Q3 2022 CME Group Inc Earnings Call
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Mhm.
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Yeah, Mike.
Hello, and welcome to see E group's third quarter 2022 earnings call. My name is Sarah and I will be your coordinator for today's event. Please note. This conference is being recorded for the duration of the call. Your lines will be on listen only however, you will have the opportunity to ask questions. This can be done.
By pressing star one on your telephone Keypad Register your question. If you require assistance at any point. Please press star Zero and you will be connected to an operator I will now hand, you over to your host John pace year to begin today's conference. Thank you.
Good morning, and I Hope you all are doing well today I'm going to start with the Safe Harbor language, then I'll turn it over to Terry on team for brief remarks, followed by your question.
Other members of our management team will also participate in the Q&A session.
Statements made on this call and in the other reference documents on our website that are not historical facts are forward looking statements.
They are not guarantees of future performance.
Involve risks uncertainties and assumptions that are difficult to predict therefore actual outcomes and results may differ materially from what is expressed or implied in any statements.
Detailed information about factors that may affect our performance can be found in our 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 measure.
On a personal note.
Today will be my last earnings call as I am retiring after more than 20 years with CME.
My first day on the job was December 24th of 2001 with a plan that senior would go public soon.
And after I joined.
See I mean, ultimately went public in December of 2002.
And it has been an amazing journey, we have created a lot of value for our investors.
I want to thank all of our shareholders and sell side analysts who I've met on this journey.
And I want to thank all my colleagues I've worked with closely with during the last two decades.
In particular, the CFO , Dave Jamie and John .
Most importantly, Jennifer in Georgia, and Susan Jacks, with whom I have worked closely with for many years.
Been instrumental to our success.
Lastly, I'd like to thank Terry for his leadership of the successful journey.
And I are the only ones left.
On the first Sami earnings call in 2003, and it's been a great run with that I will turn it over to Terry.
Thank you all for joining us this morning, I'll, Let me take a quick moment first thank you John on behalf of all of US are an incredible run more than two decades as you said, but.
CME and giving service to the organization and its shareholder relations organization, you have been an instrumental force and our Investor relations and analyst outreach, helping us grow from our early days.
You said as a public company to the leading derivatives marketplace, we have become today.
As a friend and respected colleague so many you've made a significant impact on our business. There is no doubt you'll be missed we wish you nothing but the best for you and your family going forward and again on behalf of everybody at CME and throughout the Investor community. John We thank you very much for your leadership. Thank you. Thank you.
We are leaving the investment community in good hands with the remaining members of the Investor Relations team as John referenced Jennifer Georgia, Susan JAKKS will work side by side with John through his entire career as well as Adam mimic men, who are you'll all get to know someone who recently joined the Investor Relations Department coming.
Over from our strategy Department. So if we look forward to all of you meeting up with Adam We released our executive commentary earlier today, which provided extensive details on the third quarter of 2022, I have John Lynn, Shawn Derik, Sunil and Julie Winkler on the call. This morning, as well as Tim Mccourt, our global head of equity and FX products.
Felt it was important to take some time to not only run through a snapshot of our current business and financial results, but more importantly to expand on why we feel our business is in such a strong position to finish out the year and head into 2023 on a high note.
I will start and then Sean Tim and Derek will provide some thoughts before John finishes up our commentary with details related to our financial results and our JV. Then he will then open that we will open the call for your questions.
Let me start by taking talking about the tremendous amount of uncertainty in the markets today, whether that be uncertainty around the U S. Federal reserve policy varying views about the recession risk with inflation at levels not seen since the 19 eighties or uncertainty around the size and speed of the <unk>.
Wind of the fed's balance sheet.
When there is uncertainty driving activity in our interest rate business.
The impacts Cascade to other asset classes, most prominently in equities as rate changes impact corporate valuations and in foreign exchange with various policies and approaches from central banks around the world.
We're also seeing high level of volatility in the commodities markets, which appear likely to persist given the impact of the Russian invasion in Ukraine, and the resulting disruption.
Affecting both agriculture and energy markets in the region and around the world.
Risk management management is our business.
And we have been and always will be committed to helping our customers manage uncertainty. We do this across our unique breadth of asset classes and our broad range of deeply liquid globally relevant products.
That being said, let me transition into our Q3 performance our performance for Q3 and year to date in 2022 highlights the effectiveness of our risk management solution.
Our volume is up 23% year to date versus the same period last year and up 19% from the same period in 2019 prior.
Prior to the pandemic.
The highest average daily volume quarter and cute in CME group's history. It was Q1 of 2021 risk management, what's critical at the onset of the pandemic.
The first three quarters of this year have been the second third and fourth highest adv quarters in our history.
So far in 2022, our interest rates equities and FX products have hit peak levels of large open interest holders with our interest rate products at an all time high again, just last week, suggesting that this represents a risk on environment.
Additionally, Q3 represented our fifth sequential quarter of double digit year over year growth in total Adv.
The pandemic, becoming part of our lives global economics and market participants that are left to manage not only uncertain market risk, but also potential new risks associated with the pandemic.
We're pleased the nex integration is complete.
Market participants are able to access cash treasuries and cash foreign exchange through one platform complementing our existing futures on treasuries and on foreign exchange.
The breadth of the assets we've built over time combined with the work. We are currently doing a partnership with Google to transform markets.
We will provide us further opportunity to continue our industry, leading innovation going forward and we are 100% focused on growing in the short term while also positioning the business for long term sustained growth.
Now I'll turn it over to Sean and then Tim and Derek to dig into more detail around these themes.
Thanks, Terry with a return of interest rate volatility and central bank activity, we've seen strong year over year growth in our fixed income businesses interest rate futures and options Adv were up 28% in Q3, and we've now delivered six consecutive double digit year over year ADB growth quarters for the asset class.
And as Terry described should continue moving through 2023.
Every <unk> <unk> meeting is in play and with high and uncertain inflation every jobs report and every consumer price index reading is important.
You could see this very clearly with a 34 million contracts trading on a single day on October 13th all lines related to CPI release, and the uncertainty here could remain for years as inflation ratings for rent and shelter tend to lag the real economy by up to 18 months.
These factors have led to significant trading volumes in our short term interest rate complex with volumes up 45% through the first three quarters. During this time, we have progressed the GOR at all or to so for migration with silver futures and options. Both now trading more contracts per day than their eurodollar counterparts.
Reaching a record $5 9 million so for contracts traded on October 13th.
Lastly, our arc endorsed Terminix chauffeur.
Benchmark has already been licensed to over 1700 firms in 83 different countries and has been referenced in over $2 eight trillion of loans and OTC derivatives.
On the long end of the curve, we saw double digit ADR growth in both Q2, and Q3 and Treasury futures and Treasury options has had particular strength was 21% growth in Q3, the tailwind from fed balance sheet reduction and inflation are becoming larger and have the potential to be long lasting.
The huge increase in government debt.
And as Terry mentioned uncertainty in monetary policy, then drives uncertainty in other asset classes.
Turn it over to Tim to speak to this very point.
Thanks, Sean and it's a pleasure to be on the call today.
Allow me to start with the strength of our equity index business, where our deep and liquid markets offer access to the most important global benchmark indices on one platform around the clock.
This strong foundation and positioned us well in 2022 as interest rate expectations have led to equity valuation adjustments and an increased need for risk management.
The first three quarters of this year with the first second and third highest adv quarters on record respectively for overall equity index Adv as well as equity index options Adv.
Year to date through Q3 total Adv has increased 44% in options Adv has increased 74% compared with the same timeframe of last year.
It is important to note that our growth is driven not only by volatility, but also by product innovation.
One of our most successful innovations was the launch of our micro E mini products in 2019, we view the micros as a useful tool to continue to attract new international and U S based customers given the smaller contract size and the lower upfront financial commitment.
Due to the premium price point on a risk equivalent basis, the $3 2 million micro equity contracts that trade per day at the revenue equivalent of approximately 1 million E mini contracts, despite being 110th the notional size.
We've also introduced a suite of products that bring traditional OTC functionality to CME such as basis trade index close adjusted interest rate total return futures sector futures dividend futures equity option block and most recently derived block functionality.
OTC alternative products meet customers need under the Uncleared margin rules, while benefiting from the capital efficiency afforded by our equities franchise.
These premium products command fees of 3% to four times that of standard equity rates and added approximately 160000 contracts per day in the third quarter.
Now I will turn to FX, which has certainly come alive. Following an extended period of historic low volatility with a third quarter FX Adv up 41% year over year.
Similar to equities, we have introduced innovations our FX business during the low volatility volatility period, and we're now harvesting those investments.
We've changed the minimum price increments built out of emerging market currencies introduced OTC alternatives like FX link added EPS cash markets and creative tools and analytics that show the efficiencies of trading FX at CMA. These.
These innovations position us well to continue to benefit from the volatility in the currency markets as the different interest rate approaches of the global central banks continue to flow through to the foreign exchange market <unk>.
Derek will now address the trends in our commodities options and international businesses.
Thanks, Tim while our energy business, which has been impacted by temporary market dislocations with the only asset class that was down in Q3, we like our long term structural positives for our U S energy benchmarks, including Wty crude oil refined products and Henry hub natural gas.
The U S is producing nearly 12 million barrels of oil a day and exporting record levels of crude and refined products. The use of the marginal supplier of crude oil to Europe , and Asia, which positions <unk> on our refined product benchmarks well for the long term beyond the current supply and price dislocations. Similarly, the use of the world's largest producer and XP.
<unk> of natural gas boosted by increasing the <unk> natural gas exports priced off Henry hub futures market.
Additional LNG facilities are coming online in the U S. In the medium term, which further bolsters Henry hub is the benchmark for the global natural gas market for decades to come.
As the market transitions through the short term disruptions caused by the war on Ukraine. We believe that we have the strongest portfolio of risk management tools, and our global energy and environmental products markets, which positions us well to grow this asset class over the long term.
And agricultural products Cme's markets serve as the benchmark for global price discovery in grains, oilseeds livestock dairy and lumber we saw increased customer activity in the third quarter with average daily volume of $1 2 million contracts up 6% year over year with particular strength in options.
<unk> bank customers, our strongest performing client segments this year and our strongest global growth is coming from Latin America.
Turning to metals third quarter average daily volume increased 4% to 498000 contracts led by a 20% growth in September CME group's aluminum futures continue to see strong adoption by both commercial and financial market participants given.
Given the customer growth, we are seeing the adoption of comex aluminum by top metals broker merricks and the success we've had in getting a reference prices to be included and physical procurement contracts from commercial customers. We feel that we are at an inflection point for growth in this important market.
Turning to options, we continue to see options Adv and open interest outpacing futures Terry spoke earlier about the high levels of uncertainty in the world today and options are a powerful tool for helping our global customers to manage risk in that environment and can be a more cost effective means for getting exposure since only the option premium isn't hasn't cleared.
With year to date options Adv up 27% to $4 1 million contracts a day, we are on track to surpass our record year from 2019 of 4 million contracts.
Finally, our international business continues to generate record volumes in the third quarter, we delivered $6 1 million Adv up 21% versus last year.
Just on our strong year to date results. We are on track to deliver another record year with our non U S. Adv through September of $6 5 million contracts compared to a record $5 5 million Adv from last year.
With that I'll turn it over to John .
Thanks, Derek <unk> revenue for the third quarter was approximately $1 billion and $230 million driven by a 26, 1% growth in trading activity.
This was up 10, 6% compared to the third quarter of last year and up nearly 15% when adjusting for the impacts of the formation of <unk>, Our post trade joint venture with S&P Global that we formed in September of last year.
This is our fourth consecutive quarter, when making that adjustment of double digit revenue growth demonstrating the importance of our markets. In these uncertain times market data revenue was again a record during the quarter up 6% compared to a year ago to $154 million, reflecting the strong need for the information of our markets produce <unk>.
Expenses continue to be very carefully managed and on adjusted basis were $441 million for the quarter and $359 million excluding license fees.
Our efforts towards moving to the cloud progressed as expected and we are nearing the completion of the initial foundational work necessary to migrate applications year to date, we spent approximately $21 million in incremental cash costs towards that effort and expect to end the year at approximately $30 million and within our first year guidance for that project.
On a year to date adjusted basis, excluding our Google spend license fees and the impacts of the formation of Australia, our revenues were up 13% and our expenses were only up 3%.
We continue to manage our capital expenditures effectively and with an eye towards our move to the cloud as a result, we are lowering our capex guidance to $100 million for the quarter, our capital expenditures were approximately $20 million.
Our joint ventures, and investments continue to produce meaningful results for CME group year to date on an income on an adjusted basis. These investments have contributed $272 $5 million or close to 10% of our pre tax income. This year. In addition to the earnings they contribute their strategic importance continues to play out.
<unk> joint ventures, capturing synergies through the combination of our post trade businesses without of S&P Global this creates the leader in this space and has the scope and scale for long term growth.
Our S&P Dow Jones indices joint venture has delivered 14% average annual earnings growth since the first full year of inception in 2013 strategically the exclusive rights to the indices that we have secured through our ownership of the joint venture underpins over 40% of the overall futures contracts.
At CME group and creates significant capital efficiencies across our equity complex, making us the global destination for equity futures.
We also benefit from the trading of products licensed by the joint venture to other exchanges and from the continued move from active to passive investing these joint ventures and other investments that we've made continue to position CME, well strategically and financially.
For the quarter <unk> had an adjusted effective tax rate of 23, 4%, which resulted in an adjusted net income of $719 million.
Up 25% from the third quarter last year, and adjusted EPS attributable to common shareholders of $1 98 CMP.
<unk> paid out $2 3 billion of dividends, so far this year and cash at the end of the quarter was approximately $2 2 billion.
In summary, our global benchmarks data innovation investments and strong focus on execution continue to address the needs of our clients and deliver results for our shareholders. Please refer to the last page of our executive commentary for additional financial highlights and details.
Wed 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.
As a reminder, if you will like to ask a question or make a contribution on todays call. Please press star one on your telephone keypad.
Withdraw your question. Please press star two please make sure your line's on mute locally as you will be advised when to ask your question.
The first question comes from the line of Rich Repetto from Piper Sandler. Please go ahead.
Yeah. Good morning, Terry Good morning, John .
And I guess first thing is for John <unk>.
He has been a very thoughtful and unwaveringly committed loyal employee there has been a pleasure to work with them.
However, many years and he is.
Done a great job training, Jennifer and Susan we're excited to work with that with the team going forward as well so congrats John .
Correct.
Terry I guess my question My one question would be the.
The media reported.
I think within the last month or so that you have applied for and SCM license are tied to obtain an SCM license.
Through the key FTC I was just trying to understand what was the purpose of the rationale behind doing that.
Thank you thanks.
Thanks Rich.
Appreciate it here firstly it was at the NFA, we filed the application, adding then will eventually go to the CFT assay to support.
Alright.
Cadence perspective, but.
I think what's important is I never defined how we would ever use an MCM and I think theres been a tremendous amount of speculation about how CME would or would not use an MCM.
I also think it's important to note that I don't know and I don't know anybody that does know what <unk> is going to look like three 510 15 years from now and I just don't know what that's going to look like is it going to look the same as it does today or will look completely different I don't know I don't think its in anyone's best interest to wait to find.
I think you should be going along with that process to see but I want to make sure if something very clear my commitment our commitment at CME to the RCM community as I've said is unwavering and we are going to continue to work to make them better our existing <unk> and our future Mcm's, how we can partner with them and make them better so.
I think thats really important.
And also I know theres been speculation about CME as well.
Looking to get their own MCM because of retail products.
Be very clear about this our existing FCS base and our future FSAM based wherever that may or may not be has plenty of wherewithal to address the retail market for CME group. So that is not not the purpose of doing an MCM.
So I think it's really important that we just clarify a few of these things, but again my position is in the company's position is we want to work with our continuing our existing FCS. We will continue to do so that is the model that we enjoy but we're also not of the mind that we don't think things could potentially changes on the road and we will be preparing so when I say that.
Our cost associated with this FCS so far is about zero. So we have not put any money into this we just filed an application, but we will be watching this space very very carefully and again, we will not ever puts <unk> in a position where it's coming from behind we will always be leading going forward. So.
I, hopefully I answered the questions and more but I really want to make it clear there has been no defined FCS that CME has applied for that is competing with the existing FCS model today I know all the pitfalls that people have talked about what the DSO or things of that nature. Those things can all be worked around if in fact, they need to be worked around but thats not the.
Purpose of our application.
Got it Super helpful, Terry and I will get back in the queue. Thank you. Thanks, Chris.
The next question comes from the line of Dan Fannon from Jefferies. Please go ahead.
Hi, Thanks, Good morning, and congrats John page on your retirement.
My question is for the other John just on expenses.
Obviously, the guidance implies a pretty material step up into the fourth quarter. So could you just.
Talk about what that entails in terms of where what youre spending on and how that ramps and then I know, it's early but just thinking about 2023 and kind of the roll forward of the Google spend and other investment priorities can you talk about.
How to think about.
Our growth in expenses versus what you guys have done historically.
Yes, Thanks, Dan Thanks for the question Pardon me.
Yes, the fourth quarter of this year of the fourth quarter of all years generally speaking in the fourth quarter of this year.
As traditionally the heaviest quarter in terms of expenses and we expected that to occur. This year. There are a number of planned customer events and marketing spend in the fourth quarter and we expect increased in person sales activity, reflecting to the improved reflecting the improved business environment. So if you look at last year and adjust for <unk>.
Australia, you saw about a 10% increase in expenses from Q3 to Q4. This year, it's a little bit heavier between Q3 and Q4. This would imply about a 15% increase and if you look at the expense spend between Q3 and Q4 last year, we did not have.
The improving business environment that we see this year. So we are expecting.
Definitely more increased in person sales activity marketing spend and travel.
That accounts for some of the increase.
That we're seeing this year.
The remainder so so when you take a look at sorry, when you take a look at Q3 to Q4, we expect approximately approximately 70% of the increase to be in the marketing travel and in person events. The remainder of the sequential increase would be related to salary and wages, reflecting variable compensation related to our <unk>.
Companys performance and staffing of key roles and customer facing resources, So last year.
Again, the variable compensation is higher this year than last year and also the number of employees are higher this year than last year, we're expecting to hire more going into the fourth quarter.
We also expect to see increased professional services as we are investing in growth projects, so that kind of accounts for Q.
Q4 growth compared to Q3 and a bit of about the difference between last year and this year.
Our rate as we are early in the process of.
Looking at our budget for next year.
And as you know and as.
The entire team knows the entire group here at CME has done a very effective job over the years of managing our costs and we tend to do the same.
Towards this coming year.
It's a bit too early to give to give guidance and as I said, we are still in the budget building process and that has to be approved by the board.
So we are definitely keeping our eyes on inflationary impacts.
We're looking to mitigate those impacts through process efficiencies, leveraging lower cost locations partnering with vendors and being judicious in hiring.
So.
I think the way to think about 2023 is to think about how we've been managing costs over the last several years, we've done a very effective job of ensuring that we're spending high very efficiently and we will continue to leverage that approach going into next year.
So that's some of the kind of the core business in terms of the Google spend.
In terms of our migration.
We're working through the plan for next year now.
We are as I mentioned in our last.
Yes.
I guess, a couple earnings calls ago.
We're expecting on average to be approximately $30 million in incremental spend over the next four years as we.
Approach the point, where.
Costs will be lower assuming similar volume levels.
<unk>.
I think we'll we're planning on kind of a similar type spend as this year, but there will be a function of how fast we're going to be migrating the applications onto the Google platform. So.
We're pretty we're pleased with where we're at in terms of our yield Google product progress.
About where we expected it would be and as I said in my prepared remarks.
The initial foundation that we needed to create in order to start rolling those apps.
Is.
Is nearing completion so.
We'll be looking to see the ads migrated at a quicker rate going into 2023.
So that's that's the kind of the expense view this so far this year.
Great. Thank you, yes, thanks, Dan.
The next question comes from the line of Alex <unk>.
UBS. Please go ahead.
Yes, Hey, good morning, everyone.
I wanted to talk about the LIBOR sulfur.
Are you at all so far transition now that you have I guess a date in next April to basically shut down the eurodollar, if I understand this correctly.
I want to really understand what that means both from a potential volume and also revenue impact. So can you remind us.
What youre charging for when it comes to sulfur in eurodollar today independently, where there are still certain discounts on non charging and then more importantly, as one contract goes away I assume today Theres a lot of I guess trading or are being between those two products happening. So just wondering if you have an estimate how much that could be today and.
How much of that could potentially go away so.
We were clear about again like a revenue or volume impacts come come April next year.
Thanks.
Got it.
Thanks, Terry and thanks, Alex for the question.
We're very pleased with the progress we've made in the silver transition so for futures traded $2 6 million contracts a day.
In September our <unk>.
So for options traded more than 850 <unk> contracts.
Per day.
So for futures are now trading more than double the volumes of eurodollar futures and so for options are now trading 130% of.
What eurodollar options trade every day.
So for futures now have more than 8 million contracts in open interest are 98, 5% of eurodollar futures.
So for options have reached 15 million contracts open interest or 70% of eurodollar options in terms of RPC as you know in June July and August we executed our silver first for options initiatives, which had very strong support from U S and U K regulators as well as from our customers on the back of.
Of that we've achieved the incredibly strong growth that you've seen.
That program in terms of <unk>, our options was completed at the end of August .
That program had.
First of all fee waivers are all participants for June July and August and secondly, significantly enhanced incentives to create liquidity.
Order to build the same.
Ecosystem and to have as much liquidity and efficiency in that marketplace as the marketplaces enjoyed in eurodollar futures and options. We have now achieved very much of of of what we needed to there and with that as I said, we did remove those fee waivers at the end of August and we did decrease the over.
<unk> incentives to market participants.
As you know incentives are important to ensure that we have liquidity for all participants and our eurodollar futures have had incentives historically and continue to have incentives now. So we do expect that the incentives that are required for eurodollar futures and options will be required in the longer run for sulfur fusion options. We do expect however that we will be able to.
Continued to decrease the incentives the extra incentives above what we've had fewer all our futures and options in the coming months.
So we think we're in a very good place.
We think we're on a very good path we are following our plan.
And overall I think we're in a good place.
Alex Let me just it's Terry Duffy, let me add to what Sean said, because one of the parts of your question that we didn't answer.
Is on the arb between Eurodollars and sulfur you have to remember what Sean said, I've said and others did a year and a half two years ago and subsequently every quarter going forward is that we are at an extreme benefit to have both these contracts listed at CME and we did see a lot of trading going back and forth.
When the two but the objective and the goal was to have that arb and up in the sulfur products, knowing full well that the LIBOR was going to be discontinued. So I think when you look at the Arb you will have to look at it in a <unk>.
Success rate of our being from euro dollars into the sulfur when Sean gave you the statistics, which are now larger than the euro dollar so Sean yeah, I apologize for not answering that part of the question. Thank you Terry so the inter commodity spreads between the two products are running between 250 and 350000 contract today to to to make it perfectly quantitative.
Yes.
So hopefully that gives you a little bit more insight.
All along that was our strategy as the incumbent of the eurodollars as to move it into the sulfur and we successfully did that.
Yes, no that's great great numbers there. Thank you.
Our next question, we have Michael <unk> from Morgan Stanley on the line. Please go ahead.
Oh, Hey, good morning, Thanks for taking the question just wanted to ask about customer collateral just given the movement in interest rates I was hoping you can update us on your latest expectations around the take rates on cash collateral as well as noncash collateral and how you expect those take rates and balances to evolve from here, particularly if we get another seven.
Five basis point hike in November and what you expect to see from customers in terms of shifting back and forth between cash and noncash collateral. Thank you.
Thanks, Michael I'll, let John go ahead, and answer that and I might jump in as well.
Thanks, Thanks, Michael Yes, let's take a look at our collateral earnings in its totality. So first in the non operating section of our income statement. We've got earnings on cash held by clients at the clearinghouse and that was up $14 million sequentially.
Average cash balances were lower by 27 5 billion to $117 5 billion and that was more than offset by higher returns, which were 29 basis points for the quarter, an increase of nine basis points.
The last two rate hikes were passed on to our clients, which helped lessen the reduction in those balances.
So looking and in our other revenue section of our income statement.
<unk> revenue was up $9 million driven primarily by an increase in average noncash collateral balances held by our clients in the clearinghouse and a fee increase on those balances from seven five basis points to seven basis points balances eligibility charge.
<unk> increased from an average of 81 billion in Q2 to 95 billion in Q3.
So we had a sequential increase in noncash collateral earnings of $9 million, which is in the revenue line.
An increase of.
$14 million sequentially on cash.
And that's in the non operating section of our income statement for a total of $23 million sequential increase in earnings on collateral. So let's take a look at what is going on in the fourth quarter. So far.
Average cash balances through October 2024th were $117 8 billion, so roughly flat with the average for Q3.
And we had an ending balance of cash of $110 billion on October 24th.
Noncash collateral, which is subject to fees again, there is in other non cash collateral, which we don't earn fees on but the noncash collateral subject to fees average for October so far through the 24th was $90 3 billion with an ending balance of 95 six.
So that gives you an idea of what happened for.
For the quarter and how we're how those balances are trending for the fourth quarter. So far so in terms of what happens going forward.
There's a number of factors that play into that first is the total amount of collateral that needs to be put up at the clearinghouse, which is subject to the types of trading and the risk management required for that trading so that determines the total size of the amount of collateral that's put up and then clients will have a certain.
An amount of cash and noncash collateral that they need just to run their business. So.
They'll put that up depending on what they have on hand and to the extent they can optimize their portfolio.
They will put up that instrument.
That yields the highest return so look at the amount of cash that the amount of return they can get on casualty put up at the clearinghouse versus other instruments that they could put up at the clearinghouse now what we've done over the last several rate hikes is that we've maintained the minus 25 basis points.
Fred versus what the fed has moved.
And I think that's proven to be effective to maintain.
The balances that we've been able to maintain so far but.
It's really going to be a function of what the what their businesses require and how they optimize their portfolio.
Great. Thank you.
Thank you thanks for the question Mike.
Our next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.
Great. Thanks, Thanks, very much for taking my question maybe.
Just one other clarification on the collateral balances were there other drivers in that non operating income line in the investment income and other nonoperating costs aside from the.
The collateral balances of just one question. The other question if I can sneak one in is on the.
On the RPC trends.
Coming into the.
The fourth quarter, I guess first of all as sort of some of that noise on the RPC on rates from that so for LIBOR transition and you expect that to sort of go away in the fourth quarter or over the next coming months and then it looks like you have pricing power on the micro products as well.
Across that franchise, maybe just some sort of outlook as to how that you think may that may develop coming into 2023.
Okay.
While Brian there's a lot of a lot of questions in there.
So yes.
Let's start out and take a look at the entire non operating section of our of our income statement.
And now we can I think that'll be helpful for.
For that for you to understand with all the moving parts are there so.
If you take a look between Q Q.
Q2 and Q3.
And the non operating section of our income statement you can see that it is a sequential increase of $13 million.
I talked a little bit about the earnings on cash held by our clients that the clearinghouse and that was up $14 million.
We also saw earnings on CME cash and that was up about $8 $6 million.
So that was an increase in earnings.
We did see a slight.
The increase in interest expense that was up about a half a million dollars.
And that was related to.
Our credit that we received last quarter.
Then finally as the earnings in unconsolidated subsidiaries.
I think I think you are.
Again, I kind of highlighted in the in the prepared remarks, we're very pleased with the way our joint ventures and investments have been performing.
This quarter. However, we did see some impacts of onetime items in the joint venture. So <unk>, which is our post trade joint venture with S&P Global was down about $3 million in the S&P Dow Jones sequentially was down about $6 million and Thats because both in Q2 and in Q3 there were.
One time adjustments if you normalize those out.
Earnings on those joint ventures were relatively flat with <unk>.
The earnings on the <unk> joint venture and the 19, 5% to $20 million range and then if you look at the S&P Dow Jones joint venture.
<unk>.
<unk> are roughly in the 61% to 62.
Dollar range so.
In another kind of key point to make there is that.
When you look at the non operating when you look at the S&P Dow Jones joint venture in the equity and unconsolidated subsidiaries lines.
Year to date.
Joint venture when you make the adjustments for the one time items is up about 13% year over year and has had a CAGR of 16% since 2020, so very pleased with how how those are performing.
So that gives you the kind of the breakdown on that part of your question you had a question about the RPC, which I think Sean you kind of hit that the last question do you want to just kind of reemphasize that.
Yes in terms of the RPC as I said, we had market wide fee waivers in June July and August all of those were removed at the end of August . In addition to that we had very significant liquidity incentives.
In June July and August and all of those are gone.
We do have some incentives that are greater than.
The incentives that we've had historically four euro dollar futures and options still in place.
However, we will look to reduce those as we have been I.
I do expect rate are.
A significantly higher RPC for sulfur options for obvious reasons in Q4 again the fee waivers are gone and the additional significant additional liquidity incentives that we had during June July and August are gone.
Those will be positive impacts in Q4.
And then there was a question on I think Brian you had a question on the pricing power for micros for for the microbes, yes, they've been increasing across all the categories.
Wondering if that's sustainable.
Why don't you break down the asset class that you are talking about it when we talk to them about the equities.
Yeah go ahead John .
Yeah sure. So this is this is Tim.
Thanks, Brian when we look at the micro E mini contracts as I said in my opening remarks, they are a premium price to the older sibling E. Mini contract. There are about 110th the size, but they are depending on the index. You are looking at between one fourth to one third the cost.
That is something that is of importance. It's been a good driver of growth both in terms of volume and revenue for US I think one thing that's important to note with respect to the pricing power of micro E minis, not commenting on where that might go in the future is that when we look at it relative value to other product choices in the market despite being at a premium it's still growing faster than the <unk>.
<unk> ETF do you look at the micro S&P E mini contract growth in 2021, that's up about 57% versus last year. When you look at the spy ETF, that's up only a little over 30%. Despite the premium to the E mini contract and the premium to the ETF. It is still a tremendous value to the marketplace as evidenced by.
The premium price of command as well as sustained growth academia and versus comparable product.
Yes.
And just in terms of pricing in general.
As I mentioned from the question that Dan Fannon.
Had we are going through the budget building process right now and this is the time that we take a look at at our pricing. There's a number of factors that go into the pricing decisions.
Including the health of the markets how much other how to.
Now our clients can get exposure in other markets.
<unk> that we've created the liquidity that we've created we've done a I think a tremendous job of developing a lot of value for our clients, but that is in the process.
We normally do every.
Every year about this time, we review our incentive plans is.
Shawn has mentioned and we do that regularly so we will reallocate resources.
In terms of in terms of programs to ensure that we are developing the liquidity and creating value for our clients.
So that process.
<unk> is under way now as we develop the plan for 2023.
Thanks, very much and my congrats to John P. Scherer also.
Thank you.
Thanks.
The next question comes from the line of Kyle Voigt from K B W. Please go ahead.
Hi, Good morning, maybe a question on the growth in Asia extremely strong in the quarter at 41%.
Looks like the growth there has accelerated over the each of the past three quarters.
It looks like a lot of that growth is being driven by equity index and FX. Maybe you can just help us drill in a bit further and provide any more color or help us understand which customer segments. You think are driving that growth or is it.
Asset managers hedge funds retail or other users and is there a way to help investors kind of frame the ultimate size of that opportunity from Asia and how much more runway there is to grow at these levels.
Yes I appreciate the question Yeah International continues to go from strength to strength as I mentioned at the top of the call. We are on track for a pretty significant beat on last year's total non U S volume record. It was $5 5 million last year were averaging $6 five a year this year and as you rightly point out our growth in Asia continues to go from strength to strength in the Q3.
<unk> of this year, we put our sixth consecutive quarter up in fifth third 14th consecutive quarter of growth on the APAC business were up 41% this year, our fastest growing part of our business.
<unk> grew up 14% and Latam grew at about 30%, 31% when you dig into the region as you rightly point out we've seen particular strength.
And growth with our financial products equities fixed income actually Asia Interestingly is our strongest area of growth for our energy business.
Asian Energy business is up 30% year to date this year as well. So it's broad growth equities is a strong driver for us when you look at the individual countries. It is spread.
<unk> across multiple countries. There is no one particular country, that's delivering strongest growth where we've seen particular bright spots is in Korea. Our Korean business. This year is up 45% that has now stepped into our second.
Largest revenue generator for us across all of our non U S jurisdictions that are at a pretty significant climb over the last couple of years other significant growth drivers coming out of Asia is Taiwan is up 53% volumes. This year, India up 65% in the Middle East, primarily United Arab Emirates in Dubai, specifically is showing volume growth of almost 70%.
<unk> growth. So Asia continues to be a strong support area of forest, Julie Winkler and her global sales team are pursuing.
Global sales campaigns for our regional products and bringing in new clients working through our channel partners. Our retail is a big part of that story and the micro story and I said, that's a strong part of the energy growth there as well. So hopefully that gave you some color on what we're seeing and we think that we're probably early innings of the client penetration in Asia as well going forward, it'll Kyle and I know youre the analyst.
Well Derek has now taken over the international business over the last several months. He is restructure of the division.
He has actually been globe trading around and being a customer facing participant as managing team members. So I think thats added allowed to the success of the international businesses putting.
Faced with the name and the name of the face whatever you like to say that it's really really important for us to get back out there. We have been stressing this John reflected some of the costs in our numbers, but we are back in front of clients all over the world and Derek has done a really good job of that and heading up the new international.
Okay, and I think the numbers are reflecting it so thank you for your question.
Yes. Thank you.
Our next question comes from the line of Alex <unk> from Goldman Sachs. Please go ahead.
Great. Good morning. Thanks, Thanks for taking the question I was hoping we could zone in on sort of what are the some of the dynamics in cash fixed income markets. We've seen volumes relatively slow there, especially in light of the volatility we've seen in the marketplace broadly.
<unk> revenue I guess on the kind of former next business have also been trending a little bit slower. So any color you could provide in terms of the look through to clients.
Who is doing better who is doing worse and what do you think ultimately needs to happen to get this market going a little bit more as Q T. The catalyst or as long as well as high as it is there is just muted activity.
John you want to go ahead and address that sure. Thanks very much for the question. Alex If you look our brokerage like U S. Treasury volumes are up 11% year over year year to date, and it's very similar to our.
Treasury futures complex, so broker Tech U S treasuries and Cme's Treasury futures, the most liquid treasury instrument available on the planet.
Our growing similar at similar levels.
If you look at the architect business in a bit more detail U S. Repo was up 21% year over year and European repo is up 17% year over year, So our U S retail business and our European repo business are on track for all time record years.
Some of the initiatives that we have been engaged in relative to the post migration of broker Tech to <unk> have also seen some good success, our RV trading order type achieved a new all time record in the third quarter with $2 1 billion, a day and our cross selling of broker tech into our futures clients working with our CDN S team under.
Julie Winkler.
We've added nine new clients to the architect platform that has never traded on it before and they are currently trading $6 1 billion a day. If you look at the Greenwich Survey Likewise.
You can see our results there, but year over year in September we saw a significant increase in market share relative to the alternative marketplaces in terms of go forward for the Treasury market as we said in our opening remarks.
Inflation, obviously is at the highest level in four years and is very volatile you've also only just begun to see the federal reserve reduced its balance sheet.
Federal Reserve to date has only reduced its balance sheet by about $200 billion. If you look at their their expectations for reduction in balance sheet for next year at $95 billion, a month that would mean more than one trillion in reduction in that fed balance sheet next year relative to the 200 billion that we've seen so far.
So.
In terms of the architect business doing well post migration.
New initiatives getting good traction and we also are investing in further analytics. We're also investing in.
Direct streaming platform leveraging the technology that we built for Evs. So we're using that technology, a second time for a new business.
<unk>.
So overall I think that that the increased the.
The increase deficits of the U S government.
Decreased size of the fed balance sheet and the high level of inflation should be a tailwind for that business for years to come.
For months.
Okay. Thanks.
Thanks Ross.
The next question comes from the line of Gautam Sawant.
Credit Suisse. Please go ahead.
Good morning, and thank you for taking my question I just had two follow ups here. One was just on the commentary around the interest rates complex given the types of trading and risk management strategies Youre seeing right now with the rising short term rates can you speak to the types of trading strategies or changes in client behavior that could.
Translate into activity migrating from the short end of the curve to maybe the medium and longer term products.
Okay.
Yeah sure we've seen far stronger growth in the short and as we mentioned.
With every single fed meeting in play.
We've also seen very strong growth in our so for futures and options at the long end, we have seen double digit growth, although at a slower pace.
We do expect as I said already with the reduction in the size of the fed balance sheet and the expected trillion dollar deficits as far as the eye can see from the congressional budget office.
That did that long and we will have a tailwind for market participants as we move forward.
Okay. Thank you and as a follow up can you just provide an update on the metal complex and if there is an increased willingness to participate from maybe some of the international physical warehouse operators.
Sure. Eric. This is this is Eric good question and we've certainly seen a pretty significant change in what's happening in the industrial metals market post March of this year.
As we've been talking about have been putting significant efforts into providing a robust alternative market in markets like aluminum we've established a great deal of success in the copper markets over the last five years we.
We have seen a significant increase in activity in our aluminum business specifically since March we've seen an influx of new client interest and demand from customers looking to take advantage of what they known as how comex reconcile freight within CME group on the precious metal side and on the copper side.
As I mentioned the top of my call. There was an exciting development announcement yesterday out of London, where <unk>, which is the largest a broker on the SME has announced they will be providing direct market access into comex aluminum products and providing market commentary on a daily basis to expand their customer market reach and access into comex aluminum markets were all.
Also seen more commercial customers.
Right in Comex references for aluminum for their physical procurement, which when youre moving physical benchmark. That's a heavy lift so we're excited to see both on the commercial participants side as well as on the financial participant side, increasing record levels of volume and open interest in commercial participation.
As well as the broker intermediary adoption of Comex based on client demand. So we're here to serve client needs, we're seeing that and our global efforts to procure access into that market. I think has been something we've done a good job over the last few months where point of inflection in this market, but we like where things are positioned.
And where we're going from here thanks Derek.
Thank you for the question.
Thank you.
The next question comes from the line of Owen Lau from Oppenheimer. Please go ahead.
Good morning, and thank you for taking my question.
First of all congrats Sean what do with timing.
So in terms of capital return.
In terms of capital return given the amount of cash you have on your balance sheet.
And also the leverage how do you think about variable dividend this year.
Also for valuation given where your share is trading at compared to historical level.
Or would you think about share buybacks as well thank you.
Yeah.
On our variable im going to let John and Lynn comment a little bit here, but on our variable obviously, we meet with our board and our Finance Committee, we walk through our process and make a determination and we look at obviously certain factors in the market, what we see coming.
So we don't we won't be getting that information coming out the end of the.
The year beginning of next sometime beginning of next year.
Generally generally early December early December Okay. So we got a little time on that one yet so we're not going to commit to where we're at on that yet we are still finalizing that process.
So I guess I would just add that the structure. We have that's been in place for 2012, we've returned over $18 8 billion to shareholders through dividends since that time.
We do like the transparency of the approach and we think it has served us well, but as Terry said.
Let's see is something we review regularly with our Finance Committee of the board and we will continue to do that going forward.
Got it thank you very much thanks Dara.
The next question comes from the line of Chris Allen from Citi. Please go ahead.
Good morning, everyone and congrats Mr. Future Hope you put a lot of golf in the future.
I get to play with you Chris Thank you.
Hopefully no cavities loaded any fires this time.
Yes.
Wanted to ask about.
Maybe getting back to the rates market and revisiting some of the questions already asked.
We're seeing consistent headlines of liquidity issues and U S treasuries.
Seem to be exacerbated by high volatility levels.
And it is a cautious outlook when you talked to.
Layers in the Treasury complex and also the swaption markets for example, moving.
Moving forward. So I'm, just trying to reconcile that with youre seeing or record large open interest holders in rates right. Now are obviously in a very good trajectory and rates.
Maybe help us understand how.
How youre thinking about potential liquidity issues and volatility issues in the cash markets and other OTC markets.
That's impacting you or it's not impacting particularly the treasury complex on the future side moving forward.
Yeah. Thanks for the question, Chris a really good one.
If you look at the 10 year notes.
As of a week ago, we have.
Had the fastest increase in U S 10 year note yields over the previous 12 weeks.
Since 1987.
So the level of volatility and the speed with which rates are trading.
Have not seen.
In more than 35 years.
Given that whenever you have much greater volatility it makes sense for market participants to reduce.
The.
What they are.
Trading right in terms of the size so in terms of prudent risk management for our customers there.
There is a tendency to.
Lower the amount of liquidity that they are willing to give it any individual price level. We are seeing through this very high volatility that every price level is typically trading in our markets even when the markets move quickly. So overall I think the markets are operating very well and something to keep in mind.
Is that as prices move much more quickly top of book tends to be much smaller and that is just a natural reaction to how the market works and again I would say, it's prudent risk management by our customers.
I would also say this it had to be the most telecast liquidity potential drop that we've ever seen when you have the fed raising three quarters of a percent at a clip and also that I'm talking about bring it down to our balance sheet at the exact same time.
Expected liquidity to maybe be a little bit disruptive, but I think they are priced to sean's point price that into their activity. So I think this is different than what we saw in 2018, when they had to step in to add some liquidity. So I think this has been fairly well.
<unk> about what's happening with the liquidity situation and participants have priced it at and so the volatility is going to be there, we know that and we think we benefit from it.
Did you guys thinking about this as kind of a temporary situation that the volatility settled down and be positive catalysts neutral.
I won't speak for sure, but when you referenced some of the numbers that we could go out for years to come we are at 31 trillion on a debt and rising you have a whole host of other issues fundamentally associated with not only with the U S but globally.
We think this is a one and done deal. So this could be around for a while.
Thanks, Chris.
Thanks, Chris.
The next question comes from the line of Ken Worthington from Jpmorgan. Please go ahead.
Hi, Thanks for taking my question.
If we dig into open interest after jumping in February from about $100 million contracts to 110 open interest has been stable at about $50 million of futures at Hawaii, and about $60 million of options at ally.
What is the outlook or what is your outlook for open interest over the next 12 months or so.
Maybe what asset classes do you think might see the best percentage growth from current levels and is it ultimately.
Lower volatility that drives a better oi outlook from here or might it be something else.
I think thats.
No crystal ball here by anybody in the room to make that determination of what it could or could not be it's just like we cannot predict future volumes. We just don't know theres. So many geopolitical factors.
Pandemic factors a whole host of issues that could have a reflection on open interest or not trade could go up with open interest going down the trade could go downward open interest going up who knows what the ultimate is going to look like we do believe that the open interest.
As a function that we keep a very close watch on Julian our team Julie Winkler and her team have an internal tool that helps us give guidance to what we think internally.
Openness is going to look like but again, it's very very difficult to make that prediction and especially on the asset classes. When you look at some of the asset classes. I guess, you would think and fundamentally that the AG should be higher and maybe something else should be lower or of the LNG should be higher than something else should be lower and maybe it's the opposite for that particular time.
People do different things at different times, which is a massive reflection on the open interest each and every day. That's obviously why we publish it so people can see the transparency.
Derek Yes, I think there's probably a bit of a story there relative to the options Ken when you actually look at it across every single asset class now on the financial side, it's been a very strong year up across the board commodities has struggled on the volume side. When you look at the options versus future side of the story here is continue to tell options continued to perform more strongly.
Longer than our futures, our futures year to date across the entire franchise were up 21% options were up 27%. When you dig into the open interest there is even a stronger story, even asset classes in commodities, where futures volumes are down and open interest is down you actually see open interest and volumes in options up for example.
When were seeing energy futures open interest down 24% energy options open interest is up 6%. So every single asset class almost regardless of the volume trajectory. This year has seen open interest gains I think thats reflective of more people using options more broadly as a bigger part of their portfolio management tools and Thats why its important that we.
The deepest most look at electronic markets in every asset class and we're seeing growth in futures and options.
Just be careful don't don't price in that if the options Oi is higher than the futures that has an effect on our business because the futures and options open interest can go back and forth for a whole host of reasons and there is no. One particular reason why there'll be more options growth in futures growth or more futures open interest and options open interest. So please be careful.
To hold to that number of growth options open interest because it goes back and forth.
Great. Thank you very much.
The next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead.
Hey, good morning, everyone. This is Ely from Craig's team. Thanks for taking my question could you discuss the opportunity in front of CME with the mortgage TBA futures.
Definitely a large addressable market, but could you maybe elaborate on the deficiencies with the existing system for hedging.
And then maybe discuss how this new product could potentially address dose. Thanks.
Yes ill, let John go ahead and address that market. Yes. We are as you know we continuously innovate and continuously launch new products that we see client demand for in terms of our TBA futures, we are launching them on November 7th.
The unique value proposition that we offer here is a distribution to our clients that so many of CME group's clients do not have access to the TBA market today.
I want to be able to trade the TBA market. So this will allow us to use our distribution channel to have a much wider audience have access to the marketplace that has liquid access to it today. In addition to that as with any new rates product that we add to our platform.
This will offer unique.
Portfolio Margining, our margin offset.
Opportunity, so youll be able to trade the TBA futures at a spread to our treasury futures.
If you look in the cash market tva's versus cash treasuries as a very commentary so the ability to trade the TBA futures versus <unk> very liquid treasury futures.
Number one and then secondly, the ability to a wider audience ability to trade those spreads last the portfolio margining that you can get between the treasury futures and and the TBA.
<unk> unique value propositions, I don't know im not going to predict I think new product launches are very difficult to predict so I will not predict the impact in addition to that though a couple of other things I would mention as long as you brought it up we're also launching on October 30, <unk> ester futures, so aster as the European short term rate.
Is the European equivalent of sulfur.
There is no significantly successful Esther future on the market.
If you look at.
The foreign exchange cross currency swap market today, it is being quoted.
As a spread between so for an actor.
So we are very excited and we're seeing a lot of demand for <unk> futures. We're very excited about how participants and can use our ester features at a spread to our so our futures in order to managed care short term interest rate risk both in the U S.
And Europe as well as our cross currency.
In addition to that we're seeing very strong demand as I said earlier have a repo business. So.
After rates are used heavily in European repo, we're seeing an all time record year in European repo. So we're also seeing demand for our from our European repo.
Participants last thing I will mention is in terms of portfolio margining.
We will be launching in December of this year portfolio margining between sofa options and interest rate swaps and also treasury options and interest rate swaps for the first time.
We're very excited that in the month of September we offered market participants are new all time record in terms of efficiencies of $8 4 billion a day on average.
And as you can see we are continuously enhancing that offering as we as I just said in December so.
I hope that helps to answer the question.
Thanks for your question John Thank you.
Do we have another question.
The next question comes from the line of Simon Pledge from Atlantic Equities. Please go ahead.
Hi, guys. Thanks for taking my question and I will just say congrats to you John B shares well forward retiring the way to young great.
Great Jonathan.
Hi, Sam.
My question actually is just on the treasury market the cash treasuries market I've been reading about the prospects of the market moving to ultra oil trading and I was just wondering how cme's <unk> is positioned for any kind of transition like that and what the implications are generally speaking for us.
Thank you.
<unk>.
Thank you very much for the question.
Clearly Mr. Gensler has set out several new proposals.
In terms of the U S Treasury market.
Including requirements for certain hedge funds and proprietary trading firms who've gone broker dealers.
For treasury platforms to become full rate ETS compliant.
And most recently.
For significant increases in the requirements to clear U S treasuries.
Many are talking about this as being very similar to the requirements to clear U S swaps.
Sure.
Now.
Almost a decade ago.
So we navigated that at CME group, I think very successfully with <unk>.
We used it in order to build our OTC swaps clearing business and we use it to build unique efficiencies that could not be offered by anyone else as I mentioned earlier in the portfolio margining between swaps and futures.
So we will navigate this similarly, we are all over it we are in close contact with our customers.
We are closely watching the developments in the proposed regulations.
And we will adjust our products and services in order to ensure that.
We provide everything that our clients need in that type of environment.
Great. Thanks, Thanks, very much thanks.
Thanks, Bob.
The next question comes from the line of Andrew Bond from Rosenblatt Securities. Please go ahead.
Hey, good morning, just wanted to follow up on the open interest question, particularly in energy.
Just wanted to see if you could discuss some of the dynamics driving the natural gas market. Currently has over the past few years, we've seen the emergence of Tcf is kind of more of a global benchmark natural gasoline from originally to a globally price commodity.
And we've seen some shift back to the U S dislocations in Europe , and Russia, but CME open interest has remained relatively low. So can you kind of discuss the Henry hub benchmark do you think it becomes somewhat dislocated relative to the international gas market or the other dynamics that are driving this market. Thanks.
Yeah, Great question I appreciate that you've heard us talk about the prominence that physical benchmarks play in global energy markets WTO and Henry hub, specifically when you look at the global trends in the energy markets right now the U S is now the largest producer and exporter of natural gas and that LNG shipment is now becoming more important than ever.
Before rather than pipeline gas coming into Europe from what used to be Russia, Tcf is under pressure to be redefined into something different than pipeline gas because that simply has been cut off.
There's both opportunity and threat in that situation certainly tcf market is trying to figure out what that input is going to be.
Right now we have actually just about three weeks ago launched eight new contracts for.
For two specifically address what is a gap in the European natural gas market to specifically go into a European LNG contract, which is an important contract based in northern Europe . So as TTS no longer can Orion pipeline gas coming in from Russia. We've worked with Platts is a price assessment agent to launch a futures contract that is Europe .
LNG that we think is probably the best opportunity for the market to adopt as LNG is going to be that important source of gas for Europe , taking a step back and look at the longer term picture given the lowest priced gas in the world is coming from the U S were a record export levels and if you look at the as I mentioned at the top of the call.
The pipeline for LNG liquefaction facilities coming out of the U S. Over the next 10 years natural gas is a transition fuel, but its also the energy fuel of the future yourself not just the transition Henry hub is the price marker for LNG cargos coming out of the U S. Increasingly that is becoming the source of <unk>.
Fuel for Asia, and Europe . So Henry hub is at the pivotal center of the natural gas market. We think is a physical marker where LNG cargo shipments are priced off Henry hub that further positions and strengthens Henry hub as the central price market globally for both Europe and Asia. So we like the position, we like the structural growth of physical bench.
<unk> with the U S being the leader of the export of these markets and we think that the.
Long term prospects for Henry hub, and our market, particularly are very well placed for long term strength there.
Okay.
Alright. Thanks.
Okay.
And our last question, we have rich repetto from Piper Sandler on the line. Please go ahead.
Yes. Thank you.
It was already brought up early.
To point out of Florida, John patient service and Thats as golf game was very suspect over the 20 years.
Anyway.
Yes.
We'll leave it at that point.
One last week.
Yes.
Sure.
Well you have more time to work on it like Chris said I do have a serious question, though so.
Been mentioned a number of times about.
Cross margining, and margining efficiencies and I know Terry you've been working on it and there's been a I think there's a leadership change going on in DTC. So I guess, what is the potential or.
To get it.
Increased cross margining efficiencies and the Treasury complex with DTC and.
Is that something that could come on board and just immediately release is capital.
As a benefit to clients.
Yes, rich, let me make a couple of comments about that on the timing and then ill, let Sunil who obviously has been living and breathing. This for several years in his former life and the clearing entity working with DTC and the regulators.
At a point now where I believe sometime early next month, we'll be doing the final filings along with the to the government agencies to submit into the SEC for approval on the cross Margining and then hopefully some.
Sometime thereafter, when the clock is up or in between that we will get it I think we are.
It's been a long process and achieving.
To try to achieve these efficiencies so we feel confident that we're going to get them.
And hopefully we're at the in the ninth inning of getting approval on this but again I don't want to over promise and under deliver on that but I do that is the timeline right now.
The head of DTC here in Chicago.
A new president in about two weeks ago, we had a good meeting.
Talk to the SEC I've talked to others I think we're in a very strong position to get this done.
I'll ask Sunil and give comments as it relates to the offsets for the clients.
Rich.
I'll spend a brief moment on offsets.
We've done cross margining with seven clearing houses, we do that with DTC today as well.
The effort, we're going through right now is to improve the.
Margin in portfolio.
In terms of actual offset it's a function of one's portfolio.
So if it is duration matched tenant basis right. Then the offset is tend to be very high but if it is of a different nature than the offsets are a function of that risk profile. So.
So it's very hard to actually come and give an exact offset number and it's very portfolio dependent having said that the idea here is to give clients who trade both futures.
And.
Cash products, the most capital efficient institution, because they can carry their portfolios.
That's our objective and I think we're on our way to actually deliver that.
Thanks Danielle.
Got it thank you thanks.
Thanks, Rich thanks rich.
As there are no further questions.
The floor back to management for closing remarks, well again, well, thanks, Jon I'm sure again, but.
Thank you all for participating in today's call. We appreciate you taking the time to listen to us and we look forward to talking to you soon will be well.
Okay.
Thank you for joining today's call you may now disconnect. Your lines hosts please stay on the line and await further instruction.