CME Group Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2021

There are 16 speakers on the call.

Operator

Good day, and welcome to the CME Group Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Pesher. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. I hope you're all doing well. I'm going to start with the Safe Harbor language, then I'll turn it over to Terry and our team for brief remarks followed by your questions. Statements made on this call and in the other reference documents on our website that are not historical facts are forward looking statements. These statements are not guarantees of future performance.

Speaker 1

This may involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non GAAP measures. With that, I'd like to turn the call over to Terry.

Speaker 2

Thank you, John, and thank you all for joining us this morning. We released our executive summary, as John said, Which provided extensive details on the Q3 of 2021. I have John, Sean, Derek, Sunil, Julia Winkler on the call this morning, and we all look forward to addressing any questions you have. Before I begin, in addition to John, We will discuss the financial results. I'm going to have Sean and Derek make some comments.

Speaker 2

With all the recent news associated with interest And Energy, I thought it was important that they present this morning. With that, we delivered solid volume during the Q3 of this year As we averaged 17,800,000 contracts per day, which was up 14% versus Q3 last year. We saw year over year Strength in our interest rates and energy businesses and saw significant options growth of 45% during Q3. Rates to average daily volume rose 53%, including 78% growth in euro dollars and 41% growth in treasuries. As the expectations of future rate hikes has increased, we continue to launch innovative new products, Tools and services to support customer needs, including additions to our suite of micro sized contracts that allow market users to customize their trading and hedging, As well as ESG focused futures contracts that help manage climate related risk.

Speaker 2

In terms of specific products and services, We had 2 consecutive quarterly ADV records in sulfur futures in Q2 and Q3 as the market continues to manage Their interest rate risk ahead of key transition deadlines. Bitcoin futures, ADB increased 170% compared with the Q3 last year. Ether futures are also off to a good start since their launch in the Q1 this year. In September, we launched the derivatives industry's first ever Sustainable Clearing Service to help market participants track and report on how their hedging activities are advancing their sustainable goals. Finally, Micro WTI and Micro Treasury yield contracts began trading in July August, respectively.

Speaker 2

The Micro WTI contract represents the most successful commodity product launch in our history with over 1,000,000 contracts traded within the 1st 20 days And a total of 4,300,000 contracts traded since July 12 launch. Most importantly, This innovative new contract is attracting new customers to our energy market as evidenced by the fact that almost 10,000 Micro WTI Market participants have not traded any other CME Group crude oil product in 2021. You'll hear more about this in a moment from both Derek and Sean, Respectively, in the Q3, non U. S. ADV was up 13% to 5,000,000 contracts per day.

Speaker 2

We saw 15% growth in Europe, 8% growth in Asia, 32% growth in Latin America and 10% growth in the U. S. Also during the quarter, we completed our joint venture with IHS Markit and together launched Ostrac, A leading provider of progressive post trade solutions for the global OTC market across interest rates, equities, FX And credit asset classes. Turning to Q4, we have had a strong start so far in October, averaging more than 20,000,000 contracts, Which is an increase of 35% month to date compared to the same point in October last year. Interest rates in Energy are up double digits With rates up 90%.

Speaker 2

With that, let me turn it over to Sean to give you more flavor as it relates to interest rates.

Speaker 3

Thank you very much, Terry. As Terry said, the financials unit saw a number of significant developments in

Speaker 2

the Q3,

Speaker 3

particularly regarding SOFR, the overall rates market and our crypto business. Our silver futures saw average daily volume grow to 124,000 contracts per day in the 3rd quarter, up over 180% year over year And our open interest grew to over 1,000,000 contracts, up 140% year over year. Additionally, in the month of October, We're seeing average daily volume of 227,000 SOFR Futures contracts and open interest of $1,200,000 contract. Over the last 60 days, our sulfur futures ADV made up over 78% of the global sulfur futures volumes and our open interest

Speaker 2

Represents

Speaker 3

approximately 95%. Further, on July 29, the Alternative Reference Rate Committee of the Federal Reserve endorsed CME's 1 month, 3 month and 6 month term SOFR rates. And on September 19, CME began publishing a 12 month term SOFR rate as well. Demand for access to our term SOFR rate is very high as we have already executed more than 100 term SOFR licenses to mark participants And we are currently working with an additional 300 firms who are also interested in licensing. Our fallbacks for Eurodollar Futures and Options have also been A very strong success since we finalized our rule book back on March 29.

Speaker 3

SOFR linked to open interest includes SOFR futures From $11,800,000 open interest on March 29 to $16,300,000 open interest as of October 25, Up 38%. Further, the average daily volume of our SOFR linked futures and options in Q3 was 1,600,000 contracts, representing 52% of CME's total short term interest rate ADV. In addition, our long held View regarding the rates market environment continues to gain veracity. Using CME's FedWatch tool, we can see the market is now pricing in A 60% chance of tightening by June 2022, up from just 17% just 1 month ago. Our FedWatch tool also now indicates an 87% chance of at least 2 Fed tightening by the December 2022 FOMC meeting.

Speaker 3

In Q3, the improving rates environment, as Terry said, led to a 53% growth in our interest rates ADV versus Q3 of 2020. Nonetheless, rate volatility, while higher in the Q3 of 2021 than it was in recent quarters, remained historically quite low. For example, in the 8th quarterly Eurodollar futures, it achieved just the 37th percentile of volatility This is a history going back to 2,007 and our 10 year note futures achieved only a 25th percentile volatility rank, Showing the current volatility even in Q3 was very low. Regarding CME Group's crypto offering, first let me say The recent approval of ETFs based on CME Bitcoin futures is not only an important milestone for our future contracts, but also a positive development for the broader Bitcoin ecosystem. This is a direct reflection of the strong growth and client demand for exposure to Bitcoin via CME's transparent, Deeply liquid and regulated cryptocurrency futures contract.

Speaker 3

The launch of ETFs based on CME's Bitcoin futures is validation from the industry Of what we've known for some time, the TME Bitcoin Futures are the leading source of Bitcoin price discovery in the industry. 2 new Bitcoin ETFs were launched just last week and another this morning, both of which are based or all 3 of which are based on CME's Bitcoin futures. On the back of those launches, our Bitcoin futures October ADV has risen to over 12,000 contracts We're over 60,000 equivalent bitcoin worth a record $3,500,000,000 per day, up 57% over September. Additionally, average open interest in our Bitcoin futures has grown to a record 17,433 contracts, up 70% Versus September. Our micro Bitcoin futures volume is also up 33% month over month and Our average open interest is up 97% month over month.

Speaker 3

With that, I'll turn it over to Derek.

Speaker 4

Thanks, Sean. As Terry mentioned at the top of the call, we have seen a strong return of activity in our Global Energy business in the second half of this year with both crude oil and natural gas prices hitting multi year highs. Overall, this has helped our Global Energy business to deliver average daily volume growth of 18% in the 3rd quarter, led by energy options up 26% year on year. WTI Futures reached the $84 a barrel mark earlier this month for the first time since 2014 as OPEC maintained caution on production increases And as U. S.

Speaker 4

Shale steadily recovers from the 2020 decline, prices were further boosted from returning global demand as economies reopen. In the U. S, gasoline consumption reached 10,000,000 barrels a day in July, marking an all time monthly high. Activity in WTI Crude Oil Futures Saw a 26% chomp in average daily volume in the 3rd quarter to 990,000 contracts. The WTI options average daily volume jumping 45% 129,000 contracts.

Speaker 4

This helped us to deliver strong daily volume growth in our refined products portfolio as well With our gasoline product volume up 20 percent to 196,000 contracts and our heating oil products daily trading volume up 10% to 154,000 contracts. This has helped set the stage for the significant success that we've delivered with our micro WTI futures contract. Launched on July 12 this year, as Terry mentioned, we surpassed 1,000,000 contracts traded in the 1st 20 trading days and we've already traded more 4,300,000 contracts since launch. Most importantly, this innovative new contract is attracting brand new global customers to our energy market As evidenced by the fact that almost 10,000 Micro WTI customers have not traded any other CME Group crude oil product in 2021. These new customers come from 118 different countries and represent over 50% of our micro WTI customer base.

Speaker 2

So this

Speaker 4

has been a significant source of new client acquisition for us. At the same time, we have also seen the natural gas market Experience the highest price level in over 13 years with U. S. Henry Hub Futures hitting a high price of $6.45 earlier this month, More than tripling in price from the COVID driven March 2020 lows. The resulting increase in volatility has boosted our Henry Hub Futures business With September average daily volume of 496,000 contracts, up 11% year on year.

Speaker 4

Henry Hub options were particularly strong in the 3rd quarter With average daily volume of 18 percent to 124,000 contracts, achieving our best months of August September ever. Participation has been strong from our commercial customers and we've seen our natural gas futures and options open interest dump to 6,200,000 contracts in September, which is the highest level we've seen since January 2018. So overall, we're seeing that the investments we're making in our product portfolio, Our global client development and our technology pay strong dividends as market volatility returns as our customer base manages their energy risk And CME Group's Global Benchmark Products. With that, I'll turn it over to John to discuss the financial results.

Speaker 5

Thanks, Derek. During the Q3, CME generated more than $1,100,000,000 in revenue with average daily volume up 14% Compared to the same period last year, expenses were very carefully managed and on an adjusted basis were $412,000,000 for the quarter $355,000,000 excluding license fees. CME had an adjusted effective tax rate of 23.3%, Which resulted in adjusted diluted EPS of $1.60 up 16% from the Q3 last year. Capital expenditures for the quarter were approximately $33,000,000 Semi paid out more than $300,000,000 of dividends during the Q3 And cash at the end of the quarter was approximately $1,600,000,000 At the start of September, CME and IHS Market launched Ostra, our post trade services joint venture. As a result, CME will no longer be recording revenue and expenses associated with our post trade businesses, But we'll be recording our share of the joint venture earnings in the equity and net earnings of unconsolidated subsidiaries line On a part of our income statement.

Speaker 5

For the month of September, CME would have recorded approximately $22,000,000 in revenue and $11,000,000 in expenses, but instead recorded approximately $8,000,000 in our share of the adjusted earnings of the joint venture. When you take into consideration tax implications And providing support services for the joint venture, there was essentially no impact to our overall earnings. Turning to guidance, we now expect Total adjusted operating expenses for 2021 excluding license fees and reflecting the impact of our joint venture To come in at approximately $1,500,000,000 down about $30,000,000 from our guidance at the start of the year. All other guidance remains unchanged. Finally, we are very pleased to say we achieved our planned $200,000,000 in cumulative run rate expense synergies related to the NEX acquisition this quarter.

Speaker 5

Please refer to the last page of our executive commentary for additional financial highlights and details. We would like to now open up the call for your questions. Based on the number of analysts covering us, please limit yourself to one question

Operator

We'll go ahead and take our first question from Rich Repetto with Piper Sandler.

Speaker 6

Good morning, Terry, and good morning, John and team. And thanks for the macro update, because there's certainly a lot of things going on. But on the Bitcoin Futures ETF, Terry, besides just industry validation, I think it was regulatory validation about the CFTC and your regulatory regime you have for the product as well. So I guess my question is, what kind of precautions are you taking when I'm talking about position limits Basically to ensure that the role and is as efficient as possible And we know there's some volume being generated by these ETF manufacturers.

Speaker 2

Hey, Rich, thank you. It's a great question. I appreciate you asking it. But the ETFs, as Sean stated And his comments, I think are very exciting for we based off of CME Futures. I think that in and of itself lends to the credibility of our product As a listed futures exchange and the regulation thereof, to get more directly to your question around position limits associated with it, They are an important component to any market when you have a highly regulated entity like CME.

Speaker 2

So The existing position limits in our Bitcoin futures today, as you may or may not know, is $2,000 per spot. And then we have Accountability levels going back in the deferred months, that are much larger than that. But the spot month will go to 4,000 in November, And we feel very confident from a risk perspective that we are not being reckless in any which way, shape or form that this has You know, vetted to our entire team here and with the agency. So we've filed for those changes. We're confident that The product is mature enough now to increase the size of the limit.

Speaker 2

So again, we'll be careful here, Rich. This product, we launched in 2017, not 1917. So this is a newer product, a newer asset class and we will be very, very cautious here. But again, we're excited by the Uptake and the credibility associated with PowerShares and some of the other ETFs that decided to benchmark against our futures contract.

Speaker 6

Thank you. Very helpful, Terry. Thanks.

Speaker 2

Thanks, Rich.

Operator

We'll go ahead and take our next question from Dan Fannon with Jefferies.

Speaker 7

Thanks. Good morning. I was hoping to get a little bit more color on expenses, John. So the Implied guidance with the adjustments assume some pickup in the Q4. Could maybe explain a little bit just in terms of the ramp in the 4Q.

Speaker 7

But then Given all the moving parts as we think about next year, I know it's a bit early, maybe give us some framework to think about with The JV coming out, the synergies being realized and then the broader kind of inflationary pressures we're hearing across Kind of the employment and other kind of cost factors to think about as we think about 2022 and beyond.

Speaker 5

Yes. Thanks, Dan. Appreciate the question. So in terms of our expense guidance, we did reduce our expense guidance after you adjust For the Ostrid joint venture by an additional $15,000,000 So we're about $30,000,000 Down from our original guidance at the start of the year. When you think about what we've done on the expense side, This entire CME team has done an excellent job managing our costs.

Speaker 5

We continue to have that as a strong focus. And to put kind of our expense management into perspective, after adjusting for the creation of Ostra, we're about $12,000,000 down from Last year's adjusted expenses is almost $100,000,000 down below 2019 levels. When you look at Our reduction of the $15,000,000 about half of that reduction reflects lower expected travel and in person events. As you recall, at the beginning of the year, we had about $20,000,000 we put in the back half of the year, assuming that we would be able to Have additional travel, but as you can see, there's still limitations on travel, especially international travel. We have been seeing additional pickup in meetings, Especially in Europe and London in particular, but still international travel is still a little bit tough.

Speaker 5

And the balance is really of our reduction in terms of our guidance is just Excellent continued expense controls by the entire team, including careful hiring and careful use of contingent labor. When you take a look at 2020's Q4 and 2020 1's Q4, yes, we do see a pickup In costs, the 4th quarter is traditionally our highest expense quarter. Historically, marketing and advertising spend This tend to be highest in the 4th quarter along with higher project spending as we wind up the current year and prepare for the next year. The spending this year reflects that same pattern and we anticipated a higher than normal proportion of spend when we built out our spending plans at the start of the year. We expect higher levels of spend in marketing and advertising, including targeting a portion of that spend on our successful micro products And in anticipation of a more open operating environment in 2022, we're also investing in system projects, including the migration of EBS And streaming services, which would lead to more technology related costs.

Speaker 5

Also, our incentive compensation is anticipated to be higher In the Q4 of this year than the Q4 of last year. So those are some of the items which are causing the Q4 this year to be higher than the Q4 last year, but overall for the entire Some really impressive expense controls by the entire organization. So in terms of thinking about modeling for next year, we're going through the budgeting process now. So it's really too early to provide guidance. We are hopeful for a more normalized environment, which would be positive for our business.

Speaker 5

When looking at 2022, there are a couple of things to keep in mind. We did postpone salary increases in 2021 for our staff and we don't anticipate doing the same this year for 2021 I mean sorry for 2022. Also in an open business environment, which is obviously extremely fluid, We would anticipate increased travel both regionally and globally and more in person events, which we would view as positive from a business perspective. But Again, in November, it's a little tough to see that in 2022 yet. So we'll provide some additional guidance when we Due to our earnings in February, we are starting to see some of that open up like I mentioned before in Europe.

Speaker 5

We'll continue to invest in our systems and technology capabilities with an eye towards accelerating growth globally. It is our intention that we will continue our Excellent expense management as we build out our plans for next year.

Speaker 2

So that should give you a little bit of

Speaker 5

a flavor in terms of 2022.

Speaker 7

Great. Thank you.

Speaker 5

Thanks, Dan.

Operator

All right. We'll go ahead and take our next question from Alex Blostein with Goldman Sachs.

Speaker 8

Thanks guys. Good morning. Thanks for taking the question. I wanted to dig into market data a little bit. It's been flattish over the last three quarters.

Speaker 8

I think there were some pricing adjustments that should have resulted in slightly better near term trends. So maybe kind of Walk us through sort of what's been going on behind the scenes in market data and how you're thinking about growth in that business going forward? Thanks.

Speaker 9

Thanks for the question, Alex. The data business has really been quite stable as you point out. So this quarter Coming in at $145,000,000 we were up 4% where we were in Q3 of 2020. So the number of professional subscribers that we're seeing for our real time business, which is the bulk of the revenue, has been Steady and the price increase that, we saw $5 per user has been realized. The big difference that we saw between Q2 and Q3 Three results were really audit findings were down about $2,000,000 which again is quite difficult to forecast and ones that It's really just the timing of audits that we have underway with our clients.

Speaker 9

So, Sean had mentioned too at the Beginning of the call, right, a lot of the focus for the team, particularly the data sales team has been on the term SOFR rate. We've got a tremendous amount of client engagement going on there with 100 licenses already done within the last quarter and 300 more in the queue. We are also continuing to see great uptake of those non display policies and pricing that we introduced at the beginning of the year as well as our drive Business performing very strongly. And lastly, just continue to see adoption of our cloud offering with Google on SmartStream. I think the growth is still there.

Speaker 9

It's just, again, the real difference in Q3 was based on the audit.

Speaker 8

Got it. Thank you.

Operator

All right. We can go ahead and take our next Question from Ken Worthington with JPMorgan.

Speaker 10

Thank you for taking my question. I wanted to ask about open interest in the aggregate. Open interest is still hovering around $100,000,000 contracts more or less, And it's been anchored there for a little while. And CME has been highlighting all these great things that have been happening. We've got a ton of innovation, OI build in sulfur, the build out of the micro products, the strength in energy.

Speaker 10

And in the macro, you've seen some rate movements at the 10 year in anticipation of higher rates at the short end of the curve and The commodity super cycle and the huge debt issuance you guys have highlighted, when do you think CME will start to see All these good things start to flow into the open interest growth. What's the outlook? When does This could translate into OI.

Speaker 2

This is Terry Duffy or it's Ken. I'm sorry. Ken, it's Terry Duffy. I'm going to let Sean comment, maybe Sunil as well, but let me give you a broad comment here. The open interest of $100,000,000 to $109,000,000 contracts open, which I think is what you're referring to the trend over the last several, probably a year or so, since we came off of the high of 150.

Speaker 2

A lot of it's reflected In the interest rate business, we're going through a massive transition, as Sean pointed out earlier, from LIBOR to something else. We suspect it's SOFR And people are trying to adjust associated with that. We're also seeing the low vols still that's even though we've an uptick in some of the things that you're referencing, the volatility is still significantly lower, not only in interest rates, but FX. I'm talking from an historical standpoint. That is changing.

Speaker 2

You're correct in your comments. The question is when does it reflect an open interest? We believe there is open The participants are in there participating, but you got to remember our open interest today is a little bit different than it was just a couple of years ago. We didn't have weekly options on a lot of these products. We didn't have some of the exploration constantly coming on and off.

Speaker 2

So people are taking exposures for Projected periods of time might be days versus quarters like it was historically. So we're seeing people manage their risk in a little bit different way, and I think that's reflective of the open Just as well. So I think those are all a lot of factors going into it, fundamental being the main one, but a lot of it is some of the products the way we offer people to manage risk right now, which I don't see that as a bad I see that as a good problem because open interest we don't get paid for, we get paid for transactions in the way we're structuring it now. I think that's a much more powerful Offering, but the open interest is a reflection of future trade. We've always said that to people and we still believe in that.

Speaker 2

But at the same time, we're seeing people participate in the market Because what I just outlined a moment ago with options and other products to transition from one rates to another, the fundamentals in foreign exchange being extremely quiet And we're also seeing massive directional changes in energy as Derek pointed out earlier, we went from just a year and a half ago to minus $37.50 to $84 a barrel. So you think about The massive directional participation in the marketplace has been truly one way and a lot of people just don't believe You can go from minus $37 a barrel to $84 a barrel in a year and a half. So I think there it's just an adjustment to the world that we live in today and people will again Participate in holding more and more open interest. But right now, I don't see it as a bad problem because of what we what I just outlined. And I'll ask Sean to comment more.

Speaker 3

Yes. Thank you, Teri, and thank you, Ken, for the question. Just very briefly in terms of the numbers, year over year, the open interest interest rates is up 14%, In equities, it's up 13%. In foreign exchange, it's up 22%. So very strong year over year growth.

Speaker 3

In addition to that, another number we track very closely is the number of large open interest holders as reported by the CFTC. If you look at the Q2 of this year and if you look across the financials products, rates, equities and foreign exchange, the average Large open interest holder number across the 2nd quarter was an all time record high for the combined three asset classes. If you look at the Q3, we beat the Q2. So I've had 2 back to back all time record numbers of large open interest holders on average. If you look at our interest rates business, the most recent numbers from the CFTC indicate that rates business is just 1% below its all time high in large open interest holders The foreign exchange business similarly is just a couple of percentage points below its all time high.

Speaker 3

So I think overall, the marketplace is extremely healthy and doing well.

Speaker 2

I don't know Well, yes, I don't want to think we're dodging the question because I think your question, Ken, is based on $150,000,000 OI, which was a record open interest several years ago. So I think what Sean is giving you is coming off of a different base obviously. So we don't want to be disingenuous either, They are what they are. We've gone through a lot here in the last couple of years with pandemics, uncertainty, people not sure how they're going to manage risk, but I think we're starting to see a return to that. And Sean's numbers are reflective of that.

Speaker 2

And I think that's what's positive as far as the open interest story goes.

Speaker 10

Great. Thank you very much.

Speaker 2

Thank you.

Operator

All right. We'll take our next question from Chris Allen with Compass Point.

Speaker 11

Good morning, everyone. I 3Q, I. E. Before, the separations in September. And also what were the year to date expenses?

Speaker 11

So we can kind of think about what's kind of the adjusted Starting point, for

Speaker 2

as we kind of contemplate for next year.

Speaker 5

Yes. Thanks for the question. This is John. So yes, we're very excited about the launch of Ostra.

Speaker 4

We think it's going to

Speaker 5

be very positive for our customers.

Speaker 4

We'll be

Speaker 5

able to offer them new and innovative products, improved workflow and analytics. And also we're going to be well positioned to really support the global banks In particular, so very excited about Ostra. We've, like I said, launched it in early September. We've got an integration plan that is being executed right now. And so far, we've been very pleased with The leadership there and working with our partners at IHS Markit.

Speaker 5

So in terms of on the breakdown And in more detail, the impacts for the month of September and, which will be helpful. And then, We could talk a little bit about what it looks like kind of going forward. So in terms of revenue, like I said in my prepared remarks, There's about $22,000,000 in revenue for the month of September we would have booked had we not Launched Ostra. Of that $7,000,000 is in transaction fees and $15,000,000 is in the other revenue line. From an expense perspective, it was about $11,000,000 for the month of September, about $7,000,000 of that was in compensation And the rest was split between technology, other and pro fees.

Speaker 5

In the equity and earnings Equity and net earnings from unconsolidated subsidiaries was $8,000,000 in that line. Now that $8,000,000 is net of tax. And then we had $1,000,000 in the other line in that section of our income statement. Obviously, when we had the company before the formation of Ostra, you'd have to tax effect The $11,000,000 in operating income. So when you net all that out, it's really no impact for the month of for September.

Speaker 5

Now looking at the expense level, the expense levels have been very constant in the $11,000,000 range. So there's very little in the way of volatility over the last several quarters. So $11,000,000 per month It's a good run rate. And then when you look at the revenue, If you looked at for a full quarter, if you took the $22,000,000 multiplied by 3 to give yourself a quarterly amount of 66,000,000 If you look over the last several quarters, the revenue has been in the $64,000,000 to $66,000,000 range per quarter. So those are those would be the numbers that I would work with in terms of run rates.

Speaker 2

Thank you. Okay. Thanks, Chris.

Operator

And we'll take our next question from Owen Lau with Oppenheimer.

Speaker 12

Good morning and thank you for taking my question. So the volume of Bitcoin futures has been very strong, OI has been increasing, But there will be more Bitcoin futures trading value coming up. Could you please remind us the value proposition of CME Bitcoin futures franchise And why ETF and other, institutional investors will continue to go to CMD instead of other trading venues? Thank you.

Speaker 3

Sure. This is Sean jumping in. Thank you for the question. You may recall it was back in 2017 that CME Group devised its new Bitcoin reference rate, Which has become an essential reference rate for the industry. We also created a reference rate for ether.

Speaker 3

So these reference rates are highly used by the world now, and again We're created by CME in conjunction with partners. So that's one of the unique value propositions. In addition to that, We offer, as you know, asset classes across the spectrum, across the entire commodities Spectrum across the entire financial spectrum, across equities, rates and foreign exchange. So I think the combination of all of the products that we offer is enormous. In addition to that, we are highly regulated, we are highly transparent And we have an enormous distribution out to our partners.

Speaker 3

CME Group, you I'm sure know, has a 170 year history Of being the most reliable exchange in the United States to offer our partners. So I hope that that helps to understand some of the value proposition.

Speaker 2

Let me just add to what Sean said, because I think it is important that you referenced the reference rates and Julie Winkler and her team constantly are looking at different ways to bring value to the company. And This is just another example and maybe to further note the prior question that you don't have to have transactable ideas in order to generate revenue in the future. And these reference rates are something that have been very, very helpful for CME going forward. And as Sean touched on, but I think is really important to highlight is the regulatory Aspect of CME's business, especially its crypto offering. You can imagine there's many people that are now more and more every day looking for Some form of exposure as cryptos are becoming more and more acceptable.

Speaker 2

Maybe the problem with that would be also the appreciation of the price of the product. People are maybe a little bit more concerned about where they go to get that risk and they want to make sure they're at a regulated platform. Another reason, the credibility of having a highly regulated platform It's a benefit not only to our crypto franchise, but the entire CME Group. Suneel?

Speaker 13

One thing we want to add is that we have a very strong record of risk management, especially for both Bitcoin and Ether, And we manage that through extreme periods of volatility seen even early this year. So we This is true with every product that we bring to the market. We have a strong risk management experience and Sean pointed that out. We have over 100 years experience Clearing Product at SPEAKER JULIEN DUMOULIN

Speaker 2

SMITH:] Got it. That's very helpful. Thank you.

Speaker 14

Thank you.

Speaker 3

All right,

Operator

we'll take our next question from Kyle Voigt with KBW.

Speaker 15

Hi, good morning. So you spoke a bit about the LIBOR transition and the record activity in SOFR trading. But Terry, it sounded a bit like the transition might be negatively impacting Short end interest rate open interest at the moment. So I guess I'm just wondering as the transition continues over the next couple of years, do Do you expect this to be a headwind to OI or volume over that period of time or is this kind of just a near term impact? And the second part of that question maybe for John.

Speaker 15

Do you expect any impact on net fee capture to your short end Complex through the transition to SOFR and maybe you could talk about if there are any fee holidays or incentives in place for SOFR trading at the moment And how long those will last?

Speaker 2

So Kyle, I think there was about 3 or 4 questions embedded in your question between open interest cost Senate plan. So let me touch on Sean, touch on a few of those, John, and then I will also give you my opinion.

Speaker 9

Yes. So thank you, Kyle.

Speaker 3

Right now, With huge growth in our silver futures and as I said, we're also seeing enormous growth

Speaker 2

in our eurodollar futures and options.

Speaker 3

So we're seeing both marketplaces grow in parallel Side by side. So that's actually a very exciting development. As you go into the next couple of years, that will also increase and we expect to see an increase In the spread trading between the EUROLLARS and the SOFR Futures. In addition to that, you may recall we launched Busby Futures not too long ago where we're also doing about 7,000, 8,000 contracts a day depending upon the timeframe. So the transition of the short term interest rate business to a new rate, whether it is the Bisbee or the term SOFR or SOFR It's actually a very positive thing in regards to the inter commodities trading between or the spread trading between the different instruments.

Speaker 3

So that's actually a very positive development. I also remarked earlier that we've seen enormous growth in the SOFR linked products, Again, with an ADV of

Speaker 5

more than

Speaker 3

1,600,000 contracts a day in the Q3, so that's growing very strongly. In terms of incentives, yes, we have had incentives, as anyone who follows us closely knows, Whenever we start a market and so we have had significant incentives in our SOFR futures over the recent quarters. The good news there is, that means that that's already priced into our revenues to a large extent. We will expect to continue those incentives for a period of time. But as you can imagine, as we have with all of our products, you know the history, I'm sure, Our Bitcoin features and how we've reduced incentives there, our MicroE minis and how we've reduced incentives there and how those RPCs grew pretty dramatically Once those marketplaces got up and running.

Speaker 3

So we would expect that as we get greater adoption of SOFR relative to EuroDollars, The incentives in SOFR would decline on a relative basis. So again, we're already spending a lot of money on incentives. That's already baked in, in the last 12 months. And yes, we will continue to have some incentive spend, I don't expect any kind of a significant increase.

Speaker 5

John? Yes. Thanks, Kyle. And just to Echo what Sean said, I think over time, we believe that With the value proposition that we have and we've already seen significant amount of trading happening In euro dollars post the transition dates, so I think our clients are very comfortable With the conversion program that we've got in place and in the fallbacks we've got set up, so Very excited about the where what the team has done in terms of preparing us for the transition. I think They've done a remarkable job in working closely with our clients to ensure that that happens in a very orderly fashion.

Speaker 5

In terms of fees, Sean is right. We do have some market maker programs in place. It's embedded in the revenue that we've got right now. Over time, we would view sulfur Being treated just like the rest of our short term interest rate products. So I don't See there being any unusual headwinds because of sulfur versus any of our other short term incentive products.

Speaker 5

And this is something that Yes. We as a team, Julie, Sean, myself and Derek and others, we look at our pricing all the time to ensure that We are pricing our products appropriately to maximize our top line and to create as much liquidity as we can across our platform 24 hours a day.

Speaker 2

Kyle, let me just wrap it up by saying, it's really fascinating to me that when you look at the 1,000,000,000,000 of dollars That is benchmarked to LIBOR today and we are asking the world to transition in a very short period of time into something else. You can imagine just use an example, look at the automobile industry. We're going to convert that, but we're talking about a 30 year conversion possibly. We're talking about just a couple of years. We're going to convert 1,000,000,000,000 of dollars of assets benchmarked to LIBOR into something else, Which we believe we're in the strongest position of anybody to capture that risk offset, and that is with the products that Sean outlined.

Speaker 2

Now that will not be just a measure of open interest, it will be a measure of many things as we go through this transition. To me, this might be the most exciting time in the history of interest rate trading that I've ever seen in my 41 year here at the CME. So to me, I'm very optimistic about it, but I will not judge it On open interest alone, I won't judge it on one particular issue alone. There's many factors that are going to go into this. And Sean outlined some of the things that we have right now, not only on incentives, but with the Bisbee product, with Bloomberg, with the short term So for rate and with the sulfur futures and options, we think we're in a really strong position.

Speaker 2

And one of the benchmarks is open Just Sean gave it to you. We are the leader in that one by a long shot. So I'm very pleased with this transition.

Speaker 15

Understood. Thank you very much.

Operator

We'll go ahead and take our next question from Brian Bedell with Deutsche Bank.

Speaker 14

Great. Thanks for taking my question. I just wanted to go back to the micro size Contracts and retail participation broadly. I think, a while back, it was, I think retail generated Low double digits percentage of revenue. I just wanted to see if there was an update on that and maybe how that's Trended over the last couple of years since the creation of all the micro sized contracts.

Speaker 14

And then I would imagine ETFs are considered an customer given that's who's actually trading, but, I don't know if you would put ETF usage And the underlying futures as part of retail, maybe if you could talk about it on a pro form a basis, I guess, if that's possible. And just how you think broadly about that success in launching more micro contracts across the franchise?

Speaker 2

Yes. It's a great question, Brian. Let me ask Julie Winkel to make a few comments on that and the rest of the team May play a line as well. So, Julie, go ahead.

Speaker 9

Yes. Thanks, Ryan. No, you are correct. Retail is a single digit Contribution from a customer segmentation standpoint. So still a very we're on path for a very strong year in retail.

Speaker 9

It's Looking to be the 2nd highest revenue year on record for us. I think the participation there is definitely strongest in the equity And performance was a bit subdued through some of the quarter until volatility started to pick up a little bit in Kind of mid September and since then we've definitely seen further uptick in the business. But It kind of also speaks to just the diversity of our suite, right? So the retail adoption of things like our agricultural products Has never been stronger than what we've seen this year. So ag revenue for retail in APAC, it was up 86 North American up 30%.

Speaker 9

So overall participation too just is very, very strong. We're on pace About 375,000 traders in our markets, this year, likely only surpassed, by where we ended last year, which was a record year. And we talk quite a bit as well about the new client acquisition in this space, that has been strong as well. We've brought on 134,000 New retail traders and really looking, specifically when we looked at June, July August, In 2021, we outpaced those levels that we saw in 2020 during those exact same months. How we're doing that Continues to be the same thing that we've talked about before.

Speaker 9

It's really about driving that retail traffic To our digital properties there, we saw that activity more than double from where we were last year. And also just, the interest in our educational materials. We've had about a 1000000 retail traders, visit those properties Through Q3, which is great, and our partnership, those global broker partners that we have, the educational, the outreach efforts that they make, A huge part of this. In Asia alone, our broker partners have reached about 1,700,000 active traders year to date, And we've seen our digital educational events activities up over 178%. So I think it's that continued focus on really That retail go to market that has kept the activity very strong.

Speaker 3

No, I don't think I have much to add, right. We've seen very we've got good growth in our micro treasury yields, future is doing about 8,000 a day. Our micro mini's Months to date doing about $2,400,000 a day. So nothing really to add.

Speaker 2

Brian, did I kind of address all your Yes, just

Speaker 14

on ETFs, those are considered institutionalized, right? Or is there any way to think about it? Just with the Bitcoin usage On the ETFs, I'm thinking you might get more retail participation de facto in that maybe as well. I don't know if there's any way to pro form it.

Speaker 2

We would get more retail participation from Brian, you're correct. We are institutionally driven products to ETFs, but the more liquidity that's pumped into the system by The institutional players always attracts the retail participants and conversely the same way that the larger pool of retail participants can attract Institutional participants. So we see it going both ways and then we see this as an example of that. So hopefully that answers your question, but I think you're right on, Sean.

Speaker 3

Maybe one additional comment. In terms of the micro Bitcoin futures, we are seeing huge growth on the back of the ETFs. So greater interest in our micro So month to date, more than 27,000 contracts, average daily volume significantly up from the year to date of 21,000 As I mentioned earlier, and open interest now at over 65,000 contracts in our micro Bitcoin. So we've seen enormous growth And our micro products, not just our institutional Bitcoin futures, post the ETF launch.

Speaker 2

So not to counter my colleague, because it's The proper thing to do on an earnings call, but I also would attribute a lot of that to fundamentals in the marketplace. We also know crypto made an all time high last week of 60 plus a 1000, which could be driving some of those micro retail numbers. But we do believe, as I said earlier, they work in units together to Bring more volume on both sides.

Speaker 14

Yes. Great, great. Super helpful comments. Thank you.

Operator

All right. We'll take our next question from Michael Cyprys with Morgan Stanley.

Speaker 15

Great. Thanks for taking the question. Good morning. I was hoping you could update us on your ESG and sustainability products. What sort of traction and use cases are you seeing there?

Speaker 15

And maybe you could talk a little bit about the new Product road map, what that looks like? And if you could also elaborate on the new sustainable clearing services that I think you launched and made available in September?

Speaker 2

Both great questions. I'm going to ask Derek to touch on the product side and I'll ask Suneel to touch on the clearing side. So Derek?

Speaker 4

Yes. So appreciate the question, Michael. So I think probably the easiest way to start, in our material that we've pre circulated on Slide 4, you'll notice some very Detailed comments about some of the products that we've launched and what those mean to our franchise. Specifically, on the Environmental Products side, as you know, we've launched in August our nature based GEO contracts. GEO is the global emissions offset contracts that complements the GEO contracts we launched earlier this year and we continue to see significant traction there not just in terms of the traded volumes, but more importantly The open interest that we're accruing and then the deliveries that we're seeing of these contracts as well.

Speaker 4

So since launch, we've actually now seen a peak We hit a peak open interest record of just over 10,000 contracts on December 21. We hit a new record just on Friday. And what's important about that is while these contracts are now seeing record open interest terms, we're also seeing record amounts of physical deliveries of these offset certificates as well. So we now facilitated the physical delivery of 146,000 offset credits Across 4 separate delivery cycles. And just to put that into context for what that means for customers that are taking delivery of these certificates, That's the equivalent of 146,000,000 metric tons of CO2 equivalent.

Speaker 4

So this is a market that started really about 2 years ago. We've partnered exclusively, as we shared with you on previous calls, with CBL Expanse of the largest spot platform in the voluntary offset market In the carpet markets, and we now are delivering record amounts of volume through the platform and delivery of these certificates Through 4 delivery cycles, we'll have another one this week. So this is a new market. We just launched our nature based contracts in August of this year. So that's pretty significant traction early on.

Speaker 4

There is a lot that's expected out of this conference in Glasgow, COP26. And as we continue to work with the markets and connect Well, where we are now on the global basis of where these credit go, it's a complement to the work that we've already done and continue to do On the equity side, where we host the world's largest ESG contract by nominal value, our S and P 500 ESG Index Futures, Which has seen open interest above $4,000,000,000 notional value, which is pretty significant. So when you look at the space, whether it's on the environmental product side, the traction that Seeing in a market that we are at the cutting edge of developing the voluntary carbon market side or how we're servicing the needs of customers that are looking for ESG compliance Investment vehicles, we're leaders in both of those spaces. So we're happy with our positioning, feel like we've chosen good partners. And I think the market as it adapts to a new world of Carbon neutrality, we feel like we're in a strong position there with the success we've already had.

Speaker 2

Thanks, Derek. Sunil, on the clearing?

Speaker 13

Yes. So thank you, Terry. So on Sustainable Clearing, we've seen a keen interest from our clients to actually track their hedges. They use our entire complement of products, Not just what Derek went through, but they also use our interest rate and FX and equity products to hedge their exposure. So what is important for these clients is to track their activity used to hedge their green investments, as an example.

Speaker 13

And we in clearing, we provide them a mechanism to actually track those exposures and report on them. This is a novel service. We have just started with a group of clients and we look to expand it to our product line. Hopefully that gave you a

Speaker 2

little bit of color on that Michael.

Speaker 15

Great. Thanks so much.

Speaker 2

Thank you.

Operator

And we'll take our last question from Simon Klint with Atlanta Equity. For never mind, it appears there are no further questions at this time. I would like to turn the conference back over to management for additional or closing remarks.

Speaker 2

Okay. Well, we thank you all very much for taking time out of your busy schedules. Once again, we wish that you and your families stay safe and healthy during these very difficult days that we're all dealing with, And we look forward to talking to you next quarter. Thank you.

Operator

This concludes today's call. Thank you all for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
CME Group Q3 2021
00:00 / 00:00