Q1 2021 CME Group Inc Earnings Call
[music].
Good day and welcome to the CME Group first quarter 2021 earnings call. At this time I would like to turn the conference over to John P share. Sir. Please go ahead.
Good morning, and thank you for joining us today I'm going to start with the Safe Harbor language, and then I will turn it over to Terry and John for brief remarks, followed by your questions. Other members of our management team will also participate in the Q&A session statements made on this call and and the other reference documents and our website and not historical facts are forward looking statements the.
Statements are not guarantees of future performance they involve risks uncertainties and assumptions that are difficult to predict.
And for actual outcomes and results may differ materially from what is expressed or implied and any statements.
Information about factors that may affect our performance can be found and the filings with the SEC, which are on our website.
Lastly on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures with that I would like to turn it over to Terry.
Thank you John and thank you all for joining US. This morning, our comments will be brief so we can get to your questions. As we all continue to navigate through the pandemic I Hope you and your families are staying safe and healthy.
And we released our executive summary of this morning, which provided extensive details and the first quarter of 'twenty one.
As John said I have John Sean Dark Chenille, and Julian lengths. There with me. This morning, and we look forward to addressing any questions you have.
We saw solid volume rebound during the first quarter of this year as we averaged 22 million contracts per day that represented our third most active quarter ever.
Following the record activity, we saw in Q1 of 2020 at the start of the pandemic. When we averaged 27 million contracts per day, and importantly, we had a nice rebound from the back half of the year in 2020, we had of 35% sequential increase and average daily volume from Q4 'twenty to Q1 'twenty one also.
Interest rates were up 65 per cent to more than 10 million contracts per day, and Q1 relative to Q4 and in addition, and equities energy and metals were all higher sequentially by approximately 20%.
In terms of products, we had record quarters, and bitcoin futures and so from futures micro E mini NASDAQ and Russell were each up more than 100% and.
Agricultural markets remain active, particularly in the options with more than 60% growth and both corn and soybean options Adv versus Q1 of 'twenty also we continue to see strong non U S customer of volumes originating in Europe, and Asia was approximately 6 million per day.
Day during Q1, 2020, one versus $4 7 million per day for all of 2020.
We are also pleased with the transition of broker tech onto the globex platform for the Treasury curve trades and we did see recent all time record and European repo activity.
The last quarter, I mentioned and the ongoing innovation across our markets and Q1 that continued with Japanese energy futures globally mission offset futures eat their futures micro bitcoin futures lithium and futures Mexican interest rate futures and most recently CME term sulfur also we announced.
The JV with IHS market, which we are excited about.
The main point is that we are constantly finding ways to assist our clients with the world's most diverse product offering across all of the critical and global asset classes with that let me turn the call over to John who will discuss the financial results and I look forward and answering your questions.
Thanks, Terry during the first quarter of CME generated more than 1 billion and $250 million and revenue, reflecting average daily volume of $21 8 million contracts expenses were very carefully managed and out of an adjusted basis were $437 million per the quarter and $372 million excluding license fees.
See me had an adjusted effective tax rate of 23, 6%, which resulted in an adjusted diluted EPS of $1 79.
Capital expenditures for the quarter of approximately $27 million during the first quarter of CME paid out more than one $2 billion to our shareholders and the form of our annual variable dividend of $2 50 per share and our most recent regular dividend of <unk> 19 per share <unk> cash at the end of the first quarter was more than $1 billion.
Our 2020 one guidance remains unchanged. We expect total adjusted operating expenses, excluding license fees to come in at 1 billion and $575 million, we anticipate the spending to be weighted heavier in the second half of the year as the global economy potentially opens.
Continue to expect Capex to come in between 180 and $190 million finally, our tax rate guidance remains between 23.2 and 24, 2%.
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 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 if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off until about your signal to reach of our equipment again. Please press star one to ask a question.
We'll pause for just a moment to allow everyone the opportunity to signal for questions.
Thank you our first question will come from Richard <unk> with Piper Sandler.
Yeah. Good morning, Terry Good morning, John and.
And what I hope everyone and people.
And I hope everyone's doing well and the CME team as.
We see the light at the end of the tunnel here and go but anyway. My question is on the broker Tech migration I know you completed on the E.
And in early February and you know.
John has talked about our you know the different things the relative value trading spread trades.
And as well as like other initiatives, you're going to do I'm just going to see you know we are you know what.
The interest rate outlook is you also said it took like three months the people get really up the speed and you know connect and get used to the date of it and so forth. So I'm just trying to see what could we expect from you know the migration and and the impact on interest rate volumes going forward.
Yeah, Richard and thank you for your question and I'll ask Sean to go ahead and give of responses and of anybody else would like to participate by them, but John why don't you wait and start.
Thanks, very much Terry and thank you rich great question, So so far and things have gone very well if you look at our relative share of the market.
Which is available through certain market sources and it's been on the broker Tech U S. Treasuries, it's been flat between the a and the fourth quarter and the first quarter and.
So we're very pleased with that result, given the challenges as you mentioned the participants adopting to the new platform and.
The addition that we're very excited about the new functionality that we have launched it likewise, just taking time for participants to take advantage of the new functionality.
We did launch now about a month ago, our new RV trading.
The functionality, which I have described before we.
We have we have a handful of market makers, we have about 17 customers and we're submitting orders orders and and getting executed.
And we are executing more of the 2 billion worth of volume, we're doing about 120 billion of a day and we are very excited though a Y because of it is taking time for participants to adopt to it and we have honestly three major I S fees is not yet fully completed their development. So we do expect them to fully complete their develop.
And over the next month or two and when that occurs we expect to get a significant ramp up and volumes and the significant ramp up and activity, but we're very pleased with that in addition to that on the third we're gonna be reducing the minimum price increments on three of our notes that you will recall from previous earnings calls when we when we reduced the.
The minimum price increments of our two year notes are both on the broker tech platform as well as and the tiered out futures on the listed platform and all of that.
Debt increased our overall volumes and our treasury complex and in each case by about three percentage points. So we're excited about both of those developments and things and I think it was very well as Terry mentioned earlier debt debt migration included not just the.
Our U S treasuries, but also our repo business and in particular, we're running all time records for the first quarter was the all time record and our European repo doing almost 300 billion of day. We're also doing about 219 billion of day and our U S. Repo, which is which has also gone very well so in general and I'd say, it's all going very very well and has the effect.
Yeah.
Alright, thanks, guys. Thank you.
Thanks Rich.
Thank you. Our next question comes from Dan Fannon with Jefferies.
Good morning.
My question for John just on the expense outlook, obviously after the first quarter, you're tracking annualized school of well below your guidance you talked about second half spend.
Pick up can you just maybe discuss some of the specifics that you anticipate in terms of either just travel kind of normalization and where what you're spending on and then also remind us where you are.
And the synergies if there were any additional realizations here and the first quarter.
Thanks, Dan and good morning.
We are very effectively managing our expenses here at CME group. If you recall when we got into a 1 billion and $650 million and expenses at the start of 2020. We came in at 15 and 57 guys of 15 75 for this.
You know for this year. So you know very effective expense.
The expense management over the last couple of years. So in terms of what we see obviously this is early and the year were hopeful that we see the economies begin to open up and the back half of the year. So we did expect our built into our plans for that to occur.
We anticipate an additional $20 million compared to last year in terms of spend.
Spending of four four that are for that you know hopeful eventuality. So.
We are we have that going on which is which is kind of of back half of.
<unk> expense our expense expenses and then we also are building out our east Coast data Center and we are working on the migration of.
You know of Ebs onto globex. So those are of a few items that we anticipate incurring additional costs for towards the back half of that year of of this year. So you know from our perspective, we are very focused on managing our expenses, we're going to do everything that we can too.
Keep our expenses down, but we want a balanced and with growing the business. So that's that's the the the mindset that we have debt. We have here. So we've got a couple of opportunities in front of us in terms of getting our sales.
Sales team out there the main clients you know as the economies begin to open and also you know we've got a the EPS migration and our data center, which are our costs of and are more back half loaded and so those are a couple of items secondly in terms of synergy realization and yes. We are we did.
I have synergy realization and the first quarter and we anticipate of our $200 million and run rate synergies by the end of this year, that's an additional $60 million and synergies run rate synergies that we need to achieve and we achieved about two thirds.
Of the that run rate synergies of at the US and of the the first quarter, so well on track to achieving our 200 million dollar expense synergy target.
Okay. Thank you.
Thanks, Dan.
Thank you. Our next question comes from Alex Kramm with UBS.
Yes, Hey, good morning, everyone can you just give us a quick update on what's happening on the retail side of your business I mean, I think it's been a nice growth area. So maybe just give us some of the updated kind of stats, there and and and maybe plans for engaging with that that's the customer sets are more and in terms of new products as well then.
You know and on the equity side, it seems like retail, it's gotten a little bit more tired and the <unk>.
Second quarter. So just wondering if you're seeing the same thing on the futures side as well anything you could point there too in April so far thanks.
Thanks, Alex and I'll, let Julie Winkler comment on the retail side, Chile true. Thanks for the question Alex Yeah, the the retail volume and and revenue in Q1 was certainly quite strong and you know the months of March in particular was the top three all the time revenue month for us and retail behind only March and April of last year, which obviously with it.
And the very historically unprecedented volatility when when we compare Q1 back to Q4, we saw the business up 21% with really all of our regions showing double digit growth, which is really really strong the.
The product gross it did still largely come from equities, but we also saw some nice pick up and FX and act you know more.
More specifically right with the micro E minis and emerging market at facts, and micro FX corn and soybean and it really you know that just speaks to the diversity of our product offering and how appealing that is to our active individual traders. During Q1 of them you know and she kind of expect here with everyone's still more or less.
Ah at home a lot of our outreach and Dan across our digital properties and so we solve or half of million retail traders visit our CME digital properties and that's twice the amount that we had at the same time.
Last year and.
And when we looked at the number of new traders that we were able to add and it was over 50000 during just the first quarter and so that was up another 24% over what we were doing and Q4, which just you know continues to signal there really solid momentum that we've made and as you pointed out and certainly a key part of this business is just.
And the alignment and the partnership with our global distribution partners and their you know a lot of this is around the outreach and product education and the number of active traders that are partners educated on CME products, just in Q1 and the surpassed over one 5 million traders a lot of that outreach certainly going on and <unk>.
APAC, but also in the U S and and I think that's just continuing to add to the momentum and attracting new customers to the business you know of.
A lot of this is still a largely virtual although some in person events are starting as well we had about five in person events and in Q1, so the lesson of 10%, but I think that's another great step to returning to some of that pre tax pre pandemic form of that engagement with our clients. So.
Where we're sort of certainly a very strong quarter and that there is definitely a lot of interest about the upcoming microbitcoin launch that we have coming and Matt and I would just add Alex to what Julien said that you know you referenced the is it the retail trader tired as it relates to equities you know right now we're looking at a very seasonal slow.
Month of April and that's probably what's reflecting on what you're seeing right now and the last couple of weeks, but I think what Julien said is the important part of the Onboarding process, that's going on and all of the retail and others and it's very exciting for the future growth of not only of retail trading, but the entire business. So I wouldn't read too much into the recent couple of weeks.
Thank you and then and did you give the revenue or volume percentage of retail for the quarter, sorry, I don't know if I missed this.
John do you have the in terms of the the retail volume for for the quarter. You know it was about 1.1 million contracts traded the day for retail and.
And it was what was interesting and it was strong across all of our regions right. So if you look at if you look at it sequentially Q4 to Q1 and U S. EMEA, APAC and Latam and Canada were all up double digits sequentially.
Sequentially.
Okay. Thank you.
Thanks, Alan and thanks, Alex.
Okay.
Thank you. Our next question comes from Mike Carrier with Bank of America.
And good morning, and thanks for taking the question.
The overall volumes are strong <unk>, you'll have seen some mix the open interest trends the moderation just wanted to gauge and you're saying.
And why this is happening and you think it's transitory and then what metrics are you watching that provides the confidence in the growth out of it. Thanks a lot.
Okay.
And you want to start with the yeah, it's kind of already a little bit by byproduct, Mike in terms of kind of what those trends are and to be honest. It also depends on when youre looking discreetly. If we just how big of options exploration were going to see some O I roll off but you look at average Oi trends sequentially. Most importantly from Q4 to Q1 on the commodity side, we're seeing a lot of really significant pause.
And the trends indicative of what we're seeing reflected the commercial customer base of for example, and W. T I.
We saw a you know what the overall slowdown and the back half of last year volumes and open interest decrease we saw open interest and got the UCI down on the $1 9 million contracts market and November we've seen that sequentially and build up to close to $2 4 million contracts. We actually just the 254 million contracts with the month ago, which was close to a three year high for us.
And that's reflective of the sequential participation increased participation from commercial customers sequentially. Our W. T. OE volumes were up from Q4 of 'twenty to Q1, 'twenty, one by 40% commercial customers were up 53%. So that open interest and build is reflective of broader participation.
And the commercial customers out of the energy side and not all.
And so add to that though are we set record levels of open interest and both corn and options and soybean options and again, that's driven by the the fastest growing part of our AG business right now which of those commercial customers were up 21% with commercial customers. So that sequential growth off of a record open interest growth of the fastest participation of client.
And being commercial customers and reflective of the increased risk and volatility in that market and it's just reflective of the work that we do to make sure. The CME group is the primary place for price discovery and most important of the risk management for all end user customers across the board and so that's sort of flavor on the commodity side, yeah, and I'll I'll ask Sean to comment as well.
Alex but I think.
Derek touched on a little bit what the options and I think you know you look at where C and musette today versus where it was that just a few years ago with the different options that we have today with the different explorations and not just on a quarterly basis, but the weeklies and things of that nature of you're going to see fluctuations and options Oi, which drives those numbers are quite of lot of up and down but.
The good news about that is it you know of healthy options on futures business helps protect and grow the underlying futures contract and of itself. So I find out of very good sign but the volatility and the O Y definitely goes and association with the new explorations that we have I'll, let Sean comment as it relates to the rates. Thanks.
Thanks, very much Terry so in terms of the rates obviously, the open interest down a bit but we're very excited about the huge growth and in the first quarter over the fourth quarter and in particular of several different records that we had in terms of average daily volumes. So average daily volumes of our three year notes of five year notes or all of her tenure and a third of your bond it was the best quarter ever actually.
For those particular items. In addition to that we saw enormous growth out and our Greens and our blues or a third year of eurodollar futures and our fourth year of Eurodollar futures. So with the advent of rising rates, particularly on long and you know our volumes are following through and as expected and one of the things to keep in mind is the Eva.
And to the extremely challenged environment and the first quarter was in fact and extremely challenging environment. If you look at it from of volatility perspective, and the foreign exchange.
The.
The euro yen and Sterling and you'll get the foreign exchange markets and Euro yen and Sterling.
Ranks and in terms of percentile of volatility is going back to 2007 were 14% five per cent Josephine per cent. So essentially 90 per cent of the time volatility has been higher since 2000, and and seven if you look likewise and our rates of markets that out to the eighth eurodollar future and the first quarter, we were still running at and I'm still.
And just a five per cent ranking and so in other words 95 per cent of the time going back to 2007, both of those have been higher if you go further out the curve, where we saw some increase in volumes and I already spoke about our 12th Eurodollar future. For example was the 34th percentile ranking and our 10 year.
10 year notes were at the 32 per cent. So it's still very low volatility, even though we saw very good volumes, especially further out the curve and the other thing that Mike mentioned you asked previously there was a question previously about retail.
And Julie did mention it but we are excited about our microbitcoin launch, which will be happening next week, a bitcoin you've heard us talk about before.
The but I think of I talked about it somewhat differently just kind of happened the past all the fees that our first quarter of this year of the the revenue was higher than the entirety of last year and it was about four points of $7 million and the first quarter. So.
And he was a positive and for the first time and much stronger than in the past.
With the launch of the new Microbitcoin.
Coins and today, let me talk about the large bitcoin futures that we have it's five bitcoins and the March and requirements run typically more than $105000 per contract. Obviously that is extremely restrictive in terms of the number of participants and the types of participants who can who can be involved and that with the new microbitcoin and it's gonna be.
50 of the size and Microbitcoin future we'll.
Have the approximately 2000 dollar margin. So you can see how that opens up a much wider potential customer base for that product. In addition to that while the notional size of that product is.
150 of the size of the large contract sits at 110th of a bitcoin.
The the rack rate fees are one house.
All of our.
The existing bitcoin futures. So we're looking forward to that launch and the addition that that the fees relative to other exchanges.
And we will be significantly lower even at that even at that the fee rates. So we're looking towards the launch.
Thanks, John Okay, great. Thanks for the thought of.
Thanks, Mike.
Thank you. Our next question comes from Chris Harris with Wells Fargo.
Great. Thanks, guys.
And so it was a good quarter for data revenues.
Can you maybe talk a little bit about what drove the increase and then I believe there was the price increase that went into effect in April so how should we be thinking about the outlook given that price increase.
First of all of jewelry and go ahead and talk about the market data business and then John can talk about the price changes associated with this from Julien.
Sure. Thanks for the question Christy I It was of great quarter from market data revenue and 144 million, we got 10 per cent compared to our first quarter of 2020.
And you know it wasn't a number of factors you know I'd say in addition to kind of that new the structure that we've talked about before on non display data that was implemented and you know this quarter. We also states and data feed pricing adjustments that were implemented in Q2 of last year and said this was the first quarter of that.
You would have seen those increases you know as part of the revenue and in General you know, it's just increased demand across our derived data licenses and historical data as well as there were some higher audit findings and they're kind of like we're continuing to see there is theres just consistency and our display device counts.
And and we believe that that is a result of really better compliance and also reporting of usage by our client base.
And when we you know kind of look not just at that quarter, but the outlook and I think what we're doing is listening to our clients and we're delivering data and and flexible ways, which is really how they want to you know take it in and and use it on there and so whether it's you know the day of feed side of things, whether it's the new Google.
The format and that that we're allowing and getting the data and the cloud all of those adjustments are really just speaking to those broader data trends that aren't really kind of feeding both automated trading as well as clients use of more sophisticated algorithms and you know that that really was the reason for the results you know I'll turn it to John but just.
What we have coming into effect here April 1st is the change to the real time pricing and so that has not been changed since 2018, and we're taking that price per D. C. M from $105 per month per D. C. M 210.
The John Yeah. Thank you, Julie yet and as I mentioned and the last call and we took a very targeted approach to pricing. This.
And this year are we focused on our micro products, we adjusted the member fees all right I'm sorry, the non member fees for for micro and equities, we increase at five cents per screen of five cents per side of micro gold, which we.
<unk> 20 per site and micro silver, which we increased 40 per side those went into effect and February so you'll see a full quarter impact of those of those price changes are beginning in the second quarter of this year.
As Julie mentioned, we also took our pricing on our screens and and our market data business from one of five to 110 and that's the majority of the revenue for market data that comes through on the on on this of real time data, which is which is what.
And we adjusted so.
Targeted approach, we should see full quarter impacts of all of our pricing changes this year starting in the second quarter.
Thanks for your question, Chris I appreciate it.
Thank you. Our next question comes from Alex Blaustein with Goldman Sachs.
Great. Good morning, guys. Thanks for taking the question I was hoping you could spend a couple of minutes on the JV on the on post trade services without of chest market, maybe spend a couple of minutes on kind of strategic and financial implications for CME from this transaction over the next kind of 12 to 24 months. Thanks.
Yeah sure. Thanks, I'll I'll I'll start that off.
And are very excited about the the JV with IHS Markit and you know, we think that it's going to really be impactful to the industry and be a leader in the trade processing and risk mitigation services and it'll provide our clients more efficient access to services and it would be.
A great platform to launch new solutions across a broad set of asset classes, including interest rates FX equity and credit. So you know the.
The largest markets out there and won't be able to service from and O T. C perspective, with the with the JV and what and what's really exciting about the JV is that it's very complementary in terms of and in terms of services that the IHS Markit business provides and see him he's.
<unk> services business provides so you know we're going to have this combined and.
And in terms of the in terms of the business, we anticipate the and getting the approvals you know no no sooner than mid summer, but we are well on our way in terms of getting those approvals.
And so there's no no.
And no issues, thus far in terms of and terms of the combination.
In terms of what this means going forward. This will allow us to innovate and bring to market analytics workflow tools and solutions that allow our clients to manage risk and process much more efficiently. If you think about the data that goes to CME group and the day to that goes to market serve which is IHS markets are busy.
And this very similar data and it'll allow customers to connect two one at the team versus multiple entities as they as they have Oh, you know cross asset class exposures. So very very excited about that and then in terms of financial implications.
Oh, you know what you'll see this quarter is of change in accounting for our for our business, it's going to held for sale accounting. So you'll see on our balance sheet is spelled out and our balance sheet.
And we separate out our assets and liabilities related to two of the IHS or I'm, sorry of the our optimization business and anticipation of the combination so you'll see that and our balance sheet from a financial perspective.
And it's immaterial financial implications for our adjusted earnings on a GAAP basis, Youll see a reduction and our amortization of intangibles, sorry of amortization of intangibles of gone down about $17 million per quarter, and and that is really because we.
And we put on pause any further amortization of intangibles on on these assets. So.
Those of the financial implications, so far and we'll provide more information as we get closer to the combination.
Great. Thank you.
Yeah. Thank you.
Okay.
Thank you. Our next question comes from Ari Ghosh with.
Credit Suisse.
Hey, good morning, everyone. Just a quick one on product development. So again, you're coming off of a few years of robust product development and again until you've seen strong try and adult and with these launches you know what's the if I look at your recent innovation, it's been skewed the round a little more around financing products.
Given the evolving environment, the retail USG global participation etcetera, and you talk about you know and it was the new product focus the CME and wait and see the most opportunity.
And the near to medium term. Thanks, so much.
Okay. Thanks, Harry I'll, let Julia and comment on that on the new products are with her.
Or folks who are working on these and so its really go ahead and I think two of the question Mary I mean, 'twenty 'twenty was certainly a busy year I mean, we introduced over 85, new products and our last year amid the work from home environment and you know I think we continue to be very focused on identifying those new opportunities with our clients and and working and.
Across the organization and having those to market and.
And you know the the first quarter and F 2020 have though was with.
It was quite active I would say and Derek well and jump into across the commodity suite. So you know we had our launch of F. C. D. L Global emissions offset futures, which was extremely well received by our clients of major source of engagement with them and you know one that really is it.
Just I'm going to kick off and a number of other new opportunities of crossed the ESG space and and the voluntary carbon markets. You know we've also been introducing some new Asia focused products and the first quarter, adding a China and ethylene and also the Japanese electricity futures are we just recently.
We introduced our <unk> announced the launch of the Mexican short term interest rate futures.
And you know just this morning talked them sent the really sad about the ESG at 350 futures contract. So you know where we're really focused on where there is you know of specific market needs and you know I think our clients continue to help us lead the lead us to those opportunities and.
And with that maybe I'll, just turn it over to Derek to go a little deeper and commodities yeah. That's a great question and it's one of these things all right and when we launch products, particularly in the emerging E. The renewable side or where we're looking at ESG constraints ease of markets better and the early stages of development. So it's not like putting a weekly Monday exploration route or a weekly Wednesday of operation out or micro.
The contract that instantly throws a bunch of volume out so truly makes the right point, we spent a lot of time working with particularly our commercial customers with the end users that actually have these underlying and physical risks and so I'll just give you a quick overview of some of the things that we'd want and so you really over the last 12 months Julie mentioned the couple that we've launched over the last three months we already.
We have a pretty healthy slate of bio energy products, whether it's the Chicago, New York ethanol contract that we have Rotterdam ethanol to.
Two contracts that we've launched that are going to sound really niche, but it's exactly and the the kind of area of that you're talking about used cooking oil and use of cocoa of methyl ester and these are really really technical products that serve very specific functions inside of the renewable space and something that there's a little more top of mind cobalt and lithium and these are battery metals.
But obviously absolutely imperative for as the EV market grows and the electronic businesses and cars and you're going to carbon neutral world copper is the big part of that that's a huge part of our business right now of the fastest growing part of our metals business, but most importantly building these markets outside of provide risk management solutions for commercial customers.
That need to be able to price and have access to these underlying and physical products that are a part of the future of that we're building. So there are a couple of examples and there that are may be quite quite narrow and you're not going to see those due of 100000 contracts anytime soon but they're serving specific niche. That's what we do we talk to our commercial customers. Our focus is on how to build products.
Suit their needs, we can build up and interests and the commercial customers alongside and the many examples we can go into but I. Appreciate the question, but I assure you of where I spend a lot of time with our global commercial customers building and these products are there and in our investor deck, and we'll make sure that when we put those out we highlight those to show you. The work that we're doing and this environmental space and on behalf of our customers.
And let me just make a commentary of innovation, we've said I've been here of 41 years innovations of the lifeblood of this business as it is every other business and the world that you have to have and so we are constantly looking at bringing out new products. The beauty of what the world that we live and today, we are able to bring out new products, and such and expedited fashion because of technology and with everything else and Florida.
And do well.
And whether it's regulatory approvals and things of that nature, and but what's important here is and Dirk referenced so messenger and products as he referred to them as its timing is very important and so you want to make sure that you have products and your pipeline and then you'll decide how you want to add cost to them and when it's time to promote them and the different fashion. So I do think it's important.
And and dark is right you can get a derivative of the derivative and call it of micro and good interest and volume, but there's some of these other product lines that take some time to.
The nurture and to bring forward, but it's important that you continue to innovate and so that's what we do and the cost associated with it is nowhere near what it used to be you know 10 2030 years ago.
I appreciate all of the color. Thanks, so much.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank.
Alright, great. Thanks, Good morning, folks and could you just touch on the the.
Crypto currency ecosystem of little bit in terms of how you're thinking about the obviously developing you more and more.
And the coin products and especially on the micro side you said your I think you said the the notional is going down to one one and 50 or the emerging requirements going down to 158.
And just if you can comment on first how much demand do you think there will be for that given given obviously, you're reaching down into that lower margin bracket and and and potentially the pick up from Asia on that and then secondarily on the on the risk side in terms of margin and you could you just talk about and how comfortably you are with.
The lower margin limits and as you think about the cryptocurrency trading ecosystem broadly and places where there might be even lower margin requirements do you see any systemic risks and the system.
You know either for bitcoin trading work that could eventually impact CME on the clearing side.
I think it's a really good question, Brian and let me ask Neil the comment on the risk components of it because I know what's the second part of your question, but I do believe it is very relevant as of the growth of any product is to make sure you risk manage of properly. So when you're going into a contract that is margin debt of $100000 of whatever the number is.
The 2000, and you got to say well how are you going to manage that risk. So like somebody else who's the president of our clearinghouse to go out and give you a little flavor.
[noise] flavor of how he's thinking about it right.
Thank you very much Terry.
The important to note that we did not reduce the margin the margin and stopped all over it is actually a and the margin is just the same as the larger contract the <unk>.
Margin as a percentage of the notional so and this case you know all of our initial margin. Currently is at 38 per cent of notional and still the same thing for the smaller sized contract I think what Sean Tully was trying to communicate was the.
The larger contract at a very large knows the notional size.
And it was the very higher entry point for smaller clients, who have smaller hedging needs and so as a result of a smaller contract you know again and it's at 38% margin, but you know in order to get the same exposure you'll have to actually.
Get 50 of those contracts to equate to the larger contract. So you'll end up with the same amount of margin. So there's no difference between the margin of the larger contract and the smaller contract in terms of.
It's relative value to the size of the north pole.
And that's clear, Brian and we won't participate and a race to the bottom on margins on any product, especially crypto currency. So I think that's one thing that's critically important our risk management is one of the hallmarks of the growth of this institution and so it will be very cautious how we do that so you're right. We are going to have participants in here that have a different economic makeup trey.
And these products and the ones that are trading them today because of the value of that doesn't mean that the risk management changes at all and won't be just as stringent as it is as of today, John do you want to comment anymore on the smaller contract.
Hum.
And take you the Terry and see Neal for clarifying when I said I really appreciate it.
We're excited about the launch and.
And you know the other thing every day of the ether. So we do have the features that we recently launched as well of those either features and it was more than a thousand contracts of day and so we continue to see progress of the only thing I'd say is.
You know in terms of the the the bitcoin futures that we have already as long as the the micro the micro E. Minis and we've added you know tens of thousands of new accounts and actually over the last year or more of the 200 thousands of new Tech fifties. So we are penetrating new clients, we're bringing new customers to the exchange and we're very excited.
The new size of this contract and as Terry rightfully said, allowing us to penetrate the different economic base of customers, but the the ratio as Sunil said of margins to the risk is absolutely. The same but we are still very excited about and that does it all of them.
Thanks, John and Brian Melton and gave me some more color of how we're looking at them.
And just.
One angle of that is just the crypto currency trading that's happening outside of the CME and on other platforms or are there any do you view any systemic risks that would potentially impact CME or does your margin and requirements basically you know, they're pretty solid and you wouldn't see any impact whatsoever.
Yeah, I'll, let Sonya comment, but you know I don't know if this is if someone sneezes, we all get sick type of scenario, if that's where you're going but let just let me ask Neal to give a comment as it relates to the risk management of other entities that are trading products and the contagion that could possibly happen at CME group we.
And we don't see any contagion from those they are serving of different client base. They are not regulated and the U S and U S persons cannot trade technique of you cannot trade on those platforms. Our product is completely of regulated here, especially of regulated.
Hum you know and as Terry pointed out we stand by our risk management that is very important to us and we continuously monitor our clearing firms and and we look at contagion risk as well and so again, we don't have a mark the mystery of Mark to market and we have you know margin.
Going back and forth on real time basis, we can do it as a as much as an hourly basis, if need be but we do it twice a day and.
Typical day, and so I'm very comfortable with the way we are managing the risk and that but again. The this is the new asset class, there's a lot of people participating and and all over the World. I think your question is valid, but I like our risk management model and the way we handle our client base.
Thank you so much for such a comprehensive answer.
Thank you.
Thank you. Our next question comes from Kyle Voigt with K B W.
Hi, Good morning, and maybe just a modeling question for John and just just trying to better understand the moving pieces and the decline and the other revenue I think you'd called out claims shifting towards cash collateral I guess can you just remind us what that means from a fee standpoint, so maybe the the current net fees earned on the cash card.
And the net investment income line.
Versus the fee rates on the on the non cash collateral and and other revenue.
And then also if you can just help us understand the size of the the shift and collateral debt of client shifting collateral that's occurred over the past quarter or so.
Sure Kyle Thank you for the question I hope you're doing well.
In terms of the sequential decline and other revenue you know as I mentioned on the last earnings call. There were a couple of items in Q4 of that would not continue and that is driving the majority of the sequential decline we had an annual adjustment based on exchange activity paid by our partner in Brazil for software that we license them there was.
And also a termination fee related to our agreement with the Korean exchange both were booked in Q4 and both agreement the agreements concluded and last quarter.
So those are or are not going for it and I mentioned that at the at the last the last earning call and also.
And there was also a lower custody fees and Q4 versus Q1 and that was about a two and a half million dollars.
And as customers chose to put cash up at the clearing house rather than non cash collateral. So those debt that was those are the the majority of drivers of the sequential decline and other revenue.
In terms of.
In terms of our.
Our of.
Collateral that's put up at the clearing house when you take a look at our at the average collateral of the average cash balances between the fourth quarter of 'twenty and the first quarter of 2021 are the increased from $86 $1 billion and cash put up in the fourth quarter two of $103 5 billion.
<unk> of dollars and cash collateral on average in Q1, So we saw an increase and the amount of cash put up at the clearing house, but we saw a decline and the and the return on those balances and went from of up approximately three basis points down to about two basis points in terms of the.
Return and so when you take a look and our other non operating section of our income statement.
And that those returns were about flat so.
It was about $6 million and the fourth quarter of 'twenty, and it's about $6 $4 million and the first quarter of 'twenty. One so relatively flat so the increase and the non operating section of our income statement really is a reflection of the our equity and unconsolidated subsidiaries.
And that's primarily driven by our joint venture with S&P global and the indexing space. So those are the main those of the main of.
Changes between.
The other revenue and then our other non operating section of our of our income statement. Thanks.
Thanks Kyle.
Sorry, John just on the non cash collateral piece and I'm doing this from minus what the what the net fees are there that you're that you're earning within other revenue.
The theory of it I wouldn't say, it's it's it's five basis points is what we we charge for non cash collateral put up at our and got a clearinghouse.
So you know that you know obviously, what you're seeing now is you know people make a decision in terms of what are what they have on hand and keep it up at the clearing house and they also will then take a look at the returns they can get depending on where the instruments. They can how they can they hold whether it's you know for example.
And as treasuries or whether or not they would we would deposits that at the at the fed and then they would get a sharing of that of those returns and we put up at the fed.
Thank you.
Alright, Thanks, Kevin.
Yeah.
Thank you. Our next question comes from Chris Allen with Compass point.
Good morning, everyone I wanted to follow up on the market data question from earlier and working through the future of about $12 7 million. Your view of about 10% sort of can you give us some granularity and just in terms of the dollar impact from the the higher audit findings and kind of break down the growth of between what's been driven by price increases of.
Versus the organic growth out of you hired a man.
Okay.
I'll I'll take a part of that and then we then I'll turn it over to Julie to talk little bit about kind.
The the the organic part of the the question, but in terms of the audit findings and what we saw from a sequential increase of about $2 million of about $2 $3 million I'm, sorry, and I get that correct $1.2 million in terms of sequential increase and audit findings.
Tween Q4, and Q1 and so when you take a look at the overall increase and.
You know sequential increase and our market data business and went up about about $4 4 million. So about a quarter of that was of that sequential increase was related to increased audit findings. You know, we did put in and impact and you know a a structural change in terms of R. R.
Hum market data business on non display.
The fees and that I want to say it was about a $2 million for this quarter.
In terms of and terms of impact.
And I'll turn it over to Julie for any other color Yeah, I, just think it and as John mentioned those are all right at the additional on the data speed access side of things, that's where we changed the monthly per D. C. N E. Four and users that we're gonna take this mailable feed from the VAT.
So that price increase is the one that went into effect and the second quarter of last year that took you know that increase the fees from $375 a month per D. C M to $500 for real time, and then for the delayed fees and went from $1 75, a month per D. C M to two.
150, So you know from that you know, we're we're we're seeing and you know fees of about 36% error and it's in person and what they were before and then we're also seeing good growth and drive data. So that that's been up another 16% and a lot of that is just you know people are continuing.
And to want to use our data.
And other structured products and the indices that that they create so that is all kind of helped to contribute to that uplift that we talked about the Ma.
Main point being right and that subscriber device count still hold the strong and you know it does not decline and we don't see the attrition and you know that that's the key part because that is the majority of that data revenue.
And as Joe anything of any John.
Go ahead, Chris.
Well, let's see maybe any color just in terms of how much of this is Scott what kind of increase the moment from the absolute numbers from a percentage of changes of year over year.
Sorry can you repeat the yeah, we didn't hear you very well of course, they did you say it one more time.
Yeah I was wondering if you could give any color just in terms of the percentage changes the subscriber count and the year over year basis.
Subscriber of contrary flat, yeah, it's roughly flat.
Chris So I mean, I think what I think what's really you know.
Really good news I think is you know the really the.
The pandemic.
It really showed the importance of our of our data and as we went to this remote working environment and people needed to utilize our data and with so many so much happening and a marketplace.
And that information is and you know very important for them to run their businesses. So you know <unk> been pretty pleased especially you know we've made some some changes to our pricing and and we haven't seen that flow through from a subscriber perspective at this point.
Thank you.
Thanks, Chris.
Thank you. Our next question comes from Ben Herbert with Citi.
Hey, good morning, Thanks for taking the question I was just hoping you could drill down a bit on the continued non U S strength and I know Julie mentioned retail was strong across regions, but anything.
Anything to note, particularly on the large Oh why commercial base and then also maybe against kind of different phases of recovery.
Cross the Globe and lastly, John if you could maybe.
Walk us through how we should be thinking about any RPC impacts from non U S strength. Thank you.
Sure I'll take part of your modular Julie go and comment on the strength of the U S and neither do we.
Eric handler shrunk and jump in and then you can jump and that's true really.
And so on and really the international growth side of this was the second best a record of Adv month, with $6 2 million contracts trading and now being up 33% versus what we saw in the fourth quarter and.
And this was driven you know just from a product side across the number of different areas. We saw interest rates up 17%, we saw equities up 15% energies and.
ASIC class, 20% and and metals, 12%. So those are all of you know clearly strong double digit growth. This.
And this was the interest rates are at the strongest level that we've seen and hence the first quarter of last year from a.
Customer perspective, again, I think growth was generated really across all of the segments. When when we looked at it most of it in more detail and.
And the largest gains though were among our hedge fund clients and also think trading activity and you know that continues to kind of demonstrate that diversity of that client ATB contribution that we saw in Q1 and.
And if we just you know and double click a little bit on Europe, you know that being up 34% and Q1 to $4 3 million contracts and you know there and we saw some strong growth and eurodollar futures Treasury weeklies are across really the whole treasury complex of copper and also of gasoline.
And APAC was a pretty similar story there we saw Adv of one 5 million contracts of that was up 33 per cent major growth again from a product perspective, eurodollars treasuries W. T I copper and and bonds and when we look across all of the international countries. You know the top 20 and all of the top two.
And he had double digit growth, which is phenomenal and you know this is this is where we're continuing to put our assets and our resources to to kind of continue to grow that business and in particular, you know again I think for all of those regions you know the hedge fund and and bank clients were really the the standout customer.
<unk> side of things and share can go into more detail on commodity yeah I'll touch on just maybe the agricultural piece of this because that was really the standout performer that we saw the hidden and some of the the trends we talked about early of Terry touched on some of these trends in terms of the global utilization and the way, we're focusing on global customer basis, No AG shut the showed some significant uptake.
Given the increased tightening stocks globally, particularly for corn and soybeans spa.
Specifically in Asia Pacific, We set a quarterly volume record for agricultural asset class in Asia, Our Asian AG volume was up 57 per cent year on year and as a staggering number but when you look at the continued globalization efforts that we put forward whether it's the electronic trading whether it's the products that we're building out whether it's the growth of our.
The options business, we talked about the record current options and the soybean options open interest remember that the open interest growth generally is reflective of increased participation from commercial participants, we typically see financial players and follow.
As they're following the open interest trends. So we saw record quarter, we saw record individual mom and eggs and the month of January and the continue to see going from strength the strength. There. So the percentage of our business taking place and commodities generally has been and area of growth for us over the last couple of years. This particular quarter. It was the highlight on eggs and that is obvious.
We had a very significant positive impact out of rate per contract and the eggs and I saw we saw a couple of cents of tech and the rate per contract even with the very very strong volumes, both sequentially and year on year, we still were able to.
Grow our rate per contract and I think so I'll turn it over to John for some of the RPC effects, yes.
And when you take a look at the our you know.
The RPC from participants outside the United States, It's certainly higher.
And then within the U S and it's primarily for a couple of reasons one our non U S participants tend to be non AR tends to be on you.
You know a non members of the exchange and they they pay a higher rate per contract because of non members tend to be non members and.
And then secondly, you know the mix of prop.
Products that day and <unk>.
Great also tends to have a higher RPC. So when you look at the volume the volume coming from outside the United States is approximately 29% of our of our total volume and then when you look at the revenue the the electronic trading revenue from.
Outside the United States is about 38%.
So that gives you the idea in terms of what the premium is that debt.
And they that day.
They provide in terms of the RPC.
Thanks, Jeff.
Okay.
Thank you. Our next question comes from Edwin Lu of Oppenheimer.
Hey, good morning. Thank you for taking my questions I wanted to go back to Michael might be clearing futures.
And I'm wondering what has changed since the last earnings call. So that CME has decided to launch of my coffee, calling futures and then eat the futures volume and all the work on high what do you want to see to feel comfortable of launching something like a micro keep the future. Thank you.
And I don't think anything's really changed since our last call I think that we've always looked at the evolution of this product.
And going to.
Trade the go into different participants hands as we talked about earlier. The obviously the massive increase we've seen and the price of the crypto currency you get out of itself.
The lends to a smaller contract for more participants to manage the risk and as we've talked about earlier. So I don't think we really had any change of mine since the last call and it's just part of the natural business decisions that we make here.
Going forward and as it relates to the ether contract.
And that that's a relatively new contract trading Julian when a couple of thousand of day maybe.
2000 of day, and we wont say never too of micro ether contract, but we've got and we're gonna continued to help neurostar contract along and we'll see how it goes so we'll make that decision. When the time is right. If in fact of the time is right, but right now it was an appropriate move for us to work on the micro contract with Bitcoin and we have listed the contract for.
Several years, we've got and opportunity to risk management as we talked earlier, which is critically important to the substitution and so I think that's really the the philosophy as it relates to some of the micros.
Alright, thank you.
Thank you.
Thank you. Our next question comes from Simon Clench with Atlantic Equities.
Hi, Thanks for taking my question sort of later on and the cool.
And I was wondering if we could just go back to them and just help me think about what's going on with some of the trends and RPC and I'm, particularly thinking about the energy side.
In terms of the mix, there and and why the Oxy particular of this this last three months.
Sure.
I'll take that and maybe touched over the.
So Derek to provide some color so in terms of the RPC and energy and we saw it decline a bit from Q4 and it was primarily driven.
By increased volume, we saw a substantial increase and the amount of trading activity between Q4, and Q1 and net that really are the increase of trading activity led to more volume discounting. We also saw a higher proportion of member trading.
<unk>, which also would have a lower RPC and then last what we saw is a really of a tremendous increase and the amount of W. T I trading well, which was up I think sequentially about 37% of.
About 40% I should say and and <unk>.
Net gas, which has a higher RPC was relatively flat. So you know so what that did is that you know head of product mix shift.
Towards the towards W. T I of NAD.
And that gas was a higher proportion of training and Q4 than it was in Q1 because of the W. T. I, a increase in and training and I'll turn over to Dirk for some some additional color yeah, John and if it's the combination of our client product and geographical mix for us we actually saw with the increased the.
Volatility around and the increasing story around me.
Kind of global Super cycle, that's tended the present itself this past quarter more in terms of of the record levels of copper that we're looking at right now and the AG piece of this and we actually saw some sector rotation of some of the financial players out of energy into.
And to copper and ask we've talked about some of those trends and it was a bit of a disappointing gas season for all of US last year. We had a really really act of gas season, we just saw gas kind of disappointed over the last couple of months. So from a proportion of point of view, a lower proportion of total of of gas versus the WTO.
Understood. Thanks.
Just one follow on.
Without question about just going back to expenses again.
And I know that when you originally set your targets for the year, you sort of outlined in terms of the more constructive revenue and Barbara and I was just wondering if you could talk about how.
Given where we are and the first quarter and what we see is that is that what we were talking about in terms of of book constructive revenue environment.
Are you expecting more around it and as.
As we move through the back of the midyear.
Yeah, I think it's more along and obviously, we're very pleased with the the first quarter.
And of the year, you know and that's certainly a and a nice uptick from Q4. So certainly very pleased about it really it's more around the.
And the opening of the economies around the world and getting.
The opportunity to get in front of our clients in person.
You know really as well as what we're thinking about and.
Certainly some early.
Positive signs around that and we do have some of our sales teams meeting with clients and the outdoors and and and and the like but you don't really what we're looking for is is getting more customer events more in person events of more of our.
<unk> team meeting clients around the world. That's that's really what we were referring.
Referring to and that leads to you know additional travel additional you know of marketing events you know the those of the items that we kind of put into our plans for the for the back half of this year and and we're hopeful we're going to see that.
Okay that's useful.
And thank you.
Thank you I'm showing no further questions at this time I would now turn the call back over for closing remarks.
Thank you all very much for joining us today, and taking time out of your busy schedules, we look forward and talking to the next quarter everybody stay safe.
And ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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