CME Group Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2022

There are 16 speakers on the call.

Operator

Are currently on hold for the CME Group First Quarter 2022 Earnings Call. At this time, we are assembling today's audience and plan to be underway shortly. We appreciate your patience and please remain Good day, and welcome to the CME Group First Quarter 2022 Earnings Call. At this time, I would like to turn the conference Over to John Peyshore. Please go ahead.

Speaker 1

Good morning, and I hope you are all doing well today. I'm going to start with the Safe Harbor language. Then I'll turn it over to Terry and John for brief remarks followed by your questions. Other members of our management team will also participate and the Q and A session. Statements made on this call and in the other reference documents on our website that are not historical facts are forward looking statements.

Speaker 1

These statements are not guarantees of future performance. They 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.

Speaker 1

With that, I will turn the call over to Terry.

Speaker 2

Thank you, John, and thank you all for joining us this morning. We released our executive commentary, as John said earlier today, which provided extensive details on the Q1 of 2022. Also as John said, I have John Shawn, Derek Sunil and Julie Winkler On the call or in the room with us this morning, I will start and then John will provide some comments before we open the call for your questions. Trading activity during the Q1 jumped 26% from the last quarter with average daily volume of 26,000,000 contracts per day. Average daily volume was up 19% versus the Q1 last year, driven primarily by record quarterly Equity Index ADV, which was up 30% year over year.

Speaker 2

In addition, interest rates average daily volume was up 21% for the same period. Energy and foreign exchange ADV both grew 6% compared with the Q1 of 21. In total options, ADV increased 32% to 4,600,000 contracts, including significant activity outside of the United States. In Q1, non U. S.

Speaker 2

Average Daily volume grew to 7,300,000 contracts. We saw 17% growth in Europe, 22% growth in Asia and 28% Growth in Latin America. Contributing to the record quarterly equity index ADV, the MicroE Mini products represented 43% of the activity, growing 36% from the Q1 2021 to a record Average of 3,400,000 contracts per day. Additionally, equity options increased 81% for the Q1 Last year driven by record activity across e mini S and P 500 and the NASDAQ 100 options. Within interest rates, both sulfur futures and options had record quarterly ADV, averaging a combined 1,200,000 contracts per day.

Speaker 2

The growth in our sulfur franchise has been a major objective for our And the increased volatility in rates during the quarter did not slow the momentum in this transition. At the end of the quarter, sulfur futures share of the euro dollar futures trading had increased for 9 consecutive weeks. It surpassed eurodollar's trading just last week for the first time, averaging 1,370,000 contracts above the €1,330,000 contracts traded on the same day, a major milestone in the industry Shift to LIBOR away from LIBOR to SOFR, excuse me. The uncertainty around the Fed We'll adjust the rates in terms of how much and how often can be seen in the 3 13% growth in the Q1 of Fed Fund Futures ADB compared with the Q1 of 2021. The innovative new products we've launched across the entire yield curve in recent years are more important than ever.

Speaker 2

You can see this recent front end volatility driving record quarterly ADV in the 3 year treasury note futures as just one example. Additionally, we already have 60 participants trading the 20 year U. S. Bond futures contract that we just listed at the end of the quarter. In terms of other new products, Customer demand and the ever apparent need for risk management across our global products continues to lead new product launch opportunities.

Speaker 2

During the quarter, Our microsized contract suite continued to grow with recent launch of micro Bitcoin and ether options, as well as the planned launch of Micro Copper Futures in early May. Micro WTI Futures reached The record monthly ADV in March of more than 226,000 contracts and have traded more than 16,800,000 contracts since their launch in July of last year. Our ESG offerings expanded with our launch of core Global Emission Offset or as referred to it as CGEO, voluntary offsets have become an increasingly popular tool These contracts are intended to align with the core carbon principles overseen by the Integrity Council for the Voluntary Carbon Market. Within crypto, we launched 2 new reference rates for Bitcoin and ether, providing a once a day reference rate of the U. S.

Speaker 2

Dollar price of the 2 digital assets, published at 4 pm New York time. As the New York calculation window has the 2nd most traded hours for Bitcoin, futures behind the London rate. In addition, just this week with our partner CF Benchmarks, we launched 11 new cryptocurrency reference rates in real time indices. The digital asset market continues to expand and there is an increasing demand for regulated cryptocurrency information. And finally, New option products continue to offer more flexibility to manage short term price risk.

Speaker 2

As Fed policy and economic uncertainty have implications on metals markets, We announced the early May launch of Monday Wednesday gold, silver and copper weekly options, which complement the existing Friday weekly and the month and quarterly options on these markets. With the backdrop of ongoing geopolitical uncertainty, evolving central bank policies, inflation, supply chain constraints and other economic challenges, risk management has never been more important. Our team executed extremely well during the Q1, resulting in many trading volume records. We're especially pleased with the record results and our market data business, which reached a high watermark of $152,000,000 of revenue in Q1. Looking ahead, with the supply of critical global physical commodities fragmenting, the reference of several of our global benchmark Products continues to increase and we continue to provide our clients a secure and transparent way to significantly mitigate and manage their risk.

Speaker 2

With that, let me turn the call over to John to provide you with some financial highlights.

Speaker 3

Thanks, Terry. During the Q1, CME generated approximately $1,350,000,000 in revenue. Adjusting for the impact of the formation of Ostra, Our joint venture with S&P Global, which we launched in September of last year, our revenue grew over 13% for the quarter. As Terry mentioned, market data revenue was a record, up 5% to $152,000,000 We continue to see a lot of interest in our globally relevant product set. Expenses were very carefully managed and on an adjusted basis were $425,000,000 for the quarter $344,000,000 excluding license fees.

Speaker 3

The expenses include approximately $6,000,000 toward our cloud migration. The operating leverage in our model is significant, Again adjusting for the impact of the formation of Ostra, when you compare the Q1 2022 to the Q1 last year, Our revenue rose by approximately $158,000,000 and adjusted expenses increased only $22,000,000 CME had an adjusted effective tax rate of 23%, which resulted in an adjusted net income of 7 $6,000,000 up 19.5 percent from the Q1 last year and an adjusted EPS attributable to common shareholders of $2.11 Capital expenditures for the Q1 were approximately $22,500,000 CME paid out over $1,500,000,000 of dividends during Q1 and cash at the end of the quarter was approximately $2,100,000,000 In addition to helping our clients manage their risk, we are making progress in our partnership with Google. We have completed the discovery phase of our analysis of our applications and have begun to build the technical foundation to move them to the Google Cloud platform. Our initial focus will be on moving trading data to the cloud and leverage Google's Excellent data management capabilities. We will also be looking to move our corporate and clearing systems as part of the first phase of the migration.

Speaker 3

In summary, the team at CME Group is focused on our clients and on executing on our strategic priorities. Please refer to the last page of our executive commentary for additional financial highlights and details. With that short summary, we'd like to open up the call for your

Operator

We will take our first question from Rich Repetto from Piper Sandler. Please go ahead.

Speaker 4

Good morning, Terry and John and team. Excuse me. Good morning. Hope everybody Good morning. Hope everybody is healthy and safe and your families are as well.

Speaker 4

But Terry, last quarter you spent a fair amount of time talking about the unique setup For volumes, and this was even before you had the Russian invasion of Ukraine. So, 2nd best quarter in ADV sort of played out. So, I guess my question is update on this setup because you have seen A volume pullback probably since mid March with a decline in volatility. So An update on the setup and then also how you manage, I guess, this volatility in the quarter. There's been articles about margin breaches And pretty extensive margin calls with all the volatility as well.

Speaker 2

Yes. Thanks, Rich. I mean, there's a lot packed Your question and I did refer to how we were positioned well, at the last call for people to manage their risk in a very uncertain world, I believe You're referencing and I think we've done a really good job at that and reflecting in the numbers of our Q1. So we are quite pleased to be able Manage the risk we've been able to do in every major asset class around the world that people participate in here at CME. So that being said, I have never measured A year on a quarter.

Speaker 2

I like to measure the year on a year. So I think there's a lot more left to this year. What the I think you're referring to the volume at April probably being at 20, just over 20,000,000 contracts a day, which is down from the 26,000,000 that we had in the Q1 With the volatility coming off a little bit and what does that mean? I don't think it means anything. I think this means that we have to measure the entire year.

Speaker 2

We're seeing what can happen When people need to manage risk in a real time basis and that's what we provide the deep liquid markets for them to do that. We've seen and no one saw coming Some of the unprecedented events that we have seen over the last 6 to 8 to 12 weeks in this country around the world. So I'm really pleased with that. How does that Translate into future volumes, it's hard to predict that Rich, as you know. On the margin, there are we've had Massive moves in markets.

Speaker 2

So the CME does move its margins up and down as you are aware and then we have a minimum rate and then there's our firms, Member firms, we don't control what they decide to charge their clients on top of what the margin required by CME is. Every firm seems to be different. We do communicate with firms as it relates to their everyday business and they do talk about risk and volatility And margins and we all know that they charge something a little bit different. So that's out of our control. What we're here to do is make sure we can provide deep liquid market We want to be cautious about talking about margins because we're talking about risk.

Speaker 2

And when we're talking about some of the most unprecedented times The history of the world, we want to be careful not to be dismissive of some of the margins that have happened during these times. So I would say not unexpected to see some of the margins going up significantly at the firm level, because I don't think anybody's ever seen a boots on Ground war in the European soil since World War II. So I think that those are just so many different factors going into it, Which is causing the margin increases at the firm level. So again, we'll let this play out through the balance of the year and we'll stay

Speaker 4

Great, great. I just wanted to get your broad overview. Thanks, Terry.

Speaker 5

Thanks, Chris. Appreciate it.

Operator

We will take our next question from Dan Fannon from Jefferies. Please go ahead.

Speaker 6

Thanks. Good morning. I guess, John, on expenses, clearly, good discipline as you highlighted in the quarter. But typically, the Q1 Is your highest period for compensation or even overall expenses, maybe the Q4 in some years? But Given the strength of revenues that you saw in the Q1, can you talk about the trajectory of expenses from here and what is really the ramp in addition to the Google numbers you mentioned, it just feels like the start of the year on expense side was rather low.

Speaker 3

Thanks, Dan. Thanks for the question. Yes, in terms of the expenses, the entire team here at CME Group has done a tremendous job, not just this year, but for many years managing our costs. All the employees are here at CME are focused on Ensuring that we spend as efficiently as possible and you see that is evident in this quarter's results. We As I mentioned in the prepared remarks, we got tremendous leverage in our model and you can see that reflected in our 68% margins for the quarter.

Speaker 3

We do expect to see a higher level of expenses in the following quarters as we see the full impact of our employee merit increases, which we put on pause last year and they became effective in March. So you'll see that play out for the rest Also as I mentioned in our guidance last quarter, we expect to see about $30,000,000 for an improving business environment, including increased travel, marketing events and customer facing resources, which were expected to see ramp up throughout the year. We as an organization will always be diligent on our costs, but I think as Terry indicated in his remarks, We are well positioned to serve our clients to manage their risk in this really uncertain time and we want to make sure that We've got the resources to do that and we've also are seeing an improving operating environment where we expect to be able to do more Traveling and in person marketing events to help our clients.

Speaker 6

I guess just a clarification, did some of that start though in the Q1, I mean the travel and events, I mean that was happening in 1Q though, correct?

Speaker 3

It was, but not to the extent that we expected in the back half of the year, especially in Asia in particular. That's an area that you really haven't seen it open up as much as you're seeing it in Europe. And we're seeing more kind of in country Events, then cross country events, so international travel in particular. So We expect that to be ramping up. And also, as I indicated in our discussion last quarter, we are making investment in customer facing resources That we expect to see ramp up throughout the year, especially in our international offices.

Speaker 6

Great. Thank you.

Speaker 3

Yes. Thanks, Dan.

Operator

From UBS, we will now move to Alex Kramm.

Speaker 7

Hey, good morning, everyone. Quick one from me, just on the net investment income on the I guess, on the in the clearinghouse or with the Fed. Looks like that's decently better than I thought. Can you just give us an update on what the average Balance was maybe what the basis point fee was that you realized. And then more importantly, since we got a Fed hike at the end or towards the end of the Q1, How we what's the realized rate that you're getting now?

Speaker 7

And have you seen any change in behavior? And any updated thoughts on where we're going to go as we likely will have more and more FedEx coming here. Thank you.

Speaker 3

Yes, sure. Thanks Alex. So in terms of the in terms of our non operating section of our income statement, I'll just cover both. It's up about $11,500,000 sequentially. It's 2 major pieces.

Speaker 3

1, as you indicated, is the earnings on cash held by our clients at the clearinghouse, which is Up about $5,000,000 We saw higher average cash balances of about $2,200,000,000 Our returns were 7 basis points, up about 2 basis points from last quarter. As you indicated in mid March, the Fed increased rates to 40 basis So we are returning 27 basis points to our clients and keeping 13 basis points ourselves. So if you look at it that way, all things being equal, you should see a difference between the 7 basis points and the 13 basis points going forward. So I think the currently our average cash balances Through April, so our average free cash balance at the end of the Q for Q1 was 152,200,000,000 The average cash balances for the month of April is $161,000,000,000 is the average that we have through April. We did see the ending balance in Q1 of 200 and I'm sorry, ending balance of $165,500,000,000 in Q1 and we're seeing the ending balance on 425 of $159,300,000,000 So the amount of cash at our clearinghouse is Still pretty robust.

Speaker 3

The second piece in our non operating portion of our income statement, as I said, dollars 5,000,000 of the sequential increase of $11,500,000 was related to earnings on cash held by clients at the clearinghouse. The other piece is the earnings from our S and P Dow Jones joint venture, which was up about $6,000,000 sequentially and up about 15% year over year and that JV continues to perform extremely well.

Speaker 7

Excellent. Thanks for all the color.

Speaker 3

Yes. Thanks, Alex.

Operator

We will take our next question from Alex Blush Dein from Goldman Sachs.

Speaker 5

Hey, good morning. Thanks for the question everybody. I wanted to go back to Some of the earlier comments around Google sounded like you guys have completed your initial analysis of what you guys can sort of do together. So I was hoping to get an update on sort of your thoughts around revenue opportunities and maybe some of the product launches That this venture now that this venture has kind of had a couple of months to mature?

Speaker 3

Yes, I'll take that and I'll kick it over to Sunil and Julie also for some comments. But Yes, we're making really good progress. If you want to think of it this way, we've done the deep due diligence on our applications as we Determining what the right course of action is as we migrate it to the cloud. As I've indicated in the past, this is not a lift and shift. It's really a lift, analyze the applications and look at optimizing them and then automating it When we get to the cloud, right?

Speaker 3

So at the end of the day, once the applications get to the cloud, we should have a much more efficient application suite and in the cloud. So that's our objective. And as I indicated At the end of this, it will be a much more efficient operation of our applications so that it's got good financial characteristics over the 10 year period of the agreement, but also our Expense levels assuming all things being equal in terms of trading activity and the like should be at a lower cost as well. So excited about that. So that's the first phase.

Speaker 3

We are looking at moving our market data And trading data to the cloud, we do have an offering now with Google. We're looking to expand the capabilities of that offering and that is ongoing. What's great about Google is they're Excellent at managing large amounts of data and we'll be looking to move Our data to the cloud and offering analytics and other capabilities around that data. Also during this process, As we indicated last quarter, we'll be moving some of our risk models to the Cloud, why is that important? Well, as Terry indicated, risk management is critical in this uncertain time and we want to be able to give our clients All the insights to help manage their risk as we can.

Speaker 3

And I would say last is kind of our corporate systems. So it's the stuff that we use internally to run and operate the business. We'll be looking to leverage the cloud for that. With that, I'll turn it over to Julie and Sunil for some comments.

Speaker 8

Yes. As John pointed out, getting the data into the cloud is certainly a big For us now to be able to complete our listed CME Futures and Options data into the cloud. So We moved all of our options data into GCP earlier this month. And so now we really have a full Suite of that both futures and options data available in historical and real time format for our clients to be able to access. And the team is actively working on some additional projects based on the unique data sets that we have here at CME and with The wide range of benchmark products that we have available, there are some unique total cost analysis and other benchmarking that we can do.

Speaker 8

So we are actively working on that and excited to be able to really test that with customers as we proceed in an agile way of that product development. So we'll Back to more as the year progresses.

Speaker 9

And then I'll speak to the margin calculation. We do have a real time margin calculator that we host internally. What we plan to offer with Google is a margin calculator app. As Terry pointed out, risk management is very important for our clients and we want to give them the ability and the ability to launch these calculators as necessary during the day to track their exposures. So this is something that we target to actually deliver this.

Speaker 3

Yes. That's kind of the near term Things that we're focused on. I think what's important is the long term strategy that we have around the migration of the cloud And providing our clients easier access to the markets over time, which I think as we all had indicated at We did the transaction. That's really what we're very excited about is kind of the long term opportunity here.

Speaker 5

Got you. All right. Thanks for the color.

Speaker 3

Yes. Thanks, Alex.

Operator

We will take our next question from Brian Bedell from Deutsche Bank. Please go ahead.

Speaker 10

Great. Thanks. Good morning folks. Hope everyone is well. Maybe just focus on the micro franchise.

Speaker 10

Obviously, Q1 was Extremely strong in the micro complex. You've got obviously the market volatility backdrop and increasing Take up or usage of these contracts plus obviously innovation from new products. So maybe just I know you don't like to make volume forecasts going forward, but in thinking about that product innovation and how Retail customers are using these more, maybe how your agreements are forming on the online brokerage side, for example. How should we think about the outlook for micro volumes as the year progresses based on those factors? And Obviously, 1Q was very strong.

Speaker 2

Yes, Brian, it's Terry Duffy. Let me I want to turn it over to a couple of folks because that question encompassing among many asset classes, which are represented in this room and Julie. But let me kick it over to Julie to start with to give you a little So where we're at, but you're correct, we cannot predict the volumes associated with any of our products and we won't do so. But as I did say at the earlier A comment to Rich is, this is a long year. We are very excited about the Q1.

Speaker 2

And when we saw the volatility that you referenced earlier In Q1, that was very aggressive volatility due to the beginning of a war. So now that we think volatility becomes normalized, that is We both better the entire franchise than extreme volatility that we saw in Q1. So I want to make sure I get that point across. I wish I would have said it earlier to Rich, but I wanted to emphasize that again more because I think it plays into your question not only from the micro contracts, But obviously the large size contracts as well. So Julie?

Speaker 10

Yes. Well,

Speaker 8

thanks for the question, Brian. I'll just maybe start with some broad comments about kind of retail and the micro And then turn it over to Derek and Sean to talk a little bit more about the financial results in their business. Q1 for our retail business was a record And so revenue there was up another 7% higher than that highest quarter on record that we had before in Q1 of 2020 and a lot of that Certainly was driven by the micro performance. I'd say it continues to see strong growth around the globe. So North America led the pack there really being up 34%.

Speaker 8

And when we look at Patient numbers, which is a key part of helping us really kind of work with our broker partners as well as the results. The number of retail traders is still up almost double digits in this quarter and we're continuing to see that our model And working with our distribution partners is bringing net new traders into the marketplace. That's well outpacing what we saw in 2021. So the acceleration is still there, which is great. On the micros front, this has really I'd say a continued story from what we've seen since we launched is that this is a critical component of our new client acquisition strategy.

Speaker 8

Because of the size of these contracts, we are seeing people start entering our marketplace and getting familiar with our products Through this MicroSuite and as Terry had mentioned earlier, a lot of the strategy here is on continuing to add net new products into that MicroSuite, which has been A key part of that growth as well as the volatility that we did see in Q1 naturally leads itself To a higher uptake of micro participation. The kind of some of the other trends just to wrap up From my side, the number of traders that begin as kind of micro only and are graduating, we are seeing that increase and we're Seeing that as clients move on from micro to standard products, that that revenue on average is also making them more sticky to And so I think it's important a key part is getting the clients in, but it's also helping them continue their journey into our other products So with that, maybe I'll turn it over to Derek first.

Speaker 11

Yes. I think the micro story has actually As you recall, we just launched the micro WTI contracts in July of last year and certainly going into the now the asset inflation story that we've seen In Energy over the last 4 months, it couldn't come at a better time. I'll pick up on a comment that Julie made. This is a new client acquisition story for us. If you look at the participation levels that we're seeing in our contracts, we've traded through Monday, we've traded over 19,000,000 contracts since launch, almost 40% of our volume is trading outside the U.

Speaker 11

S. We have 55,000 unique traders of which 28,000 of those customers have never traded a CME Group product before. So these are net new customers into our environment, into specifically energy and we're increasingly seeing the opportunity to cross trade these customers out across other asset classes. So over 100 firms have put trades up and what's most important about this product is the global reach of this. Since launch, over 48% of our volume in micros has emanated from outside the U.

Speaker 11

S. Across 130 territories. So this is a terrific tool used by our partners and distribution points out in Europe and Asia to bring net new customers to us. And in micro WTI, 31% of this volume is coming from pure retail traders, again, generally new participants into our world. So good new client acquisition story And it certainly complements our market, particularly in light of the fact that we've seen crude oil go from $60 to $100 That means our large contract went from a $60,000 contract to $100,000 contract.

Speaker 11

So these micro contracts at this point are a $10,000 contract well sized for the risk tolerance of retail traders. With that, I'll pass over to Sean to talk about what we're seeing in equities.

Speaker 12

Yes, we're very pleased with the growth for our micro products. The micro mini's Growth this year around 29% year over year in terms of the ADV. Actually, that's the month to date It's about 29% year over year, 35%.

Speaker 2

If you look

Speaker 12

at the overall volume then about 3,200,000 contracts a day. We did on February 1 increase Fees on those contracts, so the Micro e mini member fees, we increased from $0.04 to 0 point 0 $5 And the MicroE Mini non member fees, we increased from $0.25 to $0.30 So increasing volume on increasing fees, Something that's very pleasing from our perspective. Well, new product growth continues to Supply is substantial portion of our growth overall. If you look at and something that we update regularly, is our ADV in new product launches 6,920,000 contracts a day generating $173,000,000 in revenue, so 28% new product launch since 2010 in the financials unit. And we've recently updated the new product launch since 2017.

Speaker 12

So that is just in the last 5 years. That excludes a lot of our most successful products in our financials unit. For example, our Ultra Bomb futures, it would exclude our Ultra 10 year futures and many of our very successful products. Nonetheless, if you look at new product launches in 20 Within the financials unit, they attained 5,390,000 contracts a day in the Q1, so more than 20% of the entire exchange volumes And more than $96,000,000 in revenue.

Speaker 2

So Brian, I hope you can see that the micro complex of what Julie and the team said Is a feeder of new client acquisition, which is extremely important. Derek emphasized that. And I can't stress that enough. This is not Cannibalization from one contract to another. These are new clients coming into this company that were never here before.

Speaker 2

And whether they're trading micros or the larger contracts, is based on the risk tolerance and they're managing risk. These are not the pure retail traders. When Derek referenced retail, these are not people that are Trading like sports contracts, these are people managing risk. These are participants in the market On a daily basis. So I think it's really important that we emphasize that point.

Speaker 2

But thank you for that question.

Speaker 10

Yes, that's super, super helpful. I'll get back in

Speaker 9

the queue for follow-up. Thank you.

Speaker 13

Thank you.

Operator

We will take our next question from Ken Worthington from JPMorgan. Please go ahead.

Speaker 12

Hi, good morning. You mentioned in the release that one of the 2Q initiatives is In base metals, what is the initiative entail and what are the results you hope to achieve? And then to what extent is the timing based on Disruption we saw this past quarter in nickel markets at LME and some dissatisfaction that the market is seeing there.

Speaker 2

Go ahead, Jared. Why don't you comment on the

Speaker 11

Yes, Ken, I appreciate the question. Yes, it's certainly an interesting time in the base models markets over these last I think that the what we saw was a significant and unexpected market disruption in nickel specifically. As you know, our Comex business since we bought that and Integrated that into CME Group back in 2008, 2009. That started as a largely precious metals business and 85% to 90% of volumes and revenues coming from the pressure side. Over the last 10 years, we've significantly invested in growing out our base metals business, led by copper, now aluminum, Steel and a couple of other products.

Speaker 11

What we've been able to establish is a credibility in the use of our COMEX copper contracts specifically, which meant that when this actually happened with the LME, we immediately started to get calls from our own base metals customers experiencing the disruption in the nickel market And having concerns to express not only in the nickel market, but about the broader suite of base metals products where they're trading right now, specifically aluminum. So you saw us announce yesterday that we're going to be announcing or launching aluminum options. We actually were able to execute 2 successful Physical aluminum auctions totaling 500 metric tons of U. S. Aluminum to specifically help the physical participants in the aluminum market.

Speaker 11

So while customers are coming to us about the immediate disruption in the nickel market, as you probably know, we don't have a physical nickel market today, that's This is an opportunity to be able to more easily port those customers over into our liquid Comex base metals product already and we're seeing that movement over. The work we're doing right now is engaging those customers to find the easiest way to move them into our liquid contracts And we're certainly having ongoing conversations with them about what they would like to see as an alternative nickel market. That is a big complex market that requires Physical delivery outside the U. S. So we're converting with the industry and the commercial participants to see what they would like, but the immediate opportunity is what we're seeing in our liquid markets right now, copper, aluminum, etcetera.

Speaker 11

So good opportunity for us.

Speaker 12

Great. Thank you.

Operator

We will take our next question from Owen Lau from Oppenheimer. Please go ahead.

Speaker 13

Good morning and thank you for taking my question. Could you please talk about the driver of the strong sequential growth of your cryptocurrency futures and options ADV from the Q4 to the Q1? When the spot market was down like maybe around 40% sequentially, I mean, is there any way to hear about whether people feel more comfortable, Let's say, owning fiscal Bitcoin and Ethereum for long term or to use derivatives to hedge the position It sounds just like selling simply selling the tokens. And then also finally, could you please remind us How CME can monetize the cryptocurrency reference rate? Thank you.

Speaker 2

Okay. Owen, Sean, you want to take the first part about the crypto or do

Speaker 12

you In terms of the hedging, we think that a regulated exchange, Highly regulated, right, by the CFTC is, and highly trusted exchange, right, in terms of margins, is very important and a huge value proposition Customers who want to trade in the cryptocurrency space. So, we have built a very good and strong business In the Q1 running more than 50,000 contracts a day, with approximately 61% growth in the ADB, a lot of that growth coming from the micro contracts, in particular, the micro ether contract. So we've seen very, very strong growth with participants looking to trade on a trusted regulated exchange, namely CME. In addition to that, we're very pleased with the increases in rack rate fees that we instituted in February similar to the ones I mentioned earlier in the MicroE Mini. If you look at our Bitcoin Non member fees, for example, we raised them by $1 from $4 a contract to $5 For members, we raised them from $2.50 to $3 On the ether, similar increases for non members, we raised them from $3 to $4 for members from $1.50 to $2 So we are very pleased with the growth in volumes, the growth in the innovative new products on the micro side.

Speaker 12

We've also recently launched the MicroEther contracts and the Micro Options contract. So Further pleasing results with growth in those contracts with increasing fees. Last thing I'll mention is in regards to Our recent announcement in April of 11 new currency reference rates. If you look at these new reference rates, How do we commercialize them and why are they important? Those 11 currency indexes represent more than 90% of what I would describe as the potentially efficiency creating currencies for the marketplace.

Speaker 12

So these are non stable coins, non meme coins. These are currencies that have the And so to improve the way payments are made across the financial system. How would we monetize those? Look at what we did originally. We originally launched The Bitcoin and the ether indexes and a couple of years later we launched the futures.

Speaker 12

And as you know, we are gaining substantial revenues from those futures today. So that is the primary commercialization opportunity.

Speaker 2

Thanks, Alan. Appreciate

Operator

it. We will take our next question from Kyle Vogt from KBW.

Speaker 14

Hi, good morning. Maybe just a follow-up on Ken's Question on the LME nickel event. I'm just wondering if you could provide a bit more color on kind of the key differences in risk management practices at CME Or explain in more detail why something similar couldn't have happened at CME. And then also, do you think the U. S.

Speaker 14

Regulators will be looking closely At that LME event and could that cause them to take any or reevaluate any things such as position limits or make changes to clearinghouse oversight more broadly?

Speaker 2

Kyle, it's Terry Duffy. Let me take the back part of that question on the regulatory side. And I'll let Sunil Pacino Take the front side, which is the risk management. So on the regulatory front, you'd be purely speculating on what the agency may or may not do. You got to remember this came out of an FCA regulated marketplace.

Speaker 2

The way they tore up trades on one side is That we do not do here and Sunil can walk you through more of the risk management associated the way we manage risk versus how they manage the risk. Whether the position limits would come under question, position limits probably would not have had any effect on what the outcome here was on LME. It was more on the risk Management itself, not the exact position limits themselves. So the concentration of risk is a different thing than the position limits. So these are different factors.

Speaker 2

I don't see Our government taking this up in any which way, shape or form due to what happened in nickel, I mean, there'd be no reason to. So but at the same time, I'll reserve that. I will be testifying in Washington in May, Not only on a host of things, but not on LME, but mostly on risk in general. So that may came up. We'll see when how the Congress feels about it So let me ask Sunil to talk more about the risk side.

Speaker 9

Thank you, Terry. So from a risk perspective, CME takes a very proactive approach With an early warning system, we not only look at margins, but we look at counterparty credit risk. And from a counterparty credit risk perspective, we look at our clients' exposures, our clearing firms' exposures. In the U. S, we have a feature called Large Trader.

Speaker 9

This typically highlights Traders are clients of clearing firms with positions that cross a certain threshold with respect to the overall open interest. Given that we stress test these clients and we also look at their exposures relative to the total market, Based on that, we have a number of tools to address exposures. So This is what has created this resiliency that we bring to the market, even in times of great stress. So at the end of the day, I think it's our risk management posture that is not just based on margins or guarantee.

Speaker 2

Well, hopefully that gives you a little bit of color. But I mean, again, this is their situation, not ours, and we don't want to comment too much further on their situation.

Speaker 14

That's helpful. Thank you very much.

Operator

From Compass Point, we will now move to Chris Allen. Please go ahead.

Speaker 3

Yes. Good morning, guys. Excuse me. Thanks for taking my call. I wanted to ask about the basically how you any thoughts You may have around how market structure is going to evolve in the crypto markets.

Speaker 3

We have FTX applying for direct clearing with the CFTC, and many crypto companies have different market structures than would be allowed under the current regulatory framework in terms of Exchanges having institutional brokers even market makers. Do you see any potential changes coming from what the Crypto industry is pushing or do you see more potential for them being required to adapt to current market regulations and structures?

Speaker 2

Chris, it's Terry Duffy. Again, as I said, I'll be testifying on May 12 specifically on this topic along with some other folks. It's always difficult to predict what the ultimate outcome is, but I don't see any knee jerk reaction into market structure that's going to change in any direction. And let me be clear about this. If there is a market structure change in any direction, it won't preclude CME from participating in such market structure changes That could benefit this immensely if in fact we'd see that to be the case.

Speaker 2

I don't know that to be the case, but I don't want people to think that Crypto is the only one that has the ability to have its own separate regulation and the rest of the world has to sit idly by as they go Unregulated or exempt from a whole host of issues that we've all been in compliance with today. So I do not see that to be an outcome whatsoever. So it's a very frustrating topic to some degree, but at the same time, we'll be patient, we'll go through it, Well, we'll give our views exactly as it relates to their application, the flaws in their application, They're glaring to say the least, and we will be opposing that application. The industry is very concerned about some of the things that are NetApp. So again, you can't just create an application and pass it because it's a new asset class.

Speaker 2

The CFTC also has to look at innovative new products. I will tell you that you cannot say that you have innovation for the sake of innovation. It's got to be still under the principles based regulatory regime that is highly outlined in the CFTC today And you can't go outside of that just for the sake of innovation. So it will be fascinating to see how this all plays out, but I do not see anything playing out in the near term at all. Thanks.

Speaker 14

Appreciate

Speaker 2

it. Thank you.

Operator

We will take our next Question from Simon Klinch from Atlantic Equities. Please go ahead.

Speaker 15

Hi. Thanks for taking my question. I wanted to jump back to just your thoughts around the international opportunity outside U. S. Trading volumes.

Speaker 15

And how I I guess what you think the next steps are in terms of driving that volume higher. As I've noticed that since about the sharp rises through sort of 2017, 2018, The percentage of volumes in international has sort of plateaued to some extent. And I was just wondering if there's any particular reason for that or If really we should expect that to be moving a leg higher as we move forward and what drives that? Thanks.

Speaker 2

Thanks, Simon, I'll turn it over to Derek for that response.

Speaker 11

Yes, Simon, good question. Yes, we've seen really significant growth as our investments in our non U. S. Personnel and Infrastructure has continued to grow. If you actually look at 2021, we set a record all time volume year for our business and we actually and I think it was about $5,500,000 for total year 2021.

Speaker 11

We just missed It was our 2nd best revenue and ADV quarter, as I said, up 18% 19%, respectively. We see continued growth on the international option side specifically. That's an area of growth for us and that is also an area that brings not just options business to us, but associated futures hedging as well. If you look at the extent of our growth across the regions in Q1, We saw LATAM growing 29%, APAC growing 22% and EMEA business growing 18%. And our rate for contracts actually hung in there well Given the high percent of the options business that was getting done, yes, we're seeing micros broadly being a large non U.

Speaker 11

S. Participation area for us. And that's while that's had some downward pressure

Speaker 3

on the

Speaker 11

RPC, typically non U. S. Participation comes at a higher rate per contract, so volume and revenue has actually been quite well aligned there. I'll turn it over to Julie to talk about some of the ways in which you've allocated additional sales staff and looked at our global reallocation of resources to Europe and Asia specifically have just undergone a reorganization of our leadership globally as well to make sure that we can focus on the next 10 years of growth and unlock that those steps in line with the commercial side of the business. So Julie can talk about some of the stuff to do on the sales side.

Speaker 8

Yes. And John mentioned it earlier, right, a key component of our sales strategy and go to market opportunities is really about having people on the ground in region, building relationships with clients, Understanding their needs and driving the educational opportunities that we have within the region, which is a huge part of particularly what we do in Asia, not with our own staff, but also with a large network of third party educators that we work with to help continue to promote our products. So we have allocated additional resources internationally to continue that growth that we have seen. I'd say as I look The sales engagement numbers, the biggest year on year growth that we saw in sales productivity actually came and was led by our APAC region where that was up over 100% versus what we saw in Q1 of 2020. And so a lot of this is about continuing to build out the teams.

Speaker 8

We have been very successful at leading a very focused approach with our country planning and we've been working at that throughout the years and have Really in a place now that we're able to take that to the next level as we put more resources on the ground. We have found right with that focus And with that, we can really drive greater execution. And a lot of what we're looking at as well is just the product opportunities. So with the new client That we're seeing with Micro, with our partners in the region, with Asia starting to open back up, our Singapore office will be opening in the coming weeks. We're excited about being able to drive more in person events in the region, which is a key part of our strategy as well.

Speaker 8

So Engagement there again and outreach has been extremely high and more resources we believe will lead to increased growth going forward.

Speaker 11

Eric? And Simon, just to put an exclamation point behind that, in the materials that circulated this morning on Slide 3, you'll see a couple of graphs on the upper right hand side there showing the percent of Each of our asset classes that are trading from outside the U. S. And you see some pretty healthy gains and consistent growth. This is obviously Q2 or Q1 'twenty two versus Q1 'twenty one, but this is a consistent and, let's say, regular trend that we've been employing with the commercial resources The products we've been pushing out there.

Speaker 11

So happy to go into more detail offline, but hopefully that gives you both the product level and region level sense of where we're growing that business and Growth we're seeing as a percentage of these asset classes growth as well.

Speaker 15

That's very helpful. Thank you.

Operator

We will take our next question from Gautam Sawant from Credit Suisse. Please go

Speaker 4

Good morning and thank you

Speaker 12

for taking my question. Can you please expand on BrokerTec's expanded protocol suite including RFQ and streams Plus the UST market profile launch? And how do these new products impact the competitive of your offering relative to peers? And where are you seeing the Initial utilization of these newly launched capabilities. Sean?

Speaker 12

Sure. This is Sean jumping in. We're pleased with how BrokerTec is performing this year. If you look at year over year, year to date ADV for U. S.

Speaker 12

Treasuries, it's up 12%. If you look at the year over year month to date ADV, it's up 36%, doing overall this year about $136,000,000,000 a day. The U. S. Treasury business, I'd say doing quite well.

Speaker 12

In terms of new protocols, we're very pleased with the growth of RV trading, The relative value trading that I've talked about on the earnings calls before, creating new efficiencies where you have a much lower bid offer Spread in a very liquid market because of implied, that isn't available anywhere else. In terms of the RV trading, we're very pleased with March 29, a record day of more than $4,000,000,000 again on a base ADV this year about $136,000,000,000 a significant positive impact. Last month, dollars 2,500,000,000 ADV. We certainly see greater and greater traction and greater Customer usage of that product on a continuous basis in recent history. So we're very pleased with that.

Speaker 12

In terms of BrokerTec Stream, we're very excited about the current migration of EVS over to Globex and the use of this new and far superior technology. In particular, we're very pleased with the new technology QDM or Quote Driven Market 2.0, it's going to be applied to our EVS direct business, again, in particular, Post migration, we will be and we have announced using that same technology for BrokerTec later this year. So we're very excited to have a state of the art direct streaming technology where we have a unique value proposition to offset, for example, limits across the Central Limit order book and direct streaming, again, something else that no one else can do. In addition to that, on BrokerTec, a couple of other items that U. S.

Speaker 12

Repo for BrokerTec USA. In addition to that, we had an all time record in EU Repo, which is running likewise around 12% growth year over year. So all time records in U. S. Repo, all time records in EU repo and strong growth in U.

Speaker 12

S. On the run treasuries. The last thing I'll mention in the repo side is we have spoken before about how we have built a new offering. We call it BrokerTecquote, which is helping to electronify the dealer to customer business in the repo market across the globe. That business likewise doing very well.

Speaker 12

We had a record month recently of more than $17,000,000,000 a day, and we do what we call a term adjustment. So in other words, the dealer to customer repos tend to go on for several days and the term adjustment well over $200,000,000,000 a day. So significant positive progress on the BrokerTec business.

Speaker 2

Thanks, Sean.

Speaker 4

Thank you.

Operator

We will take our next question from Michael Cyprys from Morgan Stanley. Please go

Speaker 14

Hi, good morning. Thanks for fitting me in here. Just a question on M and A. I'd just be curious to hear your latest thinking on the M and A front. The industry has consolidated over the past decade.

Speaker 14

So I'd just be curious to hear your perspective on what's left at this point in terms of opportunity on the M and A front for CME And how much time are you spending on this today versus the past few years?

Speaker 2

Yes, Michael, it's Terry Duffy. Obviously, M and A is always Something that people want to look at, you don't want to be dismissive of potential opportunities that could benefit your shareholders And obviously your user base to create more efficiencies. You are correct though in your opening statement where you said a lot of it has consolidated And the vertical silos that we have seen around the world already. So the question will be what do you see outside of that? And I think that people are looking Multiple different directions of how they can create efficiencies in the businesses.

Speaker 2

One of the reasons I was so passionate with my team About doing the Google transaction that allowed us to have the greatest technology in the world as we implement new products coming across, which might Create opportunities that we don't even know today or tomorrow as it relates to M and A. So I think that's how people are going to be looking at it. You're correct though the landscape has shrunk over the last And the deals that we all used to talk about 10, 12 years ago are pretty much wrapped up. But we continue to look at it to see how It will benefit CME, but I think again, the technology that we have, I can't emphasize that enough is really important for us as we go forward.

Speaker 14

Great. Thank

Speaker 2

you. Thank you.

Operator

We will take our next question from Brian Bedell from Deutsche Bank. Please go

Speaker 10

Great, great. Thanks for taking my follow-up question. Maybe just, you talked about the Google Cloud in terms of The market data and analytics that you're developing, you decided this also in the recent launch of more analytical tools In the earnings commentary. Maybe tough to predict, but is it possible to Try to think about a timeline of revenue contribution from that. And if it's too early, I understand.

Speaker 10

But trying to understand if that's something that Materially impact this year's market data revenue or is that more of like a 23 24 story?

Speaker 2

Yes. Brian, I think it's tough for us to predict that, to be honest with you. I think we had a record quarter in our market data business, which we are Excited about it. As you know, that's been a problem for us over the years and we really got Julie Winkler to her credit. It's gotten that business and growing it exponentially Good job.

Speaker 2

The beauty around the Google transaction is what I said earlier. It just allows us to do so many different things going forward. So I'm really excited by that transaction, whether we can put revenue associated, I think that's really premature. I think as I said, it just opens up so many different opportunities for CME going forward, not just in market data, but many other businesses as we referenced, Julie, do you want to comment any further?

Speaker 8

I'd just add, we've been working over the last couple of years, right, to bring greater commercialization to that business and that I believe is part of What you're seeing in the record results this quarter and this is not just about making sure that our professional Subscribers have access to all of our real time benchmarks, but also understanding what other needs they have and what other data you potentially can create and monetize. And we're also seeing some great growth in our benchmark business. And so what we've been able To do in just 9 months with our term sulfur licensing with now 900 different firms licensed with over 4,000 licenses, that's a new revenue stream for that, that didn't even exist 9 months ago. So extremely focused on Where there are growth opportunities there through CME's trading business, we also can create data opportunities and that's is definitely top of mind with revenue generation in the future.

Speaker 9

Yes. No, that's great color. Thank you.

Speaker 2

Appreciate it.

Operator

As we have no additional questions At this time, I will turn the call back over to management for closing remarks.

Speaker 2

Let me thank you all again for joining us today. We We're quite proud of our quarter. We will continue to work as we go through the balance of the year. So thank you all very much. Stay safe, stay healthy.

Speaker 2

Thank you.

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Earnings Conference Call
CME Group Q1 2022
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