0001374310-12-000024.txt : 20121106 0001374310-12-000024.hdr.sgml : 20121106 20121105181354 ACCESSION NUMBER: 0001374310-12-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20120930 FILED AS OF DATE: 20121106 DATE AS OF CHANGE: 20121105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CBOE Holdings, Inc. CENTRAL INDEX KEY: 0001374310 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES [6200] IRS NUMBER: 205446972 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34774 FILM NUMBER: 121181304 BUSINESS ADDRESS: STREET 1: 400 SOUTH LASALLE CITY: CHICAGO STATE: IL ZIP: 60605 BUSINESS PHONE: 312 786 7200 MAIL ADDRESS: STREET 1: 400 SOUTH LASALLE CITY: CHICAGO STATE: IL ZIP: 60605 10-Q 1 cboe930201210q.htm QUARTERLY REPORT ON FORM 10-Q CBOE 9.30.2012 10Q
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No.  001-34774
CBOE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-5446972
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
400 South LaSalle Street 
Chicago, Illinois
 
60605
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code
(312) 786-5600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes S   No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S   No  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer S
 
Accelerated filer £
 
 
 
Non-accelerated filer £
 
Smaller reporting company £
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £   No  S
Indicate the number of shares outstanding of each of the registrant’s classes of unrestricted common stock, as of the latest practicable date:
Class
 
October 31, 2012
Unrestricted Common Stock, par value $0.01
 
  87,271,635 shares
 




CBOE HOLDINGS, INC.
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2


CERTAIN DEFINED TERMS
 
Throughout this document, unless otherwise specified or the context so requires:
"CBOE Holdings" refers to CBOE Holdings, Inc. and its subsidiaries after the completion of the restructuring transaction, which occurred on June 18, 2010.
"CBOE" or the "Exchange" refers to (1) prior to the completion of the restructuring transaction, Chicago Board Options Exchange, Incorporated, a Delaware non-stock corporation, and (2) after the completion of the restructuring transaction, Chicago Board Options Exchange, Incorporated, a Delaware stock corporation. CBOE became a wholly-owned subsidiary of CBOE Holdings, Inc. on June 18, 2010.
"C2" refers to C2 Options Exchange, Incorporated, which became a wholly-owned subsidiary of CBOE Holdings, Inc. on June 18, 2010.
"CFE" refers to CBOE Futures Exchange, LLC, which became a wholly-owned subsidiary of CBOE Holdings, Inc. on June 18, 2010.
"CFTC" refers to the U.S. Commodity Futures Trading Commission.
"FASB" refers to the Financial Accounting Standards Board.
"GAAP" refers to Generally Accepted Accounting Principles in the United States.
"OPRA" refers to the Options Price Reporting Authority.
"Our exchanges" refers to CBOE, C2 and CFE.
The "restructuring transaction" refers to the transaction on June 18, 2010 in which CBOE converted from a Delaware non-stock corporation owned by its Members to a Delaware stock corporation and a wholly-owned subsidiary of CBOE Holdings.
"SEC" refers to the U.S. Securities and Exchange Commission.
"SPX" refers to our a.m. settled S&P 500 exchange traded option.
"We," "us," "our" or "the Company" refers to (1) prior to the completion of the restructuring transaction, CBOE, and, as the context may require, its wholly-owned subsidiaries including CBOE Holdings, and (2) after the completion of the restructuring transaction, CBOE Holdings and its wholly-owned subsidiaries.
"VIX" refers to the CBOE Volatility Index methodology.
References to "options" or "options contracts" in the text of this document refer to exchange-traded options and references to "futures" refer to futures contracts or options on futures.



3


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. You can identify these statements by forward-looking words such as "may," "might," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," and the negative of these terms and other comparable terminology. All statements that reflect our expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements, including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from that expressed or implied by the forward-looking statements. In particular, you should consider the risks and uncertainties described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC.
 
While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Some factors that could cause actual results to differ include:
the loss of our right to exclusively list certain premium products;
decreases in the amount of trading volumes or a shift in the mix of products traded on our exchanges;
compliance with legal and regulatory obligations;
increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities;
increasing price competition in our industry;
our ability to maintain access fee revenues;
economic, political and market conditions;
our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights;
our ability to accommodate trading volume and order transaction traffic, including increases in trading volume and order transaction traffic, without failure or degradation of performance of our systems;
our ability to protect our systems and communication networks from security risks, including cyber attacks;
our ability to attract and retain skilled management and other personnel;
our ability to maintain our growth effectively;
our dependence on third party service providers; and
the ability of our compliance and risk management methods to effectively monitor and manage our risks.

For a detailed discussion of these and other factors that might affect our performance, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this filing.


4


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2012 and 2011

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share amounts)
 
2012
 
2011
 
2012
 
2011
 
 
(unaudited)
Operating Revenues:
 
 
 
 
 
 
 
 
Transaction fees
 
$
86,621

 
$
109,840

 
$
266,341

 
$
286,018

Access fees
 
15,965

 
16,918

 
48,107

 
51,564

Exchange services and other fees
 
7,771

 
4,531

 
23,072

 
13,497

Market data fees
 
6,101

 
4,909

 
18,850

 
14,847

Regulatory fees
 
5,711

 
5,266

 
14,487

 
14,994

Other revenue
 
6,150

 
2,140

 
11,404

 
7,015

Total Operating Revenues
 
128,319

 
143,604

 
382,261

 
387,935

Operating Expenses:
 
 
 
 
 
 
 
 
Employee costs
 
27,166

 
25,945

 
77,756

 
76,186

Depreciation and amortization
 
8,634

 
8,897

 
25,274

 
26,588

Data processing
 
5,070

 
4,337

 
14,896

 
13,671

Outside services
 
9,075

 
6,881

 
25,510

 
20,650

Royalty fees
 
11,304

 
13,956

 
34,496

 
35,475

Trading volume incentives
 
1,423

 
3,525

 
5,248

 
11,799

Travel and promotional expenses
 
2,548

 
2,416

 
8,018

 
6,470

Facilities costs
 
1,268

 
1,081

 
3,797

 
3,974

Other expenses
 
970

 
1,600

 
2,920

 
4,171

Total Operating Expenses
 
67,458

 
68,638

 
197,915

 
198,984

Operating Income
 
60,861

 
74,966

 
184,346

 
188,951

Other Income/(Expense):
 
 
 
 
 
 
 
 
Investment income
 
41

 
15

 
89

 
119

Net loss from investment in affiliates
 
(368
)
 
(190
)
 
(1,282
)
 
(650
)
Interest and other borrowing costs
 

 
(226
)
 

 
(673
)
Total Other Expense
 
(327
)
 
(401
)
 
(1,193
)
 
(1,204
)
Income Before Income Taxes
 
60,534

 
74,565

 
183,153

 
187,747

Income tax provision
 
14,776

 
33,238

 
65,482

 
80,148

Net Income
 
45,758

 
41,327

 
117,671

 
107,599

Net income allocated to participating securities
 
(515
)
 
(730
)
 
(1,690
)
 
(2,294
)
Net Income Allocated to Common Stockholders
 
$
45,243

 
$
40,597

 
$
115,981

 
$
105,305

Net Income Per Share Allocated to Common Stockholders (Note 4):
 
 
 
 
 
 
 
 
Basic
 
$
0.52

 
$
0.45

 
$
1.33

 
$
1.17

Diluted
 
0.52

 
0.45

 
1.33

 
1.17

Weighted average shares used in computing income per share:
 
 
 
 
 
 
 
 
Basic
 
87,272

 
90,334

 
87,523

 
90,195

Diluted
 
87,272

 
90,334

 
87,523

 
90,195

 
 
 
 
 
 
 
 
 

See notes to condensed consolidated financial statements

5



CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2012 and 2011



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
 
 
(unaudited)
Net Income
 
$
45,758

 
$
41,327

 
$
117,671

 
$
107,599

 
 
 
 
 
 
 
 
 
Comprehensive Income (Loss) - net of tax:
 
 
 
 
 
 
 
 
Post retirement benefit obligation
 
15

 
11

 
(8
)
 
58

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
45,773

 
41,338

 
117,663

 
107,657

Comprehensive income allocated to participating securities
 
(515
)
 
(730
)
 
(1,690
)
 
(2,294
)
Comprehensive Income allocated to common stockholders
 
$
45,258

 
$
40,608

 
$
115,973

 
$
105,363


See notes to condensed consolidated financial statements




6


CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2012 and December 31, 2011
(in thousands, except share amounts)
 
September 30,
2012
 
December 31,
2011
 
 
(unaudited)
Assets
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
160,281

 
$
134,936

Accounts receivable—net allowances of $331 and $304
 
45,379

 
37,578

Marketing fee receivable
 
8,456

 
5,195

Income taxes receivable
 
16,809

 
6,756

Other prepaid expenses
 
6,737

 
4,152

Other current assets
 
786

 
1,065

Total Current Assets
 
238,448

 
189,682

Investments in Affiliates
 
14,257

 
14,305

Land
 
4,914

 
4,914

Property and Equipment:
 
 
 
 

Construction in progress
 
9,287

 
1,264

Building
 
62,148

 
60,917

Furniture and equipment
 
257,249

 
252,905

Less accumulated depreciation and amortization
 
(251,157
)
 
(238,288
)
Total Property and Equipment—Net
 
77,527

 
76,798

Other Assets:
 
 

 
 

Software development work in progress
 
11,881

 
6,168

Data processing software and other assets (less accumulated amortization of 2012 - $131,153, 2011- $121,173)
 
30,499

 
36,001

Total Other Assets—Net
 
42,380

 
42,169

Total
 
$
377,526

 
$
327,868

Liabilities and Stockholders’ Equity
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
38,307

 
$
46,071

Marketing fee payable
 
9,043

 
5,765

Deferred revenue and other liabilities
 
8,713

 
351

Post-retirement medical benefits
 
26

 
100

Income taxes payable
 

 

Total Current Liabilities
 
56,089

 
52,287

Long-term Liabilities:
 
 

 
 

Post-retirement medical benefits
 
1,882

 
1,781

Income taxes payable
 
18,206

 
12,185

Other long-term liabilities
 
3,968

 
3,906

Deferred income taxes
 
21,860

 
21,439

Total Long-term Liabilities
 
45,916

 
39,311

Commitments and Contingencies
 


 


Total Liabilities
 
102,005

 
91,598

Stockholders’ Equity:
 
 

 
 

Preferred stock, $0.01 par value: 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2012 and December 31, 2011
 

 

Unrestricted common stock, $0.01 par value: 325,000,000 shares authorized; 91,270,199 issued and 87,271,635 outstanding at September 30, 2012; 90,781,222 issued and 88,768,885 outstanding at December 31, 2011
 
913

 
908

Additional paid-in-capital
 
64,512

 
55,469

Retained earnings
 
315,203

 
232,121

Treasury stock at cost – 3,998,564 shares at September 30, 2012 and 2,012,337 shares at December 31, 2011
 
(104,200
)
 
(51,329
)
Accumulated other comprehensive loss
 
(907
)
 
(899
)
Total Stockholders’ Equity
 
275,521

 
236,270

Total
 
$
377,526

 
$
327,868

 See notes to condensed consolidated financial statements

7


CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)

(in thousands)
 
Preferred
Stock
 
Unrestricted
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Balance—January 1, 2012
 
$

 
$
908

 
$
55,469

 
$
232,121

 
$
(51,329
)
 
$
(899
)
 
$
236,270

Cash dividends on common stock
 
 
 
 
 
 
 
(34,589
)
 
 
 
 
 
(34,589
)
Stock based compensation
 
 
 
 
 
9,048

 
 
 
 
 
 
 
9,048

Issuance of vested restricted stock granted to employees
 
 
 
5

 
(5
)
 
 
 
 
 
 
 

Purchase of unrestricted common stock from employees
 
 
 
 
 
 
 
 
 
(3,127
)
 
 
 
(3,127
)
Purchase of unrestricted common stock under announced program
 
 
 
 
 
 
 
 
 
(49,744
)
 
 
 
(49,744
)
Net income
 
 
 
 
 
 
 
117,671

 
 
 
 
 
117,671

Post-retirement benefit obligation adjustment—net of tax
 
 
 
 
 
 
 
 
 
 
 
(8
)
 
(8
)
Balance—September 30, 2012
 
$

 
$
913

 
$
64,512

 
$
315,203

 
$
(104,200
)
 
$
(907
)
 
$
275,521

 
See notes to condensed consolidated financial statements
 
 


8


CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2012 and 2011
 
 
Nine Months Ended
(in thousands)
 
September 30, 2012
 
September 30, 2011
 
 
(unaudited)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
117,671

 
$
107,599

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
25,274

 
26,588

Other amortization
 
66

 
67

Provision for deferred income taxes
 
387

 
(911
)
Stock-based compensation
 
9,048

 
9,608

Loss on disposition of property
 

 
1,179

Loss on investment in affiliate
 
1,282

 
190

Impairment of investment in affiliate
 

 
460

Change in assets and liabilities:
 
 
 
 
Accounts receivable
 
(7,801
)
 
(8,267
)
Marketing fee receivable
 
(3,261
)
 
816

Income taxes receivable
 
(10,053
)
 
5,175

Prepaid expenses
 
(2,585
)
 
(1,188
)
Other current assets
 
279

 
(157
)
Accounts payable and accrued expenses
 
(7,149
)
 
4,248

Marketing fee payable
 
3,278

 
(809
)
Deferred revenue and other liabilities
 
8,424

 
10,769

Post-retirement benefit obligations
 
(13
)
 
(3
)
Income taxes payable
 
6,021

 
8,933

Net Cash Flows provided by Operating Activities
 
140,868

 
164,297

Cash Flows from Investing Activities:
 
 
 
 
Capital and other assets expenditures
 
(26,829
)
 
(23,485
)
Investment in affiliates
 
(1,234
)
 

Other
 

 
57

Net Cash Flows used in Investing Activities
 
(28,063
)
 
(23,428
)
Cash Flows from Financing Activities:
 
 
 
 
Payment of quarterly dividends
 
(34,589
)
 
(29,476
)
Purchase of unrestricted common stock from employees
 
(3,127
)
 
(3,075
)
Purchase of unrestricted common stock under announced program
 
(49,744
)
 
(14,887
)
Net Cash Flows used in Financing Activities
 
(87,460
)
 
(47,438
)
Net Increase in Cash and Cash Equivalents
 
25,345

 
93,431

Cash and Cash Equivalents at Beginning of Period
 
134,936

 
53,789

Cash and Cash Equivalents at End of Period
 
$
160,281

 
$
147,220

Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
69,423

 
$
68,119

Non-cash activities:
 
 
 
 
Unpaid liability to acquire equipment and software
 
923

 
1,053

 
 
 
 
 

See notes to condensed consolidated financial statements

9


CBOE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2012 and 2011
(unaudited)

NOTE 1 —DESCRIPTION OF BUSINESS

CBOE Holdings is the holding company of registered securities exchanges, subject to oversight by the SEC, and of a designated contract market subject to the oversight of the CFTC.
 
The primary business of the Company is the operation of markets for the trading of listed options contracts on three broad product categories: 1) the stocks of individual corporations (equity options), 2) various market indexes (index options) and 3) other exchange-traded products such as exchange-traded funds (ETF options) and exchange-traded notes (ETN options). We also offer futures through a futures market. The Company owns and operates three stand-alone exchanges, but reports the results of its operations in one reporting segment. CBOE is our largest exchange by volume and offers trading for listed options through a single system that integrates electronic trading and traditional open outcry trading on our trading floor in Chicago. This integration of electronic trading and traditional open outcry trading into a single market is known as our Hybrid trading model. C2, our all-electronic exchange, also offers trading for listed options, but with a different market model and fee schedule than CBOE. Finally, CFE, our all-electronic futures exchange, offers futures on the CBOE Volatility Index (the VIX Index), as well as on other products. All of our exchanges operate on our proprietary technology platform known as CBOE Command.

In September 2012, the Company announced plans to establish a CFE technology hub in London which will provide European firms a cost-efficient way to send and receive CFE data and to execute trades.

NOTE 2 — BASIS OF PRESENTATION

These interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of operating revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to matters that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These estimates are based on management’s knowledge and judgments, historical experience and observance of trends in particular matters. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results of operations for the full year.

NOTE 3 — SHARE REPURCHASE PROGRAM

On August 2, 2011, the Company announced that its board of directors had approved a share repurchase program that authorizes the Company to purchase up to $100 million of its unrestricted common stock. The program permits the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation.

On July 31, 2012, the Company announced that its board of directors had approved the repurchase of an additional $100 million of its outstanding unrestricted common stock. This program is in addition to any amount remaining under the August 2011 authorization.

From August 2011 through September 30, 2012, the Company purchased 3,707,424 shares of unrestricted common stock at an average cost per share of $26.09 totaling $96.7 million in purchases under the program.
  

10


For the nine months ended September 30, 2012, the Company purchased 1,871,424 shares of unrestricted common stock at an average cost per share of $26.58 totaling $49.7 million in purchases under the program. The Company did not repurchase any shares in the three months ended September 30, 2012.

NOTE 4 — NET INCOME PER COMMON SHARE
The unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in the computation of net income per common share pursuant to the two-class method. Our restricted stock awards granted to officers, directors and employees qualify as participating securities.
The Company computes net income per common share using the two-class method, which is an allocation formula that determines the net income for common shares and participating securities. Under the authoritative guidance, the presentation of basic and diluted earnings per share is required for each class of common stock and not for participating securities. As such, the Company presents basic and diluted net income per share for its one class of common stock.
 The computation of basic net income allocated to common stockholders is calculated by reducing net income for the period by dividends paid or declared and undistributed net income for the period that are allocated to the participating securities to arrive at net income allocated to common stockholders. Net income allocated to common stockholders is divided by the weighted average number of common shares outstanding during the period to determine basic net income per common share.

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. Diluted net income per common share is calculated by dividing net income allocated to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
 
The following table reconciles net income allocated to common stockholders and the number of shares used to calculate the basic and diluted net income per common share for the three and nine months ended September 30, 2012 and 2011:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share amounts)
 
2012
 
2011
 
2012
 
2011
Basic EPS Numerator:
 
 
 
 
 
 
 
 
Net Income
 
$
45,758

 
$
41,327

 
$
117,671

 
$
107,599

Less: Earnings allocated to participating securities
 
(515
)
 
(730
)
 
(1,690
)
 
(2,294
)
Net Income allocated to common stockholders
 
$
45,243

 
$
40,597

 
$
115,981

 
$
105,305

Basic EPS Denominator:
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
87,272

 
90,334

 
87,523

 
90,195

Basic net income per common share
 
$
0.52

 
$
0.45

 
$
1.33

 
$
1.17

 
 
 
 
 
 
 
 
 
Diluted EPS Numerator:
 
 
 
 
 
 
 
 
Net Income
 
$
45,758

 
$
41,327

 
$
117,671

 
$
107,599

Less: Earnings allocated to participating securities
 
(515
)
 
(730
)
 
(1,690
)
 
(2,294
)
Net Income allocated to common stockholders
 
$
45,243

 
$
40,597

 
$
115,981

 
$
105,305

Diluted EPS Denominator:
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
87,272

 
90,334

 
87,523

 
90,195

Dilutive common shares issued under restricted stock program
 

 

 

 

Diluted net income per common share
 
$
0.52

 
$
0.45

 
$
1.33

 
$
1.17


NOTE 5 — STOCK-BASED COMPENSATION

Stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period.

11


 
On June 14, 2012, the Company granted 38,990 shares of restricted stock to non-employee members of the board of directors at a fair value of $27.33 per share, the closing price of the Company's stock on the grant date. The shares have a one year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. On August 15, 2012, the Company granted 8,163 shares of restricted stock to certain employees at a fair value of $28.98 per share, the closing price of the Company's stock on the grant date. The shares have a three year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. Unvested portions of the restricted stock will be forfeited if the member leaves the board or the employee leaves the company prior to the applicable vesting date, except in limited circumstances.

For the three and nine months ended September 30, 2012 and 2011, the Company recognized $3.1 million and $3.0 million and $9.0 million and $9.6 million of stock-based compensation expense, respectively. The nine months ended September 30, 2012 and 2011 includes accelerated stock-based compensation expense of $0.2 million and $0.5 million, respectively, resulting from departures from the board of directors. Stock-based compensation expense is included in employee costs in the condensed consolidated statements of income.

As of September 30, 2012, the Company had unrecognized stock-based compensation of $20.6 million.  The remaining unrecognized stock-based compensation is expected to be recognized over a weighted average period of 20.2 months. The Company is projecting a forfeiture rate of 5%.

The activity in the Company’s restricted stock for the nine months ended September 30, 2012 was as follows:

 
 
 
Number of Shares
of Restricted
Stock
 
Weighted Average
Grant-Date Fair
Value
 
Unvested restricted stock at January 1, 2012
 
1,252,239

 
$
29.00

 
Granted
 
47,153

 
27.62

 
Vested
 
(411,279
)
 
29.00

 
Forfeited
 
(51,870
)
 
29.00

 
Unvested restricted stock at September 30, 2012
 
836,243

 
$
28.92


NOTE 6 — INVESTMENT IN AFFILIATES

At September 30, 2012 and December 31, 2011, the investment in affiliates was composed of the following (in thousands):

 
 
 
September 30,
2012
 
December 31,
2011
 
Investment in OCC
 
$
333

 
$
333

 
Investment in Signal Trading Systems, LLC
 
11,424

 
11,472

 
Investment in IPXI Holdings, LLC
 
2,500

 
2,500

 
Investments in Affiliates
 
$
14,257

 
$
14,305


NOTE 7 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

At September 30, 2012 and December 31, 2011, accounts payable and accrued expenses consisted of the following (in thousands):


12


 
 
 
September 30,
2012
 
December 31,
2011
 
Compensation and benefit-related liabilities
 
$
13,613

 
$
18,349

 
Royalties
 
10,183

 
10,795

 
Facilities
 
1,610

 
2,229

 
Legal
 
2,503

 
962

 
Accounts payable
 
2,084

 
1,877

 
Purchase of unrestricted common stock (1)
 

 
2,018

 
Linkage
 
1,196

 
1,653

 
Other
 
7,118

 
8,188

 
Total
 
$
38,307

 
$
46,071


(1) Reflects shares purchased at the end of the period that are not settled until three days after the trade occurs.


NOTE 8 — MARKETING FEE

CBOE facilitates the collection and payment of marketing fees assessed on certain trades taking place at CBOE. Funds resulting from the marketing fees are made available to Designated Primary Market Makers and Preferred Market Makers as an economic inducement to route orders to CBOE. Pursuant to ASC 605-45, Revenue Recognition—Principal Agent Considerations, the Company reflects the assessments and payments on a net basis, with no impact on revenues or expenses.

As of September 30, 2012 and December 31, 2011, amounts assessed by the Company on behalf of others included in current assets totaled $8.5 million and $5.2 million, respectively, and payments due to others included in current liabilities totaled $9.0 million and $5.8 million, respectively.

NOTE 9 — DEFERRED REVENUE

The following table summarizes the activity in deferred revenue for the nine months ended September 30, 2012 (in thousands):

 
 
Balance at 
December 31, 
2011
 
Cash 
Additions
 
Revenue 
Recognition
 
Balance at 
September 30, 2012
Other – net
 
$
351

 
$
3,361

 
$
(3,150
)
 
$
562

Liquidity provider sliding scale (1)
 

 
29,759

 
(21,608
)
 
8,151

Total deferred revenue
 
$
351

 
$
33,120

 
$
(24,758
)
 
$
8,713

(1)  Liquidity providers who prepay transaction fees, at a minimum, for the first two levels of the liquidity provider sliding scale are eligible to participate in reduced fees assessed to contract volume above 800,000 per month. The prepayment of 2012 transaction fees totaled $29.8 million. This amount is amortized and recorded as transaction fees over the respective period.

NOTE 10 — EMPLOYEE BENEFITS

Employees are eligible to participate in the Chicago Board Options Exchange SMART Plan (“SMART Plan”). The SMART Plan is a defined contribution plan, which is qualified under Internal Revenue Code Section 401(k). The Company contributed $3.2 million and $2.7 million to the SMART Plan for the nine months ended September 30, 2012 and 2011, respectively.

Eligible employees may participate in the Supplemental Employee Retirement Plan (“SERP”), Executive Retirement Plan (“ERP”) and Deferred Compensation Plan. The SERP, ERP and Deferred Compensation Plan are defined contribution plans that are nonqualified by Internal Revenue Code regulations. The Company contributed $1.0 million to the above plans for the nine months ended September 30, 2012 and 2011.

The Company has a postretirement medical plan for certain current and former members of senior management. The Company recorded immaterial postretirement benefits expense for the three and nine months ended September 30, 2012 and 2011.

13



NOTE 11 — INCOME TAXES

For the three and nine months ended September 30, 2012 and 2011, the Company recorded income tax provisions of $14.7 million and $33.2 million and $65.5 million and $80.1 million, respectively. The effective tax rate for the nine months ended September 30, 2012 and 2011 was 35.8% and 42.7%, respectively. The decrease in effective tax rate for the nine months ended September 30, 2012 compared to the prior year period is the result of the recognition of discrete items and the benefit of a new tax apportionment method enacted by Illinois. During the three months ended September 30, 2012 , the Company filed an amended return for 2008 and completed it return for 2011 and recognized, as a discrete item, a $7.7 million benefit for a Section 199 deduction for U.S. production activities which encompasses all personal property including computer software. The Company expects to file amended tax returns for tax years 2009 and 2010 in the fourth quarter of 2012.

The prior year effective tax rate included the impact of an increase in the Illinois tax rate effective January 1, 2011 and a charge of $4.2 million taken to increase state-related uncertain tax positions.

As of September 30, 2012 and December 31, 2011, the Company had $17.0 million and $11.4 million, respectively, of uncertain tax positions excluding interest and penalties, which, if recognized in the future, would affect the annual effective income tax rate. Reductions to uncertain tax positions primarily from the lapse of the applicable statutes of limitations during the next twelve months are estimated to be approximately $3.6 million, not including any potential new additions.

Estimated interest costs and penalties, which are classified as part of the provision for income taxes in the Company’s condensed consolidated statements of income, were $0.2 million and $(0.2) million for the three months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012 the total was $0.5 million. The amount for the nine months ended September 30, 2011 is immaterial. Accrued interest and penalties were $1.2 million and $0.8 million as of September 30, 2012 and December 31, 2011.

The Company is subject to U.S. federal tax, Illinois, New Jersey and New York state taxes and Washington D.C. taxes, as well as other local jurisdictions. The Company has open tax years from 2007 on for New York, 2008 on for federal and Illinois, and 2009 on for New Jersey and Washington, D.C. The Company's tax returns have been examined by the Internal Revenue Service through 2009 and the Illinois Department of Revenue through 2008. Specific line items for the 2008 tax year are being examined by the Internal Revenue Service and the Illinois Department of Revenue. The Company is currently under audit by the Internal Revenue Service for 2010, the State of New York for the 2007 through 2009 tax years and the State of Illinois for the 2009 and 2010 tax years.

NOTE 12 — FAIR VALUE MEASUREMENTS

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.
 
The Company applied FASB ASC 820, Fair Value Measurement and Disclosure (formerly, FASB Statement No. 157, Fair Value Measurements), which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:
 
Level 1—Unadjusted inputs based on quoted markets for identical assets or liabilities.
 
Level 2—Observable inputs, either direct or indirect, not including Level 1, corroborated by market data or based upon quoted prices in non-active markets.

Level 3—Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability.
 

14


The Company has included a tabular disclosure for financial assets that are measured at fair value on a recurring basis in the condensed consolidated balance sheet as of September 30, 2012 and December 31, 2011. The Company holds no financial liabilities that are measured at fair value on a recurring basis.
(amounts in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at fair value:
 
 

 
 

 
 

 
 

Money market funds
 
$
153,000

 
$

 
$

 
$
153,000

Total assets at fair value at September 30, 2012
 
$
153,000

 
$

 
$

 
$
153,000

 
(amounts in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at fair value:
 
 

 
 

 
 

 
 

Money market funds
 
$
126,000

 
$

 
$

 
$
126,000

Total assets at fair value at December 31, 2011
 
$
126,000

 
$

 
$

 
$
126,000


In March 2011, the Company revalued its investment in NSX Holdings, Inc. as a result of an other-than-temporary impairment resulting in a full impairment totaling $0.5 million, which represented the carrying value of the investment. The investment was classified as level 3 as the fair value was based on both observable and unobservable inputs.

In December 2011, the Company, through DerivaTech Corporation, a wholly-owned subsidiary, acquired a 6.25% interest in IPXI Holdings, LLC ("IPXI") for $2.5 million. The Company contributed cash of $1.3 million and has accrued a liability of $1.2 million which is expected to become due in December 2012 and will increase the Company's share of IPXI to 10.0%. The investment, measured at fair value on a non-recurring basis, is classified as level 3 as the fair value was based on both observable and unobservable inputs.

NOTE 13 — LEGAL PROCEEDINGS

As of September 30, 2012, the end of the period covered by this report, the Company was subject to the various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.

The Company reviews its legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. The Company's assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals.

Estimates of probable losses resulting from patent litigation involving the Company are inherently difficult to make, particularly when the Company's view of the case is significantly different than that expressed by the plaintiff. The Company has not recorded a liability related to damages in connection with these matters.

As of September 30, 2012, the Company does not think that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these reviews, inspections or other legal proceedings, if any, has been incurred. While the consequences of certain unresolved proceedings are not presently determinable, the outcome of any litigation is inherently uncertain and an adverse outcome from certain matters could have a material effect on our earnings in any given reporting period. However, in the opinion of management, the ultimate liability is not expected to have a material effect on our financial position, liquidity or capital resources.

Index Options Litigation
On May 25, 2012, the Illinois Appellate Court (the “Appellate Court”) affirmed the ruling of the Circuit Court of Cook County, Illinois (the “Circuit Court”) granting CBOE, The McGraw-Hill Companies, Inc. and CME Group Index Services, LLC summary judgment against International Securities Exchange (“ISE”) and its parent company. On September 26, 2012, the Illinois Supreme Court denied ISE's Petition for Leave to Appeal. The summary judgment motion enjoined ISE from listing or providing an exchange trading market for options on the S&P 500 Index or the Dow Jones Industrial Average and

15


OCC from participating in the facilitation of such ISE index options and from issuing, clearing or settling the exercise of such ISE options (the “Injunction”). On November 2, 2012, the Circuit Court held that ISE's rule filing that purported to base options on the ISE Max SPY index would violate the Injunction.
Patent Litigation
ISE - C2
On August 15, 2012, C2 filed a new declaratory judgment complaint against ISE in the United States District Court for the Northern District of Illinois alleging that ISE's United States Patent No. 6,618,707, which is directed toward an automated exchange for trading derivative securities and is assigned to ISE, is not valid, is not infringed and is not enforceable.

NOTE 14 — SUBSEQUENT EVENTS

The Company announced that its board of directors declared a quarterly cash dividend of $0.15 per share. The dividend is payable December 21, 2012 to stockholders of record at the close of business on November 30, 2012.

Due to the impact of Hurricane Sandy, all of our exchanges were closed on Monday, October 29 and Tuesday, October 30, 2012, resulting in no trading activity on those days.
On November 2, 2012, the Circuit Court held that ISE's rule filing that purported to base options on the ISE Max SPY index would violate the Injunction (See Note 13 - Legal Proceedings).


16


CBOE HOLDINGS, INC. AND SUBSIDIARIES

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, included in Item 1 in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and as contained in that report, the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion contains forward-looking information.  Please see “Forward-Looking Statements” and Part II, Item 1A, “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

RESULTS OF OPERATIONS

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Overview

The following summarizes changes in financial performance for the three months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
(in millions, except per share amounts)
 
 
Total operating revenues
 
$
128.3

 
$
143.6

 
$
(15.3
)
 
(10.7
)%
Total operating expenses
 
67.5

 
68.6

 
(1.1
)
 
(1.6
)%
Operating income
 
60.8

 
75.0

 
(14.2
)
 
(18.9
)%
Total other expense
 
(0.3
)
 
(0.4
)
 
0.1

 
(25.0
)%
Income before income taxes
 
60.5

 
74.6

 
(14.1
)
 
(18.9
)%
Income tax provision
 
14.7

 
33.2

 
(18.5
)
 
(55.7
)%
Net income
 
$
45.8

 
$
41.4

 
$
4.4

 
10.6
 %
Net income allocated to common stockholders
 
$
45.2

 
$
40.6

 
$
4.6

 
11.3
 %
Operating income percentage
 
47.4
%
 
52.2
%
 
 
 
 
Net income percentage
 
35.7
%
 
28.8
%
 
 
 
 
Diluted net income per share allocated to common stockholders
 
$
0.52

 
$
0.45

 
 
 
 

The Company’s market share of total exchange traded options contracts was 28.2% for the three months ended September 30, 2012 compared with 26.9% for the same period in 2011.

Total operating revenues decreased due to lower transaction fees and access fees, partially offset by higher exchange services and other fees, market data fees and other revenue.

Total operating expenses decreased primarily due to lower royalty fees and trading volume incentives, partially offset by higher employee costs and outside services.
        
Transactions impacting our financial performance for the three months ended September 30, 2012

Effective August 1, 2012, CBOE increased its options regulatory fee rate and C2 implemented an options regulatory fee. The increase in the options regulatory fee is reflected in "Regulatory Fees" in the condensed consolidated statement of income.

Fines increased due to a disciplinary action against a Trading Permit Holder. The increase in fines is reflected in "Other Revenue" in the condensed consolidated statement of income.


17


Severance expense increased due to the elimination of staff positions. The increase in severance expense is reflected in "Employee Costs" in the condensed consolidated statement of income.

Income tax expense decreased due to the recognition of certain income tax adjustments resulting from the recognition of significant discrete items. The income tax benefit is reflected in "Income Tax Provision" in the condensed consolidated statement of income.

Operating Revenues

Total operating revenues for the three months ended September 30, 2012 were $128.3 million, a decrease of $15.3 million, or 10.7%, compared with the same period in 2011. The following summarizes changes in total operating revenues for the three months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Transaction fees
 
$
86.6

 
$
109.8

 
$
(23.2
)
 
(21.1
)%
Access fees
 
16.0

 
16.9

 
(0.9
)
 
(5.3
)%
Exchange services and other fees
 
7.8

 
4.5

 
3.3

 
73.3
 %
Market data fees
 
6.1

 
4.9

 
1.2

 
24.5
 %
Regulatory fees
 
5.7

 
5.3

 
0.4

 
7.5
 %
Other revenue
 
6.1

 
2.2

 
3.9

 
177.3
 %
Total operating revenues
 
$
128.3

 
$
143.6

 
$
(15.3
)
 
(10.7
)%

Transaction Fees

Transaction fees decreased 21.1% to $86.6 million for the three months ended September 30, 2012, compared with $109.8 million for the same period in 2011. This decrease was due to a decrease of 22.1% in total trading volume, partially offset by an increase of 1.3% in average revenue per contract. Transaction fees accounted for 67.5% and 76.5% of total operating revenues for the three months ended September 30, 2012 and 2011, respectively.
 
In 2012, the Company implemented several changes to its fee schedule to promote trading in various products. Adjustments were made to liquidity provider sliding scales, effectively decreasing per contract fees on multiply-listed options products and increasing per contract fees on proprietary products. For Clearing Trading Permit Holders that are proprietary firms, a single, fixed transaction fee for non-paired orders in products other than our proprietary option products was established in an effort to increase our market share. We implemented a Volume Incentive Program ("VIP") to reward firms who execute qualifying electronic, public customer, multiply-listed volume at CBOE in excess of certain thresholds, with a graduated schedule for higher tiers.

Our share of total exchange traded options contracts increased to 28.2% from 26.9% in the prior year period, while overall trading volume in the industry decreased. We believe the market share increase is primarily attributable to the fee changes and incentive programs implemented at the beginning of 2012. The Company expects market share to decrease over the remainder of 2012 due to increasing competitive pressures.

Overall trading volume is impacted by many factors which may or may not be in our control. These factors include: political and world events, market volatility, regulatory actions or considerations, availability of capital, competition, trading patterns or strategies, number of trading days in the period and seasonality.
 
Average revenue per contract, discussed in detail below, is impacted by our fee structure which includes volume based incentive programs, mix of products traded and the percentage of trading volume executed by customers as compared to professionals, market-makers, clearing trading permit holders and broker-dealers. The implementation of fee changes, which may increase or decrease our average revenue per contract, is primarily to ensure that we are competitive in the options marketplace and to ultimately improve and continue to drive order flow to our exchanges. We cannot predict the trading patterns of exchange participants but we can continue to price our products at levels that are competitive in our markets.

The following summarizes transaction fees by product for the three months ended September 30, 2012 compared to

18


the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Equities
 
$
14.6

 
$
20.0

 
$
(5.4
)
 
(27.0
)%
Indexes
 
49.4

 
61.5

 
(12.1
)
 
(19.7
)%
Exchange-traded funds
 
12.6

 
22.8

 
(10.2
)
 
(44.7
)%
Total options transaction fees
 
76.6

 
104.3

 
(27.7
)
 
(26.6
)%
Futures
 
10.0

 
5.5

 
4.5

 
81.8
 %
Total transaction fees
 
$
86.6

 
$
109.8

 
$
(23.2
)
 
(21.1
)%

Trading Volume

Our average daily trading volume for the three months ended September 30, 2012 was 4.34 million contracts, down 20.9% compared with 5.48 million for the same period in 2011. The Company experienced volume decreases across all options product categories. The significant growth in futures continued, primarily driven by futures contracts on the VIX Index. Total trading days for the three months ended September 30, 2012 and 2011 were sixty-three and sixty-four, respectively.

The following summarizes changes in total trading volume and average daily trading volume ("ADV") by product for the three months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Volume
Percent Change
 
ADV 
Percent Change
 
 
Volume
 
ADV
 
Volume
 
ADV
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
Equities
 
123.7

 
1.96

 
125.9
 
1.97

 
(1.7
)%
 
(0.2
)%
Indexes
 
72.5

 
1.15

 
101.8
 
1.59

 
(28.8
)%
 
(27.7
)%
Exchange-traded funds
 
70.8

 
1.12

 
119.1
 
1.86

 
(40.6
)%
 
(39.6
)%
Total options contracts
 
267.0

 
4.24

 
346.8
 
5.42

 
(23.0
)%
 
(21.8
)%
Futures contracts
 
6.2

 
0.10

 
4.0
 
0.06

 
55.0
 %
 
59.2
 %
Total contracts
 
273.2

 
4.34

 
350.8
 
5.48

 
(22.1
)%
 
(20.9
)%

The following provides the percentage of volume by product category for the three months ended September 30, 2012 and 2011.

 
 
2012
 
2011
 
Equities
 
45.3
%
 
35.9
%
 
Indexes
 
26.5
%
 
29.0
%
 
Exchange-traded funds
 
25.9
%
 
34.0
%
 
Futures
 
2.3
%
 
1.1
%
 
Total
 
100.0
%
 
100.0
%
 

Average revenue per contract

The average revenue per contract was $0.317 for the three months ended September 30, 2012, an increase of 1.3% compared with $0.313 for the same period in 2011. Average revenue per contract represents transaction fees divided by total contracts cleared.

The following summarizes average revenue per contract by product for the three months ended September 30, 2012 compared to the same period in 2011.

19



 
 
2012
 
2011
 
Percent
Change
Equities
 
$
0.118

 
$
0.159

 
(25.8
)%
Indexes
 
0.682

 
0.605

 
12.7
 %
Exchange-traded funds
 
0.177

 
0.192

 
(7.8
)%
Total options average revenue per contract
 
0.287

 
0.301

 
(4.7
)%
Futures
 
1.606

 
1.371

 
17.1
 %
Total average revenue per contract
 
$
0.317

 
$
0.313

 
1.3
 %

Certain factors contributed to the increase in total average revenue per contract for the three months ended September 30, 2012 compared to the same period in 2011, including our rate structure and mix of products traded. Our rate structure includes sliding scales, volume discounts and limits on fees as part of our effort to increase liquidity and market share in both multiply-listed options products and, to a lesser extent, on our proprietary products. In general, the transaction fee changes implemented in 2012 increased the average revenue per contract on index options and futures and decreased the average revenue per contract for multiply-listed options products (equities and exchange-traded funds). We expect this trend to continue for the remainder of 2012. One of the fee changes implemented in 2012 contributing to the decrease in average revenue per contract for multiply-listed products was the VIP.
At September 30, 2012, there were approximately one hundred fifteen clearing firms, two of which cleared a combined 45% of our billings collected through the OCC for the three months ended September 30, 2012. The next largest clearing firm accounted for approximately 5% of our billings collected through the OCC. No one customer affiliated with either of the top two clearing firms represented more than 16% of the billings collected for the three months ended September 30, 2012 or 2011. Should a clearing firm withdraw, we believe the affiliated customer portion of that firm’s trading activity would likely transfer to another clearing firm.
 
The two largest clearing firms mentioned above clear the majority of the market-maker sides of transactions at CBOE, C2 and at all of the U.S. options exchanges. If either of these firms were to withdraw from the business of market-maker clearing, and market-makers were unable to make new clearing arrangements, this could create significant disruption to the U.S. options markets, including ours.

Access Fees

Access fees for the three months ended September 30, 2012 and 2011 were $16.0 million and $16.9 million, respectively, representing 12.4% and 11.8% of total operating revenues, respectively. The decrease in access fees was primarily due to fee adjustments for market-maker trading permits, which lowered both the fee for monthly trading permits and pricing under the market-maker trading permit sliding scale in the current year period. Market-makers that commit to a minimum number of trading permits for the calendar year qualify for a discounted monthly rate.

The demand for trading permits could be impacted by seasonality and market fluctuations that affect trading volume.

Exchange Services and Other Fees

Exchange services and other fees for the three months ended September 30, 2012 increased 73.3% to $7.8 million from $4.5 million for the same period in 2011. The increase was primarily due to pricing increases for services such as connectivity to CBOE Command through network access ports and client application services.

Market Data Fees

Market data fees increased 24.5% for the three months ended September 30, 2012 to $6.1 million from $4.9 million for the same period in 2011. Market data fees represent income derived from OPRA as well as the Company’s market data services. OPRA and the Company's market data services for the three months ended September 30, 2012 and 2011, were $3.6 million and $2.5 million and $3.1 million and $1.8 million, respectively. OPRA income is allocated through OPRA based on each exchange's share of total options transactions cleared. The Company’s share of OPRA income for the three months ended September 30, 2012 increased to 25.2% from 19.9% for the same period in 2011 resulting in an increase in OPRA income of $0.5 million. Revenue generated from the Company's market data services, which provide current and historical options and

20


futures data, increased $0.6 million resulting from an increase in subscribers.

Regulatory Fees

Regulatory fees increased 7.5% for the three months ended September 30, 2012 to $5.7 million from $5.3 million for the same period in 2011. The increase in regulatory fees primarily resulted from CBOE increasing its options regulatory fee rate and C2 implementing an options regulatory fee. This increase was partially offset by lower customer volume industry-wide as compared to the same period in 2011. The Company's regulatory fees are primarily based on the number of customer contracts traded throughout the listed United States options industry. Under the rules of each of our options exchanges, as required by the SEC, any revenue derived from regulatory fees and fines cannot be used for non-regulatory purposes.

Other Revenue

Other revenue increased $3.9 million for the three months ended September 30, 2012 to $6.1 million from $2.2 million for the same period in 2011 which reflects fines assessed to trading permit holders resulting from disciplinary actions. Under the rules of each of our options exchanges, as required by the SEC, any revenue derived from regulatory fees and fines cannot be used for non-regulatory purposes.

Operating Expenses

Total operating expenses decreased $1.1 million, or 1.6%, to $67.5 million for the three months ended September 30, 2012 from $68.6 million for the same period in 2011. This decrease was primarily due to lower royalty fees and trading volume incentives, partially offset by higher employee costs and outside services. As a percentage of operating revenues for the three months ended September 30, 2012 and 2011, operating expenses were 52.7% and 47.9%, respectively.

The following summarizes changes in operating expenses for the three months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Employee costs
 
$
27.2

 
$
25.9

 
$
1.3

 
5.0
 %
Depreciation and amortization
 
8.6

 
8.9

 
(0.3
)
 
(3.4
)%
Data processing
 
5.1

 
4.3

 
0.8

 
18.6
 %
Outside services
 
9.1

 
6.9

 
2.2

 
31.9
 %
Royalty fees
 
11.3

 
14.0

 
(2.7
)
 
(19.3
)%
Trading volume incentives
 
1.4

 
3.5

 
(2.1
)
 
(60.0
)%
Travel and promotional expenses
 
2.5

 
2.4

 
0.1

 
4.2
 %
Facilities costs
 
1.3

 
1.1

 
0.2

 
18.2
 %
Other expenses
 
1.0

 
1.6

 
(0.6
)
 
(37.5
)%
Total operating expenses
 
$
67.5

 
$
68.6

 
$
(1.1
)
 
(1.6
)%

Employee Costs

For the three months ended September 30, 2012, employee costs were $27.2 million, or 21.2% of total operating revenues, compared with $25.9 million, or 18.1% of total operating revenues, for the same period in 2011. This represented an increase of $1.3 million, or 5.0%. The increase was primarily attributed to higher severance expense of $2.0 million resulting from the elimination of staff positions and higher salaries of $0.6 million due to increased headcount primarily for regulatory functions. These increases were partially offset by lower annual incentive compensation of $1.5 million and self-insurance medical expenses of $0.3 million. Total headcount, as compared to the beginning of 2012, is relatively unchanged as the addition of staff, primarily for regulatory functions, is mostly offset by the eliminated staff positions.


21


Depreciation and Amortization

Depreciation and amortization decreased by $0.3 million to $8.6 million for the three months ended September 30, 2012 compared with $8.9 million for the same period in 2011. Depreciation and amortization charges represented 6.7% and 6.2% of total operating revenues for the three months ended September 30, 2012 and 2011, respectively.

Data Processing

Data processing expenses totaled $5.1 million and $4.3 million, representing 4.0% and 3.0% of total operating revenues for the three months ended September 30, 2012 and 2011, respectively. The increase in data processing expenses is primarily due to an increase in hardware and software maintenance relating to the migration of the CBOE and CFE trading platform to New Jersey and other various software upgrades.

Outside Services

Expenses related to outside services increased to $9.1 million for the three months ended September 30, 2012 from $6.9 million in the prior-year period and represented 7.1% and 4.8% of total operating revenues for the three months ended September 30, 2012 and 2011, respectively. The $2.2 million increase primarily resulted from higher expenses for costs relating to legal proceedings, review of regulatory compliance and a settlement agreement with Realtime Data LLC. The terms of the settlement are confidential. The Company recorded an immaterial charge related to the settlement. The Company expects legal expenses to continue to trend higher resulting from legal proceedings.

Royalty Fees

Royalty fees for the three months ended September 30, 2012 were $11.3 million compared with $14.0 million for the same period in 2011, a decrease of $2.7 million resulting from lower trading volume in licensed index products. Royalty fees represented 8.8% and 9.7% of total operating revenues for the three months ended September 30, 2012 and 2011, respectively.

Trading Volume Incentives

Trading volume incentives decreased by $2.1 million to $1.4 million for the three months ended September 30, 2012 compared to $3.5 million for the same period in 2011. The decrease was primarily due to lower volume in multiply-listed options products (equities and exchange-traded funds), a modification in the criteria for contracts qualifying for certain quantity-based fee waivers and an adjustment to the fees paid by the Company for transactions linked to away exchanges.

Other Expenses

Other expenses for the three months ended September 30, 2012 and 2011 were $1.0 million and $1.6 million, respectively. The decrease of $0.6 million was due to losses recorded in the prior year period on the disposal of equipment which did not recur in the current period.

Operating Income

As a result of the items above, operating income for the three months ended September 30, 2012 was $60.8 million compared to $75.0 million for the same period in 2011, a decrease of $14.2 million.

Income before Income Taxes

Income before income taxes for the three months ended September 30, 2012 was $60.5 million compared to $74.6 million for the same period in 2011, a decrease of $14.1 million.

Income Tax Provision

For the three months ended September 30, 2012, the income tax provision was $14.7 million compared to $33.2 million for the same period in 2011. The effective tax rate was 24.4% and 44.6% for the three months ended September 30, 2012 and 2011, respectively. The decrease in effective tax rate for the three months ended September 30, 2012 compared to the prior year period is the result of the recognition of discrete items and the benefit of a new tax apportionment method enacted by Illinois. During the three months ended September 30, 2012, the Company filed an amended return for 2008 and completed it return for 2011 and recognized, as a discrete item, a $7.7 million benefit for a Section 199 deduction for U.S. production

22


activities which encompasses all personal property including computer software. The prior year effective tax rate included the impact of an increase in the Illinois tax rate effective January 1, 2011 and a charge of $4.2 million taken to increase state-related uncertain tax positions. The Company expects to file amended tax returns for tax years 2009 and 2010 in the fourth quarter of 2012 which it believes will result in additional deductions and should further reduce the 2012 effective tax rate.

Net Income

As a result of the items above, net income allocated to common stockholders for the three months ended September 30, 2012 was $45.2 million compared to $40.6 million for the same period in 2011, an increase of $4.6 million. Basic and diluted net income per share allocated to common stockholders were $0.52 and $0.45 for the three months ended September 30, 2012 and 2011, respectively.


Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Overview

The following summarizes changes in financial performance for the nine months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
(in millions, except per share amounts)
 
 
Total operating revenues
 
$
382.3

 
$
387.9

 
$
(5.6
)
 
(1.4
)%
Total operating expenses
 
197.9

 
199.0

 
(1.1
)
 
(0.6
)%
Operating income
 
184.4

 
188.9

 
(4.5
)
 
(2.4
)%
Total other expense
 
(1.2
)
 
(1.2
)
 

 
 %
Income before income taxes
 
183.2

 
187.7

 
(4.5
)
 
(2.4
)%
Income tax provision
 
65.5

 
80.1

 
(14.6
)
 
(18.2
)%
Net income
 
$
117.7

 
$
107.6

 
$
10.1

 
9.4
 %
Net income allocated to common stockholders
 
$
116.0

 
$
105.3

 
$
10.7

 
10.2
 %
Operating income percentage
 
48.2
%
 
48.7
%
 
 
 
 
Net income percentage
 
30.8
%
 
27.7
%
 
 
 
 
Diluted net income per share allocated to common stockholders
 
$
1.33

 
$
1.17

 
 
 
 


The Company’s market share of total exchange traded options contracts was 28.4% for the nine months ended September 30, 2012 compared with 26.7% for the same period in 2011. We believe the market share increase is primarily attributable to the fee changes implemented at the beginning of 2012.

Total operating revenues decreased due to lower transaction fees and access fees partially offset by higher exchange services and other fees, market data fees and other revenue.

Total operating expenses decreased primarily due to lower trading volume incentives, royalty fees and other expenses, partially offset by higher outside services, employee costs and travel and promotional expenses.

Operating Revenues

Total operating revenues for the nine months ended September 30, 2012 were $382.3 million, a decrease of $5.6 million, or 1.4%, compared with the same period in 2011. The following summarizes changes in total operating revenues for the nine months ended September 30, 2012 compared to the same period in 2011.


23


 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Transaction fees
 
$
266.3

 
$
286.0

 
$
(19.7
)
 
(6.9
)%
Access fees
 
48.1

 
51.6

 
(3.5
)
 
(6.8
)%
Exchange services and other fees
 
23.1

 
13.5

 
9.6

 
71.1
 %
Market data fees
 
18.9

 
14.8

 
4.1

 
27.7
 %
Regulatory fees
 
14.5

 
15.0

 
(0.5
)
 
(3.3
)%
Other revenue
 
11.4

 
7.0

 
4.4

 
62.9
 %
Total operating revenues
 
$
382.3

 
$
387.9

 
$
(5.6
)
 
(1.4
)%
 
 
 
 
 
 
 
 
 

Transaction Fees

Transaction fees decreased 6.9% to $266.3 million for the nine months ended September 30, 2012, compared with $286.0 million for the same period in 2011. This decrease was largely due to a 7.1% decrease in total trading volume partially offset by a 0.3% increase in average revenue per contract. Transaction fees accounted for 69.7% and 73.7% of total operating revenues for the nine months ended September 30, 2012 and 2011, respectively.
  
The following summarizes transaction fees by product for the nine months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Equities
 
$
46.1

 
$
66.4

 
$
(20.3
)
 
(30.6
)%
Indexes
 
150.7

 
149.5

 
1.2

 
0.8
 %
Exchange-traded funds
 
43.0

 
56.2

 
(13.2
)
 
(23.5
)%
Total options transaction fees
 
239.8

 
272.1

 
(32.3
)
 
(11.9
)%
Futures
 
26.5

 
13.9

 
12.6

 
90.6
 %
Total transaction fees
 
$
266.3

 
$
286.0

 
$
(19.7
)
 
(6.9
)%
 
 
 
 
 
 
 
 
 

Trading Volume

Our average daily trading volume for the nine months ended September 30, 2012 was 4.67 million contracts, down 6.8% compared with 5.01 million for the same period in 2011. The Company continued to experience significant growth in futures, primarily driven by futures contracts on the VIX Index, while volume decreased in all options product categories. Total trading days for the nine months ended September 30, 2012 and 2011 were one hundred eighty-eight and one hundred eighty-nine, respectively.

The following summarizes changes in total trading volume and ADV by product for the nine months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Volume
Percent Change
 
ADV
Percent Change
 
 
Volume
 
ADV
 
Volume
 
ADV
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
Equities
 
394.1

 
2.09

 
409.3

 
2.17

 
(3.7
)%
 
(3.2
)%
Indexes
 
224.1

 
1.19

 
244.7

 
1.30

 
(8.4
)%
 
(7.9
)%
Exchange-traded funds
 
244.1

 
1.30

 
282.3

 
1.49

 
(13.5
)%
 
(13.1
)%
Total options contracts
 
862.3

 
4.58

 
936.3

 
4.96

 
(7.9
)%
 
(7.7
)%
Futures contracts
 
16.3

 
0.09

 
9.7

 
0.05

 
68.1
 %
 
69.0
 %
Total contracts
 
878.6

 
4.67

 
946.0

 
5.01

 
(7.1
)%
 
(6.8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 


24


The following provides the percentage of volume by product category for the nine months ended September 30, 2012 and 2011.
 
 
2012
 
2011
 
Equities
 
44.9
%
 
43.3
%
 
Indexes
 
25.5
%
 
25.9
%
 
Exchange-traded funds
 
27.8
%
 
29.8
%
 
Futures
 
1.8
%
 
1.0
%
 
Total
 
100.0
%
 
100.0
%
 

Average revenue per contract

The average revenue per contract was $0.303 for the nine months ended September 30, 2012, an increase of 0.3% compared with $0.302 for the same period in 2011. The following summarizes average revenue per contract by product for the nine months ended September 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Percent
Change
Equities
 
$
0.117

 
$
0.162

 
(27.8
)%
Indexes
 
0.672

 
0.611

 
10.0
 %
Exchange-traded funds
 
0.176

 
0.199

 
(11.4
)%
Total options average revenue per contract
 
0.278

 
0.291
 
(4.3
)%
Futures
 
1.629

 
1.441

 
13.0
 %
Total average revenue per contract
 
$
0.303

 
$
0.302

 
0.3
 %
 
 
 
 
 
 
 

Certain factors contributed to the increase in total average revenue per contract for the nine months ended September 30, 2012 compared to the same period in 2011, including our rate structure and mix of products traded. In general, the transaction fee changes implemented in 2012 increased the average revenue per contract on index options and futures and decreased average revenue per contract on multiply-listed options products (equities and exchange-traded funds).
Access Fees

Access fees for the nine months ended September 30, 2012 and 2011 were $48.1 million and $51.6 million, respectively, representing 12.6% and 13.3% of total operating revenues, respectively. The decrease in access fees was primarily due to fee adjustments for market-maker trading permits implemented in January 2012.

Exchange Services and Other Fees

Exchange services and other fees for the nine months ended September 30, 2012