDITIONAL INFORMATION Further information about CME Group and its products is available on our Web site at www.cmegroup.com. Information made available on our Web site does not constitute part of this document. The Globe logo, CLEARING 21®, CME®, CME Auction Markets™, CME Group®, Chicago Mercantile Exchange®, E-mini®, Globex®, IEF®, and SPAN® are trademarks of Chicago Mercantile Exchange Inc. CBOT®, e-CBOT® and the Chicago Board of Trade® are trademarks of the Board of Trade of the City of Chicago, Inc. All other trademarks are the property of their respective owners, used under license. Brazilian Mercantile & Futures Exchange S.A. and BM&F are trademarks of the Brazilian Mercantile & Futures Exchange S.A. Chicago Board Options Exchange® and CBOE® are trademarks of the Chicago Board Options Exchange. Dow Jones® and the Dow Jones U.S. Real Estate Index™ are trademarks of Dow Jones & Company, Inc. and American International Group, Inc. FTSE® is jointly owned by the London Stock Exchange plc and the Financial Times Limited. Xinhua is a service mark and trademark of Xinhua Finance Limited. Fixed Income Clearing Corporation and FICC are trademarks of the Fixed Income Clearing Corporation. FXMarketSpace is a trademark of FXMar- ketSpace. KOSPI® is a trademark of the Korea Exchange Company Republic of Korea. Clearnet® is a trademark of Telus Corporation. The Lehman Broth- ers U.S. Aggregate IndexSM is a service mark of Lehman Brothers Holding, Inc. MSCI® is a trademark of MSCI Inc. NASDAQ® is a trademark of The NASDAQ Stock Market, Inc. NYMEX® is a trademark of the New York Mercantile Exchange, Inc. Options Clearing Corporation and OCC are trademarks of the Options Clearing Corporation. Russell 1000® and Russell 2000® are trademarks of Russell Investment Group. S&P®, S&P MidCap 400™ and S&P SmallCap 600™ are trademarks of the McGraw-Hill Companies, Inc. Singapore Exchange and SGX are trademarks of Singapore Exchange Limited. Swapstream® is a registered trademark of Swapstream Operating Services, Ltd. TRAKRS® is a trademark of Merrill Lynch & Co., Inc. U.S. Futures Exchange™ is a trademark of U.S. Futures Exchange, L.L.C. and Eurex® is a trademark of Deutsche Boerse AG. Copyright © 2008 CME Group Inc. C This report is printed on recycled paper. Elevating Our Community Outreach In addition to expanding our services for ﬁ nancial markets globally, we take great pride in CME Group’s long-standing commitment to being a good corporate citizen. We are dedicated to improving the quality of life in the communities in which our members and employees live and do business. Th roughout , our members and employees provided more than , hours of volunteer service to local non-proﬁ t organizations through Amicus, our community outreach program. Th ese volunteers provided much needed services and resources to those in need of a helping hand. Our partner agencies included Carole Robertson Center for Learning, Special Spectators, House of the Good Shepherd, Illinois Fatherhood Initiative, Inspiration Café, La- bouré House and Salvation Army Emergency Lodge. Fundraising drives were organized to beneﬁ t causes such as the Greater Chicago Food Depository, Oper- ation Support Our Troops Illinois and Toys for Tots. CME Group also entered its third year of partner- ship with the Washington Irving Elementary School as part of the Chicago Public Schools Futures Exchange Program. Our partnership with Washington Irving provides a unique opportunity to improve the qual- ity of education for the students and to do our part toward ensuring the success of tomorrow’s leaders. In , more than  CME Group volunteers par- ticipated in a number of service projects designed to enrich the educational experiences of these students. Th e CME Foundation was established in  to provide charitable giving that includes disaster re- lief as well as meeting the needs of the Chicagoland community, where the company is headquartered. Th e CME Foundation seeks to provide particular support to three areas of concern: children in need, education, and health and human services. Notable  grant recipients included Chicago Communities in Schools, Futures and Options for Kids, Reading In Motion and the United Way of Metropolitan Chicago. Th rough a company-wide matching gift program, the CME Foundation also funds many worthwhile charitable organizations that are impor- tant to the community. Th e CBOT Foundation continues to provide a number of non-proﬁ t agencies in the Chicagoland area with the funds needed to eﬀ ect positive change in the lives of those in need. Th e CBOT Foundation selects qualiﬁ ed organizations to receive funding annually, focusing primarily on education, health and human services, and youth programs. s e l e g n A s o L , h p a r g o h t i L n o s r e d n A : g n i t n i r P s i t i a k o m S i e i l r a h C , y a d a M m o T , e g d e l l E l u a P , n e b o D n a i r B : y h p a r g o t o h P t i a r t r o P o g a c i h C , s r e n t r a P A S V : n g i s e D HEADQUARTERS CME Group Inc. 20 South Wacker Drive Chicago, Illinois 60606-7499 312.930.1000 tel 312.466.4410 fax www.cmegroup.com info@cmegroup.com WASHINGTON, D.C. CME Group Inc. 701 Pennsylvania Avenue, N.W. Plaza Suite #01 Washington, D.C. 20004 202.638.3838 tel 202.638.5799 fax HONG KONG CME Group Inc. Level 39, One Exchange Square 8 Connaught Place Central Hong Kong 852.3101.7696 tel 852.3101.7698 fax asiateam@cmegroup.com LONDON CME Group Inc. Watling House 33 Cannon Street London, EC4M 5SB United Kingdom 44.20.7796.7100 tel 44.20.7796.7110 fax europe@cmegroup.com SYDNEY CME Group Inc. Level 17, BNP Paribas Centre 60 Castlereagh Street Sydney NSW 2000 Australia 61.2.9231.7475 tel 61.2.9231.7476 fax asiateam@cmegroup.com TOKYO CME Group Inc. Level 16 Shiroyama JT Trust Tower 4-3-1, Toranomon, Minato-ku Tokyo 105-6016 Japan 81.3.5403.4828 tel 81.3.5403.4646 fax asiateam@cmegroup.com

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