Operator:

Welcome to the CME Group First Quarter 2024 Earnings Call. [Operator Instructions]

Adam Minick:

Good morning, and I hope you're all doing well today. We released our executive commentary earlier this morning, which provides extensive details on the first quarter 2024, which we will be discussing on this call. I'll start with the safe harbor language, and then I'll turn it over to Terry.

Lynne Fitzpatrick:

Thanks, Terry, and thank you for joining us this morning. During the first quarter, CME generated nearly $1.5 billion in revenue, up 3% from a very strong first quarter in 2023. Within the physical commodities asset classes, quarterly revenue was up 14% year-over-year and represented approximately 1/3 of clearing and transaction fees in the quarter. Market Data revenue reached a record level, up 6% to $175 million. Other revenue increased 37% to $104 million, largely due to the increased noncash collateral fee implemented in January.

Operator:

[Operator Instructions] The first question in the queue is from Chris Allen with Citi.

Terrence Duffy:

No problem, Chris. Again, we'll unpack that a little bit, and I'm going to ask Tim probably Suzanne and myself, will all kind of answer the 3 different parts of it. So let's just talk about -- I think first part of your question was around is it the peak activity around treasuries? I think that would be really difficult to draw that conclusion in lieu what's going on fundamentally around the world and in the United States.

Suzanne Sprague:

Yes. Thank you very much, Terry, and thank you for the question. We do continue seeing increased participations in the cross margin program between ourselves and the fixed income clearing corporations. Some of those clearing members are seeing upwards of 75% to 80% in margin savings. And that's in addition to the portfolio margining program that we offer within CME between our interest rate futures, options and swaps, which in the first quarter of 2024, continued delivering average daily savings of about $7 billion.

Terrence Duffy:

Tim, do you have anything to add?

Terrence Duffy:

And Chris, let me just add to one thing that I was going to say at the beginning. But on the treasury complex to say that as it peaked, you know and everybody on the call knows that the different amount of opinions that's out there is related to what the Fed is going to do or not do is all over the map. And everybody has been absolutely for the most part wrong. So you had anywhere from 6 rate cuts predicted 6 months ago coming into '24 to 3 that was advertised by the Fed.

Terrence Duffy:

On the U.S. Treasury clearing, I will say that we -- I made the announcement that we are going to file an application, as it relates to this. We are in the very early stages of completing that application it will -- I think we've said publicly that we'll probably look in sometime in the fourth quarter before we can have that being viewed by the SEC, and then we'll go from there. But again, I think from our standpoint, the mandate doesn't kick in until sometime in '26 and we'll be prepared either way to go forward with it if it's in the best interest of CME and its participants.

Daniel Fannon:

I was hoping to get a little more color on some of the activity in the commodities and metals markets. Maybe talk about the health of the customer, given the robust increase in volumes, has there been any change in position limits or other things that might potentially curtail some of the activity that's been happening?

Derek Sammann:

Yes, I think it's -- we've seen a really spectacular rise in our metals activity. And then, as you know, our metals activity is made both with the precious metal side and the base metal side. Q1 was a little bit quiet. Volumes up for the first quarter were 4%. What you've seen is a significant move and change in expectations around the role that gold is playing in the market. I think a lot of us scratched our heads over the last few years about why gold was sort of stuck below [ $2,000. ]

Terrence Duffy:

And Dan, let me just add to what Derek said because I think it's really important. We talked a moment ago in our prepared remarks about how all 6 asset classes are achieving the levels that they are doing. I've talked to several people just recently as the metals run-up has happened, who I thought never traded metals anymore because of the price action, but are back in the marketplace now. So you asked, I think specifically about the customer is the customer healthy, I don't know how you phrased it, but I will tell you that it's amazing, and this is a story that we've been telling for 22 years is when one asset class might quiet down, they go to another one.

Operator:

The next question, the queue is from Patrick Moley with Piper Sandler.

Terrence Duffy:

Thanks, Patrick. I don't know if I've been open to discussing that. I think that I have said that with CME is in a strong position, if, in fact, the right transaction was to come along, and made sense for our shareholders and our clients. And so I'm not out looking for particular deals. I just said that we are in a strong position to do so if it were to arise.

Patrick Moley:

No, you hit on all of them. That was great.

Alex Kramm:

Just a quick one on market data. You pointed out some kind of like onetime-ish episodic revenues here. I think one was audit, and I get that but the other one was on derived data, and that was a bigger number. So maybe you can just remind us why that comes with sometimes episodic revenue. But then bigger picture, I think a few years ago, derived data was a big new initiative.

Terrence Duffy:

Thanks, Alex. I'll turn it over to Julie Winkler and I don't know if Sunil wants to chime in as it relates [indiscernible] Julie.

Sunil Cutinho:

The only thing I'll add is we have plans to add more data sets [indiscernible] more data sets available as risk management becomes a priority, as Terry has pointed out. So we'll be working with our clients on stress scenarios, historical scenarios, so they could use that [indiscernible].

Craig Siegenthaler:

Terry, can you hear me?

Craig Siegenthaler:

No worries. I was trying before, but nobody could hear me. So listen, guys, I know you planned to launch credit futures in June. There is an attractive capital efficiency component here with the margin offsets, especially against the rate product. How do you size up the TAM for this new segment? And how quickly do you expect volumes to ramp just given your conversations with key participants?

Tim McCourt:

Great. Thanks. And Craig, I really appreciate the question. Ourselves and our clients are excited about the launch of credit futures on June 17, which will be index futures on the Bloomberg corporate bond indices and I think CME is uniquely positioned given our strength both in the interest rate and equity complex. Credit tends to be at a nice intersection of those other asset classes, but also offers a unique distinct market where when you look at the recent growth in credit markets, that has an addressable market of about 90 billion average daily volume in terms of notional across the fixed income ETFs, the CDX, the cash bond.

Operator:

Our next question is from Kyle Voigt with KBW.

Operator:

Our next question Brian Bedell with Deutsche Bank.

Brian Bedell:

Yes. Yes. Maybe this is clear. I was on my headset. Basically the contribution from the portfolio margining in your treasury volumes. Just to sort of categorically is it really helping? Or is it really more of the market dynamics? And then the back to the treasury clearing question, maybe it's early days, but does your application complicate things with the DTC agreement?

Suzanne Sprague:

Yes. Thanks very much for the question. So just on the participation in the existing programs, we have seen some new clearing members take direct membership to be able to take advantage of the cross margin program that is currently in place for health accounts between ourselves and the Fixed Income Clearing Corporation. I think it's hard to quantify how much of that would be new activity versus activity that may have been cleared as clients through existing clearing numbers prior to that.

Terrence Duffy:

Okay. Tim, you have anything to add?

Brian Bedell:

It's a great answer.

Brian Bedell:

Right. Okay. And between EBS and BrokerTec were similar to Q4?

Operator:

Our next question now is from Alex Blostein with Goldman Sachs.

Terrence Duffy:

Thanks, Derek. Again, Alex, hopefully that gives you some clarity.

Kenneth Worthington:

I wanted to extend the competitive landscape question to rates, FMX is launching later this summer, do you see merits to the FMX value proposition? If so, which customer segments might FMX be best positioned to pursue and given that all have tried to compete with CME and rates in the past and have failed, what would you need to see to conclude that FMX might be different?

Operator:

Our next question from Owen Lau with Oppenheimer.

Julie Winkler:

Thanks, Owen, for the question. So we do have some project-based work that we do expect to ramp up over the course of the year for things like the Google migration, securities clearing that we've mentioned on the call previously. You'll also see a ramp-up in terms of the consumption. So in the technology line as we're moving more into the cloud, we will see that grow over the course of the year.

Operator:

Our next question from Michael Cyprys Morgan Stanley.

Tim McCourt:

Great. Thanks, Terry. Thanks, Michael. Certainly, when we look at our BrokerTec business, volatility has come in since the start of the year and that tends to favor the internalization of flow with less being sent to our club. And that's what we've seen in Q1. So not necessarily surprising in that regard.

Operator:

Our next question now is from Simon Clinch with Redburn Atlantic.

Terrence Duffy:

So I'm going to turn it to Sunil, Simon, but on the back end of your question, we are obviously and I've said this from the beginning, we will wait until the work is completed. I'm assuming in the back end, you're referring to the markets going into the cloud. Is that where you were going?

Terrence Duffy:

So again, that is yet to be finalized and the data centers are yet to be finalized. We're working on all those things. But again, as I've said from the very beginning of this transaction, I will not put CME's markets into the cloud or any other platform unless it's better than, more efficient than what CME offers today to its clients.

Sunil Cutinho:

I'll answer 2 aspects of that question. One is related to migration of the nonmarket workloads. And there, we are making very good progress. We intend to migrate our clearing regulatory services and business intelligence services this year subject to regulatory approval, of course. And then the second aspect of it is the data platform. We spoke a little bit about it. What we've done is we stood up our data platform.

Terrence Duffy:

Does that answer your question, Simon? Okay. I think we lost Simon. But Simon, thank you very much for your question.

Benjamin Budish:

Maybe just following up on the last point on the market data side. Can you maybe talk about how you think about the longer-term growth potential of that offering? So it sounds like there's plenty of other opportunities to kind of increasingly add value to the package there. What about in terms of the client base? How do you think about the penetration of potential subscribers versus opportunities to kind of enhance what you're adding?

Julie Winkler:

I think I will start where Sunil was talking. I mean I think as it relates to being able to have our consolidated data sets for cloud [indiscernible]. So as we think about easing onboarding to those tools and [indiscernible] to analytics, able to offer these guys. These are new opportunities that we otherwise did not have. And I think the ability to really facilitate access to customers more data. We're seeing a lot of interest in customers as well [indiscernible], more explainability or market model and this supports our business.

Alex Kramm:

Just I wanted to pop back in for a model cleanup. Can you just, unless I missed it, give us an update on cash and noncash collateral rates you've realized, et cetera, stuff that I often ask anyways?

Lynne Fitzpatrick:

Sure, Alex. So for the quarter, we averaged U.S. cash balances of about $76 billion, and we earned about 36 basis points on that cash. On the noncash, the average balances for the quarter were about $159 billion, earning 10 basis points.

Lynne Fitzpatrick:

Yes. So far in April, our average U.S. dollar cash balance is about $73 billion and the noncash is averaging $160 billion -- $163 billion, so similar to what we saw in Q4 -- Q1, excuse me.

Elias Abboud:

This is Eli Abboud from Craig's team. Given the prospect of new competition, I was hoping you could speak to the size of your network and interest rate futures. And maybe more specifically, how many unique firms are providing liquidity in rates futures on a daily basis? And when you look at the top handful of market makers, what proportion of liquidity provision are they accounting for?

Tim McCourt:

Yes. Thanks, Eli. As you can understand, we don't comment on the number of exact firms providing liquidity in a given market or at a given time or who's in what provision program or what certain subset of participants might be doing. The anonymity of the cloud is an important part of the efficacy and efficiency of risk transfer and price discovery process here at CME but what I can tell you is that our network is strong for interest rate futures.

Operator:

Our next question from Brian Bedell with Deutsche Bank.

Tim McCourt:

Sure, Brian. I think certainly, when we look at the basis trading, it's a trade that has persisted in the market now for several years. When we look at the combination of trading futures alongside cash, that's certainly something CME is uniquely positioned in our ability to help facilitate that. But it is important to note that basis trading does change some of the characteristics of how participants may be trading or the size they may be trading in and the different modalities they use.

Operator:

Our next question from Owen Lau with Oppenheimer.

Terrence Duffy:

Yes. Thanks, Owen. On the crypto, Tim?

Terrence Duffy:

But the way you asked your question is correct. This is not that material to CME. We are in this asset class, but we are not all in on this asset class. I think that's important. We're in the [indiscernible].

Michael Cyprys:

I wanted to circle back on the Google Cloud migration and your migration of clearing services and market data to the cloud. Just curious how you think about new services that you could provide customers over time as well as new revenue monetization opportunities over time. And if you look out 5 to 10 years, I guess how do you see the evolution of your business as more of it over time will be moving to the cloud?

Terrence Duffy:

Lynne, do you want to add?

Terrence Duffy:

Michael that gives you some clarity [indiscernible].

Terrence Duffy:

Thank you. I appreciate that. And let me just say, I appreciate everybody that participated in today's call and those that can't, we look forward to continually communicating with you. I want to say one thing before we close, I think it's really interesting to look at CME. We've talked about all 6 of our asset class being up in Q1. That is a great sign. We've got a question about the health of the client.

Operator:

As we are concluded, again, thank you for your participation. Please disconnect at this time.

Operator:

Greetings, and welcome to the CME Group Fourth Quarter and Year End 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Adam Minick. Please go ahead.

Terry Duffy:

Thank you, Adam. And as Adam said, thank you all for joining us this morning. I’m going start by giving a little color on the broader environment. Following that, Lynne will provide an overview of our financial results and our 2024 guidance. In addition to Lynne, we have other members of our management team here to answer questions after the prepared remarks. 2023 was the best year in CME Group's history with a record average daily volume of 24.4 million contracts, up 5% from 2022. This growth was led by records in both agriculture and interest rate products, which for the year were up 17% and 16%, respectively. Options average daily volume across all asset classes also set a record with ADV of 5.1 million contracts, up 23% versus last year. Lastly, our non-US average daily volume increased to a record 6.8 million contracts. Last year, I referred to 2023 as a new age of uncertainty. And that uncertainty extended throughout the year. We experienced continued inflation, rising cost of capital, increasing geopolitical tensions and shifting perceptions around the Fed's interest rate policy. All of these factors contributed to our customers' growing need for risk management, capital efficiencies and demand for our products. Following the very strong performance of our business in 2022 and 2023, we have seen the speculation that our interest rate business could face headwinds based on the expectation that the Fed will start to lower interest rates this year. In my 40-plus years in the industry, I've observed that regardless of whether rates are going up or down, our volumes are typically higher during periods when the change of rates is uncertain as is the case today. I've never seen such a disparity in opinions on what the Fed may or may not do, and I believe that is a tailwind for CME Group and our rates products. I mentioned earlier that our interest rate volume was up 16% in 2023 with four Fed rate hikes during the first half of the year, building off record volume levels of 2022. In contrast to the view that a rising rate environment is optimal for our interest rate complex, our volume actually grew and accelerated since the Fed stopped raising rates in July of last year. In the six months from August of ‘23 through January of ‘24, our rates volume is up 24% year-over-year. I would also like to comment on the dynamics in the crude oil marketplace. Following the Russian/Ukraine war and other geopolitical factors that influenced the price of energy, WTI or West Texas Intermediate has become even more relevant to our customers in Europe and Asia and cemented its position as a primary reference price for crude oil globally. As the primary market for WTI trading, we continue to generate growth and expanded end user client participation through developing and investing in new contracts such as CME Group's Argus Gulf Coast contract. In a very short period of time, these contracts have generated significant commercial participation with current open interest over 500,000 contracts. As indicated by the open interest, it's clear that the commercial participants prefer CME Group's Argus Gulf Coast contract. We continue to remain focused on the growth of these contracts along with creating capital and technological efficiencies in the entire suite of CME Group's energy complex. This anchors CME Group as the global leader in West Texas Intermediate. Moving into 2024, we continue to see a wide range of views as it relates to the health of the global economy, whether it's inflation, unemployment or monetary policy. Also, there are ongoing geopolitical tensions and supply chain disruptions continuing in certain parts of the world. Additionally, we're approaching political elections in over 60 countries this year. The uncertainty of those elections and the policies that could come from that are basically unknown to all, which only leads to market participants continue to manage risk. All that being said, 2024 is still very much the age of uncertainty and our products remain critical risk management tools for our clients. We have seen this reflected in our strong start to 2024, where we delivered our highest January average daily volume in our history of 25.2 million, which is up 16% relative to last year. With that being said, I'm going to turn the call over to Lynne and we look forward to taking your questions.

Operator:

[Operator Instructions] Our first question is coming from the line of Dan Fannon with Jefferies. Please go ahead.

Lynne Fitzpatrick:

Okay, sure. I'll start on the investment piece. So if you look at the guidance, we are expecting expenses to increase by $60 million year-over-year. That is inclusive of the migration spend. So of that $60 million, about $15 million is an increase in the migration expense. As a reminder, we do expect to have incremental migration expenses this year and next year before we get to cash breakeven and ultimately cash flow positive. The remaining $45 million in increase is related to core expense growth and that's in the 3% range, very similar to what we've seen historically. In terms of Google, I'll let some of my…

Sunil Cutinho:

In terms of progress on Google migration, we intend on making substantial progress with migrating, clearing, business information systems and market regulatory systems to the cloud platform. Some of these regulated workloads are of course subject to have no objection approval from regulators, but we intend on making significant progress even on the data side. I'll now hand over to my colleague, Julie Winkler, who will talk about data and data product.

Dan Fannon:

Great. Thank you.

Adam Minick:

Thank you.

Alex Kramm:

Yes. Hey, good morning, everyone. Just wanted to come back to the pricing comments you made at the end of your prepared remarks there. I think 1.5% to 2% on the future side. I think that's kind of back to pre-inflation or high inflation environment, maybe even on the lower side. So can you maybe just talk about how you thought about the price increase this year? Seems like inflation is still somewhat elevated, but then obviously curious if -- to what degree client feedback, competitive dynamics are impacting that, if at all? Thank you.

Alex Kramm:

Fair enough. Thank you.

Operator:

Our next question is coming from the line of Owen Lau with Oppenheimer. Please go ahead.

Terry Duffy:

Thanks, Owen. I'm going to turn it to my colleague, Suzanne Sprague, the President of our Clearinghouse and heads up our Clearing and Risk, and she can give you some fairly good color as it relates to the DTCC arrangement.

Terry Duffy:

And Owen, I think just to add to what Suzanne said, as you know, and others on the line know, over the last year or so, our former colleague that headed up their business, Sean Tully, talked about the efficiencies that would go along with getting us into the offsets with DTCC and in the ranges of anywhere from 40% to 80%. And so Suzanne's numbers of 75% to 80% are on the high end of what we were originally looking for. So this is a very exciting opportunity for us and more importantly, our client base.

Terry Duffy:

Thank you.

Ken Worthington:

Hi, good morning, and thanks for taking the question. I wanted to dig further into your comments, Terry, on energy and market share and sort of business shifts in that market. You call that Argus as sort of a preferred crude contract. I was hoping to get more color on crude more broadly and also what you're seeing in gas. So for crude, what are you seeing in terms of share and participation? And to what degree is the addition of Midland to the Brent marker altering behavior? And in natural gas, it seems like options in globalization seem to be the story here. Was hoping you could provide some perspective.

Derek Sammann:

Yeah, thank you. Let me take a step back a little bit, and I think it's important to note that our WTI franchise is bigger than just our CL contract. So, I want to point out a couple of ways that we continue to invest in, innovate, and grow our overall WTI portfolio in this range-bound and quiet volatility market. Terry mentioned one of those, which is the crude grades contracts, and that's a growth story with a significant participation from the commercial end user base, and that's reflective of WTI now being part of the Brent assessment, and that just means it further cements WTI as a global benchmark. Secondly, we continue to expand our WTI options franchise. We added -- expanded weekly expirations Mondays and Wednesdays. That's driving 35% growth in our crude and refined options business so far this year. Third, we continue to invest in our micro contracts. We have ADV over 100,000 contracts, 50,000 unique traders in that market, and the products overall have been a great entry point for new clients acquisition. A lot of these customers have never traded an energy contract before, so we continue to onboard new clients through that. So, all these products in our broader WTI portfolio reinforce WTI as the main benchmark globally, and it contributes strongly to the overall energy franchise growth we've seen into 2024, with overall energy up 21% and our options growth particularly up 87%.

Derek Sammann:

Pivoting over to natural gas, Ken, you're right. It's a significant story, and I think when you look at the fact that the US has now become a significant, both producer and exporter of natural gas, that really has positioned Henry Hub as a central benchmark globally for LNG as natural gas continues to be consumed globally. When you look at that business over the course of last year, you've seen significant growth. Globalization, you're absolutely right, when you continue to see the growth that we've seen in 2023, we saw our European nat gas volumes up almost 50%, and we're seeing that business up almost 100% so far in the first six to seven weeks of 2024. When you look at both the commercial participation, natural gas was up 30% with our commercial participants last year. It's up 50% so far this year, and the buy-side clients was up 50% last year and 80% this year. So, it's a global story. It's a story that's being adopted by buy-side and commercial participants, and it's a global story for us. I think the last piece of that is the central role that options continues to play in markets as volatile as we have seen in natural gas. Options are the optimal tool for the way customers interact with this business. So, when we look at our nat gas options, this has set a record last year of over 150,000 contracts, up over 40%, and the vast proportion of that was on screen. And 2024 has started extremely strong with almost 300,000 contracts so far a day, and nat gas options up over 100%. So, overall, it's a globalized story. It's one where we continue to engage and one that's real to our story.

Ken Worthington:

That was excellent. Thank you.

Operator:

Next question is coming from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Terry Duffy:

Okay. Thanks, Brian. Lynne will touch on the data as the market data pricing changes that you referenced. And then I'll have Tim McCourt and probably myself touch a little bit on the trading volume as it relates to DTCC and the arrangement associated with it. Lynne?

Terry Duffy:

Does that get to your question on the data, Brian?

Terry Duffy:

Okay, so on the trade volume question that you had is relates to the DTCC arrangement, is that the second part?

Terry Duffy:

We're always cautious on expectations, but let me go ahead and have Tim start a little bit with the client base on how they're reacting to it. And I think you got a little bit of a flavor for it on the previous answer that Ms. Sprague gave as it relates to the clients that are using it already getting the 75% to 80% efficiencies with their margin portfolios. But Tim, let me turn to you for some comment.

Terry Duffy:

And Brian, the only thing I would add to that, you have to look at what we talked about earlier today, and you see the entire 2023, especially going into the end of Q3 and the beginning of Q4 of 2023. We saw the record open interest in our treasury complex across the curve, which is very encouraging for us. So, from our standpoint, owning a cash platform and owning the largest listed business in the world, this is very exciting for us. We've talked all along about futurization of products. You're seeing that more and more every single day, the electronification of different products. And with the growth in our rates business going into last year, I think was just another example that with the record open interest in trade coming into our treasury complex. So, from the growth, it's hard to say what the growth is coming from or what's driving it, but by owning both platforms, we get the benefits either way, and we saw the benefits really materialize on the future side in 2023, especially in Q4.

Terry Duffy:

Thank you.

Benjamin Budish:

Hi. Good morning, and thanks for taking the question. Terry, in your prepared remarks, you talked about expanding end-user client participation. I was wondering if you could expand upon that a little bit, both in the energy complex. And on the rate side -- on the rate side, are you seeing sort of more activity from your existing client base? Are you seeing more participation from maybe new institutions that are increasingly engaging in the sort of risk management behavior? Yeah, thank you.

Julie Winkler:

Yeah. I think Terry is absolutely right. And the two segments that I would just hone in on, Benjamin, that we saw particularly double-digit growth from last year was really the buy side and the commodities, or sorry, the commercial segment as well. And so when we look at that, we saw really strong ADV from asset managers, again, double-digit, the [semi-buy] (ph) side clients that really are looking at our products because of the regulatory environment, the liquidity, and also the capital efficiencies that we offer. And so the products that I'd say they were most interested in and what we saw, almost half of that growth was coming from interest rates with all of the volatility and movement that we saw last year, but also a lot of interest in our commodity suite. So hedge funds, managed funds that are really looking at CME's agricultural portfolio, and also more esoteric products, things that we offer like milk and lumber, because they're looking to diversify the risk profiles and also access those uncorrelated markets. And so it's another sign of our really diverse product portfolio, meeting customer needs. On the commercial side, double-digit growth, both in terms of revenue and ADV last year. And that was really as they were looking to hedge their physical positions, manage that risk exposure, saw good uptake in some of our new industrial metals, the energy companies that we talked about before. And I think this trend speaks to the transparency, the efficiencies, and the well-regulated futures markets that we offer. And then internationally, I think, particularly in Europe, on the short-term interest rate side, we saw some really strong performance and also interest across our commodities and FX suite. So I think we have a lot to build on as we look into 2024, but very strong performance in those areas last year.

Benjamin Budish:

All right, great. Thank you for all the color.

Operator:

Our next question is coming from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Terry Duffy:

Yeah, it's a good question, Alex. I'll turn it over to Mr. McCourt. He'll start and I'm going to jump in as well, and maybe Ms. Winkler also. So go ahead, Tim.

Terry Duffy:

And I think just to add to what my colleague said, Alex, I think it's really important that we, when he references the risk management of these, we're a risk management institution and we're looking at massive amounts of open interest that have portfolio margin associated with them that cannot be replicated at other entities, so we -- to the degree we can. So we are really excited about our equity franchise. We do recognize, so we're not saying we don't recognize the growth that has been in zero DTEs. As you know, our zero DTEs expire into futures and theirs expire into cash. That has been a difference that it seems that the retail participants seem to like a little bit more than the professional participant. So we are obviously looking at different things as this continues to evolve.

Terry Duffy:

Thank you.

Kyle Voigt:

Hi. Good morning. So last week you announced that you'll be rolling out US Corporate Bond Index futures this summer. I think other venues have attempted to launch credit index futures in the past, and it historically has proven difficult for those products to gain sufficient adoption. Just wondering if you could go into some detail about why you think the time is right for this product, why your effort may be different here, and then also provide some color on customer demand that you're seeing for the product as well?

Tim McCourt:

Thanks, Terry. Thanks, Kyle. Great question. We're pleased to announce earlier this month that we entered into the IPO arrangement with Bloomberg to offer futures on their corporate bond futures for both high yield and investment grade with futures coming online summer of 2024. Still all the details are coming, but it's important to note, I think when we look at credit, is in this market with the increasing rate environment and the increasing dynamics and relationships diverging between equities and rates market, Introducing credit products to the market makes complete sense to offer another tool to our clients to manage the risk as it manifests in all parts of their portfolio, whether it be equity, rates, or single name credit. I think it's also interesting to note is that when we look at this universe in general and partner with Bloomberg, we are also tapping into a well-established ecosystem around these indices around other exchange traded products and structured products that are available. So this is a very welcome tool for clients. We've heard overwhelming feedback over the last several months during the validation process that this will be additive. It will help them in other parts of the credit market. And we're looking forward to bringing these products to market, work with our participants to make sure that they continue to grow. And I would just encourage you to stay tuned for more details as we approach this.

Kyle Voigt:

Great. Thank you.

Operator:

Our next question is coming from the line of Michael Cyprys with Morgan Stanley. Please go ahead.

Terry Duffy:

It's a great question, Michael. We haven't talked too much about that. So I appreciate the opportunity to discuss it real quick on the call. I'm going to turn it to Lynne, but I'm going to make a few comments as it relates to it as well because I think it goes into the strategy we originally acquired NEX in the cash markets and also the post-trade services that came with it and what our thought process was. So I'll save those comments and I'll let Lynne go first.

Terry Duffy:

I have nothing more to add than that because I think Lynne summed it up. That's where I was going to go with the benefits of once we acquired the business, getting focused on the cash markets to complement our futures markets was something we're really excited about with NEX. And then when you look at the post-trade services and now having the JV, I think that was nothing but a bonus for us to be able to do that with IHS and then ultimately with our partner at S&P Global. So I think Lynne summed it up quite well.

Operator:

Our next question is coming from the line of Simon Clinch with Redburn Atlantic. Please go ahead.

Terry Duffy:

Thanks, Simon. Tim?

Terry Duffy:

Thanks, Jim. Thanks, Simon.

Operator:

Our next question is coming from the line of Chris Allen with Citi. Please go ahead.

Terry Duffy:

You got it, Derek?

Terry Duffy:

Lynne? Thanks, Derek. Lynne?

Terry Duffy:

Thanks, Chris.

Chris Allen:

Thank you, everybody.

Craig Siegenthaler:

Good morning everyone. My question is on the November pricing schedule update. You didn't increase pricing on a rate. So we're curious to why you didn't touch rates.

Lynne Fitzpatrick:

Yeah, the only thing I would add to that is keep in mind, Craig, because we were incenting the SOFR product over the last couple of years, as those have rolled off, we have had some pricing -- natural pricing increases as the incentives have rolled off. So they weren't necessarily on the exact pricing change, but they were related to those incentives that have rolled off over time as it's matured.

Craig Siegenthaler:

No, that's perfect. Thank you, Terry.

Operator:

And our next question is a follow-up question. It's coming from the line of Alex Kramm with UBS. Please go ahead.

Terry Duffy:

Okay. Lynne?

Alex Kramm:

Great. Thank you. And then my other one, I don't think anybody has asked yet, but can you just give us an update on balances in the Clearinghouse cash and then obviously non-cash collateral, the return you had, and then maybe related to that, when I look at some of the data that we track on that, it seems like the cash balances have been super consistent over the last one, two quarters. So just wondering if there's anything you would point to why we may have found a floor to those declines that we had seen in cash balances over the last couple years? Thanks.

Lynne Fitzpatrick:

Yeah and just to provide you a little more of the data, Alex. So for Q3 our average cash balances were $91 billion. In Q4, the average was $75 billion and we've seen that $75 billion continue in the early parts of Q1. The earnings on the cash balance was consistent with last quarter at about 36 basis points. On the non-cash side, in Q3 we were at $137 billion on average. In Q4, that went up to $153 billion. Just a reminder that was at 7 basis points in Q4 and increased to 10 basis points here in Q1. In the early part of Q1 through February 6, our average is $160 billion on that fee eligible non-cash.

Terry Duffy:

Thanks, Alex.

Owen Lau:

Hi, thank you for taking my follow-up. So it has been more than one month after the launch of spot Bitcoin ETF. Could you please talk about how it has impacted CME Bitcoin futures and futures ETF? Do you think it's a net positive for CME? Just want to get your thoughts on this space. Thanks a lot.

Tim McCourt:

Thanks, Owen, for the question. Certainly we've seen finally the long awaited approval of the spot based ETFs on Bitcoin. And it's certainly a interesting and positive development for the ecosystem more broadly. We're hearing from customers, our futures remain a central tool for the market makers of that ETF for those who are looking to create or redeem against the futures instead of the cash process. So it's something that we've also seen strong growth both on open interest and in volume of our complex in response to the run-up that's also remained here into February. To put that in perspective, January was our best month ever in terms of average daily open interest, [tapping] (ph) four consecutive months of average daily open interest all-time highs, where the average daily open interest reached a record of almost 23,600 contracts, which is the equivalent of about $5.1 billion US dollars. But also on the volume side, the futures suite reached an all-time high of about 67,000 contracts or almost $6 billion per day in January and our micro suite for the crypto products grew four times, a four-fold increase in September, all in response to the market dynamics around the ramp to launch and the subsequent trading activity of the launch of spot Bitcoin ETF. We also remain the top Bitcoin futures exchange by open interest, and we expect this ecosystem to continue to grow as we see the interrelated products be adopted by the market and CME Bitcoin futures and our Bitcoin reference rate will remain at the center of price discovery for this continuing growing ecosystem.

Owen Lau:

Thanks a lot.

Operator:

We have no further questions. I'd like to turn it back over to management for closing remarks.

Operator:

That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Operator:

Greetings, and welcome to the CME Group Third Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Adam Minick. Please go ahead.

Terrence Duffy:

Thanks, Adam, and thank you all for joining us this morning. We released our executive commentary earlier today, which provides details on the third quarter of 2023. I'll make a few brief comments on the quarter and current outlook, and Lynne will summarize our financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. Turning to the most recent quarter, average daily volume of 22.3 million contracts was less than 1% off the record Q3 high set in Q3 2022 while our revenue grew 9% to $1.34 billion, which is the highest Q3 revenue in CME Group's history. As we've mentioned throughout this year, we are operating in an environment that unquestionably requires risk management. With so much uncertainty in the world we live in, we're continuing to work closely with our clients to help them navigate uncertainty and manage their risks. This is particularly true in the interest rate markets today. We see divergent market views around inflation, unemployment, monetary policy and ongoing geopolitical tensions, all impacting future interest rate expectations. Regardless of whether rates rise, fall or hold steady, the shape of the yield curve and interest rate views continue to shift, and our customers need to manage that risk. As a result, we have continued to see growth on top of the record year end 2022 for our interest rate business. This was our highest Q3 for our interest rates complex, up 6% from the same quarter last year. We saw particular strength in the treasury complex, which was up 16% in the quarter and is off to a strong start in Q4 as well. Completing the successful migration of Eurodollars to SOFR, we continue to list other products to complement our interest rate complex today. Our European short-term rate or ESTR contracts traded a record 10,000 contracts per day in September. Our newly listed treasury bill futures launched on October 2, and we have traded over 15,000 contracts in the first three weeks. This is one of the most successful launches of a raised product ever. Our broad product offering and focus on capital efficiencies such as the enhanced cost margining agreement with DTCC going live in January of 2024 continue to enhance the value proposition for our customers using our products to manage their interest rate exposure. On the commodity side, third quarter 2023 volume was up 15% in total and included the highest ever Q3 volume for our agricultural products. Our energy complex also performed well with volume increasing 16% from last year. We believe the current environment for this asset class will continue to bring new clients as well as existing ones to manage their exposure in our global benchmark. We believe the strong macroenvironment, combined with our diverse set of asset classes and strategic execution across our growth initiatives, positions us well for continued growth in 2023 and beyond. With that, I'll turn it over to Lynne to cover the third quarter financial results.

Operator:

Thank you. [Operator Instructions] Our first question is from the line of Dan Fannon with Jefferies. Please go ahead. Your line is open now.

TerrenceDuffy:

Yes. Thanks, Dan. I think that's the reason why people sometimes need to read the whole story and not just the headline because if you read the whole story, I haven't said anything different than what I've said for several years is, I was only stating facts to the point where our capacity is much greater than everybody else's because we've stayed very disciplined and very focused as it relates to our M&A transactions that we've done. I was only referring to our EBITDA being lower than one times compared to some of our competitors who were at multiples of that. When asked the question, if deals are to be offered, I made the reference to the comment that where else would you want to shop something but the CME? It doesn't mean that CME is interested, but that's all I was referencing. So my appetite for this hasn't changed a bit. We have not looked at anything that I -- to a point where I said, okay, we want to do a deal. I was only referencing what I've been saying for a number of years. And unfortunately, the headlines say what they're going to say. So there's not much more I can say about it than that, Dan. But again, nothing has changed from our discipline. And again, if I -- we see something and I said this publicly and I believe this, if we see something that benefits our users and benefits our shareholders, we will take a very strong look at it to build and grow this great company. That's all I was saying.

TerrenceDuffy:

Thanks, Dan.

Patrick Moley:

Yes. Good morning. Thanks for taking my question. So Terry, I was hoping you can maybe just give us your updated thoughts on the outlook for volumes heading into year-end, just given some of the evolving yield curve dynamics we've seen in this kind of heightened geopolitical uncertainty. And then coming into this year, you talked a lot about how great the setup was for CME's business. So maybe if you could just talk about how that maybe compares now to -- or how it's played out relative to your expectations, and how it maybe compares to the setup we're now looking at heading into 2024? Thanks.

Patrick Moley:

All right. Great color. Thank you.

Operator:

Thank you. Our next question is from the line of Alex Kramm with UBS. Please go ahead. Your line is open.

TerrenceDuffy:

Yes. No, thank you very much. And it's a great question because it's a great unknown too, what's going on out there. And what is being proposed and what may happen is still being hammered out. I'm going to ask Suzanne Sprague, who is the President of My Clearing House, to give you some comments on the reg side of it. She's working closely with her team as they're watching this. And then I'm going to turn it over to Tim McCourt from an opportunity perspective, what he's seeing as it relates to the complex if, in fact, some of these things happen or even if they don't. So maybe we'll give you a little two-part answer here, Alex, if you don't mind.

Tim McCourt:

Sure. And thanks, Alex, for the question. I think when we think about the opportunity why we remain excited and very optimistic that the cross margin agreement is finally coming online in January of next year is because this is something that we've seen before in our other markets. When you unlock the capital efficiencies of related products, it significantly increases the risk management capabilities of the marketplace and can lead to increased trading velocity in the product. While as Terry said, it's hard to predict the future. If we look at some of the other areas we've unlocked capital historically, portfolio margining of futures versus swaps is probably a pretty good analog to look at, and that's been in place since 2012. And since that's been put in place, the average daily savings have grown from 1 billion in 2013 to a little over 7.5 billion today in 2023. And at that same time, our rates volume grew 109%, and open interest doubled in the complex. And our cash market participation went from about 54% over 100%. So certainly unlocking capital is beneficial to the volume and the velocity of the complex, and we're optimistic about what we can do once this comes online early next year.

Alex Kramm:

Very good. Thank you guys.

Operator:

Thank you. Our next question is from the line of Owen Lau with Oppenheimer. Please go ahead. Your line is open.

TerrenceDuffy:

Yes. Owen, it's Terry Duffy here. And one of the things that we have said historically and if you recall some of the comments that our former colleague, Mr. Sean Tully made over the years that when the Fed no longer is acquiring some of these treasuries that the demand for them will have to go somewhere else. The Fed does not hedge their treasury portfolio, as you know. The other people that acquire the issuances coming out from the government need to hedge those. So it's hard to predict what the issuance is going to be. But again, those -- the parties that will be taking the issuance if it's not the Fed are traditionally people that hedge those in our marketplace. So that should benefit CME. So Tim, maybe you want to add anything more to that?

Owen Lau:

Got it. Thank you very much.

Operator:

Thank you. Our next question is from the line of Brian Bedell with Deutsche Bank. Please go ahead. Your line is open.

TerrenceDuffy:

Yes. And Brian, it's Terry. I'm going to turn it over to Tim, but sometimes there's problems looking for solutions as they say or solutions looking for problems. And this is government at its finest trying to introduce new legislation where there is no problem with the basis trade is something that will continue to move as well as it should, and the basis trade is actually what keeps the markets in line. So we feel very strongly that this is going to continue to keep the market efficient. And the more you explain that to regulators to show them what kind of potential chaos you could introduce if, in fact, you have additional regulation that takes people out of that trade which widens the basis, they may not like that outcome. So let me turn it over to Tim to give you a little bit more color. But I would be cautious to draw the conclusion that any kind of pending regulation is coming down the pike in the time zone. Tim?

TerrenceDuffy:

Thank you, Brian.

Operator:

Thank you. Our next question is from the line of Kyle Voigt with KBW. Please go ahead. Your line is open now.

TerrenceDuffy:

Thank you, Kyle. Lynne, do you want to address both of those issues?

Kyle Voigt:

Great. Thank you very much.

Operator:

Thank you. Our next question is from the line of Benjamin Budish with Barclays. Please go ahead. Your line is open.

TerrenceDuffy:

Yes. I think it's hard for us to describe if it's the regional banks or the bigger banks hedging. I mean, Suzanne can help me with more color on that as who the exact participants are because they come in to one of the bigger banks anyway, even the smaller ones do. So we're not quite sure which one is laying off the risk.

TerrenceDuffy:

And just to add to that, Ben -- thank you, Suzanne, that's a great answer. But just to add to that, Ben, the duration risk that we saw take down SVB has not gone away. As we talked about earlier in our comments, the issuance that is coming out from the government seems quite large in order to run and pay our bills in this government, and the demand has been a little bit lighter. So in return, whether we like it or not, rates are continuing to be very stubborn regardless of what the Fed does or does not do. So I think that we're not suggesting there will be more duration risk. But what I am suggesting is that people are going to have to manage that. And so whether it's the biggest of banks or the mid-tier banks, the risk management associated with duration, not only is it not going away, in my opinion is increasing because of the fundamentals of the overall treasury market in general. So from our standpoint, we think that will lead to more people mitigating and managing risk through our treasury complex from all different sizes of the banking world. That useful Ben?

TerrenceDuffy:

Okay. Thanks.

Chris Allen:

Good morning, everyone. I was wondering if you could provide color on the average collateral balances for cash, non-cash in the quarter and then with respect to the yields and then where they stand at present?

Lynne Fitzpatrick:

Sure, Chris. Happy to. So if you look at quarter three, the average cash balances were $91 billion. The yield on that averaged 36 basis points. For non-cash, we averaged $137 billion, yielding 7 basis points. If you look at October to-date, the cash balance has trended down. We're seeing average cash balances of $71 billion and a shift into the non-cash collateral, which is up to $152 billion. I would point out that on the non-cash collateral side, we did announce a fee change that takes effect in January where the charge on the non-cash collateral will be increasing from a blended 7 basis points up to 10 basis points. Just to give that a little sizing, if you apply that change to this quarter's average volume, that would have added $10 million to the revenue associated with the non-cash collateral, which rolls through other revenue.

Terrence Duffy:

Thanks.

Ken Worthington:

Hi. Good morning. Thanks for taking the question. As you go into year end, maybe could you talk about how you're thinking about price increases in data and trading for 2024, particularly in the context of the fairly sizable changes you made in 2023?

Lynne Fitzpatrick:

Yes. So as you know, on the clearing and transaction fee side, we typically announce any changes there later in the year. It's typically around the late November timeframe. Our approach is the same as it's always been. It will be a bottoms-up approach, looking at all the different markets, looking at health of the market, the value we've created, the health of our customers and the total cost of trade, including not only clearing and transaction fees, market data fees, but also the cost of collateral and making sure that we don't do anything from a fee perspective that would impact volume or liquidity, given our high incremental margin. So as I mentioned, we have increased that non-cash collateral fee effective in January that runs through other revenue. And Julie has announced some market data fee changes, which take effect in January as well. Julie, do you want to walk through those?

Ken Worthington:

That was great. Thank you very much.

Operator:

Thank you. Our next question is from the line of Alex Blostein with Goldman Sachs. Please go ahead. Your line is open.

Terrence Duffy:

Thanks, Alex. And I'm going to ask Tim and maybe so many of my other colleagues around the table to comment as well. But when we're looking at the FMX proposal, it's -- we haven't seen all their details. And I think it's really hard to comment on exactly what the competitive offering is going to be other than what you just referenced. I understand what you said. I think with the announcement of DTCC and the offsets that we are going to be able to supply to the users is going to be an extremely powerful benefit to the participants of the marketplace. And you also have to remember that FMX is coming from a position of zero futures trading today. And where we are sitting on, as Tim has referenced, record open interest in treasury complex listing new products and listing the benefits thereof. We are ready and able to compete with anybody. And competition is something that has made CME what it is today. But the benefits that we continue to work on, you've heard me say this for years that we are going to continue to look for capital efficiencies in each and every one of our asset classes. We are delivering on every one of those asset classes to deliver capital efficiencies. That does not go lost on the participants in a capital-intensive world. So when you're talking about new offerings with LSE and what they could potentially offer versus what we have, we think we have a massive compelling offering for our clients that saves them additional funds. So I like our position, and I think we are in a position of strength. Again, I think a lot of people, Alex, as you know very well, when the LIBOR was going away and everybody was going to convert from Eurodollars us to SOFR that people thought it was a jump ball. And we felt we were in a very strong position to transition 100% of that business into CME SOFR products, which we did because of efficiencies to everything we have to offer. And those go from the back office to my sales team right across the entire organization that creates those benefits. So I like our position. Again, I think you said it at the beginning of your question. We've seen this movie before. I don't want to quote you wrong, but I think that's what you said. And we will continue to take every party that wants to compete with us very seriously. But at the same breath, we think we have a very strong, powerful, compelling offering for our clients. Tim, do you want to add to that?

Terrence Duffy:

Hopefully, that gives you a little color on how we're thinking about it, Alex. But again, we take everything seriously and -- but I think, again, our offering, as Tim has said and I said, is very compelling.

Terrence Duffy:

Thanks, Alex.

Michael Cyprys:

Great. Thank you. Good morning. Two-part question. Just following up on the capital efficiencies beyond the cross margining with DTCC. Just curious what other steps you might be able to take as you look out the next three years to further enhance that. And then the other part of the question is just around the regulators proposing new capital rules for banks that can make some bespoke off-exchange derivatives just more capital-intensive. Just curious of your take on that, where you see the biggest opportunity to bring derivatives from OTC to the exchange-traded marketplace.

Michael Cyprys:

Yes.

Suzanne Sprague:

Yes. Thanks, Terry. So we do look forward to extending the enhanced cross margin program to the client level. We have had quite a bit of conversations with ourselves and the Fixed Income Clearing Corporation as well as clients on the importance of continuing to broaden that program. So we don't have any timelines to commit to at this point in time, but it is a focus of ours jointly to be able to expand those enhancements to the end client level, which I think will help even more with things we've already covered on the treasury mandate and needing more capital efficiencies to address things like increased capital costs under the Basel proposal. I think, Terry, I'll hit at a high level the Basel proposal.

Michael Cyprys:

Great. Thanks so much. I appreciate it.

Operator:

Thank you. Our next question is from the line of Craig Siegenthaler with Bank of America. Please go ahead. Your line is open.

Terrence Duffy:

So Craig, again, I've been also talking a lot about market structure and how market structures always have a shelf life, and we don't know what the next one is going to look like, but we all need to be prepared for, and that's what CME will always do. We'll be prepared for anything that comes our way. That's one of the reasons we filed for the FCM application, not just because of FTX. But not to say you're wrong because that was part of the reasons why, but it was again around market structure. I think with these vertically integrated models that is being proposed such as MIAX and I think Coinbase is the other one you referenced, the conflict of interest question for the clients is huge. And it would be big for us, too, if we decided to go ahead and deploy an FCM. So we would have to be very careful about that ourselves. But the same breath, I think that if they're going to go down this integrated model, they need to write rules associated with. This was my entire complaint around FTX that they were trying to make existing rules fit for their business proposal. So if, in fact, we're going to have integrated models of what MIAX is proposing today and go into business in the United States, you need to write rules with them because the Commodity Exchange Act clearly states in the year 2000 that those rules were written with intermediaries in mind, not on a direct model. So no saying you couldn't have intermediaries in the direct model, but the rules are not clear on that. So I think there's a long way to go. I think one of the reasons they're not getting much attention today on that is because of their size, which I think is wrong to look at it that way. It shouldn't matter their size. Who's to say they can't get bigger tomorrow, who's to say we can't do something different tomorrow as well. So I think there needs to always be rules and the rules of the road need to be applied so people understand that we do not need situations like 2008 and other ones that we could all describe because of people trying to advance businesses that they think is in their best interest without having the public's interest at heart. So again, we've always been a neutral facilitator of risk management. We will continue to do so. We like the intermediary model and again, but we don't know what the future is going to hold. But I do -- I am very concerned about some of these existing platforms. And the government needs to look at them and write rules for them if, in fact, they're going to allow them to stay in business.

Terrence Duffy:

Thank you.

Andrew Bond:

Thanks. Hi. Good morning One for Derek on the energy business. So energy markets, particularly natural gas markets, have experienced some structural shifts benefiting North American markets following the Russian invasion of Ukraine. More recently with the geopolitical events in the Middle East, are you seeing more of a continuation of these dynamics? And can you talk about the potential longer term impact of the geopolitical events of late on your markets?

Derek Sammann:

Yes. Thanks, Andrew. Yes, I think this is kind of proof positive of what we've been talking about for the last couple of years that structurally, the U.S. is an incredibly strong position, given the position we have, both in crude oil as well as natural gas. As you know, we're currently exporting record amounts of oil from the U.S. at 4.6 million barrels a day. We're also exporting record levels of natural gas while based on Henry Hub pricing record levels from our U.S. capacity point of view. So as we've talked about, that structurally positions CME's WTI franchise as kind of the leader in that space and certainly positions WTI as a global benchmark as the U.S. continues to export the marginal barrel outside the U.S. with challenges everywhere else. Natural gas, as you pointed out, has been a really, really strong point for the energy franchise overall. When you look at what's going on from an uncertainty point of view, options continue to be a significant proportion of our customers' client behavior. So we like our position in both natural gas and crude oil, when you look at the volume and growth of the both futures and options, strong in Q3. More importantly, we continue to see that strength in October with our energy options up 81% overall, energy up 26% in October. So really strong year this year, continuing really strong year into Q4. And the position that we have as the swing producer, both in natural gas and crude oil, I think, positions us well long term in what we think is a potentially multigenerational energy shift.

Terrence Duffy:

Thanks, Andrew.

Alex Kramm:

Yes. Hello, again. Just a quick one on the interest rate business again. You guys, Terry mentioned the LIBOR, SOFR transition. Obviously, that's now behind us and successful. But just maybe looking back on that, I think early on, there were some concerns that SOFR would not be the best replacement for Eurodollar and that maybe it won't meet certain trading strategies. So now that we're sitting here, I don't know, six months after the real cutoff, is the marketplace different at all? Are you seeing certain strategies not being applied anymore? And is that still room for innovation for you or SOFR, Eurodollar basically now the same thing as it always was? Thank you.

Tim McCourt:

Yes. Thanks, Terry, and thanks, Alex, for the question. I think what's interesting is when we see several months after the transition, we look at the SOFR complex at CME year-to-date through Q3, I believe we're already about 14% above the best year in Eurodollar previously. And we still have a whole quarter to go, which is exciting. So certainly adopted, certainly being integrated. We're seeing similar strategies with respect to the various option strategies, the futures, the outrights, the spread. So we're really pleased with how the ecosystem is coming along. But the one thing I would add is we also have new additional short-term interest rate products that can be spread against SOFR. When we look at the introductions of T-bills, and as Terry said in his opening comments with respect to us leading and taking really strong roots in the ESTR market overseas, these are all new things that are additive to the ecosystem that didn't exist when Eurodollars are around. So very optimistic for the future and further buttressed by our efforts on the CME term SOFR front with respect to licensing and the IP and the gravity that we're lending to that complex. These are all great things that continue to position not only SOFR, but the rest of our rates complex, given the interrelatedness and the spread strategies that exist as we head into next year.

Terrence Duffy:

Thanks, Alex.

Brian Bedell:

Great. Thanks for taking my follow-up. It's on RPC. Just some of the drivers in the third quarter that you mentioned were member mix and product mix. I think that was mostly on the product mix side between asset classes. I was wondering if you could comment a little bit about were there any outliers within the asset classes that significantly impacted the RPC? And then it looks like geography-wise or non-U.S. was actually up a little bit sequentially, and I thought that was -- usually it's typically the higher RPC. So maybe just some comments on that. And then also just on options versus futures if you can remind us on the differentials there. I think, Derek, you mentioned the options volumes in energy, in particular, were up nicely in October?

Lynne Fitzpatrick:

Yes. So if you look at the overall RPC of $0.707 versus the prior quarter of $0.724, so down $0.017. The drivers for that were really lower proportion coming from commodities products was about 18% this quarter, down from about 19.5% last quarter. We did also see a slight increase in member mix and the contribution from micros overall. In terms of the specific asset classes, I wouldn't call anything out as unusual per se. I would just point you to if you look at the year-over-year basis, on very similar volume, we saw a 12% uplift on RPC. That's driven by a couple of things. You do have a lower proportion coming from micro. You have an increase in the commodities as we've seen that rebound in this year, and you are seeing the impact of that pricing change rolling through.

Derek Sammann:

Yes. Thanks, Brian. We've seen some continued really strong growth and building on the back of what was a record 2022 for non-U.S. business. We're building on that. Again, our Q3 international volume was up 7% this year, and that was led by some of the higher RPC products. Our ag non-U.S. business is up 32%, energy up 30%, rates were up 16%, metals up 10%. Also, what you saw and I think you might have mentioned this, our non-U.S. options continues to grow extremely strongly as well. So our non-U.S. options volumes up 31% and while the overall options is up 21%. So a good strong story within a good strong story. So we saw EMEA be a particular standout there relative to the volumes. And I think we're -- the efforts we put in the place, boots on the ground, you heard us talk about the investment we're making in the majority of our sales force now being outside the U.S. is accelerating both our new clients acquisition opportunities as well as reinforcing and cross-selling into our existing customer base. So our non-U.S. business continues to be a source of strength and new client growth for us. And I think we'll see that we're on track for another record year for that side of the business across asset classes, and we like our position going into 2024.

Brian Bedell:

That's great. And then just can you remind us on the RPC of options versus futures in general?

Lynne Fitzpatrick:

Yes. So the total RPC for options this quarter were $0.658.

Terrence Duffy:

Thanks, Brian.

Owen Lau:

Thank you for taking my follow-up question. I think CME recently launched the WTI Crude Oil Monday and Wednesday Weekly options. I'm just wondering how much incremental opportunity and demand for these kind of 0DTE products, not just in energy but in the whole CME platform? Thank you.

Derek Sammann:

Yes. So on the weekly stuff, yes, we have had really great success across the entire franchise of launching additional points on the maturity curve. We've recently launched Mondays and Wednesdays in energy, particularly in WTI. We've actually set a number of records there. We had an old day record ADV about 43,000 contracts on the first of September. And that was after the addition of the Mondays and Wednesdays, we set a single day record on the same day of about 15,000 contracts. When you look at that opportunity for us, we've talked about this before, certainly in a world with as much risk as we see on any given day on any particular asset class, adding additional maturity points and a granular levels of risk management have proven to be successful. We sort of -- we plumbed that path with equities. We've incrementally rolled out asset classes. And I think over time, we found our customers have adopted those more broadly. Those are additive to the OI pool. Those have created more opportunities for spreading across maturities, but I would also note that our record options growth is accelerating, not just on the front end of the curve but across the entire maturity curve. So we're seeing growth there where the short-dated pieces are additive to the growth, but it's actually being led by farther out across the curve. So we see those as additional tools and nice additive pieces of growth, but not the primary source of growth.

Terrence Duffy:

Thanks, Owen. Thank you, Derek.

Elias Abboud:

Hi. This is Eli from Craig's team. Thanks for taking my question. I was wondering if...

Elias Abboud:

Yes. This is Eli from Craig's team. Thanks for taking the question. I was wondering if you could give us a sense of the potential impact of approval of the spot crypto ETFs on your crypto complex. What proportion of volumes in the -- futures-based ETF managers contribute to that complex today? And if we see like a migration from the future-based vehicles to spot, would that threaten the viability of that complex?

Tim McCourt:

Thanks, Eli. Thanks, Terry. Certainly, a pressing question, given the recent moves that we've seen in Bitcoin. I think one thing to note is that before we dive into the nuances of the ETF, we've also seen tremendous volume in OI growth here in the third quarter for our crypto complex. Just this week, we saw over 130,000 contracts trade, worth about $7.6 billion. That's our largest day in the crypto complex since the wake of the FTX collapse in a little over a year ago. So when we saw also a record OI in our Bitcoin futures over 20,000 contracts, which is equivalent to more than 100,000 Bitcoin. And this really speaks to the fact that we are an institutional-grade offering for the crypto community. So it is not surprising that we're the underlying for a lot of the futures-based ETFs, which has done phenomenally well in terms of serving the marketplace to date. Certainly, there's a belief that some of the uploading of price to almost 35,000, 36,000 we've seen this week is on the belief of spot-based ETF approvals. I'm not necessarily here to comment on whether that's going to happen. But what I can tell you is that we do see the introduction of additional structured products, whether it be spot or other underlying base in the crypto community will be additive to our complex at CME on two fronts. One, these markets are highly interrelated, where futures will not only be the underlying for some of these products, they will also be the hedge mechanism for market makers as well as market participants looking to hedge their digital or ETF-based holdings. And the second thing to always keep in mind is we also have the CME CF Bitcoin reference rate, which is the underlying for a lot of these ETFs coming to market. So not only will be additive to our futures-based volume as we've seen in other asset classes such as equity, it's also to keep in mind as these products take root and grow in the market, there will be additional revenue generation opportunities from the licensing front as a function of AUM and derived license fees here at CME as the IP owner of the underlying index.

Terrence Duffy:

Thanks, Eli.

Terrence Duffy:

I want to thank you all very much. Excellent questions today. We appreciate it very much and we wish you a good day, and everybody stay safe. Thank you.

Operator:

Greetings and welcome to the CME Group Second Quarter 2023 Earnings Conference Call. During this presentation, participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] It's my pleasure to turn the conference over to Adam Minick. Please go ahead.

Terrence Duffy:

Thank you, Adam; and thank you all for joining us this morning. As Adam said, we released our executive commentary earlier today, which provides details on the second quarter of 2023. I will make a few brief comments on the quarter and current outlook, and Lynne will summarize our financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. As we mentioned last quarter, 2023 is setting up to be an extremely favorable backdrop for risk management. The continued geopolitical uncertainty, and the increasing cost of capital for businesses, are just a couple of the things that have helped us deliver our financial results for the quarter. The benefit of CME Group's diverse product portfolio, spanning six asset classes was on display. ADV across our commodities asset classes increased 20%, with 34% growth in Agricultural products, 27% growth in Metals and 9% in Energy. Interest rates, average daily volume of 11.3 million was up 6% for the quarter and is up 11% compared with the first half of 2022. Despite a substantial decline in equity market volatility, our equity class delivered average daily volume of 6.2 million contracts during Q2. Our non-U.S. ADV was 6.3 million contracts for the quarter, including double-digit year-over-year growth in Ags, Metals and Energy. Options, again, played a critical role in Q2, with ADV growth of 20% to 4.7 million contracts including the highest quarterly Agricultural options ADV on record, up 32% from Q2 last year. Our product innovation in this area has driven strong growth with new participants and more product choice to more precisely match risk, as clients continue to look for ways to protect their portfolios in these uncertain times. As it relates to our rates market, expectations of short-term rate changes up or down and a divergent economic data continue to drive risk management. As we saw with the recent resolution of the debt ceiling, the treasury bill issuance increased dramatically. Over time, we expect that more coupon issuance and ongoing debt financing will contribute to greater hedging needs for years to come. On the commodities side, exports are increasing the demand for risk management using our benchmark, agriculture and energy products. With this favorable backdrop, we will continue to focus on opportunities to accelerate growth, including our recent announcement with DTCC to increase cross margining opportunities for the treasury markets. Additionally, our ongoing focus on product innovation and data services continues to enhance trading opportunities for our clients. We believe the strong underlying environment combined with our strategic execution across growth initiatives positions us for accelerated growth in coming years. With that, I'll turn the call over to Lynne for the second quarter financial results.

Terrence Duffy:

Thank you, Lynne. We are very pleased with the continued strong financial performance of the company. Before I open the call for questions, I’d like to ask Tim McCourt and Derek Sammann to comment briefly on the recent trends that we’re seeing in short-dated options products. And I’ll go to Tim, first. Tim?

Derek Sammann:

Thanks, Tim. As we’ve discussed in recent quarters, options have become a bigger part of global customers’ risk management and trading strategies. Year-to-date, average daily volume in our Options franchise across all asset classes is up 26% driven by Interest Rates, Metals and Equities and our non-U.S. options business is up 33% through June. Within this larger growth story, we have seen growing demand for weekly options expirations across all asset classes, with weekly options volume up 21% year-to-date and growing to 26% of total options trading. In addition to equities, commodities traders have similarly embraced shorter-dated expirations which allow our global customers to hedge specific event risks, such as crop reports and OPEC meetings. Agricultural weekly options were up 168% in the second quarter, which contributed to a record quarter for agricultural options overall. In Energy, our WTI weekly options grew 126% versus second quarter last year, while our gold weekly options are up 33% year-over-year. The strength of our options franchise allows CME Group to uniquely deliver significant capital and operational efficiencies and meets our customers’ need for short-dated options to help them most effectively manage risk across their entire portfolio. And with that, we can now open the call for questions.

Benjamin Budish:

Hi, there. Thanks so much for taking the question. I wanted to go back to a comment that you made Lynne in your prepared remarks, just about sort of positioning the business to kind of grow faster than the historical average over the next decade. If you could maybe unpack that a little bit, what are sort of like the key elements that you see, is it sort of a global increase in just need to manage risk, is it more customers, is it sort of increasing RPC, more volatility? How do you kind of think about what that looks like over the next decade as you indicated?

Julie Winkler:

Yeah. I mean, the -- certainly the cross-margin initiative is one that our clients are quite excited about and one that we have talked about for a number of years delivering that is going to be an important thing. Capital efficiencies continues to be at the top of their list and a very important thing in order to deploy more capital and do more trading at CME Group. I think the macroeconomic environment is quite positive across a number of our asset classes. And feedback from our clients is that they are using our markets to hedge those growing risk, as well as a need -- and seen that the increased Treasury issuance on the horizon that's going to mean more hedging from broker dealers as well. Buy-side, again, I think across the segments, we're sensing quite a bit of positivity. And as we continue to roll out more products, the options that Derek and Tim talked about earlier also is another highlight that we're giving our clients a lot of different instruments to be able to express, therefore the expectations about the marketplace and we feel we're very well-positioned from our team being able to support them globally. And that is certainly part of the international growth that we have commented on and believe it still suits us quite well for the future. We also feel real good about our data services business delivering the 8% growth and the number of new products, services, and analytics that the team is working hard to deliver, in some cases, things that we had not previously rolled out to our customer based on our data. So, all of those things give us a positive outlook for the future.

Benjamin Budish:

Yeah. Very helpful. Thanks, guys.

Operator:

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Terrence Duffy:

So, Dan, thank you for your question. You got a couple of questions in there. So the DTCC, we did put out the release with the DTCC just a couple of weeks back and we're hoping -- we're waiting on regulatory approval, which we are expecting and hopefully, we will have that implemented going into the first quarter of 2024. We feel fairly confident about that now. So, otherwise, we wouldn't have put out the release. So, we are looking at that. And again, I think you recall going back many quarters, a couple of years back when Sean Tully gave you some figures and about what he expected as far as the efficiencies, what that agreement could mean once we acquired NEX, which we thought we'd be somewhere today around 20% and we thought that we could be 70%-plus, we still feel very confident that that is going to be the case once this gets fully implemented and put forward. So, that's the DTCC question. The other question was on a couple of drivers for the business, I think is what you asked on the out years. And I'll ask Tim to make a couple of comments as it relates to his business and Derek as well.

Terrence Duffy:

So let me make a couple of comments too, Dan, because I think it's an important question that you asked. And it's really tough for us to predict the future. But as you recall, at the beginning of 2022, I said it was going to be in a very exciting year because a lot of things are setting up in favor of risk management. We think this is exactly the environment that we've been talking about for several years that we see going out for several more to come. So that's why we're really excited about some of these out years, some of the things that Tim just referenced. Risk management cannot be neglected for one moment for any businesses. We have multiple examples of failure, whether it's in small bank failures and others that continue to not manage risk that are going to be, we think, potentially have to manage that risk if they're going to stay in business. There's a whole host of factors that are coming to fruition that we think are a tailwind for CME Group. I'm going to let Derek make a few comments on his asset classes that, I think, this is an important question, not only that you're asking, but for all the analysts and investors to listen to. Derek?

Terrence Duffy:

And as we said, Dan, we can't predict volumes. But as I said in my prepared remarks earlier, when you're looking at the largest asset class, the U.S. equity markets and equity markets around the world in basically a zero-vol environment right now and we still traded at 6.2 million contracts a day. I think that goes to show you what can happen even when there's no vol. When people say, where are the future volumes are? I think we're just kind of giving you an example, where we see there at even in low-vol situation.

Terrence Duffy:

Thanks, Dan.

Kyle Voigt:

Hi. Good morning. Maybe a question for Terry. I mean, since early last year, you sounded more open to executing on M&A if the right opportunity presented itself. I guess given M&A announcements we're seeing from some of your peers domestically and internationally, can you just provide an update on the M&A environment? And given that you've not executed or announced any deals, are you not seeing the right opportunities in terms of checking the right boxes pr has that been more price driven? And then also maybe a question for Lynne or you, Terry, do you think in terms of the next 10 years, as you mentioned, kind of accelerating the growth, should we think about M&A as being a larger driver of accelerating that growth over the next 10 years versus what we saw over the last 10 years?

Lynne Fitzpatrick:

Yeah. I think Terry covered it well. We're looking at the organic growth. And if there were opportunities out there, it's certainly something we look at, but we've been very disciplined in our approach to M&A, as you've seen over the years.

Kyle Voigt:

Understood. Thank you.

Operator:

Thank you. Our next question comes from the line of Simon Clinch with Atlantic Equities. Please proceed with your question.

Terrence Duffy:

Sunil or Julie, you want to touch on the opportunity on the market data, then the Google partnership.

Julie Winkler:

Yes, Simon. Why don't I just start for a minute just talking about the data services performance and then just quickly go into some of the product build-outs that we've been working on with Google. As I mentioned earlier, this quarter, we were up 8% versus where we were a year ago. And that is driven from high demand from our professional user base as well as our retail clients, we're seeing a steady increase in the number of those professional traders that are accessing our real-time exchange content and really seeing growth across all of those subscriber segments positive. In Q2, we did not see as many of those one-time true-ups as we saw in the first quarter. So we definitely still had positive growth. But if you remember, back to Q1, Lynne had mentioned some of those one-time payments. So those can come from everything, from audits, true-ups and derive data audit fees, even true-ups some real-time subscribers from accruals. So I just wanted to call that out as well. We continue to say those are sporadic revenue items, but it's worth calling that out this quarter. And again, we're feeling quite positive about where the device usage is, as well as the new products that we've been able to introduce. As Sunil pointed out, and for us being able to really get our data into Google Cloud at the magnitude that we're sitting at now, has allowed us to accelerate the development of new products for our data business, including new analytics products as well. So we've been highly focused on how we're going to enhance the business. And then that is through making our data more available through APIs, increasing the flexibility and how we can package our data, how we distribute our data, how we're going to be able to price our data. All of this is just much better enabled once this is accessible through the cloud, as well as we believe, making it much more easy for clients that don't access CME data today to be able to use these new services. The computation that you can do is, just far as enhanced from what we are doing in an on-prem environment. And so that's allowing us to create as well some new compelling trade execution analytics. We've been able to put that into production this quarter. And we'll be sharing that with our clients shortly. And so this is really us being able to leverage our own proprietary data and giving our clients this benchmarking activity and allowing them to really take action on that data and providing them with insights. And all of this just leads into how are we helping our clients better manage their risk. So we're also looking at some new opportunities on the clearing and the risk side. So we'll be seeing more of that rollout. And it's just the speed and efficiency, which with the cloud puts behind us, is allowing that new product production that we otherwise had not seen specifically within the data business. Hope that helps.

Simon Clinch:

That's really thorough. Yeah. Thank you very much.

Operator:

Thank you. Next question comes from the line of Alex Kramm with UBS. Please proceed with your question.

Terrence Duffy:

Alex, thank you. Appreciate your question. I'm going to let -- there's a lot of people kind of chopping at the bit to take that question. But I'm going to let Tim start and then I'm going to join him and rest of the team. Go ahead, Tim.

Terrence Duffy:

Julie? Thanks, Tim.

Derek Sammann:

Yeah. And just to add a couple of data points to what Julie said specifically. When you look at retail in our metals complex, for example, retail volumes year-to-date are up 21%. And as you know, Metals is our highest rate per contract business at $1.50. Also options growth has benefited from retail participation, up 8% this year. So the benefit of being able to walk into a customer, any customer or distribution partner and offer every major benchmark liquidity product to them means that when sector rotation happens, we're going to be the beneficiary of that. So we see strength in certain asset classes when they set to rotate, whether because you've got normalization of volatility over cost of capital, we're going to benefit from that. And we see that. That's the benefit of the story and the growth behind the franchise.

Alexander Kramm:

Yeah. Lots of great color. Thank you very much.

Operator:

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead, sir.

Terrence Duffy:

Thanks, Brian. Derek and Tim, do you want to start, and then I'm going to...

Terrence Duffy:

So let me just accentuate a couple of points here, Brian, because I think it's really important. We're the largest futures exchange in the world. Our futures franchise is massive. One of the reasons it is what it is, is because of the growth of options. But the real growth is in the future for the out years. So our options business continues to be here better it only bolsters our futures in hedging business going forward. That's, to me, a real story for the future franchise of CME Group. So it's not just an option story like some people are talking about it. They're different firms that they represent. We are futures exchange with options and the options grow the future as well. And that point cannot be missed. I don't want you to think we're on only growing options in futures or not. So that's a very important point that we have to go forward.

Terrence Duffy:

Say it again?

Terrence Duffy:

Yeah.

Brian Bedell:

That’s great color. Thank you so much.

Operator:

Thank you. And up next, we have a question from Craig Siegenthaler with Bank of America. Please go ahead, sir.

Terrence Duffy:

Sure, Craig. It's Terry Duffy. Let me make a comment on that. Price hikes are part of the business, but we're -- it's not the strategy in how we grow the business. So we look -- everybody has got costs that they have are incurring and we're no different. But that's not our strategy to grow the revenue of the company. Our strategy is to grow the business, not grow what we charge. So again, we will continue to look at that on a month-by-month basis and make decisions as we see fit. But we're not prepared to say right now what our pricing will or will not be in the next couple of years on the out years. Lynne?

Craig Siegenthaler:

Thank you.

Operator:

Thank you. And our next question comes from the line of Owen Lau with Oppenheimer. Please proceed with your question.

Terrence Duffy:

So thanks, Owen. I'm going to ask Lynne to give you the first one on the market data question. Then Tim will touch on the digital assets.

Tim McCourt:

Great and thanks. When we look at the cryptocurrency complex at CME, you're correct, we recently announced, which I think is an innovative and interesting product. And that is the Bitcoin/Ether ratio spread contract that will go live the weekend of July 29. That's interesting where it's effectively the price of Ether divided by the price of Bitcoin in one contract. That will trade alongside the other cryptocurrency products, including offsets for clearing at CME. When we look at the crypto composite, CME remains strong. Our value proposition remains salient with our institutional client base. We've seen continued adoption of our products in terms of both traders in the OTC space, as well as futures traders as well as the growing importance of our contracts as the underlying of some of the most popular ETFs out there in this space, which are continuing to grow, both creating volume and open interest. When we look at the volume that we're doing in the larger size Bitcoin and Ether contracts, that is up about 6% versus this period, H1 through 2022. And on pace for another strong year in crypto here at CME. When we look at our product development, we do stay currently in the Bitcoin and Ether lane for tradable products. We do have a multitude of reference rates. But with regards to your question about the Ripple case, it's really not in our position to comment on that case. Our mantra and the philosophy that we use is, we will continue to only deploy product as the regulated venue offering regulated products. And we'll wait for further regulatory clarity from the SEC and the CFTC before we introduce this additional product.

Owen Lau:

Thanks, Dan.

Ken Worthington:

Hi. Good morning and thanks for taking the question. And the SEC has a number of proposals for centralized clearing in the rates markets for treasuries and repo. So a couple of questions here. I guess, first, Terry, which of the major parts of the clearing proposals are most likely to make their way into the final rules? Maybe second, how do you think these rules could impact rate liquidity and volatility and ultimately flow through CME rate activity? And then lastly, to what extent is participating directly in a clearing platform for treasuries and repo important or even a priority for CME?

Tim McCourt:

Sure. I think the one thing I would add is, while we continue to evaluate the proposals and the various suggestions and regulatory reforms that may be discussed, we're certainly looking to participate in those conversations with our clients and with the regulators to see what makes sense from a risk management and a clearing perspective for our customers. As Terry said, very hard to predict what the final rules may look like. But I think broadly speaking, when we look at the totality and the gravity of the interest rate complex at CME across futures and options, cash market or BrokerTec and OTC bearing, we certainly are already in a position of strength to the ability to unlock capital efficiencies for our clients. We are averaging about $7.5 billion of savings across the portfolio margin in the rates complex today. So anything that would increase the velocity or the benefits of central clearing is certainly will be something that we're looking to engage. But it's important to note, not only with our portfolio margin, as Terry said earlier, with big gross margin on the horizon, with the expanded suite of products available to the clients across SOFR, the Ultra 10 notes, the Ultra 10 bonds, is that we're already providing a lot of capital savings to clients, where these may be additive, but we'll have to wait and see how the final rules shake out.

Ken Worthington:

Great. Thank you.

Michael Cyprys:

Hey. Good morning. Thanks for taking the question. I wanted to ask about capital management. If we look back over the past decade, you guys have returned a tremendous amount of capital through the dividend and primarily the special dividend. A lot of that was during a zero rate backdrop, but with meaningfully higher rates today over 5%. Just curious how the rate backdrop is impacting your calculus and thought process around capital management? And to what extent might you think about evolving, shifting to policy and considering buybacks? Thank you.

Lynne Fitzpatrick:

Yeah. So as you know, Michael, we've had that policy in place with our variable dividend since 2012. We've returned over $21.5 billion to shareholders in the form of dividends during that time. We do think a lot of our shareholders appreciate the transparency of that approach and the ability to track progress towards it as we move through the year. So we do like both the flexibility and that transparency. That being said, we always do look at alternatives to make sure that the way we are returning capital is the most attractive form for our investor base. And to date, we have found that, that dividend policy has been preferred.

Michael Cyprys:

Great. Thank you.

Operator:

Thank you. Our next question comes from the line of Patrick [indiscernible] with Piper Sandler. Please go ahead, sir.

Terrence Duffy:

Yeah. Thanks, Patrick. Congratulations on your new role there at the firm. I will say a couple of things. The agreement with DTCC has been in the works for a long time. So you're exactly right, a little frustrating on that part. Why now? I think that when you look at where -- listen, we're only one part of the equation. We needed DTCC to be prepared to do this as well. They had some other projects in the works. They had to finish up. And everything takes a little bit longer than you anticipate. So we couldn't control their side of what they needed to do for this agreement. We have now come to a finalization on this with them. And like I said earlier, we're looking to have this as soon as it's approved, hopefully, being implemented by Q1 of next year. And again, extremely excited about what this could do for the marketplace because of what Tim and others have said what we see in the out years as far as risk management goes and how necessary it's going to be for all products. So if you're going to have that capital efficiencies amongst products is key in order to grow these businesses and make it more efficient for each and every client. So we do believe that this cross margining agreement will be extremely beneficial to the clients and make their capital more efficient, which in return, should benefit CME immensely. Tim, I'll let you comment more on the agreement under what Patrick has raised.

Terrence Duffy:

Thanks, Tim. Thanks, Patrick.

Operator:

Thank you. And we now have a question from the line of Chris Allen with Citi. Please go ahead, sir.

Terrence Duffy:

Thanks, Chris. Lynne?

Terrence Duffy:

Great. Thanks.

Operator:

Thank you. And we now have a question from the line of Andrew Bond with Rosenblat Securities. Please go ahead.

Terrence Duffy:

Thanks, Andrew. Good question and Derek?

Terrence Duffy:

Andrew, let me just say one more thing because you referenced it, and I talk about this a lot too, is geopolitical. I think geopolitical has got a factor in every single trade and every single asset class going forward. I mean, the tensions around the world are just amazing when you look at not only with the -- what's going on between Ukraine and Russia and the rest of the world being involved at the potential of what's going on between China and Taiwan, I mean, the tensions are so high all over the world. The geopolitical has a factor in every one of these markets and risk management is critical to it. So I think you're spot on for raising the geopolitical risk, but it's not only associated with LNG. It's across the board.

Terrence Duffy:

Thanks, Andrew.

Brian Bedell:

Great. My questions have been answered. Just one clarification. The rate paid -- or I'm sorry, the rate earned on the cash collateral balances in the second quarter and the rate that you're paying out to the clients?

Brian Bedell:

Okay. Great. Thank you.

Operator:

Thank you. I will now turn the call back to the management for their closing remarks. Please go ahead.

Operator:

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day.

Operator:

Greetings and welcome to the CME Group First Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, April 26th, 2023. It is now my pleasure to turn the conference over to Adam Minick, Senior Director, Investor Relations. Please go ahead, sir.

Terry Duffy:

Thank you, Adam, and thank you all for joining us this morning. We released our executive commentary earlier today, which provides details on the first quarter of 2023. I'll make a few brief comments on the quarter and current outlook, and Lynne will summarize our financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. John Pietrowicz is also on the call with us this morning. John will be staying on with CME through at least the end of the year as a Special Advisor to the company. Among other things, John's responsibilities will continue to be to work with Investor Relations activities. But this is the first for John to be on the call not in the CFO role. So John, please don't jump in when Lynne is speaking. I'd like to thank you, John, for your over eight years as CFO as well as your important work at CME prior to that. John has been a key part of every major milestone our company has achieved over the last 20 years. And we thank him for his many contributions to our business and we look forward to continually working with John throughout the balance of the year. With that, I will turn to a few comments regarding the first quarter, which was continued evidence of this new era of uncertainty. As I said in my Financial Times op-ed from February, risk management has been elevated from a supporting player to the star attraction as investors are managing portfolios with near constant market challenges. Following the best year in CME Group's history, first quarter 2023 average daily volume increased 4% from an extremely strong first quarter 2022 to 26.9 million contracts and was just short of our all-time quarterly record average daily volume in the first quarter of 2020 of 27 million contracts. This quarter included our all-time highest single-day volume of 66.3 million contracts on March 13th. All of this and other things have led us to the highest adjusted diluted EPS in the history of CME Group. Throughout the entire quarter, there were shifting perceptions about the Fed's near-term rate path as well as significant banking concerns in March and the continued development of the SOFR market led to the increasing need for the management of interest rate risk. This drove 16% growth in our interest rate ADV to the record 14.5 million contracts. Record March SOFR future's ADV of 5.2 million contracts exceeded previous record seen in Eurodollar futures. And since quarter end, we successfully completed the migration of our Eurodollar open interest to SOFR without issue on April 15th. In addition, our past investments in building out our options franchises are paying off. With such turbulent macroeconomic backdrop, options are an increasingly important risk management tool. First quarter options ADV grew 26% year-over-year to a record 5.8 million contracts, including double-digit growth across interest rates, equities and metals and 30% growth in non-US trading activity. First quarter options revenue grew 12% to a record $218 million. The first quarter was a great example of CME Group seamlessly doing what we are designed to do. The significant volatility spikes and associated turmoil affecting the banking sector in March further highlighted the systemic importance of sound risk management practices by institutional participants. There are no guarantees, but hedging can provide certainty. And the significant first quarter activity highlighted that some of today's most important trades are to manage risk. The future is more uncertain than ever, but we know we can expect a whirlwind of geopolitical and economic hurdles to persist. And we will continue to focus on innovating and offering market participants meaningful capital and operational efficiencies across a diverse and global relevant product set to manage their risk. With that, I will turn the call over to our new CFO, Lynne Fitzpatrick, to cover the first quarter financial results.

Terry Duffy:

Thanks, Lynne. And before we get to your questions, as Lynne said, I want to take a few – just a moment to acknowledge Sean Tully, who announced his decision to retire from CME Group in June of this year. Since joining us in 2012, Sean has been a strong leader for our financial products business and continuing to grow that through the period of tremendous growth and transformation. I especially want to recognize Sean for his outstanding job that he and his team did in the interest rates to facilitate the successful transition from LIBOR to SOFR. This was no small feat. As many people on this call remember, we had many conversations prior to the transition about where we're going to be able to transition or where others are going to do. Sean and Aga and others did an amazing job of bringing 99.99% of the SOFR business here to CME Group. And now it's the largest contract in the world, supplanting what Eurodollar futures used to be. It's really an amazing accomplishment. Following Sean's retirement in June, Tim McCourt, who has been overseeing our equity index and foreign exchange cryptocurrency business will assume Sean's responsibilities and lead the organization covering our financial and OTC products as well, the utmost confident in Tim's ability to manage this broader portfolio. So, Sean, on behalf of everybody here, we'll have more accolades with you off the call. But thank you for everything you've done, and maybe you could say a few words to people that you've been talking to for so many years.

Terry Duffy:

Thank you, Sean. Appreciate it very much. With that being said, we're going to get into your questions now. And Sean will be participating in that. So, I'm sure you will enjoy his answers as always. So, with that, we'll turn it over to you for your questions.

Rich Repetto:

Yes, good morning Terry and team. And first, I'd just like to echo your comments and congrats, John P. and Sean, as well on the transitions. Anyway, so Terry, you brought up that risk management focus that you -- in your editorial pretty timely with a banking crisis two weeks afterwards. But down at the FIA, we talked about sort of the longer term impact that it could have on risk management and utilization of the CME product. So, I was just trying to get an update after what time has passed and just get some insight, I guess, from Terry and Sean about the conversations you have with risk management focus on these mid-tier banks, what might change, and what might it mean to the CME going forward?

Sean Tully:

I'll just say that we have initiated a sales campaign specifically focused on regional banks across the firm. And we are very focused on providing them with the interest rate swaps and other products that they need in order to better manage their risk. We are very excited about offering them that, especially with our OTC interest swap clearing. And as Terry said, whatever swaps they do in addition to potentially increasing our OTC swap clearing business, the back side of those swaps will be hedged by larger banks either using our futures or the BrokerTec US treasury platform. So the better people manage risk, the better it is for themselves, and the better it is for CME and CME shareholders.

Julie Winkler:

I would just add, I think the relationships with a lot of these regional banks has definitely been something we've been working on as we've got the term SOFR benchmark here at CME Group. This was a key asset of which these individuals, these firms needed access to this rate. And so getting out, licensing those firms up was an activity that we've been doing over the last 1.5 years. And so those relationships are not -- I mean, are still relatively new, but the fact that we have them within our clients' outreach is a key part of this. And a lot of it is education, and this is something that CME Group has a very long history of doing very well and something that we'll continue to do with these firms.

Rich Repetto:

Yes, definitely. And the focus on risk management couldn't have been more timely. It's been great working with both Sean and John. Thanks.

John Pietrowicz:

Thank you, Rich.

Dan Fannon:

Thanks. Good morning, and congrats to both Sean and John as well. A question is on market data. Obviously, the price increase that went into effect drove some of the sequential growth and I guess, record revenue. But you talk about also increasing subscribers. So just curious about this is a good starting off or jumping off point here for revenue. And then ultimately, where these subscribers are coming from? Is it mostly retail, or how we can think about momentum in the market data business?

Lynne Fitzpatrick:

Sure. Thanks, Dan. So if you look at the market data revenue this year, we did grow 9% off of the first quarter last year. You have the impact of the price increase, which went into effect in January. As a reminder, that was about a 4% increase for market data. Also within this line, you do have about $4 million in audit fees and catch-up payments for prior period activity. These do tend to be more episodic. For comparison, there was about $1 million in this type of fees in Q4. So it's a combination of that pricing increase as well as the increased subscriber count, which I can turn to Julie to talk about what she's seeing there.

Dan Fannon:

Great. Thank you.

Alex Kramm:

Yes, hey good morning everyone. I feel like this is a throwaway question that we ask every time after we have a big quarter like we had in the first quarter, but I guess it has to be asked every time, obviously, with April off to a slow start. I know we see this, again, time and time again, you have a lot of volatility, a lot of changes in the environment, and then things get a little bit quiet when people have to lick their wounds a little bit. But curious, Terry, if there's anything you would point to that speak to the underlying fundamentals of the market, any particular slowdown in any particular client types or anything that would make you think differently around what you're seeing so far this quarter? I know it's hard to predict, but it's got to be asked.

Alex Kramm:

All right, fair enough. I'll jump back in the queue.

Operator:

Our next question is from Brian Bedell with Deutsche Bank. Please go ahead.

Terry Duffy:

So, this is purely a speculation question at best, as you can imagine, Brian, because I've been around long enough to watch the 2011 debt negotiation literally go down to the last hour before the clock ran out on government spending. And there was a negotiation between then speaker and then President Barack Obama. So, you never know what's going to happen. I can only tell you a few things. And one of the things I'm saying to my folks here in the organization is when you look at the setup today in Congress, one of the things I look at as far as where this may or may not go, you can only see so much, right? So, the speaker is going to propose a piece of legislation that's got massive cuts associated with it over the next 10 years. The President is not going to like that, and in return, the Speaker is offering up $1.5 trillion in lifting to the debt ceiling. That's going to be the legislation. That may pass the House, but if they lose five votes, then it doesn't pass the House. So, pretty interesting dynamic right now. That probably won't go anywhere in the Senate or it probably won't go anywhere with the administration. So, then we go on to the next round of negotiations. So, let's think a little bit about how the negotiations at work in Washington right now. As you recall, if anybody is a student of politics, you saw that there's 15 rounds of votes going for the Speaker of the House. And in those 15 rounds, there was a handful of people that were trying to extract certain things for their benefit, maybe holding the Speaker's feet to the fire on certain things. I was not part of it, but you can only assume what was going on because the votes finally got to a place, which means there was a negotiation going on. So, I'm assuming that negotiation will continue on, but the difference this time is you're dealing with a much different Congress with Republicans holding the majority, obviously, in the House side and then looking to extract a lot of cuts. Whether you agree with it or not, it's not for me to make that decision. I'm just telling you what I see. So, I wouldn't be surprised if they don't get something passed out of the gate. And -- but then we'll have to see where it goes. Historically, people never want to go back to their districts and be the person who did not vote for a debt ceiling lift, which could hurt the US economy or hurt the US --. We had a downgrade in this country before. I'm not saying it's happening again, but there are people that -- they have firm beliefs that you have to look at the long picture, and the government spending is out of control. These are not my words, these are theirs. So, I just want to make sure I say that. So, I think it's going to be a little bit more tricky than historical debt ceiling that we've seen. And as far as the Fed cycle goes, I'll let Sean comment on that, what it means to it, and then maybe Sunil can comment about the treasuries, what it means, if anything, to us.

Sunil Cutinho:

I'll cover two areas. One is operational and the other is risk. From an operational perspective, the Treasury Market Practitioners Group has put out a document on best practices on handling maturing securities and coupons. CME works with SIFMA and other industry bodies to actually align those on the operational side. On the risk side, we have handled these scenarios -- similar scenarios in the past. We don't take it lightly. And as Terry pointed out, we are also taking into account a different environment, a political environment. So, taking all of those into account, we manage risk with respect to our collateral and as well as our interest rate market, both long end and the short end. And as an example, you can see that in March was one of the most stressful periods for rates. And the clearing has -- the CME clearing has and its clearing members really manage that very well. So, I have no doubt they'll do the same.

Brian Bedell:

Yes, that’s a lot of great color. Thanks. Thanks so much everyone.

Operator:

Our next question is from Kyle Voigt with KBW. Please go ahead.

Terry Duffy:

Thanks, Kyle. Sean, do you want to start and then--

Terry Duffy:

And Kyle, I think some of the things you look at is also if you had a concern, did anybody else pick up open interest in a listed product such as SOFR and why we didn't get it. And as I said in my earlier comments, 99.99% of all open interest is here at CME Group. So, we didn't see that. And for whatever reason, people take down risk or add risk. That is their decision. As we said earlier, we're here to manage it. So, open interest fluctuations up and down are something that we've all seen historically in this business forever.

Terry Duffy:

Thanks Kyle.

Owen Lau:

Good morning and thank you for taking my question. So, CME has a strong balance sheet. Could you please give us an update on the M&A strategy? And any gaps that you would like to fill both locally and internationally, given that the valuation of many companies have come down quite a bit? Thank you.

Owen Lau:

Got it. Okay, thank you very much.

Alex Blostein:

Hi, good morning guys. Thanks for the question. I was hoping you could spend a minute on competitive dynamics in the equity derivative space. Obviously, SPX options at [indiscernible] seen really nice growth, and a lot of it came from the dailies, understanding that it's a different product set than E-mini and micro and mini futures for you guys. But are you seeing any evidence of substitution away from your complex? And if so, what sort of customer group is that mostly prevalent in? thanks.

Tim McCourt:

Yes. Thank you, Alex, for the question. I think when we look at the option growth in the equity complex, it's certainly a growth versus growth story. And we're seeing very strong growth here at CME. When we look at the equity options complex at CME for options on futures, we've had a record Q1 ADV of over 1.3 million contracts, which is up 7% versus 2022 full year and up 11% versus Q1 of 2022. When we look at some of this growth, you can't ignore the multiyear trend of increasingly short-dated options coming to market as a result of the market wanting more precise risk management. The same-day expiring options or zero DTEs is the latest step in that trend, where CME also has zero DTEs every day of the week in the S&P out for five weeks. We continue to introduce products that are important to our customers and we've seen various growth in those same-day expiring often. They're up over 41% in Q1 versus the 2022 full year volume. But when we look at these expirations, it's important to note at CME that we also have over 50% growth in Q1 versus 2022 full year in our options that are longer than one week in expiration. The story at CME is not just the same-day expiring option. We have very strong growth and growing open interest in our complex with the Q1 average open interest for equity options being 5.2 million contracts, up about 8% year-over-year. But also let's look more broadly at CME. This is not just an equity option story. We have very strong options offering at CME with a record Q1 ADV of 5.8 million contract with 26% growth versus Q1 of 2022 across all of our options and also set quarterly records not only in equity but also interest rate options at CME. We've also had very strong growth in our metal complex options, up about 24%. And our non-US option ADV is up about 30% over the same period last year. So, not only are we growing, we're not -- certainly not seeing our participants turn to other markets because they can manage all of their option-related risk here at CME.

Derek Sammann:

Yes, I'd just add -- Tim talked more broadly. I mean, this is such a differentiating factor for CME Group, where we've got core benchmark liquidity in every major asset cost, not just in the future, but more importantly, in the options. Options are critical because options actually create a stickier futures environment for customers because of the capital and operational efficiencies of the offsets in our clearinghouse. Tim mentioned the success that we've had across the franchise as a whole. And just to repeat what Terry said at the top of the call, we had a record revenue quarter of $218 million in Q1 of this year, and that was broad growth across the entire franchise. And as it relates to the sticky value proposition, customers are using the story, particularly as it relates to options as a broader part of their overall set of risk management tools. And yes, we're seeing a shift to short-dated options. We ourselves set a record in our weekly options across the franchise as a whole 1.4 million contracts, but that actually was not what drove that record 5.8 million. That actually represented about 25% of our options complex down from 30% last quarter. So, our growth is in term risk management tools out across the curve. End users, open interest holders, our biggest client segment growth driver for the entire franchise with buy side. That tells you who is using our products. And particularly, we saw that true -- ring true particularly strongly in our energy complex and Henry Hub natural gas franchise. Not only did we see our natural gas options business up 16% against really difficult comps of last year, but we're seeing that business up again in April, as Terry referenced, energy up as a whole about 3% this year, in large part due to what we're seeing in Henry Hub gas options and futures. So, it's a broad-based story. It's one that differentiates us from our competitors. It's term open interest, and you know what open interest means to transactional revenues and volume and client capture. So, we're excited about that. We've had great success in building our front end. We'll continue to serve the needs of customers globally. And I think the data points we shared today speak to a strong strengthening franchise for futures and options.

Derek Sammann:

That is correct.

Terry Duffy:

Thanks Alex.

Chris Allen:

Yes, morning everyone. Maybe you could just talk a little bit about pricing and rate per contract. I was wondering if you could give any color what the price might look like on a full quarter basis if the price increases had been there? And on the member mix shifting, is this just something you're seeing in the first quarter of this year, or has it been a longer term trend? I know you've had new sales efforts in different asset classes, too, whether it's regional banks or other players on FX and things like that. So, just trying to get a better sense of pricing trajectory moving forward.

Chris Allen:

Great. Thank you.

Chris Allen:

Understood. Thanks.

Operator:

Our next question from Ken Worthington with JPMorgan. Please go ahead.

Tim McCourt:

Yes. Thanks Ken. So, I think it's an interesting question, right? One, I don't necessarily agree with the concept that zero DTE options are a replacement for futures. I mean, fundamentally, options are nonlinear products that have very dramatically different risk profiles intraday that do not line up with the one form movement of the index that a future does. So, I don't think it's replacing because I think that is not necessarily a fit-for-purpose hedge in replace of E-mini options. The one thing that I will say that's great is when we look at the totality of the equity ecosystem, our E-mini complex at CME is the leading price formation for equity index products across the globe. As such, we are also the preferred hedge vehicle for the totality of index trading that goes on, whether that's hedging SPX options, whether it's hedging OTC swaps, whether that's hedging ETF activity. So, these are things that we all see that risk recycling into our market as the primary venue for equities. When we look though also at the market maker activity relating to your question from just what's publicly available as a function of RPC, trading those options in lieu of E-minis is not a cost-effective strategy for market makers or members in CME. And I don't necessarily think that is happening from the fundamental economics available at CME versus other venues.

Ken Worthington:

Great. Thank you.

Michael Cyprys:

Great. Thank you. Good morning. Continuing with the options theme but a different question here, coming back to the strong and record options activity that you guys are seeing. Can you just talk about the sustainability of this level of activity? How broad-based is that across your customer set? And what would you say is the opportunity for continued options usage across your customer set? And maybe you could talk about some of the steps that you're planning to take over the next 12 to 18 months around product development to drive continued growth and options from here?

Derek Sammann:

Yes, great question. The reality is the growth of our options is accelerating growth in our future. As we mentioned before, it's a sticky value proposition for customers that are using options in their portfolio hedging and the cross margin efficiencies they can't get anywhere else. To your question on the kind of spread of participation across our client segments, this is a broad set of participants that's driving growth. We -- as I mentioned before, buy side, in a record quarter for us, our buy side participation in options was up over 40%. Props are up in kind of the mid-20%. We saw growth in retail. We saw commercials and banks participate. So, this is broad-based participation. As I mentioned before, I can't stress enough that the reason the customers are using options here is because they're adding increasing amounts of that to their portfolios out across the curve. So, Tim mentioned the position that we have in open interest in the equity side of the business. We're seeing that growth across all asset classes as well. What I think was mentioned briefly before that with the overall franchise being up at record levels, our non-US growth is even faster than our growth inside the US, growing at 30%. So, we see growth across client segments. We see growth across geographies. When you actually look at the rates of growth out across the board, we saw our EMEA options business up 41%, our LatAm options customer business, up 29%, and our Asia-Pacific business, up 16%. So, as it relates to the sustainability, it relates to the client efforts, it relates to the front-end work we've done in CME Direct, which is our own front end. We've got record participation and record revenue generation through our own front end, which is expanding access to client base, either directly through our connection to us or for our partners as well. On top of that, we've been continuing to build option-specific sales assets in our regions in Europe and Asia. We're seeing the fruits of that. Julie can speak to the sales campaigns that we execute in any given year and the staff that we have that's out not only training customers on how to access our front end but with a significant amount of educational resources that were put in place in Europe and Asia to draw more customers US to increase their participation in options across the board. So, hopefully, that addresses the kind of the growth and scale of the opportunity set. We continue to see outsized growth outside the US. And we'll continue to grow and develop those products that suit customer needs.

Terry Duffy:

Thank you, Michael.

Simon Clinch:

Hi everyone. Thanks for taking my question. I was wondering if I could just get some housekeeping numbers for you from in terms of the cash collateral versus noncash and sort of what the earned rate was on the cash collateral as well, please?

Lynne Fitzpatrick:

Yes, sure. So, if we look at the cash collateral for this quarter, we earned $93 million on those balances. The average balances were down a bit from last quarter, but turn did increase from 32 basis points to 33 basis points. So, if we look at the averages, if we look at Q1, we were at 109.6 in average balances in cash. That compares to 117.6 that we saw in Q4. On the non-cash collateral side, may be helpful as well. We had average balances for Q1 of $99.2 billion, that's up from $89.7 billion that we saw in Q4. And a reminder that those -- the earnings on the non-cash collateral comes through in our other revenue line.

Terry Duffy:

Thanks Simon.

Operator:

Our next question is from Craig Siegenthaler with Bank of America. Please go ahead.

Terry Duffy:

Good morning.

Terry Duffy:

Sean?

Lynne Fitzpatrick:

Yes. And if I could just take it to the higher level, Craig, if you look at the growth in volume versus Q4, our rates business was up 47%. So that 1% decrease that you're seeing in RPC really shows that the changes in pricing, including the roll-off of some of the SOFR incentives, all of that is offsetting higher volume tiers that you would see with that really strong growth in volume. So that RPC result was particularly strong in rates.

Operator:

Our next question is a follow-up question from Rich Repetto with Piper Sandler. Please go ahead.

Derek Sammann:

Yes. Thanks, Rich. That's a great point. If you look at actually the first quarter energy ADV, yes, it's just below 2.1 million when you compare that to the full year of 2022 that had that huge bump in that tough comp that we're facing in Q1 of this year, that's actually up 3% versus full year 2022, and it's up 14% sequentially versus Q4. So, the trend is very much what we expected to see, not only -- and this is actually more important. If you look at the rebuild and restacking of our open interest, we're up about 1.9 million contracts open interest in our WTI futures that based -- and Brent followed that same trend to kind of drift it down. Over the course of the year, it came back up. So, we're seeing a nice resumption of participation from financial players, ETFs, financial players, hedge funds, asset managers. And we're seeing that reflected in the open interest trends. So, once we saw the kind of the deleveraging impact of higher margins begin to recede, that brought some financial players back in. We're seeing more ETF participation, broadening the complex as a whole. I think two of the things we're most excited about in our energy business, you've heard us talk a lot about the centrality of WTI as the global benchmark for the crude oil market. We've seen that certainly in the record levels of exports. I think Q4, US exported just over 4 million barrels a day. That puts WTI squarely in the middle of global energy markets. So, what are we doing about that? Well, not only are we seeing a resumption of activity in WTI, but we have about five years ago, seen the structural shift in the energy market. We recognized that WTI being a global benchmark needed to be explicitly connected to the export community. So, back in 2018, we built a suite of products we call our crude grades contracts that are basis contracts that trade primarily in Houston and Permian and the Midland contract as a basis to our WTI contract. So, customers that are involved in either domestic or more including the export market are increasing their activity in those grades contracts. The reason I mentioned that is because we just -- we're just sitting below -- we just had a recent record open interest in those contracts of 490,000 contracts open. Again, those trade as a basis to our WTI contract. So, it both reinforces WTI and explicitly connects WTI to the global export market. We set an individual day of volume trading record on the 8th of February at 57,000 contracts. And the last point that I'd make on that, the significant participation is coming from commercial and physical players. The last point that I think we'd want to -- be remiss in not speaking to is the Henry Hub franchise, similar story there with LNG facilities coming online in the US and the success that we're seeing in the low-price gas development here in the US, our Henry Hub franchise actually saw an increase on the futures side and market share back up above 80% in a competitive market. And we're seeing that serve as the primary basis point for trading and the pricing of LNG cargoes leaving the US and increasingly replacing lost Russian gas to Europe and Asia. So, we think the volume trends are solid. Terry mentioned a little bit earlier in answering a separate question that our volumes in the commodity side generally are up in the second quarter. And we're seeing energy follow that trend as well with energy volumes so far month-to-date Q2 in April, up 3%, really led by Henry Hub. So, a lot to like in what's going on. Happy to take more of those questions off-line. There's a lot of detail there, but we like the global basis position we have in both the natural gas market and crude oil market.

Terry Duffy:

Thank you, Rich.

Operator:

And our next question is also a follow-up from Alex Kramm with UBS. Please go ahead.

Sean Tully:

Yes, Alex. So really good questions. Really appreciate your pointing those out. So, two questions there. In terms of answering the first one and SOFR replacing Eurodollars or LIBOR, it's very clear from the first quarter with SOFR futures and options beating the all-time best quarter in the 40-year history of Eurodollar futures and options. And SOFR futures and options are being used just as intensively and just as extensively as you all futures and options ever were. So, that's a very positive sign. In addition to that, in terms of the long-term strategic positioning of the business, the interest rates business is better positioned today than it ever has been before I would argue in its entire history. And part of the reason there is the global banking system has turned to CME term SOFR for lending. There are now more than $3.7 trillion worth of loans across the world, and I think now nearly 90 different countries, that are based on CME term SOFR that are based on CME's SOFR futures. So, $3.7 trillion worth of loans, more than 2,400 in individual institutions that have been licensed, which Julie mentioned earlier, gives us a huge opportunity relative to cross-selling opportunities and to increase our penetration of folks like regional banks where they have had to license our CME term over and create that relationship with us through that. So, I think that that's been a very positive for us, especially, again, you know, everyone knows, US dollar LIBOR owned by ICE Benchmark Administration and under US law under the LIBOR Act and recently selected by the FCA in the UK CME term SOFR is the Safe Harbor. So, CME term SOFR will be used by ICE Benchmark Administration starting on July 1st in their US dollar synthetic LIBOR in order to manage legacy contracts. So, we have replaced US dollar LIBOR. That's a huge opportunity for us and again, strategically better positioned. In terms of future growth, I'm hugely excited as I always am, as you've heard me on many years on this call. We redesigned when we launched SOFR futures and options, particularly we redesigned the way packs and bundles, it's a technical issue, but we redesigned how packs and bundles are quoted in the market and traded. That's going to make it much easier for us to launch hopefully, later this year, options on SOFR packs and bundle. Those options on SOFR packs and bundle, you've heard me say this before so many times, we love to have listed, clear standardized contracts that are lower total cost than the OTC equivalent. Well, options on packs and bundles are going to be listed, cleared, standardized, lower total cost alternative to the swaptions market. The swaptions market isn't clear. So, I'm massively excited about that opportunity for the SOFR business that we didn't have with Eurodollars because Eurodollars weren't originally designed with that in mind. When we designed the SOFR futures and options, we had that in mind from day one. In addition to that, we're very excited about €STR, our €STR future is the most liquid European short-term risk-free rate contract in the world. And we're very excited about our TBA futures and other features that we've launched. So, the pipeline that we have in front of us for further development is very strong and I would say it's the strongest it's ever been.

Sean Tully:

Sorry, OTC conversion and fees, I did miss that question. Sorry. So, we did charge. You are correct. We did charge that conversion. And it was a much lower charge than we normally charge and I think we posted $10. So, it was $10 per swap. That is the published fee. So yes, we did charge for that event.

Alex Kramm:

Excellent. Thanks again.

Operator:

And it appears we have no further questions at this time. I'll turn the call back to management for closing remarks.

Operator:

And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day everyone.

Operator:

Greetings and welcome to the CME Group Fourth Quarter and Year End 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 8, 2023. I would now like to turn the conference over to Adam Minick. Please go ahead.

Terrence Duffy:

Thank you, Adam and thank you all for joining us this morning. We released our executive commentary earlier today, which provided extensive details on the fourth quarter of 2022. I am going to start with just a few high-level comments regarding the year and then John will summarize our financial results and Lynne will speak to our expense guidance for ‘23. In addition to John and Lynne, as Adam said, we have other members of our management team present to answer questions after the prepared remarks. 2022 was the best year in CME Group’s history, with record average daily volume of 23.3 million contracts, up 19% from ‘21. The growth was led by our financial products, which finished the year up 25% to a record average daily volume of 19.5 million contracts. Options average daily volume across all asset classes also set a record with ADV of 4.1 million contracts, up 23% versus last year. And finally, our non-U.S. ADV increased to a record 6.3 million contracts. Throughout 2022, we continued our efforts on the LIBOR transition. We collaborated with the industry and the market participants to shift trading behavior, order flow and open interest to SOFR. And as a result, we are beginning 2023 with a SOFR’s futures and options as the leading tools for hedging short-term interest rates with deep liquidity supporting a wide range of strategies across the forward curve. Customer demand continued to drive our industry leading products and services innovation throughout the year. We enhanced our Micro product suite with additional contracts and in aggregate the Micros contributed nearly 3.5 million contracts of ADV to the overall record activity. During the year, we further invested in our S&P Dow Jones Indices joint venture to expand its offerings to include leading fixed income and credit indices. Our joint ventures and investments continue to produce meaningful results for CME Group. For 2022 on an adjusted basis, these investments have contributed nearly $350 million or 9% of our pre-tax income. 2022 also was a fundamental year for our Google partnership. We built out the cloud platform and successfully migrated some early application. ‘23 will be about accelerating our application migration, including launching data products in the cloud. We have an aggressive migration plan for ‘23 and look forward to reporting our accomplishments throughout the year. Risk management will continue to be critical for our customers as we move into 2023 with higher cost of doing business in general and uncertainty persisting across all of our asset classes. We continue to focus on what we can control, innovating and offering market participants, a meaningful capital and operational efficiencies across a diverse relevant product set. So far this year, volume is averaging approximately 23 million contracts per day, near the average for all of 2022 and our focus will continue to be on growing in the short-term while also positioning the business for long-term sustained growth. With that, I will turn it over to John and we look forward to your questions.

Lynne Fitzpatrick:

Thanks, John. We expect total adjusted operating expenses, excluding license fees, be approximately $1.49 billion for 2023. Our guidance reflects our continued focus on cost discipline, which will moderate the impact of inflation and a full year of normalized travel and in-person events. In addition to our core expense guidance, we expect the investment related to the Google partnership and our cloud migration to be in the range of $60 million in expense, offset by a $20 million decrease in capital expenditures, bringing our incremental net cash cost for the migration to approximately $40 million for the year. Total capital expenditures net of leasehold improvement allowances are expected to be approximately $100 million and the adjusted effective tax rate should come in between 23% and 24%. We would now like to open up the call for your questions. Thank you.

Rich Repetto:

Yes, good morning Terry – excuse me and John and Lynne.

Rich Repetto:

Good morning. So as we start the year, Terry, I just wanted to get – stay broad and get your outlook on volumes for 2023 given that you were so positive last year and they certainly came through on financial products. But just seeing what your outlook and we know no one gets perfect right all the time, but anyway, the outlook on volumes?

Rich Repetto:

Understood. Thank you very much.

Operator:

Our next question is coming from the line of Dan Fannon with Jefferies. Please go ahead.

John Pietrowicz:

Sure, Dan. Thanks for the question. Let me back up and take a look at all the kind of pricing changes and adjustments that are going to impact 2023. As I indicated in my prepared remarks, the transaction fees have been adjusted. And we made adjustments across all of our asset classes in our futures business. We take a very careful and targeted approach with the objective of not impacting volumes. As I said, assuming similar trading patterns as last year, the increase would be in the range of 4% to 5%. The impact of financial products and commodity products each is an increase of about 4% to 5%, so about 4% to 5% each of our financials and to our commodity product sets. The impact took effect on February 1. So you see two-thirds of the impact in the first quarter and a full quarter impact in Q2, that’s related to transaction fees. So let’s look at market data. Beginning January 1, we had an inflation adjustment to our market data subscriber licenses, which is also in the range of 4%, assuming similar conditions as 2022. In addition, we have seen the completion of our very successful SOFR First for Options initiative. That had about an $11 million in fee waivers, which lowered revenue and $8 million to increase license fees in 2022 that we will not have in 2023. So a number of adjustments across our revenue set. I think as we look at it, we create a lot of value for our customers and felt that this was appropriate to do.

John Pietrowicz:

No, I am sorry, that was SOFR. That was our SOFR Options – our SOFR First for Options program and that impacted our transaction fees. That was not included in the 4% to 5% that I just mentioned. This was in addition to that.

John Pietrowicz:

Alright. Great. Thanks, Dan.

Gautam Sawant:

Good morning and thank you for taking my question. Can you please provide us with more details on the non-operating income outlook? Can you also provide a breakout of investment income, how cash within the clearing house is trending? And how you think the pace of clearinghouse cash balances could move over the next 12 months and where does the non-cash collateral stand?

Terrence Duffy:

Does that answer your question?

Lynne Fitzpatrick:

Sure. So, we saw in Q3, it was at $94.9 billion, it was at $89.7 billion for Q4. And quarter-to-date, we are at $90.1 billion.

Gautam Sawant:

Got it. Thank you.

Chris Allen:

Yes, good morning everyone. I was wondering if you could provide a little bit more granularity around market data, maybe just some of the products rolling out with the addition of Google. And when this year you saw the year-over-year increase driven by some price increases in new demand in terms of SOFR. So maybe you could give us a little bit of color there just in terms of how that kind of breaks down? And just on the Google migration, I thought that was $30 million in annual costs. I know you are talking about incremental $60 million. I am just wondering what’s this incremental cost related to just in terms of is it more migration or is it new product developments, any color there would be helpful? Thank you.

Lynne Fitzpatrick:

Sure. So on the cost side, in 2022, we did see $30 million in expense in line with our guidance. The guidance for 2023 is $60 million in expense. Now we will see an offset to that as we are seeing a decline in the capital expenditures related to capital refreshes that are no longer required. So we have about a $20 million offset that we are seeing step back. But the $60 million in expense guidance will be approximately evenly split between professional fees and technology fees for this year.

Julie Winkler:

Yes. So, market data certainly was – had a very strong quarter again in the fourth quarter, we were up another 8% year-on-year and the increases is due primarily to both the value of our data, the new products that we are introducing and also the fee adjustments that we made back in January of 2022. And we also are seeing throughout the year favorable performance both in our drive data area in terms SOFR licensing, as you mentioned and also just organic across our professional subscriber devices and also non-display. And I’d say the one thing as it relates back to our new products and also our work with Google is we know that we have very valuable data and we know being able to produce more of that data in analytics and putting that in the cloud is going to be really what our clients are asking for. And so we are highly focused on looking at new ways to develop that with our partners at Google. We have got a number of deep dives underway with them on the innovation front, including things on data analytics, AI, ML, new APIs and also new ways to help our clients understand the data and analytics around their risk management. So we have already begun to launch a number of those products, those begin to be rolled out in forward. And some of it is also just our new product operating model that we are using. And so we are seeing an increased velocity in which we can put these products out, so things like in our data mined area. Some of our new benchmarks and indices are also being created through that. And so you’ll continue to see a rollout of – specifically as it relates back to the term SOFR revenue. This is revenue that was part of the licensing effort that the team is underway. At the end of Q4, we had over 2,000 firms that we have licensed for term SOFR products. And really, we’re continuing to see increased demand for that. That was up over 300 firms just since the end of Q3, just to kind of show the acceleration of that. These are – the revenue there is around people being licensed for OTC derivative product usage. And also, we’re finding in a lot of these cases, these are new customers to CME Group. So we’re also working heavily within our sales organization to convert those users and expose them into our trading business. And so with everything within market data, it’s what can we do to provide insights to our clients that will also create support and synergies and transaction based. I hope that helps us.

Terrence Duffy:

Thanks, Chris.

Alex Blostein:

Hey, good morning. Thanks for the question. I was hoping just a follow-up on the last discussion around cloud migration and expenses related to that. As you guys think about the future beyond 2023, and any incremental costs associated with migration. I was hoping you could flesh that out. But also bigger picture, as you think about CME’s expense flexibility on a go-forward basis. To what extent do you think this sort of limits your ability to be more flexible like we’ve seen in the past? Thanks.

Lynne Fitzpatrick:

Sure. So if we think about the Google migration, I think what John guided to last year, was that we would see about 4 years of incremental cash costs averaging $30 million cash cost per year. So we did see that $30 million in 2022. The cash cost for this year are estimated at $40 million. So we do expect over the next 2 years to have some incremental costs related to the migration. After that point, we see ourselves getting to breakeven and ultimately a cash flow positive for the investment. One of the reasons that we are pursuing this initiative is to increase our flexibility. And we will continue to see a move from infrastructure-intensive spend and moving into this environment where we have CapEx coming down, the coming down, ultimately, we will see more of the expense in the technology line as we are renting the capacity as we need it as opposed to building through infrastructure. So that is the migration that we expect to see over the next several years on the cost base.

Alex Blostein:

Great. Thank you.

Operator:

Our next question is coming from the line of Brian Bedell with Deutsche Bank. Please go ahead.