Moody's Affirms CME Group (CME) at 'Aa3'; Reflects Consistently Strong, Market Leading Position

Moody's Investors Service affirmed CME Group Inc.'s (Nasdaq: CME) Aa3 long-term issuer and senior unsecured debt ratings and (P)Aa3 unsecured shelf rating, as well as its Prime-1 short-term issuer and commercial paper ratings. The outlook is stable.

RATINGS RATIONALE

The affirmation of CME's Aa3 ratings reflects the firm's consistently strong financial performance and leading market position as an operator of derivatives exchanges and clearinghouses. Once again in 3Q14, its diversified derivatives product offerings and control of liquidity pools in select products resulted in a robust operating margin (reported operating income/revenue) of 56%.

The affirmation further reflects CME's conservative financial policy. Supported by strong financial performance, management has maintained low financial leverage as measured by a Debt/EBITDA ratio of 1.2x as of September 30, 2014. The company maintains moderate shareholder distributions through a flexible dividend policy. It has also approached strategic growth through pursuing joint ventures or buying smaller stakes in companies as opposed to making large acquisitions while utilizing significant leverage. These attributes are core to its current high ratings.

An important challenge facing CME is a pending EU decision on whether or not to designate the US's central counterparty clearinghouses (CCP) regulations and standards as equivalent to European standards. An adverse ruling could mean that US-based CCPs may not be granted Qualifying-CCP (QCCP) status in Europe. Therefore, transacting at these CCPs could become cost prohibitive for European banks and buyside clients, given the higher risk weighted capital charges under Basel III for clearing at non-QCCPs.

CME has several options to mitigate the impact of an adverse equivalency ruling, including: (a) the option to offer clearing of certain over-the-counter products on CME Clearing Europe, which already received European regulatory approval, and (b) the ability to offer similar contracts on its US- or European-based CCPs. Thus, even in the event that CME were affected by an adverse decision, Moody's expects the financial impact to not significantly affect CME's credit standing.

The affirmation of the Prime-1 rating reflects the company's solid cash position and cash generation capacity. Additionally, CME has alternate liquidity resources in the form of a committed revolving credit facility and a line of credit, which position the company to manage potential future cash needs, particularly contingent liquidity needs for its clearing operations.

What Could Change the Rating - Up

CME's long-term ratings are at the higher-end of Moody's rating scale, and further upward rating momentum is limited. However, over the long-run, a combination of the following factors could put upward pressure on the rating:

- Acquiring an even greater global scale and market share across multiple products

- Achieving and maintaining an even lower leverage ratio (Debt/EBITDA)

What Could Change the Rating - Down

A combination of the following factors could put downward pressure on the rating:

- Aggressive financial policy resulting in a spike in leverage from a large acquisition or significantly increased shareholder distributions

- Loss of market share in multiple products, whether driven by regulatory reform or firm-specific causes, leading to significantly lower margins and therefore cash flow generation

- Material operational failure

- Potential future regulatory requirements for substantial capital or liquidity increases related to its clearing operations that significantly stresses the holding company's financial position

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