Q4 2022 CME Group Inc Earnings Call
Please standby the conference will begin momentarily we thank you for your patience and ask that you. Please remain on the line. Please standby.
[music].
Greetings and welcome to the C. N E group fourth quarter and year end 2022 earnings call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
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As a reminder, this conference is being recorded Wednesday February eight 2023, I would now like to turn the conference over to Adam Minnick. Please go ahead.
Good morning, and I hope, you're all doing well today, we will be discussing CME group's fourth quarter and full year 2022 financial results I will start with the Safe Harbor language, then I'll turn it over to Terry and team 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 in the other reference documents on our website that are not historical facts are forward looking statements. These statements are not guarantees of future performance.
Risks uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement.
Detailed information about factors that may affect our performance can be found in 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 measures with that I'll turn the call over to Terry. Thank you Adam and thank you all for joining US. This morning, we released our executive commentary earlier today, which provided extensive details on the fourth quarter of 2022, I'm going to start with just a few high.
Level comments regarding the year and then John will summarize our financial results and Linn will speak to our expense guidance for 'twenty. Three in addition to John and Lin as Adam said, we have other members of our management team present to answer questions. After the prepared remarks 2022 was the best year in CME group's history.
With record average daily volume of $23 3 million contracts up 19% from 21.
The growth was led by our financial products, which finished the year up 25% to a record average daily volume of $19 5 million contracts options average daily volume across all asset classes also set a record with Adv up 4.1 million contracts up 23%.
Versus last year, and finally, our non U S. Adv increased to a record $6 3 million contracts.
We're out 2022, we continued our efforts under LIBOR transition, we collaborated with the industry and the market participants to shift trading behavior order flow and open interest to sulfur and as a result, we are beginning 2023 with the sulfur futures and options as the leading tools for hedging short term.
<unk> interest rates with deep liquidity supporting a wide range of strategies across the forward curve.
Customer demand continued to drive our industry, leading products and services innovation throughout the year, we enhanced our micro product suite with additional contracts and in aggregate. The micros contributed nearly $3 5 million contracts of Adv to the overall record activity.
During the year, we further invested in our S&P Dow Jones indices joint venture to expand its offerings to include leading fixed income and credit indices are joint ventures and investments continue to produce meaningful results for CME group for 2022 on an adjusted basis.
These investments have contributed nearly $350 million or 9% of our pre tax income.
Wanting to also the fundamental year for our Google partnership we build out the cloud platform has successfully migrated some early application 23 will be about accelerating our application migration, including launching data products in the cloud we have an aggressive migration plan for 'twenty, three and look forward to reporting.
Our accomplishments throughout the year.
Risk management will continue to be critical for our customers as we move into 2023 with higher cost of doing business in general and uncertainty persisting across all of our asset classes. We continue to focus on what we can control innovating and offering market participants meaningful capital and operational.
<unk> across a diverse and global relevant product set so far this year volume is averaging approximately 23 million contracts per day near the average for all of 2022 and our focus will continue to be on growing in the short term I also positioning the business for long term sustained growth with that.
I'll turn it over to John and we look forward to your questions.
Thanks, Terry financially 2022 was a record year for CME group with adjusted double digit revenue and earnings growth driven.
Driven by CME is record annual trading volume 2022 revenues were $5 billion up 11% when adjusting for <unk>, which was launched in September of 2021, our annual adjusted expenses, excluding license fees and before the impacts of our cloud migration, where approximately $1.425 billion, which.
It was $25 million below our annual guidance, our adjusted operating margins for the year expanded to 64, 7% and adjusted net income was up 20%.
For the year, our incremental cash costs associated with our migration to the cloud were $30 million and in line with our expectations.
Turning to the fourth quarter CME generated more than $1 $2 billion in revenue with average daily volume up nearly six 5% compared to the same period last year market data revenue was up nearly 8% from last year to $153 million.
Expenses were very carefully managed on an adjusted basis were $464 million for the quarter and $382 million, excluding license fees and approximately $9 million in cloud migration costs.
<unk> had an adjusted effective tax rate of 22, 8%, which resulted in adjusted net income attributable to CME group of $698 million up 15% from the fourth quarter last year and an adjusted EPS attributable to common shareholders of $1 92 capital.
Capital expenditures for the fourth quarter were approximately $23 million CME declared over $3 billion of dividends during 2022, including the annual variable dividend of $1 6 billion.
And cash at the end of the quarter was approximately $2 8 billion.
Finally in November we announced fee adjustments, which became effective February one.
Assuming similar trading patterns as 2022, the fee adjustments would increase futures and options transaction revenue in the range of 4% to 5%.
In summary, 2022 was the best year financially for CME group, we served our customers well successfully transitioned the majority of our of the volume of our LIBOR based benchmarks to sulfur executed on our cloud migration strategy, all while managing our costs very effectively with that I'll turn over the call to lend to discuss CME.
Group's 2023 guidance.
Thanks, John .
Total adjusted operating expenses, excluding license fees and approximately $1 49 billion for 2023.
Our guidance reflects our continued focus on cost discipline, which will moderate the impact of inflation and a full year of normalized travel and in person events.
In addition to our core expense guidance, we expect the investment related to the Google partnership on our cloud migration to be in the range of $60 million and expense offset by a $20 million decrease in capital expenditures, bringing our incremental net cash cost for the migration to approximately $40 million for the year.
Total capital expenditures net of leasehold improvement allowances are expected to be approximately $100 million and the adjusted effective tax rate should come in between 23 and 24%.
We'd now like to open up the call for your questions. Thank you.
Thank you if you'd like to register a question. Please press the one followed by the four on your telephone you will hear three till I'm proud to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three once again to register for a question. Please press the one followed.
For our first question is coming from the line of Rich Repetto with Piper Sandler. Please go ahead.
Yeah, Good morning, Terry excuse me and John and Lin.
Good morning, Greg.
Good morning, So Mike as we start the year Terry.
I just wanted to get a broad and get your outlook on volumes for 2023.
Given that you are so positive last year and they've certainly came through on financial products, but to see and what your outlook.
And we know no one gets a perfect right all the time, but anyway the outlook on volumes.
Yeah. Thanks, Rich I think last year when I made the comments that I did you know I think we saw the reflection in the marketplace by CME, having the biggest year in its history and I think that's because of what we're setting up whether it was geo politically and just other fundamental.
Factors in the market, whether it's the price of rates at that given time price of certain products. You can see that the market was setting up for what I thought was going to be a pretty explosive year and now it is really difficult to predict future volumes as you know so I'm not going to try I will make the references I said in my prepared remarks that we're starting up in January with Adv roughly around the same as we ended last year at <unk>.
223 million contracts per day, which is a pretty exciting start to the beginning of the year. So it's really hard for me to predict the broader.
The balance of the 11 months, we have left in this year.
People talk about the age of depressions age of a recession.
Recessions you know I think it's the agile uncertainty rich and now the question is what does that trend laid into so I really don't know, but I think again, we are positioned as I said in my prepared remarks that give the offsets that give the efficiencies for people to manage and mitigate that risk.
It's really hard to predict what's going to happen to geopolitical events could be stacking up like we've never seen before the debt ceiling issue I mean, I've, even had internal not I want to say argument's debates with my own team about what does it mean, because we've always had a densely and thats always been satisfied.
We have a congress like I've never seen in our history I'm not so sure it's going to be as easy as people believe that they can negotiate a debt ceiling agreement so there'll be answering in the coming in into Q2 into the summer months to see what happens when that deadline arises where the fed and the treasury can no longer move money around to pay the country's bill. So I think that's got a big factor into it we still have the <unk>.
Grain Russian conflict, which seems to be not going away anytime soon so I still think risk management is going to be at the forefront of people's minds and with the increase in the interest rates that we've seen over the last year. You know people that are managing money, having to reissue new additional debt theyre going to need to lay off that risk and I think our product suite lens to that so I think theres a lot of <unk>.
Testing factors in there what does that translate into volumes a tough one to come up at the end of equation.
Understood. Thank you very much.
Our next question is coming from the line of Dan Fannon with Jefferies. Please go ahead.
Thanks, Good morning wanted to follow up on the pricing the 4% to 5% increase that you mentioned John that I think are above what the typical one to two we've seen from you in the past so maybe a little bit more detail behind that and then also on the non transactional side as you think about maybe market data.
If their pricing potential power there and as you think about this year any changes that we should be aware of.
Sure Dan Thanks for the question let.
Let me back up and take a look at all of the.
Kind of pricing changes and adjustments that are going to impact 2023.
As I indicated in my prepared remarks, the transaction fees.
Had been adjusted and we made adjustments across all of our asset classes in our futures business.
We take a very careful and targeted approach with the objective of not impacting volumes as I said, assuming similar trading patterns as last year. The increase would be in the range of 4% to 5% the impact of financial products and commodity products. Each is an increase of about 4% to 5% so about 4% to 5% to each of our financials.
And to our commodity product sets.
The impact took effect on February one so youll see two thirds of the impact in the first quarter and a full quarter impact in Q2, so thats related to transaction fee. So let's look at market data.
Beginning January <unk>, we had an inflation adjustment to our market data subscriber licenses, which is also in the range of 4% assuming similar conditions as 2022.
In addition, we've seen the completion of our very successful sulfur first for options initiatives that had about an $11 million.
$11 million in fee waivers, which lowered revenue and $8 million of increased license fees in 2022 that we will not have in 2023, so a number of adjustments.
Across our revenue said I think as.
As we look at it we create a lot of value for our customers and felt that this was appropriate to do.
Great and so just to clarify on the market data you had an 11 million dollar drag in revenue last year that should normalize plus a 4% pricing increase.
Sorry that was sulfur that was our sulfur or silver.
So for options are sofa first for options program that impacted our transaction fees that was not included in the in the 4% to 5% that I. Just mentioned this is in addition to that.
Great. Thanks, Dan.
Our next question is coming from the line of Tom <unk> with Credit Suisse. Please go ahead.
Good morning, and thank you for taking my question can you. Please provide us with more details on the nonoperating income outlook and can you also provide a breakout of investment income how cash within the clearinghouse is trending and how you think the pace of clearinghouse cash balances could move over the next 12 months and where does the noncash.
<unk> stand.
Sure Gautam. This is Glenn I'll take that if you look at the non operating income in the quarter. It increased by about $8 million versus the third quarter that was driven partially by an increase in the earnings on the cash at the clearinghouse that was about up about $9 million to $95 million for the quarter, we saw average balances.
Relatively steady at $117 billion.
Largely the same as what we saw last quarter, but we did see an increase in the returns from 29 basis points.
32 bit.
Now we didn't change the keys that we have on the funds held at the fed but what we did do is look to optimize our return using repo markets and on their short term deposit.
We also saw an increase in the returns on our corporate cash that was up $12 million in the quarter the $23 million.
These increases were offset slightly by decreases in the equity and non consolidated theory those were down $13 million in total that included a 4 million one time gain that we saw in Q3 related to the JV.
JV.
In terms of the cash and non cash collateral.
It's difficult to predict obviously, where we will go going forward, but I can provide a little more detail on what we've seen so far in this quarter to date as I mentioned the cash balances were relatively flat at 117 billion in the last two quarters to.
To date through February six our average balances are at $113.
Hey, Julien.
Does that answer your question.
Yes, and just where does the noncash collateral stand.
So we saw in Q3 it was at $94 9 billion.
80, 970 for Q4.
Quarter to date, we are at 91.
And just to go back to the clearinghouse flash for a second I think it's really important to note. We strategically did not increase our keep because we knew there was alternatives that people could park their money and versus keeping it in a clearinghouse that actually bared, a tremendous amount of fruit by us making that decision because we were able to keep.
The numbers that Lynn referenced.
And continued.
Bringing in the additional revenue that we may not have if we tried to increase our taken people would've gone to alternative investments.
Okay.
Got it thank you.
Our next question is coming from the line of Chris Allen with Citigroup. Please go ahead.
Yeah morning, everyone. I was wondering if you could provide a little bit more granularity around market data, maybe just some of the products rolling out.
With the addition of Google.
And this year you saw the year over year increase driven by price increases and new demand and term sofa invoice you, maybe you could give us a little bit of color there.
Just in terms of how that kind of breaks down and just on the <unk>.
Google migration.
Thought that was $30 million in annual costs.
Now you're talking about incremental 60, I'm just wondering what what's the incremental costs are related to just in terms of is it more migration or is it new product developments any color there would be helpful. Thank you.
Yes, Thanks, Chris we're going to let.
Let's talk about costs on the Google migration, because I think I'll make sure. We're all saying the same numbers and then we'll turn it over to Julie to talk about the data here on.
On the cost side in 2022, we did $830 million in expense in line with our guidance again for 2023 is $60 million and expense now we will see an offset to that is we are seeing a decline in the capital expenditure related to capital refreshes that are no longer required that we have about a $20 million.
We are seeing.
But the $60 million and expense guidance will be approximately evenly split between professional fees and technology.
Sure.
Julien Yeah. So market data certainly was had a very strong quarter again.
The fourth quarter, we were up another 8% year on year and the increases is due.
Primarily to both the value of our data the new products that we're introducing and also that the adjustments that we made back in January of 2022.
And we also are seeing throughout the year as favorable performance both in our derived data area at terms. So for licensing as you mentioned and also.
Organic growth across our professional subscriber devices and also non display.
And I'd say, the one thing as it relates back to our new products and also our work with Google as.
We know that we have very valuable data and we know it being able to produce more of that data and analytics and putting that in the cloud is going to be.
Really what our clients are asking for and so we're highly focused on looking at new ways to develop that with our partners that Google We've got a number of deep dives underway with them on the innovation, Brian including things on data analytics, AI ml, new API and also new ways to help our client.
To understand the data and analytics around their risk management.
So we have already begun to launch a number of those products again, it's being rolled out.
Q4.
And some of it is also just our new product operating model that we're using and so we're seeing an increased velocity in which we can put these products out to things like in our data mining area.
Some of our new benchmarks and indices are also being created through that.
And so youll continue to see a rollout of that specifically as it relates back to the term sulfur revenue.
This is.
Our revenue that was.
Part of the licensing effort that the team is underway at the end of Q4, we had over 2000 firms that we have licensed for terms now for product.
And really we're continuing to see increased demand for that that was up over 300, just since the end of Q3, just to kind of show the acceleration of back these are the.
The revenue there is around people being licensed for OTC derivative product usage and also we are finding in a lot of these cases. These are new customers to CME group. So we're also working heavily within our sales organization to convert.
Those users and expose them into our trading business and so with everything within market data. It's what can we do to provide insights to our clients and that will also create supports and synergies with our trading and transaction based.
Hope that helps us.
Thank you.
Thanks, Chris.
Our next question is coming from the line of Alex <unk> with Goldman Sachs. Please go ahead.
Okay.
Hey, good morning. Thanks for the question I was hoping just to follow up on the last discussion around cloud migration and expenses related to that.
As you guys sort of think about the future beyond 2023.
And any incremental cost associated with migration I was hoping you could flesh that out but also bigger picture as you think about <unk> expense flexibility on a go forward basis to what extent do you think.
It's sort of limits your ability to be more flexible like we've seen in the past. Thanks.
Sure. So if we think about.
Migration I think John got into last year was that we would see about four years of incremental cash cost averaging 30 million per year.
Didn't see that $30 million in 2022, the cash cost for this year are estimated at 40 million. So we do expect over the next few years to have some incremental costs related to the migration after that point, we see ourselves getting to breakeven and ultimately our cash flow.
<unk>.
For the or the investment one of the reasons that we are pursuing this initiative is to increase our flexibility and we will continue to see a move from in.
Infrastructure incentive spend and moving into this.
<unk>, where we have capex coming down depreciation coming down ultimately, we will see more expense in the technology line as we are renting the capacity as we need it as opposed to building.
Stock here, but that is the migration that we expect to see over the next.
Several years.
Just one thing to add to that.
If you think about the investment that we make in technology things like artificial intelligence Big query machine learning, we're able to we're able to get that through Google without having to make the investment ourselves. So there's a lot of positives associated with the migration to the cloud.
Including flexibility ability to launch products faster when you think about the business cases.
Certainly going to be able to have better returns on our investment because we don't have to build out the entire infrastructure assuming success. We can build towards success. So a lot of real positives, we think in the long run strategically with our relationship with Google.
Great. Thank you.
Thanks, Alex.
Our next question is coming from the line of Brian Bedell with Deutsche Bank. Please go ahead.
Hey, good morning folks.
Let's come back to the.
Or if we talk about the interest rate franchise, obviously record record volumes and record revenue. There is a perception that as the fed ends tightening that would reduce volumes but.
We've got a number of other.
Factors that could continue that.
Strong volume so just wanted to get your thoughts on that as being.
Obviously the price increases.
And then also.
But the new potential customers that Julie you talked about from the terms. So for the introduction of those new customers. So maybe just if you can comment on that and also.
The 10 year comp or the long bond complex in terms of what you've been saying historically about more treasuries, making into private hands and being Hedgeable and then other things that youre developing on the long end of the curve and not to mentioned that higher alright, Thank Haryana RPC on the treasury side versus the short side.
Thanks, Bryan and Sean you want to go ahead and start yes. Thank you very much for the question Great question.
Terms of the overall rates complex, obviously, a very good year. This year as you said with record volumes.
Open interest record large open interest holders in fact, if you look over the last decade, we've more than doubled the number of large open interest holders. So working very closely with julie's team expanding our client base significantly.
If you look at that growth in the market environment, obviously, the market environment has been a strong positive.
In terms of the very long end of the curve to get specifically to your 10 year question, we havent actually yet seen.
<unk> uptake that we that I had expected.
Our treasury futures.
With the reduction in the Fed's balance sheet in fact treasury futures are down slightly this year theyre down 3%.
So that marketplace is actually down so how is it that we are up 7%. So far this year relative to last year, which was a strong year.
We've seen as something that Linde has mentioned I think on past calls, which is that now with the federal reserve.
Having greater uncertainty as to whether they will be increasing rates or decreasing rates and with a much greater dispersion that you see in the economic numbers with some seeing a very strong economy and others seeing a very weak economy, we see greater demand than ever before for our interest rate options. So if you look at our shorts.
Term interest rate options. This year they are in fact up 40%.
That's obviously driven by the huge success in the investment we made in so for options last year.
And if you look in fact now at our silver futures plus sulfur options, we're doing 5 million contracts a day so far this year so.
The outlook relative to the federal reserve and having the opportunity or the potential for either increasing rates or decreasing rates.
It makes greater need for our products than ever before.
Okay.
If you could talk about the organic side I think.
You talked about the new.
New trading customers from the two.
Two dozen firms that you're onboarding.
Im really excited is another thing that I'm very excited about is.
Think about what we did over the last couple of years was we migrated our single largest business. The short term interest rate futures and options business from the LIBOR benchmark over to the silver benchmark.
That has meant is a significant investment and resources time and money in order to facilitate that migration with our clients.
But what we're going to get back to what we're going to be able to get back to this year is innovation and new products. So I'm very excited about the new options products that we will be launching this year.
We've got several of them in the pipeline, we've got some new futures products in the pipeline and you may recall that about half of the growth in our listed.
Rates futures and options business since 2012 has come from new products. So.
We will be launching many new products. This year that we are very excited about and getting back to that that innovation in terms of the additional clients.
Where are we now have.
More than 2100, new clients licensed with CME terms, so far I'll turn it over to Julie.
So in terms of who those clients are I think it might just be helpful. If I just talk for a minute about some of the segments clearly banks are the largest segments.
One's that are lending against this rate for all of the work they are doing across business loans trade finance commercial real estate.
But some of those other groups that are more to that organic point that you asked about is for the first time a lot of private lenders. So these can be specialized hedge funds PE firms.
<unk> company.
Those that they're definitely our lending and need this rate in the US. We're also seen licensees coming from the buy side and other investors running loan syndication CLO debt and again those are use cases very specific to buy side participants and those are really touching it.
Cross the globe. So we're seeing that in Europe , and Asia as well and also just other fintech and service provider. So you can imagine there is a growing number of vendors that are going to need these rates or valuations risk management loan administration accounting and this is where our sales team is critical to being able to work those through the funnel.
And also you can imagine the education around that right. So we're continuing to work with commercial clients corporate treasurers to help them understand both how that rate works get them licensed and help them understand what other risk management products and data we have available for them. So.
We are working through this and as I mentioned still have a good pipeline of opportunities across the segments that we're working through right now.
Okay.
Great color. Thank you so much.
Thank you Brian .
Our next question is coming from the line of Alex Kramm with UBS. Please go ahead.
Hey, Hello, everyone. Just just another one on the pricing side, maybe for a minute I know you talk about your impact of the price increase the similar similar way every year. When you say like how are you adjusting same mix as we saw last year.
It should be this or that and obviously a higher level. This year, but we've also seen in recent years as that mix never really seems to be driving that.
Upsides.
There's a lot of US expect so I know you don't have a crystal ball, but.
Now with the four to five that you're talking about maybe the question is how much do you think we should expect to stick and maybe just review what the biggest drivers of that mix or that has maybe worked against you on the pricing side I know there was a loaded question, but hopefully you get the gist of it.
Yes, thanks, Thanks, Alex.
It's very difficult to obviously as you know to predict.
How the mix is going to happen year in and year out and I think what we've seen.
Certainly over time as volumes build.
The only real impacts we have our mix shifts to our RPC. So in other words, we generally don't reduce prices you saw an example, when we wanted to change behavior, where we adjusted.
I gave some fee waivers for the silver first for options, which obviously was hugely successful but to put it into perspective right. So if you look at what we did last year, we made a one 5% to 2% price adjustment at the time I said that the biggest impact was going to be.
In the equity part of our business and if you look at equities.
Our if you look at the RPC for equities in the fourth quarter of 2021, we're at $52 six.
If you look at the RPC in our equities complex today for the fourth quarter were.
We're at 53 and a half cents.
And this is on a 25, 6% year over year increase in volume.
So when you talk about its sticking I would say that's pretty sticking.
Especially when you consider.
Volume incentives and the like that we have.
In our equity our equity business so.
We do.
We do take our pricing adjustments extremely seriously we look at it on a product by product basis were very surgical we have regular discussions around to make sure that we're making the investments in market maker program and incentive plans appropriately and.
I would say that.
Overall, when you look at our volume and pricing dynamics I think we've been pretty successful in.
And what we've what we've done in terms of adjusting prices at the right time.
Okay fair enough thanks, guys.
Thanks, Alex really appreciate the question.
Our next question is coming from the line of Simon Collins with Atlantic Equities. Please go ahead.
Hi, guys. Thanks for taking my question, maybe Sean if I can go back to you just on the point.
Previous question about <unk>.
I guess, the fed balance sheet reduction and I guess, the surprise that we haven't really started to see the benefit of that yet in the long term rates franchise.
Something I've been puzzling over myself in terms of the substantially higher outstanding debt that's out there the shifting towards more public holders of that debt.
<unk> been interests relative today's levels of outstanding debt seems still seem to be ready to go to work.
It could be what do you think would be the actual catalyst.
What's holding back.
That thesis from playing out at this particular point.
Yes, I don't see anything necessarily holding it back I'm just looking at the facts.
While in 2018, when the fed reducing its balance sheet by 500 billion, we saw 26% increase in our Treasury futures.
The fed, let's let's maybe a bit careful here right. The fed didnt start to substantially reduce its balance sheet until September . So it's actually a very recent phenomenon, although it's been about 500 billion.
So as we know the fed is expected to reduce their balance sheet by more than a trillion this year.
So I would wait and see.
Again, it was it had a very positive tailwind for our business in 2018.
But as I said earlier it has not yet shown us significant positive.
Our results this year.
And that said not yet.
Yeah.
Okay. Okay. So it's just too early.
Yes.
Okay.
Okay. Okay.
Okay great.
And I was just wondering as well.
Terms of.
Just getting back to collateral balances as well as in follow up.
How should we think about the overall levels of collateral requirements at the moment and how that should trend over time, because obviously they research during the last year and I was just wondering how we think about things normalizing in the next couple of years and the impact.
With the business.
Yes. This is John I'll jump in and then maybe sneak can make a couple of comments.
I would say, it's very difficult to discern overall collateral balance because when you think about it really is a function of.
The trading that's occurring on the exchange and the open interest that we have.
And our clearing house and the risk associated with those with those trades.
So from our perspective.
All about risk management, and ensuring that the <unk>.
Safety and soundness of them of the markets and Thats, all Thats very Paramount.
Terry indicated at the start we've been doing a lot to incent our clients.
Two two.
Keep the cash balances are to keep the collateral in cash.
Here at CME group, we do it for two reasons.
One obviously, we earn more on it than noncash collateral, but most importantly from a risk management perspective, having cash is much more advantageous from a risk management perspective than the noncash collateral so.
We tried to we tried to strike that is that appropriate balance ultimately, though it is.
It's a decision by our clients each and every day in terms of whether or not it can be cash or noncash based upon the returns that they can get.
So.
We've been.
I think really.
In terms of how we've been approaching it and.
Obviously, it's.
Something that.
It was benefited our clients because they get access to the fed.
So the fed balance sheet to the fed and then also it's been beneficial for us and I'll turn it over to.
They'll need to turn over to Neil I guess I hit it.
Thanks.
Thanks, Tom.
Our next question is coming from the line of Michael Cyprus with Morgan Stanley . Please go ahead.
Hey, good morning, Thanks for taking the question I was hoping you could spend a moment on the energy complex with volumes down a bit year on year of January I was hoping you might be able to elaborate on what you're seeing across the marketplace. How do you see the opportunity taking shape for this year and energy and maybe you could talk a little bit about how the customer participation has varied across your.
We're sad to what extent have elevated margin levels are still holding back volume and activity at this point and how you see all that evolving this year. Thank you.
Yeah. Thanks, Mike I appreciate the question following the larger the demand shock we ever saw in the energy market in 2020, followed by the largest supply shock ever in 'twenty, two we're actually starting to see the global energy market begin to normalize one of the indicators. We're seeing there is financial players are starting to return to this market one of those clear indicators we're seeing.
Of that this year, so far we're seeing our open interest recover in our WSI complex, we're up about 28%.
Up to about $1 8 million open interest since the end of 'twenty two.
And that's really a function of both margins normalizing, but we're seeing hedge funds asset manager and particularly index trackers come back into the market. They exited largely in the challenging circumstances of last year. Despite the fact that it was a challenging year last year. If you look at some of the points that really carry the franchise are carrying over into this year to a degree.
Lastly, our options market performed extremely well on the energy side with energy revenue on the option side up 9% versus the previous year globally. We also saw continued growth outside the U S with our Latam business and energy up 70% last year and our APAC volumes up 15% last year. Finally, we saw continued growth back on the client side.
<unk> in retail with our micro wty contract in the fourth quarter Ti volumes up 28% to a little over 100000 contracts. So good global participation and good client segment participation more importantly, when you think about where the energy markets are going we continue to see the energy markets revolve and evolve around WTO.
The central marketplace and price setter for both physical and.
Financial markets couple of proof points here number one in the U S is now exporting a record level of $4 1 million barrels in Q4, we look to believe that that export capacity will continue to growth.
Waterborne crude exports are not equal to Iraq, and the number two slot behind only Saudi Arabia. So U S is putting more Wi Fi WTO products out into the global markets. We're also expecting that in the market expects global oil production out of the U S to increase about 1 million barrels between now and 2024, such as increase the WTO.
Our footprint globally. So the U S exports already up about 40% on 22 versus 21 and exports roughly up double into Asia. Since 2018, we continue to see exports of U S product out into the global market. So what does that mean, what we're seeing not only is that strong and positions WSI and <unk>.
A point of price, making for the global oil market, but actually our Rguest Gulf coast grades contract has a combined open interest at about 375000 contracts and we just had a record volume about 11000 contracts.
This year. So when you think about what that means we've got <unk> said in the global price of oil Brent is not going to be put into Midland and <unk>.
<unk> into that assessment that means that continually centralize the WTO there we've got the largest export market and now production on the upswing. So we like that we've got the strongest position in the export market and in that basis contract. Those rguest grades contract as I said about 375000 contracts open interest 87% of that is.
[laughter] participation, that's where customers price discovery in <unk> and then they hedge their exposure out to the basis to the Gulf and then it exports from there so.
We like the position that we're in in terms of the centrality of <unk>. We think we've got the right product mix and we've got the client mix and financial players coming back yet so.
Like Jerry said, we can't predict what volumes are but we can talk about the very strong structural position that <unk> has on the global oil market going forward.
Great. Thank you.
Our next question is coming from the line of Owen Lau with.
Open Hymer. Please go ahead.
Good morning, and thank you for taking my question.
Could you please give us an update about your strategy and outlook in the digital asset space do you see your clients pulling back and then you recently you recently launched <unk> reference rate indices, one other weights I'll reference rates or products would make sense for CME down the road. Thank you.
Thanks, Tim.
Yes. Thanks for the question. So when we look at the digital AD space and the crypto currency business at CME.
We remain seeing very strong growth in our offering.
As a reminder, our approach to the crypto currency products as being the regulated venue offering regulated product in a way that provides bonafide risk management and trusted access for the marketplace. We've seen that value proposition rain true in Q4 with some of their more widespread events in the crypto currency space, where we saw a record volumes in November .
<unk> record large open interest holders of 139 holders in the month of November and that momentum hasnt slowed down with respect to the adoption and continued growth at CME.
What I mean by that is let's look at the number of accounts typically we add about 450 accounts per month, and our crypto currency business and in November we added 934 over doubling the normal account opening and in January we have seen over 700 accounts, new accounts opened with respect to creating crypto currency products at CME.
That's really a testament to the marketplace broadly turning to CME in times of stress and the rest of the crypto currency ecosystem. When we look at the product development front, we have focused on additional pricing products. These are non tradable reference rates in real time indices. We did in last month introduced three new reference rates around the meta versus.
That complement some of the additional indices, we introduced with respect to the <unk> sector and crypto currency as well as the more than dozen so more traditional crypto currency tokens that we also have reference rates on and really the strategy. Here is we want to make sure that CME along with our partners see a benchmark remains one of the preeminent pricing providers for peripheral.
Currency as people need a trusted source to figure out how on a given day once a day with reference rates or real time tick by tick what these assets are worth.
That is where we will continue to develop on the reference rate pricing, but we'll listen to customers. We don't necessarily have anything else in the hopper with respect to additional tokens additional reference rate, we have almost 50 realtime indices in reference rates out there at present and our product development will be again sort of in the bitcoin in ethers Lane as a function of the regulatory landscape.
Find ourselves in however, the one thing I will add is when we look at the broader ecosystem. The product development is not just a function of what CME can list, but our products are being more increasingly used by other participants in the marketplace as the underlying for ETF structure products OTC trade. So we are at the center of the growing ecosystem with re.
Expect to bitcoin and ethereum regulated products and we expect that trend to continue in 2023.
Got it thank you very much thanks.
Thanks Alan.
Our next question is coming from the line of Ken Worthington with Jpmorgan. Please go ahead go ahead.
Hi, Good morning, Thanks for taking the question you Register to launch in <unk> last year, where does that application stand and in the wake of the collapse of SPX is launching in SCM, a priority or even still makes sense. Thanks.
Yes, Ken I'll take that listen.
<unk> application that we launched is not exactly.
Taken anybody away from their day job following that process on the application.
We're looking and I'm looking at a long term market structure and what is going to look like and I do believe and I've said this jewel congressional hearings prior to Mtx's collapse that if we are going to have a different market structure that we all need to participate and have things in place and rules in place in order to facilitate whatever the world going to look like for tomorrow.
Since none of us really know what the world's going to look like for tomorrow as far as what the <unk> business is not going to be it was prudent for us to go ahead and get the application process in place as I've said and I've said publicly we are unwavering I am unwavering about our commitment for our FCA modeled today, whatever we do going forward I would.
Hope if in fact, the model is the change that we can work with Arab CME to bring them along so we can have a bigger piece of the pie for everybody to be successful.
So I wouldn't read too much into that.
When you when you're in a situation where the government appeared to be willing to.
Approve technically a direct model without writing rules to the direct model and applying rules that were written back. Many many years ago that are applicable only to the FCA model made no sense to us. So I had to be prepared along with my team in order to put certain things in place just in case that was the decision.
Of our government I don't believe that's the case I think there will be new rules you heard Commissioner Johnson or you may have seen in her public remarks from Duke University about wanting to write rules as it relates to a direct model. Even if it comes forward that is a very long difficult process to write rules and I've been around this business for 40 years and I have been.
In Washington, helping REIT rules or participated in the process and it is very difficult to do so I don't see that going anywhere soon and but at the same time. The FCA is nothing more than what it's a wait and see for what the future may or may not break and there's nothing more to it than that Ken.
Great. Thank you very much thank you.
Our next question is coming from the line of Craig Siegenthaler with Bank of America. Please go ahead.
Hey, good morning, everyone.
I have a follow up to an earlier question, but I wanted to hone in on energy specifically, so now that your margin requirements have been declining and especially in energy what has been the early feedback and how much of a positive impact do you think this could have on volumes.
Derek Yes, thanks, Craig as I mentioned before we are in the process as seen this market normalized now the first time, we saw when you saw the disruptions of Ukraine or happened last year margins popped up that did basically deleveraged a number of financial players in the market and they pulled back we did not see commercial participants step away because that risk continued to be.
Sitting there on their books I think as we've seen margins normalized that's one part of the overall equation.
We certainly have seen as I mentioned the open interest trends.
Turned very positively as I said, our open interest in UTI retinal versus end of last year was up 28%.
The Nat gas side, we're seeing similarly open interest is up about 10% from the beginning of Q4 last year and the most important marker. There is look at the open interest holders in the types of those customers coming back in.
Our large open interest holders and natural gas have also grown up about 17% up to just about 420 <unk>.
First at the beginning of Q4, so as we suspected increased cost to transact increase margin tends to initially push financial customers out we've seen index trackers retail in the form of micros start to come back and that will be a process and we see that reflected initially both on the large open interest holders as well as growth in rebuild of open.
Interest and more importantly, structurally as I mentioned, we like our position in <unk> and Henry hub as a central points and being the largest export market in both of these products and setting the global price of both natural gas and oil globally. So those are the markets. We're seeing right now that will be a slow build but we like the trajectory. This is on going into this year.
Thanks, I had a follow up on the rate side to go.
Go ahead, Greg tenures down like.
How can you guys hear me.
Yes go ahead.
Oh perfect. Thank you guys. So the tenures down like 40 basis points year to date the fed could go on hold in three to six months those will probably be negative factors for your rate complex, but at the same time Qt does continue and there are margin lower margin requirement. So like how should we think about all of these kind of mix of positive and negative factors on.
The rate complex.
Yes, I think similar to my answer earlier.
Whats priced into the curve right now obviously the world goes to CME fed funds futures to see what the expectations are in the market for the federal reserve.
Currently there is about 50 basis points or two more 25 basis points tightening priced into the curve and then further out the curve there is actually 200 basis points and easing.
As I said earlier.
The uncertainty about the federal reserve is from my perspective, and if you look at the marketplace, increasing not decreasing relative to the probability of either tightening or easing and in each case by substantial amounts.
The dispersion of economic data with the 517000 non farm payrolls versus for example, the ASM numbers, which are running in the high forties you have everything from the potential for continued boom too.
To.
The potential for recession. In addition to that you can look at the excess savings.
Of households that remains post COVID-19.
Which remains according to recent reports it around two six trillion.
So.
Enormous ex xa excess savings enormous uncertainty huge increases in rates from the federal reserve.
Personally think that the uncertainty is very high the rates could go either way and what we've seen again is overall for our treasury futures. They has declined slightly relative to last year down 3% in terms of volumes right. As I said earlier, our short term interest rate options, which are reflective of that uncertainty of the federal reserve were up 40%.
Year over year.
So I think that the environment is highly uncertain and let me just add to what John said and this is just personal theory that I think the fed when you say Greg that they could hold on their increases I think when you looked at most of 2022 most of the participants were looking for a pivot the pivot never happened.
And then we saw to Sean's point.
The fed chair talking more hawkish, even as recently as a couple of days ago. So even if there was a hold I think people would anticipate that that would mean, a pivot which would mean massive activity on refis and people waiting to do a lot of business as they are waiting for that moment that you were referring to as a hold and if in fact the market was to do a pivot if that was to happen.
It would be more activity not less so even at a hold.
I think that would not be bearish for CME, there could be very bullish for CME.
Thank you Terry.
Thank you.
Yes.
Our next question is coming from the line of Andrew Bond with Rosenblatt Securities. Please go ahead.
Yeah.
Hey, good morning, just following up on energy and specifically natural gas 22 is one of the tightest gas markets over the last decade.
And this year, we appear to be set up for one of the more oversupplied market for many years and we're seeing this with pricing at the lowest levels.
In 18 months. So can you talk about how this dynamic is likely to impact market participation and perhaps some of the structural shifts we've seen.
Since natural in the natural gas market since the Russian Division.
Yes, and natural gas is an interesting one it was directly certainly impacted by the Russian invasion. When you had that pipe gas coming from Russia directly into Europe , which is effectively the basis for the flow for the CTF contracts. So light crude natural gas market is beginning to normalize now.
Given the unusually warm weather, we've had both in Europe , which I think has failed a lot of Europe out as well as here in the U S. The market was making sure that there was enough supply going into a normal winter. It's now feeling oversupplied in a warm winter, which is not a terrible tank for the consumer but is creating some interesting dynamics in the market. We actually are seeing when we looked at last year the full.
Our Henry hub volume was down a couple of percent to 3% something like I think I saw something a little bit of a larger magnitude than the downdraft, but as I mentioned before open interest is up 10% from the Q3 low. So we are seeing that market begin to normalize and more importantly, we're seeing participants on the large open interest orders up 17% from <unk>.
And into Q4 January is starting well overall, our Nat gas complex as a whole was up about 1% led by options up 8%. So we are seeing some normalization of activity. There I think in the same way that we think about the structural position of our energy markets in the same way that we've seen the market evolve around WTS that global physical market where C.
The same thing happened around Henry hub, and Henry hub is by far the largest natural gas market in the world growing in importance every year, that's a function both of the significant production in the U S. But the growing export capacity in volumes out of the U S. As well. So it's not only is Henry hub, a huge domestic market, it's becoming in light of the challenges to TTM.
As the global marker is while TTS gonna have to position or the European market will have to begin to referenced an LNG point out of northern Europe . The Tcf itself was taking pipes gas coming from Russia. So we.
In terms of where we're seeing client participation somewhere to crude we're starting some normalization open interest up client participations flowing back in.
And the centrality of Henry hub mobile.
Nat gas market puts us we believe in a very strong position, however market dynamics evolve, whether we're going to be low and flat for a while or trending back up that just a function of we're in the middle gas season, right now and an unusually warm winter I think that's part of the overhang of the price right now, but we like the dynamics.
We like our position and just the magnitude of the Henry hub versus TTS is something like it I think the Henry hub market will be normalized by molecule size is about 20 times the size of TTS. So we like our position we like our customer participation EMEA open interest trends are heading in the right direction.
Got it thanks.
Thanks, Andrew.
And our next question is a follow up question from the line of Alex Kramm with UBS. Please go ahead.
Yeah, Hey, Hello again.
Just one follow up on the energy business, you got a bunch of questions on that and I actually wanted to step back for a second I mean, you saw you said several times that you really like your strategic position.
But when I look back over the last whatever 510 15 years that business has been basically ex growth and in the last five years. For example, I think it's down 4% CAGR in revenue terms.
When I look at your primary competitor, which obviously, we all know and track I mean, I think at the same time these guys have grown.
5% revenue CAGR. So you know there is a 9% delta so.
With the positioning but I'm just wondering like what's structurally.
It has happened there and I know you have different product sets and so forth, but you're still paying the same sandbox. So hoping you can close that gap and maybe any idea of like how.
Yes. Thanks I appreciate it I think you are right. We do have different product sets in our energy franchise. When you look at our Henry hub franchise and Isis <unk> for example that those those results have not been markedly differently.
In terms of performance over the last couple of years, certainly ice has the basis market here and the Tcf complex, which I think is under significant strain right now.
In terms of what that means going forward as a long term marker given some of the physical challenges where those gas flows are going to come from and what that now represent.
I won't try to to tell you otherwise the TGF market has been on a good run for the last two or three years. So they are in product set that we are not we are in products at bay or not I would point to our global missions offset contracts in the voluntary carbon markets. As an example of a market that we are and that they are not in right now they are in the compliance markets one of the voluntary market. So when you.
Break down the pieces on the like for like businesses. Those results have not been markedly differently, where the different results or some of their asset some of their products, where they are and where we are not have been contributors to the bottomline growth. So from our perspective, we as I said, we look at the structural benefits from the positioning of our core complex and <unk> and <unk>.
<unk> crude which looks very positive as well as the Henry hub complex both of those being the biggest market is now the biggest export markets for those respective products.
So we just going forward well, we like what we've done we've globalized our business, we have expanded our options complex, but that outperformance Alex as I said, it's really a function of.
They've been <unk>.
To be in products, where they have franchises that we are not operating in and that's you got to be both good and lucky to be successful in this business and we like our position going forward.
Very helpful. I appreciate it thanks Alex.
And our last question in queue is coming from the line of Kyle Voigt with K B W. Please go ahead.
Yes.
Hi, good morning.
Maybe a question for Terry.
I know you agreed to an extension on your employment contract last year, but was that I believe is set to end next year I'm wondering if you'd be able to or would be willing to share whether youre open to extending your employment contract again and also if you could address or provide any color as to how the board views succession planning more broadly.
Yeah, Thanks, Scott and then and obviously, there's some confidentiality into the.
The conversations that I've had with my board, but I will just give you a general.
<unk> My contract goes through the end of 2024 I'm committed to my board that I will be here through 2024 at.
At the same time, we will be looking at we are looking at succession and if in fact, the board is not comfortable with that process I told them I would say until they are so that's kind of how we're leaving it.
So a lot could happen between now and then obviously, but my commitment is to the company. It has been all these years and won't it will not deviate from that so the board knows that but we all have a job ahead of us to make sure that we do the right succession planning and make sure. It's a seamless one and that has the attributes to do multiple things.
From Washington to M&A, and everything else Theres a lot goes on in these businesses and there's not too many exchanges as we know in the world that people know how to operate so we got to find the right person, but we've got we have a lot of talent and not only in his room, but through the organization and if in fact, the board is and comfortable with where we're at then I will extend until they are.
Yes.
That's very helpful. Thank you very much thank you.
And that is all the questions. We have I would now like to turn the call back over to management.
Well. Thank you all for taking time out this morning, and we hope you have a good day and be safe.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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