Q3 2019 Earnings Call

Ladies and gentlemen, thank you for holding it will be beginning today's conference and approximately two minutes again, thank you for holding well be beginning today's conference and approximately two minutes.

Good morning. Thank you all for joining us, let's start with the Safe Harbor language and I'll turn it over to Terry job for brief remarks, followed by your question.

Statements made on this call and then the other documents on our web sites that are not historical facts are forward looking statements. These statements are not guarantees of future performance. They involve risks uncertainties assumptions that are difficult to predict.

Therefore, actual outcomes and results may differ materially from what has expressed or implied in any statements or detailed information about factors that may affect our performance can be found in our filings with the FCC, which are on our website also on the last last page of the earnings release, you will find a reconciliation between GAAP and non-GAAP measures.

With that I would like to turn the call over to Terry Thanks, John as John said well. Thank you all for joining us this morning.

Comments will be Bruce a weekend, you're right to your questions. We released our executive commentary this morning, which provided extensive details on the third quarter.

In Q3 average daily volume grew to more than 29 contracts per day up 30% compared to Q3 last year normally in the months, So July and August or slow. So we're pleased with the activity this year.

We delivered record quarterly average daily volume and metals products, which rose 32%.

Average daily volume and interest rates and equities were each up more than 35% our options business continues to perform very well during the third quarter.

Options volume reached 4.1 billion contracts per day or up 32%.

We drove significant growth.

Customers based outside United States during the third quarter volume originating from Asia reached a record levels of 1.2 million contracts per day up 61%.

Volume from European based customers increased by 34% versus Q3 last year and Where's the third best quarter overall with records in metals and equities lastly, the activity from Latin America has accelerated.

We had 150 252000 contracts per day during the quarter the second highest in our history.

We continue to deliver successful new product Rollouts are popular micro EMA knees Eightv was 35% sequentially from Q2 into Q3, we reached a monthly record and our news. So for contract in September was 58000 contracts traded and ideally record in mid September of.

More than 150000 contracts traded.

New products that announced recently include the E mini gas in P.S.G. futures U.S. liquefied natural gas export futures and also we developed a bilateral pricing.

Agreement between CMB and the Shanghai Gold exchange.

Turning to the next integration we're pleased with how it is progressing we've made great progress leveraging the joint sales teams to enable cross selling and to offer the full portfolio products and services. We're also beginning to combine the office space around the world, which should assist with generating revenue synergies at a lower costs.

We remain laser focused on this very strategic transaction and look forward to keeping you updated on our progress with that let me turn the call John to provide you with some additional comments.

Thanks, Terry It was a tremendous quarter revenue reached almost $1.28 billion the highest level. We've seen this year during what is typically a seasonally slow quarter, Gary touched on the strength in our futures and options franchise. We also saw sequential growth in the next business, including it S broker check and try reduce.

During the third quarter, our adjusted expenses, excluding license fees came in at $409 million up slightly from the prior quarter remain highly confident that we will come in between 1.64 at $1.65 billion in adjusted expenses for the year, which we reduced by $10 million last quarter.

One final note.

Earlier this year as proposed federal regulations were released related to the U.S. tax legislation enacted in 2017. These regulations clarified whether reduction would be available related to foreign customers service from our U.S. operations as a result of these regulations and the nearing completion of our 2000.

As an 18 tax returns we've revised our income tax calculations for 2018 in 2019 to reflect the new guidance. We recorded an 89 million dollar tax benefit and the current quarter of this approximately 52 million related to 2018. It was taken out this quarter in adjusted non-GAAP results there.

Remaining $37 million relates to the first three quarters of this year, resulting in adjusted effective tax rate of 20.5% for the quarter.

Adjusted Q3 diluted EPS, including this entry was $1.90. We expect the annual 2019 effective tax rate to be approximately 23.5%.

With that short summary, we'd like to open up the call for your questions based on the number of analysts covering US. Please limit yourself to one question and then feel free to jump back into the queue. Thank you.

Thank you, ladies and gentlemen, if you would like to ask a question. Please signaled by pressing star one on your telephone keypad. If you are using a speaker phone it seems to make sure. Your mute function is turned off to about your signaled to reach our equipment again press star one do ask a question well pause for just elements to allow everyone an opportunity to signal for questions.

And our first question will come from Richard Repetto with Sandler O'neill.

Yes, good morning carried good morning, John .

Well I guess.

Good morning, everybody's asking about the volume picture and I know not to focus on short Todd what do you caught short term things, but you know the volumes have across asset classes. It dropped over the last two and half weeks. So I guess any insight there, but I guess more importantly is the longer term picture if interest rates.

Are you know so much of the you know drives so much of the complex in the transaction revenue Wonder how would you talk to think about the outlook for the interest rate bar in the interest rate transaction revenue.

In a low rate environment.

Going forward as well.

Well richer I'm going to I think the lot of us like that kind of jump in a little bit you snippets of what we think what we got to be careful because as you know, it's very hard for us to predict future volumes of what they may or may not be that being said when you look at the volumes across especially the last period that you referenced last couple of weeks.

They have been across they've been down significantly in the easy apps into cash markets and the equities all across the board you've seen a tightening of volumes going on so it's not just see I may and then when they when it comes to interest rates.

No you look at all that we're at 90% service economy in the United States, 10% manufacturing roughly and there are a lot of different borrowing costs at different levels that I think people continually need to manage that risk and regardless of what they used the fed funds rate or the borrowing rate is by the fed there's a lot of people that don't get that we're going to continually.

Let's do you have people manage risk throughout the curve. So I still think that there is uncertainty as it relates to what those rates are going to be and I I think that the business is that where we know we're set up in a very good position to capture additional volatility. There's no question is undeniable that it has slowed down.

It'll be interesting to see what the chairman.

Paul says coming up so I'll, let Sean the comment more but I would not just try to base a 12 month period on a two week cycle [noise].

Yeah, Hi, Rich this is Sean to again, so for last two weeks I'm certainly the volumes have been lower than they had been the previous couple of months.

But really not a surprise relative to the ebb and flow of economic information end markets. If you go back a month or so ago. The probability of tightening at the fed meeting, which is kind. This week was less than 50% and sorry, excuse me that probably easing the bus and 50%. If you look at the ability to say it's running around.

94%. So the market has gone from a highly uncertain situation relative the F. One team meeting excuse me to a certain situation at least from a market standpoint, when you do that when you remove the uncertainty.

Then the marketplace volumes tend to fall into the volatility tends to fall because marketplace has come to a conclusion.

So so I think that that's a part of the drag in terms of the last couple of weeks, but that's the ebb and flow no doubt there will be high levels of uncertainty it up on C. meetings that are upcoming later this year as well as I'm into next year I'm. It's just a short term event in terms of the volumes themselves as well you still get our volumes Terry I'm into.

Okay that if it gets the largest cts in equities for example, comparable to our products, they're down much more in terms of audience than our products and they're running down around 50% ours are down substantially less than that we continuously look at making sure. There are products are the most attractive of any products available in the marketplace and mark participants come to us.

For for managing their risk. So we're continuously as you know focused on adjusting our products in order to make them more attractive as well as innovating new products.

You know that for example, you will recall.

The minimum price increments in our two year futures in January of this year and those are volumes dropped substantially relative to the rest of the marketplace now versus where they were a year ago. So our two year futures running at around 16% of our rural volumes of our Treasury futures, whereas previously they were running at more like a 12.7%.

So in addition, 150000 contracts coming out of out of the two year notes on the back of that Yeah. We've also seen outside to growth for example, in our 10 year Ultra tenure futures, which you know or new just couple of years ago recently doing 267000 contracts day I'm very excited about so for you've you've heard in terms of innovation.

And or talking about so for in the month of September the silver futures as Terry mentioned earlier had a record day of 152000 contracts.

In a single day, putting that in perspective that 670 billion notional equivalent it's an enormous day for the repo market. The fact that there was volatility in the repo market repo traders now coming to see any can manage their risk recall that we only launched that product in may of the previous year, we now have more than 1.7 trillion.

Non interest in that product. So we're continuously innovating in terms of the micro you many.

Terry mentioned that earlier on the call I'm. We're currently at 565000 contracts 80, the more than 50000 contracts.

Trading I'm, sorry, more than 50000 accounts trading so huge growth in the contract.

Huge number of new participants trading it you haven't straight on that'll also mentioned is 2.65 contracts so far smaller than the minis.

And so very additive to our products or whether it's the the so for a future smothered adjusting existing contracts whether its you know the micro remains were continuously looking I make sure that we've got the absolute most innovative most attractive price possible for our clients.

And we look to grow our complex and any interest rate environment or any market environment enrich. Let me just have one more thing. So I think there's a bit of confusion, sometimes when people look at rates our businesses not driven off of making money off of money. We have a very small part of our business does that does that.

Unlike some other businesses our business is to manage risk for a whole host of interest rate fluctuations that's got to come to our marketplace to mitigate that so I think when we look at rates at the historical low levels that affects people, who are trying to make money off of money versus what we do feel it.

Okay understood very helpful guys. Thank you.

Thank you. Thanks rich. Thank you. Our next question comes from Dan Fannon with Jefferies.

Thanks, Good morning, So Terry you mentioned, the next integration and the.

Potential kind of the meetings and potential revenue synergy opportunity I guess could you be specific about kind of what's happening and the success, you're having or meetings and progress I think at the start it was around some of the intermediary in the banks in Europe and Asia. So I guess, if there could be some more tangible.

Kind of comments around what the progress you're having would be helpful.

Yeah. That's a great question I want to ask Brian to chime in on this the talk little bit more about because even leading this effort along with John So Brian maybe you can chime in little bit. Thank you, Terry where we're not skipping a beat us since our last a chat on our last earnings call in terms of integrating the businesses I think.

Very formidable part of this is the sales effort. So you heard Terry alluded to earlier, how weve really integrated our sales teams.

We're speaking with one voice says were able to go out and engage with our client base and help them drive solutions to meet their risk management needs across both the cash the futures.

As well as the optimization services that we offer and that's resonating very strongly.

What's very exciting for US is the introduction into some other quadrants within the banking community, particularly in the regional banking sector, which is an area that we've not quite have the engagement on the core future side of the business and that's offering up I'm more opportunities again across our entire portfolio.

So we're very excited about how the sales efforts have come together and how we're able to cohesively represent the offerings that we have John .

Thank you Terry I'm Dan.

It's interesting we had to call just yesterday with the sales team I think you'd kind of a tangible example, I try resolve which is I'm working on providing our clients help in terms of the initial margin.

Relations that they're going to have to do about 300 come due.

At this current year and followed by the following year with.

About 700 more clients that between 20 and 21.

We are they were educating all the entire sales team about what this offering is so that our entire salesforce and can help sell that product to all of our clients. So really it's being able to sit down and talk about the entire suite of services as Terry mentioned, we're about managing risk and you know we're able to do.

And sit down and offer them, whether it's the whether it's on the future side, providing risk management through the clearing house or whether it's on the cash side offered risk management on the Oh, you know with our optimization business. So it's really you know it's kind of interesting is a great example, in terms of being on the call and and having.

The then walk through this this campaign that we're working on across the entire Salesforce, Sean Yes, I mean, one specific example would be helpful. So so far I talked to briefly earlier and Terry talked briefly earlier about our great success in terms of silver futures 58000 contracts today in the month of September about 50000 contracts today so far.

This month, you think about the broker tech business due to 260 billion worth of U.S. refill every day. So our broken Tech repo team is on the phone with those repo desk literally every day does the same traders who needed to hedge their risk in so for during the month of September . So it's very easy to have a that that protect team.

Who has the largest yes vertical business that exists I talk to their clients and tell them into our so our futures, which are now I think a very significant success. If you get the silver features today I'm during the month of September we ran at around 83% of the average daily volume and we're currently running 93 or 94% of the open.

The interest of the marketplace. So it's a clear opportunity, where we're already getting those opportunities in the synergies.

Thanks, Dan for your question.

Thank you.

Thank you. Our next question comes from Ben Herbert with Citi.

Hi, good morning.

Turning them.

I was just hoping you could touch on the non U.S. volume strength in the quarter and kind of help us think through.

Organic efforts to expand the quite customer base versus just overall.

Macro and geopolitical uncertainty.

Ben Thank you for that question I'll ask Brian to again address that as you does set up the international business. You know as we noted this is one of our top quarters in terms of producing activity volume and revenue is out of international or international activity grew by 40%.

We're generating from this past quarter 5.3 million contract of our total volume AMEA represented about 34% increase of 3.8 million a day and Asia, which we're very excited about 1.2 million.

Their activity was up about 61% as I've mentioned in past visits with all of you we've really I'm chartered our focus on our country planning so that we can more deeply.

Penetrate the activities across the quadrants within each of these regions and it's definitely resonating with the marketplace I can break it down by product.

And financials equities, I commodities, where that activity is coming up.

And so through those sales efforts as we've indicated having the boots on the ground being able to offer as a broad array of asset classes were continuing to see great growth coming out of all of these regions.

New clients coming into our existing products one of the major drivers for the last quarter was our interest rates and so.

When we talk about you know our two year Treasury I'm complex for example.

There's different segments that are driving that growth I'm coming out of Europe versus coming out of Asia and that goes to the efficacy again of the sophistication of our sales team being able to reach out to those very specific segments and bringing them in to these markets.

It just a.

Talk little bit about the international growth as it relates to the tax.

You know the tax deduction that we're taking really you know the it's another benefit to the strategy we have growing globally.

Our ability to take this tax deduction really is because we've chosen to service our foreign clients from the United States. So to the extent that we're continuing to grow globally in as Brian indicated that you know that growth is faster outside the U.S. needs them within the U.S., we're able to take advantage.

<unk> of you know this the this tax deduction. So you know it's another benefit or you know to growing globally and also you know we're able to as we grow globally, we're able to utilize our systems 24 hours, a day and provide our clients better and better liquidity 24 hours a day so it really.

It's it's able leverage all the infrastructure that we have and really allow us to create that liquidity. So when an event happens anytime day or night, we read the place to manage that risk.

Thanks for your question Ben.

Great. Thank you.

Thank you weren't next question comes from Brian , but dealt with Deutsche Bank.

Great. Thanks for joining folks if I may and link in the the the combination of the sales forces question with with some organic growth initiatives that you've got.

And the question is your outlook of the potential for improving volumes from things like the fast the rules on on MBS hedging.

Traction with your portfolio, we're ready to I guess, how the portfolio margining savings are resonating with clients.

And and also the international traction to linking that together with the combination of sales force can you sort of potentially see sort of you do in an elevated and improvement in volumes from those initiatives combined with the with the now combination of the other two sales forces.

Thanks, Brian Let me turn that the Sean and then Brian can add in little bunch online, but im sorry, Yeah. I mean, if you look at insurance companies. Overall, there has been increased usage of our treasury bond futures in particular over the last couple of years and as you know we've seen great growth in our treasury futures complex and as well or treasury options complex.

In addition to that in terms of the portfolio Margining, we are very excited.

About the a significant increase in uptake.

Over the last year in October we reached a new all time record in terms of portfolio margining sitting market participants 5.7 billion worth of margins that help us to lead to very strong growth as well and ROTC clearing if you look at ROTC clearing volumes. For example, this year overall total volumes across all key.

Currency is no products running about 136 still in a day up 29% from last year. So a very significant increase and again with a very large.

Participants increased number of participants taking greater advantage of portfolio margining on the portfolio Margining front as well, we've recently announced that we are enhancing and enhancing our portfolio portfolio margining efficiencies.

We will be doing that in the month of November .

In terms of that that will make it even more efficient than it is today.

You trade eurodollar futures as they said as a spread excuse me to U.S. dollar interest rate swaps.

So we continuously enhance all of our services, we've enhanced the efficiencies on ODC clearing it is showing through as much greater growth and it takes time for participants to sometimes take advantage of all of the new products and services all the new enhancements that we create but over time they do in.

All of where they are.

I'll just comment from the international perspective capital efficiency is of Paramount importance to our user community, particularly on the banking sector as well as to buy side, our activities throughout EMEA and Asia, particularly looking at the interest rate quiet.

Brent.

We've seen tremendous growth coming out of the banking banking sector as well as hedge funds a lot of this is being driven out of the Singapore, Japan and Australia.

The same thing holds true in terms of on the EMEA side so throughout Europe .

We've seen triple digit growth coming out of the hedge fund community and our rates as and almost triple digit growth coming out of the banks, that's being driven out of the UK. Some some areas the Czech Republic, something very interesting you've heard me talk about the country planning and highlighting.

The Netherlands in Switzerland, those areas right now and number two and three in terms of our drivers of growth I'm coming out of AMEA and again, that's driven out of the interest rate sector.

Okay. Thanks, very much I'll get back into queue for another one.

Thanks, Brian Thanks, Fred.

Thank you for our next question comes from Michael Carrier with Bank of America.

Good morning, guys and thanks for taking the question.

John given some of the near term volume concerns you know yet you know obviously is solid quarter, maybe could you just given an update on how you're thinking about expenses in the near term maybe area as a more flexibility some of the weakness continues and then any investment needs on the horizon. Thanks.

Thanks, Mike.

You know I think you know as we've always talked about there's there's a couple line items that I'm really kind of fluctuate based on our business performance. One of them is obviously, our bonus or bonus fluctuates based on our business performance than our license fees. You really are a you know about three quarters.

As of our license fees are as attributable to the equity complex. So you know sort of staying downturns in the on business performance and in the equities.

You know will will impact our expenses.

As I said in when we had this call in April when we had a bit of a slow period at that point. You know this is Don a lever or that we want to a pull a prematurely. So you know there's always ebbs and flows as we've talked about on this.

Call in terms of a volume so we want to be very careful that we don't you know squeeze too tightly and impact future growth. So we're always.

Very focused on managing the business extremely efficiently.

You know so we are always very careful with every dollar we spend but we don't want to impact a you know future growth by prematurely squeezing even harder you know in terms of a you know in terms of our our go forward investment we're constantly investing in the business.

We're investing right now in the build out of glow backs to migrate off from you know the legacy next infrastructure into our glow backs infrastructure. So we are right now having you know a double carrying costs. A you know as we build out the test environment build out the couple.

Cassidy and capabilities and glow backs, while running your production system for you know for next and then once that ultimately you know.

You know is completed there will be able to decommission. The legacy next infrastructure. So you know we're constantly investing in the business. We're investing in you know providing our customers the best experience.

You know as we move broker tacking MBS onto glow backs, we can capture some of the revenue synergies that we've been talking about a and also mixture that we're constantly give me our clients the very best trading and risk management experience.

Alright, thanks for the color.

Thanks, Mike Thanks Bye bye.

Thank you. Our next question comes from tile boys with KBW.

Hi, good morning.

Maybe just a just one on a this joint recommendation that was written by some large banks and asset managers last week with respect to.

The management standards and one of the suggestions I was in the paper was around skin in the game feels like a topic that that comes up every couple of years here, but and the paper suggested I think ccps should put up 20% the default on that number keeps fluctuating around but.

Can you just talked about can you just talked about the regulators and thinking about this topic and whether or not you think that the regulators have appetite or like how far up on their priority list would be releasing some new CCP management standards.

Oh going forward.

Thanks, Kyle as Terry.

I'm, a little bit and I'll ask Aneel and maybe Brian to comment as well. We are we were a little surprised obviously to see that paper drop the way it did.

Theres a lot of things in there that we've been discussing for a number of years going back probably the 2011 2012.

There were couple new issues in there that.

We had never heard from the the signatories about this before especially on the skin in the game percentages, the where they put it in two different levels. As you know she got me have skin in the game and snail, can explain a better than I, but we are first in the waterfall one of the things about what's going in the game you have to be very very careful from you know, we believe that people who.

To introduce risk to the system should be putting in the money for the system. We are here to manage the risk we don't introduced the risk and so those that are bringing the most at risk you know should be putting in funding for the default. We don't want to have smaller participants that are trying to hedge their crops and do other business throughout the world.

Production be so you know get into a situation where they could get hurt because they are the smaller participants in the bigger ones introduced too much risk to the system, but don't want to put the money up so that that's a bit of a concern for us, but it's also a bit of a moral hazard for a lack of a better term. When you are the first line of defense with a large.

Number of people could you know look at you as a moral hazard knowing full well that you are the first line up defense on a default as the CCP. We don't think that and you know is good for risk management practices. So we don't we don't subscribe to that there was some other provisions in there one on new products that I found very disturbing I think.

When you look at new products, if there's not a new product candidates exchange without some kind of.

Zero in front of it we create liquidity, we nurture it we build it we risk management quite differently. So surprised to see some of the the rhetoric that came out and that paper associated with that the last thing that I'll comment on is as it relates to a boat.

The the participants would have to see if they want to participate once a default happens we're very concerned because of their positions that they could happen to market and then having a vote associated with it we think that can be definitely an inherent conflict of interest for the other participants, which I referenced earlier. Your other question was due the regulators.

I have an appetite to address this it's not for me to speak for the regulators you have to talk to them to decide what their appetite as I have been and communication as Brian and other members of my team working with the commission explaining the ER the issues that I just explained to you or otherwise I witnessed Adam do you right now in this call. So I have discussed.

Everything I've said to you what the regulators and our concerns associated they're up and I think there very well aware of and that's all I can say, but I cannot speak to the regulators.

Thank you.

Oh, Hi, Scott. Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Hello. Good morning, everybody question for you guys around the equity futures business.

Definitely strong traction from some of the new new products.

Can you talk a little bit about a win the incentives are set to expire here and as we sort of think about.

The more normalized capture each of these buckets again kind of holding maybe the mix of volumes constant kinda, where should the catch rate for the equity franchise, what what's the that sort of look like Oh. Once these sort of he remembers go away.

Sure. Thanks, Alex This is John that I'll toss it over to [noise].

Sean Yeah, we've been very very pleased with the performance of the micros far exceeded our expectations. You know in Q2, we had about 8% of the total trading volume was in our equity complex was related to micros, our that increased about.

16% this this quarter so.

What does that mean in terms of their rate per contract.

So that we had about a five cents a downward pressure on our rate for contract related to the micros in in the second quarter and by 10 cents impact this quarter, but the good you know the positive thing is that this is all additive to our revenue.

We don't think that there is any.

Oh, you know any you know cannibalization of our our business. So this is really kind of new on new revenue for us. So very very pleased with a with the performance Sean Yes. The only thing I would add is that.

We did have a very aggressive.

Incentive program initially and that is waning off.

And you know the incentives will the a bit lower starting next month next month.

Even lower than this month, but only a bit lower so.

But we will keep some incentives in place in order to retain the very strong liquidity, so you're seeing a probably now and you'll see in the next quarter.

You know something more like a the RPC or than that obviously that we expect in that product nothing to remind you of in terms of the cannibalization work and again, we believe it it's it's not cannibalization or 50000 accounts as I said earlier trading the product gaps craze 2.65 contracts so much smaller than any many recall.

That's micros or 110th the size. So the average trade is about 25% of any many so so that tells you that this is additional in addition to that on the pricing just as a reminder, that four members. It's four cents a contract. So I mean, they E mini equivalent that's 40 cents versus a rack rate.

For a member and every minute just 35 cents. So a nice premium in addition that for nonmembers, our E mini straight at $1.18 per contract, whereas these are a 20 cents to multiply by 10 Thats $2. So they're also priced at a significant premium on a risk adjusted basis, Yes as Alex This is John so yeah.

Just give you an idea the average RPC for the Minis has gone from about five cents.

To about eight cents.

Currently.

Im sorry enough Minis micros.

Great. Thank you. Thanks.

To your question else [noise].

Thank you. Our next question comes from Ken Worthington with JP Morgan.

Hi, Good morning, and there was a wall Street Journal article out this morning with regard to your dollars in data.

Does quoted the quoting size issue highlighted impact all asset classes or was this just a euro dollar phenomenon and does the data phenomenon have any impact on volumes, if so which direction I couldn't quite tell and if you could could you take a guess on magnitude.

Yeah, Ken Thanks [noise].

We're answering a lot of questions in the press these days.

And the Reticles their written of Doug why on integrating addressed your another I'll address the the messaging program in policy perspective in terms of your you had asked if we.

Have programs in place to address how.

Our users utilize the technology in the access into our call backs platform. We do have a messaging policy that applies to all of our product complexes and its calibrated based upon.

How these markets trade, we are very sophisticated in terms of our understanding of messaging and messaging ratios to two transactions and so it's very transparent policy that we've had in place we did see a a dynamic occur over the course the last few weeks in terms of messaging.

Increasing.

Significantly we got on top of that we addressed our policy we introduced.

And enhancement to the policy dealing with excessive messaging and that has addressed that the conduct that we've seen so we're we're pleased with the actions that we've undertaken to to ensure that you know behavior, that's coming in messaging, that's coming into our system and our infrastructure is appropriate.

For the overall marketplace in general.

Thank you for your question and I think Brian summed it up very very well I couldn't add much more to that but I I cant underscore enough that the policy change that we have made including our marker wrecked division is very important we've talked with the participants in the marketplace. We've addressed these issues they understand our concerns if that doesn't benefit anybody.

By people trying to.

Circumvent with the messaging traffic. So I think that we're in a much better place than we were before I don't believe our procedures are policies in the past for flawed I just think that we you need to amend these things once in awhile and that's exactly what we did so I think thats what the article was reflecting so hopefully that answers your question.

Great. Thank you.

Thanks, Kevin.

Thank you. Our next question comes from Jeremy Campbell with Barclays.

Hey, Thanks, guys.

Actually color earlier around Rich's question around the the absolute level of rates in the Richard volumes, but I'm also getting some more specific questions from accounts are about the impact of.

The fed to open market market bond purchases on Hawaiian volumes in the rates business now I know that the recent kind of caused like you. He has been named a more stabilize in the middle market and there's been there was obviously a lot going on.

Seven to 10 years ago during the initial rounds of Qiwi from a regulatory macro context as well, so Terry and Sean you talked earlier about risk management in the rates business, but.

The current level of Qiwi or if we get like an escalation of queuing than a couple of years. How should we you know one thing about the need for risk management, and acutely driven lower revolve world to maybe what the impact could be on Oh I in volumes and then I guess three if there's any parallels we can draw by looking at what see me. It's kinda prior experience was during prior TKI recycle.

That's great question, Jeremy I want to try and Sean that I'll jump on your stuff, Yes, I think it Jeremy in terms of the heads. Most recent activity is purchased a T cells as wells as entrance into the retail market clearly that is in order to stabilize the amount of liquidity available for overnight borrowing lending you know relative to the.

Jump that that the federal reserve the marketplace.

Experience in September .

So the federal reserve, if you'll recall prior to the financial crisis was very active on a daily basis in the repo market in order to make sure that it had the right level or reserves in order to target. The fed funds rate you do get all of these recent actions in terms of federal reserve entering the overnight repo the term repo and the purchase of T. Bells. This is also they can target the overnight.

Right.

Thats not changing and its it really does not impact the long part of the curve it doesn't impact on anything but their ability to target. The overnight rate. If you think about it with the advent of financial crisis in the huge quantitative easing that they did during the financial crisis.

They grew their balance sheet tremendously.

And a lot of uncertainty from the federal reserve on how to get that overnight rate into the time zone that they want. It. So these are additional tools that are using just to make sure that that overnight rate is about where they want it.

He doesn't change or you know the volatility in the the FOMC in terms of changing their target rate. It doesn't change that whatsoever, which is really what a lot of our products go too.

So I don't see it having a big impact in terms of previous.

Experience.

If you look at yes from the very early.

Part of the financial crisis, and the early part of your in straight policy of volumes were challenged no question, probably no nine to 12 relative to you know the implosion of bank balance sheets. For example, however, if you look at our experience since 2012, even during zero and trade policy. We grew our interest rate business tremendously and I I think.

I can underline tremendously if you look at today for example, we're running and this is statistic you've heard me talk about an earnings calls last for years.

Back in 2012, we were running about 45% to the average daily volume of US Treasury cash market in terms of our Treasury futures today, I'm happy to say, where a new all time record of 121% in terms of Treasury futures relative the cap Treasury bond market. So we we've shown right that we can continue to grow we grew our open interest we grew the number of large open interest holders.

We grew our volumes relative to the underlying cash markets routes or anvil, and and again I think I said earlier my job.

And I know jarred Derrick feels the same way our jobs or grow our complexes in any market environment now through innovation and making our parts more attractive.

All this had a little bit I think Sean summed it up very very well.

You know I think when we look back and Oh, eight or nine and 10, when we were creating and Sean and his team, we're creating new products to mitigate risk and rates a lot of people. So we know what are you doing everybody else up the geopolitical fundamental factors in the marketplace. They waited for that to change for their business to grow that's not what we did so even if you're at all.

Quantitative easing and these rates go into historic lows, we grew the business as Sean pointed out with all the new products. He introduced so I'm quite confident what the trillions of dollars of exposure that's out there and a whole host of different durations associated with lending today that we have to continue the innovate and that's exactly what we did last 10 years.

To give the numbers that Sean just.

Raised a moment ago. So that's the way I look at the next several years, we'll continue to look at what the needs of the market our to mitigate their risk no matter what the price of the fed lending rate will be because we know there's trillions of dollars out there that needs to be managed so I'm I'm I'm quite optimistic about that business yeah. Thank you.

Thank you.

Thank you. Our next question comes from Oh, and Lau with Oppenheimer.

Good morning, and thinking about taking my questions.

So again not just the divestitures of some businesses like on next exchange next Treasury and and so could you. Please size to revenue and expense impact of those spaces for us and do you have any timing of the sale or you are still in the process to look for buyers and Additionally, you also expect.

To realize $30 million expense synergies this year up $5 million, but maintain your run rate at $50 million, what was driving that acceleration off the expense synergies realized sanction. Thank you.

Alright, thanks on all that John glad to address that yeah. Thanks.

Yeah, let's let's talk about kind of the businesses that.

That we've we've acted on a Enzo Enzo closed at the beginning of the of October next exchange and next Treasury, we anticipate closing in the fourth quarter.

Then we have email, which is a platform in Italy that we are winding down so when we look at the forecast for 2020 . The impact on revenue was about 15 million the impact on direct costs were about 25 million. So those are at a four.

Our cash loss of around $10 million. So those are those we've we've all I'm you know we've acted on on all of those businesses.

With regard to the with regard to the synergies Yeah. We did increase our the amount we realize in terms of synergies this year and really it's it's a function of the great work that you know that the management team has done in terms of managing the integration we were able to.

To make some of the office moves faster than we had originally anticipated which allowed us to capture some of those synergies are earlier than we anticipated I'm. So we actually realize more synergies this year and we're well on track for achieving the.

The $50 million run rate synergies by the end of this year and that's net of as I mentioned previously we do have a double Kerry in terms of infrastructure is where we have a the next legacy infrastructure as well as the glow backs infrastructure running in parallel in anticipation of that Mike.

Ration of broker attack and DBS, So you're really as Tony indicated in his prepared remarks were very very pleased with way.

You know the integration has been going and I'm really excited about kind of the future of our business with next.

That's very helpful. Thank you very much.

So things on thank you. Our next question comes from Chris Harris with Wells Fargo.

Thanks, guys.

Can you talk a little bit about your expectations for the next Gen. S platform and then how is this platform different from globex.

Why don't we have a shot and Brian discuss that real quick so I'm sure a very briefly in September we did announce that.

We will be launching over the next 18 months will be migrating clients from the current MBS direct platform to what we call MBS.

QD M 2.0, the primary differences are much much faster speed and much greater bandwidth.

So these platforms, our direct trading platforms between Counterparties.

And so the faster speed the greater bandwidth groups that gives a much more efficient trading at a much lower latency, which is very attractive to market participants getting I'll remind you and so again, that's a rollout over 18 months, it's going to take time, but at the moment of participants are consuming the data over the platform there.

Not actually transacting and they're doing that in order to test the performance of the system before it is used for actual trading and the performance results. So far very pleasing relative to both there and our expectations and the other thing on that platform that we have that you should be well aware of is the analytics.

The allow customers to continuously revised the way they execute their trades and to optimize it for lower cost. So we're very excited about the enhancements that we are making to the B S technologies as both the other technologies that we're that we've inherited from the next doesn't.

Yes.

Brian a major value driver of all of this is moving all of these markets around the globe backs without a doubt and engaging with our client base and the most active users of E. B S.

Theres, a great deal of enthusiasm and the migration to on the call backs platform.

I think it's fair to say that Ah, yes platform.

Was due for.

Some substantial upgrades prior to our acquisition and so the ability now to have the benefits of infrastructure that they're already used to being able to migrate now these markets onto that platform and as we're doing it we're enhancing functional.

Attributes that they need it and wanted for some time.

We're also reducing the complexity in terms of how order messaging comes into the platform and how those orders I received by the matching engine. So its very important for us to be actively engaged with the client base is we're going through this integration process. The feedback that we're getting so far is.

During the positive.

Thank you for your question.

Thank you were next question comes from Brian , but dealt with the Deutsche Bank.

Great. Thanks for taking my follow up just one clarification on the tax free John is that 23.5% is that a good run rate to consider also for 2020 .

Yeah, Great Great question, Brian you know, it's a function of a you know what we think the business is going to be looking like in 2020, but you know really the tax benefit that we're getting.

This quarter, we anticipate that continuing until until 2025, where it gets.

You know decreases by about a third so we're anticipating a tax benefit of 40 between 45 and $50 million per year.

Obviously subject to you know any potential tax law changes is subject to the finalization of the regulations, which we don't anticipate changing so this benefit that we're getting in terms of you know servicing our international customers outside of the U.S. from within the U.S. is an ongoing benefit for us and will provide.

You know the effective tax rate guidance going into Ah Ah you know our fourth quarter call. In February . So you know very very very pleased with our international growth and international expansion our strategy of growing globally. On you know again is benefited through our.

Our tax.

Situation.

Okay. That's helpful. And then maybe if I could just you're in a one aspect of my my first question and that was just the you guys fewer me maybe Sean could comment on this on the Fas the hedge accounting rules and I think Brian you mentioned regional banks are now.

You've been able to penetrate the regional bank, you need to little bit better or would the combined sales force to just I'm thinking about what banks may do in particular now that hedge accounting, it's been relaxed, which I think well out of MBS hedging a more MBS hedging is if I'm right on that.

Yeah, certainly the the action that the FASB has taken has really you know made it you know certainly much more you know easier and efficient from a from a financial reporting perspective.

Two you know for for utilization of our products I think really a you know this is really I think more on the margins than it is a I'm kind of a major driver of activity because at the end of the day, it's really the economic impacts that people are concerned about rather than the financial reporting.

Which does have some impact, but I think it's more on the margins I don't know Sean do you John I don't think I have much to add to that I mean in addition to that Brian its we wouldn't be able to track on what impact that's having very closely.

You know probably a again a small positive marginal benefit.

Great. Thanks very much.

Okay. Thanks, Brian .

Yeah.

Our next question comes from Kyle Boys with KBW.

Hi, Thanks, taking my follow up I'm, just curious if you get if you could give us an update on the net investment income line just the total cash collateral.

Like average in the quarter and your base points that you're generating on that and then if we get another cut.

From the fed AG, how the net fee rate will likely move going forward.

Yeah, Great I'm glad you asked because I I've been studying so [laughter].

So anyway, Kyle so taking a look at the nonoperating a portion of our section you could have our income statement you see that's you know it's gone up about you know a $5 million and really it's a function of a couple of primarily two things. One is we did have a sequential increase of about 2 million dollar.

As related to our cash on deposit at the at the clearing house and that was partially offset by lower returns that we got on those balances and the balances increased about on average the average balances increased about $3.8 billion.

So it went from about on average 25.6 billion in the second quarter, two about 29 billion up 29.5 billion in the third quarter or the amount of return. We got went from about 34 basis points to 32 basis points from Q2 to Q3, so in total.

The sequential increase of about $2 million, a we did have a change in our a in the Mt. We charge for non cash collateral, which isn't the other income section of our I'm sorry. The other revenue section of our income statement and that increase sequentially about $10 million.

So yeah that that's not in the other income section, but up above another other revenue.

The other main driver of the non operating a section of our income statement is lower interest expense, that's down about a $2.3 million and that's really a function of.

That's really a function of lower cat lower balances lower debt balances, we've been focused on paying down our debt. So those are two men two main drivers and the other non operating income section of our income statement I do want to point out we did have a reclass from investment income of about $3 million to equity and not equity earnings.

Nonconsolidated or unconsolidated subsidiaries.

And that is really related to legacy next investments us. So that will now be recorded in a equity earnings and unconsolidated subsidiaries. So those are the main drivers.

That's great. Thank you if I could just one more just on their balance sheet. I think you have about 400 million of CP outstanding right now if I'm calculating that correctly.

Do you anticipate paying down that commercial paper completely by the end of the year or maybe just timing there.

Just trying to get a sense of how much of your cash flow will be available for the.

For the annual variable depends here. Thanks.

Yeah sure Yeah, we don't if we don't give out guidance on that so just to kind of walk down our capital structure or we had about $1.3 billion cash on hand, we're comfortable with the 700 million dollar minimum cash balance risk, we're comfortable with that that level with 1.3 billion cash on hand, we've got.

3.9 billion in total debt of which we have $435 million in commercial paper and we're currently sitting at a 1.2 times debt to EBITDA. So we paid down about a half a billion dollars in debt since the first of the year you know in terms of a when you look at modeling the fourth.

Quarter, you generally a you know we do have one of our larger cash bills. You know obviously, it's subject to business performance in the fourth quarter.

You know, we don't have pension funding as we prefunded data in 2017. So if you look at historical cash trends, we usually have a pension funding, but like I said, we mentioned we pre funded that in 2017. So we will not have won in 2019.

We anticipate a lower than historical tax payments as result of the tax change.

So that'll have a fairly significant impact in terms of the cash flows and then the fourth quarter, which.

We will be a benefit in terms of Ah Ah cash generation in the fourth quarter or we do have a bond interest payment in the fourth quarter and ATP tends to be higher in Q4, and we also have a dividend in in December . So those are some kind of puts and takes to help in terms of modeling the castle and.

Fourth quarter in terms of the actual pay down of the commercial paper, we're not giving any guidance on that.

Okay. Thank you.

Thank you weren't next question comes from Richard Repetto with Sandler O'neill.

Yes, Hi, Karen John just one quick last follow up.

The retail E.

E brokers went to zero commissioned on the equity any T.F. trades, and I and I know the futures trade, there's still a premium.

I guess in retail I think has been a good part of your you know bottomed and you mentioned that before I take it was 10% or somewhere around there, but anyway do you expect to see any impact I know you offer some woody called benefits to futures trading on for that retail it can't you can't get in equities as well so how do you see the balance.

That does zero Commission is impacting your retail side of your business.

Thanks, Rich you know that Brian touch on that and then I'll give a comment.

Thanks, Rich our retail partners continue to look to us for products education sales and our marketing efforts to help them grow and expand their client opportunities. We've developed some very strong partnerships in this regard over the last several years and it's been very fortuitous in terms of a growing segment as you well no.

Our business for US you know they look to us for one liquidity in the products that we offer the margin efficiencies and leverage offered in our futures versus the other alternatives and then or 24 by seven global access to our liquidity that in concert with the education efforts that we've undertaken with them.

Has allowed us to help them our growth.

Their user base significantly in terms of focusing them towards certain asset classes and products.

Through these efforts I'm, particularly through Julie Winkler sales team and her marketing efforts.

We've been very dedicated to our retail growth efforts, we've been successful and generating over 90000, new retail futures traders and this year alone just to break that down a little bit our retail average daily volume today's about 734000 contracts and Q3, which is up 34%.

And I have this we're very excited to say, 49% growth coming out of me and 26% of this is coming out of Asia.

When you look at the product innovation perspective, we rely heavily on on I'm. This group as well in terms of addressing their increased demand for example for the micro you many and the efforts that have come out of that one of our most successful product launches as Sean Antares have outlined and on the education provider.

I need to work very collaboratively and providing education and marketing efforts to grow that knowledge base of our products and our most recent success area. It's been an area of consistent focus for the last two years is in options our options growth through the from this community has been tremendous so when you take a look at the total cost of trade from perspective.

Given all the above that I've just outlined we're very confident in our retail clients in our partner firms and that they'll continue to look to where offerings and rich just add to though I think Brian sums it up quite well, but if you look at what some of the biggest retail brokers are saying that use our products today. They are saying there with some of their most valued CLI.

And so they have today.

I think that that's an important statement that they're making that's not us, making us that that making it I don't want to reference and because normally say their name, but at the same time I don't want.

I would not want to see retail brokers trying to push people on the derivatives or futures that don't have a good understanding of them. That's not what we're all about when we talk about retail we talk about sophisticated participants and I think thats a lot with these a discount brokers have so well continue the educational process working with the retail brokers into our pro.

Got it wrong, but at the same time because their business model may have shifted a little bit on zero commissions, we don't want I'm, just pushing them into our markets others that are not accustomed to.

Got it very very well prepared and Terry and Brian .

[laughter]. Thank you.

Thank you at this time, we have no further questions. So I will turn it back to management for closing comments.

Well. Thank you all very much we look forward to talking to you over the next several weeks then we'll see you next quarter.

A couple of my question. Thank.

Thank you.

Thank you, ladies and gentlemen that concludes the seem to me group third quarter 2019 earnings call. You may disconnect your phone lines and thank you for joining us this morning.