CME AR03intractve3 3/23/04 1:54 PM Page 123 Chicago Mercantile Exchange Holdings Inc. Annual Report 03 CME AR03intractve3 3/23/04 1:54 PM Page 124 2003 WAS A YEAR OF CONTINUOUS GROWTH AND CHANGE FOR US. It was also our first full year as a publicly traded company. We demonstrated all-around growth in: Trading volume in each product category: Interest rates, equity indexes, foreign exchange and commodities Volume of electronic trades: 282.4 million Net revenues: $536.0 million Net income: $122.1 million We also maintained, or achieved, our status as the largest U.S. futures exchange in terms of: Trading volume: 640.2 million, an average of 2.5 million futures and options on futures contracts traded per day Notional value: $333.7 trillion (The underlying value of the products on which CME futures and options on futures are based.) Open interest: 29.7 million open positions in futures and options on futures contracts at December 31, 2003 An additional 2.7 million open positions for Chicago Board of Trade contracts cleared by CME Clearing: $1.4 billion per day in settlement payments $37.6 billion in collateral deposits Our successes keep building on themselves. We have momentum. CME AR03intractve3 3/23/04 1:54 PM Page 125 FOR YEAR ENDED OR AT DECEMBER 31 (in millions, except per share data) 2003 2002 Change Income Statement Data: Net revenues $÷536.0 $÷453.2 18% Income before income taxes 206.1 154.2 34 Net income 122.1 94.1 30 Earnings per share: Basic $÷÷3.74 $÷÷3.24 15 Diluted 3.60 3.13 15 Balance Sheet Data: Current assets1 $÷516.2 $÷401.6 29% Total assets1 665.5 541.5 23 Current liabilities1 80.8 76.0 6 Shareholders’ equity 563.0 446.1 26 Other Data: Total trading volume (round turn trades) 640.2 558.4 15% GLOBEX¨ volume (round turn trades) 282.4 198.0 43 Open interest at year-end (contracts) 29.7 18.8 58 Notional value of trading volume (in trillions) $÷333.7 $÷328.6 2 Key Ratios: Return on average equity 24.2% 27.1% Return on average assets1 20.2% 21.6% Operating margin 38.5% 34.0% 1 Amounts exclude cash performance bonds and security deposits, securities lending transactions and interest earning facilities. CME AR03intractve3 3/23/04 1:54 PM Page 126 NON-STOP. We mean that quite literally. CME AR03intractve3 3/23/04 1:54 PM Page 1 As part of the global marketplace, our business stretches across all time zones and touches many kinds of customers. But the reason we’ve become a global marketplace, the reason that demand for our products continues to grow, is because we work continuously to identify and meet market needs. We’re always attuned to how we can offer better risk management products, always seeking to expand awareness of our marketplace, always working to provide better service. Non-stop. CME AR03intractve3 3/23/04 1:54 PM Page 2 Ours is more than a nine-to-five business. CME AR03intractve3 3/23/04 1:55 PM Page 3 CME AR03intractve3 3/23/04 1:55 PM Page 4 CME AR03intractve3 3/23/04 1:55 PM Page 5 We’re always pushing beyond imagined limitations. CME AR03intractve3 3/23/04 1:55 PM Page 6 We’re leading the way in the evolutionÐand revolutionÐ of the futures industy. CME AR03intractve3 3/23/04 1:56 PM Page 7 CME AR03intractve3 3/23/04 1:56 PM Page 8 To Our Shareholders: CME’s first year as a publicly traded company was notable for its many triumphs.This was our Exchange’s fourth consecutive record volume year, with 640.2 million contracts traded.We opened a promising avenue of growth as we began to provide clearing and related services to the Chicago Board of Trade in November through the historic CME/CBOT Common Clearing Link.We implemented a number of initiatives to make CME markets more widely available to customers worldwide.The successful execution of our growth strategies led to another strong performance in 2003, with net revenues of $536 million and net income of $122 million, or $3.60 per diluted share. The year 2003 also marked a transition. Jim McNulty left CME at year-end, having completed his mission of helping our Exchange transition to public company status. Craig Donohue has assumed the CEO role, as well as Jim’s positions on the boards of CME Holdings, CME and OneChicago, our joint venture with the Chicago Board Options Exchange and the Chicago Board of Trade. Joining him in the Office of the CEO is Phupinder GillÐknown around here simply as “Gill”Ðpreviously, the President of our Clearing House Division. Both Craig and Gill have served CME with distinction for the past 15 years.Together, they will help CME attain new heights, given their proven leadership skills and deep knowledge of our exchange, our industry and the competitive landscape 8 in which we operate. Although CME has been a publicly traded company for only little more than a year, we hold ourselves to high standards for corporate governance, transparency and openness. And yet, we continue to evolve. In the past year, our Governance Committee studied public company and exchange governance models and recommended enhancements to be implemented after our shareholders’ meeting in April 2004.We will recruit additional independent non-industry directors, form a CME AR03intractve3 3/23/04 1:56 PM Page 9 Market Regulation Oversight Committee to be composed solely of independent, non-industry directors, and expand the role of independent non-industry directors on our Audit, Compensation and Governance committees. CME’s charter requires a diversity of business interests to be represented on our Board.Within those guidelines, we will continue to seek ways to further strengthen CME’s ongoing commitment to sound corporate governance. CME’s future has never been brighter.We are the largest futures exchange in the United States, as well as the only publicly traded U.S. exchange.With the full implementation of the CME/CBOT Common Clearing Link on January 2, we became the largest clearing organization for futures contracts in the world.We enjoy a strong competitive position, have the right strategies in place and remain focused on innovation and execution. The roadmap to accomplish our goals has not changed.We expect to expand our existing business by further increasing access to our markets, reaching out to new customers and adding to our product line.We continue to be a formidable competitor in the United States and around the world based on our diverse products and outstanding technology. Our commitment to building profitable growth and creating value for our shareholders and customers has never been stronger. 9 Sincerely, Terrence A. Duffy Chairman of the Board February 10, 2004 CME AR03intractve3 3/23/04 1:56 PM Page 10 Dear Shareholders: 2003 was another outstanding year for Chicago Mercantile Exchange, both operationally and financially, as we continue to evolve our business to meet the diverse needs of market users around the world. During the year, we built upon our 105-year history of innovation and leadership, introducing a number of new products and product line extensions.We also implemented significant technical enhancements to expand access to our markets, increase trading efficiency, and create new revenue opportunities. Financially, in our first year as a public company, we got off to an impressive start.Trading volume expanded 15 percent to 2.5 million contracts per day in 2003Ðmarking our fourth consecutive year of double-digit volume gains. Revenues increased 18 percent, and net income was up 30 percent. More importantly, we enter 2004 in an enviable competitive position and plan to capitalize on our distinct advantages. Today, CME is the largest futures exchange in the U.S. Clearing more than 85 percent of all U.S. futures and options on futures trades, we are also the world’s largest derivatives clearing organization. We hold more than $37 billion in collateral and transfer between $1.4 and $6 billion each day in settlement payments.We provide investment facilities with $14 billion under active management. 10 Additionally, we are the futures industry’s largest processor of electronic match transactions. We processed more than 433,000 electronic match transactions each day in 2003. CME is also, by far, the number one exchange in terms of notional value and open interest. In 2003, more than $333 trillion in notional value was traded at CME and our year-end open interest totaled nearly 30 million contracts. By contrast, our nearest competitor had $86 trillion in notional value and 4.8 million contracts of open interest. CME AR03intractve3 3/23/04 1:56 PM Page 11 We talk frequently and proudly about the size and scope of our exchange, because with size comes liquidityÐthe ability of markets to quickly and efficiently absorb large purchase and sale orders. Liquidity is a critical factor in attracting more business and expanding order flow. Simply put, our size fuels our continued success. Likewise, important secular shifts taking place in today’s business environment are favorable to CME markets.There is an increasing appreciation for the transparency and efficiency of our products, as well as a strong awareness of the substantial balance sheet benefits that our daily mark-to-market, fully collateralized central counterparty clearing mechanism provides. Moreover, changes in banking rules, accounting standards, and tax policy are driving increased demand for exchange-traded derivatives products. Given our industry leadership, ongoing innovation, cutting-edge technology, and proven operational capabilities, CME is uniquely positioned to seize new opportunities in the marketplace and achieve our growth strategy.